Oireachtas Joint and Select Committees
Wednesday, 8 March 2017
Committee on Budgetary Oversight
Developments in the National Debt: National Treasury Management Agency
I welcome, from the National Treasury Management Agency, Mr. Conor O'Kelly, chief executive, and Mr. Frank O'Connor, director of funding and debt management. They will be dealing with developments in the national debt.
Before we begin, I remind the members and witnesses to turn off their mobile phones. The interference of phones affects the sound quality and transmission of the meeting.
I bring to the witnesses' attention that witnesses are protected by absolute privilege in respect of the evidence that they give to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, 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 they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the longstanding parliamentary practice to the effect that members should not comment on, criticise or make charges against either a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I now invite Mr. O'Kelly to make his opening statement.
Mr. Conor O'Kelly:
I thank the Acting Chairman and the committee members for the opportunity to address the committee and assist it in any way we can. I am joined by Mr. Frank O'Connor, who is head of funding and debt management at the NTMA.
I do not intend to read out my opening statement. If it is okay with the Acting Chairman, I will refer to some of the key points that I reference in it. We have provided some slides that we use when we are in front of investors around the world talking about the Irish bond market which we thought might be a useful way of drawing out some of the key points that might be of interest.
The key starting point is that our debt, as is well known, is quite elevated and is still standing at €200 billion. That is four times what it was in 2007. Although our debt-to-GDP ratio is showing an improving trend and our economic fundamentals are good, nonetheless some of the other key ratios that investors look at do not show Ireland in quite as favourable a light. I will reference some of those.
As I say, the economic fundamentals are exceptionally good and have been for a number of years. A particular focus for investors in the bond market is our fiscal position and our primary surplus. The fact that the household budget is in primary surplus means that, essentially, our debt levels are stable. That is an important dynamic and an important statistic for investors. Our credit ratings have also improved and we are now rated in the A category by all of the rating agencies.
In terms of investor demand for Irish bonds, we have moved clearly from being considered a peripheral credit to being what we now consider to be a semi-core credit and we are now trading very much in line with France and Belgium as opposed to some of the peripheral countries when we trade in the market place. That has been not only talked about in researched reports, but mentioned in the Financial Timesa couple of days ago. That has been the case for the past 18 months or so, and it reflects our strongly improving credit performance. That has been tested in volatile market conditions and even when negative news hits the markets, Ireland has tended to trade closely to France and Belgium as a semi-core.
Investor demand for Irish bonds has widened and our investor base has widened. That is particularly important for Ireland. Ireland is very dependent on overseas investors for its debt. Ninety per cent of our bonds are owned by overseas investors and that puts us in quite a vulnerable position versus other countries which have higher rates of domestic savings and participation in the bond market. One of the few ways we can mitigate that is to diversify the investor base by region and by type, and we attempt to do so. That has been happening. Our investor base, I am glad to say, has been broadening significantly.
In terms of what we have done in the market in the past couple of years, since 2015 we have issued €27 billion in total at an average yield of 1.3% and an average maturity of 16 years. Some of the key highlights of that was the refinancing of the €18 billion of IMF debt on which we produced an interest saving of approximately €1.5 billion for taxpayers over the period of four years. Probably just as important was the replacement of the maturity of that debt. It was averaging four-year maturity as IMF loans and those were refinanced with maturities closer to 19 years. By extending the maturity profile, that has also helped to improve the position. We issued Ireland's first 30-year bond during that period and last year we also issued a 100-year bond at a yield of 2.35%, what was known as a "centenary bond". The fact that we were able to do that is a reflection of Ireland's credit but also, and probably more so, a reflection of the extraordinary interest rate environment that we live in, with quantitative easing and the impact that has had on interest rate markets.
This year, we have announced to the market that we will issue between €9 and €13 billion as a target for funding for the year. We issued a €4 billion 20-year note at a yield of 1.73% earlier this year. We additionally raised, through a dual-auction last month, another €1.25 billion. We have another auction tomorrow where we will again announce a dual-auction of ten-year notes and 30-year notes, and the size has yet to be determined. This dual-auction is something that we have not done for quite a few years but we are finding it very effective, both for accessing pockets of liquidity along the yield curve and smoothing out the benchmark yield curve.
What about the interest bill, which is probably most of interest to this committee and many others? The total interest annual interest bill is €7 billion at present. That is down from €7.5 billion and trending towards €6 billion. We would be very confident about that number. As to whether it ultimately could go lower and go to €5 billion, that will be dependent on interest rate conditions and markets, particularly over the next three years.
The next three years are an important period for Ireland because there is €52 billion in maturing debt that needs to be refinanced between October 2017 and October 2020. To put that in context, that maturing debt in the next three years is in excess of the total national debt that existed in 2007. The interest rate environment, while we are refinancing that debt during that period, will be critical in determining the long-term overall cost of the national debt in terms of an interest bill.
The team is on the road constantly. Ireland is a very small market, a very small country. It is less than 2% of the European bond markets. It is less than 0.5% of the global bond markets. Even somebody who is an index fund manager does not necessarily have to buy a market such as Ireland. It is a planes, trains and automobiles job. The NTMA is on the road and always has been. That is a core part of the business. Whether we have a lot to issue or a little to issue, we need to keep the credit story in front of investors and ensure that they are fully aware of the dynamics.
I thought I might go through some of the slides to show the committee what we talk about to investors when we are on the road. We tried to pick out some of the slides that we thought might be of most interest to the committee.
The first slide provides a potted history of Ireland's bond yield. New investors, in particular, need to be able to put the market in context. Obviously, that history has been pretty extraordinary and I will point to three of the dates we have highlighted to illustrate this. In July 2011 Irish ten-year bond yields were at 14%, while Irish two-year bond yields were at 24%. That was at the time we were entering the programme and essentially being shut out of the bond markets. The next date of note is December 2013 when, following some tough policy decisions and renegotiation of margins, extensions and maturities by the troika, Ireland was gradually able to re-enter the bond markets without a precautionary credit line. The last date to point to is January 2015. We can see the considerable impact the announcement by Mr. Mario Draghi of the ECB's quantitative easing programme had on the interest rate markets.
I wish to talk briefly about quantitative easing. We spoke about the interest bill being €7 billion annually. In 2014 the official forecast by the Department of Finance for the interest bill today was €10 billion. We are now at a figure €3 billion lower than what was forecast only three years ago and on our way to it being €4 billion less. That is an annual saving against what was forecast in 2013. How has that happened or from where has the value come? Obviously, Ireland has been a material beneficiary of the quantitative easing environment. It is a disproportionately high borrower and a highly indebted nation; therefore, we have been a disproportionate beneficiary of quantitative easing. Various policy decisions and the improvements in our credit story are obviously major factors too, but we are talking about savings of €3 billion to €4 billion against what the Department forecast only a very short time ago. There have been significant savings for Ireland in that regard.
