Seanad debates

Tuesday, 15 July 2014

Strategic Banking Corporation of Ireland Bill 2014: Second Stage

 

Question proposed: "That the Bill be now read a Second Time".

2:55 pm

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I am pleased to present the strategic banking corporation of Ireland Bill to the House. This is a significant Bill, providing for the establishment of the strategic banking corporation of Ireland, or the SBCI. By increasing the availability of longer-term flexible debt finance, which is appropriately priced, the establishment of the SBCI will provide SMEs with access to the type of patient intelligent capital that will increase productive investment, encourage growth and generate additional employment opportunities. In this way, the SBCI will play a key role in reinforcing Ireland's economic recovery.

The Government recognises that SMEs are the backbone of the economy, employing nearly 70% of those at work. A stable and appropriate supply of credit to the SME sector encouraging start-ups and enabling incumbent firms to grow is essential. 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.

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 evolving financial architecture and will build on and reinforce the concrete measures that the Government has already introduced to support employment and growth in the SME sector.

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. Consequently, officials from my Department of Finance, with the assistance from staff of the National Treasury Management Agency, NTMA, have worked closely with KfW, the German Finance Minister and the European Investment Bank to establish the most appropriate way to maximise 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 company will be owned by the Minister for Finance. It is not intended that the shares will be sold at any time but, to ensure flexibility, the legislation sets out how the sale of the shareholding could be enabled if deemed necessary. Although the initial operations of the company will focus on supporting SMEs, other strategic sectors could also be supported in the future. With this possible expansion in mind, the company is being structured so that it is as flexible as possible. 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 other lending institutions, which will be required to transmit the benefits of the more favourable funding terms to their customers, the 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 will enable Irish SMEs to access the new finance from the earliest possible date. On-lending institutions could include not only the Irish commercial banks but also foreign banks, specialist funds or other qualifying providers of finance. Participants will be required to meet prescribed criteria that will be set by the SBCI to ensure that the on-lender can lend prudently to the targeted market.

The SBCI will provide funding to on-lending institutions that will enable them to offer SME loans of longer tenure - for example, five to ten years - and with more flexible conditions attached. Examples of the latter are capital payment breaks or interest rate holidays. This type of financing is an integral feature of the countries with robust and dynamic SME sectors. It is essential for both growth and employment that the development of the Irish SME sector be supported in a similar manner. The challenges facing SMEs in accessing credit are the product of a complete interplay of supply and demand factors. The SBCI has been designed in a manner that addresses both of these elements.

The provision of a steady supply of low-cost funding from the SBCI should lower the barriers for entry for new providers of funding. Less concentration and increased competition in the provision of financing will clearly be beneficial not only to SMEs but also to the wider economy.

The SBCI also has the potential to incentivise the demand for credit from SMEs. By ensuring financing of a longer tenure and with more flexible conditions attached and that is potentially at a lower cost, the SBCI will provide an important signalling effect in regard to releasing any 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 presently served by current 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. The SBCI will be financed from the outset by a mix of finding from KfW, the European Investment Bank and the National Pensions Reserve Fund's directed portfolio for a period up to ten years. 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 European Investment Bank combined will more than match that amount and, therefore, the combination of the three initial sources of funding will provide a pool of over €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 European Investment Bank and KfW are finalised. This can only occur once the SBCI has been established as a company. In its initial phase, the 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.

