Oireachtas Joint and Select Committees
Thursday, 8 May 2014
Public Accounts Committee
2012 Annual Report of the Comptroller and Auditor General and Appropriation Accounts
Vote 7 - Office of the Minister for Finance
Chapter 1 - Exchequer Financial Outturn for 2012
Chapter 2 - Government Debt
Finance Accounts 2012
We now move to No. 7, 2012 Annual Report of the Comptroller and Auditor General and Appropriation Accounts; Vote 7 - Office of the Minister for Finance; Chapter 1 - Exchequer Financial Outturn for 2012; Chapter 2 - Government Debt and Finance Accounts 2012.
Before we commence, I ask members, witnesses and those in the Visitors Gallery to switch off their mobile telephones. Also, I advise witnesses that they are protected by absolute privilege in respect of the evidence they are to give to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a Member of either House, a person outside the Houses or an official, by name or in such a way as to make him or her identifiable.
Members are reminded of the provisions within Standing Order 163 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policy or policies.
I welcome Mr. John Moran, Secretary General, Department of Finance and his officials and in doing so acknowledge that this is the last occasion on which Mr. Moran will appear before the committee. I wish Mr. Moran well in the future and thank him for his past contributions to the Committee of Public Accounts.
His contribution was constructive and informative. I have no doubt that he will go to pastures green and to better things. I wish him well. I ask him to introduce his officials.
Mr. John Moran:
I thank the Chairman for those particularly kind words. I am accompanied by a number of officials today. They include Mr. Greg Dempsey, our chief financial officer, Ms Cep Carthy, who works with him in the finance unit, Mr. John McCarthy, our new chief economist, Mr. John Hogan, head of banking policy, and Mr. Des Carville, head of our shareholding management unit. Mr. Dermot Quigley, whom I am not sure I am supposed to introduce, is also present. He is our colleague from the Department of Public Expenditure and Reform.
Mr. Seamus McCarthy:
The annual finance accounts present the receipts into and issues from the Central Fund of the Exchequer, together with a set of statements that analyse the transactions. The financial statements of the national debt, which are prepared by the National Treasury Management Agency, NTMA, are presented in full as Part 2 of the finance accounts. The chapters that are the subject of today's meeting were compiled to highlight key aggregates and trends in Central Fund transactions and in broader State liabilities.
Chapter 1 summarises the Exchequer's financial outturn for 2012 when Central Fund issues exceeded receipts by almost €15 billion. Receipts into the Central Fund in 2012 totalled €41.1 billion, representing an increase of 6% year on year. Issues from the Central Fund amounted to €56 billion in 2012, a decrease of 13% year on year. General Government debt is the standard and most complete measure used to report Government debt under Maastricht treaty provisions. At the end of 2012, Ireland's general Government debt stood at around €192 billion. The debt represented 117% of Ireland's gross domestic product at the end of 2012 compared with 104% a year earlier.
The principal components of the general Government debt at the end of 2012 were borrowing by the NTMA on behalf of the State, which is referred to as gross national debt and which is accounted for in the national debt account, and promissory notes issued in 2010 by the Minister for Finance to the Irish Bank Resolution Corporation and the EBS Building Society, which were not included in the NTMA's national debt accounting.
The nominal value of the promissory notes at the end of 2012 was just over €25 billion. In the context of the liquidation of the Irish Bank Resolution Corporation in February 2013, the related promissory notes were cancelled and replaced with floating-rate Government bonds issued by the NTMA. The bonds now form part of the gross national debt. Almost 90% of the June 2013 gross national debt was in the form of medium to long-term debt instruments. Funding received under the EU-IMF programme of financial support for Ireland accounted for almost one third of that debt. Figure 2.6 presents a maturity profile of the debt and indicates that, at that date, over €100 billion would fall due for repayment for re-financing by 2020. Exchequer payments in 2012 related to servicing of the national debt totalled over €5.8 billion. This was up 23% when compared to the debt-servicing costs in 2011. It should be noted that this excluded the interest that accrued in the promissory notes.
The NTMA estimates that the weighted average cost of servicing the gross national debt was 3.8% at the end of June 2013. Around 80% of the debt was at fixed rates.
Cash and other financial assets held by the Exchequer totalled €23.8 billion at the end of 2012, rising to €30.6 billion at the end of June 2013. This reflects an increase of over 28% in that six-month period. Almost 46% of the end-of-June total is held as cash on deposit in the Central Bank. The average interest rate earned on such deposits was 0.09%. A significant portion of the available cash balances was held in short-term bank deposits and non-Irish treasury bills. Those investments earn a higher rate of return than the interest on Central Bank deposits but they also carry a higher risk.
The build-up of cash and other financial assets reflects the State's intention to have sufficient advance funding in place by the end of 2013 to cover 12 to 15 months of Exchequer financing needs after the EU-IMF programme came to an end. However, there is a cost to the Exchequer associated with maintaining high levels of cash balances because the return on those assets is lower than the State’s average cost of borrowing.
Accrued pension entitlements of public servants are a significant liability of the State but these are not reflected in the finance accounts. At the end of December 2009, an estimated €116 billion had accrued in respect of such pensions. The 2012 finance accounts continued to note the estimated end-2009 liability. Later assessments of the liability had not been made despite the very significant changes in public sector employment and remuneration in the intervening years. As discussed when the Accounting Officer of the Department of Public Expenditure and Reform appeared before the committee recently, a more up-to-date estimate has now been prepared and actuarial reviews and projections of public service pension costs will, in future, be carried out regularly. This should help to ensure decision-makers are aware of the long-term cost impact of public sector pensions and of changes in pension terms, and that the timing of pension outflows.
In the 2011 report on the accounts of the public services, I recommended that the Department of Finance should review the level and quality of disclosure in the finance accounts so as to increase the transparency of information about the public finances. The Accounting Officer agreed with the recommendation. In March 2013, a team from the International Monetary Fund, IMF, visited Ireland to evaluate Ireland's fiscal management and reporting arrangements based on the IMF's fiscal transparency code standards. The report of the review team, published in July 2013, contains detailed recommendations on the reform of a number of areas, including the nature, content and timing of fiscal reporting, and a proposed action plan for implementing the recommendations over the period 2013 to 2017. The report's recommendations are set out in Annex 1 to Chapter 1.
The Government has asked a steering group under the joint leadership of the Departments of Finance and Public Expenditure and Reform to implement the proposed action plan, as appropriate. My office is represented on that steering group. The Accounting Officer will be able to brief the committee on progress to date in that regard.
Finally, the 2012 appropriation account for the Vote of the Office of the Minister for Finance records expenditure totalling €26.2 million on four programme areas. These relate to the costs incurred in respect of budget and economic policy, financial services and taxation policy, banking sector policy and the provision of shared services. The expenditure on banking sector policy recorded in the appropriation account is €6.8 million. However, members should note that this does not include costs associated with staff seconded to the Department from the NTMA to deal with banking sector issues and certain related consultancy costs. Those costs are borne by the NTMA and are not recouped from the Department. The level of costs incurred is not disclosed in either the appropriation account or the NTMA's financial statements.
At the end of 2012, the Department had underspent by €7.5 million relative to its budget. That amount was accordingly liable for surrender back to the Exchequer. Note 3 indicates that much of the shortfall related to delays in the filling of vacancies and the use of pro bonostaff in a number of key senior posts and lower-than-expected legal advisory fees arising from the postponement of certain bank and debt restructuring projects.
Mr. John Moran:
I thank the Chairman. I thank also the Comptroller and Auditor General and his team for their help in producing the accounts. As ever, they have worked satisfactorily with our team. I have already distributed a statement that contains a number of observations for the committee. I thought it would be useful given that this is the last time I will be appearing before it. I do not plan to read all of the statement but I would like to identify some of the important issues in it.
Mr. John Moran:
Yes. We distributed the statement earlier. If members have questions on it, they may ask them if there is time.
Essentially, we are here to examine the accounts of 2012. However, the environment is fast moving and an awful lot has changed so, with the permission of the Chairman, I will probably touch on much of what has changed since the production of that set of accounts.
Everybody recalls that, in 2012, given the number of changes, we decided to revise our statement of strategy to refocus the Department across five goals which were not necessarily related only to a particular division. These were, essentially, the economy and jobs, the public finances, living standards of citizens, the exit from the troika programme and the banking sector. As these were the objectives when I took up my role, I felt I owed the committee the courtesy of announcing my resignation, which I announced to the Minister yesterday, so that it would be aware of that before this hearing, rather than doing it afterwards.
Because of the announcement yesterday, I have given a lot of thought to what I might actually highlight to the committee today among the many things that have happened in the Department. Of course, I could have spoken first about the performance in the accounts and the savings that we actually produced in delivering our outcomes. I could also have spoken about the stabilisation of the economy and the work we have done in the fiscal and banking sector. We made a somewhat brave statement in terms of resetting our objectives, which were agreed by the management team, and actually putting as our first objective the economy and jobs. We did that despite the fact that it was a task not just for our own Department, because a lot of actors have a role in this, and in view of the fact that at the time the Irish economy was losing 350 jobs a week. It was a particularly unusual task. The management team felt that what we had to do was to actually put that as the core of everything we did and, in effect, embark on a programme to see what we as a Department could contribute to what is one of the most troublesome issues in our economy at the moment. We tried to do so by, in some respects, enlarging the scope of what we had anticipated we would be doing in 2012 and to run that through into 2013 by conducting with the new economics team a micro-analysis of the economy. We did this by looking at different sectors and seeing what barriers existed, which, of course, informed our decisions around our budget, as well as through a relentless pursuit of solutions for banking and the financing of the economy, which I am sure we will talk about, and also a very public engagement with foreign and domestic investors and business communities around Ireland to try to rebuild confidence, which was essential to getting investment into the economy.
It is only appropriate that we should take some satisfaction from the fact that, in a relatively short period since the statement of strategy, we have moved from a situation of considerable job losses to one in which unemployment continues to drop every month, and has come from a peak of 15.1% down to 11.7%. Alongside that, the rate of interest paid by the NTMA to finance any of the activities of Government has dropped from a high of 14% to below 2.75% today. These are two key measures in terms of where we were going.
We distributed an annual review earlier, so rather than actually go through all of our specific performance against our goals, of which there are many, I thought it was more appropriate to simply distribute the document to members. I am happy to answer any questions on that. The review speaks for itself in terms of delivery over the course of the last year. However, I will take this opportunity to thank the staff in the Department and, equally, their families for their personal contributions and the single-minded dedication to these tasks that I saw over the last two years.
Something I have often heard is that people do not appreciate the size of the Department and the feat of delivery in view of this. There are just over 300 people in the Department, of whom 60 or 70 are engaged in very significant transaction-based material and work in Tullamore. That means we have produced these annual reviews using less than 1% of the Civil Service. In a sense, we have done that by dividing people into overlapping teams which have concentrated in the last year on different types of project. There are the business-as-usual projects that people more typically associate with the Department, and we have also had a separate group of people working towards a reform agenda to achieve a higher-performing Department. We have people looking at legacy issues from the crisis and we have had a team looking in particular at the Presidency of the Council of the European Union, which was, of course, a major priority for us during the course of last year.
Given that this is going to be my last appearance before the committee in my current role-----
Mr. John Moran:
I hope it is-----I thought it appropriate to share with the committee some more detailed observations about changes and improvements we have been making in the Department and, therefore, engage in a conversation about why we felt they were necessary. There will be no specific issues raised on the accounts by the Comptroller and Auditor General, so perhaps this is an area where a discussion today might help people to understand some of what we have been doing. For me, it is a question not so much of looking at individual policy issues and the result of our handling of them, but of using those policy issues as a way to test whether we have in fact managed to change the Department so that it can identify issues into the future, perhaps come up with strategies to avoid risks and, if things do occur, as they often do, actually have a strategy and a way of dealing with them.
Many have questioned in the last two or three years the failings that occurred in our system. I think it would be useful for me to explain what we have been trying to do over the course of the last number of years to fix those problems. We believe that new processes which embed better governance, more effective communication and a culture of open challenge and encouraging questioning among staff in the Department will go a long way towards addressing the problems we have seen in the Department in the past. Therefore, I am grateful for the time to explain some of the things we have been doing in respect of that.
First, I would like to talk about this issue that keeps coming up with regard to management teams and managing change. The right combination of management change in an environment such as we have had draws on the skills and knowledge of the past and supplements them with new skills and new perspectives, while coaching the entire team as a unit and training the whole team. In that way, we can build a new cohesive unit to actually tackle the problems. It is probably appropriate for me to say, as I have said in the statement, that it would be foolhardy to believe that somebody can land into a complex situation and not draw on the best experience of the people found in that Department. With that combination of experience, which is what we had, we have now got a new set of views in the Department about the problems we have had to address. Inevitably, there are changes of personnel as people move on to new challenges. Like myself, two other senior managers will be leaving the Department, one for a shorter period of time and another in retirement. I would like to thank both of these in particular - Jim O'Brien and Michael McGrath - for their efforts, particularly on the international framework in Europe in the last couple of years.
We have seen the physical reforms in terms of the economy and the banking sector, but what has perhaps not been so obvious to the public is what we have been doing to live up to our statement of strategy and try to build a more modern, professional and forward-looking Department, and to introduce new principles and values into that, which are the principles of equity, partnership, leadership, challenge and integrity, and, of course, openness and transparency. In many ways, when people reflect on what is described in the statement, they will understand that the challenge we have set ourselves in terms of change has actually gone beyond the recommendations of the Wright report in respect of the Department. At the time, in 2012, we had a Department with three policy areas but, quite frankly, less attention had been directed towards the support and control function, and many of the changes are actually reflected in what we have done there. We continue to work away quietly on this. The job is now well mapped out among the team in the Department and we are well under way, but we have not finished everything that needs to come into place.
We have, as we set out in 2012, taken the decision to reunite the budget and tax policy areas so that they work together, and we have also reunited the banking and financial services areas, for reasons that will become obvious if we get into the issue of funding the economy, where we see those two as being much more interconnected. Our newly created international division has actually opened up the Department to the world a lot more than before, and I will come back to that later. Our last important policy area is the building of our new economics division, which was possible following John McCarthy's appointment as chief economist.
We have tried to move the focus of the Department away from just short-term forecasting to a much more robust discussion of broader economic areas and an engagement with the external world in respect of developing our thoughts. In the next few years, we would like to move towards a system under which we can have additional economic modelling capacity over and above what we have had in the Department in the past and, more importantly, to integrate what is being done in the economics area with the important work that has been developing in the risk and financial stability capabilities.
Most importantly, what we think has been the change in the Department is a completely different focus on what support, risk functions and control functions mean. We have changed our internal structures to better facilitate a culture of greater challenge. We have new risk, legal and compliance functions and a completely different way of carrying out peer review of policy directions and advice to the Minister, which are now central pillars of the way we work. The State's accounts are now produced by a team led by Greg Dempsey, who is on my right and who is an accountant with 20 years' experience. We have a team of risk officers led by Neil Ryan, who has more than 20 years of legal and banking experience. We now have a new policy committee under the direction of Ann Nolan, who is one of our most experienced civil servants and who has an unparalleled knowledge of each area of practice within the Department, in order to encourage cross-discipline and cross-unit debate. We have established a legal and compliance unit under Antoine Mac Donncha with a newly recruited experienced compliance officer added to that team, along with other recruited lawyers, to facilitate the legislative process. Our management advisory committee is operating in a way that looks more like an executive-style management board. Under Mr. Dempsey's direction, we have also added a new corporate office to support the function in the first instance of the management committee and the new sub-committees - the risk committee and the policy committee. More importantly, it houses a project management office which now runs quarterly business planning processes and has weekly updates to the management as well as training for all staff in project management techniques. We have also set out to reinvent how we communicate with the outside world in terms of sharing information both within and outside Ireland. I think people will have seen the first half of this. We are also continuing to change the way we communicate internally in the Department.
