Oireachtas Joint and Select Committees
Wednesday, 24 May 2023
Committee on Budgetary Oversight
Sovereign Wealth Funds: Discussion
I welcome our guests from the National Treasure Management Agency, Mr. Nick Ashmore, director of the Ireland Strategic Investment Fund, and Mr. Ian Black, chief financial and operating officer. Before we begin, I will go through the formalities and explain some limitations to parliamentary privilege and the practice of the Houses as regards the references witnesses make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. Witnesses are again reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I remind members of the constitutional requirement that they must be physically present within the confines of the place that Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate where they are not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.
I invite Mr. Nick Ashmore to make an opening statement.
Mr. Nick Ashmore:
Rather than give a formal written statement, we brought a short presentation. I propose to talk through that. I am not sure if the slides are available. Can they be shared?
I refer to the first slide. By way of context, as the Chair said, I am the director of the Ireland Strategic Investment Fund, ISIF. That sits within the broader architecture of the National Treasury Management Agency, NTMA. The agency is overseen by a group, which is the board. It has a number of governance committees and a number of functions, which are laid out in the slide. There is the Ireland Strategic Investment Fund; the National Development Finance Agency; the funding and debt management unit, which handles of the bond issuances and treasury management; the New Economic and Recovery Authority, NewERA; and the State Claims Agency. Of the governance committees, the investment committee is specific to ISIF. We all share the same core set of common services and resources with the corporate functions, which Mr. Black leads. We thought it might be helpful to talk through the various funds that have either existed or currently exist in terms of the management of sovereign wealth.
I will move on to the next slide. The original sovereign fund in Ireland was the National Pensions Reserve Fund, NPRF, which was established in 2001 under the National Pensions Reserve Fund Act 2000. It was established for the purpose of meeting as much as possible of the cost to the Exchequer of social welfare pensions and public service pensions to be paid from 2025 until at least 2055 or later. It came into operation in April 2001. Given the long-term nature of the fund, its allocation was 80% towards equities and 20% towards bonds at a high-level asset allocation and at expression of the risk appetite of the NPRF commission, which was tasked with the management and ownership of the fund. Over time, and in order to achieve diversification and exploit other potential sources of additional long-term return while managing the risk within the same risk profile, the strategy evolved to include other asset classes such as small capitalisation equities, corporate bonds, commodities, absolute return funds, private equity, property and infrastructure.
The fund had its own independent governing body, namely, the NPRF commission, which was appointed by the Minister for Finance. A team was established within the NTMA to manage the fund. It adopted both strategic and dynamic asset allocation to efficiently manage the fund against changing market dynamics. The investment strategy was developed and then implemented within the NTMA. It sought to have a high level of transparency to a wide set of stakeholders and, ultimately, both sought but also had to have a high degree of flexibility in its approach, given the way that mandates evolved and markets regimes changed. Ultimately, the financial crisis took hold over the country.
I will move onto the next slide, which is about the history of the fund. It shows the evolution of the NPRF as the funds were brought in. Over that first period of time, there was an annual contribution of 1% of GNP. That equated to approximately €1.5 billion a year on top of the original €7 billion that was contributed at the start, which largely formed the proceeds from the sale of Eircom in the public offering. The fund had a fairly straightforward run over those first seven or eight years. Then a couple of things happened. First, 2008 was a particularly hard year in the markets and the fund took a hit. As we started to move through 2008, 2009 and 2010, the inception of what we call the “directed portfolio” took place. That was the use of a portion of the fund to fund investments into AIB and Bank of Ireland as part of the Government recapitalisation of those institutions. Ultimately, the fund invested approximately €20.7 billion into AIB and Bank of Ireland. At the end of 2021, which is our last published set of figures, that was reflected by a residual value of about €4.8 billion and approximately €11 billion of proceeds received to that point. That has since evolved. At that point, we still owned approximately 71% of AIB and approximately 8% of Bank of Ireland. Bank of Ireland’s shareholding has now been completely liquidated and the shareholding in AIB has been traded out down to 53%. We still have a slight majority holding in AIB within the directed portfolio. The NTMA has no real role in the management of the directed portfolio. We simply execute on behalf of the Department. The SFAD team within the Department manages that investment on behalf of the Minister.
Mr. Nick Ashmore:
Subsequent to that large withdrawal of funds, the NPRF was much smaller. From 2011 onwards, it was clear that the sense of direction from the new Government was the move towards the establishment of ISIF. The process of developing that idea, along with other changes that were made to NTMA over that time such as the creation of NewERA and the passing of a new NTMA Act, which formed a new governance structure over the agency, took place between 2011 and 2014. The fund continued to be managed. It found itself concentrated in illiquid assets at that time. There was a move to sell down the portfolios that had not been sold to fund the bank investments that were less liquid, such as private equity and real estate. The fund also started to make initial investments in strategic-type investments. It started to prototype the type of investments that ultimately ISIF would make and makes now.
We will move on to the next slide. The second fund I will talk about is the National Reserve Fund, NRF, as it is known now. It was originally characterised as the rainy day fund when it was created. The NRF was established in 2019 to put aside a pool of capital that could be used in the event of an economic shock. It had quite specific terms around when it could be used. It was initially created and funded with €1.5 billion withdrawn from ISIF. However, subsequently in 2020, Covid happened and the fund was fairly quickly used to help to support Exchequer spending in that year. The fund was reconstituted at the end of last year with an intention to use some of the surplus. It now contains €6 billion - €2 billion contributed at the end of last year and €4 billion contributed this year. It is managed very conservatively. We have a very short time horizon on the investment strategy. Currently, in Exchequer notes, we are developing a short-term investment strategy which would see it diversify into a few other asset classes, but equally low risk and highly liquid. It really is just a pure reserve for the time being. The maximum size of the NRF under the current legislation is €8 billion.
We will move on to the next slide. ISIF is the primary effort in terms of the NTMA’s investment management operations at the moment. We have the directed portfolio but, as we mentioned, that is separate. The €9 billion that we manage is the discretionary fund. That is made up of a mix of Irish impact investments and global low-risk liquid investments that act as a reserve source of liquidity to fund Irish investment or Irish-related investment as we make those. The mandate of ISIF is to invest on a commercial basis in a manner designed to support economic activity and employment in the State. It is a wide-ranging mandate. We try to have a fairly cohesive strategy to make sure we are focusing our efforts where we can actually add value rather than spreading it too widely or displacing other activity. Since its inception, the fund has committed over €6 billion across approximately 175 different investments – a mix of funds and direct investments. It has catalysed a further €9.5 billion of co-investment alongside those investments. Its accumulated return to the middle of 2021 was €2.1 billion.
On the strategy for and deployment of ISIF, we agreed with the Minister and launched the new strategy in June of last year. That is designed to see ISIF look to help the State in addressing key challenges. At the top of that list is climate; second is housing enabling investment; third is scaling indigenous businesses, which is always a core role for ISIF; and fourth is food and agriculture.
Those four investment themes form our areas of focus. They are designed to align with key Departments as key stakeholders and we have a team dedicated within ISIF to making and managing investments in each of those areas. In climate, the strategy is to try to make commercial investments that will help the State meet its targets in terms of positioning itself for a net-zero carbon economy. That involves a multistrand approach to investment across different time horizons, so as we look at the 2030 targets we are much more focused on things like renewable generation, energy storage, biogas and other things that are going to help bring the emissions down quite quickly. For the longer-term goal of achieving net zero by 2050, we are more focused on longer-term investments, maybe in earlier-stage technology growth capital companies, venture capital and that kind of thing. It is about new technologies that are going to help us bridge that much harder gap to get from 50% to 100% reduction. We set out an ambition in climate to invest €1 billion across that theme over the next four or five years and we are making good progress against that ambition right now.
The second theme is housing and we have a strong focus on supporting where we can the production of mass-market housing across the State. We invest up and down the capital structure in senior debt, mezzanine and equity. Alongside that is enabling investments and this where we are active in urban regeneration in cities around the country - not in Dublin, but in the likes of Limerick, Cork, Galway, Waterford and Kilkenny. We have laid out a €500 million ambition in that area to deploy funds into those centres across a range of investments, including not just urban regeneration, but also growth businesses and other aspects as well.
The third theme, which is scaling indigenous businesses, is working alongside Enterprise Ireland to ensure the funds are available in venture capital, growth funds and other means that can invest in fast-scaling indigenous companies. We work with strong local investment managers, but also try to bring in international managers to add to that ecosystem in order that there is comprehensive funding ecosystem for businesses to operate within where they can get access to the investment they need to grow and scale.
Last is food and agriculture. We have always had a bit of a food and agriculture capability but we have made it a dedicated theme in the last year and that is starting to pay dividends. It is a key area for the economy and the underpinning of rural society, but is also a set of industries facing an existential challenge with climate, though also a significant opportunity as well. We have world-leading food companies, a high degree of entrepreneurship and a highly-engaged and switched-on base of farmers who are very tuned in, in our experience, to the challenge of climate change and looking to respond to that. We see as much a strong commercial investment opportunity there as we do the threat of having to decarbonise.
Underpinning all that, we also maintain a degree of flexibility such that if we have another major economic dislocation such as the pandemic or Brexit, we can flex into investments in that area we might not normally look at. We operate within an economic additionality framework. We seek to have additionality in all our investments and we try to minimise, where we can, deadweight and displacements. That is really where we try to avoid displacing other economic activity or investments and we try to avoid doing things that are obviously going to happen anyway without our help. If we are to look at a compelling and national situation we would do that in dialogue with the Minister for Finance; we would not go off and do that unilaterally.
That is the strategy for ISIF. The last slide notes the level of co-investment we have achieved over the years, but also the flexibility ISIF was able to offer during the pandemic. At the beginning of the pandemic, we turned the investment strategy quite dramatically to broaden out the types of investment ISIF can do with an initial focus on stabilisation of companies. It saw ISIF invest in things like tourism and hospitality where normally the risk of displacement would mean that we would be less active. Over time and through the stabilisation investments we moved back to recovery investments and gradually moved our way back, as the economy recovered, into helping businesses recover along the lines of our main themes. That programme was active from the spring of 2020 to the summer of 2021. We then switched back and launched the new strategy to reset and go again.