We will work with the Eurpean Commission's Directorate General for Competition on this matter. At one level, the SBCI will operate in a countercyclical manner in seeking to compensate for any constraints in the provision of financing to enterprises, particularly SMEs. It will also operate with a broader development mandate which will enable it to channel investment towards key strategic sectors of the economy.
In the interests of ensuring adequate time for discussion, I will briefly outline the Bill. It has seven parts. Part 1 sets out the preliminary and general provisions, including the purposes of the Bill. It also provides that costs directly attributable to the SBCI will be liabilities of the company itself. Part 2 provides for the establishment of the strategic banking corporation of Ireland through the formation of a private company under the Companies Act which will be independent in carrying out its functions under this legislation. It further allows the SBCI to form subsidiaries. Part 2 also provides that the memorandum and articles of association of the SBCI will be consistent with the provisions of the legislation. Part 2 also sets out the main functions of the company, limits the board to nine members and mandates the NTMA to provide it with any business support services it requires.
Part 3 sets out the funding arrangements of the SBCI, determines the authorised share capital and provides for the initial issue of shares. The key points are that shares to the value of €10 million for the Minister will be funded from the NPRF, authorised share capital will be €250 million and never exceed €1 billion, and a loan from the NPRF can be converted to equity if necessary. It is not intended that all borrowings of the SBCI will need to be guaranteed by the State. The part further provides that the Minister may dispose of shares in the SBCI as he or she sees fit. It is not intended to use this provision, which is included for flexibility. The SBCI's outstanding borrowings at any particular time will be limited to €4 billion. Part 3 also provides for an amendment to section 54 of the Finance Act 1970 to allow the Minister to engage in normal banking transactions with the new company. This enabling provision is usual when creating a State entity which involves borrowing and funding from the Exchequer. The Minister will be empowered to direct the NPRF commission to provide credit to the SBCI and to provide funding to it in respect of the subscription of the Minister's shares in the company. The maximum amount of funding the SBCI can be given by the State will be €5 billion. Part 3 further allows the board of the SBCI to decide what dividends will be paid to the Minister. It also provides that any dividends received by the Minister shall be paid into the Exchequer.
Part 4 provides for the issuance of guarantees by the Minister. It gives the Minister the authority to guarantee any moneys borrowed by the SBCI up to a maximum of €4 billion. The details of any guarantee will be laid before the Oireachtas as soon as may be after it is given. Guarantees will only be used when specifically required to enable borrowings from external providers of loans by the SBCI.
Part 5 sets out how the company will be accountable to the public through the Comptroller and Auditor General and the Committee of Public Accounts. Part 6 provides that the Minister, the NTMA and the NTMA's employees and staff are not to be considered 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 is covered here. The provision ensures that the Minister and the NTMA can carry out their various other functions without their involvement in the SBCI constituting a block on their work. Part 6 also provides that certain provisions of the Companies Acts will not apply to the SBCI. The provisions in Part 6 of the Bill will ensure that the Minister's relationship with the SBCI will not prevent him or her carrying out any of his or her functions. They will further avoid redundant reporting requirements in the administration of the SBCI. Part 7 sets out a number of tax exemptions which will apply to the SBCI and any subsidiary wholly owned by it. It will be valid as long as the Minister for Finance remains the sole shareholder and, therefore, sole beneficiary of such tax exemptions.
A robust, dynamic and innovative indigenous 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. The proposed establishment of the SBCI builds on the measures and initiatives which have already been put in place by the Government to enhance SME access to finance and may be considered a milestone in our continued economic recovery. By ensuring the provision of improved credit 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.

3:05 pm

Photo of Darragh O'BrienDarragh O'Brien (Fianna Fail)
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Anything that goes some way toward improving the lot of the SME sector is welcome, but while the Bill is welcome, it is most inadequate. In the programme for Government, Fine Gael and the Labour Party promised a strategic investment bank. This is not a strategic investment bank. It is not a bank and the Minister is not applying for a retail licence. The Minister mentioned Chancellor Angela Merkel. This was in his discussions with her. Does the Bill represent the scraps from Chancellor Merkel's table given that she has not seen fit to follow through on the commitment given to the Minister for Finance and the former Tánaiste and Minister for Foreign Affairs and Trade? That commitment was heralded as a seismic shift in the context of the split between banking and sovereign debt and as a matter of crucial importance for Ireland, which is what it would have been. Is this being given by Germany because we are not getting the other deal? I note from the Minister's recent comments that he does not feel we will get that deal. Having said that and while I am not trying to pour cold water over the whole thing, there are valid questions to be asked and I welcome the fact that the Minister is here to present the Bill in person.

In the briefing note prepared by the Department of Finance and in the Minister's speech, reference was made to the potentially lower cost of funding. However, will the Minister insist on and will the SBCI set conditions for the retail banks to which they give money? I refer to loan terms and rates, the conditions applying to loans and the mark up for the banks. The money will be put into the SBCI from three different sources and lent on through our retail banks. Will we set conditions as to what the banks can do with the money and as to how much profit they can make? I note the comments from ISME and Chambers Ireland in that regard. While they have given the legislation a cautious welcome, there is concern that the banks will simply provide this funding to their blue chip customers.

We have an overall issue with debt and access to credit in the SME sector. The Minister's note on the SBCI refers to "more suitable terms and conditions". Will we know what they are at the appropriate time? I do not expect that to be set out on Second Stage, but how do we know that will be the position? Will there be lower costs for the SME sector? How will the Department and the SBCI itself track the money they give to Bank of Ireland or the AIB, for example, to establish what those banks are doing with it? Will they track who the money is being lent to and the rates and terms of loans? Will they track what clients and sectors are being lent to? All of us, including the Minister before he came into government, have shared a great frustration that the banks were set targets which they would not meet. There are question to be asked in this regard and we must ensure that the money, some of which is coming from the National Pensions Reserve Fund and some from KfW, which is fine, is lent for the purposes the Minister for Finance intends. Is there any point in just giving money on more favourable terms to blue chip companies which can access credit elsewhere?

If such a company is currently borrowing from Bank of Ireland, for example, but will now be able to avail of better rates from the same bank through this fund, will it be allowed to eat up large chunks of the funding?

I am not questioning in any shape or form the Minister's motives in bringing forward this legislation. We are all agreed on the need to give further support to small and medium-sized enterprises. That need is there because the banks have failed to fulfil their function in this regard. Time and again they have missed the targets on business lending set by this and the previous Government. My question then - I am certain it is valid, even if the Minister does not - is why we should have faith that they will do the right thing when it comes to this fund.