Under the leadership of Niall O'Ceallaigh, who joined the Department shortly before my appointment, we have outsourced operational HR to the shared services function established by the Department of Public Expenditure and Reform. This has freed up our HR function to become what one would expect to see in a professional HR function - focusing on issues such as how we recruit people, how we carry out learning and development, how we carry out flexible resource management, with a biannual exercise that involves looking at our resources and priorities and, more importantly, how we carry out performance management integrated fully with our business planning process. It is worth saying that we believe we are now managing both the good and bad performance of our teams. We started this process with a 32% compliance record on performance management systems but we completed that exercise in 2013 with 100% compliance. Therefore, every staff member in the Department had a full process of evaluation of their performance and the objectives set for them into the future.
We have begun what will, unfortunately, be a very long process of enhancing the IT systems in the Department, starting with a new external website for clearer communication but, equally, using that and other methodologies for better internal communication, document sharing and working while we are on the road and out of the office. As I mentioned to the committee last year, during the course of last year we redirected our internal review and audit committee to look not just at specific issues but much more at the vulnerabilities in the way we tackle strategic areas and help us to scope what the remedial action should be. This year, we have also begun the process of taking the best of what we have learned from the troika management team and integrating that with our medium-term economic strategy team into a unit to focus on driving economic development and growth.
The reputation of the Department, like that of Ireland, took a very significant beating. I believe things are now quite different on both levels. People recognise the changes that we are trying to make in the Department. Back in 2012, statements made abroad about being Irish were treated in the same way as working at the Department of Finance was treated. It was something people avoided volunteering to others. I can say that this is not a comfortable place from which to drive policy, innovation and implementation. It was not a comfortable place for our management team to begin the important task of rebuilding morale, our reputation and the belief in delivery that our team need in order to be able to achieve its objectives. Many members of the team in the past were just diligently doing what they had been asked to do. Many of them then jumped in with extraordinary efforts once the crisis hit to try to solve the problems facing the country. It was not a comfortable place for me when I joined the Department in terms of the task and reputational risks that were being put in place. More importantly, given that the Committee of Public Accounts is a committee that looks across the entire system, it is not a comfortable place in respect of discussions around hiring people whom we are trying to persuade to come into the public sector. They all have the same worries about reputational risk. The Department and, in some respects, the broader public sector had gone from being a place where one would want to work to being a place that people preferred to avoid. That is a task that I would ask the committee, along with other colleagues that remain in the system, to continue to think very seriously about. We also ask the committee to do what it can to support ways in which we can continue to improve the system, to be innovative, to be brave in setting our targets and to attract the best talent to the public sector.
On the plus side, as with the economy of Ireland, we found that the fundamental foundations of the Department were the right ones for a rebuilding exercise. The staff had a deep commitment to the job at hand and a willingness to go beyond the call of duty to devote time and energy to their task. There was, however, an acknowledgement that it was necessary to deploy more investment. There was an equal acknowledgement that there was a need for additional skills. Over the course of the past few years, we have now recruited more than 100 new people into a Department of 300, a statistic that may surprise some people who believe that things have not changed. Many of our team members have refocused, are being trained, are coaching and are being mentored so that they can compete for new positions and prove that sometimes people who are already in the Department are the best people for the job. To prove that point and to reinforce it, we have also been operating in the past year or two a rule that is unique to the Department. We will only fill positions at the levels of assistant principal and above through a competition that is open to the public, including internal staff.
We have been changing the way we do business to put stakeholders first. I have identified a number of issues in the statement that go towards the various stakeholders. I will not necessarily go through them in great detail other than to point out that we believe that for the Government and Oireachtas, we have changed very significantly the way we interact to allow ourselves to be open to fair challenge of our own thoughts and, more importantly, not be afraid to change our own advice if new perspectives or arguments are brought to our attention. However, we needed to change quite dramatically the way in which information is handled and stored in the Department. This job will be costly and it will take a lot of time to achieve best practice. While there has been much improvement in recent years in the quality of information on which we must base our daily decisions, it is still very much below what I would consider to be the optimal level for policy decisions to be made on a national basis. It will require considerable further investment of technology and time. We are not yet where we need to be to data-mine the wealth of information that must be present across all Government organs of State so as to make the best decisions. This should be a priority across the entire system. We need to continue to break down silos and improve communication flows, to be more efficient and to use technology to do that. One of the small successes that is of particular importance as a starting point for us is that after processing 5,866 parliamentary questions using a paper-based system in 2013, we now have an electronic system, so moving physical files around the Department will no longer be a feature of our work in 2014.
Equally, we are aware of the leadership role that we need to play. In dealing with stakeholders we have been trying to engage somewhat differently with the wider public service by showing greater leadership and leading from the front. Mr. John Hogan has chaired two very important committees on mortgage arrears and SME credit to drive a cross-departmental piece of work. I commend, in particular, the way he has embraced the new management techniques we have been using in the Department and has allowed them to be used across a much broader system. We have also been responsible, under the direction of Mr. Paul Ryan, for a number of shared services projects which are key to making the public service more efficient. We have been involved in the Clearing House strategic group and have led the performance of the medium-term economic strategy, as well as supporting Action Plan for Jobs. We have also stepped up to the mark in Europe. My colleague, Mr. Aidan Carrigan, has been appointed vice chairman of the financial services committee in Europe, which has significantly increased Ireland's influence in respect of policy decisions coming out of Europe.
I have heard it said over the course of the past two years that the Department is closed to the views of industry and the social pillar, but this is not the case. For many years, under Mr. Derek Moran's direction, the tax policy unit in particular has been leading the way in terms of the way it consults outside stakeholders. However, we recognised that more could be done and that we could be more transparent. As a result, we have published diaries on our website to ensure people know who we are meeting and that we are available for meetings. We have also taken a break from tradition by identifying on our website - by name and photo - our management team in order that people understand who is responsible for what within the Department and to promote accountability for our actions.
The example that sticks out the most for me in terms of changes to the way the Department operates is the way in which we handled the preparation of the medium-term economic strategy. We consulted not just with people in the system, that is, the economists with whom we discussed the type of areas we should be examining as we developed a plan for the next seven years, but also with external stakeholders of an official type. More important, as we worked our way through the system, we realised that this is a country that has changed dramatically, and so we set up a young entrepreneurs event where we brought people of diversity into the environment. We invited young entrepreneurs under the age of 35, female entrepreneurs and people who did not grow up in Ireland to give their views, which assisted us in developing a path for the next seven years. The way in which we deal with academia has also changed significantly. We now think we are moving into an environment where the Department is able to produce papers and information which will help others to analyse the same policy issues with which we are struggling as we go through the various actions we have to do.
I have mentioned the way in which we have changed our engagement with the international world. Ireland does not live in a vacuum and we have commented on the need for a new engagement with respect to Europe and the outer world. By having a new international division, we have done that, not only by having our people visiting other areas but also by engaging in very significant bilateral secondments to other treasuries and to the European Commission as we build our team and have new people come to work with us.
The public, however, remains our most important stakeholder. Our Department is less public facing than others in terms of the delivery of our services. We are conscious, however, that every decision we make has a direct or indirect impact on all public shareholders. This means we are fully aware at all times of our responsibility not only to work to increase living standards but also to ensure we do the maximum to ensure sustainable growth for the future and avoid pitfalls that are inevitably lurking ahead. We have invested a lot of time in improving the communication channels we use for the public. I can also say that in the Department there is a greater recognition that we owe a particular duty to the public to ensure we do whatever we can to avoid falling into another failing in the management of the economy. For that job, the embedding of a new culture of openness, of internal and external challenge, peer review, risk management and robust and innovative policy formulation is key. This is not easy stuff, in case anyone thinks it is. It requires ensuring adequate investment to have access to the best talent and the best information. It also means learning to listen and embracing an environment - often lacking in organisations - of open, free and honest debate and mutual trust, where everyone's views are well received and cheap shots avoided. It means nurturing talent to create the leaders of tomorrow who need to be instilled with a sense of creativity to help to develop policies for a changing world and also a sense of conviction and of courage to be able to identify the next problem and shout "stop" when it is needed.
As I said earlier, I am proud of the team with whom I have worked. I hope this committee and our other stakeholders are happier with what we have been doing in recent years. Along the way I have had occasion to mention many of the senior managers of our team, but it is the other unsung members of the staff to whom real credit must go. They are the people who have made our results a reality. I thank the committee members for their attention and hope I have stirred some thoughts and ideas about what we might talk about. I welcome the opportunity to address the committee and look forward to questions from members.
I thank Mr. Moran and his officials for appearing today. I echo what the Chairman said in his opening remarks as I have always enjoyed our exchanges with Mr. Moran at this committee. He has been a transformative Secretary General at the Department of Finance. As he said in his opening statement, today is a good opportunity to look back at the past two years and how the Department has been managed. If we have time, I would also like to look at the medium-term strategy because it is probably the most important document the Department has produced during Mr. Moran's tenure and it merits detailed examination. As this may be Mr. Moran's last appearance before the committee, I invite him to be as open and forthcoming as he would like to be in discussing issues relating to the Department.
Mr. Moran mentioned the Wright report in his opening statement. Was that the first document Mr. Moran picked up when he went into the Department two years ago? Is that where he started?
Mr. John Moran:
I did not quite have that luxury when I started in the Department because, as the Deputy will remember, we were in the middle of a banking crisis. I had to deal with the banking stuff first, but in the course of the first year I had the luxury of working in the banking unit before becoming Secretary General, and that allowed me to observe the way the Department worked. Clearly, I had my own observations in terms of governance and various issues. At the time, the Department was being split in two, which meant there was an opportunity to revisit governance structures in a way that might not have been possible if everything had been as before. The Wright report had identified issues within the Department, and Mr. Kevin Cardiff quite correctly suggested that before I embarked on developing my own ideas about where we might go, I should pick it up. In fact, we compiled a report on all the recommendations in the Wright report against what we could do. As I mentioned and as is obvious from the list I have just given, there were other things that were obvious in terms of what was needed in the Department, some of which were caused by the split. Inevitably when one splits a whole into two, some pieces move to either side of the line and that left some gaps we needed to fill.
Mr. John Moran:
No, a process was under way. What has changed is that in the past two years we have tried to split up peoples' responsibilities more. Setting up a corporate office to drive issues like the introduction of business planning meant that there were people for whom that was their day job. They were then insulated somewhat from some of the day-to-day problems that were hitting us from all sides at that stage.
Mr. Moran has listed different changes, including the fact there is a person dealing with the State's accounts with 20 years accounting experience, there is a risk officer, several project management teams and so forth. The Department has been totally restructured in the past two years. There has been a total change in the landscape in terms of how the Department of Finance works. Is that fair to say?
Mr. John Moran:
Yes. What became obvious to me - risk is a good example - is that many people in the Department were focused on what one would describe as risk. Risk was being managed by people who were thinking about the risks if tax receipts did not come in at the right level or the risks in terms of banking issues.
What is different in the way we have approached it is that while people are still focused on those, spend their time identifying risks they deal with and come up with plans as to how to deal with them, there are now separate groups of people who manage the risk register. They sit in a room with other people across the Department thinking about risks that occur across the whole area in order to do a peer review. Some of that structure was missing. We have been involved in the recently published national risk assessment whereby some of those techniques will spread all the way across Government.
Mr. John Moran:
I think everybody understands there were failings in the system. It is very difficult with hindsight to try to decide what one would or would not have done. One observation I had during the time I was there was that compared with other environments in which I had worked, we were looking at a series of challenges that were being managed by people that were critical point issues to be dealt with across the system. Even at that stage, there was some limited information in terms of being able to deal with them. It is easy to say that in other environments we would have seen more people dealing with those issues. However, people took the decisions, which were perhaps understandable at the time in terms of budgetary restrictions, not to resource the problems as much as they might have. One of the lessons is that we have to find a just medium, both at this committee and elsewhere, to avoid creating an environment where people are afraid to spend money and invest in dealing with problems.
Mr. Moran referred to getting settled in the Department and then turning to the departmental report on the Wright report and how it would implement it. Are there any recommendations Mr. Moran did not agree with in that report?
Mr. John Moran:
Off the top of my head, I do not recall exactly what it was. I know we spent a lot of time going through them. In fact, we have even sent a document to this committee. Some of the recommendations were no longer relevant, quite frankly, because the Wright report was about a Department with a lot of other issues, including spending. Our approach differs from the Wright report. In fact, it was more necessary due to the way we had restructured the Department shortly after my arrival in 2011. When we brought in the team from the NTMA, which was managing shareholdings in the banks, we integrated everything into one unit rather than having two separate ones. It became easier to see that, in some respects, we were also not just the Department looking after the State's finances but also the Department looking after shareholdings in six large institutions, some of which were being wound down, and NAMA on top of that. Moving towards an environment that would replicate a large holding company structure and having a legal department and a risk committee was a much more obvious step at that stage because the Department had a policy function and a shareholding function.
In discussing it with colleagues, we understood that the type of techniques used in the management of shareholdings and entities were quite applicable to a lot of the decisions we were taking and the way in which we were dealing with issues and policies.
I would like to touch upon the bringing in of expertise. The recommendations in the Wright report talked about substantially increasing analytical capacity in the tax policy area. We spoke previously about getting the right staff in the Department and Mr. Moran mentioned that today in terms of reputational risk. It has also been raised in terms of salaries. I think Mr. Moran said that 100 new staff have come in. Is he happy with the Department's capacity to meet things like tax forecasting or risk analysis in various areas?
Mr. John Moran:
Mr. McCarthy might kick me from the side on this one, but I mentioned the struggle concerning information technology that is available to us. There is a certain duplication of effort when things are too manual. When one is moving from one spreadsheet to another, one must double-check stuff. If one had a single, integrated system, we could have a lot more information. We could optimally have a better sense of where forecasting needs to go by drawing on information sources from other areas. That technology does not exist in the system at the moment.
As for the more intellectual challenge of doing this, I think we are in very good shape. When I took over as Secretary General, we were fortunate that a large number of institutions volunteered staff to us. It was simply not possible to hire staff at the necessary speed so that we could work pro bonoin the Department and train up people internally. It takes some time to do that.
During Ireland's EU Presidency we had a similar interchange of people who came in from the private sector and worked with the Department. We still have some work to do in encouraging and allowing more people - who have grown up in the Department and have it as a future career - to spend some time externally in other environments and vice versawith other people. That mix of skill sets will improve the overall position.