That is my opening presentation. I am happy to take any questions.
I thank the officials for the presentation and the work they are doing with ISIF and the NTMA. We are dealing with sovereign wealth funds and Mr. Ashmore has touched on two we currently have that ISIF manages. The officials will be aware my colleague, Deputy Brady, has brought forward legislation to direct ISIF to divest from companies that are on the UN list of those operating illegally in the occupied territories in Palestine. Do the officials have any comment on the progress of that legislation and ISIF's role in ensuring it is not investing in companies involved in that type of situation?
Mr. Nick Ashmore:
The progress of the legislation is a matter for the Department and the Oireachtas process. ISIF, and the National Pensions Reserve Fund, NPRF, before it, operated an ESG policy and in many ways has sought to be at the forefront of the deployment of ESG as a factor in terms of how it runs its operation, how it invests the fund and to be cognisant of the responsibility we have in managing State funds.
The ESG programme involves a number of elements. We have a number of active exclusions in operation at the moment. Those include antipersonnel landmines and cluster munitions, fossil fuel companies, companies involved in the manufacture of nuclear weapons and then more broadly, carbon-intensive companies we seek to avoid. In each of those cases we operate a list that excludes businesses we filter out from our investments. It is part of a multitiered approach. We have a policy of active ownership and engagement and integration of ESG into all our investment decisions and we work either directly with the investment managers or the investee companies in the Irish portfolio to engage around issues that involve ESG. Often we are engaging with our companies around diversity, especially in management structures and boards.
On the specific issue though, the UN has identified 112 companies that are operating in breach of international law in the occupied territories. ISIF invests in nine of those. Has this come up at board level? Is ISIF going to make a decision now to withdraw its investment from those companies or will it be the case that we, as legislators, need to pass a law to direct ISIF to do that?
Mr. Nick Ashmore:
It has come up in terms of our activities within ESG. Within our global portfolio where we are dealing with listed companies around the world, which is where these investments are located, we work with a third party called Federated Hermes EOS. It engages on behalf of multiple investors in active engagement with companies around ESG matters, and that includes the matter of human rights.
Mr. Nick Ashmore:
ESG refers to environment, social and governance issues. It is what we call social and responsible investing. It is an important theme. The NPRF was one of the founding signatories of the UN Principles for Responsible Investment back in 2006. That body now encompasses thousands and thousands of investors around the world and we were right at the beginning of that process.
Within Hermes's engagement programme is specific engagement around companies that are having issues with human rights. That also involves a number of these companies that are operating in the occupied Palestinian territories. Hermes has been engaging on our and other investors' behalf with these companies around these issues, proactively. With ESG, there is a sort of two-tier approach across the market. The first approach is to engage to see if we can persuade companies to change what they are doing, such as maybe to cease operations, operate in a more transparent way or open up what their activities are in order that other investors can come in and other stakeholders can see what they are doing. Hermes has engaged with a number of companies on our behalf and on behalf of other investors in the occupied Palestinian territories. Some of them are on the list and some are not but are actually active. One of the challenges with the UN list is that it is a point-in-time list. It has not been updated in recent times. It is not that old, but there is not a sense it is going to be updated regularly.
At the moment we are working with the Department on the response to the initiation of the legislative process and to try to see where there is a solution that would work within the legislation to address this.
I am going to move on to the broader wealth funds. We are all conscious of what is happening in regard to Palestine, the oppression and illegal occupation of its territories. Generally, and I do not propose to speak on behalf of people throughout the State, but I think there is a message here. Not in Our Name. Taxpayers' money should not be invested in companies that operate illegally in the occupied territories. It is not acceptable. It should not require Ireland Strategic Investment Fund, ISIF, which deals with discretionary investment portfolio, to have to wait for legislators to pass legislation to direct it otherwise. I genuinely believe people do not want their money invested in this way. There are plenty of other investment opportunities. I hear what Mr. Ashmore said. He may want to respond to that but in regard to the wider questions of the sovereign wealth fund, ISIF also invests in Home Building Finance Ireland, HBFI. It invests in supporting house building. The interest rate environment is changing. Some institutional investors will look at more lucrative or rewarding returns elsewhere. There is an issue in regard to finance for construction and developers. Does Mr. Ashmore believe that the creation of the new sovereign wealth fund could complement what is already being done in terms of ISIF and HBFI in regard to providing funding for the construction of homes throughout the State? Does he believe there is a role for a fund which obviously would have to be diversified in nature for investment domestically or does he believe that should be more international? Does he believe the NTMA, given its positive track record in relation to managing funds, not least of which is ISIF and the old National Pensions Reserve Fund before the Government gave it to all the banks. There was a good return sought on all those funds. Does he think the NTMA is the vehicle to manage that in the future?
Mr. Nick Ashmore:
The choice of the vehicle to manage the fund is really a policy matter. Certainly the indication we have is the fund will be operated within the NTMA structure. Given that we are already managing sovereign wealth and other funds there is a strong logic to that. In regard to housing, ISIF is active in the housing space. We committed more than €1 billion so far. We are exploring the limits of what we can do in that space in regard to deploying funds. We are conscious that a gap is emerging in the equities space. We are strongly looking at that. We have invested up and down the capital structure. At the beginning we invested strongly in senior debt. There was a sense that the banks would only go so far in their volume of senior debt for developers that they would deploy. Therefore we deployed the Activate Fund and cornerstoned that investment. That investment has been very productive in terms of the amount of housing it has funded. We worked with fund managers in the mezzanine space and more recently we have done some equity investments in that space. There are many factors in terms of the challenge in the housing market. Finance is certainly an important factor. It is not one of the only constraining factors. The presence of another investor is not necessarily going to change the dynamic beyond the fact that we are deploying as much as we can and trying to leverage in other players into the market to deploy in the commercial space. If another fund is active in that space it will not be on a soft money basis. The new fund is likely to have a commercial approach to investing. Its objective will be to maximise return. Should Irish housing be an attractive asset in the context of a global opportunity certainly there would be a logic to going into that. However, I am not sure that will be the case for some time. We are not constrained in terms of the capital we have available to put into this space. The biggest constraint is finding the partners to work with, the opportunities to deploy the funding and viable situations where it stacks up commercially to invest the money and build those houses.
We are very much on the commercial side of the line. There are many different State institutions on the supporting side of the line. Home Building Finance Ireland sits somewhere in the middle. There is the Housing Finance Agency, the Land Development Agency and if we can do anything to support them, we will. Some of the developments in which we invest have Part 5 social housing. About 1,500 social houses have been built through financing from ISIF over the last while. We are doing as much as we can and will continue to do so. If we can do more, we will do more. I am not sure another fund in this space with sovereign wealth is necessarily a net benefit. It could be but I would not say it is necessarily a net benefit in addressing that challenge.
I thank Mr. Ashmore for his presentation. I wish to go back to the question raised by Deputy Doherty on the motion before the Dáil last week and the fact that we might be putting funds into places which are occupied territories. Will Mr. Ashmore come back on that again?
In Mr. Ashmore’s presentation he talked about balanced regional development. I come from County Galway. There seems to be a theme that investing in the cities of Galway, Limerick and Cork is regional development. It is not. We have a good deal of money in the pot at the moment. We also have a deficit in infrastructure. I want to get Mr. Ashmore’s thoughts on this because I believe we have a potential opportunity to deliver infrastructure to allow the regions to grow. However, there seems to be an attitude of “if there is demand for it, we will put it in”. We have to be brave and start off by putting in the infrastructure and then the people and the jobs will follow. There is a lack of infrastructure in regard to wastewater treatment to enable housebuilding in the regions. With Uisce Éireann concentrating on population centres in regard to delivering infrastructure, we are creating a bigger divide. That has been backed up by the EU when it did the report recently that found the north and west of this country is a lagging region. Would Mr. Ashmore see ISIF being given €500 million for regional investment as being more of the crumbs from the table as opposed to putting it top of the agenda?
In my opinion, if we are seriously talking about investing in climate action, the first thing we need to do is invest in public transport in the regions. I refer to projects such as the western rail corridor, the road from Charlestown to Collooney, Galway City outer bypass and connecting the western rail corridor to Collooney in order to have an actual Atlantic economic corridor region that we would all be proud of, and where people would come to live, work, raise their families and generate population and growth. The theme seems to be that we provide a school or a road if people are there and they are jammed up in traffic whereas we should have a bit more vision and think ahead more. We should ask what we need to put in to make a region work. We have that opportunity. Money is at the disposal of ISIF but because the Northern and Western Regional Assembly area spanning eight counties is a lagging region, we can actually positively discriminate towards that region in terms of infrastructure. We can also extract a higher percentage of Structural Funds from Europe on the basis that it is a lagging region. It is a massive opportunity. Does Mr. Ashmore agree?
Mr. Nick Ashmore:
One of ISIF’s themes was regional development. We scrapped that. Regional focus runs across all four of our investment themes now. We are focused on trying to drive activity within the regions across early stage company, scaling companies, infrastructure and urban regeneration but the ISIF mandate is fundamentally a commercial one. We are not a delivery mechanism for policy-driven financial spending, essentially. Infrastructure that does not provide a commercial return is not something we are in a position to be involved in. However, what we find is that our commercial investment can often be an analog piece within a more complex puzzle. A good example of that is the Limerick Opera investment which is under way right now.
It is a major segment in the centre of Limerick that has been completely regenerated. We financed the construction of commercial real estate as a cornerstone building in that site. Elsewhere in the site, urban regeneration funding is driving the creation of a new public space. There will be a new public library, a new tax office, OPW buildings, a hotel, apartments and other accommodation. All those things are coming together. That site had to be redeveloped as a package in a joint venture between the ISIF and Limerick 2030, which is the development subsidiary of Limerick City and County Council. Without the commercial piece, it was difficult to get the project moving forward. We often play a role as a catalyst but also by helping to unlock such situations. We recently had a market engagement event in Limerick that focused on scaling businesses, housing and enabling investments. We had attendees from Galway and Sligo councils. We had engagement up and down the west coast. We are open for business. We can bring commercial investment, help to unlock urban regeneration or regional development or back a company. We invested in Payslip in the region. It is a strong emerging software company focused on managing payroll for companies around the world. We have a regional bias in everything we do but we do not necessarily provide a solution for the policy questions in some of these situations.
