Ciarán Cannon (Galway East, Fine Gael) | Oireachtas source

That is not a problem.

A stable and appropriate supply of credit to the SME sector promotes growth, encourages start-ups and enables incumbent firms to grow by taking advantage of trade and investment opportunities. It is accepted that regardless of the economic and financial cycle, there always will be structural problems in the market that constrain SMEs in accessing credit. This is a feature of SME funding across the OECD. In particular, innovative firms, small firms and firms early in their life-cycle would appear to be more affected by such market imperfections. These imperfections or constraints also tend to be exacerbated by financial crises, as was the case with the impact of the international financial crisis which began in 2008. Furthermore, crisis-enhanced constraints may also persist beyond the return of broader financial stability. In the years since the outbreak of the international financial crisis, Irish SMEs, like their counterparts across Europe, have been obliged to operate in a more challenging and difficult environment.

In light of the importance of the SME sector, the Government has responded to this challenge by articulating a clear vision that SMEs should have the opportunity to access sufficient finance to meet their enterprise needs in a manner that enables them to fulfil their growth potential, thereby supporting growth and employment in the economy. In particular, Government policy has focused on ensuring that micro, small and medium-sized enterprises have access to capital, equity and debt funding from a more diverse range of bank and non-bank sources.

The Government's medium-term economic strategy, MTES, sets out the ambition of developing a more diversified, competitive and responsive financial infrastructure that can finance growth in the SME sector as we move into a new phase of economic recovery and growth. The Action Plan for Jobs 2014 builds on the previous plan and contains an integrated suite of measures and initiatives that are designed to enhance access to finance for micro, small and medium sized enterprises. The establishment of the SBCI will be a key element in this new and evolving financial architecture and will build on and reinforce the concrete measures that the Government has already put in place to support employment and growth in the SME sector. This active policy intervention in the credit market for SMEs is justified not only by the importance of the sector but also by the fact research demonstrates that enterprises, including export-orientated firms, which face real or perceived credit constraints are less likely to participate in growth-enhancing activities such as investment, recruitment, exporting, importing and marketing.

The establishment of the SBCI follows directly from the announcement by the Taoiseach in November 2013, when we successfully exited the EU-IMF programme, that he had held discussions with Chancellor Merkel to specifically find ways to reinforce Ireland's economic recovery by improving funding mechanisms in the real economy, including access to finance for Irish SMEs. This announcement followed early discussions during the summer of 2013 between officials of the Department of Finance and the German state's promotional bank, Kreditanstalt fur Wiederaufbau, KfW. The German Government asked KfW to work with the German and Irish authorities to deliver on this initiative at the earliest possible date. Officials at the Department of Finance, with the assistance from staff of the National Treasury Management Agency, NTMA,, have worked quickly to establish the most appropriate way to maximize and sustain the benefits to Irish SMEs of this enhanced co-operation.

The SBCI will be established as a private company in the first instance. Shares in the corporation will be owned by the Minister for Finance who will be empowered to change the ownership structure if it is deemed appropriate or necessary to enable the intended expansion of the SBCI. Although the initial operations of the SBCI will focus on supporting SMEs, other strategic sectors could be also supported in the future. With this possible expansion in mind, the corporation is being structured so that it is as flexible as possible. The SBCI will be a for-profit company but will not aim to maximise its profits at the expense of passing benefits to the SME sector. Rather, it will cover its own costs while ensuring that it maximises its economic impact for SMEs. The objective of the SBCI will be to increase the availability of loans of greater duration, with enhanced terms and potentially at a lower cost to the SME sector. To achieve this objective the SBCI will operate as a wholesale lender and will provide funds to on-lending institutions, which will be required to transmit the benefits of the more favourable funding terms to their customers - the SMEs. On-lenders will include not only the Irish commercial banks but also foreign banks, specialist funds or other qualifying providers of finance. The tangible benefits to the SMEs will be additional availability of funds, with improved and flexible terms that are more tailored to their ongoing business needs.