Will the Minister indicate whether it is his intention, either on a later Stage or after the legislation is passed, to introduce tighter regulation in regard to the operation of the strategic banking corporation of Ireland? What level of reporting will he receive from the bank? Will it be done on a quarterly basis, for instance, and will information on lending be sectoralised according to area of the economy, size of company and so on? Will there be scope for any of these moneys to be used to restructure existing SME debt in cases where profitable and viable businesses are being strangled by the terms of their existing loans? These are the questions we need answered before we can assess whether these proposals will work. The Minister may not have all the answers today, but I hope he will be able to address some of them. We all have genuine concerns as to whether we can trust the retail banks to lend this money into the sectors where it is needed.

The Minister mentioned that new market players will be able to access the fund. That is welcome. However, what is the situation in respect of banks like Ulster Bank which are actively downsizing in the Irish market? Will that particular bank be allowed to access these moneys while at the same time shutting down branches in this State and in Northern Ireland? Is there any intention to require banks accessing this funding to give a commitment to the Irish market into the future? I look forward to teasing out these issues on Second Stage and in due course by way of amendment. I give notice of my intention to bring forward amendments on Committee Stage.

3:15 pm

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I welcome the Minister and the Bill he is presenting to the House today. We have all been calling for initiatives to ensure more funding is put into the market more quickly, which is what this legislation seeks to do. The only criticism I have is that it would have been better to have enacted these provisions sooner.
The SBCI will essentially function as a wholesale bank, sourced from the Ireland Strategic Investment Fund, European Investment Bank, KfW and potentially other sources, charged with lending moneys to the retail banks, which will, in turn, lend to SMEs. Inability to access credit remains a problem in the Irish market. To give a small example, a man came to see me the other day who was looking to purchase a quad bicycle for his farm. More paperwork was needed for the €5,000 loan he was seeking than he was required to complete for a €200,000 loan he took out seven or eight years ago. That type of thing is not conducive to business. It is a minor example but indicative of what is happening.
I am not much concerned about which of our retail banks have access to the moneys that will be available from this fund, but I am concerned about how they will administer the funding. For example, will there be a ceiling on the margin they may charge per loan? Will there be any requirement regarding the differential between the interest rate charged by the SBCI to the retail banks and the rate they subsequently pass on to business customers? If a business falls into arrears or default, at what stage will the retail bank be told that it is not allowed to overcharge beyond a fixed figure? If the Minister does not have the answer today, we might discuss it further on Committee Stage. We all know of too many examples of banks overcharging while, on the other hand, they are never slow in telling customers to read the fine print. I do not know if such is possible, but I would like to see a ceiling put into the legislation whereby banks would not be permitted to engage in overcharging. Such a provision would give absolute certainty to businesses where they are seeking a loan over, say, ten years. In a context where the retail banks will be getting the benefit of a very low rate, my concern is that they will take the opportunity to do what they have done on too many occasions, namely, fail to act honourably where a business is experiencing a cash-flow problem or other difficulty. It should not be an option for the banks to use this fund to overcharge customers.
Following on from the point made by Senator O'Brien, 70% of jobs in this country are attached to an SME. I consider my own business, which has a full-time staff, to fit into the category of SME. The impression I am getting - it is a welcome one - is that this fund is mostly intended to assist smaller rather than larger SMEs. After all, the latter are capable of getting funding for themselves, while the situation can be much more difficult for smaller firms with one or two staff or whose owners are drawing only a small salary for themselves and perhaps one family member. Would it be possible - again, I do not expect the Minister to have the answer today - to define what is an SME for the purpose of this legislation? Is it a company with fewer than five staff, for example, or a firm with a turnover of less than €200,00? I do not have a fixed view on what the definition should be, but I would like to know whether including such a definition is feasible. If it is, it would be a way of targeting SMEs with smaller turnovers and fewer staff, that is, the businesses most in need of this type of support. Such a provision, if doable, would be a good day's work.
On assuming office the Minister for Finance took over not just a poisoned chalice but an unholy grail, but he has done a superb job in seeking to clean up the banking sector. The bedding in of the Irish Bank Resolution Corporation and National Asset Management Agency has helped us to get back in order, together with other policy directions he has taken. I am satisfied he is doing the right thing, too, in this case. The State does not need to go back into an ICC or ACC scenario, with the costly establishment of institutions and premises around the country. The retail sector is already there and will be given the opportunity to access these moneys. Having said that, I would like the controls associated with this initiative to be sharp controls. We must ensure there is no opportunity for chicanery - a word I often use in reference to the banks - in the operation of the fund. We do not need to go hiring people and establishing another banking structure. The pillar banks are there, as well as Ulster Bank and potentially other players who may enter the banking sector in the medium term. There is also the possibility of mergers in the future.
I welcome this legislation. We must ensure the right people get the opportunity to borrow at a low cost over a specified period. Such an arrangement will give certainty to everybody in business, whether theirs is a very small SME or a larger company.

I will leave it at that. If the Minister does not have the answer to these questions now, perhaps he will deal with them on Committee Stage.

3:25 pm

Photo of Sean BarrettSean Barrett (Independent)
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I welcome the Minister to the House. The deadline for submitting amendments was 1 p.m., so if some of the amendments I have submitted have been answered in the Minister's speech, it is because I did not know what was going to be in his speech.