If I may make a comment, Mr. Ashmore referred to infrastructure that does not provide a yield. Public transport does not provide a yield in the sense that it may not be profitable but it is an enabler to developing a region. This is public money. Why are we not changing the focus to use this money not so much to provide a monetary dividend but to provide a dividend for the future of the regions? What I mean by that is that we should put in the infrastructure whether it is roads, rail, sewerage or water as enablers to allow businesses to thrive and develop. I worry that we are trying to make a profit from public money rather than trying to use it become the enabler.
Mr. Nick Ashmore:
There is largely a policy question at the heart of the Deputy's comments and we are not in a position to comment on policy. There are many aspects of economic growth and enabling infrastructure is absolutely part of that. We can make a return on parts of enabling infrastructure. We invested previously in a fibre ring around Dublin. That is a business that can create an income. It is a critical piece of infrastructure but is it also something that can operate and be funded commercially without Government subvention. The ISIF is a pool of capital that can be invested commercially and therefore crowd in other investment. It is quite rare in a Government context. Regional economic growth with that enabling investment also needs finance for young and growing companies on a commercial basis in order for that activity to succeed. It is a question of there being different roles and different activities in Government to address different challenges and our mandate is quite specific around commercial investment. We do not have the discretion to stretch beyond that both with respect to the policy we have been asked to execute and Government accounting. Non-commercial expenditure is by necessity voted expenditure.
I thank Mr. Ashmore for an interesting presentation. I learned a lot. Mr. Ashmore may say what I ask about is commercially sensitive. I hope he will not. Is it possible to get more detail on the spread, type and categories of investments and their geographical location? I am curious about that. Are there tables that say we have this much in housing or forestry and how detailed are those categories of investment?
Mr. Nick Ashmore:
With respect to regional activity in Ireland, we report once a year on the economic impact we are having. We report on the location of the jobs in the companies we have invested in and on the split of the gross value added, the economic activity of the businesses we have invested in. About 50% of the jobs are in Dublin and 50% elsewhere in the country. About 20% are in Leinster, outside Dublin; about 20% are in Munster; and the balance is split between Connacht and Ulster. About 38% of economic activity is in Dublin; 35% is in Leinster, outside Dublin; 25% is in Munster; 7% is in Ulster; and 5% is in Connacht. About half of our impact is in Dublin and the other half is all around the country with a greater concentration in Munster and Leinster.
That is interesting.
Mr. Ashmore stated that the job of ISIF is commercial investment. I think "on the commercial side of the line" is the way he put it. That is a slightly blurry line in some areas, is it not? It could be argued that it is hard to say on which side of the line social, public and affordable housing are. I would be interested in Mr. Ashmore's view of that. Public housing delivers a return. It might not be as much of a return as private, solely commercially-focused housing, but it still delivers a return and it saves the State money in a more general sense because less money is being paid in housing assistance payments, HAPs, and rental accommodation scheme, RAS, payments. Arguably, the net effect is good from the State's point of view. I wonder about that. I think Mr. Ashmore mentioned that ISIF directly invests in social housing.
Mr. Nick Ashmore:
We have invested in housing developments and some of those houses have ended up as social housing. Approximately 1,500 of the approximately 11,200 homes we have helped to finance are social homes. They came through Part V or through the developments ultimately being sold as social housing, perhaps bought by an approved housing body, AHB, or some similar body. The ISIF was also directed over time to provide some of the initial capital of the Land Development Agency. The initial equity for the LDA was withdrawn from the ISIF and injected into the LDA to enable it to commence operations. We are actively funding that and it is drawing it down right now. However, that was under the direction of the Minister. It is not a commercial activity per se.
Perhaps this is a policy question. It has often struck me that it would be far better if public money was used to own. We get 10% or perhaps 20% of new private developments. The ISIF is involved in some of those. Would it be a good investment or could the ISIF make an investment decision for us to own 50% or 70% of them? That would also potentially mean we could control rents a little better when they get completely out of kilter.
Mr. Nick Ashmore:
The challenge with trying to do that within a commercial structure is that we have to avoid state aid. We must be explicit that the investment returns we are making are commercial, that other commercial investors would make and seek the same risk adjusted returns. It gets challenging as regards the viability when we get down to social and affordable housing. There is any number of commercial investors who would love to own big portfolios of social homes, but they will be making a commercial return from them and that is money. Social homes will be provided in good condition but the State would be paying a profit to those investors as part of that. An element of the logic of the State or AHBs owning social housing makes sense. There are a number of different ways of delivering social and affordable housing and there are quite a few agencies involved in that. Another branch of the National Treasury Management Agency, NTMA, is the National Development Finance Agency, NDFA. It is involved in and manages public-private partnership, PPP, projects. It is now managing a sequence of different bundles of social homes that are being built using the PPP process.
The risk and the financing of the construction of those homes is outsourced to a third party investor and manager that delivers the homes for a period, at the end of which the homes, having been fully maintained, are transferred into the ownership of the State. The State does not have to put up the money for those homes or finance them during the 25-year period. That is another model for the delivery of social housing. It does involve the markets. We do not get involved because it is not an area in which finance is lacking. There are plenty of market participants and we would displace them if we were to invest in those properties. There are a number of different ways to achieve that objective but it is a policy matter-----
However, there are some areas where it is a little bit blurry. Mr. Ashmore has said the NTMA is somewhat involved in social housing, such as in the case of Part V provision. I am wondering about that. Does the NTMA approach possible partners or do they approach it? How does that work? How does the NTMA decide what businesses or-----
Mr. Nick Ashmore:
It tends to be a mix. In some situations, we get an inbound request to finance a fast-growing company that is going to have a serious impact. It might be quite a fast-moving process and we might have to move quite quickly. In the case of urban regeneration on the Limerick Opera site, the transaction was three, four or even five years in the making. In that case the NTMA was proactive and sought to get the stakeholders together to see what could be worked out, what their needs were, what we were looking to do and how to make it work. In terms of housing, we get inbound requests for financing from developers and people who are financing developing. When we look at new situations where we might want to deliver a market solution, perhaps through a new fund that would provide equity for a number of developers, we might actually look for people to partner with us. It is a mix of proactive and reactive approaches.
Hopefully, there will be no more votes. I want to follow up on the regional development aspect of the funding. How are the projects valuated? I know Mr. Ashmore said this is done commercially but what model does he use to evaluate them? I am asking particularly because we are in a situation with the region in transition and the lagging region where we get 60% EU funding for those really important projects. I want to know how the National Treasury Management Agency, NTMA, interacts with the European Regional Development Fund, ERDF, funding and how we are maximising those opportunities. When we evaluate things, do we evaluate them in the short, medium, or long term? Will Mr. Ashmore expand a bit on that?
Mr. Nick Ashmore:
What we are looking for is situations where we can be additional so we can help things to happen that would not happen otherwise. With ERDF funding, or in some cases, URDF funding, it is a question of whether we can find a local authority that has access to those funds but can expend those funds in an overall scheme or transaction where we can make a commercial investment in part of the programme. That might be an equity investment in a company or it might be a debt into a development for a new office or commercial building, or an industrial building for that matter. In terms of the money we deploy and the risks we are taking, and it might be senior debt, mezzanine or equity, each of those gets more expensive the more risk one is taking. We benchmark that price against other market transactions and what other people would charge if they were completely commercial, non-Government, private investors. We have to make sure we are pricing at the same level that they are. Often the difference is that we have a longer time horizon than they do. We can invest out to 25 years; they might be limited to ten or 15 years. We can fill that gap and do stuff that is additional but we would charge the same amount as they would charge if they were able to go to 25 years. That is how we think about how we price the investments and the funding that we provide. It is not cheap. It is certainly not as cheap as Government funding or ERDF funding. If one can blend grant-supported or Government funding with commercial funding in a broader transaction, one can make larger things happen that would not otherwise happen. Does that address the question?
Mr. Nick Ashmore:
It was one of our first. We have a pipeline of these. It has taken us a while to figure out how to do these. They are not easy. In Kilkenny, the old Smithwick's Brewery site was taken in by the council so it owned the site. On that site was the old brewhouse which was a big concrete construction. We funded the conversion and renovation of that into a state-of-the-art sustainable office building. At the same time, the council contributed the value of that existing infrastructure as part of a joint venture transaction. Its investment was in kind in the form of the building, our investment was the money to renovate the building and we both jointly own that building now and it is rented out to Tírlán, the agri-co-op, and a number of other small local businesses.
Everything outside Dublin. Obviously, it is a big concern around the region in transition and lagging region and one sees the metrics there are continuous and unchanging. Within that defined area or that region, how much has been invested?
Mr. Nick Ashmore:
I cannot give the Deputy the figure for invested but certainly about 5% of the economic activity and the employment we are supporting is in that region. It is quite small and admittedly so. To some extent, that reflects the availability of commercial investment opportunities. There are a lot of opportunities there but how many of them are actually able to provide that commercial return. We also have a size question as well. The Ireland Strategic Investment Fund, ISIF, team is managing a very large amount of money so our minimum investment size is about €10 million. Finding projects that are smaller than that, we do not tend to do directly but we will work with partners, venture capital funds and seed capital funds that are operating in those areas. We have venture capital funds that have invested in companies in Mayo and in the north west. Certainly, we would encourage them as much as we can to invest more. We spend time in the region as well to try to better understand those opportunities.
That would be good because the big problem we have is obviously to attract commercial activity when we do not have the basic infrastructure. We spoke earlier about the national grid and what we are losing there in terms of renewables and possibilities along the Atlantic economic corridor. Without those vital pieces, and Deputy Canney mentioned some earlier on around the western rail corridor and others, when the evaluations were made this is taken into account. It was very alarming to hear the Minister for Transport last week on the N17. When Mr. Ashmore mentioned deadweight in terms of not being able to fund something that it is already going to be funded, is there a timescale on that? Basically he and the Taoiseach are saying the N17 would be funded. It will happen but there is no timescale. How far does deadweight go in terms of knowing whether a project is going to be done or not regardless? How do we take the time?