The next slide in our presentation gives members an idea of where we are vis-à-visthe rating agencies. It is worth noting that we are now in the single A category for all investors. That is important because many conservative investors around the world need the sovereign to be in the A category in order for them to be able to invest. An A rating opens up additional pools of capital to us. Moody's, the last rating agency to bring us into that category, rated Ireland as sub-investment grade as recently as January 2014. We have, therefore, made quite a move in a very short period.
The next slide illustrates the gross national debt composition. I will not go into detail on it now, but I will be happy to answer questions about it later.
The next slide deals with the evolution of the national debt. We are stabilising at a point just above €200 billion. That is the forecast for the next few years. However, I cannot emphasise enough the extent to which our stock of debt increased from 2007 up until today. It is four times larger than it was in 2007. There are very few countries in the world the national debt of which increased by that multiple during the same period. That is the real legacy of the crisis and that debt position still leaves us quite vulnerable.
The next slide refers to some of the key fundamentals in terms of fiscal out-performance that have encouraged investors, as well as the rating agencies, to re-rate our bonds. Investors have actually been ahead of the rating agencies in re-rating Ireland in the semi-core from the periphery. In terms of the general Government balance and the budget deficit, we have outperformed the European targets every year for the last six years. As members know, we are on target to close that gap and go into surplus by 2019. The next graph emphasises the primary surplus, which is the Government's budget without interest costs and a figure on which investors focus. Debt as a percentage of GDP is a figure to which the market refers very often and our position in that regard has been improving significantly and smoothly owing to our stronger growth levels. It is driven by GDP growth rather than by the debt changing; therefore, it does not change the stock of debt as such. It just changes the position relative to GDP. Obviously, when we had the distortion of GDP, it caused people to look for other indicators. We have the GNI* and the working group chaired by Governor Lane which will be very helpful in that regard. That said, investors have always looked at a number of other indicators. At what are investors looking? They can see that our stock of debt is high and need to determine our ability to repay them and refinance our debt. They are the data for which they are looking. Obviously, GDP growth is a key indicator in that context.
The next slide contains a number of tables in which Ireland's position does not look so good, on a relative basis, in terms of debt-to-GDP. Members should focus on the two middle tables which show Government debt to Government revenue and interest to Government revenue. As only Greece and Portugal rank ahead of Ireland, we still have a long way to go, being the third worst performing country in Europe in both categories. The tables are a better indicator of our vulnerability. From our point of view, we want to stress the fact that Ireland is still a very indebted country. While the interest rate environment has allowed us to refinance and lower our interest bill, the stock of debt is still very high. It is at a very significant level. We must bear this in mind.
The next slide shows the actual interest bill. The point I made about the forecast is illustrated in the graph in red in terms of where we were forecasted to be and where we are now. The interest bill is beginning to decline and headed towards €6 billion. On the back of the refinancing and fundraising done to date, we can be confident that we will get to the figure of €6 billion, but whether it will be any lower will depend on the interest rate environment in the key period of the next three years.
I now invite my colleague, Mr. Frank O'Connor, to go through the next three or four slides. He is the person on the road with the team, so to speak, and better equipped than me to talk members through the next section of our presentation.
Mr. Frank O'Connor:
I will be as brief as I can. The next slide shows the breakdown of our investor base. It shows the last eight syndicate transactions where we launched a benchmark bond of a particularly large size, that is, transactions that were bigger than an auction, going back to 2013. It illustrates the point made by Mr. O'Kelly about how dependent we are on overseas investors. If members look at the right hand side of the graph, in terms of geography, about 87%, on average, of participants in the syndicate transactions were overseas investors. On the left hand side of the graph we have tried to provide a breakdown of the types of investor involved. The good news for us in that context is the evidence of the quite diverse real money accounts back in the market. Members will have noted in some of our press releases the size of the order book and the fact that the number of orders was over 200. In that sense, we were not reliant on ten or 11 large clients. Members should note that the term "central banks" does not refer to ECB quantitative easing but to other central banks buying our debt. We are talking about what I would call a much healthier, real money account base of long-term debt holders like pension funds and central banks. The graph gives a description of what the situation has been like in the past few years.
Beyond that is the maturity profile. I will not delay on it, but I will make a point about the various colours used. Pre-crisis, there was just one colour of Irish Government bonds. Obviously, it excluded our retail debt. As there is now official sector debt, there is a multitude of colours. The task for us over time is to find a home among traditional investors for that official sector debt, which entails EU money, the last remnants of the IMF money, bilateral loans, etc. It could be up to a magnitude of €70 billion. We have bought ourselves time, which is good news, but we must be mindful of this.
I will not stop on the next slide. It is included for members' convenience and shows the actual numbers per category as opposed to graphically.
I will conclude on the last slide. It repeats the maturity profile on the left-hand table and the average life of debt portfolios in Europe on the right-hand side. Look at the clear white bars which show large redemptions. That is what we have been doing in recent years. It is debt we have already repaid to reduce our funding profile. The red is where we have been lengthening the portfolio. The significant reductions in 2017, 2018, 2019 and 2020 primarily relate to IMF repayments. When we repaid the IMF early, the debt only had, on average, four years of life left. As Mr. Kelly mentioned, we funded to 17 or 18 years, on average, through a 30-year bond. We took that opportunity, not only to save interest, but also to go further out the yield curve to improve the profile. In addition, in recent years we have been buying back some short-dated bonds on a bilateral basis. We have probably bought back €2.5 billion worth of bonds in that regard and switched them to longer maturities. We have made progress. The figure a couple of years ago was €70 billion in redemptions, but now it is down to approximately €52 billion.
The right-hand side of the slide shows that the average life of Ireland's debt portfolio is one of the longest among our European peers. This is on foot of the negotiated extensions in Europe, plus what we have been doing in the market in recent years. It has left us in a healthier space such that we are not a hostage to refinancing risk in any one year, notwithstanding the fact that a couple of large maturities are approaching.
I thank the delegates for their fascinating presentation. The slides helped. I have three questions, although the delegates have answered one of them. There is a likelihood that the State will sell 25% of AIB in the short term and the understanding is the proceeds of any sale of bank stock would go towards reducing debt. Have the delegates any comment to make on this? In what manner would they like to see the stock disposed of? I am not asking whether they approve of it officially, as they would not comment in that way, but will they make an overview comment on the matter, including the potential impact on the debt?
Mr. Conor O'Kelly:
I would not like to comment on the AIB initial public offering, IPO, process, but it is well known and the Minister has stated that the proceeds will be used to pay down debt. That is the expectation of investors in the marketplace and any material deviation would cause them to rethink and take time to pause. I cannot speculate on what the impact would be. Given that investors loaned Ireland money to help to resolve the banking crisis by putting money into banks, it is not unreasonable for them to expect money to come back to them in debt repayments. I do not want to comment further.