The SBCI will be financed from the outset by a mix of funding from KfW, the European Investment Bank, EIB, and the directed portfolio of the National Pension Reserve Fund, NPRF. The NPRF will provide €10 million in equity capital and a loan facility of up to €240 million, which can be converted to equity if necessary. KfW and the EIB combined will more than match that amount and, therefore, the combination of the three initial sources of funding will provide a pool of more than €500 million for the SBCI to use in its start-up phase. Further details will be released as and when the funding contracts with the EIB and KfW are finalised. This can only occur once the SBCI has been established as a company.

Both KfW and the EIB have indicated that they are willing to provide low-cost funding to the SBCI for up to a ten-year term. The locking in of this lower cost supply of funds for this extended period is a major benefit for Irish SMEs because it can mitigate the disproportionate funding risks that SMEs face. It will ensure that they will have access to a steady and secure supply of lower cost funding, which is a major competitive advantage. Another key advantage of the SBCI will be its capacity to extend to SMEs loans of longer duration and with enhanced and more flexible terms and conditions attached than are typically available in the market at present. Specifically, the SBCI will provide funding to on-lending institutions that will enable them to offer SME loans of a longer tenure, for example, five to ten years, and with more flexible conditions attached, for example, capital repayment breaks or interest holidays.

This combination of longer tenure and customised conditions and potentially lower cost pricing will provide SMEs with access to patient intelligent capital that will support their long-term development, stimulate increased investment in growth and generate additional employment opportunities. SMEs will have a greater capacity and incentive to make investments on the basis of improved cash flow that is more tailored and customised to their business needs. This type of financing is an integral feature of countries with robust and dynamic SME sectors and it is essential, from both a growth and employment perspective, that the development of the Irish SME sector is supported in a similar manner. Facilitating access to funding with more attractive terms and conditions will also assist in enhancing the competitiveness of SMEs in a context where Irish SMEs have been, since the onset of the financial crisis, disadvantaged by the increased fragmentation within the Single European Market.

In the initial phase, loans from the SBCI will fund loans to SMEs for investment purposes. The range of financial products available to the SME sector will grow during the first year of the SBCI's operations and we will be working with the European Commission's Directorate General for Competition on this matter. To date, the directorate has been very supportive of this innovative initiative and we will continue our proactive engagement with it. Similar to how KfW operates in Germany, the SBCI, acting primarily as a wholesale lender, will lend to on-lenders who will then on-lend to SMEs. That will enable SMEs to access finance facilitated through regulated providers from the earliest possible date. This indirect approach will not inhibit the SBCI's ability to enhance the provision of credit in the marketplace and improve the funding environment for SMEs. The strategic role of on-lending development institutions is a well-established model that is both effective and successful in other markets such as Germany, Spain and France. It is also the operational model that is traditionally used by Europe's development bank, the EIB. Experience in other countries indicates that any on-lending facilitated by a state-sponsored financial institution such as the SBCI is generally complementary to the SME lending that is offered directly by private financial institutions.

The challenges facing SMEs in Ireland accessing credit are the product of a complex interplay of demand and supply side factors. Significantly, the SBCI has been designed in a manner that will assist in improving both the supply and demand side elements of SME access to finance. As already outlined, on-lending institutions will include not only the Irish commercial banks but can also include foreign banks, specialist funds or other providers of credit in the market. The provision of a steady supply of low cost funding from the SBCI should lower the barriers to entry for any new providers of funding and, therefore, has the potential to increase competition in the provision of finance to SMEs and other strategic areas of the economy.

Existing or new entrant market participants will be required to meet prescribed criteria which will be set by the SBCI to ensure the on-lender can lend prudently to the targeted market. Less concentration and increased competition in the provision of financing clearly will be beneficial to not only SMEs but also to the wider economy, and accords with the overall Government policy objective of creating more diversified and balanced sources of financing for the real economy.

The SBCI also has the potential to incentivise demand for credit from the SME sector. As the Department of Finance's credit and demand surveys demonstrate, despite tangible improvements in business performance, demand for credit from the SME sector remains somewhat muted. By ensuring financing of a longer tenure and with more flexible conditions attached and potentially at a lower cost, the SBCI will provide an important signalling effect on releasing any latent or pent-up demand for finance from the SME sector. The expanded pool of lending products from a potentially broader range of credit providers could also serve the needs of a wider cohort of SME customers than is served at present by lending institutions.