Mr. Nick Ashmore:
That is a separate question. A road project like that is going to be Government expenditure. It is not expecting a return. If we were to come along and fund that road, we would want to put a toll booth on it and we would want to charge people to drive up and down it. We have a fair number of public private partnership, PPP, roads in the motorway system. There is not a huge appetite to do more. A lot of factors go into those policy decisions. What is interesting around the regions though, and we are seeing this in food and agriculture, is that there is a whole new segment going to emerge around anaerobic digestion, the production of biogas and biomethane and we are looking at opportunities in the north west in that respect at the moment. We think that is going to be all over the country. There are sources of biomass in all the different regions and there are areas of the economy that we cannot decarbonise without the use of biogas.
Obviously we have to be able to upscale our renewable wind and wave energy and all of that as well. Is the National Reserve Fund capable of providing the counter-cyclical instrument in the event of an economic downturn in the way that it is currently designed?
Mr. Nick Ashmore:
That mechanism has been proven to work because it was able to be withdrawn and used during the Covid-19 pandemic. It is events of that nature, scale and level of dislocation that are required to trigger it. I do not have the exact wording of the trigger points to hand but they are laid out in the legislation. The fund was designed really for those extreme situations. The fact that within the first year we saw an example of how it could work is probably important validation.
I thank Deputy Conway-Walsh and Mr. Ashmore. I have some questions as there is nobody else online who is waiting to come in. Regarding the fund size, the ISIF fund size was €9 billion if I am correct, and accumulated returns to mid 2021 based on the last annual report of €2.1 billion. The 2022 annual report would be expected very shortly, I think in July. I do not expect Mr. Ashmore to anticipate what is going to be in that report but would it be fair to say that accumulated returns for 2022 would be higher than €2.1 billion?
Mr. Nick Ashmore:
No. Last year was a very difficult year in markets. There was a huge amount of dislocation and a lot of pull back in valuations, really off the back of the horrendous situation in Ukraine, the spike in energy costs, the resumption of inflation, and the rise in interest rates.
It is fair to say that figure will move in a negative direction rather than a positive one.
The performance of ISIF since it was established in 2014 is impressive by any measurement. I received figures from the NTMA last week in a reply to a parliamentary question to the Minister for Finance. Yearly performance in 2014 was +5%, which at the time was good, +10.7% last year. We can anticipate that it will be lower than 10.7% on the basis of-----
On housing, the last time I met Mr. Ashmore was in Drogheda at a significant event in the context of capital investment and the enabling housing piece. ISIF is involved in an arrangement with the Housing Infrastructure Services Company and others to fund critical infrastructure to enable the development of several thousand new homes on the north side of Drogheda, one of the fastest growing areas in the country. That is quite typical of some of the indigenous investments that ISIF has undertaken that generate a long-term return for the State but manage to leverage other opportunities. Locally, we know how long it has taken to organise the development of that infrastructure. It is certainly not displacing any other investment. Essentially, this was the opportunity of last resort, not to put too fine a point on it, because many other funding opportunities were interrogated over the years. It is a very positive development from an economic and social point of view.
Accepting and understanding that Mr. Ashmore is limited in what he can say because the policy decision has not yet been taken on what form any prospective new sovereign wealth fund might take, given the anticipated scale of it in terms of accommodating significant surpluses over the next period, at a top level, based on international experience, would Mr. Ashmore give us a sense of what the breakdown might be in terms of indigenous versus international investment? ISIF is operating some international investments but the sense I have, although I have not seen its most recent annual report, is that the bulk of the investment is indigenous. Any new fund would be much more diversified, I think that would be fair to say. That is the trend.
Mr. Nick Ashmore:
The best example is the NPRF, which really was 99.9% internationally invested right up until the point when it was first used in bank investments. It had made some investments in Irish venture capital firms alongside Enterprise Ireland from about 2006 onwards. It saw a good commercial opportunity in those investments. It was able to invest internationally and domestically. However, the Commission was very much of the view that it needed to diversify outside the State as a balance to the risk within the State and so there was a strong logic in investing almost all the fund internationally.
When we look at different countries around the world and the different approaches to sovereign wealth management, there are a number of different types of fund that we commonly see. Singapore is probably the best example. They have the central bank, the Monetary Authority of Singapore. That contains the country’s liquid reserve, day to day, to protect the currency. They have Government of Singapore Investment Corporation, which is their long-term savings fund. It is equivalent to the NPRF and, potentially, this new fund. That is very actively invested globally, fully diversified and very intensively managed. They have a state pension fund that is really just to fund the state pension. Then they have Temasek, which is their equivalent to ISIF, a sovereign development-type fund. It does invest much more internationally because Singapore is a small economy and a fund that size would have the impact of blowing up the economy if it was largely invested there.
The ISIF is much more appropriately sized for the opportunity set in Ireland but even with that, we are unlikely to get the whole €9 billion invested here. Certainly, some of it is destined for the Land Development Agency but also we will need to keep cash reserves and liquidity to be able to manage the portfolio. Without overblowing the capacity of the ISIF team, because we run a tight ship with an investment team of about 45 people, we are exploring the limits of what we can deploy commercially using sovereign development funding in the Irish market. Looking to another fund to duplicate or replicate any of that activity I think would be a duplication and would not be necessarily as efficient. That is not to say that the new fund would not in time find opportunities in Ireland that make sense, or it might be globally diversified in passive equity investing and would include Irish stocks.
Unlike most countries that have sovereign funds, we have a sovereign development fund. In a way, we are at the forefront in that respect. It is unusual to have a sovereign development fund. The European model is more to have national promotional financial institutions like KfW in Germany or the CDP in France. Other countries around the world have sovereign wealth funds and potentially have sovereign development funds. Nigeria has one fund but three portfolios. It has domestic infrastructure, long-term savings and some reserve activity as well, all under one roof.
That might be the direction of travel here. We are speaking in a bit of a vacuum because the policy decision has not been taken, and I know Mr. Ashmore is constrained by that. In terms of his knowledge of the kinds of funds that were anticipated here, how they might be developed and the kinds of arrangements involved in how they operate, we want to guard against any excessive withdrawal from the fund. Such a fund might be at risk from political choices that might be made down the line. The legislation governing the fund would be very important. Typically, what kind of thresholds would be put in place for withdrawals from a fund? We have had experience with the NPRF during the crash in 2008 and 2009, the capitalisation of banks and so on. We had funds withdrawn to assist during the pandemic to support business and jobs. Would Mr. Ashmore have a sense of what kind of threshold should be put in place limiting withdrawals?
Mr. Nick Ashmore:
It is really too early to say without defining the purpose of the fund. One of the most significant threats to the approach of setting up a fund is unexpected events and withdrawals that are on a different timeline from the investment strategy. The longer the term of the investment strategy, the more risk we are going to take and we are going to be slightly less liquid. The chances are we will be asked to withdraw the funds when the market is at a low point, which it was in 2009. The opportunity for ISIF to recover from the financial crisis was lost because we had withdrawn the funds. Those are all critical elements to the design of any fund. It is interesting. We were talking in the recess about how we have the benefit of history. We are very unusual in that we are a country that had a sovereign fund that ended up having to be deconstructed due to external factors in an unexpected way. We know first-hand that it can happen. It is important in the construction of any fund that those things are dealt with and addressed.
I have a short question for clarification. All of the fund is stored entirely in Irish sovereign debt. When the National Reserve Fund buys Irish Exchequer notes, the fund is buying Irish debt. Is that right? I just want to understand the process. We have €6 billion from tax revenue and rather than spend that money, we decided to save it to buy the Irish debt. When we then put the money into the National Reserve Fund, we increase the national debt. Is that right? When we withdraw the money, we obviously reduce the national debt. What happens with the €6 billion then? Does that enter general government spending?
Mr. Ian Black:
Part of it came out of a budgetary surplus. To the extent that it was coming out of a surplus, there were not any borrowings required. In a sense, all we have done is we have taken that surplus and bought a treasury note, which is effectively in cash. It forms part of the NTMA's or State's cash buffer. There is a concept called gross debt and net debt. The gross debt is unchanged because it is primarily from surplus, but because it is cash, we deduct the cash from the gross debt to become a lower figure and the net debt is reduced.
Mr. Nick Ashmore:
We do not have to withdraw the money from the fund. If we redeploy the money from the fund, it will redeem those Exchequer notes, so they will be cancelled and that element of the gross debt will disappear. One of the things we are looking at is diversifying the holdings within that fund. We are getting some clarification as to the time horizon within which the fund might be required and that may allow us to diversify into some other investments just to balance the portfolio. At the moment, it is all in Exchequer notes, which is a very attractive place to park it right now because at this point in time the yield is attractive, but there are other investments that we think would work well in that fund, so we do not see it being in Exchequer notes completely for ever.
Mr. Nick Ashmore:
The National Reserve Fund is designed for a situation where there is a challenge to the Government finances in affording to address those types of situation. If the Government funds are very tight and we have an emergency, for example, if there is a flood and we need to spend €1 billion on flood defences, then if that meets the criteria in the legislation for withdrawal from the National Reserve Fund, the Government will withdraw that money and deploy it as it sees fit within its own spending mechanisms. Our role is to make sure that: we are providing safe custody for those funds; we are managing them efficiently; we are maximising the return; and making sure that the risk is minimal and that liquidity is high in order that funds are available for use, but are not sitting idle and we are getting what return we can for them. That is the main concern of the NTMA. The use of the funds in whatever form is really a policy question.
I thank the witnesses very much for finishing up on a very informative presentation and discussion. I hope we will have further discussions. I wish them the best of luck with all their investments on behalf of the State.
I thank Mr. Ashmore and Mr. Black for their contributions. It is the start of a process in terms of our interrogation of the question of sovereign wealth funds and where we go from here. We appreciate their contribution. I have no doubt we will be hearing from them again at some point soon. I thank them for taking the opportunity to be with us this evening. It is appreciated. I will suspend the meeting for a few moments. Is that agreed? Agreed.