Mr. Conor O'Kelly:
It is difficult to gauge what the market reaction would be to anything. The market buys and owns Irish bonds based on the expectation of forecasts of economic activity and growth, statements of Government policy and the likelihood of X, Y or Z happening. Many investors consider Ireland's net debt position. They look at its gross debt and assets, including its holdings in the banks. They subtract them and arrive at a net debt position which they analyse vis-à-viscounterparties in any credit decision. The credit agencies are the same, in that net debt is one of the metrics they consider. People have subtracted the banks' holdings in arriving at the net debt figure. Since the degree to which investors are dependent on this for their decisions to invest in Ireland varies widely, it is difficult to say one way or the other. They do not all speak with one voice. However, a material deviation would have negative implications for Irish credit yields and credit spreads, but I would have no way of quantifying it.
GNI* was mentioned. We heard a fascinating presentation on it last week when the Governor of the Central Bank and the director general of the CSO attended the committee. Essentially, Mr. O'Kelly is saying we owe a pile of cash and the ratio to whatever measurement is used is irrelevant, given that the pile of cash remains the same.
Mr. Conor O'Kelly:
I have no idea, as I am not a GNI* expert. It will be another indicator and there are many indicators that investors consider. Debt-to-GDP is one of many indicators that display the health and vibrancy of an economy. Investors and credit agencies look for indicators of a country's ability or lack thereof to repay debt. As for getting hooked on one particular statistic or number and believing that is all investors and credit agencies consider, they are instead looking under the bonnet and way past these numbers to all sorts of additional micro-element. It is slightly unhelpful that debt-to-GDP is not an historical statistic that we can use as reliably as we could in the past, but that is more of an inconvenience rather than dramatic in terms of how it would affect people's investment behaviour.
Mr. Conor O'Kelly:
Anything that can affect economic growth is a significant factor. We are asked questions about whether we are worried about Brexit, Grexit, Frexit and Trump and whether we have contingency plans, but we have none for any of it, the reason being that we are in the permanent contingency business. Ireland is a small country that depends on overseas investors to borrow a large amount of money. That makes us extremely vulnerable to potential external events, some of which we might be able to predict like Brexit or are already in the public domain. More than likely, something we have never even discussed will come around the corner and be a surprise. When a country has a small, open economy like Ireland, has a high level of debt and depends exclusively on international investors to lend the money to fund it, it is in the permanent contingency business, full stop. One can do a number of things to mitigate this such as ensuring one has cash and access to it in terms of short-term funding. Currently, there is €9 billion in cash on the books and additional access to very short-term cash. One can diversify the investor base by geography and investor type. One can diversify the product base by, for example, introducing index-linked, green bonds and other securities, as we will look to do in the future. One ensures the maturity profile is as smooth as possible and that one's debt is as long as possible. These are the only mitigants a small country like Ireland can put in place.
We spend most of our time assuming that something awful is going to happen and that is what we are paid to do. We are asked to ensure that we are protected and that we are able to access markets notwithstanding the conditions. I do not want trivialise Brexit, Grexit or anything else, but my experience would say that it is more likely to be something we have not thought of and that, therefore, we must have a permanent contingency plan in place that will allow us to withstand things we have not even envisaged as of yet.
I welcome Mr. O'Kelly and Mr. O'Connor. The term "leprechaun-proofing" has entered the lexicon. It is obviously in response to the inflated GDP figures last year. We discussed it at a meeting of the Committee of Public Accounts late last year. The GNI*, on which Mr. O'Kelly says he is not an expert, is a new key indicator that is being looked at by the Central Bank and others in terms of having a better indication of real production levels out there and a real measurement of the economy. While Mr. O'Kelly trivialised that somewhat, is it not true that whatever indicators or measurements we come up with, the only one that matters in respect of the application of the fiscal rules - which is what we must concern ourselves with here in terms of a budgetary process - is GDP? Is that Mr. O'Kelly's understanding?
So we can have all these indicators like GNP, GDP, GNI and GNI*, which are all very interesting and will all tell us different things, but in reality, the only one that really matters is the GDP figure. The GDP ratio versus debt is how we measure the fiscal space and, consequently, apply the fiscal rules. That is an important distinction because it relates to our work in terms of how much money will be there for us to invest in the economy in future years.
How sustainable is the debt? What type of risk analysis is undertaken by the NTMA in respect of the sustainability of debt? It is just above €200 million. Is that the-----
The question is about how the NTMA does it. How does it evaluate risk? Debt is either sustainable or it is not. If it becomes unsustainable, the NTMA needs measurements and processes in place that allow it to make a judgement on whether debt is sustainable, unsustainable or somewhere in between. When the NTMA carries out its risk analysis, what does it specifically do? How does it evaluate whether or not debt is sustainable or unsustainable?
Mr. Conor O'Kelly:
Our role is to ensure that we can access markets and finance the country's borrowing requirement as efficiently as possible. That is the mandate that has been given to us so when we carry out our risk analysis - between 60 and 70 people in the NTMA spend all of their time doing this - we are trying to work out access to markets, the price of that access and how we can best optimise our ability to raise money in the marketplace at the lowest possible interest rate.
That was something Mr. O'Kelly did not say until I prompted him so that is another measurement. Is there anything else that the NTMA would examine when it is looking at risk and the sustainability of debt?
Mr. Conor O'Kelly:
Again, what we are looking at is our access to markets and should access to markets become more difficult, how we can ensure that they are as optimal as possible and that we are accessing different pools of investors and doing so in the most optimal and cheapest way possible. It relates to how we can ensure that when we come to the market, we have the freedom to decide that we are not bound to go to one place on the U-curve or one group of investors who could then charge a higher price. We want to get ourselves into that optimal position. We can only do it to a certain extent but we try to mitigate those risks as much as possible. Mr. O'Connor can talk about some of the-----
How much of the global figure of €200 billion of debt is debt that was brought about through borrowing for day-to-day spending and how much of it is debt that is legacy debt related to recapitalising the banks or crystallising losses in banks? Does Mr. O'Kelly have that breakdown?
Mr. Conor O'Kelly:
May I speak in very round numbers for illustrative purposes? I do not mean to underplay the materiality of the numbers. Essentially, if one looks at the 2007 figure of €47.2 billion and the figure of over €200 billion, that is an increase of approximately €160 billion in the debt during that period. In the region of €60 billion was due to the recapitalisation of the banks, while €100 billion was due to the operating budget deficits we ran during that period when revenue fell and we had to finance those deficits over that three or four-year period. Of the €60 billion that was borrowed to go into the banks, about €30 billion is likely to come back and €30 billion is unlikely to come back. Therefore, a net effect of approximately €30 billion of the increase in the debt, from €47 billion to €200 billion, will be due to the banking crisis.
