Wednesday, April 29, 2009

Is Aer Lingus doomed or just chronically delusional?

AT one stage in Ireland, Aer Lingus, telecom company Éircom and the Catholic Church were considered to be of ‘systemic importance’.

But nowadays the importance of each is not as systemic and the record of Aer Lingus and Éircom, as public companies, has been a disaster as far as meeting expectations are concerned! The mainstream status of the Catholic Church has been hobbled by a plague of clerical paedophilia stretching back through living memory which were responded to wholly inadequately at the time.

If your business is in the process of losing over €107 million how wisely would you spend €5.8 million? Colm Barrington was appointed chairman of Aer Lingus last October. When Ryanair launched a bid for Aer Lingus last December Barrington spent this amount defending the bid. He wrote to Aer Lingus shareholder on 22 December 2008 urging them to reject the Ryanair offer – which was based on a cash offer of €1.40 per share for the 25% stake owned by the Irish Government. This valued Aer Lingus at €748 million as recently as last December.

Barrington’s letter stated:

· That Aer Lingus (on 22 Dec) is and will be a profitable business.

· Aer Lingus has (22 Dec) unmatched financial strength - net cash of €803 million

· Aer Lingus has a clear strategy for profitable growth

· That the board of Aer Lingus has delivered on its promises and has a vibrant independent future

Less than 80 days later, on 11 March 2009, Aer Lingus published its 2008 full-year results. These revealed a loss of €107.8 million and net cash of €653.9 million. But this is after burning €340 million last year.
The Government rejected the Ryanair offer in January. The shares in Aer Lingus currently trade at €0.59 and its market capitalisation is €315 million, equivalent to 97% of the 2008 payroll of €334 million. The €635.9 million cash that Aer Lingus claims is clearly not unencumbered in the view of the market makers and the cash drain
What value was obtained for the tissue of fantasy that the €5.8 million spent on defending this bid when the ultimate decision was essentially based on politics?

Ryanair also made an offer for Aer Lingus in November 2006, shortly after the Aer Lingus IPO based on a price per share of €2.80 but this was rules out by the European Commission on grounds that it would create a near-monopoly. Aer Lingus spent close to €25 million defending this unsolicited offer, arguing in 2006 that it has “excellent prospects as an independent company; a compelling customer proposition which competes successfully with Ryanair and a clear strategy to grow profitably with a 15% per annum return on capital”.

Aer Lingus has had a patchy history. Turnover in 2008 of €1.35 billion is similar to turnover of €1.32 billion in 2001, although the business mix is different. The airline flew 6.3 million passengers in 2001 and 10 million in 2008 having added to its aircraft capacity.
An IPO in September 2006 yielded €400 million and a further €104 million to augment a pension fund. But losses of almost €70 million were incurred in 2006 and when the losses of 2008 are taken into account, Aer Lingus has made a cumulative loss of €72 million since the IPO.

Ryanair claims that Aer Lingus is condemned to a future constrained by losses, sub-optimum scale, regional airline and declining traffic with a high cost base. Aer Lingus speak of “exceptionally challenging trading conditions, falling consumer demand and a weakening outlook for the dollar and pound sterling”.

Aer Lingus has a labour force of over 6,800 in 2001. It spent in the region of €300 million bringing this number down to fewer than 4,000 and is to spend a further €52 million from April 2009 on further streamlining. This had the effect of increasing the staff-passenger ratio from 923 in 2001 to almost 2,400 in 2007.

While job numbers were culled directors’ emoluments were not. Fees paid to non-executive directors, who are obliged to attend a handful of meetings, were increased from €18,000 to €45,000 in 2007. The remuneration package of Dermot Mannion, chief executive of Aer Lingus, since August 2005, increased from €530,000 to €1,115,000 in 2007 but was pared to €652,000 last year . His predecessor at Aer Lingus and current chief executive of British Airways, Willie Walsh, earned a comparable package in for running an airline with a turnover of £7.5 billion and profits of £694 million, after tax.

One of the consequences of the job cull is that the 25% shareholder, the Irish Government, is collecting €10 million less in social insurance and pro-rata less income taxes.

Ryanair has the ambition to become one of the Big-4 European airlines. The rate of airline closure and consolidation in the European airline industry has been accelerating. Air France / KLM has taken a 25% stake in Alitalia and the Lithuanian airline FlyLAL is bankrupt. Ryanair’s market capitalisation is currently €4.88 billion – comparable to Lufthansa and Delta Airlines but significantly higher than British Airways. It returned a Q3 (31 December 2008) loss of €106 million attributable to higher fuel costs in 2008. Ryanair carries more passengers in a single month than Aer Lingus do in a year.

The former chairman of Aer Lingus, John Sharman left this position last October. The guiding hand and wisdom of Seán FitzPatrick disappeared last December when it was disclosed that he concealed personal loan transactions at Anglo Irish Bank, which he founded, from its shareholders. Mannion left more recently. A reformed management team has been announced whose mission has been formed, whose role is to do what the 2006 defence document highlighted – to deliver value!

Tuesday, April 28, 2009

Irish Life and Permanent board: should they be endorsed for anther year of brilliant stewardship?

It is outrageous and unconscionable that the board of a bank that has presided over appalling performance that has squandered shareholder wealth and mugged the taxpayers of Ireland for critical support to sustain the business, should even consider seeking a renewed manadate. But that is precisely what is to happen at Irish Life & Permanent Plc.

99% of the 135,484 shareholders in Irish Life & Permanent Plc (IL&P) are holders of 5,000, or fewer, ordinary shares but they only control 21% of the total equity. All shareholders will have an opportunity to have their voice heard at their version of Dance Hall Q's and Hucklebuck Shoes, also known as the AGM, on 15th May at the RDS and voice their pained reaction to:

  • An 86% collapse in share price

  • Abandoned dividends

  • The rogue deposit in Anglo Irish Bank after the Government bank guarantee covering deposits, senior unsecured debt and asset-covered securities was announced

  • Losses of €122 million arising from transactions with Lehman Brothers and an Icelandic bank

  • Customers unable to obtain personal or business credit

A share price of €11.89 meant that the value of IL&P at the start of 2008 was €3.28 billion. A share price of €1.60 at the end of 2008 meant the group was worth €443 million, a drop of over 86%. The corresponding drop in share value at Bank of Ireland and AIB in 2008 was greater. The appetite for shares in Irish financial institutions is severely impaired by the ambiguity connected to their extravagant property loans.

The calamitous drop in wealth and absence of income is devastating for so many but the implosion of pension funds is crucifying a huge number of pensioners whose providence was meant to equip them to be wholly independent members of what is now referred to as the coping class. But it was the €7.3 billion deposit in Anglo Irish Bank at the end of September 2008 by Irish Life Assurance Plc, apparently without the sanction of the board of IL&P, that has fatally destroyed the reputation of this group, which was once hailed as an emblem of providence and prudence. They must have all been fast asleep in their showband bus after a late night gig in Claremorris and the roadies decided it was better not to disturb them!

This AGM is to take place without any explanation of this transaction and it defies credibility that the existing board members, with one exception, are seeking election on a platform of astute, unrelentless, brilliant but light-touch, vicarious stewardship. Wow!

Many are curious as to how a modest-sized institution, which IL&P is, could be in a position to invest such an enormous sum outside its business. The core capital of Irish Life & Permanent is of the order of €4 billion. Could this have been compromised by this transaction?

Cash balances at 31 December 2007 were €253 million but dropped to €200 million at the end of 2008. IL&P was more depndent on debt funding in 2008 than previously. It had to raise €1 billion through an internal transaction with Irish Life Assurance to support its own bank in the middle of 2008. Irish Life Investment Managers that none of its clients assets were utilised in the Anglo Irish transaction. How could the board not have been made aware of what was going on by the chief risk officer both in the context of scale and context?

If IL&P did not have access to cash resources of €7.3 billion was cash provided through another Irish bank and, if so, which one?

