Wednesday, 14 March 2012
Joint Committee on Finance, Public Expenditure and Reform DebatePage of 3
Chairman: We are now in public session to consider an overview of the operations and functioning of NAMA. I welcome Mr. Frank Daly, chairman, Mr. Brendan McDonagh, chief executive, and Mr. John Mulcahy, head of asset management, at the National Asset Management Agency. They are all very welcome. The format of the meeting will be that Mr. Daly and Mr. McDonagh will make some opening remarks which will be followed by a question and answer session for members.
I remind members, witnesses and those in the Gallery that all mobile phones must be switched off completely at this time. I wish to advise witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009 they are protected by absolute privilege in respect of the evidence they give to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and continue to do so, they are only entitled to qualified privilege in respect of their remarks. They are directed that only evidence connected to the subject matter of these proceedings is to be given. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair that they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.
Mr. Frank Daly: Mr. McDonagh will outline in greater detail the progress that has been made by NAMA since we last appeared before this committee. He will also discuss the issues that are demanding most of our attention at present. I would like to focus briefly on a number of themes which I consider useful to be clarified in the context of recent commentary, with the first relating to jobs and investment.
One of the issues we consider paramount in the context of NAMA’s objective of contributing to the social and economic development of the State is the question of employment. There have been one or two high profile suggestions recently that NAMA has been putting jobs at risk through delays in its decision making. What is most surprising about these reports is that they were completely at variance to the facts. We welcome accurate, balanced and questioning commentary about NAMA, and much of the commentary is of that nature. However, I am sometimes surprised at the readiness of a small number of commentators to accept often deliberately misleading stories about NAMA without showing the scepticism that might be due given the obvious interests of many of those promoting these stories.
A recent example is the creation of 230 high-tech computing jobs in south-west Dublin, which have come about through a €100 million investment facilitated by NAMA, working closely with South Dublin County Council and the IDA. The facts in this case are completely at odds with how some have described the position and no attempt was made with our offices to check even the basic facts. With that issue in particular, NAMA inherited a number of problems which, left unresolved, would have prevented any investment in the site, including a right of way dispute involving an adjoining landowner and outstanding development levies owed to South Dublin County Council. These are not untypical of the types of legacy problems with which NAMA deals daily. Working effectively with South Dublin County Council and the IDA at a senior level, NAMA’s actions not only paved the way for this investment but also ensured the sale of a another site in the vicinity that will comprise a second substantial high-tech investment.
On this theme I would like to comment generally on NAMA’s role in facilitating major investments in Ireland. NAMA’s dexterity in lease negotiations has, for example, been a crucial element in winning recent investments for the country. NAMA’s approach is at all times informed by a determination to make investment happen, and NAMA will pull out all stops where there is a prospect of investment and jobs for this country.
Accusations that NAMA is frustrating the sale of land or property is also an issue that emerges from time to time, usually from the party with whom we are negotiating or parties on its behalf. The objective is invariably to stack the deck in its favour. NAMA would be failing in its duty to the Irish taxpayer if it allowed itself to be played in this way, but the credence given to these claims by some who should know better never ceases to amaze me. The usual pattern is that a party makes an unrealistic offer and attaches unrealistic conditions to this offer. The party would then express public incredulity when NAMA turns down the offer. It is interesting how many times the party ultimately returns with an offer that reflects market value.
In addition to supporting investment that creates employment, we regard the preservation of jobs as an important part of our function. Some support is simply not justifiable or sustainable because the principals involved were engaged in building houses or commercial premises for which there is no prospect of demand and for which I doubt there was any real prospect of demand when they were first hatched at the very height of the property market boom. Our mandate is, first and foremost, to act commercially. We are not going to, nor should we, sink taxpayers’ money into property assets if we do not see demand for it emerging over a realistic timeframe, generally between two to five years.