Before we begin, I will go through the formalities and explain some limitations to parliamentary privilege and the practice of the Houses as regards the references witnesses make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. Witnesses giving evidence remotely, from a location outside the parliamentary precincts, may not benefit from the same level of immunity from legal proceedings as witnesses who are physically present. Witnesses are reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I remind members of the constitutional requirement that they must be physically present within the confines of the building in which Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate if he or she is not adhering to this constitutional requirement. Any member who attempts to participate from outside the precincts will be asked to leave the meeting.
I invite Professor Kinsella to give his opening statement.
Professor Stephen Kinsella:
I thank the clerk for the invitation to address members today. I have given evidence to the committee on several previous occasions and it is a privilege each time to do so on my behalf and that of the University of Limerick. This occasion is a little different in that I have chosen to take a particular angle, which is that I allocated myself the role of research assistant to the committee. I am aware the committee has a large briefing staff, but this is a very technical area. In my capacity as professor of economics and as someone studying the Irish economy, I decided to ask myself what the financial landscape of the Irish economy looks like when a third savings fund is included. That is the context in which I place my remarks. I do not propose to read through the document I have provided or to read out prepared remarks. The briefing note is more than sufficient to contain my thoughts.
The first point is that it is a welcome act of foresight by the Government to try to cope with two simultaneous factors. The first of these is the windfall from corporation taxes, which the Department of Finance estimates at €65 billion. However, if one is looking into the national finance figures as long as I have been, one starts looking carefully at how the Department does its forecasts and one realises it is maximally prudential. That means we should expect the €65 billion to be the lower bound of any estimate. The sum could be €70 billion, €80 billion or €90 billion. It could be larger. Therefore, the problem the Government is trying to solve could be larger, and it is a problem of allocation.
That is how I started thinking about this. Were one to allocate a large but temporary surplus, the only thing one would do is think about saving it or investing it. I set out five actions the Government could take with an unexpected windfall. One is to increase current spending. We all know how that would be done. The other possible actions are to decrease current taxes, increase capital spending, invest the surplus into a long-term financial asset, which is the proposal today, or pay down the stock of sovereign debt. That debt stands at approximately €240 billion, with an average interest rate of 2%. It is not too expensive for us at the moment, but if we think about the State as a private business, the cost of funds to keep going is approximately 2%. We need something that will generate more than 2%.
The Department's briefing note seems to me a cursory briefing note, not designed to be in detail. It is designed to give a bit more detail to the proposal but it is by no means the final arbiter. It says something to the effect that the Department would like to use this sovereign wealth fund to do one thing, which is to cope with ageing, that is, to fund the extra €7 billion to €8 billion that will have to be spent to support an ageing population. Given most of this is pensions, it strikes me that calling it a sovereign wealth fund is probably a bit of a misnomer. It is really the National Pensions Reserve Fund, NPRF, 2.0. In essence, it is storing up money for the pension payments that will have to be made into the future.
There are a couple of issues with this and a couple of questions I have about it. First, it is important to look at where we are in the economic cycle. The graphs I have included in my document clearly show that we are in the unusual policy position of having to allocate the benefits of a primary surplus. As we see from the first graph, deficits are more our norm. We have had longer deficits for much longer than we had previously. The second thing to note is that the economy is more or less at its full potential. Unemployment is below 4%. Capital spending is rising very sharply relative to its trend. As we have seen from the various economic statements, we have large increases in forecasted receipts. We have an economy in which increasing current spending probably will be inflationary and raising capital spending will immediately run into the implementation challenge we have seen in recent years. We may not get any extra houses or hospitals for the increased expenditure, which will merely increase the profits of the private companies that are already building those houses and hospitals.
The third issue, which is worth teasing out, is the nature of the investment and financial landscape in this country today. There is approximately €14 billion in the Ireland Strategic Investment Fund, ISIF, which is the remainder of the previous NPRF. We have the national reserve fund - the so-called rainy day fund - which has approximately €6 billion in it and goes up to some €8 billion. Then there is this third reserve fund, which is predicted to go up to somewhere between €90 billion and €120 billion, depending on how capital is injected. Therefore, we have three funds. One of them, ISIF, invests pretty much entirely in Irish equities, the other is a straight-up savings fund and the third is what we will call a sovereign wealth fund for the sake of argument. However, the latter has a number of interesting features that are quite different from what the standard literature looking at sovereign wealth funds would suggest. I provide a number of links in the footnotes of my document to big literature reviews that look at the 50-, 60- or sometimes 70-year history of these funds, what they do, how they behave and what the key issues are with them. One learns a lot from these kinds of meta-analyses. The first thing we learn is that our fund has a 20- or 25-year time horizon. Already, that is a bit strange. The pension funds in Canada, Singapore, Norway, Australia, Africa and the rest of south-east Asia have an unlimited time span. They are not supposed to stop at some point. However, that is very much the case for the Irish fund.
Another interesting thing to note is the size of the fund, in that it is quite small relative to what we would normally understand as a traditional sovereign wealth fund. Even arriving at the largest amount of €90 billion if most of the windfall is saved, which may be politically challenging for various reasons, we still have only €90 billion under management, which places it as a very small sovereign wealth fund relative to the larger ones. This is a little tricky in that we are producing a relatively small fund using one source of assets, which is the windfall from corporation taxes. There is no discussion of what would happen if we had an auction for 5G or 6G, for example, and how those funds might be used. There is no discussion about other sources of revenue, such as whether any excess profits from offshore winds would go into this fund. There is no discussion about that. We are only talking about one source of funds, but there should be many sources. They could all be one-off sources. If we decided, for instance, on a big privatisation, with a big release of funds, those moneys could and should go into something like this. However, there is no discussion about sources. Moreover, on the uses of the funds, there is only one, which is to deal with the ageing population. We can think about climate change and many other uses for these funds. In fact, sovereign wealth funds are used for all of that.
The other issue the committee and the Department really should consider is the need to get very much into the weeds on this. The real devil is in the detail of how we decide to extract funding and what the rules should be for taking funding from this source. If there is a crisis in the morning, how is the Minister for Finance of the day to take this money?
How is that possible? It is a very complicated question. It is not clear to me that there is a sufficient understanding of the difficulties with this.
My final point on this relates to transparency, governance and operations. The transparency issue is very important. Sovereign wealth funds exist on a spectrum from essentially completely opaque and almost personal wealth all the way to maximally transparent. Where we want this to be depends on the goals of the fund. If we can assume that it is going to be managed by the NTMA and that we can expect similar levels of transparency, there are still questions as to how it is going to be operated. Are we going to have private operators allocating these funds? How do we ensure that the transactions costs are very low so that we are not spending the interest rate increase and whatever money we make on behalf of the taxpayer paying for the various money managers? There is a question as to implementation. What incentives do we use in that regard?
While it is not mentioned in the report anywhere, I am assuming that this will have a very strong environmental, social and governance, ESG, component and that we will not invest in oil and gas and so forth. However, I do not know that.
For my final point, I will raise four major open questions. Why is there an upper limit on the fund? Why are we only allowing such and such to happen? It strikes me that we are building institutional architecture for the State and that we should let it get as big as it needs to get. If it needs to get smaller, that is fine. We need to study other countries' experience. The White Paper gives four countries as examples. There are quite literally hundreds of examples and we need to study those. The withdrawal rules need to be studied very carefully. My concrete suggestion to this committee is that a committee of five experts on sovereign wealth funds be appointed to ensure that international best practice is followed and that these withdrawal rules are written down extremely clearly and publicly. The source of funds is simply assumed to be one area. I would like that to be examined.
My final point is a major one. This is really a piece of institutional architecture that should not just outlast this Dáil or this decade, but that should still be here in a century. If we want to build something that is really of long-lasting value, we should have a sense of where it sits in the overall blueprint. My question for this committee - it may be a wider question - is: where is the blueprint? It feels like this is reactive thinking as a response to an unexpected circumstance. It is a good thing but it would be great to have a proactive process in which there would be a portfolio of three sovereign wealth funds or savings funds. They would do different things, which is great. Perhaps we would need a fourth or perhaps we would only need two but we should have a sense of how these things connect and what their relationship to one another is.
I thank Professor Kinsella for his presentation. I found it most interesting and I would agree with most of it, looking at the timeline of the Norwegian model and what they learned along the way. There is no need for us to reinvent the wheel in some instances because Norway has had a couple of decades since 1998. Unfortunately, we gave away our oil and gas, otherwise we could have had the same experience here. I agree with what Professor Kinsella said about the different sources of revenue, particularly if we do the renewable energy sector properly. Coming from Mayo and the west, I see the potential in the western economic corridor for how we can do that. We have opportunities.
When Professor Kinsella says most sovereign wealth funds have limits regarding percentage allocations that can be put towards single-name equities, what is his view of the current approach of the national reserve fund being completely invested in Irish debt in the form of Exchequer notes?
Professor Stephen Kinsella:
I thank the Deputy. What is interesting about the three different funds, which sort of comes back to the point I was making earlier, is that one fund, the Ireland Strategic Investment Fund, ISIF, is essentially designed for investing in Irish business and improving the productive capacity of the country. By law, that has to earn a commercial return, which is great. Since the national reserve fund is invested only in Irish debt, it is an interesting model because one can reverse out of it very quickly. If one is investing in one's own debt, it is almost like treasury bills, T-Bills, in the USA, since one can just move in and out of it. If one needs to access it, it is there. If, God forbid, there was another pandemic, it could be accessed immediately, which would be good. If we started investing the national reserve fund in bonds, public equities, stocks and shares, and such simple stuff, it would simply become another sovereign wealth fund and have a different person. The upper limit on the national reserve fund is €8 billion, which we are nearly at. That is interesting. Why would we, as a growing economy, choose to limit the amount of savings that we have?