If the transaction did not involve cash changing hands but was based on some form of IOU, does this introduce a fraudulent consideration with a possible criminal case to be answered?

Are the incumbent board members motivated by narcissism? Perhaps the prospect of sharing close to €1 million in fees to attend 9 meetings cannot be disregarded. But a dispassionate observer might opine that this particular showband ought to have performed The Hucklebuck for the last time and that an encore was unnecessary, given that the curtain hem of credibility is already dropping close to floor level.

One of those seeking the trust of the shareholders is former Financial Regulator, Liam O'Reilly one of whose other sinecures is chairman of the Chartered Accountants Regulatory Board. The bean counters are investigating the role of former finance director, Peter Fitzpatrick, in the Anglo Irish Bank transaction. Will we see the cronnies tripping each other up?

There are occasions when the reputation of an entity is so compromised that the prospects of redeeming it without a change of personnel is even less promising than the prospects of Leitrim winning the Sam Maguire Cup. I don't even think that if Gillian were to don a Tina Turner wig and belt out a rendering of Simply the Best would change the mood of angry shareholders. Her eforts, I’m afraid, would be in vain, if the institutional cronies fail to hunt in a pack.

Sunday, April 26, 2009

The Uninspiring Leadership of Peter McLoone

PETER McLOONE is chairman of the public sector committee of ICTU. He is general secretary of the trade union IMPACT. The Government appointed him chairman of An Foras Áiseanna Sathair, otherwise known as FÁS, where he has oversight of a budget that in 2009 is €1,080,687,000. This money represents an increase in funding of €912,500,000 since McLoone was appointed Chairman of FÁS in 2005. The State provides 99% of FÁS funding, a portion of which finds its way to ICTU and its vested-interest counterpart IBEC. McLoone would have presided over much of the Molloy-Craig controversial era of ‘entitlement’ at FÁS and the expenditure of tens of millions of € that did not comply with standard corporate governance oversight and was subject to a review by the Public Accounts Committee last year. Rody Molloy was director-general until details of his stewardship became publicly know. Craig was an apparatchik who has returned to work following an absence while an investigation concerning him was under way.

Both Molloy and Craig were cited for the extravagance of their expense accounts, which in Craig’s case surpassed €400,000 over an 8-year period. Molloy had a penchant for extensive first-class air travel, usually to exotic, sunny, pleasant destinations that provided very high levels of personal service at very significant cost to the State. When Molloy’s wife accompanied him they opted for slum-class air travel. But McLoone, with the innocence of a 3-month old infant sleeping in its Moses basket, was ignorant of all accusations of malfeasance in the agency.

McLoone is a citizen of a country where 372,800 sign on the Live Register reflecting an unemployment rate of 11% and McLoone forecast that unemployment could reach 580,000 by year-end. He is a citizen of a country that remunerates 370,027 public sector employees, including 90,508 pensioners.

The living standards and job security of the 1,250,000 that comprise the remainder of the labour force are under constant and grave threat. Those aspects of the economy that offer limited, but low-paid, employment prospects are in selling second-hand goods, money lending, fruit and vegetable gardening, door-to-door selling and distribution, green energy and fast food, according to the FÁS survey of the Irish labour market published in March 2009.

McLoone, like the rest of us, is a citizen of a country whose Government intends to spend €63.9 billion to be funded by tax revenue of €34 billion. The gross pay element of government expenditure is 35%, €22,365,000,000 or an average overall cost just north of €61,000. The capacity of the Government to fund this level of expenditure is wholly uncertain and circumstances are likely to seriously worsen. Oireachtas members have also thrown a gauntlet by refusing to immediately abandon long-service increments and pension while serving in public office - the foot soldiers of a government that presided over years of appalling management of public finances.

Last week McLoone spoke at the annual general meeting of the Public Service Executive Union and stated that the national partnership process is fundamentally dependent on existing pay, pension and job levels being guaranteed – as though these are immutable entitlements. McLoone promises union conflict in a society that is going broke and the spirit of many is crestfallen and desolate. This man has been at the centre of economic and social policy development for a long time and all he can inspire his members with in this time of crisis is the threat of chaos.

Professor Paul Krugman, the distinguished American economist, in a recent article about the Irish economy 'Erin Go Broke' published in The New York Times, stated the recovery, when it happens, will be based on ‘export-led growth’. One of advantages that Ireland could cite as an advantage was its agile, can-do labour force and there are many illustrations of this among the largely non-unionised private sector workforce.

One of the few multinationals that is unionised in Ireland is the Lufthansa Technik Airmotive plant at Rathcoole. It, like SR Technics in Dublin is in the aircraft engine maintenance business. It has been one of the few major businesses in Ireland with significant current investment plans. That is until the zombie unions have virtually caused the doors of the business to be slammed shut for good. Turkeys voting for Christmas!

This idiocy is only surpassed by the award of tens of thousands of € by an Employment Appeals Tribunal to employees of Munster Carpets last December in a dismissal case where all sides acknowledged that those concerned routinely slept on the job during working hours!

This raises some basic questions. The Government is, at last, being forced to show form in the management of public finances after years of profligacy. Change is the order of the day.

Is it wise for the Government to retain the services of a chairman in a State funded entity who is as blind to malpractice inside that agency as McLoone proved to be? Secondly, is the partnership process capable of igniting economic recovery when the vested interests that participate in it demonstrate the agility and imagination of an elephant suffering from trapped wind?

If Mr McLoone can offer society nothing more inspiring than chaos and hyperbole perhaps it is time for his curtain call.

Saturday, April 25, 2009

Poor John! Methinks he doth protest too much.

Former Minister of State, John McGuinness TD, following his departure from the wood-panelled office in Kildare St, has found his voice, even if it is somewhat scattered in its direction. He describes the discontent in the Fianna Fail parliamentary party, his perception of the shortcomings of his boss, Tanaiste Mary Coughlan TD and the absence of enterprise among those who served him faithfully, diligently and selflessly in the finest tradition of the public sector.

He has discovered a 'disconnect' between the paliamentary party and the leadership and considers that his former boss and her style of management not the best, in contrast to his own, no doubt. Poor John, an undiscovered jewel in the crown of greatness! I listened to a tabloid journalist on RTE radio describe John as having a 'high profile' but I was unclear as to the foundations of this, or upon what pantheon it was built. It has been said by many in a position to make an informed judgement that the footprint left by John's slippers across the universe, when he was a minister, were disappointing and not sufficiently enduring to mark this man out as one of the iconic economic architects of the State; a personality whose name is unlikely to become embedded as a trophy intellect in the economic history books of the future.

But,of course, he might choose to illuminate the nation's thinking, through his own fluent eloquence, as to what aspects of his contribution the nation should especially treasure, now that he as been deprived of half-car status.

John naturally feels an inevitable sense of disappointment but can the depths of this compare to the crushing disappointment and outrage of Bev Flynn whose ambition to great office has been thwarted by her younger pretender and most impressive constituency colleague, Dara Calleary? It doesn't take the comments of a tabloid journalist to realise that Dara is much admired. The unsolicited and spontaneous comments of his county men and women speak volumes in this regard. He beat the socks of Bev in the last election and the Taoiseach had to recognise this and establish a vanguard to compete against the Kenny-O'Mahony-Ring triumvirate next time out.

John romped into this Dail at the top of the poll in the 2007 general election and ensured that FF won 3 seats in Carlow Kilkenny. If he hasn't made his mark outside Kilkenny, he certainly has in Kilkenny! Methinks the man doth protest too much! The media will play with the sense of rejection that this man feels, like a poodle when its suits them. But he needs to sets his sights on higher objectives than merely being a self-pitying moron. Poor John!