What the Minister is doing is important. We know our banking system was not fit for purpose and that it had the faults Senator D'Arcy has just mentioned. When we look at how the loan book evolved from approximately 1998-2000 to the time the banks went to the Department of Finance to be bailed out, we see that one of their bigger faults was that they were obsessed with property, financial intermediation and personal lending. The loan books show that hardly any of the extra money went to either industry or agriculture.

Has the corporate culture of Irish banking changed? In addition to reducing the high cost base to which Senator D'Arcy referred, can we stop the banks using the Minister's money this time around to do a repeat performance of what they did the last time? I do not know how we can cure the banks' obsession with property, financial intermediation and personal lending. Do they know anything about small and medium enterprises? Have they divorced themselves so completely from small industry that they will not know it when it comes seeking the lending the Minister proposes in this Bill?

The Minister said in his speech that the Bill tries to iron out the cycles of mad lending in the Irish banking system, where there were huge rates of increase in the supply of credit for those areas I mentioned. This destroyed the environment in which small and medium enterprises try to operate. What counter-cyclical measures can be invoked or to what was the Minister referring in his speech? On the purpose of the Bill, the Minister seeks to address the compelling need to facilitate the availability of suitable credit in the economy of the State, and we commend that. However, do we need to avoid pro-cyclical lending policies? How can we restrain such policy, because it was undoubtedly a feature of what got us into so much trouble. Do we have investment appraisal expertise in the Department, which will supervise this new strategic bank, and in the banks, given they made such a shambles during the boom period when they went on a large investment spree? The expertise that can be brought in from KfW and the European Investment Bank will be important in that regard. On page 6 of his speech, the Minister mentioned the counter-cyclical manner in which the corporation will operate. I will be interested to hear what mechanism will be used to ensure this when the Minister is back for Committee Stage.

I note that the Comptroller and Auditor General will be involved and believe this is important. We must get to a culture of accountability and value for money and we must find out where mistakes were made and correct them. During his time in opposition, the Minister was Chairman of the Committee of Public Accounts. It is a pity that the expertise in the Office of the Comptroller and Auditor General is used after a disaster has happened and it will be good to get his involvement at the beginning. He will have a pretty good idea of where things can go wrong, because he will have examined many cases in the past where they did go wrong and seen what lessons should have been learned.

The last page of the Minister's speech deals with tax exemptions. Will these exemptions be allowed continue in the general reform of corporate taxation. I am against tax exemptions in principle, on the basis that a single, low rate of corporate tax across the board is better than building in more exemptions. The Minister also mentioned a steady and secure supply of credit. This means the corporation must act in a counter-cyclical kind of way. It must not have the faults of the banking system which we have already mentioned. It must avoid a property fixation. If any of this money ends up in the property sector, that will further restrict the development of small and medium enterprises. We spend too much money buying and selling houses and farms to and from each other.

Section 11 provides that the Minister shall be sole shareholder, but is there any scope for having other partners in this operation? The Bill provides under subsection 11(6)(b) that the Minister "shall without delay subscribe for those shares". Might the Minister also have the option to seek market funding, to try to create a market and persuade Irish banks to lose their property fixation and join him in this project? I welcome the fact the Minister will lay these documents before both Houses of the Oireachtas and commend him on that.

Do we have the expertise to do this? We certainly need expertise. The explanatory memorandum states: "We will seek to encourage effective competition in the provision of credit in the State." This is important and should dilute the impact of the pillar banks, but how will we ensure it happens? This is a question I would like an answer to during Committee Stage.

What the Minister is doing is important as our banking system is still not fit for purpose and is remarkably slow to learn lessons. In addition, it still has a remarkably high cost base. The executives of State-owned banks bailed out by the State insist on paying themselves multiples of what the Taoiseach earns. I hope this new body will not follow suit, because we are trying to get the Irish economy competitive again. The banks are the core of our problem, but we will try to address that in the inquiry into the banking system.

This Bill is a good response to the issue of the banks and I look forward to developing my points further on Committee Stage.

Photo of John GilroyJohn Gilroy (Labour)
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I welcome the Minister to the Chamber and welcome this Bill which will be a central plank in providing SMEs with access to funding. Senator D'Arcy said that one criticism of the Bill is that it is only now coming before us. It is a pity we did not have it a year or two ago, but the fact we had no money is probably the answer to that criticism.

It is worth reminding ourselves that 70% of people working in the Irish economy are employed in the SME sector and anything we can do to support the sector must be welcomed. SMEs face structural difficulties and problems in accessing finance that larger corporate companies do not face. Last year, after the Taoiseach announced this proposal in talks with Angela Merkel, it was decried by many and they described it as a second bailout. There was all sorts of nonsensical talk and the SBCI was greeted by some commentators and some Members here as a bad thing. I hope those who were negative at that time will reflect on what we are doing through this Bill and agree it is necessary and should be welcomed. However, we will not dwell on the past.

Senators Barrett and O'Brien have made most of the comments I would like to make, so I will not repeat them, but I have some other comments to make. The Minister said in his speech that the maximum amount of SBCI funding that can be given by the State is €5 billion. How and why did the Minister arrive at that particular figure? Senator Barrett has spoken a lot about the corporate banking culture.