We tell most people just to save as much as they can, particularly since they know they are going to get older. It is interesting that we are explicitly saying in this paper that we know we have a problem with ageing. That is absolutely true. It was true when the National Pensions Reserve Fund was set up over 20 years ago. We could see the ageing trend. It was clear then. This is a welcome attempt to manage that. The difficulty that I have is the suggestion that that is the only problem we have to solve. I use the example of climate change because climate change in Ireland, from a fiscal perspective, essentially means paying for floods and flood barriers. It will all be capital expenditure. There could be a housing estate that is completely flooded which has no insurance because it has flooded before and the State simply has to either flatten it and move the people, which in other words means building more houses, or it will have to make those houses whole again. Either way, the State is paying out to make something happen. It makes sense that we might use this for those uncertain expenditures, because that is what it is there for.
We could have a fourth fund. We could just use this sovereign wealth fund, which we could call sovereign wealth fund A, for ageing, and create another one, called sovereign wealth fund B, for climate change. The issue is that this is not necessarily how funds should work. Funds should be pooled because then they can be compounded. Even though €90 billion seems like a lot, it is quite small, relatively speaking. It makes sense to have one big sovereign wealth fund that is fed from multiple sources and has multiple uses. It strikes me that it will be required by life. Life will happen to the Irish economy in the next 20 years. There will be some crisis and we will need to take from it, exactly as we did from the national reserve fund. We took €1.5 billion from it to cope with Covid. Things will happen. We will have to take money from this.
I referred to this in the note but I really want to emphasise that the withdrawal rule is very important. I suggest in the note that a supermajority of the Dáil is required. Pretty much everyone needs to agree that this has to come out. It cannot just be the Government of the day. When the principal is withdrawn, that kills the compounding, as we all know from basic leaving certificate accounting. We just cannot take it away. We need to be very careful not to do that and no Minister for Finance should be empowered individually to do this. In fact, it should be quite the opposite. I mentioned earlier, maybe during the break, that Norway has a rule that any primary surplus is, by law, instantly invested into the reserve. That is in order to give the compounding, which is really wanted.
To come back to the question the Deputy asked, the national reserve fund being invested almost entirely in Irish debt is just a matter of financial engineering. It could be decided to change that at any point. I see it as being a welcome thing. My only question is why it is only €8 billion.
I am trying to get at why as well. In the interests of transparency, the way Professor Kinsella describes is much better for people to be able to see where their money is going at the end of the day. Could a sovereign wealth fund be used to invest in land or physical infrastructure? I am thinking of the amount of public land that has been given to private developers by successive Governments. Can we invest in the green energy infrastructure? What would the pros and cons of that approach be?
Professor Stephen Kinsella:
It is a really good question. I talk about it a little in the paper with regard to investing in Irish equities. Basically, if there are two funds, ISIF and this new fund, both investing in Irish equities, then at the very minimum there will be a lower cost of funds for Irish businesses, which may lead to state aid rule issues, and we will almost certainly crowd out private sector investment in some areas, which I am almost certain is not what is wanted. That is one con. A second con with investing in land or private infrastructure such as wind farms is that while this will be a small sovereign wealth fund, it will be a large amount of money relative to the overall Irish economy. For example, if option 3 holds and the maximum invested amount is put in, which garners a return of 3% and there is €100 billion or €110 billion to spend, that is about as much money as the entire Government spends today. If that was thrown into anything Irish, it would basically explode whatever sector was being invested in. One would have to be very careful.
I welcome Professor Kinsella from Limerick. We are very happy to have his expertise in the room with us. I thank him for his time and for travelling up. I want to speak a little about the potential for leveraging our sovereign wealth to develop critical infrastructure. A previous contributor spoke about the green infrastructure that will be built in the coming years.
Some years ago, when I was a fitter man, I cycled up the coast of Norway. I have to say it is not something I will do again because it was quite an arduous journey at the wrong time of the year. I happened to meet some executives of an oil company who spoke about the Norwegian story and how they discovered oil in the 1960s when it was a poor nation. Unlike other countries that discovered oil it leveraged the wealth to develop infrastructure among other things. We might seek to leverage in some way the vast wind energy resource that we have. It could mean wealth accruing to the country in the coming decades. How would we use it? Would it be best if we spent it for the benefit of the nation or put it aside and spend it at a future date via a sovereign wealth fund?
I am interested in Professor Kinsella's views on infrastructure. The Cathaoirleach Gníomhach and I speak regularly about rail infrastructure up the west coast of Ireland. We and Deputy Conway-Walsh would like to see that infrastructure built. Sometimes it is not politically expedient to invest in rail infrastructure because it is a long-term project. It often makes sense to build roads and the work on roads is very visible. Rail is the poor relation of Irish transport infrastructure. Perhaps we should leverage through a sovereign wealth fund the wealth we are accruing to develop the critical infrastructure that this country needs. In particular I am thinking about rail. Work on roads, by and large, is done. This is my main question.
Professor Stephen Kinsella:
What is worth reflecting on is that the purpose of a sovereign wealth fund is to invest some principal from some source and derive interest from it. What the interest is used for is an entirely political decision. If we take Norway, Australia or Canada, or any of the major sovereign wealth funds, what they use the funds for is very interesting. In Norway, for example, approximately 20% of all current spending comes from the interest flow every year. There is a reinvestment process. It is fascinating to look at. We can easily see a situation where it is used for rail or other infrastructure.
This slightly complements my answer to Deputy Conway-Walsh. I would not have the funds investing directly in Irish Rail. I would not have it buying the equities of a private rail company. I definitely would not have us take the principal from the sovereign wealth fund and stick it straight into a rail company. All that would do is eat the seed corn. I would take the interest revenue, which would be pre-defined and would have a withdrawal process, and, if it is big enough and the political will of the day is there, invest some of it in rail or, perhaps, water. We do not tend to talk about water very much because it is not very sexy. Rail, road and water are long-term projects. A very good way to think about it is to ask how boring something is. The more boring it is, the more important it probably is. We talk about sewerage and water infrastructure all the time. Climate change means more flooding, which means more water, which means more drainage. This means the soil make-up changes. These all need to be managed. They can be managed in a very slow and boring engineering way, with no disrespect to engineers. This is a good thing. This is what I would use it for.
The great thing about this is that no one is taken from in this process. In any budgetary cycle, as we all know, a certain fiscal space is allocated to capital spending, current spending and elsewhere. What is interesting is how Australia or Norway use their pension reserve funds. They are used for these type of long-term infrastructural projects. I would see no problem with this whatsoever. It is fascinating to see that when this is managed in a transparent way and when the incentives are nicely aligned we get a very favourable outcome not only for the taxpayer but also for the infrastructure of the State.
I am sure Deputy Leddin saw when he was going around Norway the quality of the materials, roads, parks and swimming pools. I presume he was not looking at the sewerage infrastructure. The quality is there. I have been there. I was part of the Positive City ExChange project, which has twinned Limerick with Trondheim in Norway as what are referred to as European lighthouse cities. Very often we compare systems and the systems there are very well developed. The systems in Limerick are great but the systems in Norway are very well developed because they have had decades of infrastructural investment. They are able to do things because they have next-generation plugs and everything else. It is absolutely fascinating to see.
Professor Stephen Kinsella:
It depends. I will give two examples. There are several but I will give the example of two different sovereign wealth funds in Singapore. One is GIC, which is a large general fund, while the other is called Temasek. The GIC invests in everything while Temasek is essentially there to invest funds from previously nationalised or privatised industries like rail, road and air. The uses of these two funds are totally different. The resources are there, they come from different places and the uses are very different as well. It is fascinating to see the difference but regarding the withdrawal rule, which was the point I was making before, you set these things up with a specific objective. That might get bigger but it needs to be specific. Then there are transparency and rules around governance. The withdrawal issue is the major one around that. Then you align the incentives of the people managing those funds so that they deliver the outcome you set in the first place. For example, you could easily have a situation where the funds were managed internally, such as entirely within the NTMA, or the NTMA farms out the money to various providers and has them invest on behalf of the State for a fee and they remit the difference back in. With those two different scenarios, the State essentially acts as both custodian and investor if it is just the NTMA. If it farms it out to private businesses, that is fine too but, of course, one must then think carefully about what the appropriate benchmark is. You might think the benchmark is 2% so the cost of borrowing for the State is about 2% so whatever you make has to be above 2%. Alternatively, you could pick the Standard and Poor 500, which is normally the benchmark you might use. If the Standard and Poor 500 grew about 5% this year and you guys made 8% - happy days - but if you guys made 3%, not so much. There is then the question of the difference between the nominal amount, which does not correct for inflation, and the real one, which does, and so forth. You can get as complicated as you like about these things. The point is that at every stage, you must be extremely clear about what you want from it and then allow the system to accumulate as it goes. When you withdraw, and you withdraw under very specific circumstances, the reasons for which you withdraw it are clear.
To go back to the previous example, my criticism of this is that its narrow definition just for ageing costs. In a certain sense, that is a positive because you can only use it for ageing costs so in seven years' time, the Minister for Finance of the day may say he or she does not want to use this for ageing costs but would rather use it for climate change, roads, rail or houses. Actually if you build the rules within to say that you can only spend this on pensions, the Minister for Finance is bound by that rule and must then work backwards to change it.
This is me being a bit political but colleagues across the House might agree that the climate challenge is great but is also over-arching and that you might say that climate is the criteria and within that, it could be grid development, transport infrastructure or nature restoration, although I do not know if any country is actually doing that. It might make sense that this is what we start to think about in the Oireachtas and the rules we might set. Many of these projects that are very climate and sustainability-related are long term and are things that are often difficult to do because they are long term and do not necessarily deliver a political dividend in the electoral cycle we have.
Professor Stephen Kinsella:
I see where the Deputy's question is coming from. However, the reason this is set up to deal with the demographic issue is that the demographic issue is a known known. We know it is going to happen and we know it is going to cost €8 billion. We also know climate change will cost us a lot of money. We just do not know how much. What is very interesting is that the Climate Change Advisory Council and the Irish Fiscal Advisory Council both agree that we should have a sense of what the cost of climate damage in seven years will be but there is no estimate whereas we have a very good estimate of what we think the pension cost will be. It will be €8 billion or something like that under no policy change. My very strong feeling is that this number will rise because of the issues associated with it but I am very interested in why we would keep it defined in one source of funds and one use. It strikes me that we should have many sources and many uses. That is a design decision that we will need to get into in much greater detail but I do not think it is political. It is much more a case of focusing on a known known versus an unknown known. We do not know much climate change is going to cost, therefore, we do not know how much we have to save to offset it. The problem is we know it is not cheap so it-----
I am impressed by Professor Kinsella's ability to quote Donald Rumsfeld's comment about known knowns, known unknowns and unknown knowns. I thank him for his answer, which is very comprehensive and certainly gives us a lot to think about.