Thursday, April 23, 2009

Dublin Gears Up for Euro Election on June 5th

It is 20 years since Dublin voters first directly elected MEP's. There have been 6 Euro elections since then and slightly more than 2 million valid votes to elect candidates to 24 seats - 4 for each election. Fianna Fail have won 27% and Fine Gael have won 25% of these 2 million votes. Fianna Fail and Fine Gael have each won 7 of the 24 seats. Labour also won 7, if the seat won by Proinsias de Rossa as a Workers Party candidate in 1989 is included. The Green Party won two and Sinn Fein won one.

The next Euro election will take place on June 5th. The Dublin constituency has grown by almost 33% since 1979 and its 820,000 voters comprise a very ethnically diverse population.

This election will be different becuase the Dublin Euro constituency has been made a 3-seater, which means that the quota will be higher, possibly as high as 105,500 votes.

The current cohort representing Dublin are:
  • Gay Mitchell, Fine Gael
  • Eoin Ryan, Fianna Fáil
  • Proinsias de Rossa, Labour
  • Mary Lou McDonald, Sinn Féin

Eight candidates have been declared so far:

  • Eoin Ryan and Eibhlin Byrne (Lord Mayor of Dublin), Fianna Fáil
  • Gay Mitchell, Fine Gael
  • Proinsias de Rossa
  • Déirdre de Búrca, The Green Party
  • Mary Lou McDonald, Sinn Féin
  • Caroline Simons, Libertas

Twelve candidates contested this election in 2004. The election will be based on the 2006 Census of Population revealed that Dublin had a population of 1,187,186, an increase of 5.7% over 2002.

2004 Election

The total poll was 435,136 of which there were 13,239 spoilt votes leaving a valid poll of 421,897 valid votes. The quota was 84,380.

Mitchell was elected on the first count with 90,749 votes or 1.08 of the quota.

Ryan was elected on the fifth count with 61,681 votes or 0.73 of a quota. But the second FF candidate meant that the party’s total vote in the election was 97,950 votes, or 116.1% of a quota.

De Rossa was elected on the 6th count with 54,344 votes, or 0.64% of a quota. But he had a running mate who brought the total vote of The Labour Party to 95,051, or 112.6% of a quota.

McDonald was the sole Sinn Féin candidate and polled 60,395 votes, or 14.3% of a quota.

2009 Election

The revision of the constituency to e 3-seater means that the quota rise to 25% of the valid poll and if the turnout is similar to the last Euro election that will translate into approximately 105,500 votes. The turnout is likely to be about 85% of the number that voted in the last general election. How will this impact the parties?

Fianna Fáil

Despite being hammered in the opinion polls and the appalling state of the economy, FF would need a drop of catastrophic proportions for Eoin Ryan to lose. They won 196,000 votes in Dublin in the 2007 general election.

Their challenge is to win an extra 7,500 votes above the number won in 2004 from a cohort of voters who have supported the Party before.

FF has 19 Dáil deputies in the Dublin Euro constituency. 90% of these made quota in the general election and FF has at least one TD in each of the 11 constituencies. The prospects of Eoin Ryan being returned to Europe are strong notwithstanding opinion poll trends.

Fine Gael

Mitchell won 90,749 votes in 2004 and the party won a total of 91,891 votes in the 11 Dublin constituencies in 2007. But FG has no representation in 3 Dáil constituencies and just 7 of its 10 Dublin deputies made quota in 2007, an election of revival for the party.

Fine Gael have been politically castrated in Dublin since the early 1980's. That was the era of pro-life referendums, divorce referendums and the beginning of Ireland becoming a more liberal, luralist society. But a rump of Fine Gael found it difficult to abandon its posture as pussy cat to the Archbishop of Dublin. The consequence of this is that Fine Gael have never broken 91,000 votes in Dublin so the 15,000 extra votes needed this time must come from voters who have never supported Fine Gael before. Are there enough of these? Probably by the end of the count

Given more favourable opinion poll ratings, a realistic challenge for FG would be to win 100,000 votes in Dublin in the Euro election. That would signal a basis of recovery in the capital in the run up to the next general election.

The Labour Party

If zombie trade unions, such as those on the brink of closing Lufthansa Technik at Rathcoole, the only business with serious investment plans in Ireland today, do not torpedo the advances made in the opinion polls, Labour should win a Euro seat in Dublin. Its total vote in 2004 was a very respectable 95,051 and in the 2007 general election Labour won 70,681 votes in Dublin – which means that it needs to win 35,000 more votes to make quota in the Euro election. deRossa polled 54,344 votes in the 2004 Euro election and it was the 40,707 votes of his running mate, Bacik, which secured his seat on the 6th count. But this candidate will be 69 years of age when this election takes place and I suspect his profile and impact may not be as strong across Dublin to successfully fight this campaign as a loner, as he would like to believe. Ronald Reagan won the US presidency at this age. But deRossa is not an actor and he has work to do this time round to demonstrate that he has the vitality and freshness for another 5 years!

Sinn Féin

McDonald won 60,395 votes in 2005 ousting the incumbent McKenna from The Green Party who won 40,445 votes. However, SF only polled 35,356 votes in the 2007 general election so there is quite a gap of 70,000 votes to attain the quota of 105,500 votes needed next month. The incumbent candidate has made little impact on the electorate and it is hard to see how she will overcome the deficit.

The Green Party

Christopher Fettis was the first candidate to contest the Euro election in Dublin. He did so in 1984, won 5,242 votes and lost his deposit. Trevor Sargent built on this base and won 37,317 votes in the 1989 European election. Patricia McKenna was triumphant in 1994 winning 40,388 votes, when the quota was 55,569. She was also successful again in 1999 but polled 35,659 when the quota was a tad higher at 56,135. She won 40,445 votes in 2004 but lost to Mary Lou McDonald

The Greens won 41,813 votes won in 2007 general election– enough to return 5 candidates to Dáil Éireann and the performance of their Ministers has been fairly solid.

Their Euro candidate, Deirdre de Búrca, has never held elected office in Dublin and her press release of April 22nd pandering to overtures to her to stand for Libertas does not define a candidate terribly sure of herself or with a compelling loyalty to the Greens. A waffling quotation from her to the effect that she refused the Libertas invitation for many reasons is pitiful. What next? Perhaps a press release to confirm that she does not use Jeyes Parazone bleach as a shampoo!

Their deputy, Paul Gogarty, managed to trivialise his stature in a recent Hot Press interview. He may as well have stood under the GPO and shouted "I am an inconsequential, marginalised political buffoon", so if the Greens want to the considered heavy political hitters their candidates need to sop scoring 'own goals'.

The Socialist Party

Joe Higgins won 23,218 in the 2004 Euro election and he and his candidates won 11,518 votes in the 2007 general election. Any advance on this will be progress!

Progressive Democrats

The PD's did not contest the 2004 Euro election. The won a total of 20,481 votes in Dublin in the 2007 general election acrosss nine constituncies but won only one Dublin seat - Mary Harney in Dublin Mid West. The wake before annihilation.


Four independents won 14,089 votes in 2004 – 4% short of a quota between them. This would imply that the established parties garner over 75% of the votes . Dublin voters have been fairly conservative and consistent in their voting habits. But the pain felt in May as a consequence of lower pay packets, the absence of a job or the prospect of a job could test their patience.


Both FF and FG should reach shouting distance of quota. A battle over 40,000 votes will determine the 3rd seat and nothing is absolutely certain!

A convincing campaign by deBurca could return the Greens to Europe from the capital. Is there a catalyst for a recovery by Sinn Fein and what is this?

The voters will not respond to the narcisstic social science experiment manifested by Libertas, especially in such uncertain times. Their founder may rant about the anonymous bureaucratic control from Brussels but his own derring-do is, frankly, anonymous ill-defined!

It would appear from opinion polls that voters are experiencing a certain amount of 'mature reflection' with respect to The Lisbon Treaty and recovery in the context of prevailing and prospective economic prospects.

deBurca Scores an Own Goal!

I have felt since we first directly elected MEP's in 1979 that The Green Party (Comhaontas Glas) had something special to offer as a component of Ireland’s representation at The European Parliament.