I share all of his concerns about this matter.

I have a number of questions for the Minister. What mechanism will the SBCI put in place to ensure the retail banks lend to SMEs? Will it use a dual assessment structure to monitor how the banks lend money? If, in the context of a bank's own lending criteria, an SME is considered to be an unattractive risk, will it be automatically debarred from borrowing money under the scheme proposed in the Bill? Will there be two mechanisms in place to allow people to borrow money or will it be a single mechanism? How will the position be regulated in order to ensure the banks are actually lending? Is there a danger that this new structure will displace any of the financial products already available from the retail banks? Is there a risk that it might be perceived to be against a bank's interests to lend money under the SBCI scheme at a rate that is lower than that which applies to its own products? I accept that there may not be a risk in that regard and that there may be no concerns about this matter. However, if there is a risk, what mechanism will be available, either under the legislation or by means of regulations, to ensure the banks will lend the money as intended?

I will not repeat what previous speakers stated. The Bill is very welcome, but there are some concerns about what is proposed, particularly as the retail banks have not covered themselves in glory in the past seven or eight years. I was approached recently by several people who run their own small businesses and outlined how difficult it was for them to access credit from the retail banks. When representatives from the banks come before the Joint Committee on Finance, Public Expenditure and Reform, they state there is no problem at all, that their lending rates are fine and that they are meeting all of their targets. The Central Bank of Ireland appears to agree with them, yet the reality for certain customers seems to be at variance with this.

The Bill makes provision for a very welcome initiative that will give support to SMEs. Perhaps the Minister might outline his opinions on the points I have raised.

3:35 pm

Photo of Kathryn ReillyKathryn Reilly (Sinn Fein)
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I welcome the Minister. Sinn Féin welcomes the Bill, but we believe it could have been stronger and better designed. We are concerned about that fact that even though it has taken a great deal of time for us to reach this point, the Bill is being rushed through the Dáil and the Seanad prior to the summer recess. We are not happy about this. I am aware that the Dáil only discussed the first couple of amendments on Committee Stage before the guillotine was applied. We have an issue with this, particularly in view of the importance of the legislation and the intention behind it.

A number of other speakers have also raised concerns about the content of the Bill. Reference was made to the commitment in the programme for Government to the establishment of a strategic investment bank. We know that the SBCI will not be a bank. This is because banks require banking licences and the SBCI will not have one. The corporation will obtain money at low rates of interest from the EIB and the KfW and then lend it to the retail banks in the hope they will pass it on. This is something of a convoluted way of supplying credit to Irish businesses and there are fears about whether it will work. Sinn Féin is concerned about the lack of adequate safeguards in the context of ensuring the cheaper credit being made available will reach SMEs in the real economy. People seriously distrust the banks, rightly so. There should be stronger safeguards in place. Banks which do not pass on the cheaper credit in an equitable way should be punished in some fashion. We are informed that the SBCI will operate along the same lines as Germany's KfW. As has been stated, however, the Bill does not allow for direct lending by it into the real economy. The Bill is lacking in this regard.

The Bill allows for the guaranteeing of investments without Dáil approval. That is a bad way of doing business and a mechanism which would hold those involved more responsible should be put in place. The Bill focuses very much on the SME sector, which is both right and good, because the sector is the most important in the State in the context of providing employment. Prominent economists have speculated on the likely outcome of the unravelling of SMEs that are overburdened with debt. The Central Bank has set targets for the banks in the context of debt restructuring, but, unlike those relating to mortgage arrears, these are kept secret. These targets should be made public and banks which are not doing enough should perhaps be named and shamed.

I am a firm believer in stimulating the economy and in State-led investment. In that context, I welcome the steps being taken in the legislation. As stated, however, I am disappointed that more has not been done. There is a need for a strategic investment bank to lend directly into the real economy. I again welcome the Bill.