In the majority of cases, however, we are working positively with debtors, including smaller debtors who run important local businesses and provide employment. We estimate, based on our experience to date, that approximately two thirds of NAMA’s debtors fall into this category. These are the debtors who are realistic about what needs to be done to work through their debts and who, for instance, have agreed asset disposal strategies and received funding from NAMA to secure their existing operations and enable projects to be completed. Many of these may not be so-called megastar debtors but, with NAMA’s support, they can continue to provide important employment and contribute to the economies in which they are located. In this way, NAMA directly supports 9,500 jobs in enterprises of between two and 1,100 employees spread across a range of business sectors and locations. Without NAMA support, this employment, the wider impact of which includes significant additional indirect and induced employment, increased taxation and reduced social welfare expenditure, would not be possible.
Since its inception NAMA has approved advances of working and development capital of more than €500 million in the Republic of Ireland and further advances to Republic of Ireland debtors in respect of projects elsewhere, which also helps to support operations and employment here. Right now, the reality is that NAMA working and development capital represents a significant proportion of construction industry activity and employment in Ireland. Mr. McDonagh will describe a number of NAMA innovations, including staple finance and qualified investment funds, designed specifically to unlock the potential for increased international and indigenous investment in Ireland’s commercial property markets and to facilitate home ownership among the cohort of prospective buyers most affected by the precipitous decline in mortgage lending and concerns about future housing values. NAMA’s plans are firmly in line with and supportive of stated Government policy related to the need for stability in Ireland’s property markets, which may now be displaying clear signs of undershooting in terms of their medium-term equilibrium level, although perhaps not to the same degree that they overshot on the way up.
The issue of NAMA’s social contribution is something on which Mr. McDonagh will focus in more detail, including our role in the provision of social housing and contribution to housing policy more generally.
NAMA has a clear commercial remit against which we will be ultimately judged. In this context, the NAMA board has committed to offering first option to public bodies on the purchase of property which may be suitable for their purposes, including, for example, for schools, health care facilities, including primary health care centres, community and recreational amenities and civic buildings. Towards this end, we have ongoing and constructive engagement with the Departments of the Environment, Community and Local Government, Education and Skills, Health, and Tourism, Culture and Sport, as well as the universities and the HSE, with a view to identifying possible solutions for them. Examples include the provision of sites for the Department of Education and Skills, UCD and UCC and the development of a primary care centre and an ambulance station in Tallaght for the HSE.
This social contribution is sometimes more personal, for example, our very quick intervention, in co-operation with Dublin City Council, in regard to suitable properties for residents evacuated from Priory Hall, although the Priory Hall development was not a NAMA asset. We are also involved in interventions that are, on the face of it, small-scale for NAMA but huge for the individuals and families concerned. In a recent incident we were able to provide a larger premises for a family with a severely disabled child. These social interventions matter to us and it is important that we say so.
I am conscious Mr. McDonagh will deal with a range of other issues relating to our day-to-day activities so I will conclude my opening statement by referencing my commitment, and that of NAMA, to engage proactively with Oireachtas Members on NAMA’s work. We are always available for such engagement.
Mr. Brendan McDonagh: I thank the committee for the invitation to attend and give evidence before it today on NAMA’s functioning. Mr. Daly has covered a number of important points on the principles that guide NAMA’s strategy and day-to-day activities and has articulated the agency’s commitment to supporting the national imperative of economic and employment recovery. As chief executive, I reiterate this commitment.
I want to outline the milestones that have been reached by the agency in the two years since its establishment and to signpost the agency’s evolving strategic direction. I will do so with reference to the facts about our work. I will also highlight a number of what I believe to be misconceptions about the agency with regard to the scale, composition and geography of our loan portfolios and underlying securities and in respect of how the agency goes about its daily work.
Today’s engagement is timely for a number of reasons, not least because the agency has reached the next logical and very important juncture in its evolution. We have concluded the first critical phase of our work. This has included purchasing and transferring loans with a face value of €74 billion while simultaneously constructing an organisational infrastructure capable of meeting the enormous challenges set for the agency by the magnitude of Ireland’s financial and property market crises.
The agency is in a new phase, focused on our core commercial objective of recovering for the taxpayer at a minimum what we paid for the acquired assets in addition to whatever we have invested to enhance property assets underpinning these loans. NAMA is pursuing a number of strategies to achieve this overriding objective. The main strategies are the agreement of detailed asset sales schedules with debtors; the optimisation of NAMA cashflow from loans and debtors; the adoption of an active loan sales strategy; innovations to attract international investor capital to Ireland; and measures to increase market activity in commercial and residential property markets in line with the potential for recovery in both. We are also developing strategies to achieve our objectives in the broader context of the 2009 legislation, taking account of the need to contribute to the social and economic development of the State.