Déirdre de Búrca seemed like a potentially interesting candidate despite never having won elected office in Dublin. The last Green MEP to represent Dublin was Patricia McKenna, whose droning, middle-aged whinging voice excited every misogynist instinct in my body and has become an obsolete irrelevance to electoral politics in Ireland.

It is said that British Royals neither ‘complain nor explain’. I was astonished to discover that the web site of The Green Party contains a press item, dated April 22, on behalf of Ms de Búrca explaining that she had rejected an invitation to run as a candidate for another party and attributed her decision to “many reasons”. Is this woman utterly naive or just totally lacking in political judgement and political self-esteem? What political party would allow itself to be demeaned by referring to a rival unproven political entity that is founded on nothing but the vacuous narcissism of an individual with nothing to offer but personal vanity and unascertainable credentials? The least that the electorate expect of any candidate representing a political party is loyalty to that party.

I must conclude that this maybe the nemesis of Ms de Búrca’s political career and the prospects of The Green Party doing the business at the European Parliament election on June 5th.

Wednesday, April 22, 2009

Gormley Fails to Persuade Ahern to Restore the budget of The Equality Authority

It is clear that the coalition comprising this Government has distinct elements. Fianna Fail are the untuned diesel engine. The Green Party provide the heating, air conditioning and catalytic coversion. The Progressive Democrats are the timing chain that sundered at 30,000 kilometres following one hand-brake jerk too many by Michael McDowell. Jackie Healy Rae and Lowry are synthetic floor mats inside the vehicle.

The Equality Authority was one of the first casualties of public spending reductions when Dermot Ahern TD, Minister for Justice, Equality and Law Reform cut the Authority's 2009 budget by 43% from €5.89 million to €3.33 million. The former chief executive, Niall Crowley, subsequently resigned but is to be replaced, despite the ban on pulic service recruitment.

John Gormley TD, Leader of the Green Party, at its recent annual conference, categorically stated that these cuts would be reversed but Minister Ahern confirmed today, April 22, this will not happen.

I find myself having little sympathy for the Authority. An award was made of €3,500 was made earlier this year to a former pupil of Dunmore Community School in Galway on grounds of gender discrimination. This arose from a 2004 dispute between the recipient of the award and the school authorities concerning the length of his hair. The person concerned was a Leaving Certificate pupil at Dunmore and sat the examination at another centre.

It was also reported that a €1,000 award was made in relation to a similar dispute at another school. Both awards are payable by the Department of Education and Science on behalf of the taxpayer.

I found it utterly incredulous that the State should have any involvement whatsoever in disputes of this nature and the thought of taxpayers money being awarded frankly appalled me. The Minister reported that €45 million in public funds has been committed to this Authority since it was established in 1999. It has clearly lost its credibility with the Minister and at least some sections of public opinion so it I am not surprised that this is the outcome and that the resources that it had hitherto enjoyed will be used for policing.

The expenditue of the Department of Justice Equality & Law Reform was €2.59 million in 2008 having increased by 51% since 2003. It is forecast to be reduced to €2.4 billion this year. Savings at The Equality Authority less than 2% of the projected savings. The marginal difference is minute but the political hiatus is deep. The Minister's has taken a bead at the Authority despite his generous comments about the recently published document Equality for All in a Time of Change.

The prosposed decentralisation of The Equality Authority is on hold although there are 16 staff already located there and a further 19 are based in Dublin. This will threaten the viability of the outlet that Birkenstock were rumoured to be planning for Roscrea.

Tuesday, April 21, 2009

Inspiring Political Leadership in Ireland as Recession Edges Towards Depression

Ireland is attempting to undertake public sector expenditure of €54 billion in 2009 to be funded by potential tax revenue of €34 billion. GDP in 2009 may be more than 10% lower causing the current recession to become a depression. The national debt in March was €54.24 billion and is set to rise as Irish banks become paralysed zombies.

There has been much comment about burden sharing as unemployment soars and job prospects are virtually non-existent. The following is a verbatim extract from the budget speech of Brian Lenihan TD, Minister for Finance on Tuesday, April 7 2009.

“Fairness must be the cornerstone of all our efforts to achieve economic renewal. Everyone wants fairness but there is less agreement about what it means. For many, it means the next person should pay. But the reality is everyone must give according to their means. Those who have most must give most. But before we ask anyone else to give, we in this House and in this Government must examine our own costs. Those of us in politics have been entrusted with a great privilege by the people. We must lead by example.
  • The Government has decided to introduce a number of additional changes to the remuneration of Deputies and Senators.
  • There will be a 10% reduction in all expenses other than mileage rates where a 25% reduction has already taken place.
  • Deputies will no longer receive long service payments or increments.
  • The arrangement whereby former Ministers are paid Ministerial pensions while they are still members of the Oireachtas will be discontinued.
  • Oireachtas members who are on paid leave of absence as teachers may no longer avail of the arrangement whereby they can keep the difference between their teachers’ salary and the cost of employing a replacement.

The allowances paid to Oireachtas Committee chairs will be halved and the payments to whips and vice-chairs are to be abolished.

The Oireachtas Commission has put forward its own proposals for a reduction in the number of Committees and I am happy to leave that matter to these Houses.

Some of these changes will require legislation which will be introduced shortly. The members of this Government reduced their salaries by 10% last October. Ministers of State made a similar reduction. The public service pension levy was applied to members of the Government and Ministers of State. As a result, Ministers have seen a reduction of one fifth in their incomes”.

But it has now transpired that none of these arrangements apply to current incumbents, just to newbies! The guys and gals in the Oireachtas didn't share the Minister's vision of asking for cuts to begin in Leinster House.

The Irish Independent canvassed 32 Oireachtas members and asked "will you give up your ministerial pension?" The highest benificiary was Bertie Ahern, who stands to lose €111,235 and he indicated 'yes' with a clarity reminiscent of his vote for Albert Reynolds when Fianna Fail were choosing a candidate to contest the 1997 presidential election. 25 of those canvassed could not be contacted or decliedn to answer

Monday, April 20, 2009

The Moral Hazard of the Banks' Bail Out

Six Irish banks are being bailed out by the State because of their systemic importance. This is supposed to mean that the consequences of their failure would have an adverse, far-reaching impact on the economy and the financial welfare of the country. Taxpayers are naturally concerned that if large scale public resources are committed that these are used to create repair a problem not to make those who caused the problem richer and this can arise in many ways including the valuation of assets and liabilities and through the derring-do of executive and non-executive leadership.

The resources required in Ireland to bail out banks are enormous in the context of our resources – potentially 50% of Gross Domestic Product. If Ireland were to experience a 10% drop in GDP this year, which could happen, the recession we speak of would become a depression. Foreign lenders are becoming ever more cautious. Tax revenue has collapsed from €47 billion in 2007 to a potential €34 billion in 2009. Taxes and levies have been raised several times in the past 12 months and Government spending has been curtailed. These initiatives are designed to impress lenders and the rating agencies' but it will aggravate the downturn. The guarantees and the direct investment provided to the banks could even strain the long-term solvency of the country and this puts further strain on the country.

There are many uncertainties in relation to the bank bailout and one of these is the consequence of moral hazard. Moral hazard arises when banks make choices in the light of Government support that would not make were this not available. A glaring example relates to the disclosure of losses arising from impaired loans. Last week AIB announced that it has increased the amount being set aside to cover impaired loans from €106 million to €1.8 billion. Irish Nationwide Building Society has announced a loan loss impairment charge of €464 million, increased from €48.8 million in 2007. The loan loss impairment charge was €17.6 million in 2006; €27.2 million in 2005 and €6.5 million in 2004.

Following the publication of a 9-bullet point press release last Friday, the Taoiseach has announced that this institution is to join the bailout fraternity. Irish Nationwide announced a loss of €243 million after this very large loan loss impairment charge. The common understanding of a building society is that of providing house loans to members from the proceeds of members' savings. The risks involved would be fairly widely dispersed and thus moderate.