Mr. John Moran:
It is perhaps not just the Department but the whole of Government which is moving towards an environment in which we are able to use the information that is across the whole system in a much more automated way than is currently the case. We can use some of the work that has been done by the Central Statistics Office and others, and have a greater investment in using this type of stuff, because we are in a world of open data. However, we are not necessarily in a position yet where those techniques are finding their way into the cohesive whole of government approach.
Mr. John Moran:
We have started to mention it. Maybe I can say this today, but I could not have said it two days ago. I do not think we should be ignorant of the fact that this is a very large multi-year project. Some of the work that Mr. Dempsey is trying to do on financial accounts concerns a series of improvements over many years which will involve quite a lot of effort by people. As we move out of a period of crisis management across the entire system into a period of stability and building for the future, I think there is an opportunity to focus on this kind of stuff as well. The Department of Public Expenditure and Reform is looking at techniques to allow a whole of government approach to reform.
What is the relationship with the Department of Public Expenditure and Reform now? Mr. Moran spoke about closer collaboration with that Department, but has it proven difficult for the Department of Finance, being cut in half?
Mr. John Moran:
It is a very good decision to keep us all in the same building. In effect, that allows people to continue working together very well. We are both participating in economic management councils and we share the preparation of papers. There is a quarterly exercise of looking at Exchequer returns, which involves both the expenditure side and the revenue side. By definition, that means that people are constantly stitched together during the year, which is incredibly important in preparing the budget at the other end.
We both have a shared purpose and shared views on infrastructure and development in the State. They help to identify the projects that need to be done. Our Department can bring to that some of the other elements of what we do in terms of financing techniques to bring new financing to those type of objectives.
Are there fluent management structures between both Departments? Could an assistant secretary or a second secretary go straight to a staff member at the Department of Public Expenditure and Reform with a task? I know they are in the same building but are they completely siloed in separate Departments?
Mr. John Moran:
There is a surprising amount of work done. In fact, during the short break we were talking to some of the people who asked if we would present to one of their committees on some of the work we are doing. Therefore, we do get this integration. The proximity, in terms of being in the same building, certainly helps.
Mr. John Moran:
It is not just at assistant secretary level, but from assistant principal officer level up. We took the view that should be done for a number of reasons. One of the things that has occurred is that it has also helped to set the benchmark for people and an understanding for those inside. We have had a number of people who have been successful in competitions at a particular level. After a year of performance management and further training, realising they have additional skills, some have found they can go for competition at a level above that and move with extra speed through the system to find their appropriate level. It has been very successful as an exercise and well received by staff.
Mr. John Moran:
Typically, they enter as permanent members. There are probably some who have come in on fixed contracts but typically they are permanent. We took in, over the course of 2012, 40 graduates at administrative officer level. They were also eligible for these various competitions subsequently along with the rest of our staff.
Mr. John Moran:
Essentially, there is a once a year process of sitting down with one's manager and going through a form. We had a difficulty the first year it started. Due to the lack of completion at the beginning, the objectives had not necessarily been set for people. Now we are in the second cycle of where we are going. What should happen is that objectives should be set on an individual basis for all staff and checked by the corporate office and human resources people to ensure they map up with the business planning process and align with the Department's objectives, individual units' deliverables and how individuals contribute to those over the course of the year. To the extent that we identify at the beginning of the year that additional training or help might be useful to complete those objectives or for other reasons of progression, it is noted on the form. The form then crosses to the HR team which builds that into the learning and development plan for the person. There is a mid-year review and at the end of the year there is a genuine series of conversations with people.
What was interesting as a departure in the last series and what worked very well was that there had been some discussion about whether and how one sets the exam equally for people across the entire Department. Inevitably, people are achieving or exceeding objectives. For the system to work well, it is important they feel the same exam standard is set for everyone. To encourage that, we introduced in this round - beginning at senior management level - a Department-wide discussion on all principal officers, cascading down, whereby views were exchanged as to what the relative performances of those people were. We asked those people in turn, who were initially dubious about how the process worked, to do the same thing for the assistant principal officers who were working to them. This year, we have got to a point where people feel a lot more comfortable that this represents a fair assessment. We have had situations where we have identified people as performing less well than their peers and worked with them to improve by obtaining the right skill sets and training.
As I have said, there was a six year period where very little training was done in the Department. Working with that, members will see in our accounts the extra budget funding for training and development now.
Mr. John Moran:
Early on, I said that it is not done. There is a path to go through. We now have a risk committee that meets monthly. The committee will have to continue to meet and talk about risks. With each subsequent discussion, the discussion gets better. The process works better and the crossover between that and the policy committee and all the various communications that have to happen improves.
The parliamentary question submission system means that process is now paperless. We are moving that technology to cover all submissions that go through on policy matters. This will help to create a much improved record of the process of deliberation. The system will be automated to allow it be searched more easily. It is a continuous process of improvement and it does not just stop.
Mr. John McCarthy:
Parliamentary questions are a very good example. The Deputy asked about our interaction with the Department of Public Expenditure and Reform. Both Departments have engaged in doing that together. The outsourced information technology is a function of the Department of Public Expenditure and Reform and we are moving to an automated system, having already done so in relation to parliamentary questions, for ministerial and policy submissions. We are moving together; therefore we can roll it out further. The genesis for the exercise was a journey one of our people undertook to other Departments to spot other best practices. Some Departments are ahead of others. There were others which already had some of this stuff.
Mr. Moran is welcome to the committee. I wish him the best in whatever career he moves to. He will do very well. I thank him for his years as Secretary General. The fact he came from the outside was a good idea.
I want to discuss banking and banking debt, but the figure before us on Government debt is for the end of 2012, when it was €192 billion. What is the most up-to-date figure available?
That is fine. I was interested in the documentation Mr. Moran provided to us on the cost of the banking crisis, which is a heading on a chart on page 27 of the document from a speech Mr. Moran delivered last week. He had various charts with him which I wish to summarise. I quote his figures as we all get lost on these issues.
The first chart I found interesting was on page 7 of his document and it illustrated the dependency on banking in Europe. Essentially, the point the Department or Mr. Moran was making was that the banking crisis had a far greater impact in Europe than in the USA. He set out figures showing that the aggregate balance sheets of the EU banks were four times higher for the EU GDP whereas in the US, they represent only 0.8% of GDP. It probably explains how they were able to take a hit like the collapse of Lehman Brothers when the banking sector was not even 1% of GDP. In Europe, the European Central Bank had to be far more defensive of the banking system and maintaining banks which represented 4% of GDP. Whether it was right or wrong is another day's work entirely. Has the percentage changed much? Does that suggest that Europe continues to be at greater risk if there is something wrong with European banks versus banks in the United States where the banking sector is a much smaller proportion of the economy?
Comparing Europe and the USA, what is the position in the OECD or among other major partners? Are they closer to the high level of European dependence on the banking sector as part of its GDP? Is the OECD average closer to the USA? Is there a fundamental strategic weakness in being so dependent on the banking sector in Europe?
Mr. John Moran:
The Deputy has picked up on an important point. In the speech associated with this, I make reference to how we have been approaching the problem over the past couple of years. Europe and Ireland had a particular vulnerability at the time of the impact of the crisis because so much of the economy was funded on bank balance sheets. The impact of regulatory change designed to make banks safer, which has been coming through the system thereafter, had a disproportionate impact on the European economy as a result. To answer the question on the OECD, looking at Canada and Australia and what has been happening in other countries, we find that infrastructural funding continues to be significantly funded through capital markets instruments outside the pure banking system. A bit like the US, although that is more to the other extreme, they have embraced non-bank techniques for funding growth in the various economies. We took advantage of this and were able to benefit from it in 2011 when we took the decision to accelerate the sale of the Anglo Irish Bank portfolio in the United States. It was obvious to us early in 2011 that the US had recovered to have more liquidity than Europe. That liquidity allowed us to derive a pricing benefit in respect of the sale that was not obvious here. In some respects, from that point onwards, as we think about what we have been trying to do in the banking policy area, which is one of the reasons pulling together the financial services team and the banking policy team makes more sense from our perspective, we have been trying to fix the banking system and trying to encourage funding sources that are not within the banks. A measure of success of that in Ireland, which has put us ahead of the European system, is that following the liquidation of IBRC, which was a large part of our domestic banking system, very little of the credit supplied by that bank moved to the domestic banking sector. That has allowed us, particularly in the funding of real estate projects, to move to an environment where significant funds come into our system other than through the banking system. The obligations of Basel III and other regulatory changes is that credit will be more expensive if provided by banks.
In Europe, where did Ireland stand at the end of 2008? I refer to the balance sheet of the Irish banks relative to GDP. Where does Ireland now stand? Are we way above the European 4% figure? Perhaps Mr. Moran did not expect this question.
Mr. John Moran:
In 2011, when we did the PCAR analysis, in some respects we identified putting in place a system that would have AIB, Bank of Ireland and the rest of the Irish banks. It was roughly €100 million each, amounting to €300 million and 2% of GDP in the domestic banking system. In some respects, the failure was that by operating the system we did not have many deposits. The structural difficulties in existence were that there were two types of economy - domestic and international - funded through the same banking system so a stable domestic deposit base, around €150 billion, was funding a much larger banking system. We also moved over the NAMA assets, which had come out of the banking system and a lot of other deleveraging had taken place.
European economies had greater reliance on the banks relative to the size of their economies and so there was a greater move to protect each country's national banks. We nationalised our banks and Mr. Moran is now calling for denationalisation. That is the Irish view. Is it also the European view?
Mr. John Moran:
The Deputy may not be aware that we were asked to co-chair an analysis group on this issue for Europe. It was presented by us along with my Italian co-chair, Alberto Giovannini, to an informal ECOFIN meeting in Athens. The slides presented here was the message we gave to Europe and accepted by the group at the time. Europe is now acknowledging that we must move towards an environment in which securitisation and much closer connectivity between pension assets and the rest and projects that need funding is part of the system.
The heading on page 27 refers to costs of the banking crisis. This submission states that Ireland invested €64 billion in our banking sector, which was 40% of GDP at that time and Mr. Moran is saying that, since then, we have generated income of €5.2 billion from the bank guarantee, €4.7 billion from the sale of Bank of Ireland contingent convertible capital notes, CoCos, Irish Life and the redemption of preference shares by Bank of Ireland, bringing the net figure to €54 billion. Mr. Moran is saying that the State investment in Bank of Ireland is €1.5 billion, €11.6 billion in AIB and €400 million in Permanent TSB, amounting to a total value of €13.5 billion. Some €40.7 billion is the net cost to the Irish taxpayer to date, with €64 billion being the top line figure, €1 billion generated from the matters mentioned and assets, based on the valuations on page 27, of €13.5 billion. This amounts to about 25% of our €160 billion GDP. Is this correct in respect of the cost of the Irish banking crisis relative to GDP?
These figures are important because we all know the €64 billion figure.
In respect of the IBRC liquidation, can Mr. Moran give an estimate of the fees and costs associated with the IBRC liquidation of February of last year? It is well in train and we are nearly there.
Mr. John Moran:
I will ask Mr. Des Carville to speak about this. In the context of the IBRC liquidation, it is important to make points about the process. I mentioned the experience over the course of the past year compared to what we had anticipated. The positive momentum behind the sovereign debt issues and the stability in the economy has moved the horizon of investments for investors, particularly non-Irish investors but increasingly Irish investors, from a position of not wanting to invest in Irish assets to being very happy to invest in those assets. It has allowed us to take advantage of the opportunity to sell up to 90% of the assets of the bank rather than have them transferred to NAMA. This has put us into a virtuous circle because by not having to do so, it got people comfortable with the idea that there was not a residual liability in some respects in NAMA. Even more satisfactorily from our perspective, the risk we faced at the beginning of the process - of potentially discovering that the valuation of the assets when put into the process may lead to a residual risk for the State - has been overcome.
The exercise of doing that, however, is complicated. Our team in the Department has been doing that internally. We have some inevitable costs that were associated with the liquidation originally and the legal transactions associated with that. I will leave Mr. Carville to deal with the costs to the liquidator, because he has been involved in trying to push those downwards.
Mr. Des Carville:
The special liquidators, Kieran Wallace and Eamonn Richardson, were appointed in February 2013. They are legally obliged to produce a statement of affairs two years post liquidation, which will be in February 2015. At that point, they will detail the total cost of the exercise. There is quite a bit of uncertainty around the ultimate outcome of the exercise and around some outstanding litigation. Therefore, it is not possible to predict what the final cost will be, but they should be in a position to produce that statement in February 2015.
Tell me about the tender process. As we know, the legislation was rushed through the Dáil on a particular night in February 2013, although we understand it had been drafted the previous November. Therefore, although the legislation may have been rushed through the Chamber, it was not rushed legislation but was prepared carefully and in a considered manner. Tell me about the tendering mechanism, given word on it did not seem to leak out. How did the Department seek a tender for somebody to liquidate an organisation the size of the IBRC without word breaking out on it between the tender process and the legislation being brought to the floor of the Dáil? How was the tender assessed and what kind of figures are we talking about? I do not want to leave here today without a figure, because that sounds like a blank cheque.
Mr. Des Carville:
The Deputy is absolutely right that confidentiality was maintained prior to liquidation. It was a very closed circle of knowledge and it is a credit to the people involved that confidentiality was maintained right until the ultimate announcement.
In regard to the costs, they are based on NAMA agreed rates with liquidators for services of this nature. In addition, we managed to negotiate an additional discount, based on the volume of work, both on the legal side and on the side of the special liquidators. However, I am not in a position today to give an actual quantum figure.
What Mr. Carville is essentially saying sounds like the tribunal mechanism, namely, that hourly or daily rates were agreed, based on the NAMA rates. Therefore, whether it goes on for six months or three years, the longer the process takes, the more hours are involved. The early successful conclusion of the project, meaning a lesser transfer to NAMA, was probably a bonus. It sounds like a tribunal, with a daily or hourly rate agreed, but with no limit on the number of hours, perhaps millions, that can be included in the process. This is what it seems like to me. It seems it was set up in a similar way to tribunals.
Mr. John Moran:
How we have been analysing the process - this is being done by Mr. Carville's team and some others - is we have been trying to check a measure of the expected outcome of the Anglo business plan, so to speak, at the beginning of the year against the cost of the liquidation. One of the difficulties here is that when one asks the liquidator to undertake the job of effectively managing the bank down to zero, one must do an analysis - I am reluctant to give any sense of the position, although I am happy to send the Deputy the analysis - and compare the total cost of effort required to do the job being done against what the bank would have done. The bank would have had a certain number of staff at the outset and nobody would have considered this expense to be external fees as these staff were the employees in the bank.
We must trust the liquidator to make these decisions, to the extent that the liquidator, in managing the process, might decide to reduce the number of staff and supplement that by people of his own team. The Deputy should recall that at the outset of this exercise, it was unclear what level of co-operation one would get from the existing teams in banks. Therefore, we had to have a certain element of external and double cover in the earlier weeks. As things stabilised, the liquidator was able to conduct the exercise of winding down the banks, using both his own team and the people in the bank. Therefore, the appropriate measure of analysis would be to compare the expected cost of running the bank during this period against the cost now of running the bank plus the cost of the liquidators' fees. In a sense, whether one pays for somebody who is an employee of the liquidator or of the bank to do treasury activity, it is appropriate to look at both. One analysis we were doing was to continue to monitor the expenditure of the liquidator, in the context of adding that to the cost of running the banks, to ensure we did not get into a situation of excessive expenditure, given the job in hand. At the same time, we recognised a considerably different job needed to be done.