Is Mr. O'Kelly aware of criticisms from the Comptroller and Auditor General regarding the use of public private partnerships, PPPs, in respect of process and a lack of any value-for-money analysis of process when such partnerships are being looked at? In the context of look-back exercises, it is the view of the Comptroller and Auditor General that we do not evaluate whether or not we get value for money for PPPs. This is matter being re-examined because of the limitations regarding the fiscal rules. There is a debate - we will get to it in a moment - about whether there needs to be greater flexibility in respect of capital spending. One of the things that is being looked at is possibly making greater use of PPPs. Before we embark on that journey, it would be beneficial for us to look at how effective we have been up to now in respect of PPPs. Does the NTMA have a level of oversight in respect of that? What is the NTMA's role regarding PPPs? What is Mr. O'Kelly's response to what I have said about the Comptroller and Auditor General's concerns in terms of there being no real analysis of value for money beforehand and very little look-back afterwards?
Mr. Conor O'Kelly:
The National Development Finance Agency, NDFA, is part of the NTMA. The NDFA takes all PPP projects from start to finish - accommodation PPPs and non-road PPPs. Once they are delivered by the sponsoring Department and the decision is made to do is as a PPP, the NDFA takes over the process and procuring of that from the beginning to the end of the 25-year cycle, which is the normal period for oversight of that. In respect of the value-for-money element-----
Mr. Conor O'Kelly:
I think we were sitting in the room at the same time, with the Comptroller and General sitting to my right, when we discussed value for money. I would welcome more value-for-money exercises around looking back at PPPs. There has not been a huge amount of historic data in respect of being able to measure direct procurement versus the PPP model but there is enough now. I would welcome it with regard to any of the PPP projects. I am quite comfortable that value for money exists. The public sector benchmark is set quite stringently with the sponsoring Department at the outset. Any PPP must meet that benchmark in the first instance so it must be cheaper. When the first procurement is done, the figures must be below that public sector benchmark which has been set by the sponsoring Department. At the financial close, which is normally 18 months later, it must be retested to ensure that it meets the public sector benchmark. In my opinion, PPPs have more stringent public sector benchmark accountability than direct procurement. That is my personal view. It is not our role, but I would welcome the Comptroller and Auditor General or somebody else looking back to demonstrate that value for money for was obtained. I would be very confident it would be discovered that value for money exists in PPPs. There are times when PPPs are good value and worth pursuing and times when they are less good value. They are not always good or bad.
I am not an apologist for public private partnerships, PPPs, in any way. I am as interested as is the committee in how to procure and get infrastructure built in the optimum way for the taxpayer. When is it worth turning up the volume on PPPs and doing more of them? When is it worth doing fewer? An environment where balance sheet restrictions exist, infrastructure requirements are significant and interest rates and the cost of PPPs in nominal terms and even in relative terms are low, is an environment where PPPs should be looked at as something we could do more of.
In a report in 2015, the IMF stated that in some economies, the private sector is largely displacing governments in providing economic infrastructure. It goes on to talk about energy, transport and water. Ireland is cited as one example where it is displacing Government spending. The reason for that is the limitations of the fiscal rules. This is one way around it because we cannot get around the flexibilities. Some of us are concerned about that if we are seeing more privatisation of funding for basic infrastructure. It is quite cheap for the State to borrow now, as Mr. O'Kelly said himself. NewERA was before the Joint Committee on Future Funding of Domestic Water Services and said that it had borrowing for water provision built into its programme up to 2021. It is actually cheaper for the State to do it. That is what I am talking about.
I am not saying that Mr. O'Kelly is saying that. It is a point that was made to us by the Minister when he appeared before the committee and we asked him about the fiscal rules and flexibility. He said that would be dependent on whether we get support for changes from within the European Union. We will have to look at greater use of PPP in the absence of that. I ask Mr. O'Kelly to be conscious that, if we are looking at greater use of PPP, it could be more expensive and I have given the examples of where it is cheaper for governments to borrow at the moment. I also ask him to be conscious of the Comptroller and Auditor General's concerns, notwithstanding Mr. O'Kelly's personal view of value for money. He is the Comptroller and Auditor General who audits value for money and if he has concerns, as Mr. O'Kelly has acknowledged, those concerns need to be taken on board.
Mr. Conor O'Kelly:
I reiterate that I welcome the Comptroller and Auditor General doing as much work as possible to prove value for money on historic projects. He said at the time that he was not resourced appropriately to do so and he would like to do so himself. We have all agreed that it is a good thing to do. We would all like to see it done. That is an issue for the Comptroller and Auditor General, not for me.
Let us talk about PPPs for a second. I am not saying that one is exclusive of the other. Channels have to be kept open. Infrastructure has to be built. Not all projects are suitable for PPPs. Larger projects tend to be more suitable for PPPs. What is the cost? What is being paid? We can currently borrow money in the market directly at just over 2% for the period of a 25-year project, which is the length of most PPPs. Approximately 4% to 5% in total in debt and equity is going to be paid in an all-in cost to the State for PPPs. That is what it will pay in private capital. It is 2% to 3% higher than what we could get over that 25-year period.
What are we getting for that money? Is that good value? We are getting the infrastructure built, managed and retained over that 25-year period, and returned to the State in a state that gives it a 20-year life-cycle from that point. The committee has to decide whether that is good or bad value. I think it is time to have more PPPs when rates are this low, the requirements are so great and the balance sheet restrictions are so significant. I am not saying we should have entirely PPPs, but maybe 20%, 10% or 15%. That is more than we normally do. They are circumstances which make that an environment where more might be done.
I accept that and have no difficulty with Mr. O'Kelly's response. I am only making the point that if we are examining a greater use of PPP only because of restrictions which are in place, then it is a valid argument that we should do that, because there are restrictions. It should not take away from one of the issues which this committee is looking at, which is the need to get greater flexibilities for capital spend. That would give us a greater choice.
Mr. O'Kelly makes the point that it isn't either-or but is about choice. There is not much choice at the moment. We have very little capital spend because of the limitations of the fiscal space. This year's budget is going to be worse because we have carry-over costs, reduced fiscal space and even though we can smooth capital spending, it is still going to be quite low. The choices are quite limited. I make that point more for this committee than for Mr. O'Kelly.
Mr. Conor O'Kelly:
I accept all the Deputy's remarks, but I am giving our perspective.
The thing to consider is that interest rates are being locked in for 25 years at today's rates when a PPP is done today. That private capital is quite cheap in absolute and historic terms today. In our opinion, risks of interest rates are asymmetric. They may stay low for a very long time. They may still be like this in 20 years' time. Future taxpayers may be able to borrow money at today's levels but the risk of them going higher versus going lower or staying where they are is asymmetric. Therefore, it is my humble opinion that we should lock in more capital rather than less while able to at the current extraordinarily low rates, which they are by any standards, because the risks are asymmetric.