Photo of Hildegarde NaughtonHildegarde Naughton (Fine Gael)
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I welcome both the Minister and the legislation. We all have experience of dealing in our localities with small businesses which have been endured an extremely tough time in recent years as a result of the downturn in trade and the lack of credit available to facilitate refinancing and development. The new strategic investment fund which will make an initial amount of €500 million available for the SME sector is aimed particularly at small and medium enterprises and will be delivered through existing financial institutions, that is, the banks and other financial entities which qualify for participation. The SBCI is modelled on systems which operate in various other European countries and which have been shown to work successfully, particularly in Germany.
It is clear from the regulatory impact analysis that the proposals contained in the Bill constitute the most suitable vehicle for the delivery of credit to small and medium enterprises. The involvement of the German financial institution, KfW, in the scheme is the positive outcome of negotiations between the Taoiseach and the German Chancellor. The moneys it will provide, in addition to those from the European Investment Bank and the National Pensions Reserve Fund, will ensure the availability of low-cost funding to the SBCI for the next ten years. Fixing low rates for the next ten years will be of huge benefit to those SMEs in receipt of loans and also reduce the risk involved in seeking finance. The ability to lent these moneys, the inclusion of initial capital breaks and longer repayment periods than those currently available are all huge positives. The European Investment Bank has released a statement in which it warmly welcomes the establishment of the SBCI.
I wish to comment on a matter which was reported in last Friday's edition of The Irish Times. It appears that Opposition Members in the Dáil, including, I am surprised to say, Deputy Stephen S. Donnelly who knows more about these matters than any of the others quoted, roundly criticised the legislation in terms of the speed of its passage through the Dáil. The article to which I refer also contained an allegation regarding potential liabilities of €4 billion in State guarantees. Let us be clear about this matter. Since the Government came to office, the Opposition has been shouting for money we did not possess to be invested in various areas of the economy, including that to which the Bill relates. As a result of the excellent fiscal discipline displayed during the past three years, the Government has been able to devise a scheme which will lead to the investment of funds which are sorely needed in the SME sector. I will say this clearly in order that there will be no misunderstanding: the banks and other financial institutions which act as on-lenders have a responsibility to assess the risk in lending the moneys being made available. It is they, not the State, that will carry the risk. After Deputy Stephen S. Donnelly's reported criticism last week, he obviously had a change of heart and produced what can only be described as a litany of praise for the actions of the Government in this matter in an article he wrote for the Sunday Independent. The article did not contain one word about the speed with which the legislation had been passed in the Dáil. However, it did contain an acknowledgement that "Critically, these on-lenders will bear the risk of the loans to the SMEs, minimising the risk to the public money".
I very much welcome the legislation, particularly the contribution it will make to the retention and creation of jobs in the domestic economy. I look forward to its speedy enactment and the provision of much-needed credit for the SME sector.

Photo of Feargal QuinnFeargal Quinn (Independent)
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I welcome the Minister and the Bill. I thank the Minister for facilitating a briefing session with his officials this morning. I found the session extremely useful in that we had the opportunity to put some of the queries we had about the legislation to the officials.

One of the queries I have about the Bill relates to whether it targets start-ups. I accept that it is targeting successful businesses. Any lender will consider the position of an existing and successful business and lend money to it. What we need to do, however, is encourage start-ups. I am not sure how we will do this, but I would like to rest assured that we have the means at our disposal to measure what is required.

SMEs claim that they were not made aware of the schemes introduced on previous occasions. To what extent can we make them aware of the schemes available, particularly that being established under the Bill? Would it be possible to provide a simple online facility by which they might check what is happening? I am sure there are plans to provide such a facility and it would be a wise move.

Another matter which arises relates to the need for transparency. Private banks received money in the past, but was it always passed on?

How do we ensure this time that the money will be passed on to those who need it? In this case, I am arguing strongly for start-ups rather that existing businesses because they are already successfully getting money comparatively easy. Will a deadline in respect of the time within which a decision must be made be imposed or will people be left hanging on endlessly awaiting a decision, which appears to be one of the difficulties in this area? Some years ago, I was involved in setting up a bank which did not succeed. However, one of our ambitions at that time was to ensure that when a person came into the supermarket and applied for a loan he or she would know before reaching the check-out whether the loan had been approved. This was an attempt to copy what was being successfully done in America. However, it did not succeed.

Will this money be available for use by credit unions or is that out of the question? I note this was not mentioned in the Minister's speech. Perhaps there is no room for the credit unions to get involved in this area. Perhaps also they do not need this money. In regard to credit, I believe we can do even more with AVCs. I was very happy when the Minister made the decision to allow people access to some of their pensions and additional voluntary contributions. This is a way of releasing cash into the economy which, in turn, helps people and businesses to survive. Anecdotally, it appears to have been a massive success, in respect of which I congratulate the Minister. Could consideration be given to extending this initiative? I suggest this on the basis of Denmark having allowed people access to their pensions and thereby boosted its GDP by 1% to 2%. Imagine the effect if we could do that here. I would welcome if the Minister could consider this. I note there was also no mention by the Minister of crowd funding. Perhaps it does not arise in this context. I am an enthusiast for crowd funding. There are some great stories of business start-ups on that basis.

Setting up a business in Ireland is difficult in terms of the amount of time and effort involved in visiting the many places required in this regard. In New Zealand, this can be done all in one day via a website. I would like to encourage this practice. I believe it would be a step in the right direction. The aim of what is proposed should be to encourage start-ups rather than assist existing successful businesses. I believe what is proposed will be successful if focused in that area.

3:45 pm

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I thank Senators for their thoughtful contributions and general support for the Bill. The establishment of the strategic banking corporation of Ireland by increasing the availability of longer-term flexible debt finance which is appropriately priced will provide SMEs with access to the type of patient intelligent capital that will increase productive investment, encourage growth and generate additional employment opportunities. In this context, the company will be supportive of domestically-focused and export-oriented SMEs. It is intended that the company will have a role in tackling supply-side issues facing SMEs' access to finance and attempt to tackle demand-side issues. SMEs will now be reassured that their needs are being catered for and that the SBCI will be in place to cover their needs into the future. This should have the effect of releasing pent-up demand. The provision of loans that are designed to meet the customised needs of SMEs should also incentivise demand and build confidence in the SME sector, thereby encouraging investment in growth and employment.