Mr. Carville referred to the fact that as we went into the process, we realised significant volumes of work were involved and that the process would take longer because of the level of due diligence that needed to be done and because of the repair job that needed to be done on the assets to allow them to be sold, in the context of legal and other work. Therefore, we re-engaged with the liquidators and the legal firms and despite the lack of a legal right to do so or to require them to exercise a reconsideration of their fees, they have reduced them. We will get the figures on that for the Deputy, but we need to do the analysis to get the total picture on that.
This issue is important. We have been talking for ten minutes about the costs of the liquidation of Anglo Irish Bank, but have not heard a single figure mentioned yet. I repeat that the response sounds like the answer we would have got to a question on the cost of a tribunal, that it all depends. Mr. Moran can see how we can see no difference.
Mr. John Moran:
I am not equipped with the numbers or hours. I wanted to make the point that we can sometimes analyse the cost of doing things. The Deputy should bear in mind the reason I started by making a statement. It is important we maintain a balance. I agree the committee should have the information, but it is important we maintain an analysis around the cost of exercises that is in some perspective to the job that is required to be done. This exercise was one which done badly could have resulted in significant costs of billions of euro for the taxpayer. Done well, it has resulted in no additional exposure for the taxpayer and will likely pay out to some of the extra creditors who expected nothing.
I will send the committee more work on the specific analysis, but we were not prepared for that coming here today.
Let me put it on the record that I am on Mr. Moran's side on this. I believe it was the right decision to liquidate and believe the Department is carrying out the right process. I am happy the Department is getting the various loan fund packages and that it is all happening. Perhaps Mr. Moran cannot provide this information, but does he know what fees the liquidator has been paid to date, over the past 14 months? He must know that. He may not have the information here, but I would be surprised if he did not know after 14 months.
Mr. Moran knows what I am getting at. What fees have been paid? He has given a good context and has compared the cost of the liquidator's staff versus what the cost of what it would have been to pay the staff in the IBRC if it had continued to manage down the bank in its own time. Does he have a figure here on the estimated annual running cost of the bank or will he send it on to us?
My next question is, by what kind of benchmark can we judge this?
That is one type of benchmark by which we can judge the outcome of this process. It is very difficult to find effective benchmarks, but the other one I would suggest is a consideration of how the cost of winding down the €20 billion in Anglo Irish Bank compares with the costs incurred by NAMA for a proportionate wind-down of some of its assets. Might we find, for example, that the special liquidator process was actually a more efficient way of disposing of €20 billion than setting up a State agency in the form of NAMA? Alternatively, will we conclude that NAMA, with its complement of staff and so on, would have been a more efficient way to deal with IBRC? I am trying to find a benchmark by which to assess what is being done. It is fine to be given a figure, but what we really want to know is whether that figure represents value for money. We can only come to a conclusion in that regard by comparing what NAMA has done with what others in the same line of business are doing. I agree it is right not to have two State organisations essentially doing the same business, namely, winding down bad bank loans. I see the sense in that, but has the Department compared one with the other? I realise there are different scales involved here.
Mr. John Moran:
It is really comparing apples and oranges because one of them, NAMA, has a mission that will take a number of years, which in some respects is more similar to the mission that was given to the IBRC management in 2011. The liquidator's job, on the other hand, had two components, one of which was an exercise of stabilisation of a situation with a lot of uncertainty around it in terms of the level of co-operation that might be achieved. To the credit of the team in the bank, its members have co-operated very significantly with the liquidator, which has in itself helped to reduce the external costs. In many ways, that reflects the good result we have achieved in terms of where we have ended up.
The NAMA situation is different. There is a review that is constantly taking place that is apart from the statutory reviews. One sees that the business objectives of NAMA have evolved over time with the new market we are in. As Irish assets have become more attractive and, by definition, more expensive for buyers and better for the taxpayer, NAMA has engaged in an acceleration of the wind-down over and above what was expected at the beginning. It also has mapped some of what it has been doing in terms of the disposal strategies - something it was not doing two or three years ago - to reflect the fact that we now have real estate investment trusts which are additional acquirers of assets. By increasing the number of acquirers, the value of the assets has gone up.
In regard to IBRC, the signs are that further funding will not be required, which sounds like good news. If there is a surplus at the end of the process, where does it go? Mr. Moran referred to unpaid creditors.
Mr. John Moran:
The liquidation of IBRC that was put in place under the legislation was effectively following a normal liquidation process. Even though it was done by statute, in reality, it involves the same process. The first and primary creditor was effectively the Central Bank of Ireland, which represented the residual emergency liquidity assistance, ELA, funding arising from the State guarantee. That is why we speak about the importance of selling the assets over and above a threshold. Once we get over that threshold, the State's contingent liability becomes nil. If any remaining assets arise after that which can be disposed of and create cash, then the unsecured creditors will participate in that. It is important to recall, however, that the State is part of the liquidation and had a responsibility for the guarantee of the large payout of deposits that happened at the time. Therefore, when we sum up all of the unsecured creditors of IBRC, the State is one of those unsecured creditors in that respect, and quite an important one as a percentage matter.
In respect of NAMA, what are Mr. Moran's views on an earlier wind-up? Is it a good thing if we can at least recover par or does he believe we should hold out longer and perhaps make a profit, thereby bringing down the net cost of the banking investment to well below the €40 billion we have been discussing?
Mr. John Moran:
We are engaged in an ongoing exercise of reviewing the current situation in regard to NAMA. It is a little early to make predictions and we are awaiting a report from the board, but we are doing our own review. The stabilisation of the market that we have seen in the past year or so has happened much faster than was foreseen and is at the high end of any expectation we had. That has opened up different opportunities in respect of how we look at NAMA. However, I would like to have the views of the board before saying anything definitive in that regard.
Mr. Moran referred to projections for how the banking sector in Ireland will look in 2020. ACC Bank, Danske Bank and Bank of Scotland have either moved out of the Irish market or are winding down their operations here. We are facing a situation, in other words, where we will have very few banks and very little competition. I do not see that issue being fully addressed in the documents to which Mr. Moran referred. It seems clear to me that the greatest problem in the banking sector in Ireland in the years to come will be the fact there are so few banks in the market.
In regard to the European stress tests that will take place later in the year, we have spoken about the high dependency of EU economies on the banking sector when considered relative to GDP. We are now hearing that some of the larger banks are working to exclude some of their assets from these stress tests. In such a scenario, how valid will the tests really be? Is there a situation where the EU does not want full stress tests because if the result of those tests are poor, that could have another negative impact on the EU economy?
Mr. John Moran:
On the question of competition in banking, what I tried to convey in my opening statement, perhaps not clearly enough, is that there has been a great deal of discussion on whether or not we should have two, three, four or some other number of banks. The point I was trying to make is that we are of the view that people should look first at the size of funding that is going into the economy. I do not know what the exact percentage will end up being but, for example, if we move to a scenario in which 50% of the funding of the economy comes from banks and 50% comes from non-banks, then, by definition, even if we only have three or four banks, they are only comprising half of the funding source. We need to take account in doing the calculation of how many participants are funding the economy of those parties who are playing on the other side. We plan to use the Ireland Strategic Investment Fund and the strategic investment bank to allow more funders to come into the market, not necessarily as banks but as participants who can facilitate an increase in competition. We are concerned about ensuring there are enough providers of funding in the system, but the analysis of the issue is a little more complex than it might appear.
The other important aspect to consider in regard to competition is that we are moving into a world of banking union, where a European regulator will, in effect, be regulating all of the banks across Europe. The Deputy is correct in observing that at the beginning of the crisis what we saw was a nationalisation of banking systems, where national regulators were reluctant to allow their banks to participate in lending activities in other jurisdictions, especially where domestic deposits were concerned. A well-functioning banking union should allow us to reverse the worst impacts of those developments and get back to a situation in which European banks are participating in activities across the Union, and the eurozone in particular. We see a perfectly plausible scenario developing where we stop talking about banks as French, Italian or whatever, because they have become European banks in the same way that we think of United States banks. It is a lot easier to imagine in such a scenario that we would see a return of European banks into the Irish economy, particularly if our economy is growing.
The insurance compensation fund had a balance going into 2013 of €735 million. How do issues such as Setanta Insurance going into liquidation impact on that fund? Do Setanta Insurance and Quinn Insurance, for instance, have a call on the fund?
Mr. John Moran:
The situation with regard to Setanta Insurance is actually quite complex. The problem was that Setanta was an insurance company that was regulated in another European country. In other words, it was engaging in "passporting" in order to write insurance in Ireland. The important issue in this regard is that there are a number of limits on the way the insurance compensation fund actually operates and the pay-out it will make. If, for example, it is a 65% pay-out, there is an overall cap of €850,000 in terms of the amount that will ultimately be paid out. That is why, in the management of this exercise, the Central Bank and others have been encouraging people who are policyholders with the company to take out new policies. There are groups in my Department and the Central Bank which are working through the various issues involved. These issues remain complex in the context of whether the funds are available or whether they can cover corporate purchasers of insurance versus individual purchasers. There is also the question of what happens if there are two insurance policies in place. It is important that the first policy is terminated and that the new one then comes into play. I do not believe we have an expectation of what the actual pay-out might be, but the fund will need to cover it because, in effect, it operates a little like the uninsured-----
Mr. Moran can understand why ordinary people might be concerned about an insurance company in Cyprus having a passport to do business in Ireland. Effectively, the State had no control over that company's behaviour because it was not regulated here and, as a result, Irish people have lost out. Mr. Moran appears to be saying we should take steps in this regard in respect of our financial institutions and that there should be pan-European rather than national banks. If that were to happen, customers of banks based in other jurisdictions could suffer the same fate as those who took out policies with Setanta. The more one denationalises the banks, etc., the more one opens Irish citizens up to encountering problems in other jurisdictions. Mr. Moran has stated this is how the banking sector should evolve in the future. Are we not just asking for a bigger problem down the line?
Mr. John Moran:
We are operating in an environment in which the Single Market and the single currency hold sway. What we have learned in the banking system, for example, is that the infrastructure previously in place within it was not suited to the environment to which I refer. It did not mirror the underlying framework of the economy or the fiscal position. That is why we are standardising deposit protection and the regulation of banks across Europe. It is all coming from the same place; therefore, there is less likelihood of there being a divergence or a failure in an individual national system. This is the opposite; it is a national-----
My final question relates to a different topic, namely, the establishment of Irish Water. Now that the debts of local authorities - from borrowings relating to PPP arrangements, etc., for their water investment programmes - are being transferred to a semi-State agency, what proportion of the national debt will be transferred from general government debt to the debt of the said agency? Will Mr. Moran clarify whether VAT will be payable on water supplied?
I welcome Mr. Moran and his colleagues. I take the opportunity to commend him for the work he has done to date, but I must admit that I am somewhat intrigued as to why he is leaving the Department of Finance. I suspect many others feel the same way. I was trying to think of an analogy for what is happening and the one I have come up with is that it is similar to going to the cinema to see a film and walking out halfway through. That said, it is incumbent on me to note that a great deal of work has been done and the fact that the public finances have stabilised, that there is growth in the economy and that the national debt is decreasing, albeit it very slowly. When one considers the work already done and what has been put in train, it is difficult to understand why Mr. Moran is leaving.
Will Mr. Moran outline the current position of AIB, Permanent TSB and Bank of Ireland in terms of the State's investment in them and their being fully privatised again at some point in the future? In the context of the 2013 statement by the European Union to the effect that it would consider the recapitalisation of the Irish banks, will he comment on the sheer cost of the financial crisis to Ireland? I would like our debt levels to be reduced even further and the issue of bank debt is a central element in that regard. Will Mr. Moran outline his general views on where our dealings with the European Union on the retrospective recapitalisation of Irish banks come into play in this matter?
On SME and mortgage lending, representatives of the banks appeared before the Joint Committee on Finance, Public Expenditure and Reform in recent weeks. Will Mr. Moran comment on the fact that almost 50% of the so-called sustainable solutions relating to mortgage debt take the form of legal letters, rather than anything more concrete or long-term in nature? There are only approximately 38 mortgage-to-rent schemes, of which AIB and Bank of Ireland have each only approved one. During a recent lecture - I do not know whether it was intended to be the case, but this ended up in the public domain - Professor Morgan Kelly commented on the possible impact SME lending could have on economic recovery. Has the Department had interaction with Professor Kelly?
I acknowledge the great work already done, but a number of issues remain outstanding. Perhaps Mr. Moran might comment on some of them. Will he also indicate why he does not intend to continue the work he has started?
Mr. John Moran:
I thank the Deputy very much. I am certainly flattered by all of the comments to the effect that I should remain in the Department, particularly as they appear to indicate I could contribute something more. The Department is now much more transparent in its operations and to continue the Deputy's analogy, we are actually watching the sequel to the movie via the Internet and reading about it on the website.
It is important that people understand there is nothing sinister about my decision to depart. I returned to the system in 2010. It has certainly been an intense and fun four year period in terms of what has happened. It is important to understand what is involved when one is obliged to deal with what, in effect, is crisis-management. Everyone can remember what the system was like previously. We have circulated a number of papers which detail what has been achieved in recent years. There are benchmarks one could try to identify in the context of when one should leave. I do not think it is necessarily a good idea for people to always assume that they are going to remain in the same place forever.
I have been saying to many of the people involved, not only this crew around me who are now well capable of continuing with the job, but those we could not find space for because there are only a certain limited number of seats in the committee room, that it has always been a management principle of mine that I should always find a way to make myself redundant. If a person becomes indispensable in any way in his job he may miss an even bigger challenge or opportunity ahead to which he could contribute.
Mr. John Moran:
Essentially, the job I came back to do was in some ways marked by the troika programme and what actually needed to be done. There was one main objective in respect of the job in hand, although back in 2010 that was not necessarily the way of measuring it, because it did not materialise until later in that year when I was asked to become involved in thinking about the banking system while I was at the Central Bank. In some respects the question was about when we would be able to say that the country was back in the markets again and that we had exited the troika programme. Perhaps it would have been a difficult and a different decision had we gone for a precautionary credit line at the end of last year. I suppose I am pleased to say that we did not and it has worked out and therefore now I can make this decision with a free scope.
Perhaps other things had to be done but the other job that I had to do during that period was, having accepted the role of Secretary General, to identify based on my experience and the discussions I was having with others - there are references to this in the report - what I thought could get fixed on a parallel programme, and to put in place a programme to allow that to happen.
No one has the single truth in respect of what needs to get done. The best way to do this is to hand it over to someone else who can improve further what needs to happen next. Let us consider where we have come from, even in the past four years, compared to the type of thing that we discussed the first time I appeared before this committee. We have liquidated IBRC and the State is back in the markets. I could not say it in my earlier statement to the staff yesterday morning because it was too sensitive, but the restructuring plan of AIB has been agreed and the restructuring plan of Bank of Ireland has been agreed. We are significantly down in State ownership. A series of other things have happened in that respect. As I mentioned already, it was important for me during the course of last year to try to identify what needed to happen for the future and, in effect, lay out an analysis of where we, as a team, thought things should go. This was in effect set out in the medium-term economic strategy at the end of the year. That now gives to my successor and others in the system a direction of travel that comes after the troika programme. It clearly sets out where we should be going and how we should be working to the next phase of the recovery of the economy.