I thank Professor Kinsella for his presentation and his opening remarks. I would like to tease out his thinking about this. When he talks about drawdown from the fund after a period of time, is he talking about drawdown from the interest or the return that is generated from the investment or is he talking about drawing down some of the capital that was invested?
Professor Stephen Kinsella:
It is only the interest. In my view, we should not draw down the capital. I would not call it a concern because it is still a proposal but the idea is that this fund would be depleted at the end of 20 or 30 years and that we would simply withdraw the €7 billion or €8 billion per year we need. It strikes me that we could simply leave it there. That requires that the funds to cope with demographic pressures to be found elsewhere but by definition, if you start withdrawing the principal, you destroy the compound.
I thank Professor Kinsella for that clarification. So the fund is earmarked for ageing. In his opening statement, Professor Kinsella said the cost of ageing can be identified as pensions but pensions constitute just a portion albeit the larger component but it is not the majority component. Health, long-term care and education are also factors and the cost of those three areas combined will be larger than the cost of pensions over the next 20 to 30 years. Professor Kinsella talks about known knowns and unknowns. Given the fact that we know this cost is coming and bearing down on us, would it not be more appropriate to plan for that now in terms of tax revenue to make sure the additional costs of education, health and pensions are dealt with through whatever changes we need to make to PRSI or income tax or decisions regarding expenditure as opposed to a sovereign wealth fund dealing with issues that may not be known at this point such as a pandemic in the future or a major issue relating to migration that would cost billions of euro? We have spent €3 billion on Ukrainians who are fleeing persecution.
The issues regarding climate change are immediate and I do not think we can put some of that off for ten years because we do not have the money at this point or we have an expenditure rule that limits us to 5% so we cannot build the type of infrastructure we need to make us energy-sufficient and we cannot develop our ports. There is so much infrastructure that needs to be developed. I would like to tease that out. We know some of the costs will arise in 20 or 30 years, although some of that may change. Demographics have changed dramatically over the past two years. A colleague of mine and I were talking about the elections and the way boundaries will be cut off in the census.
The population of County Donegal has grown by 5,000. It has been great to have new arrivals there in the past two years. I want to focus on the question of whether, given what we know, we should be planning for that differently.
I am looking at the report of ageing from the Department of Finance, which refers to the period up to 2050. I mentioned a 30-year horizon. The report puts pensions at 7.5% of GNI*, healthcare at 5.1%, long-term care at 2.4% and education at 3.2%. Even if we project it out to 2070, pensions would be the largest component, but the other three components are actually greater than pensions.
Professor Stephen Kinsella:
I understand. By the way, I was in Letterkenny last week and I met a group of Ukrainian schoolchildren there. It was a really interesting discussion because they were asking about Ireland's future. They had not been to Letterkenny previously - I doubt they knew it existed two years ago but they are now here and very much part of the school infrastructure. It was very interesting. The Deputy is right that Letterkenny has had to deal with a large influx of Ukrainians. It was brilliant talking to the children's teachers because they gave me a very good sense of what they had done and the lengths they had gone to in order to really integrate the children. It was brilliant. I found listening to the accents fascinating because they were a little bit Ukrainian but there was a little bit of Donegal in there too, which is brilliant.
On the substantial point, the choice is about allocation. The Minister for Finance or the Minister for Public Expenditure, National Development Plan Delivery and Reform of the day is going to have to make a decision about allocation. Medium-term expenditure rules are useful because you can have the system growing at 5% and only allocate, say, 20% to housing, but that means you will need to make reductions in other areas. Otherwise, the chance of overwhelming the State's finances if something goes wrong is very high. The key lesson for me from the 2002-06 period is that relying on one category of expenditure to expand, and then weakening the tax base because you think that is going to keep going, is a massive mistake. In fairness to the Department of Finance, what it is saying is that it recognises the windfall nature of the corporation taxes and it is coming up with at least one model to absorb some of that windfall issue.
One could argue that we need to put the money somewhere now in order to get a return on that, and I have no problem with that and presumably it will happen. The nature of the surplus is such that we could do a bit of everything and get away with it, and it would be fine, and “a bit of everything” in the context of €12 billion extra a year is a lot. The question is whether we are going to earn a large enough return for the taxpayer in order to justify it. That is really it.
On the first page of the report I talk about what current spending means in terms of a return, including capital spending and so forth. I am involved in a local building project in Limerick so I am very aware of what it is actually like to do capital spending on a daily basis. The reality is that capital spending becomes current spending the moment it is allocated because you have to pay for bricks, for builders and so on. At a certain level of granularity, there is no such thing as capital spending and it is actually all current spending in a certain sense. The difference is that that kind of current spending ends because the building is built, which is great if it is a community centre or a road, or something like that. The question we have is, when that stops, and if the taxable base is weakened and the expenditure base is too high, in any circumstances where the economy falters, people suffer. That is the key motivating factor for me, namely, we do not want to have the base of spending increased too quickly relative to the base of taxable income. This is an effort to take some of that windfall out before it gets built into the base of permanent spending.
The question I would have, and it was something that came up a fair bit in other questions, is that this is not going to be that big a sovereign wealth fund. At its highest amount, if we put in the maximum amount possible, we would end up with €90 billion, which, compounded over, say, 15 years, gives us €102 billion or €103 billion. It is not that big, relatively speaking. To go back to the start of my answer, as an allocation decision, do you get more out of a return in a public value sense from investing in roads or climate change now, or do you get more later by investing it in the sovereign wealth fund? The Norwegians would certainly say that by banking the principal and living off the interest, they have done better.
We would settle for living off the interest if we could have their fund. Obviously, there are two different things that can happen in terms of the surpluses. The surpluses are of such a scale that, of course, we need to establish a sovereign wealth fund. However, it needs to be not like the national reserve fund, which is invested in short-term notes but does not have any return whatsoever. The NTMA has a track record going back decades in terms of the National Pensions Reserve Fund and the Ireland Strategic Investment Fund, where it is getting good returns. Even in a low interest rate environment, it has got really good returns in regard to our past investments.
There is some argument about additional capital spend, that is, straight spend by the State, and perhaps Professor Kinsella could talk about that. He has provided a helpful graph on capital spending, which is rising sharply, although the Government's projection in respect of such spending is not being met, so there are issues, The sharp rise is coming in at about 4%, which is the European average for capital spending. The problem with the graph is that there is this massive dip for a ten-year period. Is there not an argument that there is a need for catch-up spending? There is a very defined programme here that is not about increasing current spending because that is not sustainable, and is not about the normal level of capital spending that we would want to see the State invest, year on year, so to fill that gap, there is a need for additional catch-up spending.
When we talk about extra billions in certain areas, we sometimes look at the State as the only player. The State is not the only player; the State is a minority player in regard to investment, so an extra injection is not going to flood the levels. I would be interested to hear Professor Kinsella's ideas on catch-up spending and infrastructure to give us a defined understanding of what that is.
When talking about investment, the second part is that it would be investment on a commercial basis. It might be the development of a port. For example, if we want to harness wind energy, Belfast is the only port we can operate out of. We should not be waiting another five years to be able to capture what is there. There are many examples of where we can invest with a commercial return so the fund is not in any way reduced but is, in fact, increased.
I will move on to my next question. Earlier, Professor Kinsella gave five choices in terms of Government allocation. The reality is that the Government is likely to do maybe three of them, with some of it going into a sovereign wealth fund and some into additional capital spending. Possibly the worst decision would be to reduce the national debt. Given the interest rates on our national debt are 2% at this point, and while we know it is a high level of debt as a proportion of the economy and even GNI*, it is way below European averages and is falling. In light of the return we get on investment compared with the cost of the national debt, is there a sensible argument for using some of this windfall to reduce national debt as opposed to investment? We have the money there. If we get into trouble, we could reduce the debt at any stage. If I was managing my books, and if I was able to invest at 4% and get a loan from the bank at 2%, I would be saying “Give me more money.”
Moreover, what return I had on the investment, I would not spend; I would just store it there. In Professor Kinsella’s view of the national debt issue, is that a prudent thing to do at this point? We talked to ISIF about gross and net debt. The reality is you are reducing the national debt when you have a sovereign wealth fund, if you can cash in the chips when needed and some of them can be liquid very quickly.
Professor Stephen Kinsella:
Those are good questions. I will go through them backwards because I think it is sensible to do so. I gave five choices. I agree with the Deputy that three would be appropriate. It does not make sense to reduce the national debt. Why pay down debt that is on average at 2% and that is being well managed by the NTMA, which has a great reputation for doing that? It is the highest rated debt that it has been for 16 years. I do not think reducing debt makes sense at the moment. The stock of overall debt is fine. The economy is growing much faster than the rate of growth of the debt so no economist who understands debt dynamics would suggest reducing debt. I do not think item 5 is a runner.
Current spending will have to rise, particularly for lower-income households. The recent report from the Central Statistics Office, CSO, showed poorer households and those with large mortgages have been experiencing much higher levels of inflation. A little bit of money will need to be spent on them. I do not believe tax cuts are optimal at this point. They are politically popular but one of the key lessons we learned is to not weaken the tax base when things are going well. Reducing income taxes on a marginal basis for lower-income households might make sense but for most people there is little evidence that the higher rates of tax act as a disincentive to further work. My colleague, Dr. Darragh Flannery, in the University of Limerick is a brilliant labour economist. He and I have gone through the data carefully and there are no data to suggest that. One hears a lot that if taxes are increased, people will work less. We do not have those data. It could be because people have high living expenses and have to work more. It could be on the other side. We will see large increases in capital spending anyway. We will certainly see some increases in current spending.