I welcome the delegation from the National Treasury Management Agency, NTMA.
I want to focus on the period from 2019 to 2020. Mr. O'Kelly stated that NTMA is seeking to issue between €9 billion and €13 billion in bonds over the course of the year. He said that it got 2017 off to a positive start, raising €4 billion from the syndicated issue, the 20-year bond. I notice NTMA's achievements in the past few years. It successfully raised close to €27 billion in long-term debt at a weighted average yield of just over 1.3% since the start of 2015. It repaid the IMF loan facility of €18 billion. We saw the first ever issue of the 100-year note, which saw us borrow €100 million at a yield of 2.35%. The NTMA has those achievements but, overall, Mr. O'Kelly has rightly given a very sobering account of our national debt for this committee of all committees. The global size of that and the percentage of debt compared with our general Government revenue is almost frightening, in a sense. It puts the committee and the proposals that we would make for budgets and so on under intense pressure.
The period of 2019 to 2020 seems to be a very dangerous time for NTMA and this State in the sense that a quarter of the debt, €50 billion, has to be refinanced between 2018 and 2020. Other colleagues have mentioned the grave uncertainty that we are in. We seem to be in a fundamental watershed period of history and therefore we are vulnerable. Would it therefore be appropriate to refinance as much as possible of the burden that is hanging over us in 2019 and 2020, and get on with it while the waters are relatively calm? Concerns have been raised that with Brexit and other issues, we could have a perfect storm again, like in 2009, and the agony that we have suffered since then. Is there not a huge case for doing something as soon as possible to refinance that huge burden?
Mr. Conor O'Kelly:
That is a great question and we have been looking at these chimney stacks, as we call them, coming for the last couple of years, as the Deputy will not be surprised to hear. I will let Mr. O'Connor take this question since he has been more actively involved in it. This number was €70 billion not so long ago, and it is probably more accurately based on what we have already done. In the background, it is getting towards €40 billion of its full obligation. We are looking at the interest rate markets, and notwithstanding surprises or whatever economic shocks might come, quantitative easing, QE, exists, the European Central Bank, ECB, is anchoring rates very low and investor demand and pools of capital are there. While it is important to show that we still have elevated levels of debt, the way the market is structured gives us confidence that our ability to finance and refinance at relatively low rates is still quite strong. Does Mr. O'Connor want to add anything there?
Exactly that. It is correct to say that despite the progress, it is still substantial. However, nearly everything for a number of years involved having our minds set on those particular dates. To go back to the IMF point, the extension was deliberately issued as longer. None of our recent auctions of syndications has tapped into that part of the curve. They are always longer. In addition, we have bilaterally, on occasion, switched with primary dealers and bought back a couple of billion in these short-dated bonds and switched them for longer. We continue to work on that.
I do not know if members saw it in the material, but at the end of last year we were holding €9 billion in cash and have already done €5.25 billion pretty early this year. We have another auction tomorrow. Our target is to end the year with more than €10 billion in cash. We carry that into that cycle so that while €52 billion is the formal redemption requirement, we are already down at close to €40 billion in our minds. As such, quite a lot has been done already. In addition, members might be familiar with the floating rate notes the Central Bank holds. While it is a matter for the Central Bank to decide what to do with them, we have bought back €6 billion of those over the past few years. They are bonds that will be sold in that period also. Dealing with some of that, which is due to come out, is also helpful in terms of what might be happening in the marketplace.
Quite a bit has been done and we are very mindful of it. We look at it first in terms of getting the liquidity. Refinancing the debt is one part, including the price at which one refinances it. Other defence mechanisms are about getting access to the liquidity notwithstanding price. If one looks at our maturity profile, we deliberately left 2021 quite empty, so to speak. It is some official sector debt. At the end of 2015 and in 2016, people were asking us for a five-year bond but we deliberately did not issue one to mature in that year because it can be a defensive mechanism. While there are large volumes to be rolled in 2020, one could issue some short debt into 2021 and then have a normal year as well. One could do a bit of both. In addition, it should not be forgotten that the bonds will not all mature on the same date in 2020. There will be a couple of bonds. We are watching it in terms of access to markets' liquidity and price. As such, quite an amount has been done as we have indicated. Some people might question why we have one of the longest average lives but we have been doing that with the deliberate view that these are larger redemptions compared to other parts of our yield curve.
What we do is very much of a long-term nature. To show members how far back these things were thought of, I give the following example. Ireland sought extensions in the European loans twice. I remember during the second extension when Portugal was asking for the same, the initial negotiations or conversations were on rolling the debt for a few years. However, we actually used that profile front and centre to argue that it would just create a bigger problem as we started to enter this period to put the official sector debt in a short maturity. As such, we now have the European loans going out to the 2030s and 2040s. That was done with a watchful eye on the redemptions to which the Deputy referred.
When I was on the Committee of Public Accounts, I remember Dr. Somers used to come into us quite a bit. He always seemed to have quite a nice kitty somewhere. He was like the mother of the household and always seemed to have €20 billion or so on hand even going back to the early days of the crash. Does the NTMA have a standard amount in that regard? Mr. O'Connor said the NTMA hoped to have €10 billion of offset.
Mr. Frank O'Connor:
We want to be careful about giving the market our exact guidance, but broadly the Deputy might remember that coming out of the EU-IMF programme, we kept a strategic liquidity buffer or approximately 12 months pre-funding as a minimum. We were at 12 to 15 months. As a rule, we have a six-month minimum requirement. While in the next six months, we do not have a big requirement, nevertheless we hold a lot of cash. It is just a minimum as things have improved. To go back to giving an example, we had €9 billion in cash at the end of last year and already have €5.25 billion. The Exchequer borrowing requirement for the first few months of the year was actually positive because it is not linear. It is seasonal in nature. We have a bond redemption in October, so that is, effectively, funded. As such, approximately €6 billion in October 2017, which is in the €52 billion figure, is funded. If one thinks about it, we said €9 billion to €13 billion. We only need this year, if one takes this year on its own, the €2.2 billion Exchequer borrowing requirement and €6 billion bond redemption. As such, we have already allowed for the growing of our cash balance into this period and are probably ahead of ourselves this year. That is in the mindset. To go back to the Deputy's point about the buffer, we keep a substantial cash balance. At the end of February, it was close to €15 billion and at the end of the year we are targeting it to be in excess of €10 billion.
Mr. Conor O'Kelly:
We have been the beneficiary of an extraordinary interest rate environment since the beginning of the QE announcement in early 2015. The effect has been to anchor short rates but also to flatten yield curves and keep longer rates allowing countries like ours to access longer-dated borrowings and improve the profile. That has been the significant benefit. Ultimately, it has to stop at some point.