NAMA applies best practice in dealing with the decisions of banks and the borrowings of debtors that were at the root of the property market problems in this country, and which continue to frustrate economic recovery. An important aspect of NAMA’s work, therefore, is the application of rigour in our dealing with debtors. This is not what many were used to in the banking and property development practices that have led us all here but it is the only way the mistakes of the past can be put right. However, NAMA’s rigour does not mean, as some critics claim, that we are either slow or lumbering. The fact is we are neither; we are careful and the average decision time is within six days. This is one of the key misconceptions about the agency I wish to address. I ask committee members to consider the facts as I work through a number of key headings relating to the agency’s work.
A total of 189 NAMA-managed business plans have now been assessed representing approximately €59 billion, with three debtors to complete whose debts amount to €2 billion. These were late acquisitions in October 2011 and we expect to complete the review of these business plans by April. A total of 541 participating institution-managed business plans of the 599 smaller debtors have been assessed, with 58 to complete. According to these figures, we have completed the assessment of business plans covering 97% of the loans on our balance sheet with reference to a loan acquisition value of €31.8 billion.
I wish to take this opportunity to advise the committee of the decision of the NAMA board to establish dedicated teams comprising 15 existing NAMA staff which will monitor and supervise intensively the management of the 599 NAMA debtors being managed by approximately 500 staff in Bank of Ireland, AIB and the Irish Bank Resolution Corporation, IBRC, which operate on NAMA’s behalf. The teams concerned will be situated in the institutions and will ensure the highest standards are applied by the institutions to the management of the €5 billion of NAMA debt involved. This decision is part of the evolving NAMA strategy referred to at the outset.
In cases where it makes demonstrable commercial sense from the perspective of the taxpayer, we work with debtors with a view to maximising the potential return from their loans and associated assets. This, in practice, means the sale of properties to support phased debt repayments; the assignment of rental income; the granting of charges over unencumbered assets; and the reversal of transfers to relatives and others. We have approved asset sales valued in excess of €7 billion and in the 22 months since March 2010 when we acquired our first loans, we have generated more than €6.6 billion in cash flow.
We also have been granted charges over assets with a value of €221 million. This means we have secured almost €250 million in new securities from our debtors since we began operations. It further protects the position of taxpayers. A total of 50 of our largest debtors transferred assets to family members or connected parties. Of these, 31 involving assets worth €160 million have been reversed. The highest single transfer reversed was worth approximately €30 million. We are pursuing 22 others, some through the courts, and we are actively carrying out asset searches in other cases outside this top 50. When completed, the aggregate value of these unpledged assets may prove to be approximately €500 million.
Circumstances exist in which the agency has to take enforcement action - which is not a preferred option - where debtors have been unwilling to work with NAMA because they consider our terms to be too onerous and because of NAMA’s objective commercial assessment of the best likely return for the taxpayer. In such cases the agency explores the various enforcement options legally available to it, including the obtaining of judgment and seeking to attach this judgment to assets owned by the debtor concerned to the extent it is legally permissible to do so.
NAMA has taken enforcement action in 214 cases connected to 116 individual debtors and declined 44 others. At the start of this month, NAMA updated its website list of properties subject to enforcement action. The total number of properties now listed is 1,119. A total of 72% of these properties are located in Ireland, with 13% in Northern Ireland and 15% in Britain. The geographical breakdown can be somewhat misleading in that enforcement can relate to individual properties or multiple properties such as apartment blocks. In Northern Ireland, for instance, the bulk of enforced properties are single units.
In the vast number of cases, the properties subject to enforcement are for sale or are under management and generating income. In some instances, receivers are working through outstanding title defect and ownership issues and planning and compliance issues, and these will be offered for sale as soon as is practicable and in line with NAMA’s strategy for dealing with the property. Since the end of March 2010, NAMA has made more than 7,000 individual credit decisions ranging from the relatively straightforward to substantial and complex applications. This amounts to more than 160 credit decisions per week. As I noted, the average turnaround for decisions is six days and we work to a target turnaround of seven days.