A more stable supply of lower-cost funding from the SBCI will also assist in building confidence within the SME sector as it increases the certainty of financing to that sector, even in adverse financial market conditions. An institution with a clear SME lending focus will also serve to raise awareness levels regarding the availability of financing, which could also encourage more would-be borrowers to apply for funds.

The SBCI will, at one level, operate in a counter-cyclical manner in seeking to compensate for any constraints in the provision of financing to enterprises and in particular SMEs. It will also, however, operate with a broader developmental mandate that will enable it to channel investment towards key strategic sectors of the economy.

That many states, for example Germany, France, Spain and Canada, have long-standing national development or promotional banks, highlights the role such state-sponsored financial institutions play in pursuing broader public policy objectives, such as enhancing access to finance for SMEs or for particular strategic sectors. In the aftermath of the financial crisis, it is evident that a growing number of governments have sought to use national development or promotional banks to support the SME sector in particular. Countries where such institutions were already in place, such as Germany, France and Spain, have expanded their roles and remits to address cyclical financing constraints, while in other countries, such as Portugal and the UK, new financial institutions have been or are being established. At the same time, these national development and promotional banks have continued to undertake their broader developmental role of channelling investment towards specific sectors that are considered to be of particular strategic importance to the economy and broader society. KfW, for example, has implemented promotional programmes to support SMEs in the renewable energy, energy efficiency and wind energy sectors.

The Finance for Growth report of the European Council's Economic and Financial Committee's high level expert group, which was co-chaired by the Secretary General of the Department of Finance, clearly identified that national development or promotional institutions should play an increased role in providing finance for SMEs within their own countries and in other jurisdictions. The SBCI's support from the EIB also shows that Europe's investment bank has taken a more proactive role than in the recent past. This approach has been championed by officials from the Department of Finance in its engagement with the EIB. Given this evolving financial architecture throughout the EU, it is important that SMEs in Ireland have access to financial products similar to those available to comparative enterprises in competitor states. Otherwise they will operate at a serious competitive disadvantage that will constrain their capacity to take advantage of broader economic recovery. The SBCI, with its concentrated focus on improving the supply and availability of financing to the SME sector, will ensure that Ireland will have in place a State-sponsored financial institution capable of supporting long-term investment in the SME sector.

The establishment of the SBCI entity will also mean that Ireland will have in place an institution that can serve to facilitate direct EU financing from multilateral bodies, such as the EIB and the European Investment Fund. The nature and remit of the SBCI will also enable greater co-operation by the Irish State with other European national and multilateral development financial institutions.

I will now turn to the detail of the main provisions of the Bill, which has seven parts. Part 1 of the Bill, containing sections 1 to 4 sets out the preliminary and general provisions. Section 1 merely provides for the short title of the Bill and allows the Minister for Finance to commence the Bill or particular parts of the Bill at different dates. Section 2 sets out the purposes of the Strategic Banking Corporation Bill. The main purpose of the Bill is to improve the availability of credit to enterprises and other persons in a manner that benefits the economy and the economic well-being of the State. This will be achieved by the establishment of a new company, the strategic banking corporation of Ireland, SBCI, which will avail of credit and make credit available through on-lending to enterprises, in particular SMEs. The Bill empowers the Minister to guarantee the borrowings of the SBCI and to provide funding to it, although it is hoped that in time the SBCI will be able to fund itself without the need for either further loans from the Government or the need to guarantee all of its borrowings.

Section 3 is a standard provision providing definitions for certain words and terms used in the Bill. Section 4 provides that expenses incurred by the Minister in the administration of the Act will be sanctioned by the Minister for Public Expenditure and Reform and paid out of the moneys provided by the Oireachtas. Essentially, this covers the expenses of the Department of Finance in working to establish the SBCI rather than the operating costs of the SBCI. Costs directly attributable to the SBCI will be the liabilities of the SBCI and not the Minister or the Department of Finance.

Part 2 of the Bill, containing sections 5 to 10, provides for the establishment of the strategic banking corporation of Ireland, SBCI. It provides for the formation of the SBCI and group entities. It sets out the functions of the SBCI and outlines the composition of the SBCI board and the SBCI's relationship with the NTMA.