Mr. Conor O'Kelly:
Right now, QE is continuing and there is no decision to do any tapering or change the outlook. We will continue to be a very significant beneficiary of it. At some point, one has lengthened one's maturity. For us, initially, it gave us the opportunity to lengthen the maturity, issue 30 years and have a disproportionate interest in going longer. Now, we have the luxury of having a 12-year average, which is one of the longest maturities in Europe, and that means when we come to auction, we want to go to the cheapest place on that particular day at that particular time. It gives one the luxury of getting oneself into that position whereas at the beginning of 2015, one just needed to lengthen the maturity and get some longer dated debt.
Does the NTMA have a calculation for how much Ireland has benefitted from QE? Obviously, interest rates, longevity and all of those things have improved, but does Mr. O'Kelly have a net figure as to how much Ireland benefitted as a country from QE?
Mr. Conor O'Kelly:
It is €7 billion and on its way to €6 billion. As such, €3 billion to €4 billion per annum is the interest saving, which must be due to the interest rate environment in which we have been able to refinance. That has been driven largely by QE. However, it is also due to the policies adopted by governments and decision makers at the time, including Deputy Burton, which improved the credit story and the fiscal position for Ireland. We saw our credit spread narrowing against Germany and moving into that space. That had much more to do with our fiscal position than with Mario Draghi and interest rates. That is Ireland as a creditor moving from the peripheral category with Spain, Italy, Portugal and Greece to the category with France and Belgium, where it is today. That is really more about Ireland, its credit story and the fundamentals. That is the credit spread narrowing from 140 to 150 base points over Germany to where it is now at 70 or 80 points above. The rest of it is more about the absolute level of rates, which have come down. That is more to do with QE. It is very difficult to break it out but we have been a very big beneficiary.
Looking at the economy at the moment, a couple of things stand out. One is that our demographics are rather different from those of most other European countries. In the long run, that is very much in our favour. In other words, we have many young children and a much slower rate of ageing, although that will come into play by 2050.
We have a much lower rate of aging than most other European economies.
The biggest difficulty we have is the lack of infrastructural capital development, obviously including housing. In Mr. O'Kelly's view, how do we leverage our current quite positive position, assuming quantitative easing, QE, and no great disruptions in the euro? How can we manage the capital investment programme at the level we require for our population and to continue to be attractive to foreign direct investment, FDI, while developing sustainable Irish businesses at SME and larger scales? I would see those challenges as being really difficult.
In the context of Brexit, we hear a lot of discussion of the potential for certain offices to move here, possibly to the IFSC. There is a real bottleneck as regards housing, however, as well as in our overall transport infrastructure. I am not going to go on about broadband but that is a further difficulty. We also have targets in respect of environmentally appropriate actions. What would Mr. O'Kelly's advice be as to how we should pitch the capital investment targets that I think we really need to meet those challenges?
I meet people from the European Investment Bank from time to time, as I am sure other Deputies do, and I leave wanting to pull my hair out as it is so frustrating. In theory they have bags of money there. In practice, it is "not for giving out to you lot" because there is some point or other on which we do not hit perfection. I understand it is out there in the market and has to get returns, not unlike the NTMA. However, we really have this investment gap.
Mr. Conor O'Kelly:
In our position, borrowing more money is not a strategy that we would recommend. It is not really a good idea to borrow more money because interest rates are low. It is like saying to a household that it should go down to the bank and borrow more money, even though it has a big mortgage and credit card bills and a leased car in the driveway. That is the kind of situation we are in. It is difficult for us to suggest borrowing more money, even for capital spending, even though at some point the market will look more favourably on that. When our debt levels get down further in two, three or four years' time, that is going to become a legitimate option for us and the reaction from the market will probably be quite sanguine for capital investment. We are still just a bit too elevated for that.
There are the other parts of the NTMA that have a remit that is potentially more relevant - first of all the Ireland Strategic Investment Fund, ISIF. I was not around when the ISIF was set up but, to me, that was an enlightened legislation from the Oireachtas. On an international scale, the limitations of monetary policy are now becoming obvious to everybody. There is therefore a need for fiscal stimulus to be added, yet countries are already indebted. Ireland, through the creation of the strategic investment fund, having moved the mandate from the National Pensions Reserve Fund, NPRF, to focus on Ireland only, has a fiscal mechanism for investment that is pretty unusual. Many European countries are looking at that now with some degree of envy. It is a very powerful vehicle.
As the Deputy is aware, €2.6 billion has already been invested by the ISIF in a variety of investments across the country, creating 19,000 jobs - 60% of them outside of Dublin - in all sorts of sectors. Most importantly, as we always co-invest, the multiple of investment, which we expected to be twice what we put in, has turned out to be about 2.6 times. We are talking about €7.2 billion being invested because of the ISIF investment of €2.6 billion. It is an €8 billion fund which gives great capacity still; our pipeline of projects is about €2 billion in value. That investment can be targeted at infrastructure in all sorts of ways, depending on where the requirement is. Housing is obviously a big requirement. There is €550 million dedicated to housing. There are platforms like Activate Capital, Ardstone or the DCU campus. Some €54 million was put into a DCU accommodation campus by the ISIF, which released another €150 million from the European Investment Bank, EIB, for an overall campus development. That is the kind of impact and investment that can be made by the ISIF. We have a very powerful vehicle there.
Obviously, ISIF has to make off-balance-sheet investments, so it has to be commercial. We have a mandate to have what we call a double bottom line, that is, a commercial return plus economic impact. We work with investment partners and co-investors, which again helps keep our activities off-balance-sheet by demonstrating commercial capability.
The Minister has asked us to look at the housing area and social housing in particular. In the investments we have made so far, there is a pipeline of about 8,000 residential units which are being built and will be completed. There is potential for another 8,000 units in other platforms and investments that ISIF is currently considering. It is a long-term fund. Although the impact is not as immediate as any of us would like, the ISIF really can create long-term sustainable infrastructure investment to help solve some of those problems.
I see the summaries which Mr. O'Kelly referenced in terms of ISIF's lending. I do not think the housing market will really recover until such time as we have affordable housing for which, say, the likes of some of the NTMA's junior employees might be in a position to get a mortgager, even in the Dublin area where the price is somewhere from €350,000 to €550,000. I just don't see that happening in any serious volume at the moment.
What the Irish market lacks is volume. We have a lot of housing projects. While that is all very good, the volume in terms of numbers relative to demand needs to be improved. There is pent-up demand from the ten years since the economy crashed. Some of the people who got their jobs ten years ago and are now in their early to mid-30s, maybe even older and, even though they might be public servants with lifetime jobs or people in stable, strong sectors, they cannot find houses to buy. I think everybody here would know people desperately scrambling to get mortgage approval.
Is there anything that Mr. O'Kelly believes would generate volume in the Irish market? I am thinking in particular of levels of affordability, which obviously vary in different parts of the country. I am also thinking of what people like the social housing authorities, say, are doing. They are talking now about affordable rent, as well as traditional life-long social housing tenancies. The volume is not there. A further issue is the fact that the housing associations are minutely small, given the numbers required.