Another misconception is that the National Asset Management Agency is simply a debt collection agency. The 7,000 credit decisions to which I referred have underpinned more than €1 billion approved in advances of working and development capital to debtors. New advances of more than €1.1 billion have been approved and are split between Ireland, at 45%, Northern Ireland, at 1%, Great Britain, at 45% and other locations, at 9%. We will allocate capital wherever there is a commercial rationale for doing so. A number of important points are worth making in respect of this split given some recent commentary. The approval of advances in Britain must be seen in the context of asset sales of more than €3 billion of loan and property assets in that country, which represents a significant net income flow for the National Asset Management Agency and Irish taxpayers. More than 80% of NAMA’s cashflow is currently generated from UK assets, reflecting current liquidity in the British market and the location and quality of the assets underlying the agency’s loan portfolio. It makes sound commercial sense for NAMA to focus on liquid overseas markets at this point in the economic cycle.
In terms of Northern Ireland, the figures presented may not provide the full picture. The agency has advanced significant additional working and development capital to Northern Ireland debtors who have projects both in Northern Ireland and the United Kingdom. Much of this capital is therefore accounted for with reference to data for Great Britain. It is also important to note the mix of assets in NAMA’s Northern Ireland loan portfolio, which is characterised by a high proportion of land not under development or so-called dry land. This limits the opportunity to advance new working and development capital at this stage as it does not make economic sense to do so.
In Ireland, we have approved working and development capital advances of more than €500 million. This represents a significant injection of capital into the construction sector and more widely at a time when the economy is experiencing a protracted credit drought. We anticipate there will be significant opportunities in the coming years to advance working and development capital in respect of the Irish market as the economy improves. In making this point, I am conscious of the misconceptions relating to NAMA’s Irish loan portfolio. While due diligence on acquired loans is nearing completion, a preliminary analysis suggests that 56% of such assets are located in Ireland, 34% in Britain, 4% in Northern Ireland and the residual 6% largely elsewhere in Europe and the United States. The property assets underlying our Irish loans are worth €18 billion by reference to November 2009, approximately €11 billion of which is located in the greater Dublin area.
Our ongoing engagement with potential investors suggests there is growing overseas interest in acquiring Irish commercial assets, particularly in prime office and retail properties in Dublin with good covenants and attractive yields. The scale of the fall in Irish commercial property prices from peak of close to 65% according to the Investment Property Databank, IPD, has meant that yields on investment assets have reached very attractive levels of more than 8%. Measures announced in the recent budget, including the substantial cut in stamp duty and new capital gains tax incentive relief, are also likely to help the market.
NAMA’s residential portfolio is predominately located in the metropolitan growth centres of Dublin, Cork, Limerick and Galway, which are characterised by strong rental markets and emerging indicators of pent-up demand for residential purchases. The agency will only provide additional capital to projects that are commercially viable and only where the additional capital will deliver a better return to the taxpayer than otherwise would have been the case.
In terms of NAMA innovations, we are constantly examining ways to encourage transactions in the property market through the use of innovations such as vendor finance, qualified investment funds or initiatives for the mortgage market. Vendor finance is an example of such an initiative and is an increasingly attractive option from NAMA’s perspective. While there is significant interest in our portfolio, lack of finance is a major difficulty in Ireland and internationally. Most buyers are unable to borrow at an interest margin of less than 4.5%, even on good assets. As NAMA’s cost of capital is lower, we are able to offer vendor finance at a minimum margin of 2.5% and up to 70% loan to value.
Vendor finance offers a number of advantages for NAMA, the most obvious being the opportunity to de-risk our loan portfolio significantly. It also brings more buyers into the market and adds price tension. This is true even where the option of vendor finance is not taken up by the eventual buyer. The need for vendor finance becomes clear when one considers that most traditional lenders to the sector are pulling back from making new loans, and other major financial institutions have announced moratoriums on lending to property, both here and internationally. NAMA is not a bank and considers vendor finance as an aid to market participation only when applied to the right product and, critically, the right client. Applied correctly, it can play a positive role in attracting international investment into Ireland’s commercial property market and supporting employment.