Mr. John Moran:
Yes, seven years. Anyone who does crisis management and such things and who understands that there are many things to change will understand that it is never a good idea to say that they will only be there for one or two years, particularly when they wish to tackle some of the more fundamental reform issues that we were trying to tackle. It was important for people to understand that for however long those issues needed to be addressed, I was prepared to stick around and help drive that forward.
Mr. John Moran:
I have not decided what I am doing. The last time I left for six months, I stayed away for six years. This was an important issue for me and perhaps this is why it is a little unusual as an approach. I took the view, given the role I had and the number of conflicts that would have existed in respect of any discussions about what the future held, that it was critical for me and the system that I would not engage in an exercise of negotiating a contract or taking part in any other discussions about what I might do next. From this perspective, whether it is a public sector or a private sector role and whether it is in Ireland or elsewhere, I can genuinely tell the committee that I have no specific plans or no definite preferences at this stage. It will take a given time to put in place a successor and it was equally important for me that there was not a vacuum in the Department at such a critical time. Anyway, it seemed that this was an opportune time to leave because it will allow the successor time to get his or her feet under the desk in advance of the budget coming at the end of the year, which is in fact the next critical issue.
We wish Mr. Moran well. Let us develop that. Obviously, many good things have happened. Let us focus on the banking system. Will Mr. Moran offer his thoughts on where he sees the future for AIB, Permanent TSB and Bank of Ireland? Can he link that to the mortgage restructuring arrangements that are taking place and the fact that 50% of these appear to be in legal letter form? There is an issue in terms of remuneration. I am asking the questions that the person looking in wants asked. There is an issue with the large salaries of some of the chief executives of the banks. What is Mr. Moran's view on how to deal with that?
A commitment was given at the European Council meeting in July 2013 to the effect that the Council would consider the retrospective recapitalisation of the banks. Will Mr. Moran offer the committee his perspective on that? A significant amount of our national debt is tied into that area. Obviously, it could make a significant difference in terms of the burden. Will Mr. Moran outline his interaction with Morgan Kelly on the SMEs?
Mr. John Moran:
I can comment on the bank system generally, taking for read all that we have said about other participants. The particular banks that we chose to keep in the system in 2011 have been on a journey. In the beginning we thought about this in terms of five steps and we are now very much in the last step. Stability is restored, there is liquidity, they have been capitalised and so on. We are now at the point where we must ensure those banks actually function to service the economy.
Mr. John Moran:
Absolutely. Mr. Carville and his team have been engaging with the Central Bank and the banks and we are starting to crunch the numbers. We believe that our banks are well positioned going into these stress tests compared to some of the other banking systems in Europe. We have already done an asset quality review. They are redoing the exercise albeit with a different pinch point in time. However, broadly speaking we do not expect to see surprises in that element. When we analyse the stress test parameters and where they are relative to the economy and property prices, which, of course, are a significant driver, and so on we maintain that they are where the banks already are in terms of some of the capitalisation we carried out in 2011.
Mr. John Moran:
We are certainly on the confident side in respect of the stress test numbers. It was certainly a far greater uncertainty for us earlier in the year because until such time as we know the parameters it is very difficult to know what the stress tests will be. In some respects the parameters of the stress tests, which involve looking forwards as opposed to looking at the current books of the banks, were going to be a decision of those in the European regulator about whether they believed the banks should operate with a particular level of capital or more, all of which represents an investment in the banks. However, it is a different leverage for the balance sheet. The point where they put that level would have been a result of where they set the parameters of the stress tests. We believe that with the current levels of capitalisation in the banks and where they have put it, at least in the first instance, it seems as if we are in a good position with respect to going into those tests.
Banks are slightly different. They have different parameters, so we will need to examine each individually, but we do not expect to see a significant shock of the magnitude experienced previously.
Mr. John Moran:
They are different. With Bank of Ireland, we have become something of a passive shareholder of 14%. We do not control the bank. Therefore, our decisions in that regard must relate to pricing and when it will be appropriate to sell the remaining shares. The slide shows a gap that we have identified between the amount of money we invested in the banks and how much we have in them currently in the form of share value, which has already recovered. The Government will need to exercise judgment about when to divest itself of an asset that could produce more income and help to close the value gap, but that is an investment decision. We continue to monitor the situation.
Mr. John Moran:
In effect, it is a new management team that was put in place. It is travelling on a path a little bit behind Bank of Ireland, as everyone in the investor community would acknowledge. It has taken time to get a management team in place to deal with the issues. The bank will reach profitability a little later than Bank of Ireland, but it has already identified a clear path in that regard. At that stage, Parliament should probably start considering whether it would be appropriate to sell and, if so, how much of the bank to sell.
Mr. John Moran:
It has come down a different path. It was very much embroiled in a bank assurance entity. Of particular satisfaction to us, it has moved from developing an asset management centre in order to deal with legacy problems to participating in new lending in the markets. Recently, it appointed a head of small to medium-sized enterprise, SME, lending so as to expand further.
From the outset, we have viewed Permanent TSB as a bank that, depending on how the banking sector shapes up across the world, presents even more of an opportunity for a strategic player who wants to participate in Ireland, given its scale and various other factors. The dynamics of how the State might divest from that bank are different, but the important fact is that it is getting back to doing real banking. From the perspective of the economy, what we care about in the first instance is that the banks participate. Then we should have-----
Mr. John Moran:
At the moment, it is a relatively small institution. In a more pan-European banking system like the one to which I referred, there could be scenarios in which something happens. In 2011, we decided that our pure mono-line building society-type model did not seem to be a fully viable banking model. This is one of the reasons that Permanent TSB is engaged in using its client base to broaden its-----
Mr. John Moran:
I have not spoken with him. He had spoken with the Central Bank’s Governor, Professor Patrick Honohan. That is when the Central Bank first stated it would have an interest. I have some opinions on his views, but I have not spoken with him directly, although I would have no problem with doing so.
On European bank recapitalisation, in the announcement in July 2013, Europe basically agreed to consider countries on a case-by-case basis. Ireland, particularly its taxpayers, carried bricks on its back during the European banking crisis. Is this issue live and how will it progress? What is Mr. Moran’s overall view of it?
Mr. John Moran:
The first question is one of timing. The first precondition to a real discussion on any direct recapitalisation is the establishment of the European Financial Stabilisation Mechanism, EFSM. It will be in place at the end of this year. The earliest date at which one can see any meaningful result will be once that is in place and, I suspect, once the results of the stress tests are known and other countries consider how to bring the EFSM into operation.
Originally, we took great care to have written into the relevant documentation an acknowledgement that some situations, most notably from our perspective our situation, should be retrospectively or retroactively – I am never sure which word is right – examined on a case-by-case basis to open up the door for a discussion on-----
I have two final questions. First, Mr. Moran commented on the mortgage crisis. Second, and this will kind of be Mr. Moran’s last testament, what is his opinion of how Ireland will progress during the next three years – I will not make it five, as that would be too long – and the risks that could impact on it?
Mr. John Moran:
Mr. Hogan might address the mortgage issue. That would be helpful, as he is closer to it.
As to Ireland, I attended a conference recently where we tried to predict the future. Someone asked the audience of 300 people how many felt they knew what would happen in three years’ time. Not one was able to raise a hand with any degree of certainty. When we asked what they would be doing in six months’ time, a couple of brave souls started raising their hands.
I am positive about where we are heading. We are seeing a rebuilding of confidence in the economy and a clear sign of recovery, both in jobs and the rest of the important indicators.
Mr. John Moran:
I mentioned what I viewed as being important, that being, to ensure we build a system – I mean the Department and the broader system – that is able to analyse risks, as they will change. Had the Deputy asked me this question last October or November while we were going through the risk analysis ahead of our departure from the troika programme, the main systemic risk that we would have identified related to events in north Africa. We did not envisage the threat to Europe coming from farther east. The risks will change. Therefore, we need to be robust and agile.
One of the most important issues is our ability to create growth in the economy. It goes to everything that drives results. It goes to creating jobs and creating and maintaining a situation in which the debt is sustainable. Unfortunately, in an open economy like ours, this will significantly be a function of what is happening in our main trading partners. We can help by diversifying. The third main activity in the medium-term economic strategy is growing in new markets, but that will not happen overnight. Potential growth levels in Europe, the UK and the US will dictate much of where we go.
Mr. John Moran:
I do. The State is borrowing at its lowest ever rates. Banks are able to borrow. We need to remember where we were and where we are. At the time when I might have imagined what that statement would look like, the Irish banking system had taken approximately €150 billion of support from the European system.
It is now below €30 billion. The guarantee system that we had to put in place started at €375 billion and is now below €20 billion. We are in a situation in which the banks are secure and deposits are back up. There are still jobs at hand. We have new management teams in the banks. They are driving forward on mortgage arrears. One would like to think they are driving forward on the small and medium enterprise, SME, lending and building profitability in the banks, but it will be a process. Rome was not built in a day.
Mr. Moran is leaving after two, which is fairly premature. I am interested in that. Mr. Moran says he has achieved stability in the banking sector. It was reported that Mr. Draghi is refusing to release the letter written by Jean-Claude Trichet to Brian Lenihan because he says there are ongoing concerns about financial stability risks in Ireland. He is not quite ad idemwith what Mr. Moran is saying.
Mr. John Moran:
I know, but every so often I have made comments and found that what was reported was not necessarily exactly what I said. We probably need to see the broader statement. From my perspective - that is the vantage point we are at - we do not see a systemic risk issue in terms of the stability of our banks. I do not know if Mario is talking about something that is broader in Europe from his perspective. I think there are threats to the system in Europe; they are well documented. Clearly, if there are major shocks in Europe they will have an impact on us.
I will quote from the letter. Mr. Draghi states that the ECB decided not to release this letter for the time being, as "the protection of the public interest as regards monetary policy in the European Union and financial stability in Ireland continued to justify the confidentiality of the letter". He further states that even though several years have passed and the prospects of the Irish economy have improved considerably, risks, especially financial stability risks, are still present. It seems to me that he is at odds with what Mr. Moran is saying. He goes on to say that the situation continues to require close monitoring and notes that Ireland is under twice yearly post-programme monitoring by the troika. I am not questioning what Mr. Moran has done so far - that is another day's work - but it seems to me that after two years Mr. Moran is making a judgment of his own work and achievements, which may or may not be right, which is not necessarily shared by Mr. Draghi or others overseas. In other words, there is not necessarily financial stability and banking stability. Does Mr. Moran accept that?
Mr. John Moran:
Part of the problem is that without having been there to hear the conversation and understand the context, it is difficult to try to extrapolate from what he said. To me, financial stability is not just about the banks. Financial stability is about many issues, and I have already referred to growth, the dependence of our State on growth externally and what that feedback loop would be in respect of the sovereign debt. That is the reason we have recommended in the medium-term economic strategy continued fiscal diligence so as to reduce our vulnerabilities. We are a State that is still spending more money than it is earning. We have high debt levels and therefore we are vulnerable to external shocks. Part of the process that has been set out is reducing those vulnerabilities. I am sure the ECB has an interest in that as much as anyone else. We have learnt the impact it can have in other countries in Europe across the whole system. The Deputy would be correct to say that if we look across the European platform there are many countries in which one would say there are risks, and the development of those risks in an adverse way could give rise to financial stability issues. That does not mean we have a banking system that is unstable.
They do not want to release it because they think it would affect the stability of the banking system in Ireland, which is a fairly strong statement. It is in reply to a question from Martina Anderson, the Sinn Féin MEP. It is a fairly strong statement to the effect that the dangers that existed in 2010, which were obviously referred to by Jean-Claude Trichet in a letter to Brian Lenihan, remain. Otherwise, he would release the letter. If it were all over it would be historic.
Mr. John Moran:
I would not say the situation is the same now as it was then. When that letter was written we were talking about a banking system - I do not have the exact dates because I do not have the catalogue of years exactly right in respect of that - which had €150 billion of funding from the ECB because it could not raise its own funding. There was nobody willing to lend money to the Irish banks and depositors were not willing to put their money in the Irish banks. Not even Irish people were confident about the Irish banks. We are now looking through a lens in which the banks have grown their deposit base from that period by over €15 billion. That is almost 10% of the deposits. We are looking at a system in which they are borrowing money on an unsecured basis using their mortgages as collateral for the first time since the crisis occurred. I do not think of those two situations as the same, but I would not want to question Mario Draghi's views on it.
Mr. John Moran:
As I said earlier, we have a risk register in the Department. We look at many different risks. These situations could develop. We are comforted somewhat by the issues we saw when a banking crisis developed in Cyprus. We did not see any impact from that in Ireland so I believe the vulnerability of our system to even external shocks is much less than it might have been at the time that letter was written.
Obviously, Mr. Draghi does not share Mr. Moran's confidence. Otherwise, I presume he would release this letter and say it was historic.
Does Mr. Moran see any real dangers ahead for the Irish economy or for the stability of the banking system? Is Mr. Moran saying we are completely out of the woods in that regard?
Mr. John Moran:
No. I did not say we are fully out of the woods. I have already stated that we have many risks. One way to describe it is that we have dark shadows in every area. We are not in a particularly vibrant world at the moment. We have gone through a system over a number of years of low economic growth which has, by definition, depleted many of the balance sheets of various enterprises, including but not limited to the banks. We can see a number of downside risks but we can see considerable upside risks on the environment as well. The problem is to monitor them and share the information and the lessons we have as much as possible so we can get other people's views on them.
Mr. John Moran:
-----but we have been talking about the banks up to now in terms of the job at hand. The job I came back to do in 2010 was to deal with banking systems. I had already been dealing with the banking system for four years. In terms of a list of things that have improved significantly since then - I will not bother to go through them, as they are in the report - a significant number of things have been achieved. If I had tried to guess where we would have been on those I would not have expected us to be as far down the road as we are, even now. That is because things have improved across the world in a positive way in the past year or two, and particularly in the euro area, in ways that I would not necessarily have expected.
Mr. John Moran:
No. I said that I considered that the job in hand was to come back to Ireland to help a situation that was under what I believed was very considerable stress.
I would have agreed with Mr. Draghi or Mr. Trichet at the time on the level of risk to the financial stability of the State. Over time, we have moved to a scenario where there is considerable stability in the system. I have a management team in which I have full faith. Issues such as mortgage debt and household debt are still very important and we need to continue to work through them in our system. We will not find a magic wand, wave it over these problems and make them disappear. Household debt in this country has decreased by €30 billion in the past four to five years. If it decreases by another €25 billion or €30 billion, we will start to get into territory that one would regard as much safer by international norms and where one would not necessarily see the same drag on domestic recovery. However, as with every household dealing with these issues, a path is found, but it takes some time to get to the destination. We are seeing all the various important indices moving in the right direction. As part of the job in hand, we have now got to a point at which we are actually looking at these issues, sharing the information with people, helping others to analyse the issues and continuing to work through them.