Irish Nationwide had residential mortgages of €2.547 billion in 2007, down from €2.599 billion in 2006. 98% of these were in Ireland and 28% related to houses in Dublin. But Irish Nationwide also had commercial mortgages amounting to €9.785 billion of which only 37% were in respect of Irish properties (16% in the Dublin area). 53% of the commercial mortgages were in Britain (34% in London). The total loan book in 2007 was €12.332 billion. This has was reduced to €10.474 billion in 2008.

Ireland had become very dependent on tax revenue derived from construction such as capital gains tax, stamp duty and corporation tax. But the drop in tax revenue from these sources has been dramatic reflecting the burst bubble of the construction sector. Capital gains tax has dropped by 54%; stamp duty by 48% and corporation tax by 20%.

The reserves of the Society in 2008 were stated to be €1.2 billion, a reduction from €1.51 billion in 2007. However, the 2007 figure included a property revaluation reserve, of which €67 million, but the property values of 2007 no longer prevail.

Irish Nationwide makes a point each year of commenting on its cost-income ratio which in 2007 was 17%, “which continues to be the lowest of any Irish financial institution”. A wonderful accomplishment when directors’ emoluments amount to €3.49 million – 78 times the average annual pay of the 400 staff of the Society (€44,500).

If 50% of Irish Nationwide's loan book concerns transactions outside this country, to what extent is it of systemic importance to Ireland? How valuable is the Irish Nationwide franchise? A strong franchise is derived from a strong competitive creates pricing power and a status that can make it a sought after acquisition target. Why did Irish Nationwide never cede its mutual status and become an acquisition candidate? Does its reluctance offer any insight into the real quality of its business and prospects? Are its problems fundamentally different in character to other covered institutions?

The moral of all of this generally is that taxpayers need to be extremely vigilant as to whether Government intervention repairs the banks and building societies, or merely affords an opportunity to those who control them to enrich themselves through ‘adjustments’ that would never see the light of day if Brian Lenihan was not standing by with buckets of your hard-earned money! The issue concerns what is called ex post accountability - whereby problems are resolved after uncertainty has been resolved, or thought to be resolved. But as we are living in a country where the Finance Minister indicates that serving politicians are to forego political pensions, while serving in elected office and less than two weeks later his boss indiciates that this measure will only apply to the politicians of tomorrow, doesn't inspire confidence that this Government has the savvy to really understand the implications and vulnerabilities of its bail out initiative.

Tuesday, April 14, 2009

If the axe really fell on Irish Government spending, where would it be felt?

I was listening to Batt O’Keefe TD, the Minister for Education on RTE radio news this afternoon blathering about the government having a "€54 billion spending commitment to be funded by €34 billion in tax revenue" (if they are lucky!) He had been to the INTO conference in Letterkenny where, it is said, he received a ‘cool reception’ - no applause from the delegates.

What would happen if the Government really did swing the axe and align spending with revenue, as they will inevitably have to? Current outgoings cannot be funded by spiralling borrowings, on top of which provision must be made for extraordinary State borrowing to rescue the dumb, profligate overpaid bankers, after their delusionary programme to convert every dungaree-wearing driver of a Toyota HiAce van to become an Aston Martin owner wearing a navy blue crombie with a suede collar, imploded with an unspeakable deluge of bad debts and hand-washing.

The population of Ireland increased by 11% between 2003 and 2008. Our tax revenue increased by 27%. A growth in public spending of this scale may have been sustainable but our public expenditure actually increased by 60% between 2003 and 2008 - only to be surpassed by the emoluments paid to top bankers.

The Department of Communications, Marine and Natural Resources was the only government department which reduced spending in this 5-year period and this was accomplished by spending €50 million less!

Welfare increases, which outstripped those prevailing the neighbouring jurisdiction, were an important component of the overall increase. Welfare spending increased by €3.7 billion in what was a relatively benign environment from a welfare perspective. Unemployment in 2003 was 88,000 and the Live Register recorded 172,414. The labour force expanded from 1.89 million in 2003 to 2.2 million in 2008. We certainly needed to augment and enhance infrastructure to cater for this unprecedented growth.

IBEC advocated a radical cut-back in welfare spending before the budget. Its director general, Turlough O'Sullivan, is to retire shortly. He will be relieved to be beyond the ambit of socially dysfunctional politicians. But when the time comes for him to reside in a room full of geriatrics, who are sitting in a collective puddle of piss, he might reflect on what it is like to be thought of as nothing more than an inconsequential, voiceless 'demographic entity' in the calculus of Ireland's pertnership movers and shakers. There is nothing like the rasping, self-righteous cadence of a Northern Ireland accent on the media airwaves to emphasise this perspective, whatever one might say about the prudence of our generous welfare system. It is the perfect foil to the 'inheritance brats' as defined by Paul Sweeney, economic advisor at the ICTU.

The April budget was designed to raise €1.8 billion to cope with a collapse in tax income but there was very modest cuts in public expenditure.

If the Government was prune up to €20 billion off its spending to match its income and 2003 spending patterns were adopted as a guide the following cuts are indicative of what would be necessary to balance the budget at a departmental level:

  • Agriculture & Food -€866 million
  • Arts, Sports & Tourism -€313 million
  • Communications, Marine and Natural Resources –no change
  • Community, Rural & Gaelteacht Affairs -€235 million
  • Defence -€220 million
  • Education and Science - €3.35 billion
  • Enterprise, Trade & Employment -€409 million
  • Environment, Heritage and Local Government - €847 million
  • Finance / Revenue Commissioners - €284 million
  • Foreign Affairs - €440 million
  • Health and Children - €5.8 billion
  • Justice -€873 million
  • Social and Family Affairs - €3.70 billion
  • Taoiseach - €58 million
  • Transport -€1.07 billion
    TOTAL €18.46 billion!

But as the Live Register now lists over 370,000 people and and additional €4 billion in welfare expenditure has been provided for in the April budget, the foregoing cuts are nonsensical because, in practice, there would be no €3.7 billion cut in welfare spending and the net additional €7.7 billion to fund welfare would have to be obtained through additional cuts, over and above those indicated here, to reach the €18 - 20 billion spending cut target!

Monday, April 13, 2009

Unprecedented fiscal balancing act necessary in Ireland

The latest budget, the second in six months, introduced on 7 April, leaves the Irish Government with a very fine balancing act. Tax revenues dropped by 13.7% in 2008 and a further 16.5% drop in tax revenue is projected in 2009 to potentially yield €34 billion, equivalent to the yield level of 2003/04. But net expenditure forecast at €49 billion is only 0.4% lower than in 2008 resulting in a budget deficit of up to 13% % of GDP. Ireland has been given leeway by the EU to 2013 to reduce the budget deficit to 3%

While tax revenue was weaker in 2008 by 13.7% government expenditure in 2008 increased by 10.2%.

Expenditure at the Department of Agriculture & Food increased by 45% to €1.69 billion. Expenditure at the Department of Health & Children increased by over 10% to €13.74 billion and, not surprisingly, expenditure at the Department of Social & Family Affairs increased by almost 14% to €9.3 billion. Expenditure on agriculture has doubled since 2003, which is surprising given that agriculture added value to GDP is only of the order of 2%.

The drop in tax revenue last year was particularly pronounced in capital gains (54%), stamps (48%) and corporation tax (20%) with the latter contracting to 2003 levels

Welfare expenditure in 2009 is forecast to grow by almost 20% to €11.1 billion financed by projected in Arts, Sports and Tourism (22.7%), Communications, Marine and Natural Resources (16.8%) and Foreign Affairs (10.8%).

Tax receipts in the first quarter of 2009 were down 23.4% on the first quarter of 2008. There were drops in all headings but the most dramatic drops were in capital gains (70%), stamps (62%), corporation tax (43%), excise (31%), customs (27%), capital acquisition (22%) and VAT (18.3%). This trend mirrors the drop in retail sales, particularly vehicles and in property transactions.