If one looks at housing associations as they developed in the UK, their numbers are much greater. Does the NTMA follow the housing market? I know the NTMA has a lot of analysts working with it. It would be very interesting to hear whether it has identified any mechanisms because it is a real problem at the moment.
Mr. Conor O'Kelly:
It is a huge focus for the ISIF. We have already invested €525 million across different platforms, which are being monitored and beginning to make quite an impact. We are looking at providing funding in a number of other areas, in particular infrastructure that would enable houses to be built. We are all familiar with the difficulty of the lack of roads, pipes or other infrastructure. Enabling infrastructure can release the viability of house building. We are looking at a number of projects in that area. It is a significant focus for us but within that specific fund.
If I could ask one other question on the proposed sale by the Minister for Finance, Deputy Noonan, of a quarter of AIB, as I understand it, the broad rules are that the money realised must go to pay down debt. In terms of the figures that have been provided to us by the witnesses, what does that do, if anything?
Mr. Conor O'Kelly:
No, what is much more important from our point of view is the principle of it, namely, that the market has invested in Irish credit on the expectation that proceeds from any of the bank sales will go to repay debt. How valuable that is depends on the timing of the sale, the percentage of the sale and what the market is at the time. Mr. O'Connor does not like to bank anything before it is there.
Mr. Frank O'Connor:
I do not want to speculate on the amount as the bank tries to enter an IPO process. If one is talking about realising a price of that magnitude, in the context of a €200 billion debt portfolio, one is talking about more than 1%. As Mr. O'Kelly outlined, we do not assume the money so in terms of the numbers we talked about and our funding range that we told investors for the year, we tend to err on the side of caution because only six months ago or in summer 2016 people felt that bank share prices in terms of equity valuations were not as attractive. There has been some recovery in those prices so people might have felt an IPO was talked about then did not happen but is now back on the table again. We tend to err on the side of being cautious. In the numbers we present here we do not assume the amount in terms of cashflow. What investors want to know is if it does happen, what would happen the proceeds and the signal around that.
I have to run so I appreciate Deputy Burton allowing me in. I had to attend statements in the Dáil earlier so I missed the latter half of the presentation. If I recall correctly, Mr. O'Kelly indicated in the written presentation supplied in advance of today's committee meeting that PPP fund lending is €4.6 billion. IBEC is lobbying for another big tranche of PPPs for road building. What is the average interest rate we pay on a PPP?
I note that a significant amount of lending is in legacy debt to the European Union from the bailout period. Was it ever possible for us to pay that back early, in the same way we did with IMF debt? If I recall correctly the figure was 7%. Given that we are able to borrow for the long term at such rates would it not have made sense for us to pay back European debt?
I was remarkably reassured by some of the figures but the one relating to debt as a percentage of Government income is still very high. If there is any slip in Government income is there a threshold above which that might start to have a significant effect on the overall cost?
Mr. Conor O'Kelly:
We are just looking at accommodation PPPs not including roads. The question is what is the cost of the debt. The cost of debt on current projects for the past 12 months for the average accommodation PPP, the majority of which are 25-year contracts, is approximately 2.5%. We are raising money at 2.5%. There is an equity component of approximately 10% of those so the all-in cost for the equity and debt of a PPP for us as a country entering into the contract is approximately 4%. Let us give a bit of room and say that it is between 4% and 5% depending on where rates are. The NTMA can borrow directly for that period for approximately 2%. One is essentially paying an additional 2% to 3%-----
Mr. Conor O'Kelly:
Yes it is twice the rate but twice the rate when rates are 10% is not the same as twice the rate when rates are 2% because one is getting all-in funding in real money terms. One can forget about the absolutes and the relatives. Interest rates are extraordinarily low. In our opinion they are unlikely to stay extraordinarily low for a very long time. Future citizens and taxpayers may not be able to borrow at such attractive rates for 25 years. The risks are asymmetric. There is an opportunity to borrow all-in equity and debt at between 4% and 5% for a project where the PPP investor takes the risk on delivering the building, managing the portfolio for 25 years and then handing it back to the State in a condition that can survive another 20 years. One is paying 2% to 3% above the rate at which one could do it oneself and that is what one is paying for. It is an environment where we should probably be looking at that as a reasonably attractive option, irrespective of-----
Mr. Conor O'Kelly:
No, it is straight line amortised over the 25 years. That is the advantage, so when one has balance sheet restrictions, that is why PPPs are attractive and that is why one sees PPPs. Even in America now PPPs are starting to come up in states that are really struggling to borrow money directly themselves in the bond markets.
The second question related to European refinancing of other debt alongside the IMF. Mr. O'Connor would kill me if I did not let him answer this question because he was in the room when most of the negotiations took place so I will let him respond to that question.
Mr. Frank O'Connor:
I will give a reminder on the IMF, which is what I would call the expensive portion of the money. When one is above one's quota with the IMF the credit margin in the early years was 3% plus the reference rates – the special drawing rights, SDR, reference rate – but after three years if one does not start to repay the IMF another per cent is added. Three years into it one is talking about a 4% credit margin plus the SDR reference rate, which is why we always talk about IMF money costing 4% to 5%. When our bond yields started to cross 3% into 2%, there was a desire to repay the IMF early.
European loans are different. European loan are for much longer than the IMF loans and they are cheaper. In simple terms, the European money, through the ESFS facility and the EFSM are rated AAA and AA. We are rated A. One should remember that the pace at which investors expect the money to change from all the other debt we have to fund and the institutional debt coming back into that traditional investor base is different. I will give one example, the ESFM had to roll one of its maturities so it lent us money by issuing a bond until 2015. It had to roll that because it had committed to us not repaying until after 2027. It did three deals at an average of 14 years. It went to the market with an array of bonds.
This was December 2015, or just before it. They funded it at 1.13%. The same 14 year bond that we had, our 2030 bond at that time, was trading at 1.8% so the European one does not arise at this time.
Mr. Conor O'Kelly:
I do not think that there is a magic figure. Investors look at all these metrics but anything that affects Government revenue particularly if we become more dependent or too dependent on one particular stream of revenue, as happened in the past, would set off alarm bells. Investors do look at a host of different metrics and I do not think that holding up any one of these or imposing a particular threshold is necessarily a good way to look at it.
Mr. Conor O'Kelly:
The holdings in the banks are not in those numbers. Investors look at net debt, we are looking at gross debt there. Net debt would be the holdings that the State has in AIB or Bank of Ireland or PTSB. Technically those are held in the ISIF's directed portfolio on behalf of the Minister and that is where they sit but that is just a technicality. We do not put them in our figures.