To cover the second part of the question, I agree with the Deputy that it is equivalent to paying down a bit of the debt to use the sovereign wealth fund because you can always sell out of it if needed. However, investing the principal into the Irish economy on a commercial basis would likely overwhelm parts of the economy. To explain what I mean, ISIF has €14 billion of assets under management and is already investing in the economy. If this fund is also investing, it is likely to crowd out the private sector, if care is not taken.
I agree with everything Professor Kinsella has said. If I did not make myself clear, I am not suggesting a €90 billion fund would invest in the Irish economy. I believe the fund has to be diversified. The question is whether a portion of the fund can be invested in the Irish economy. Were ISIF to scale up to €20 billion or €22 billion, I do not think anybody would say that would crowd anybody out. There is scope for that. Should it be completely non-domestic or is there a role here for it?
The national reserve fund should not have a function any more. It should all be part of the same fund and invested in the future. There were always problems with the national reserve fund because the drawdown is tricky and can only be done for three purposes. The point I was making was not to have the whole fund focused on the domestic economy, but on whether to restrict it from investing a portion into that economy or not.
Professor Stephen Kinsella:
If you have the globe to invest in and the overall goal is to derive the largest possible return from the fund, then you should look globally. If you want to take a piece of the fund and place it into ISIF, sure, go for it. ISIF is probably the wrong place to put it. ISIF, as far as I am aware, is still looking for more investable projects. I do no think there is any sense it is running out of money.
To answer the first part of the Deputy's question, without putting words in his mouth I think he has in mind a remedial work scheme. If the crisis had not happened, the dip in the chart would not be there. It would be more or less a straight line. How to fill in the area under that curve with spending? We could probably work out what that is pretty easily. It is just an integral. I could work it out after this. Let us say it is €20 billion, which is probably not that wrong. If you choose to only do €5 billion, rather than taking it from the fund I would never put it in there in the first place. I would create a separate remedial capital works fund and say universities should have this many new buildings. The Deputy mentioned ports. That would be the first and maybe only thing I would spend on: having world-class ports and maximising the return for the taxpayer from this wind. The next Dáil should have a Minister for wind. It is not a bad idea because having somebody whose job is to extract that value for the taxpayer is a good thing. If the State chooses to step into that role in a big way, there is an argument for a separate fund that just does that. It would have to run on a commercial basis and there would be state aid rules to consider. It would not be a simple process. By choosing to invest in one or two sectors, let us say offshore wind and batteries to keep it simple, that kind of strategic capital fund would be useful because it alters the structure of the Irish economy.
A different one, which is more like a remedial work scheme - like University of Limerick needs another building, Letterkenny IT needs another building and we need another hospital - is, I think, closer to the Deputy’s conception. The question there is whether we can get over the implementation issues. The supply function of the economy is pretty much full. It is difficult to find people to build things, as I know from personal experience. It is quite difficult to get this to work. If you want to build a new hospital, you have to have the people, expertise and planning systems ready to go. If that were there and it was clear we would be able to finish it for that amount, it would probably make sense. However, do not forget that then effectuates a larger current spending. Building another children's hospital, say in County Donegal, would immediately switch on a much higher health spend in that area. Capital spending switches off but leads to an increase in current spending. I will give a simple example. The motorway system costs a lot to maintain. The capital spending was finished nearly two decades ago. Is that fair? No. It is nearly finished but the overall maintenance costs are there and are quite considerable.
The other argument concerns the revenue costs in terms of job opportunities created by opening up a region or through the investment in a hospital. Where a hospital is running at crisis point, it is inefficient, costly and is sending stuff out to the private sector. People get sicker and undergo more complicated and costly operations. If we are running efficiently, in theory it should be cheaper, even though more nurses are employed and so on. I hear Professor Kinsella’s point, however.
Professor Stephen Kinsella:
I will develop the Deputy’s point slightly because I find myself thinking about what it means to alter the structure of an economy. I will take the example of the University of Limerick.
It is the one that is obviously on my mind at the moment. We turned a series of fields into a town over a 50-year period, which altered the economic trajectory of the region. We created more jobs because UL existed. UL continues to do that and is brilliant at doing so. I would say that pound for pound, we are probably the largest economic actor in the region. If UL were a business, it would be a business worth a couple of hundred million euro. UL employs a lot of people and does a lot of good stuff.
What is interesting are the jobs that UL attracted because it existed in the first place, which speaks to a certain restrictiveness in thinking about commercial return and return on investment. Thinking in terms of the creation of public value, I have no doubt that creating the Atlantic Technological University, ATU, for example, will probably generate an economic return in the next half a decade. That is probably true also for the local hospital as it will draw more people to the region. Also, a better housing stock will draw people to a region who will, in turn, add to the productive capacity of the economy. So there is a "stitch in time saves nine" argument to be made in this instance. The question is whether things can be done quickly enough in order that the structure changes. UL did not start out with 18,000 students but with 112 students. There is a question of sequencing but it absolutely can be done. It is one of the really exciting things about these kinds of policies. We are in a position where we can make these allocative decisions and say, no, we will spend a bit here and save a bit there. If you do things like altering the structure of the ports and creating large battery farms, you have the potential to create entirely new industries and businesses as a result. It is of huge benefit. If economists had cards, this might get my card taken off me. The benefits are unquantifiable sometimes and sometimes you just have to go for them so it is not a bad thing.
Professor Kinsella has given us a lot of food for thought. I ask him to discuss what he envisages to be the future for the national reserve fund. In case I did not convey my view, I believe that catch-up capital is required, which means it does not go into the fund and there is a role for investing in the domestic economy. How do we invest now to ensure we are secure in the next ten to 15 years?
Professor Kinsella spoke about third level education. Let us consider some challenges. Obviously there are challenges in the areas of infrastructure, energy and education because we have not made the necessary investments in third level education. Tomorrow, the Committee of Public Accounts will conduct hearings on the immigration investment programme. How many third level colleges have used the programme to attract badly needed investment? People had access to residency visas if they came here. Money from China was being pumped in and was holding up our universities. I do not know if UL was one of them but seven universities received millions of euro under that programme. As a State we create programmes which are closed and a bit controversial but support a lot of good developments not only in terms of universities but also in terms of social housing and community projects, etc. Oversight was more the issue in this case. We created programmes for access by wealthy individuals into our State and, in many of these programmes, they got a commercial return because part of the programme was charitable or philanthropic. Most people got a commercial return so it was a commercial investment. What if we have the ability to do that ourselves?
As to what is done by ISIF, Professor Kinsella is 100% right that ISIF seeks projects. I think we should give the NTMA a mandate or a bigger mandate and give it an extra €5 billion, €10 billion or whatever because I am sure that the NTMA will put the money to good use. That is my own thinking. It is not just a case of having a catch-up programme and not investing commercially in the Irish economy. I think that there is a role for that as well as part of the fund which is investing across the globe. What I say next will probably be a point of difference but I do not think the NTMA should be restricted and not allowed to invest in the State. It might be the case that the NTMA thinks that is not appropriate or there are better returns elsewhere. I am not suggesting directed investment. Those are my thoughts.
My last point was about the national reserve fund. We have €6 billion in the fund currently. By law, that amount can only increase to €8 billion. The fund has not had any return and may have lost value . What future does the professor envisage for the fund? Does he think the fund should be shut down and put into the new sovereign wealth fund? Where does he see the fund?
Professor Stephen Kinsella:
I am glad the Deputy asked me his question again because I realise that I did not answer him. Almost the last thing I say in my paper is that the sovereign wealth fund is a piece of additional financial architecture. One of the things I would love is the blueprint. I want to know where we think we are going to get to with the overall financial architecture of the State. Let us consider the State's balance sheet. The State owns Leinster House, Áras an Uachtaráin and all that stuff. The State has physical and financial assets. What do we want to use this balance sheet for and how do we choose to allow it evolve over the future? We are adding on another sovereign wealth fund. It strikes me that if you can get return from using the national reserve fund, you should do so. If we stick that fund into the overall sovereign wealth fund, I do not see any particular loss and, in fact, there is probably a benefit. However, there may be a function for it or it may be repurposed. Maybe the €6 billion is the remedial capital fund, of which the Deputy spoke about. What is sure is that if it is earning a near zero return or losing money, we should change what it is being used for.
ISIF does its own thing. We have other reserves that the NTMA is managing for us. It strikes me that there should be an expression by the Government, and certainly by the Department of Finance, of the overall blueprint as to the financial architecture of the State. If we have what are essentially three savings pots, are we going to end up with six? Is that the plan? This is an ageing fund effectively so will there be a climate change or an offshore wind one? Are we going to have just one that does a number of different things? It strikes me that only having the one makes a lot of sense. It is a case of multiple sources, multiple uses. It strikes me as well that having the fund managed by different people in different places around the world with certain amounts of institutional expertise makes sense as long as they do it cheaply on behalf of the State. It is fine to earn a return but they must earn an excess return for the State.
Finally, if we had a blueprint like I mentioned and the plan or objective was clear, it would mean that as those funds become available you could switch on the next thing. If the funds are not available, you do not switch it on but you know that it is going to be there. It is the financial equivalent of an architectural master plan. Why do we not have a master plan? It strikes me that we should have one. In his recent history of the Department of Finance, my UL colleague, Dr. Ciarán Casey, who is a fantastic young economic historian, talks a lot about the need for a deeper foresight function in the Department of Finance and in other parts of the State. This is an example of foresight. We are discussing 2030 and it is a fantastic thing to be talking about. It is a brilliant place to be and a privilege to be able to talk about the vast economic surpluses that we would like to invest in it.
I thank the Deputy and Professor Kinsella. I do not have any questions. Three things have come from this debate. The first thing is the need for a master plan or blueprint and a deeper visionary take. Second, we need to analyse international best practice to see what countries with money have done and take the best from what they have done. Finally, we are talking about money we have and that is a positive.
How we use it is crucial. We need to make sure that we get the best possible use out of it. Professor Kinsella's insights have been very informative for us this evening. It is a pity about the votes because we were going in and out of the meeting. There is certainly a lot of food for thought here. I hope we will engage again with Professor Kinsella. I thank him very much for his time.