NAMA will consider vendor finance on a case-by-case basis. By the end of this year, we also intend to have launched at least one sub-investment fund, known as a qualified investment fund. These sub-funds, based on regional or sectoral portfolios, are a way to attract institutional investors such as pension funds and sovereign wealth funds to buy properties on a phased basis. We are also about to begin an active loan sales process, having recently established panels for Europe and the United States. This will enable us to monetise the loan portfolio and thereby reduce the size of our balance sheet. We will also pursue an active marketing strategy for loans and, with the consent of our debtors, for the property assets securing them.
We are also close to launching a pilot residential mortgage initiative with partner banks which, in simple terms, will provide potential purchasers with a level of protection against housing values falling from current levels over the next five years. We have received approval from both the Minister for Finance and Central Bank and are awaiting final approval from the European Commission, which we expect to receive shortly. In all cases, the sale of loans or the assets underlying them will be conducted in a structured way. We will not sell off the portfolio cheaply. There have been attempts, driven by misconceptions about Ireland, to low-ball us but we have not been a fire seller as that would not be in the interest of the taxpayer.
In terms of NAMA’s wider socioeconomic contribution, we are at all times open to proposals, and the agency actively contributes to public policy processes aimed at supporting the achievement of wider social and economic objectives. While there are wide-ranging examples of this, I will focus on the agency’s engagement with the Department of the Environment, Community and Local Government and local authorities regarding unfinished estates and the broader issue of social housing provision. Following release of the report of the advisory committee on unfinished housing developments last June, the Minister of State with responsibility for housing established a national co-ordination committee to oversee action on unfinished estates and monitor and drive progress. NAMA has assigned two representatives to the committee which meets regularly. The committee focused its initial attention on the 243 estates categorised by local authorities as the most problematic, known as Category 4 estates. It is often incorrectly assumed that the vast majority of unfinished estates are under the NAMA’s control. Only 29 or 12% of Category 4 estates are controlled by agency debtors or receivers. We are funding, through our receivers, the cost of urgent remedial work on these estates, which is estimated at €3 million. Good progress has been made in this regard.
NAMA is moving towards dealing with the next worse group of problematic estates, namely, Category 3 estates. The agency has exposure to 150 of the 1,500 estates in this category. Work on these estates is ongoing and we are at an advanced stage in clarifying the status of each site, agreement of plans and timetables for site resolution.
In December 2011, NAMA identified more than 2,000 properties as being available for social housing. As the Minister for the Environment, Community and Local Government stated at the time, this represents potentially “one of the largest housing allocations made in the history of the State”. NAMA is working systematically with local authorities and the Housing Agency to determine the demand for and suitability of the identified properties. This work is well advanced and we expect units to come on stream in the coming months.
NAMA has exposure to 121 hotels of more than 900 hotels operating in the country, which is a relatively small share. While the agency has exposure to 20 golf courses, most of which are attached to the hotels to which I referred, there are more than 400 golf courses in the country. These figures show that, contrary to urban myth, our debtors have relatively small exposures to the hospitality sector.
While I am conscious of time, I wish to briefly address a number of additional issues. The first issue is NAMA’s ongoing interaction with State agencies, including the IDA, to identify the potential for synergy between NAMA related properties and the requirements of inward and indigenous investment. The agency’s chairman referred to a recent example involving 230 new jobs for Dublin and noted that NAMA’s actions facilitated the sale of a second site. NAMA has worked closely with South Dublin County Council and IDA Ireland in addressing legacy issues. Further, we are developing communications systems to ensure the timely relay of information to NAMA from State agencies which interact with us directly or through clients.
In his budget 2012 speech, the Minister for Finance referred to the NAMA policy guidance for dealing with upward only rent reviews. Our guidance provides an opportunity for NAMA to approve rent reductions where it can be shown that rents are in excess of current market levels and viability is threatened. The policy also provides for the appointment of an independent valuation of market rent where necessary. Where a qualifying tenant is unhappy with the negotiations with his or her NAMA landlord, he or she can contact us directly and many landlords have done so. It is important to add that the guidance is not designed to accrue benefits to a tenant who may be in a position to bear the burden of rent under existing contractual arrangements where the tenant is part of a group with profitable trading outlets inside or outside Ireland.