The mortgage arrears situation is another issue. I have been well reported - correctly in this case - as actually having identified what was a real problem back in 2011 and 2012. I referred in particular to the risks to the economy of excessive debt in households and SMEs, and the need for the banking system and others to move forward and drive towards a real resolution of the issues across the system. However, there were not systems in the banks to deal with these problems. There are now such systems in the banks. Some of them are moving faster than others but at least they are all moving in the right direction. It is now for the regulator, Mr. McCarthy and others to continue to monitor the trends and keep the pressure on. One hopes the banks' management teams and boards have also realised the importance of their keeping the pressure on so as to ultimately resolve this issue and ease some of the pressures pertaining to the domestic economy.
Mr. John Moran:
When we did the stress test in 2011, we were thinking in terms of ending up with a capital hole in the banks that we wanted to keep in the system that could have been as high as €30 billion. That order of magnitude is a very significant risk to the State and an enormous drain on it. We are looking at a stress test that looks like a normal stress test for banks that are operational. The weakness of our banks in respect of the stress test is that they are not all generating capital in terms of profitability, which, in normal banks, we would like to see. As banks grow, they need more capital to be able to fund a growing balance sheet. The mere fact that in a stress test one says a bank needs more capital is not necessarily negative in itself. However, what we think is that the magnitude of capital, were it to be required - I am not saying it will be - would not be such as to create one of these financial stability shocks to the system. That is the information we are getting from the banks' management and the Central Bank.
Mr. John Moran:
Yes, I am. However, I did not say we would get through them with absolutely no capital required. Each of the banks will have to be examined. On the question of whether we will get through the tests without creating a major shock to the system, I believe we will. However, there are a number of issues that arise. If one looks specifically at bank stress, one realises there are a number of elements that are common throughout Europe that have a particular impact on our banks. I do not have the information to know whether this will actually lead to what is suspected. For example, there is an assumption that any asset in the bank gets replaced with an asset generating the same return. That means that every tracker mortgage book that is repaid or portion of a tracker mortgage book that is repaid in the Irish banks is assumed to have an equally low-margin asset replacing it. Of course, that is not the reality. We know the reality is that the banks are actually rewriting mortgages with much higher levels of income than in the back book they have as they work through that system. These are complex issues. Making statements on and estimating at this stage of the year what is going to happen when the banks do what will be a very significant exercise of calculation under the stress tests is not an easy task, and it is not necessarily a fair task to ask me to do. As we look through our lens and pick up all the information we can pick up on the basis of the parameters, we do not regard the stress test at the end of the year as one whose magnitude will be such as to create a significant shock to the system. It may create no shock at all.
Mr. John Moran:
If one is running a bank - these people are running banks - the first place to go for capital is the existing shareholders or the private sector. We own only 14% of one of the banks. If there were even a call for capital in that bank, the most we would be putting in would be 14%. We do not even need to because it is likely that the bank would raise capital through its existing shareholders. We either participate or do not participate.
Mr. John Moran:
At that stage, we will have to have a sense of it. The analysis will be effectively the same as that determining whether we should sell portions of AIB. If we were allowing AIB to raise capital in the private markets, that would have the effect of diluting our share in the bank. However, there would be more money in AIB because there would be more capital. Therefore, the bank would essentially have grown larger. We would just not own all of it.
Mr. John Moran:
I was asked earlier about my views on the various banks. I have indicated that we see these banks as effectively following each other through a path. If I were being asked this question about Bank of Ireland, nobody would doubt its position on raising capital at the moment. AIB is a little behind. I think AIB could raise capital at the moment if it wanted to; it is a question of price. Our management of the AIB shareholding for the State does not involve our asking whether we need to sell the shares but asking whether we have prepared the asset that we ultimately want to sell in the best way so as to maximise the shareholding value of the State. If, after the stress test, the bank requires capital - I do not know whether that will be the case - and it is to be raised from the outside markets, we will have to ascertain whether the investors would put a value on the asset that we are essentially selling by allowing ourselves to be diluted because we are not chasing 99.99% of the offering. We would have to ask whether we believed we had the asset at a point that resulted in the maximum value for the State or whether we believed it was better for us to be the investor in terms of the bank - in other words, to continue to hold the dominant share because the asset would look better in the future.
Mr. John Moran:
We have also put in place a whole system of direct recapitalisation. We are going back into the same environment as earlier. At the point at which we examine these various options as the shareholder, we could decide to put in more money. We could recycle money that we have taken out of other banks and say it is a good idea to put it in. I do not know whether the Deputy considers that to be going back to the taxpayer, in respect of the assets, but there has to be analysis at the time of what we believe the asset value to be and the best way to handle it.
Mr. John Moran:
Mine was not yesterday. It was badly reported on the radio yesterday apparently. The reality is that 14% of the bank shares are held by the State. We were not the only shareholder to vote for that remuneration. If one looks at the performance of that bank over the past number of years, and if we talk about maximising shareholder value, at a certain point, I believe it is appropriate to recognise the performance of a management team and to find some parameters in which one recognises that performance. There are lots of different ways to do that but, certainly, one important issue would have to be the valuation of our interest in the bank and what had happened to that in terms of how the bank had performed and the value created for the taxpayer in respect of the shareholding over the period of time. In that respect, Mr. Carville might have the exact numbers of how many voted in favour.
Mr. John Moran:
We had, but it may also be that it was shareholders saying their asset had gone up very considerably in value, they are happy with the performance of the management team and they do not think it is important enough to destabilise the team by starting to look for pay cuts in a scenario in which we had already got that as compensation.
Mr. John Moran:
The advice was along the lines I said, which is that we had a number of different considerations to take into play, including what was the objective performance of the bank over that period of time, a large measure of which is the valuation of the shareholding. We talked earlier about the AIB gap of €6.5 billion. If we were to find that the AIB management team and others were to find a way to close that gap, we would be very happy as shareholders in respect of the bank shareholding at the end of the year. I do not believe we would be sitting here quibbling about this amount of money; we would be finding ways in which we might reward the management team.
Yes, but the Department voted for him. If it had objected to that, it would have expressed reservations and voted "No". What does the chairman do to get this? The €490,000 is utterly outrageous but what does he do for the consultancy deal? That is an extraordinary deal for someone to get.
Mr. John Moran:
First, the decision is a policy decision, as the Deputy knows. As to what way the Government wants to vote on this, we make recommendations as things come through, and we give suggestions in the context of what I said at the beginning and in the context of risks and various other things we might have in the system. I can say this as somebody who is not going to be involved in these decisions next year. However, I do think it is important for us to reflect a little, particularly in the political process, about these types of issues, which are very sensitive issues, and how we want to handle an environment in which we can find a way to reward people for the work they are doing.
With regard to the issue of an executive or non-executive chairman, as both of us know, having both sat on boards, what may be described somewhat easily as "only working a certain number of hours a week" does not and should not reflect the reality of the responsibilities of officeholders. I believe Deputy Ross and I would both agree and like to see that people who sit on boards take the responsibilities very seriously and engage with the institution in terms of the amount of time that is required to do what is required to be done. While I do not want to personalise this with respect to any one individual, a search was conducted for that position and relative skill-sets were put in place, the board of the bank recommended this as the option to us and to the Minister, and we agreed to do it. However, we did it on the basis that this is an individual who is not necessarily just counting the number of hours he is doing. He is undertaking very serious responsibilities as a chairman would have in respect of the control of the board and, indeed, of the CEO and the management team. It is important that, as we think about our system and about reasons why people leave or do not leave the system, we try to find a balance that actually gets us into the right space for the future in respect of growing the economy.
I think it was an extraordinary opportunity that the Department missed to reform the way boards are selected and paid, and the way individuals always come from the same pool of insiders, and are selected and land in these plum positions where they are paid outrageous sums of money, which their career records and CVs do not justify. However, that is a reform which, I suspect, Mr. Moran is also going to leave to his successor.
Mr. John Moran:
I would like to mention one point, which is that from the very beginning of the process, since 2011, we have made it very clear to people that if they are interested in serving on the boards of the banks, and interested in serving other issues, and they have the skill-sets, we are interested in engaging in picking the best people for those roles. However, we have moved into a scenario where we are not flooded with all of these people who Deputy Ross seems to believe are out there, who have these very competent CVs and who are willing to work in various institutions across Ireland. There are some but I think the Deputy would perhaps like to create an impression that we are operating in a very small pool in some way on purpose. That is not the case. We have again gone through a very exhaustive search in respect of AIB, where we need to find a chairman for that institution, and that is coming to a conclusion. The Deputy will probably like to describe the situation somewhat similarly again into the future.
Mr. John Moran:
However, the reality is that we do not have this list of people the Deputy seems to think are out there. If he can help us in finding those, we would be more than happy, even before I leave, to try to bring them into the system.
It is easy to say that there are many people who want to do these jobs but these are positions that increasingly carry an awful lot of responsibility. We want the people who take those jobs to do so with the seriousness we need because we have seen the damage and destruction caused in the past when those jobs were not done to the right level.
Mr. John Moran:
I want to make one small correction. The Department reacts to the names submitted to it by the boards of the banks. This is not a case of the Department shutting people off from engaging in the process. My understanding of the last process that AIB ran is that it tried to use professional firms to source people for this role with a competency that is suitable for the amount of money the State has invested in that bank in terms of running and moving the bank to the next level. I do not believe, and I hope Deputy Ross is not suggesting, that the agencies used by AIB or indeed the board of AIB have been shutting people off from participating in those competitions. We are reacting to the people and the lists of names given to us as to whether we can trust the management we have chosen to run the bank and trust the various people they engage to try to source people across the rest of the world. We have not confined this to Irish people but have encouraged them to look elsewhere so as to have a larger pool of potential candidates. If one has people, there are channels by which these people can do it. We certainly have not been exercising any veto at the Department over people who have been coming through to us that way.
In respect of the appointment of the chairman of AIB and what is being paid within AIB, how does that compare with the figures quoted by Deputy Ross regarding what is being paid in Bank of Ireland? The chairman is on €590,000 and the chairman of Bank of Ireland is on €480,000. How does the figure of €843,000 compare with AIB? What is Mr. Moran's input?
Mr. John Moran:
Until such time as we have completed the process with AIB, and I do not think we have gone through the process yet, I would not like to get into individual compensation. We are mindful that there are overall caps in respect of compensation and that to the extent we have been engaging in new contracts with the various bank officials, we have been trying to deal with those in the context of the caps that are in place. This will reflect-----
Bearing in mind the cap and the difference and so on in terms of AIB versus Bank of Ireland and the Department's role in it, it is unusual that the Department would have voted for the arrangement within Bank of Ireland without making some sort of noise about it or objection to it.
In respect of mortgages and the SME sector, I acknowledge the work that Mr. Moran and his team have undertaken and the achievements within the number of years he was been working there because we are in a different place. However, we are in a different place with a set of new challenges. The new challenges relating to mortgages and the SME sector have, by and large, not been dealt with. There is a significant debt in the bank relative to mortgages and SMEs. They have not been addressed with any great speed to release these families and individuals back into the real economy to allow them to perform fully again. When I look at the amount of money being paid to the senior executives in the bank on both sides, it raises the question of why more is not being done for the SME sector and mortgages.
Some of the young people with mortgages within those banks are being dealt with in a deplorable fashion. All of us here, and I am sure I am no exception, have seen people come into our clinics whose health is now becoming an issue because of the actions of the banks, some of whom are outside the arrangement in terms of how many times they phone the person and so on. It is appalling. As it is, the lives of these people have been devastated, they see no way out and they are being offered no way out. The mortgage-to-rent scheme has just not been successful. They see no way out and the banks pursue them daily. I want to hear Mr. Moran tell me what the Department can do to make the banks respond in a real way to settle these bad debts and to deal with people realistically. The real message here is that they cannot pay. They will never pay their debts back. They are simply unable to do so and the banks do not seem to recognise that.
Quite a number of SMEs cannot pay their debts back either. We risk losing them as performers within the economy if we do not address in real terms the debts they have. Has the Department quantified within the banks or have the banks told it exactly how much money within their system is at risk because people will not be able to pay? Has the Department taken into account the fact that when people lose their homes, they qualify for rent allowance, local authority housing and all of that and that there is an associated cost to the State? We have gone way past moral hazard and I do not see the banks doing anything real in terms of mortgages for individuals and families and the SME sector in comparison with some of the write-offs the corporate world has achieved. Has the Department assessed-----
Mr. John Moran:
I will give some general statements and will call on Mr. Hogan who is closer to the market side to come in. Taking it in inverse order and dealing with the SME sector, I referred earlier to the fact that in the earlier part of the crisis, much of our focus, appropriately so, was on trying to get lending to SMEs. The target for that lending obviously included viable businesses that should have been able to draw down money to grow. Otherwise the economy simply would not be able to conduct itself.
The analysis or policy tools used to try to drive lending in the banks included the lending targets and the Credit Review Office to adjudicate as a third-party on what was deemed a fair or unfair decision by the banks in respect of lending. Certainly, it has taken longer than we might have wished for the population of small and medium-sized enterprises to become more comfortable using the Credit Review Office as an arbitrator in that respect but there has been some success where that has happened.
Bearing in mind that much of this effort started in 2011, one thing we observed along the way was that several SMEs which up to that point had been grouped as one category were in reality in a very different category, in that they were SMEs with unsustainable debt or with significant debt that may have had nothing to do with the underlying business. The two categories had to be disaggregated. In many cases the balance sheets of either the SME or the owners of the SME had been destroyed by property businesses attached to them which had failed.
The speech to which I referred earlier made at the Irish Banking Federation in 2012 was an exhortation by us to the banks to get moving on the resolution of SME lending and to deal with the problems we have referred to, in particular the need for those SMEs with too much debt to have a resolution. At the time, more of the focus was on the mortgage arrears issue, which in many ways reflects the same thing but the situation was capable of being addressed.
My understanding of the latest statistics is that Bank of Ireland claims to have resolved over 90% of what it considers to be the troubled loans in terms of offering SMEs real solutions. I gather Allied Irish Banks is probably at 65% or 68% at the moment and working towards the completion of that by the end of this year. For Permanent TSB this is not necessarily an issue.
Like with the mortgage arrears, the difficulty experienced in resolving the problem, particularly in 2011 and early 2012, was that the banks were simply unable to deal with these issues. They were not ready, they did not have operational systems and they did not necessarily have the right mindset to work through the resolution of the mortgages. However, since then and under pressure from the regulator, they have in fact been moving considerably on the SME side.
There is another point on the SME side. To the extent that we went through this process, there was initially a focus on the banking sector and what we would do to get more lending out of the banks. Then we evolved with the policy decisions to an understanding that there was a need for other sources of financing for businesses in Ireland, in particular for rebuilding balance sheets, because many companies had gone through years when they had depleted the reserves that one might typically see associated with a firm seeking a bank loan. We needed to be able to find mechanisms to put equity into those balance sheets before they could get borrowing from other banks. That has been the focus and there is almost €1 billion of State money put aside in the National Pensions Reserve Fund for a turnaround, growth and credit fund for businesses. We are trying to deal with the bank situation and the Credit Review Office for the smaller companies but we have the Microfinance Ireland fund and credit guarantee fund and so on as well.