As the banking crisis rumbles on it is worth noting that private sector credit as a percentage of GDP has increased from 115% in 2003 to 214% in 2008.

Saturday, April 11, 2009

Banks' bailout: Is the Irish taxpayer blinded by optimism?

Now that the National Asset Management Agency (NAMA) has been inaugurated, is the taxpayer being asked to approach the resolution of the banking crisis on the basis of a blind act of faith? The challenge is admittedly both complex and enormous, with many uncertainties although the idea of taking over portfolios’ of loans, good and bad, is an encouraging feature. The cornerstone of success is dependent on property development borrowers repaying loans in full, over an agreed time or by forcing the sale of their mortgaged collateral property assets at a time and on a basis that yields the State a profit above the loan balance due.

There have been references to the approach of the Swedish Government to their real estate induced financial crisis in 1992. But there are important differences to that currently prevailing in Ireland with respect to the scale of the problem and the level of national indebtedness.

Private sector borrowing in Sweden increased from 85% to 135% of GDP in the five years prior 1992. Private sector borrowing in Ireland has increased from 136% to 214% of GDP between 2004 and 2008. The Swedish Government was obliged to commit a sum equivalent to 4% of GDP (around €14 billion) towards the rescue with a net cost equivalent to 2% of GDP when the crisis abated and profit on the sale of assets realised. The estimated toxic loans arising in Ireland remains uncertain but if they are €90 billion, this is equivalent to 50% of our shrinking GDP.

The Minister for Finance, Brian Lenihan TD, intends to visit the financial centres of Europe as a confidence boosting measure and confidence needs to be restored rapidly of credibility is to be reinstated. His audience will seek explicit answers. Our profligate banks increased private sector credit by 97% to €393 billion since 2004 on terms that no competent Financial Regulator or Government ought to have tolerated. Current economic conditions and the confiscation of substantially more income in the form of taxes and levies following the Budget, aggravate the prospect of timely repayments being made on loans that should have never been approved.

Will the Minister be able to tell his audience that an orderly and complete change in the board of directors’ of each of the supported banks will commence not later than the 2009 annual general meeting of that bank? Will be able to demonstrate confidence in the risk management competency and procedures of these banks against a background where the risk process at Irish Life & Permanent did not escalate details of the €7.5 billion investment in Anglo Irish Bank to the board before this transaction was executed? How will the Minister be able to convince these audiences’ of Ireland’s capacity to recover its prosperity and solvency because, unlike Sweden, we do not have an abundance natural resources or an equivalent indigenous industrial base?

If some of the supported banks or building societies, following a downward revaluation of the assets held as collateral for loans are not likely to return to profitability in the medium-term, will they be closed or merged sooner rather than later?

There must be transparency if the taxpayer is to repose trust in these measures and those who brought about this crisis must bear the cost of their malevolence promptly.

Tuesday, April 7, 2009

Persuading Fruit of the Loom to Come to Ireland!

I have often wondered when a substantial foreign direct investment comes to Ireland what are the tentative steps, the catalysts, that causes an embryonic concept to become a compelling reality. I remember a former IDA Ireland executive in the late 1970’s being rather curt about the investment prospects of County Donegal at the time and suggesting that its best prospects might be to spread grass seed across the county!

But as I listened to Blessed Be Fruit of the Loom on RTE Radio 1 last night, Monday April 6th, one of the Documentary on One series produced by Peter Woods, I reflected on my own role in persuading Fruit of the Loom to locate in Ireland. This episode described the impact of Fruit of the Loom in Co. Donegal and how the work undertaken there migrated to Morocco for labour cost reasons in the mid 1990’s

My story began at daybreak on a June Sunday morning in 1986 at Shannon Airport. My colleague who was in charge of the IDA Ireland office in New York and the New York based representative of Shannon Development met the Chairman of Fruit of the Loom at a lunch in New York a few weeks earlier, hosted by one of the Irish-American organizations in the city. The customised printing of t-shirts had become popular in the States and prompted the company to expand into Europe. The visiting delegation arrived shortly afterwards and comprised the Vice Chairman and the President of Fruit of the Loom and their wives. The fifth member of the delegation was the Vice President with responsibility for engineering. It was a first-ever visit to Ireland for all of them. This visit took place before fax came into vogue and a decade before the Internet and e mail was even dreamt of! I recall reading details of the proposed visit on a telex page and was convinced that there was a real chance of winning an investment, if every effort was made to do so. The visit programme was to include Limerick, Cork, Westport and Buncrana and it was to last a week.

1986 was a time when about 16,000 people were employed in the Irish clothing manufacturing sector. Some of these businesses operated on a cut-make-and-trim (CMT) basis subsisting on wafer thin margins. The only added value was the labour input and the customers were typically the large supermarkets or chain store outlets in Ireland and the UK. Others businesses, such as Magee of Donegal and Clubman of Buncrana made and marketed branded garments. Several icons of the clothing industry, such as Sunbeam Ltd and Glen Abbey, were closing down as a consequence of cost and competitive pressures.

Life was more informal in the mid 1980’s than it is today, especially in the vicinity of airports! I arranged with a colleague from Shannon Development to meet the delegation directly off the arriving aircraft from the United States. My instincts told me that if I won the spouses over they might persuade the businessmen that Ireland was the perfect destination for their expansion plans! I recall being as busy as Basil in the 1970's classic sitcom Fawlty Towers pulling their luggage off the conveyor belt in the customs hall at Shannon!

Before long we were on a small bus heading to Dromoland Castle. The adage that there is only one opportunity to make a good impression is certainly the case in the foreign direct investment world. But our driver, instead of taking the main road between Shannon and Dromoland was soon driving down what seemed to very narrow pot-holed lane with grass visible between the wheel tracks! I vividly recall his first comments, in a broad County Clare accent, “the price of gas in this country would crucify you”! Thankfully, it wasn’t too long before the outline of Dromoland Castle was visible as the morning sun caressed its parapet and I was glad to draw their attention to the Stars and Stripes flying on the roof with a noble sense of purpose and welcome.

Following a full-Irish breakfast and a morning rest the plan was to bring the party to the majestic Cliffs of Moher. But, unfortunately the icnonic Cliffs were shrouded in dense fog when we reached them, which was a great pity! Shannon Development hosted dinner that evening at Dromoland and I had a sense that the group were beginning to bond with us I recall receiving a phone call from Willie McCarter, then the owner of the McCarter family business, before retiring to bed that Sunday night to exhort me to make sure we went to Buncrana. He was extremely anxious to meet the delegation there.

I rented an Islander aircraft from Aer Arran the following day and, following an overview of Limerick and Shannon Town area, we departed Shannon for Cork. The wives were taken care of that day by another colleague, the late Joan Aylward who was attached for many years to the IDA Ireland office in Galway.

The highlight in Cork was to visit Sunbeam Ltd in Blackpool which was then on the market. We had lunch beforehand at Arbutus Lodge with the then Minister for Foreign Affairs and local TD, Peter Barry and Frank Boland, a high profile local businessman. Despite all the forensic planning the visit to Sunbeam was a crushing disappointment. The factory has ceased to operate by then and I have a recollection of an emaciated Alsatian dog belonging to a security company, roaming the site. The culture at Sunbeam was very ‘old school’ ~ directors’ dining room, staff restaurant and works canteen combined with an on-site garage to service the managing director’s Jaguar and other company vehicles. The American visitors were quite deflated as we flew from Cork to Galway Airport and a night at Ashford Castle. They questioned whether it was basically possible to make their type of garments efficiently in Ireland. I have only stayed in Ashford Castle on two occasions and on each occasion the people I brought subsequently made a substantial investment in Ireland. The second investor, some years afterwards, was Masonite, now located at Carrick-on-Shannon.