Section 5 enables the formation of a private company under the Companies Act, called the strategic banking corporation of Ireland, SBCI. The SBCI will be independent in carrying out its functions under this Act. This section allows the company to use the word "banking" in its name by disapplying sections 7(1), 8 and 15 of the Central Bank Act 1971 and exempts the SBCI's name from having to end in the suffix "Limited".

Section 6 provides for the SBCI to be able to form, promote or take shareholding in various types of subsidiaries, such as companies or joint ventures, and sets out the terms on which this can be done. These will be known collectively as SBCI group entities. The SBCI is not permitted to guarantee the borrowings or liabilities of any of its subsidiaries without the approval of the Minister. A definition of the SBCI's group entities is given in section 3.

Section 7 provides that the memorandum and articles of association of the SBCI will be consistent with provisions of the legislation. It establishes that no alterations to the documents will be valid without the prior approval of the Minister.

Section 8 sets out the functions of the SBCI. The main functions of the SBCI will be to provide and promote, in a prudent manner, the availability of additional credit in the State suitable to the needs of borrowers, in particular SMEs. The SBCI will encourage more competition in the provision of credit in the State and greater diversity in the types of finance available. The functions of the SBCI will also include sourcing international and domestic funding to facilitate lending and providing finance to projects that contribute to national economic development.

Section 9 provides for the SBCI to have a board of not more than nine members including its chairperson. It sets out that the first directors on incorporation will be appointed by the Minister and that subsequent boards and the position of company secretary will be appointed by the SBCI in accordance with the terms and conditions of appointment set out in the memorandum and articles of association of the SBCI. The Minister will continue to appoint a chairperson from within the board.

Section 10 provides for the SBCI's relationship with the NTMA. It sets out that the NTMA will provide the SBCI and any of its subsidiaries with business and support services and systems that are considered necessary for the SBCI to perform its functions. It will allow these services to be provided either directly or indirectly. The section also provides for the NTMA to assign staff to the SBCI to enable it perform its functions under the Bill. Under this section the NTMA may also supply the SBCI with treasury services and advice in connection with debt securities and borrowings of the SBCI. The NTMA may also enter into transactions of a normal banking nature as an agent of the SBCI. The NTMA will be reimbursed by the SBCI for the costs incurred under this section. The NTMA will be also able to perform similar functions for subsidiaries of the SBCI.

Part 3 sets out the funding arrangements of the SBCI. Section 11 provides for the determination of the authorised share capital of SBCI by the Minister for Finance, and for the initial issue of shares in the new company to the Minister. It also provides that the SBCI will issue shares to the value of €10 million to the Minister. This €10 million of equity capital will come from the NPRF.

The authorised share capital will be €250 million or a higher amount as the Minister may decide. However, the authorised share capital may never go above €1 billion. If the strategic banking corporation of Ireland, SBCI, determines that further equity is required to meet its financial obligations as they fall due, it may issue further share capital to the Minister in exchange for the conversion of the outstanding loans from the NPRF, the Central Fund or a combination of both. Any change to the share capital will be laid before the Oireachtas. It is not intended that all borrowings of the SBCI will need to be guaranteed by the State.

The Bill provides flexibility around the value of the SBCI's share capital and gives the Minister the power to pay in authorised share capital at the request of the SBCI. This is being done to facilitate a flexible capital structure known as callable capital. It is used by the European Investment Bank, EIB, among others to facilitate funding of an institution without the need to guarantee all borrowings. This model will be beneficial in the medium term but will not be used in the initial year of the SBCI. Callable capital involves an agreement with the lenders to a company that, should a certain balance sheet position be reached, the borrowing company will increase the amount of its issued and paid-in capital to a pre-agreed level. In the interim, the lender will lend to the borrower on the basis that the authorised share capital has been set to at least that level, and it is usually happy to lend even if the paid-in capital is a fraction of the authorised capital. This has a potential benefit in that there is no need to issue a guarantee for further borrowings.

Section 12 provides that the Minister can dispose of shares in the SBCI as he sees fit. Any fund received in respect of the shares will go to the Exchequer - for example, proceeds of sales or redemptions of shares. If the Minister is disposing of shares in the SBCI, the reasons for the disposal must be given to the Oireachtas. It is not intended that the Minister for Finance will sell shares, but flexibility to do so has been included.