Commentators have pointed out that liquidity in the Irish SME credit market is in general not a particular issue. However, this assertion extends only as far as the credit product types that incumbents are willing to offer. Longer-term debt finance is relatively hard to come by in the Irish SME credit market and the SBCI will be addressing this shortfall in liquidity or absence of particular product types.

The strategic banking corporation of Ireland is being established as a private company but will operate with a strong public policy mandate in terms of providing additional finance to the SME sector, stimulating economic activity and contributing to the economic well-being of the State. As a wholesale lender, providing funds to on-lending institutions, the SBCI will enhance the supply of funding by using existing channels and encouraging new entrants into the market. New entrants are not restricted to foreign banks coming in to compete with the existing banks but could be other traditional providers of credit who would expand their operations or find entirely new ways of delivering credit in the Irish market.

The strategic banking corporation of Ireland will seek to distribute its funding across multiple on-lenders in an effort to both diversify its portfolio of front-line lenders and also to enhance competition in the market place. Its relationship with on-lenders will be vital to its effectiveness. Consequently, a number of requirements will be imposed upon the on-lenders to ensure that they use funding for SME financing and to fulfil the purposes of the legislation. These conditions will ensure that the actual benefits of the funding arrangements provided by the SBCI are clearly passed on to the ultimate end user, namely, the SMEs. The strategic banking corporation will demand from existing lenders and other new entrants that all funding drawn down is either used as intended or returned to the SBCI. The reporting requirements set by funders of the SBCI in conjunction with the nature of the lending agreements with on-lenders will also provide the SBCI and the Department of Finance with sufficient data and information to enable them to analyse and explore the effectiveness of the SBCI in terms of financing SMEs. This information will be utilised to inform and shape ongoing product development to ensure that customised financing needs of SMEs continue to be met by the SBCI.

A key function of the SBCI is to finance projects which promote economic development. It is also possible for the SBCI to provide, via on-lending institutions, financing to social and environmental projects that enhance economic development, provided they present the on-lender with reasonable repayment prospects. At the same time, it is important to recognise that the SBCI, in conjunction with NewERA, and the soon to be established ISIF, will collectively provide a more robust infrastructure for financing productive investment in the real economy, thereby contributing to more sustainable long-term economic and employment growth. Achieving this type of economic and employment growth will provide not only economic but also social and environmental benefits to the country and its citizens.

To establish a company which can enter into agreements with the international providers of finance and the on-lenders in the Irish SME market, we first need enabling legislation. Waiting until the autumn semester to commence or complete that legislation would effectively mean that the work that needs to be done in establishing the company could not proceed until September at the earliest and the sequential actions which follow that, such as establishment of a board, hiring of staff, signing of agreements with the international lenders, establishing internal operations, signing agreements with the on-lenders and awareness raising initiatives, could not commence until October or thereabouts. It was decided, therefore, to expedite this enabling legislation so that additional and enhanced lending to SMEs would be facilitated in this year and without delay.

The SBCI will be audited by the Comptroller and Auditor General and will also be accountable to the Committee of Public Accounts on the effectiveness of its operations. It will later be included as a new body to be covered by the new freedom of information regime. I am working with my colleague, the Minister for Public Expenditure and Reform, on this. I consider that these provisions are sufficiently broad to ensure effective public oversight of its ongoing operations.

Under the legislation, the Minister of Finance is to be the sole shareholder in the SBCI. It is not our intention that the shares will be sold or disposed of any time. The SBCI will be a key element in the future financing of the real economy and contributes to our stated ambition of creating 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.

State-sponsored development or promotional institutions are an integral part of the financial architecture in other countries such as Germany, Canada, France and Spain and it is recognised that they will continue to play a key role in the financing of many economies in years to come. My Department has contacted a number of similar institutions throughout Europe and exchanged information with an OECD research team on the subject of development institution models. Using this information on the models used in other jurisdictions and the products available elsewhere, the SBCI will be customised and tailored to the Irish market.

It is important that SMEs in Ireland have access to similar financial products that are available to comparative enterprises in competitor states otherwise they will be operating at a serious competitive disadvantage. With its concentrated focus on improving the supply and availability of financing to the SME sector, the SBCI ensures that Ireland will have in place a stable State-sponsored financial institution capable of supporting long-term investment in that sector.

An interdepartmental policy group known as the State Bodies Group chaired by my Department will play a role in ensuring that the SBCI can be linked into other Government initiatives aimed at improving access to finance in the economy. Many of the State bodies involved have been examining the effectiveness of their individual schemes. It is intended that where a link between the SBCI and such schemes is possible and would be beneficial or create synergies, the Departments and agencies involved would work with the SBCI. Microfinance Ireland has met with the SBCI project already with this in mind and will liaise further on possible link ups.

I do not intend for the SBCI to receive blanket exemptions from Central Bank regulation. The company will not conduct banking business at the start of its operations. It can bring about benefits to the economy by being established as outlined and can expand its operations to other areas in the months and years to come. The legislation is flexible and facilitates this anticipated growth. Should the company commence or seek to commence any activities which are ordinarily regulated by the Central Bank of Ireland, we intend for the SBCI to be treated no differently from any other company and it would, therefore, need to engage fully with the relevant authorities before commencing such operations.