Mr. Conor O'Kelly:
There are five core remits. There is funding and debt management, which Mr. O'Connor runs, and we talked about ISIF. There is the NDFA which looks after the PPPs and NewERA which looks at the commercial semi-States in terms of governance and corporate finance advice to the various Ministers. There is the State Claims Agency which looks after all the claims against the State which has become a very big part of the NTMA's operation.
At one stage, going back to Anne Counihan's time, the NTMA was quite involved in giving the HSE advice on capital spending, about the purchasing of up to date technical equipment such as high level imaging. In effect, the NTMA was carrying out a kind of value for money analysis and seeing if it could be done on a regional basis. At the moment there are problems in quite a significant part of the country, first, where pregnant women do not get scans at 20 weeks and, second, where the more modern technology which is available in the private sector in Ireland for blood tests for issues a baby might have at around 11 or 12 weeks of gestation is not available. Is any of that still being done by NTMA? That work was very useful because it allowed evaluations on a regional basis, as happened in Waterford or Mayo at the time, and equipment which was maybe a couple of million euro or up to a couple of million was not that dear, in conjunction with some of the hospital developments.
Going back to capital development, we have a situation in the HSE where a lot of its capital equipment is older and it needs a strong cycle of renewal. Is that capacity still there to resume that work?
Mr. Conor O'Kelly:
Yes. What the Deputy is referring to in reference to the HSE may have implications for the clinical risk team of the State Claims Agency in relation to equipment but we would not have any role in terms of expenditure or otherwise.
What if they bundled projects together? We have a lot of hospitals now with equipment that is so old it is embarrassing and that will continue. If we could find a mechanism where equipment could be renewed much more rapidly. There was something of a mechanism before, I am not saying that it was perfect but it resulted in a big improvement in things such as MRI machines being provided to hospitals. At the moment, the director of the HSE is bemoaning the fact that he has a very large capital investment gap, including on small-scale stuff.
I have a couple of questions for Mr. Kelly and Mr. O'Connor but I will not keep them long. The opening statement was taken as read, but it states that in 2030, the forecast cost of borrowing will be €10 billion. I note that has reduced by €4 billion or maybe €5 billion. That is a very welcome development and very positive for the country.
On the sustainability of the debt, while balancing the budget is a policy matter for the Government, carrying a debt in excess of €200 billion puts the State at a certain level of risk. What advice is being offered by NTMA on the sustainability of this debt?
On the measurement of the debt, does the NTMA use any other metrics to measure the level of indebtedness?
Mr. O'Kelly discussed that already, that is fine.
Mr. O'Kelly touched upon quantitative easing and the benefits we have experienced as a result of that. Will this easing have an impact on the sovereign bonds?
Mr. Conor O'Kelly:
Ultimately, markets are preparing for a normalisation of interest rates in an environment where central banks are not as active in the market in relation to these kinds of programmes. We tend to look at everything from a worst case scenario in that regard but we do believe that interest rates are likely to go higher, yield curves are likely to go steeper and credit spreads are likely to go wider. That will have an impact on us in the medium term and will make it more difficult to get the number down, that the Deputy mentioned, from the €10 billion that was forecast to the €7 billion to the €6 billion to €5 billion. We cannot predict what will happen but our working assumption is that rates could go higher when quantitative easing stops and that encourages us to pre-fund now as much as possible to take advantage of the low rate environment.
Mr. Conor O'Kelly:
I suppose Brexit is on everyone's risk register. Anything that affects economic growth affects debt sustainability and investors' perception. We got some head winds in front of us from Brexit and European instability as well as Trump and uncertainty around tax, in particular, and other policy so they are the headwinds today that we have to consider along with other things that could come around the corner at any time. We have not isolated any particular risk but Ireland is facing some significant challenges that it has not had in the last couple of years which will negatively impact on its rating by investors.
Another thing that we have discussed quite a lot at this committee is off-balance sheet funding. There appears to be a reluctance on the part of the Minister in this regard. Has the NTMA examined this issue in terms of funding projects which will not appear in the national accounts? What advice has it for the committee in the context of off-balance sheet funding for projects?
Mr. Conor O'Kelly:
Obviously the ISIF is a vehicle and a fund which can, through its commercial mandate, continue to invest in various infrastructure projects and they remain off-balance sheet. I have mentioned PPPs a number of times today.
It is the kind of environment where public private partnerships should be looked at more favourably than they were in the past. That is mostly because of the level of interest rates currently and the ability to fund all in at between 4% and 5% for 25 years. I would question whether that type of low rate environment will be available to generations in the future.
Mr. O'Kelly mentioned the Ireland Strategic Investment Fund, ISIF. A key issue is the extent to which the public bodies engage with that and show a commercial return for projects they are putting forward. Is the National Treasury Management Agency, NTMA, happy with the level of engagement with public bodies? What message would the NTMA want to send to those seeking funding for those types of projects on which they have to show there is a commercial return?
Mr. Conor O'Kelly:
The message is that we are open for business. We have engaged with most of the Departments and, hopefully, most of the key industries know about us by now. The Kilkenny regeneration project is particularly interesting and councils throughout the country are beginning to look at what might be possible. People are also looking closely at the infrastructure in terms of housing. There is quite a big regional spread so as we make investments across the country, awareness of the fund becomes more significant. Our pipeline is very large and full of some very interesting high quality projects. I am very comfortable about that but if people do not know about us and they have something to say, they should come and see us.
We have examined 5,000 projects in the past two years in regard to ISIF. We have only made 39 investments so there is a high bar to jump, but we are happy to see everything.
Mr. Conor O'Kelly:
When we are in a very low interest rate environment, the benefits of the funding that can be accessed by a triple A institution at the EIB are less obvious than when rates go higher. That is a reality that exists currently but the EIB moving to Dublin is a very positive step for Ireland and it is likely to get us more engaged. I would see that being very beneficial over the medium to long term rather than in the short term.
Mr. Frank O'Connor:
As in the answer to the European loans question, because it is rated higher, when it does lend to us it can be cheaper. It is not as dramatic as it was in the crisis when we were rated less than A. The gap is narrowing but it is still cheaper. To give the Acting Chairman an example, last year the EIB loaned approximately €430 million directly to the Exchequer close to a 15 year life and, from memory, it was at some 1.78% so it is useful in that regard.
The witnesses were asked by a number of Deputies about the PPPs. Where do public private partnerships work well? For example, school bundles appear to be a very positive avenue for the NTMA to go down. Is that a good example of where the NTMA can expand?
Mr. Conor O'Kelly:
Yes. Scale is what PPP operators look for, and they look for a continual pipeline. Primary care is a very good example. Some 14 primary care centres are currently being built around the country through PPPs. That is about €160 million in total value so it is projects with a value between €100 million and €200 million. Smaller scale projects do not tend to attract the capital and the breadth of interest at the kind of rates that would become attractive. Medium to large scale projects are particularly suitable. The schools bundles have worked extremely well and the Department of Education and Skills, and the schools, are very happy.