Joan had driven the American wives to Ashford and following a delicious meal we had a bit of a sing-song. I recall the Manager of Mayo County Council and local Dáil Deputy, Enda Kenny, joined us. After dinner all of us gathered around the piano for an old fashioned sing-song.

We were up early on Tuesday morning and flew in the Islander to Castlebar Airport. Travenol had been a major employer in the town for many years but had closed down. It had owned a large factory and one of my goals was to promote the idea of Fruit of the Loom as a successor project. Before visiting the Travenol site we visited a small clothing manufacturer called Portwest, owned by the Hughes family. Portwest specialised in workwear and following a brief tour the Vice Chairman approached me and advised “I can tell by the buzz in that plant that it really is possible to operate a productive clothing business in Ireland” The labour content of a t-shirt was quite low in terms of minutes per garment produced and that was the core argument in favour of locating in Ireland in the context of the cost structure that prevailed in the mid 1980’s.

We departed late that Tuesday and flew to Derry and onwards to Buncrana where we met members of the McCarter family. The very positive perception of the Portwest operation was crucial in nurturing a positive disposition towards Buncrana. The social aspect of these fact-finding visits is as important as the business aspect and I recall several really pleasant meals in Buncrana with the McCarters who were very gracious. The discussions in Buncrana were very positive. I think that the McCarter plant employed in the region of 400 people at the time and by the time we departed Buncrana the basis of a proposition was in our mutual minds.

The President of Fruit of the Loom had injured his foot towards the end of the visit and he required crutches which slowed the pace somewhat. They stayed at The Berkeley Court hotel in Ballsbridge, Dublin and took the opportunity to have a look at the city. They kindly invited my wife, Patricia and I to Jury’s Irish Cabaret on the Friday evening. That show was a staple of the Dublin entertainment scene at the time and starred personalities, such as Hal Roach.

The delegation was to depart for the United States the following Saturday morning. There was an very warm rapport established in the course of the week. I brought my two children into The Berkeley Court to meet the Americans and we had one more full Irish breakfast. Hilary was 12 years old and Stephen was 9 then.
Today, Hilary, recently newly married in Australia to Howard Sharp is expecting her first child. Stephen is working in Galway having toured Australia and acted as a marine n a soap opera produced by Steven Spielberg - The Pacific, a television mini series about US invovlement in the Pacific rim during World War II.
I had arranged for access to the VIP Lounge when we arrived at Dublin Airport, a gesture greatly appreciated by the visitors. I recall one the wives showing the kids the VIP Lounge visitors book and pointing out the signature of former British Prime Minister, Ted Heath, himself a recent visitor to Dublin and insisting that the kids also sign the book, which they were delighted to do!

I travelled to the headquarters of Fruit of the Loom at Bowling Green, Kentucky with a colleague, John Colgan and we met Andrew McCarter there. The upshot of that visit was that the investment the people of Donegal and Derry became familiar with was agreed. The job numbers advanced from the 400 then employed at McCarter’s in Buncrana to about 600 and the McCarter family were to manage the new venture.

I recall a member of the IDA board remarking when the matter of grants was being discussed “I thought that we were only interested in up-the-market clothing projects”. That was the case but when we decided on this approach we never anticipated the arrival of Fruit of the Loom and the possibility of it being such a good fit with the tradition of the clothing and, particularly the shirt-making industry, in the county. We also felt at the time that if the investment has a 10-year life it would represent good value. The troubles in the North were flaring at that time and Buncrana, in common, with many Border locations were struggling from an economic perspective. The grant approval process extended through three stages culminating with Government approval. All of this was accomplished within a six-month time frame, excellent evidence of the agility and efficiency of the Irish public sector!

Fruit of the Loom grew greatly beyond our expectations and job numbers in the county reached 2,800 across several site and a spinning facility was set up in Derry at the prompting, I believe of John Hume, who took a great interest in what was unfolding.

It is nice to look back, recall that first telex message and then consider what a wonderful contribution that investment made to the welfare of the Inishowen Peninsula. I remember the shop fronts in Buncrana getting a much needed face lift and the entire town taking on the ambience of a town with a mission in the course of many subsequent visits there. Fruit of the Loom is now owned by Berkshire Hathaway, which is controlled by the legendary American investor, Warren Buffet. It includes the Russell athletic and apparel business and is listed as employing a total of 34,896 persons in the 2008 Annual Report of Berkshire Hathaway.

Thursday, April 2, 2009

Construction Industry Federation need your income tax contributions to boost sector revival!

The Construction Industry Federation (CIF) submitted what it describes, as a revenue neutral, 10-point plant to stimulate the industry in advance of the Budget on 7th April. These are essentially about the creaton of various tax avoidance loopholes and tax holidays, maintaining capital spending at a high level, the faster consideration of planning applications, a social insurance tax holiday, VAT reductions and even the removal of the cap on the tax deductibility of charitable donations.

The removal of the cap on charitable donations is so touching - but why is it made without reference to the millions of € already donated by property developers to bona fide charities - if that is the case? Surely, this evidence would make that argument more compelling! One would hate to believe that the removal of this cap could possibly be subverted for anything but the most noble and heart-rending reasons directly connected to legitimate charities. But when an industry has to surrender €150 million to the Revenue Commissioners in unpaid tax liabilities, an observer could never be too careful when it comes to the question of creating tax avoidance loopholes.

Well, the facts are that the Irish economy has been run into the ground by a coalition of rampaging developers, delusionary politicians, ungoverned and ungovernable banks. Ireland cannot afford a hyperactive construction sector operating at a level that is unsustainable and totally unrelated to genuine need. The days of acquiring property to play Russian roulette are going to be a thing of the past.

Tax revenues are estimated to drop from €47 billion in 2007 to €34 billion in 2009. Rapidly rising unemployment is well on the way to fully depleting the social insurance fund. Stamp taxes are likely to be €2.5 billion less and VAT could be €2 billion lower in 2009 than last year.

The Irish construction industry suffered a downturn of 48.2% in production volume and a 35% decline in value since peaking in 2005/06. The downturn was especially severe in the residential sector. Dormitory communities have mushroomed within a radius of over 100 kilometres from the larger cities throughout the country and those householders who are working are spending an awful lot of time commuting in the early morning and late evening.

Many large developers are believed to be in severe financial difficulties with several openly declaring an inability to meet obligations in full or on time. Overexposure to the sector ultimately resulted in the nationalisation of Anglo Irish Bank in January 2009 and a major State bailout for 5 other banks and building societies.

The Anglo annual report for the year ended 30 September 2008 indicated that at least 15 of its customers each had indebtedness in excess of €500 million. Other Irish banks and building societies have experienced very high levels of bad debts and impaired loans relating to the construction sector. The construction bubble, which had ridden high for many years on the prospect of aggressive property inflation, has burst and is causing havoc, disruption, widespread negative equity and billions of € in impaired loans.

The 2006 Census of Population reports a total of 1,469,521 households in Ireland. The construction industry completed slightly over 610,000 residential units between 2000 and 2008 and employment growth in the industry climbed from 178,100 in 2000 to 284,600 in 2006 before contracting to 233,100 last year. The construction industry lost 48,800 jobs in 2008.

The average price of a house in Dublin was €339,042 and outside Dublin €255,999 in February 2009. This represents a monthly decline of 2.1% in Dublin and 0.8% outside Dublin – an annual decline of 13.3% and 9.7% respectively. House prices increased 4-fold in ten years and there are now many unoccupied houses, some of which have never been occupied.

Many taxpayers would be quite cynical about this so-called plan; some will be plain angry. Past initiatives, such as first-time buyer grants, never made the impact intended on the consumer because their value is subverted into the price of a transaction. The developer increase the price and the buyer never obtains the benefit of the grant. Others would be very angry with the overall performance of this industry. The construction sector does not inspire trust. Too many poor quality, badly designed, hugely overpriced houses in poorly planned neighbourhoods with hopelessly inadequate infrastructure have been the bane of many house buyers.

