Brian Lenihan Jnr (Dublin West, Fianna Fail)

I am not questioning the Senator's right to a Second Stage debate but while it is against the tradition of this House to comment on the other House the Second Stage debate there continued into Committee and Report Stages with the same arguments being rehearsed on those stages that had been dealt with on Second Stage. They had been dealt with in committee in August, and have since been dealt with time and again. This country must move on. We will not rescue our banking system if we do not make a collective effort to repair it. That is essential and that is what the Government is doing.

The Bill has been the subject of intense and passionate debate, not only during its passage through the Dáil, but ever since I published the draft discussion document at the end of July. I thank the various parties, including Deputies and Senators, and welcome the constructive proposals they made at various stages in that public discussion. The lengthy debate has resulted in an improved and robust Bill which I am pleased to present to the Seanad.

This is an important Bill. It ensures the appropriate structure and mechanisms are in place for NAMA to perform its functions and achieve its purpose. Arising from the debate in the Dáil, I have made several amendments. While I do not intend to go through every amendment, I will briefly outline the most significant changes.

I introduced a Report Stage amendment which provides for a future surcharge on the participating institutions in the event of NAMA making a loss. While I do not expect NAMA to make a loss, it is nevertheless appropriate to afford the taxpayer maximum protection against any possibility, however unlikely, that a loss may eventually arise. Any such protection must, however, be balanced against the risk that the application of a statutory surcharge could result in the participating institutions having to provide for a future liability in their accounts, in line with international accounting standards.

The proposed amendment in the Bill strikes this balance. The basis of this charge, if applicable, will be a report by NAMA on its aggregate profits or losses from its establishment to the date the Minister for Finance seeks the report. The report will be certified by the Comptroller and Auditor General.

The Dáil has approved the provision for a tax on windfall gains arising from the future rezoning of land. The proposed measure introduces a new 80% capital gains tax rate on a windfall gain relating to disposals and rezoning decisions on development land. I will introduce a further amendment in the Seanad this week to ensure absolute clarity on a subject that is very complex in terms of striking a balance between achieving its purpose and ensuring it is not applied unfairly.

One area of common ground between all political parties has been the fundamental need to restore credit to the small and medium-sized enterprise sector, SMEs. This concern, held by Deputies across all parties, is the basis for introducing this legislation - to ensure the return of the flow of credit to businesses. This is an important issue and one of the first objectives of NAMA is to facilitate the flow of credit to the real economy. On Report Stage in the Dáil I introduced an amendment to provide the Minister for Finance with a power to issue guidelines to the participating institutions on lending practices and procedures to improve the flow of credit to SMEs and, if necessary, other sectors. The power is a wide-ranging one and will allow for a response adapted to the particular circumstances of different sectors and at different times. It is not a power that can simply be exercised prior to the entry of the participating institutions into the agency scheme. It is a power that can be exercised from time to time as occasion requires. This approach recognises this is a complex situation and allows for a flexible response to changing credit needs. It is essential the banks continue to lend to creditworthy businesses and individuals. The amendment's purpose is to provide the Minister with the legislative power to issue guidelines to the participating institutions on this important issue.

The banks are generally in the best position to make the commercial decision on whether they should make credit available for a particular business proposition. They are familiar with their existing customer base and have considerable expertise in analysing these propositions, including the terms and conditions under which they are prepared to lend. However, there is a danger they have become too risk averse and businesses are entitled to be certain their applications have had a proper hearing. It is clear, therefore, that there is a need for an appeal mechanism to have a decision reviewed. It is not enough for the Minister to take power to issue guidelines. The Minister must be in a position to see these guidelines are complied with. Hence an appeal mechanism is essential and such a provision has been included in the legislation. This is a complex issue that needs to be teased out with all stakeholders. My objective is to ensure mechanisms are in place, with a strong input from outside the banks, to allow potential borrowers a right of review where credit has been refused. Discussions are ongoing on how this can best be achieved.

The Bill has also been amended to cap the amount to be spent by NAMA on the acquisition of bank assets at €54 billion. As preparations for NAMA have advanced, it has allowed us to further hone our estimates of the assets to be acquired and how much they are likely to cost. It is appropriate a cap be placed on this amount so as not to potentially expose the taxpayer to an ever escalating amount of assets. Any order to vary this cap can only be made by positive resolution of Dáil Éireann.

With regard to risk-sharing, the legislation has been amended to include a maximum amount of subordinated debt securities that can be issued by NAMA in consideration for the acquisition of bank assets. That maximum is to be 5% of the consideration paid for the bank assets.

There is a balance to be struck between maximising the amount of risk shared and helping the economy and people by putting the financial system back on track. If too much risk were left with the banks, it could limit the extent to which they were freed to lend in support of economic development. It is imperative the banks are not lumbered with unnecessarily high contingent liabilities. Subordinated bonds are a method of sharing the risk associated with the agency. They put the banks at risk if NAMA were to lose money, which is not our expectation, without giving them an upside concerning the gains.

Public debate and press commentary have naturally focused on the price NAMA will pay for loan assets. Senators will be familiar with the provisional information I circulated to the Dáil in September on five of the covered institutions where we had the opportunity to carry out some analyses and stress-testing in the past year. Based on these assessments, NAMA estimates it will purchase loans with a book value of €77 billion for €54 billion. This is a projected discount of 30% which will inflict significant losses on the banks and their shareholders. The sum of €47 billion is the estimate of the current market value of these loans and the estimated aggregate purchase price includes a further €7 billion to reflect long-term economic value. Long-term economic value is an integral part of the valuation process to ensure the goal of stabilising the financial system is achieved and that, as a consequence, we are in a position to support economic recovery. The approach strikes a balance between recognising and reflecting the long-term potential of assets transferred to NAMA, while minimising any potential risk that the agency will make a loss.