In the past month we have advised of a number of changes in structure and responsibility at a senior level in NAMA, including the proposed appointment of a chief financial officer, a process which is well under way. These will ensure that NAMA is correctly positioned for the challenges ahead and will enable it to focus its full attention on the management of its portfolio of assets and maximising recovery of funds for the taxpayer.
Our projected costs for 2012, at €194 million, are 0.6% of the consideration we paid for the loans. Some €74 million of these costs will be paid to the institutions who employ 500 staff to administer the loan portfolio on our behalf.
We are generating strong cashflows through a combination of debtor repayments and the asset sales. This will be used to finance working and development capital and also towards paying down NAMA bonds as part of meeting the €7.5 billion repayment target by the end of 2013.
In accordance with the IFRS accounting standards, there has been some commentary lately about the accounting policy used by NAMA. Effectively, we have had to apply a methodology known as effective interest rate methodology. We acquired a distressed loan portfolio at a significant discount to original par value and we are using a collateral base valuation model in accordance with accounting standards to project the expected recovery on the related cashflows and expected receipts on the disposal of these assets over time.
A significant portion of the loans acquired are not expected to perform in accordance with their original contractual terms. As a result, the most significant portion of the cash generated by NAMA will be on the future disposal of underlying property over time and not from the receipt of the expected contracted interest. Interest income is therefore recognised on loans in accordance with this methodology by reference to the related cashflows on a proportionate basis over the life of the loans rather than on a cash received basis in order to accurately reflect the effective rate of return over the expected life of the loans. This is in accordance with international accounting standards and approved by their auditors.
In addition to the public accountability provisions contained in the National Asset Management Agency Act 2009, we have implemented a number of strategies to support communications with the Oireachtas and with the public. No person is more conscious than me of the huge responsibility we have at NAMA, but I am fortunate in that I have been able to assemble a strong committed group of people and I have a very supportive board. Our objective every single day is to do the right thing. We recognise that others may have contrary views but many of the commentators propose no realistic or credible alternatives. We are always open to receiving ideas and solutions on how best to optimise the portfolio.
Deputy Michael McGrath: I thank Mr. McDonagh, Mr. Daly and Mr. Mulcahy for their attendance here today and for their comprehensive opening statements, which were circulated in advance, which meant we had an opportunity to study them and prepare some questions.
I have a fundamental question for Mr. McDonagh and Mr. Daly. Based on their experience to date and based on all of the available economic data currently before them, how confident are they, in overall terms, that NAMA will recoup, at a minimum, the €31.6 billion it has paid for the loans plus the operating costs of running NAMA to the end of its lifetime? That is the fundamental question that needs to be answered. I accept fully that there are a great many unknowns, that there are variables and that the economic picture is changing all the time, but it is important that we get a sense from them as to their best judgment, as of today, of the likelihood of the taxpayer recouping all of the money that has been paid out and the anticipated costs of running NAMA up to the end of its lifetime.
The key issue for NAMA, and this has been very well identified in the Michael Geoghegan report, which is a useful body of work, is to evolve from its start-up phase, it having been on a statutory footing now for two and a quarter years. Michael Geoghegan put it well when he spoke of the need for NAMA to become “a proactive, externally focused, entrepreneurial, confident business”. That is what it needs to become. I hope NAMA is committed to that and to moving beyond being simply a debt collection agency and to operating as a commercial asset management agency, which is what it was envisaged to do.
One of the key issues NAMA faces is the management of going concern businesses. That is an issue that has emerged in recent years. The structures may not have been in place properly to deal with going concern businesses that are NAMA’s debtors and in particular associated companies within debtor groups which perhaps are not involved in the property development game but which continue to operate as going concerns. In my experience, they are finding it difficult to interact with NAMA which does not have the experience of dealing or the expertise to deal with those types of businesses that are trying to continue in operation.