The reality is that retailers, for example, have exhausted all of their money. Their savings are gone. Some of them are staying open out of pride. They would have a good business if only the overall debt was dealt with. It might have been debt created by the purchase of property, as Mr. Moran said. The banks are not responding to them in any real or meaningful terms. I am shocked by the numbers in my constituency and I imagine it is reflected throughout the country. These people are being left to hang out to dry. They are now being pushed to the point where they will not recover. The banks will break them. We did not allow the banks to go; we saved them. I consider the retail sector and the high streets of this country to be an important part of our economy, but we are allowing them to go broke. Let us consider the number of properties that are boarded up in every village, town and city throughout the country. One cannot but be shocked. The names over the doors indicate that families have been in business for generations but they simply cannot continue. It will take a vast amount of money to rebuild that part of Ireland but the banks are not playing a role. I think they are disgraceful in the way they are behaving.
Deputy O'Donnell pointed out that on the mortgage side they have said that they have taken action but 50% of the action they have taken has involved sending letters. I have seen letters to individuals in which they have been declared unco-operative. One individual came to me and explained that he was setting aside a €50 repayment each week into an account but his lender was not taking the money. Then he got a letter suggesting that he was not co-operating.
A considerable number of people will find themselves without a home and on the streets after this because they simply cannot get the bank to understand that they do not have the money to pay. The local authorities do not have the houses to give them. The rent allowance system and the rental accommodation scheme are at breaking point in terms of the money the Government is putting in but that is their only escape. I am afraid the banks have failed to respond at that level. I agree with Mr. Moran that there is change at the higher level. I suppose I am referring to the smaller end of the SME sector, including the retail sector. All these businesses represent indigenous jobs created in towns and villages but the banks are letting them die. I appreciate the job Mr. Moran did and I understand that he is finishing up, but I believe his team should be focused on those community businesses that would be feasible if they got half a chance.
Mr. John Moran:
One of the difficulties covers some of the population to which the Chairman referred. Let us consider the mortgage situation and the SME sector. There has been considerable discussion about how the banks have not been playing ball and that we should have someone come in to help to find a resolution - the Insolvency Service of Ireland has been put into place and so on - ultimately to bring people together to reach agreement. That requires a recognition of the reality of the situation on the bank side and on the borrower side.
Since there are fewer SMEs than there are mortgages and the population is smaller, it should be easier to deal with them. Through the regulatory system we have tried to put pressure on the banks to resolve the loans rather than simply ignore the problem. Sadly, that was what was happening during the earlier phases of this crisis. There is a third party which I believe can play a valuable role in resolving the type of situations to which the Chairman referred. It could bring assistance to the family that has run a business for many generations but who may not be used to dealing with the banks in this kind of a discussion. I am referring to the Credit Review Office. The office has a team of people and they have been successful. Some people have raised problems individually with us but it is not appropriate for us to engage with the banks in respect of an individual borrower. However, we have asked the Credit Review Office to engage and to try to mediate a resolution of the situation. In some cases the office has successfully done so and in some cases we have seen the introduction of third parties to do so. If there is a problem with the operation of the Credit Review Office in this respect, we would like to understand what that is.
I have no wish to labour this any more, but there is a problem with the banks and how they deal with individual mortgage holders and the SME sector at a particular level. This is my final question for Mr. Moran. Will he please acknowledge that and have it as part of the conversation with the banks on a regular basis? Have the banks given him a figure relating to those mortgages and SMEs that are in difficulty with their loans?
Have the banks provided a breakdown of the figure for the number of mortgages and loans to small to medium-sized enterprises, SMEs, those being, employers of one to ten employees, that are in difficulty? Have they indicated to the Department whether more money may be necessary to deal with this situation, given the fact that a substantial amount of money might not be repaid?
What type of provision have they made for bad debts relating to mortgages that will not be repaid by people who are now out of work and are in houses that were purchased for €250,000 but are now valued at, for example, €80,000? There must be a figure for such cases. What provision has been made in respect of the SME sector? How much money will the banks need to deal with all of that? This is the type of information that is required.
The Secretary General can respond shortly as I wish to ask a further question on a matter that has been mentioned. This crisis has lasted since late 2007, yet we are still dealing with SME and mortgage issues. In 2012, there was a discussion on banking versus sovereign debt and so on. The EU took a particular stance on what we should and should not do with bondholders in banks. In the past two days, a senior adviser or official stated that it should be recognised that we were badly treated at the time. The country and the individuals who comprise the debt, be they SMEs, mortgage holders, household debtors or so on, will not be able to repay it in their lifetimes. Is there any indication that Europe will change its stance on our role in saving the euro system? It has been recognised, although I cannot cite the name of the European official who made the comment.
Where would we be without our own adviser on the right-hand side? President Barroso’s former adviser made the statement and it has been recognised, but there is no tangible result that would allow us to deal more sympathetically with the businesses and individuals who, having had their lives ruined, now want to move on and do something different. Has Mr. Moran any opinion in this regard?
Mr. John Moran:
I cannot comment on what was or was not stated at the earlier stages. It has been recognised by Europe that the way in which the balance of responsibility lay early on – let us pick the beginning of the bailout – in terms of the sovereign and Europe’s participation in providing assistance was not the right one. It has been moved significantly in a number of ways since. There has been considerable assistance at the level of the sovereign. Ultimately, the capital invested in the banks was funded by sovereign debt on our side. This has been recognised through the reduction in interest rates and the extension of the maturity dates under the programme. Knock-on impacts are more difficult to quantify, but this has been incredibly important in reducing our cost of borrowing. As late as a year ago, we assumed that the State’s cost of borrowing would be 4.5%, but we are nearing 2.5%. One reason for this among others is the fact that almost 50% of the State's debt falls due beyond 2020. There is little pressure on the State to refinance that debt in the early years. A significant role was played by the extension in the maturity dates agreed by Europe in respect of the original bailout. Since the date of the bailout in 2010, there has been considerable movement.
The committee will remember our chart describing the amount that had been invested in the banks. We calculated the capital that had been invested in Anglo Irish Bank versus the other banks. The burden of what was invested in the former, which was essentially a decision to shore up that bank and may have formed a part of the discussion referred to by the official in question, fell entirely on the State with a significant repayment obligation. This was reflected in the promissory note transactions, under which it was a requirement to buy €3 billion of funds per year over a ten-year period. This burden was not removed, but it was pushed 25 and 35 years further down the road to relieve pressure on the State in the short term. As the committee knows, this was done with Europe’s co-operation.
The third element has been discussed, that being, the direct recapitalisation. I cannot tell the committee what will happen in that regard. An acknowledgement by the partners in Europe was reflected in the June statement and has been reflected in the documentation that has passed through various legislative processes concerning direct recapitalisation. There will be an opportunity for a discussion to examine situations on a case-by-case basis. Everyone around the table at least knows that the Irish expect to be discussed in this regard and to have Ireland's contribution to the euro’s stability recognised. However, we also need to remember-----
Mr. John Moran:
It is difficult to know what more could be done, but we certainly know that a significant weight rests on the State’s shoulders as a result of recapitalising the banks. How much of that will remain is unclear. Were an increase in AIB and Bank of Ireland shares to bridge the gap of €6 billion, we could find that the bailout of the three pillar banks – permanent tsb, AIB and Bank of Ireland – had not cost the State anything. As such, the only issue to be discussed would be Anglo Irish Bank.
Given policy decisions around Europe, it is clear that Europe has moved into a space that is consistent with the way we started the debate in 2011, in that senior creditors of banks should in certain situations play a part in the rescue of the banks, which was not an available policy option even at the beginning of 2011. There has been an understanding and recognition across Europe that the resolution of banks requires an element of contribution from creditors and that this option was not available at the time.
Mr. John Moran:
That is appropriate, but it is equally important to remember that the impact of some of those decisions has also helped with the restoration of stability in Ireland, the view of the sovereign and the cost of borrowing. The Greek cost of borrowing today is not the same as the Irish cost because we had a different resolution at an earlier stage. We also received a benefit, not just in the cost of the Irish sovereign’s borrowing, but in the cost of borrowing for semi-States and banks, which is passed on to SMEs.
I might ask Mr. Hogan to mention some of the-----
Mr. Des Carville:
The total loans were €208.9 billion, of which €53.9 billion were classified as impaired, which is 25.8% of the total. Against that total of €53.9 billion impaired loans, there were provisions of €29.4 billion, which represented 54.5% of the impaired loans, or 14.1% of the total loan book. I think the Chairman's question is specifically related to small and medium enterprises, SMEs. I do not have a breakdown as to what the level of provisions were specifically against the SME book but I can say 19% of the €208.9 billion, which is the first figure I mentioned, related to corporate loans and SME loans.
The point I am making is that if they are dealing with this in the way they said they are dealing with it, they must have a figure for the mortgages that will not be repaid, and they must have a figure for the SME sector on the basis that they simply will not be repaid. I want to know the figures in those two categories. What are those figures?
Mr. John Moran:
It is important to remember that when a loan is impaired the bank then has to set aside provisions for what it thinks it will lose in that loan. What is important with respect to the Irish banks, and this is what I referred to earlier, is how we can break through the numbers to understand where the reality sits. The asset quality review that was conducted by the Central Bank before Christmas, which is being repeated by it, involved bringing in external parties to assess the loans and the loan books and look at samples of those to decide whether the level of provisions the banks were holding against those was adequate for the risks. I cannot say exactly where it is because there is an element of judgment involved but what we see from the numbers is that with this third party validation, both of the auditors and the Central Bank, we do not have a one-for-one parallel between impairment and the provisions, which suggests that the banks are correct in the view that not all impaired loans will lead to 100% losses, but there is a percentage in that regard.
The kernel of this problem is that when the banks are being examined in terms of the stress test, the figures and the statistics they give Mr. Moran hide the fact that individuals simply cannot pay the debt. There are significantly more of those people, and SMEs than is being discussed in their conversation with Mr. Moran and the Department. I say that because I have seen the letters that have been issued to individuals who have no hope of paying back the mortgage. They are unemployed. They have gone from a marriage to a separation where two of them were working. They are now separated, the house is in negative equity, the amounts due on it have not a hope of being repaid yet the banks continue to write to these people as if there was some hope in that regard.
There is a significant number of such people turning up at local authorities who also have a debt in this regard. They have another system of loans that is in arrears. In the context of the stress test for the banks, I ask them to please give us the figure for the exact amount owed to them that obviously will not be repaid. Even if the house was sold it is a cost to the Exchequer because the people must get housing from the local authority, rent allowance or go on the rental accommodation scheme. I would like to see that analysis.
Separate to that I would like to see the figure for SMEs that have a viable business but a bad property debt somewhere. I believe it is greater than the figures I have seen. Economists who have looked at this and other people who have carried out an analysis of it will tell Mr. Moran that the debt is greater than the banks are telling us. That is one issue. The other side of both of those issues is that they are not giving individuals a chance when the banks got a chance, supported by the Irish taxpayers. That is the point I am making. I would like to see that conversation take place.
Mr. Moran has been here since 12 o'clock answering questions and before I call Deputy Collins and Deputy Murphy, would he like to take a break for ten minutes?
Mr. Moran and his officials are very welcome. I will comment briefly on some of the discussions the Chairman had on mortgage and legacy issues with the SME sector, divided into core and non-core business. In terms of some of the problems, particularly with private mortgages, it is a clear there is a communication problem between the bank and the mortgage holder. Usually, there are health, stress or other issues involved. People can go to an insolvency agent but there is a cost to that. On the social protection side we need to consider providing somebody with assistance. People are going to the Money Advice and Budgeting Service but it is swamped with these cases. There is a need for somebody to be brought in to help both individuals. With all due respect to the banks, we cannot expect them to make a decision without information. They are dealing with people who are extremely stressed for one reason or another and they do not understand the need to get that information to the bank. There is a void in that regard. A fund was set up in the Department of Social Protection to help such people but it does not appear to have been activated. Mr. Moran might examine that to see if we can help people who are in that bind.
Listening to what is happening on the ground, and I am quite close to the business sector, it is clear the banks are helping where viable plans have been put before them. The situation has improved in that regard. I am not saying it is perfect but it seems to be moving in the right direction. In terms of issues that arise with small businesses and so on, the local enterprise offices, LEOs, have been set up and it is hoped mentors can be put in place.
It is very easy to talk about retailers on the high street but retailers in rural Ireland are facing major issues with online businesses. We must understand that it is not just a banking problem. We may need to examine a different way of keeping rural Ireland open such as a co-operative model or social enterprise, which is the buzz word now in Europe. If we are to have the services they will have to be provided in a different format in terms of a business that is all about profit. We need to examine a number of issues as opposed to simply saying that everything is to do with the banking scenario.
My only question for Mr. Moran is on SME lending, the growth of the SME sector and, in particular, start-up businesses and the appetite for risks. It is not fair for us to ask the banks to regard this as being their problem. We are putting in place all the regulation on banks which means they cannot lend money unless they have a certain percentage set aside to reduce risk. We want to be serious about driving the economy and creating more jobs. We talk about supporting start-ups and entrepreneurs but they do not have access to real capital unless they apply for high potential start-up, HPSU, funding from Enterprise Ireland but they must have a potential start-up. Only a small number of people get through that process. Various operations are going on throughout the country but there is very little finance for them unless they get angel investors or find a different source of finance. That is a real problem in the economy.
I would welcome Mr. Moran's opinion on that and on what we can do going forward. I am aware of the microfinance fund but the targets in that regard are not being reached. Again, there is an issue with it in terms of appetite for risk.
I have many concerns in regard to the bureaucracy around the fund. As I said, in terms of targets, it is way behind. On the credit guarantee fund, I regularly come across businesses that want to expand but cannot access the funds to do so. I am not suggesting that the banks are the appropriate lenders in this regard. Many of the new investment funds mentioned are not in this space either. I am speaking in this regard not of SMEs but micro-businesses which employ 70% of all people employed in this country and are located in every small and large urban town in Ireland. This is a real problem. I would welcome Mr. Moran's views on it.
Mr. John Moran:
During my presentation last week on future banking, I tried to explain our thought process around funding enterprise. It is not of any comfort to us but worth noting that this is not only an Irish problem. The point being made over and again by us in respect of the process is that Ireland's economic difficulties and the creation of jobs will only be solved through a vibrant SME sector. This will not happen without funding being available to companies. The slide which Deputies can now see is taken from the presentation I gave in Europe. It shows the significant differences in funding rates available in Germany and France versus Italy and Spain. Europe is struggling with the same issues across the whole system.
The way in which we have been trying to handle this is well set out in broader terms in the medium-term strategy and in a more specific way in the Action Plan for Jobs in the context of the sector on funding for growth. One of the particular difficulties being experienced in Ireland, which may explain some of the issues raised by Deputy Collins, is that in the past in Ireland when a person was setting up a business it was often capitalised by positive equity from the business owner's home. This served as a personal guarantee in respect of the business. In other words, the positive equity from the business owner's house, or, perhaps, that of his or her parents, served as a security for the banks in lending money to the start-up business. We believe this led to the belief at that time that the banks were funding businesses when in fact they were funding the credit side of the balance sheet and the equity and mezzanine risk of the balance sheet.