Concerning the estimates I gave Dáil Éireann in September, it is important to make it clear this is a top-down estimate, not a bottom-up valuation. The legislation provides for a bottom-up valuation. A final figure cannot be arrived at until that valuation is concluded. It was essential in the interests of transparency and putting the maximum amount of information into the public domain that as Minister for Finance I disclosed our estimate based on our top-down view of what we saw in the financial institutions. The figure is an estimate and subject to the bottom-up valuation, the detailed loan-by-loan valuation required under the legislation. That bottom-up valuation will give the final picture.

The valuation methodology adopted is based on European Commission guidance which states the transfer value for assets will inevitably be above current market prices to achieve the relief effect. Since so much time in this debate has been devoted to the issue of long-term economic value, I want to reiterate the Commission's guidance. The Commission has stated transfer values will inevitably be above current market prices to achieve the relief effect. It has also stated transfer values may reflect the underlying long-term economic value of the assets involved. Our approach reflects the fact that the market for these assets is distressed and likely to return towards normality over time. I emphasise again that the success of NAMA does not rely on a return to bubble prices in the property market. NAMA will break even with modest growth in property prices over ten years. When the risk-sharing measure is factored in, it is estimated NAMA will have to achieve less than a 10% uplift over current market values on its assets over ten years to break even. Further improvements were made to the valuation methodology during debates in the Dáil. Changes made include limiting the uplift for long-term economic value to ensure the application of the valuation methodology will not result in an inappropriate overpayment for loan assets. The changes also provide for possible circumstances where the price paid for certain categories of assets may not exceed current market value.

In the area of valuation we have included in the Bill two key risk-sharing measures to protect taxpayers from the risk of loss. Part payment in subordinated debt balances protecting taxpayers with incentivising the banks to discharge their role in managing the loans efficiently. Furthermore, if NAMA makes a loss on winding up, a levy by way of a surcharge will be applied to participating institutions to make up this loss.

Senators will know that I made it clear on several occasions that discussions with EUROSTAT were ongoing to determine the accounting treatment of NAMA debt, leading to the decision last month by EUROSTAT that NAMA debt would not be added to the general Government deficit. The importance of keeping NAMA bonds off balance sheet should not be taken lightly. As a small country, having our asset relief mechanism on balance sheet, while other countries had theirs off it, could create significant anomalies when international market analysts or investors were comparing Ireland to others as regards EUROSTAT debt and deficit statistical returns. The statistical treatment does not change the fact that operations of NAMA will lead to an overall increase in the amount of the State's potential liabilities. Nor should it be overlooked that these liabilities will be matched by a countervailing asset holding.

The master special purchase vehicle will be established by the NAMA board to conduct the purchase, management and disposal of loan assets identified and valued by NAMA. It will be a separate legal entity, jointly owned by private investors who will own 51% of its ordinary equity and by NAMA which will hold the remaining 49% ordinary equity. The subscribed capital of the master special purchase vehicle is likely to be €100 million which has been accepted by EUROSTAT as being appropriate. This is a tiny fraction of the total consideration involved in NAMA. The special purchase vehicle will be run with the objective of making a profit on the purchase and management of the assets it acquires from the financial institutions. This will be for the overall benefit of taxpayers. The potential return to private investors is capped annually and at maturity and restricted in a rational way to the amount of their investment. If the master SPV makes a loss in its lifetime or is wound up, the equity invested and associated undeclared dividends will be lost.

Senators should bear in mind the following important points. A detailed legal shareholder agreement will be put in place to ensure that at all times the board will have a veto over the master SPV actions and decisions. This will protect the interests of all Irish citizens. I intend to issue a direction to the board that not a single decision should be made or allowed to be passed by the master SPV which will not be in the best interests or in line with achieving the objectives and purposes of the legislation. Also, the use of private investment in this way is not unprecedented. It will bring the Government accounting debt treatment of the Irish asset relief measure into line with other European financial stability and relief measures.

Following concerns raised by Deputies during the Committee Stage debate in the Dáil, I have made a number of alterations to the Bill which ensure the master SPV and group entities are addressed in more detail in the legislation. The changes confirm that certain provisions explicitly apply to the National Asset Management Agency group entities, including the master SPV. For example, amendments made ensure the Prevention of Corruption Acts apply to all directors on the boards of NAMA group entities and that duties applying to the board members will also extend to the boards of the group entities. In addition, the detailed reporting requirements in Part 3 of the Bill will also specifically apply to the activities of the group entities.

The establishment of the agency is a prerequisite for economic recovery and the generation of employment. In cleansing the balance sheets of Irish banks, it will allow them to focus their resources on discharging their essential role in the economy which is to provide credit and we have included in the Bill legislative provisions to ensure this will happen. In tandem with the other initiatives the Government is taking to restore competitiveness and bring order to the public finances, having the agency up and running as soon as possible will ensure we are well placed to take the earliest possible advantage of the economic upswing when it takes place around the globe and in our export markets. The legislation I am introducing in the Seanad today reflects detailed consideration of how the agency will need to operate to protect the significant investment of the State and generate a return for the taxpayer.

I thanks Senators, without exception, for convening Seanad Éireann on a Monday and giving this legislation the degree of attention I know they want to give it. It is appreciated by the Government that all Senators have put their own personal interests and diaries aside to give the legislation full consideration. I very much appreciate this. I ask Senators to examine the proposal in detail and look forward to hearing all views expressed in the debate. The establishment of the agency is critical for the future of the country and I hope Senators can see their way to support it.