Mr. McDonagh mentioned the number of business plans that have been assessed. How many business plans of the top 180 or so debtors that NAMA manages directly, and of the remaining 600 or so currently being managed by the financial institutions, have been agreed and signed off on?
Mr. McDonagh referred to upward only rent reviews in his opening statement. Did NAMA lobby the Government or make its views known to Government about the impact of removing the ban on upward only rent reviews in recent months? Mr. McDonagh referred to the guidance, to which the Minister referred on budget day, which provides an opportunity for NAMA to approve rent reductions. Can Mr. McDonagh advise if NAMA has approved rent reductions for tenants, who, as we all know, are under great financial strain and find it difficult to get by?
Can Mr. McDonagh advise the level of the cash reserves currently held by NAMA, where they are deposited and the rate of return NAMA is earning? Is he satisfied that those reserves are being put to the best possible commercial use in terms of maximising the return for the taxpayer?
Mr. McDonagh referred to asset sales and I know NAMA has a commitment to redeem further bonds towards the end of next year. He referred to approving asset sales of €7 billion. To what value have those sales been effected and revenue been received in respect of them? Is there a sense that the low hanging fruit has now been sold or is it that the media tend to focus on the top hotels in London that have been sold? I get the sense that vast elements of NAMA’s property portfolio will not be as marketable. Mr. McDonagh confirmed that 80% of NAMA’s cashflow is currently generated from the UK in the form of debtor repayments and asset sales. That is a concern given that only about one third of the portfolio is accounted for by the UK. Mr. McDonagh might like to comment on that.
On the issue of the spousal transfers or transfers of assets to relatives, Mr. McDonagh covered that in his opening statement and confirmed that 50 of the largest debtors transferred assets to family members, presumably in contravention of the National Asset Management Agency Act which empowers NAMA to reverse any such transfers. It must be a matter of huge concern that such a high proportion of the wealthiest developers have engaged in such a practice. Can Mr. McDonagh advise if, through his examination, he has identified any matters surrounding those transfers that should be or have been referred to the Director of Corporate Enforcement or the Garda Síochána?
Mr. Frank Daly: I will start off with Deputy Michael McGrath’s first question. He asked, based on our experience to date, the level of confidence we have in regard to recovery of the €31.6 billion plus carrying costs. It is a timely question from our point of view. It is one of the things the board is engaged in currently in terms of looking at our strategy and at what has happened in the property market since we acquired all these assets, based on November 2009 values. Everybody in this room will know that the property market has gone in only one direction since then. It is timely that we are looking at this and it is a key question for us as to what we will recover. I need to say and again put on the table that our objective continues to be to recover as much as we possibly can for the taxpayer. It is not confined to the €31.6 billion plus carrying costs; it is anything we can get on top of that, which would bring us up to a maximum of the par value of the loans. Mr. McDonald and I have been realistic about that lately. The prospects of recovering the full par value of the loans certainly are not great. In fact, they would be pretty weak. Will we recover the €31.6 billion plus carrying costs? I would be confident we will. It will be a huge challenge but based on what we see at the moment, the activities we are engaged in and the initiatives we mentioned in our opening statement, such as monetising the portfolio, I am confident we will recover.
Mr. Frank Daly: I am unsure what the carrying costs are, Mr. McDonagh might have a better view of that. Any consideration we give to figures covers what we have paid out for the loans, plus carrying costs plus interest.
Mr. Frank Daly: There is nothing to suggest we would not achieve that figure. Like everything else, there are risks attached to it and many of our projections are based on economic recovery. It is interesting the way that forecasts of economic recovery, growth, GDP and GNP change rapidly. No one is extremely confident in making forecasts for here and our projections are based on that.
The Deputy asked if we are proactive, externally focused and entrepreneurial. In terms of what the agency has been doing and the initiatives we have mentioned, and the plans we have in the Irish, British and other markets, absolutely. It was natural that the first huge job for the agency was to transfer the loans to the value of €74 billion, around 11,000 loans from 800 to 900 individual connections with all of the legal and other due diligence. It is a massive job done without any great difficulty or scandal. Other agencies of our type that have engaged in such work have not got this far without major scandal so we regard that as a success.