As a result of the crisis, a huge amount of available capital in Ireland that might be used, in particular in the smaller business sector and also the larger business sector in terms of growth, no longer exists because many of the houses that might be used for this capital are in negative equity. This is the reason for the market failure of start-ups. It is also the reason getting the microfinance and credit guarantee funds, and angel investors and others, to work more effectively in Ireland is a key part of the solution. This is a more critical issue than it would have been in a different environment where there was a lot of positive equity in the system because positive equity would allow the banks to extend loans which are in many ways from a risk perspective at the enterprise level equivalent to an equity risk. As a result of this, we will have to move to an enterprise environment that is more open to sharing ownership of companies, perhaps at an earlier phase than has been historically the case.
In Germany, one sees the opposite to this. For example, many of these businesses there are family business because an equity pool has been built up that allows families to create a balance sheet that can take credit from the banks. We do not have the capacity to do that. We are also in a much more dynamic situation in terms of start-ups and, therefore, the model will probably be somewhat similar to the model seen in more dynamic start-up environments such as the United States. As such there will be a greater requirement for angel capital and growth. The part of the trough in which perhaps there is a shortage in this regard is the growth capital area.
Colleagues on the group chaired by Mr. Hogan are reviewing the efficiency or otherwise of the microfinance and credit guarantee funds. These are important parts of the system. As stated, small SMEs essentially need to be backed by way of resolution of the negative equity problem and the putting in place of alternative mechanisms through which start-up capital can be provided to companies, with the banks playing a particular role after that. When business grows through the system the banks can then have a role to play. However, venture capital is needed first. There are other charts I could show to the committee which show that there are considerable differences between the amount of venture capital available in Europe as compared with the amount of venture capital available in the United States. If we want to move towards an environment of entrepreneurship and start-up, particularly in the technology space, it being a key part of our economy, these are the issues we need to resolve. It is at the equity start-up phase that Enterprise Ireland will have to be key and have a broader range.
Deputy Collins referred earlier to the LEOs. The LEOs on the ground will need to play a key role in joining the dots for enterprise in terms of working out where they are going. We have discovered along the way that many companies did not have all the right training. The issue of finding more mentoring for companies and better education has been mentioned before. The Department of Education and Skills is now participating in the SME credit committee in the context of the provision of education. Another key part of technology currently in development and close to launch, which we have put together with other colleagues across the system, is a website which allows a small business trying to find a solution to a particular problem, be it in regard to funding and so on, to log on, indicate its location, size and problem and be directed to the various supports that are available. We have learned through the process that there are many supports available but is hard to know which ones work or are relevant. By way of testing, the new website has been trialed with approximately 700 SMEs with a view to seeing if it can be improved in terms of the solutions loaded onto it. I will now ask Mr. Hogan to respond to the issues on the equity side.
Mr. John Hogan:
The issue of equity was mentioned a few times today, including by Deputy Collins. It is an issue of which we are very mindful. Next week, we will be putting together a group involving representatives from the Departments of Finance and Jobs, Enterprise and Innovation, ISME, SFA and other relevant actors in the State agencies to consider the constraints and solutions around equity. We have also opened up a consultation process on our own website, through which submissions can be made to the Department for consideration by the group. The closing date of that process is some time during the course of this month. This is an important part of the work which we will be doing over the coming months to try to address that particular gap. Mr. Moran mentioned the online tool which is close to being launched and will be very important. The feedback from businesses that have seen it already has been very positive in terms of it actually giving them a real sense of how to access the vast array of State supports available.
Deputy Collins also raised the issue of mortgages, mortgage arrears, the advice function and the Department of Social Protection fund. This involved payment by the banks of a fee in respect of advice to be given to individuals coming to them seeking an assessment of their situations, having been presented with a long-term solution by their financial institution. One of the things we are looking at in terms of that review is does that advice come at the proper time or is it too early or too late. One of the recommendations which we are currently putting in place is that there would be a two-stage payment, with the first payment being made available at an early stage when the individual is completing the SFS form and engaging in the first instance with the financial institution. I believe that is very important in terms of addressing the gap mentioned by the Deputy.
It is important at a later stage for that assessment to be made by the adviser in terms of the actual sustainable solutions being placed in front of him.
That is good to know as it is a big issue, given the spiralling out of control.
With regard to the equity model, we have some mechanisms, including the BES, that have never been used. Perhaps the BES could be re-examined and made more simple. There is an old relief, the seed capital relief, which has been in place for 20 years but which has never really featured to the extent it should have. It involves investing money and getting tax back on it. Equity is very hard to have at an early stage of investment because one has to prove oneself. There are different rounds and phases. There is the real start-up stage where one needs to have some money. Usually, when one gets State funding, one needs to have matching funding. There is a lot of bureaucracy in that regard. While it is great to have websites, trying to get ten applications in is a job in itself on top of trying to start and develop the business. There needs to be more awareness of what one person is capable of doing. We need to make the system easier.
I thank Mr. Moran for his contribution as Secretary General in the Department of Finance and for the work he has done in helping us through the banking crisis. I wish him well in his new career, wherever that will be.
I thank Mr. Moran and his officials for being here for so long. I wanted to wait until the end of the meeting because I wanted to examine the strategy for growth, or the medium-term economic review, which was released when we exited the bailout programme last December. My first question concerns the status of the document. Is it a recommendation to the Government? Does it outline our obligations regarding our commitments to our European partners? Was it approved or seen by the troika before it was published?
Mr. John Moran:
First, this is a Government-approved document. Its genesis was in an earlier period when we indicated it was important, as we got closer to the end of the troika programme, to have a plan or strategy for the direction of travel thereafter. Last year in particular, it would have been part of our own allocation or Estimates. With a group of people, some of whom were in my colleague's area, we embarked on consultation both across the system and with various other stakeholders on what we believed was important for the Irish economy as it entered the next phase of growth. All the economists in the public sector met in one forum in Dublin Castle. We identified quite early on a number of horizontal themes we believed were important as we went through the process of considering the levers we could pull. Not surprisingly, those were the issues of innovation and how we could upskill the economy. Also to be borne in mind were entrepreneurship and how we could take advantage of our significant FDI-type environment and the domestic entrepreneurial environment in terms of start-ups, the butcher and farmer, all of whom are entrepreneurs in their own way. We sometimes forget about them and think only about the technology sector. It was also a question of trying to broaden the thinking so people would actually want to set up their own business as opposed to working for somebody else.
The third element we thought merited particular attention was that we felt we were at the beginning of a new era of interaction between Ireland, the rest of Europe and the outside world as Europe was developing and as the Irish domestic population was developing in terms of an open labour force and various other phenomena. We referred to the upside risks in this regard. There are constraints we do not have in Ireland in terms of the growth potential of the economy because, in fact, labour mobility in a single market, such as the one we have, is much different than it might otherwise be. We wanted to analyse the opportunities for Ireland to start thinking about itself less as a national economy but more as a regional economy in a European environment developing a banking union.
Having done that work, we decided it was best presented with three pillars, the first being the requirement to actually maintain a responsible public finance position. We can go through the details of that. It was basically a matter of returning to circumstance involving the State paying its own way and in which we would start to reduce the debt.
The second area involved looking at the fact that we do not believe an economy can function and grow without credit. Finding a way in which to fund the economy was required. In any case, these are issues that we had been addressing, but our work created a framework for them. The third area was to analyse, with considerable assistance from colleagues across the entire system, the Irish economy sector by sector, to some extent as we had been doing anyway. We drew up a series of sectors, not necessarily aligned to Departments. They were sectors that we identified with the CSO and we asked how we could move those different sectors forward. Then we had a stakeholder programme in which we considered the horizontal issues employing tables and groups of people that represented each of the sectors, and we tried to collect through this exercise the themes and various issues that were reflected.
The third section of the document identifies some of the issues that had cropped up, giving a sense of where we believed we should go. This was agreed because there was a steering group involving the Department of Jobs, Enterprise and Innovation, my Department, the Department of Public Expenditure and Reform and others.
When the document went through to the Government, it referred to the fact that all the Departments that are now considering their own strategies must do so by reference to this. The important point is that we move along an holistic path forward, as happened under the troika programme to a certain extent.
Mr. John McCarthy:
Deputy Murphy asked whether there were any obligations in the document. The only legal obligations within the MTES are set out in the fiscal chapter, where we identify the various numerical fiscal rules we will be subjected to, both externally via the Stability and Growth Pact and domestically via the fiscal compact, the subset of the fiscal stability treaty that relates to numerical fiscal rules. Essentially, we set out how we will comply with those, namely, to correct the excessive deficit as part of the corrective arm of the Stability and Growth Pact in a timely manner, that is, by next year. In determining what is required after that, we move into the preventive arm of the pact, which requires our need to make rapid progress towards a balanced budget in structural terms, in other words, when one accounts for the impact of the economic cycle. Those are the rules on the deficit side. There is also a rule on the debt side.
It was already used. The troika did not have a problem with it being in the document.
Let me turn to page 12 and to the issues Mr. McCarthy was addressing. There is a note under the table on page 12 that refers to the general Government balance after 2016 as being a technical assumption that indicates what is required to support the achievement of the medium-term objective of a structural balance by 2019 and its maintenance thereafter. When we examine that table and the figures for after 2016, we note a technical assumption will be based on a future policy decision. Is it a necessary policy decision to keep us in line with our commitments?
Mr. John McCarthy:
It is. The reforms of the Stability and Growth Pact were necessitated by the crisis. The reforms in 2011, particularly in the preventive arm of the pact, introduced what is known as an expenditure rule.
This is sometimes called the expenditure benchmark. To assess compliance with progress towards one's medium-term objective, one looks at the improvement in the structural budget balance but one also complements that analysis with how one is performing vis-à-visthe expenditure rule. What the expenditure rule essentially says is that one will have nominal growth in revenue in line with the potential growth rate in the economy. If, for example, GDP is growing by 3% in nominal terms, revenue will grow in line with that figure in the long run. The figure varies from year to year because the elasticity can vary depending on, for instance, the composition of aggregate demand. However, on balance and over time, revenue growth tends to move in tandem with GDP growth.
If one maintains expenditure, net of discretionary measures on the revenue side, below the potential growth rate of revenue, one automatically gets an improvement in one's structural position. The technical assumption is that expenditure, net of discretionary measures on the revenue side, is kept sufficient to achieve the required improvement towards the medium-term objective. It is quite technical.
To take general government debt beyond 2016, if we want to move to a position by 2020 where it is below 93% of GDP, the figure on the last line, we must follow through with the eradication of the deficit and return to a balanced budget in 2020. Is that correct?
Mr. John McCarthy:
We are required to have a balanced budget in structural position by 2018. For Ireland, as for most other countries, achieving the medium-term objective should be sufficient to more than comply with the debt correction rule. I believe the Deputy is asking about that rule, the one twentieth rule which features on the last line.
Mr. John McCarthy:
The 3% in nominal terms is in the corrective arm of the pact. However, there are two items of legislation, the preventive arm and corrective arm. Once one moves out of the excessive deficit procedure, one is legally bound to move towards a balanced budget in structural terms. One moves from a headline deficit to the underlying or structural deficit. There is a legal requirement that member states make sufficiently rapid progress towards their medium-term budgetary objective. It is country specific. For us, the objective is a balanced budget in structural terms, while for some countries with higher levels of debt or problems with demographics - the ageing of the population - it is more onerous and for others, it is less onerous. However, achieving this path, given that our potential growth rate is still reasonable, should be more than sufficient to comply with the one twentieth rule or debt correction rule.
The two top lines on the table are GDP growth and unemployment. The former is very positive. Did we challenge this projection? It is all moving in one direction, which is also very positive. If one considers previous forecasts, however, including those produced by the International Monetary Fund and others, the projections for 2013 were very positive but as we moved towards the end of 2013, that was no longer the case.
Mr. John McCarthy:
On the growth forecast, obviously this was a document that the Government approved. The figures provided are our forecasts. However, the GDP forecasts contained in the document are very similar to those contained in the stability programme published at the end of April. Our projection for GDP growth in 2014 is 2.1%. The change is very modest. However, the stability programme update numbers go all the way out to 2018 and have been endorsed by the Fiscal Advisory Council. The numbers in the document are, therefore, very similar, with differences of 0.1% here and there, and they have been endorsed independently. They are also quite similar over the medium term to the European Commission numbers because it is done on a supply side basis. There is not, therefore, a dramatic difference in terms of the GDP numbers. The ESRI would have a stronger set of medium-term forecasts.
The one area where there is probably an upside is unemployment, figures for which are provided on the second line. The figures we have had subsequent to the medium-term economic strategy have been much more positive than had been assumed. In other words, instead of an unemployment rate of 12.5% for this year, as embedded on the second line, the rate already stands at 11.7%. There is, therefore, probably some upside on that figure and we are probably in line to achieve the employment targets embedded in this as well.
What does that mean in terms of the anticipated increase in revenue collected? Revenue in quarter 1 was ahead of target and approximately €450 million higher than in quarter 1 of 2013. Have projections been made for revenue for 2014?
Mr. John McCarthy:
Nominal tax revenue will be driven by nominal GDP as opposed to real GDP. However, in terms of what we are saying for this year, the figures are set out in the stability programme. Total tax revenue in 2014 is projected to be slightly more than €40 billion. The figure can be found on page 15 of the stability programme document.
Mr. John McCarthy:
We are very much in line with where we thought we would be. That is the expectation for the year as a whole. We are still very much of the view that we will achieve our budget target of 4.8% of GDP, with both revenue and expenditure pretty much performing, in aggregate terms, as we thought they would.
The increase in growth will not be sufficient to accommodate any correction in the deficit that is required through expenditure cuts in Departments. We will still have to make cuts of approximately €2 billion for 2015. Is that correct?
Mr. John McCarthy:
Yes, we set out that figure in the stability programme on the basis of real GDP growth of 2.7% and nominal GDP growth of 3.6%. On that basis, we will need additional consolidation of approximately €2 billion to achieve the required correction of the excessive deficit by next year, which is our legal requirement.
Mr. Dermot Quigley:
The comprehensive review of expenditure is under way and Departments are working on it. The idea is to get material in from the Departments before the end of June. Realistically, the Government will be looking at the material that comes in from the Departments, taking on board inputs from the Department of Public Expenditure. However, it will merge into the consideration of the budget, which will be a matter of September and the first half of October.
I will ask one final question. In terms of anticipated growth for 2014 and the deficit figure we must reach by reducing expenditure across Departments, there has been speculation that revenue arising from any growth achieved will be used to offset the tax burden. This is mentioned in the document.
On page 21, it refers to providing a potential revenue quote that is reasonable and states that taxation reductions can be achieved over the medium term. Do we know how much money we might be looking at in terms of financing that reduction, for example, through changing the tax bands?
For example, if the standard rate tax band was increased by €10,000, we know that it would cost about €1.3 billion. Is the Department now trying to see whether that will be available in the economy across not just this year but next year as well because it is talking about forecasting?
I am not going to ignore the fact that Deputy Mathews has indicated but the Standing Order of the committee is that only members of the committee can contribute so I am not in a position to ask him to come in. I ask the members to dispose of Vote 7 and Chapters 1 and 2 of the 2012 Annual Report and Appropriation Accounts. Is that agreed? Agreed. I reiterate my thanks to Mr. Moran and the officials who accompanied him on the three different occasions he appeared before the committee. I thank him for his information, courtesy and efficiency and wish him well in the future.