Section 13 provides that the SBCI may borrow money in any currency through any type of debt it sees as appropriate. This section limits the amount of borrowings that the SBCI can have outstanding at any particular time to €4 billion. If the SBCI were to borrow in a foreign currency, those borrowings would be valued using the European Central Bank's published exchange rates. This section also allows the SBCI to engage in transactions of a normal banking nature for the purposes of carrying out its functions.

Section 14 provides for an amendment to section 54 of the Finance Act 1970. This amendment allows the Minister to engage in normal banking transactions with the SBCI. Under this section, he may issue funds from the Exchequer for the purposes of those transactions and any associated cost arising out of same. Broadly speaking, this is an enabling provision and is common when introducing a State entity that involves borrowing.

Section 15 provides for the Minister to give directions to the National Pensions Reserve Fund Commission with which the commission must comply. This section provides the Minister with the power to direct the commission to provide credit to the SBCI and to provide funding to same to fund the subscription of the Minister's shares in the company. The Minister may also exercise any right based on a direction or terminate the terms of a direction.

Section 16 sets out the maximum amount of funding that the SBCI can be given by the State, which is €5 billion. It explains that the funding of the SBCI includes any loan, investment, exchange of assets, subscription for securities, debt securities, issued share capital and callable capital.

Section 17 allows for the SBCI board to decide what dividends are to be paid to the Minister. It also provides that any money received by the Minister in respect of his share in the company, including dividends, shall be paid into the Exchequer in such a manner as the Minister directs.

Part 4 provides for the issuance of guarantees by the Minister. Section 18 gives him the authority to guarantee any money borrowed by the SBCI up to a maximum of €4 billion aggregate of all guarantees outstanding. Accrued interest does not count towards this maximum amount. The details of any guarantee provided for by this section shall be laid before the Houses of the Oireachtas as soon as may be after it is given. Guarantees would only be used when specifically required to enable borrowings from external providers of loans to the SBCI.

Part 5 sets out the procedures for ensuring the public accountability of the SBCI. Section 19 provides that the SBCI must submit its accounts to the Comptroller and Auditor General for audit within two months of the financial year to which they relate. The audited consolidated accounts will also be presented to the Minister and laid before each House of the Oireachtas.

Section 20 provides that a senior member of the staff of the SBCI nominated by its chairperson will, whenever required by the Committee of Public Accounts, give evidence to that committee on the accounts and reports of the Comptroller and Auditor General into the SBCI.

Part 6 sets out two miscellaneous provisions. Section 21 provides that the Minister, the National Treasury Management Agency, NTMA, and the latter's employees and staff are not to be considered either shadow directors under section 27(1) of the Companies Act 1990 or de factodirectors of the SBCI. It is intended that the board of the NTMA be covered in this respect, ensuring that the Minister and the NTMA can carry out their various other functions without their involvement with the SBCI being a block on that work.

Section 22 provides that certain provisions of the Companies Acts will not apply to the SBCI. These provisions ensure that the Minister's relationship with the SBCI does not prevent him from carrying out any of his other functions and avoids redundant reporting requirements in the administration of the SBCI.

Part 7 contains one section, section 23, which sets out a number of tax exemptions that will apply to the SBCI and any subsidiary wholly owned by same. This section is a standard provision for all companies and subsidiaries wholly owned by the Minister for Finance. It is valid as long as the Minister remains the sole shareholder and, therefore, is the sole beneficiary of such tax exemptions. This section also provides that income and gains arising to the SBCI or a wholly owned subsidiary of same will be exempt from dividend withholding tax, corporation tax, DIRT, interest withholding tax, capital gains tax and stamp duty.

A robust, dynamic and innovative indigenous small to medium-sized enterprise, SME, sector is key to ensuring sustained economic recovery and employment growth. Micro, small and medium-sized enterprises need access to a steady and secure supply of credit if they are to fulfil their growth potential, take advantage of business and investment opportunities at home and abroad and create employment for our citizens. The proposed establishment of the SBCI builds on the measures and initiatives that have already been put in place by the Government to enhance SME access to finance and can be considered to be a major milestone in our continued economic recovery. By ensuring the provision of improved credit that is tailored to the business needs of enterprises, particularly SMEs, the SBCI will make an important contribution to stimulating economic activity, enhancing competitiveness and generating employment across the State. I commend the Bill to the House.

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