Television news stories of many newly built residential properties being severely flooded at several locations throughout Ireland during the heavy rains of the past two summers. Some were foolishly built on flood plains and are prone to chronic recurring flooding in the future. What perspective did the planning authorities authorised this have?

More than €500 million has been spent on the Mahon Tribunal an investigation into planning corruption and bribery involving developers and politicians covering a long period. This has been sitting for over 10 years, presided over by no less than 3 circuit court judges. One of the principal characters in this opera, Frank Dunlop, pleaded guilty to 5 sample counts of bribing members of Dublin City Council in relation to the rezoning of land for development purposes on behalf of developers. He is to be sentenced on May 18th.

The expansion of the construction sector took place against a background of grossly excessive and undisciplined lending by the banks both to developers and house buyers. This resulted, for example, in sites in the inner Dublin suburbs being traded for prices in excess of €50 million per acre and the development of these sites would have to be very intensive and unsympathetic to legacy development to be financially viable. Many of these sites are mothballed for the time being because demand for commercial property has collapsed.

The African-born chief executive of a leading Irish bank personally advocated with the planning authorities on behalf of a bank customer! Back in the days when retail customers believed that they had a bilateral relationship with their banks throughout the life of a house loan there were strict guidelines on the amount one could borrow. Loans were not to exceed 250% of the borrower’s annual income and if there was a spouse, or cohabiting partner, 100% of the second income could be factored into the calculation. But in the era of securitisation, structured derivatives and leveraged transactions it seemed anything goes, including mortgages in excess of the property value and 5, or more multiples of the annual income of the borrower.

The numbers of the Live Register in March 2009 was 372,800, an increase of 173,300 in 12 months. Thousands of others are working short time or enduring stringent pay cuts. Lower disposable income will cause asset value, including house values to be reduced dramatically. The number of redundancies reported to the Department of Enterprise, Trade and Employment in March 2009 was 53,492, an increase of 100% in 12 months. The basis of resilient demand for residential property is simply not there. No sector can be expanded on the back of an unemployed or underemployed labour force.

Doubts about the probity of the construction industry are also evident in The Revenue Commissioners surveillance. They completed over 3,800 audits of the construction sector in 2007. This yielded €129.6 million in additional tax payments. A further 40,161 assurance checks yielded €21.8 million in additional tax payments or a total of €151.4 million.

The overtures by the CIF and other lobbyists are being made at a time when annual tax revenues have dropped from €47.2 billion in 2007 to a possible €34 billion in 2009. The social insurance fund is on the brink of being fully spent as unemployment levels are escalating steeply. The solvency of the Exchequer is the number one priority of this budget but the volatility of the economy makes it extremely difficult to forecast what the future holds with any degree of stability and confidence.

The consolidation and stability of public finances in the number one national priority – not the provision of lollipops to greedy developers funded by income tax contributions of a dwindling labour force. The path to economic recovery will not be based on a continuation of this madness and it would be outrageous for State funds to be squandered on the shopping list of the CIF. The CIF’s 10-Point Plan is no more than an opportunisitc, superficial egotistical rant that contributes nothing to either inspiration or confidence.

Wednesday, April 1, 2009

Is Ireland a nation of credit card junkies?

The popularity of plastic money has increased enormously in Ireland. The number of personal credit cards in use has increased over the five years since February 2004 by 21½%, similar to the percentage increase in the labour force between then and May 2008.

But personal credit card indebtedness, according to Monthly Statistics for February 2009 issued by the Central Bank, has increased by a massive 70% over these 5 years and now amounts to €2,896,700,000. Credit card indebtedness over the past 12 months has increased by €119.4 million, or just 4.3% since February 2008, so the current credit squeeze has not accounted for the bulk of this overall increase of almost €1.2 billion since February 2004. We are now spending less and repaying less, but owe more.

Credit cards offer many attractions, including the relative ease with which personal unsecured debt can be accrued. Some people use them as a cash substitute while others avail of the opportunity for a revolving, if a relatively expensive credit facility. They also, of course, offer a means to readily obtain cash at ATM’s.

Advances in internet technology, together with the evolution of the European single market, has spurred the growth of internet commerce in Ireland. One of the impediments that Irish consumers faced was that retailers did not enjoy the benefit of economies of scale because the Irish market was relatively small, choice was limited and prices expensive. But that impediment is now overcome as consumers can easily shop throughout the European Union for items of interest and these can be delivered to them in Ireland at a reasonable cost. Many regular service providers also encourage the use of electronic payment systems for a whole host of products and everyday services.

Retail sales in Ireland contracted in 2008 by 20%. Tax revenue dropped by 19% in January, compared to January 2008. New monthly spending by personal credit card users dropped by 18.3% to €766.4 million and monthly payments by personal credit card holders dropped by 15.8%, or €157.9 million in February 2009, compared to February 2008. The number of personal credit cards currently in issue is 2,212,000, just 1.6% more than a year previously. Depsite such a significant drop in new monthly spending and monthly payments that corresponds to the overall drop in retail activity, the total level of credit card indebtedness has increased by €119.4 million (4.3%) in the year to February.

The average indebtedness per personal credit card in Ireland is €1,310. Credit card holders typically make a monthly payment of €380 but spend slightly less, €346, each month.

Credit card trends and spending patterns have to be seen in the context of general economic trends.

The severity of the economic downturn is reflected in the most recent Live Register statistics. These are not designed to measure unemployment because they include part-time workers, who work up to 3 days each week, seasonal and casual workers entitled to Unemployment Assistance or Benefit. But, nevertheless, the trend is awesome and worrying, not just in the context of paying credit card debt but also, of course, in securing a stable livelihood.

The number on the Live Register in March 2004 was 168,880, an increase of 821 over a 12-month period. The seasonally adjusted total number under the age of 25 years on the Live Register in March 2004 was 32,900.

The number on the Live Register in March 2009 was 371,271, an increase of 173,279 over the most recent 12-month period. The seasonally adjusted total number under the age of 25 years on the Liver Register in March 2009 was 79,700.

The credit card industry emerged from the long-established practice in the United States of hotels and merchants providing customers with paper indetification cards for the purpose of doing business with that particular firm.

The credit card, as we know it today, made its debut in New York in 1950. Diners Club became the first all purpose credit card, which, of course, allowed the cardholder to use the card at multiple businesses. The Bank of America ‘BankAmericard’ arrived in 1958. American banks were not allowed to operate outside their home state and this would have been a constraint on the development of the credit card business so Bank of America set up a separate entity known today as Visa and it became an association controlled by its member banks' and financiial institutions'. It was 1966 before Master Card was created. Today both cards account for 70% of the world credit card market. The American Express charge card also emerged in 1958 - the difference being that all money outstanding has to be paid in full at the due date each month. Larger retailers were reluctant to accept credit cards at first - but smaller retailers considered that they offered them a competitive advantage against their larger rivals.

Visa and Master Card are associations owned by member financial institutions worldwide – 16,400 in the case of Visa and 23,000 in the case of Master Card. Last year Visa processed €2.3 trillion in payments covering 55 billion transactions by 1.7 billion card users.

Master Card processed 21 billion transactions used by 981 million card holders. Apart from processing transactions and having sophisticated technology platforms to mitigate fraud, both entities offer insights into consumer behaviour and buying trends. Neither issue cards, set annual fees, determine annual percentage rates on cards or solicit merchants to accept cards. The customer’s bank deals with these matters. Boards of directors are elected by member firms based on a voting system that is correlated to the transaction volume of particular banks.

The credit card industry is considered mature because such a high proportion of the population are users, sometimes of several cards concurrently. The original credit card family now includes debit cards, charity cards, special cards for discrete subsets of customers such as high net worth individuals and the promotion of loyalty points. But one of the big issues for credit card issuers is the reduction of interchange fees and the impact of these on competition. Larger merchants can negotiate lower fees. The issue of fraud, identity theft and the obligation to secure confidential information also exercises this industry.