A robust, dynamic and innovative indigenous SME sector is key to ensuring sustained economic recovery and employment growth. The establishment of the SBCI builds on the measures and initiatives that have already been put in place by this Government to enhance SME access to finance and can be considered to be a major milestone in our continued economic recovery. As a State-sponsored private company, the SBCI is mandated to provide additional credit that is tailored to the business needs of SMEs. In carrying out its core functions, the SBCI will make an important contribution to stimulating economic activity, enhancing competitiveness and generating employment opportunities for people across the State.

Some specific queries were raised by Senators. Senator Quinn asked whether it would help start ups and the answer is "Yes". It may help start ups or credit lines may be used to expand existing companies. An online tool has been launched and collects in one location all Government supports for SMEs. It can be accessed on the Department of Finance website. It is also being sponsored by the local enterprise offices. One can go to a local enterprise office, access this online and all the assistance available to SMEs will be there on a very user-friendly way. It has already had several thousand hits and has been of benefit to SMEs.

Crowd funding may also be supported. The SBCI will examine that when it is up and running. The Credit Review Office and the lessons from KfW will inform the setting of deadlines for decisions regarding SMEs. Credit unions are not excluded and can be considered for funding at a later time. If the SBCI is happy, it can work with them and the Registrar of Credit Unions concurs. That will be kept under review but it is not envisaged at the initial start-up phase.

In response to Senator Barrett, the Department will try to flexible in addressing amendments submitted to the Bills Office even if they come in after the deadline. We will stop the clock or do some of those initiatives that develop from Brussels. We will get the Senator's amendments in if we can. KfW and the European Investment Bank do not want their funding being used for property development so it is not envisaged that it will be used for this purpose.

In response to Senator Michael D'Arcy, rates between the SBCI and the on-lenders will be passed on to the SMEs. Under DG Competition rules and the SBCI's intention, banks or on-lenders will contractually be obliged to pass on all of the benefits of funding from the SBCI to the end customer. An SME is defined in the legislation. We will aim for small and medium-sized companies but the SBCI will help all SMEs. A total of 90% of loans in Ireland are for less than €10,000.

In response to Senator Gilroy, €5 billion from the State is a cap, not a target. It is made up of €1 billion maximum from equity and €4 billion maximum from lending. It is not intended that the State would fund all of that but, again, flexibility is built in. We looked at comparable investment funds across Europe and strategic investment banks. In proportion to the GDP of certain countries, €4 billion to €5 billion would be the appropriate comparable balance sheet cap on a strategic investment bank here.

In respect of the actual mechanisms, the money will come from KfW and the European Investment Bank in the first instance but also from our strategic investment fund. Obviously, interest rates fluctuate but at present, it would be coming at a margin of about 25 basis points so the interest rate is very low, which is one of the major advantages of getting money from KfW. The second advantage is that the typical SME going into Bank of Ireland or AIB will apply for working capital which is probably renewed annually. Alternatively, the SME may have to reapply at the end of the year. Again, it can get term loan arrangements but it might be two or three years. It is very hard for an SME in Ireland to get money from anywhere between five and ten years yet if one is carrying out a strategic expansion of a company, that is what one needs. One of the big flaws in Ireland is that when SMEs reach a certain size, they either get stuck there or if they are in the modern economy involving any of the modern technologies, they tend to be sold on. Quite frequently, one finds that a very successful SME in Ireland reaches a certain point of development and a US multinational buys it. Sometimes, it transfers its intellectual assets offshore and we lose it to the economy. We will be very conscious of that. The advantages are not just the availability of cheap money but also the fact that there would be a range of products tailored for the start up and expansion of the SME sector and that in the Irish context, it would have novel lending terms of between five and ten years.

As well as that, KfW, upon whose experience and advice we rely quite a lot, has interest rate holidays. If one decides that one will expand one's company, quite clearly, one's business plan would not say that the company would be profitable until perhaps year three or four. If one can gear the credit product so that one can be carried for the first two and a half or three years at which point the interest rate repayments come in at a slightly higher level when the company is profitable, one can see the advantage of that and the encouragement that gives to a company to expand.

Of course, we all have the interest that companies would expand so there is more growth in the economy and, consequently, more jobs created. That is the range of advantages.

The legislation provides that the fund may lend directly and it does not exclude this. Whereas the initial model will be on lending through the commercial banks or through new lenders, the idea of lending directly is not excluded, and I would see it growing into that.

I believe this is a very significant initiative and I am delighted it has received such support here today. I believe people will look back on this in 20 years time and see it as a landmark decision. This will be like the founding of the IDA or one of the successful State agencies and it will be seen as one of the big initiatives that grew the economy. We are very grateful to our colleagues in the European Investment Bank, to the German authorities through KfW and to our own Ireland Strategic Investment Fund for getting involved in this. I know there are many other questions of detail that Senators would like to get into but we can do that on Committee Stage and Report Stage. Generally, I recommend the Bill very strongly and I hope it will be as successful as I believe it will be.

Question put and agreed to.

Committee Stage ordered for Wednesday, 16 July 2014.