Sometimes I hear people saying we should not be focusing on debt collection. We are not a debt collection agency, we are an asset management agency but it would be naive to think we do not have debts to collect on behalf of the Irish people. We do and we cannot lose focus on that. We will keep a focus on it, however, at the same time as our primary focus being on asset management and working out.
Mr. McDonagh might want to talk about where we place the money but the cash at hand amounts to €4.3 billion, not the €6 billion mentioned from time to time. We have been talking already about how NAMA focuses on working with debtors for the benefit of the Irish economy and jobs. That will need injections from NAMA in many cases. We have made it clear that although we have authority under the Act to borrow €5 billion, we have no intention of doing that. We do not intend to go back to the Exchequer. It is important we generate cash and generating €6 billion to date is not inconsiderable. We have productive uses in mind for that cash. Most importantly, we must ultimately pay down our debt and every time the troika visits Ireland, Mr. McDonagh must account for how we are doing. There is a specific target of €7.5 billion by the end of next year. A figure of €4.5 billion is not inconsiderable. It sounds a lot but it is being put to good use.
Mr. Brendan McDonagh: There was a question about business plans. There are 790 individual business plans and we have strategies for 530 of them agreed with debtors. There are 180 debtors who have had enforcement orders against them, some of which were inherited by us when the loans were acquired, including some high profile ones. There are about 60 other business plans to assess. Effectively, the statistics show close to two thirds of the debtors are working constructively with us to achieve an outcome to work their way out of the situation. In fairness, it has not been easy for some of these debtors who got themselves into severe difficulties; two thirds of them are trying to work their way out and repay their debts, giving us unencumbered assets.
There were two questions about upward only rent reviews. NAMA made its views known to the Minister in early 2011 that the policy decision was up to Government but there would be an impact on the portfolio we were managing on behalf of the taxpayer if the upward only rent reviews were changed. Have many people applied for rent reductions? From 2011 until this morning, we have received 150 applications from debtors and people contacting us after the debtor did not engage with them when they were looking for rent reductions. We have approved 120 of those rent reductions and we have 30 others on hand that we must decide on. We are doing our bit to be realistic about what is happening in the market.
The Deputy asked about asset sales and we said €7 billion had been approved. We have collected more than €6.6 billion in cash, with close to €5 billion as a result of asset disposals. Some of the approvals do not happen because the buyer wants to chip the price at the end or cannot get the finance he wants but our job is to keep the transactions rolling.
It is no secret that to meet our 2013 requirement to get €7.5 billion in cash, we must sell the assets with the greatest liquidity and those are in overseas markets, particularly in London. The Irish market is moribund. In 2006, there was €3 billion worth of commercial property transactions and €4 billion of speculative land transactions, along with €39 billion in residential mortgages, giving a total of €46 billion in activity in the Irish property market. Last year, there was €200 million in commercial property transactions, €28 million in land transactions and €2.4 billion in residential mortgage activity. The market place is completely different and that is an issue. We have €18 billion worth of assets in Ireland and we are trying to attract international capital but €11 billion of those assets are in Dublin, which is where economic activity takes place and will return to economic growth much quicker. We are confident we can realise those assets but the issue is about making the environment right for people to invest in Ireland.
In my statement I said there had been 50 debtors’ transfers to relatives and we have retrieved €160 million to date. I have previously said there is no pot of gold; many of these debtors, and we have had sworn statements when we asked for details of transfers for the last five years, did not see the market changing and they regret that now. Of those who have transferred assets out, the majority are transferring them back because they realise we will not support them unless they do that. For those who refuse, we must pursue a different option. That option starts off with enforcement and, second, with us taking court actions. We are involved in a number of high profile court actions at present in terms of trying to reverse asset transfers. We are not afraid to do that.
Mr. Brendan McDonagh: Absolutely. We made it clear in our guidance note that if one is not getting any traction with the debtor, one can contact us directly. We will talk to the debtor and see if we can find a reasonable solution.
The last time Mr. McDonagh was before the committee he spoke about the self indulgent, the unviable and those who were complying. Today he said that two thirds of developers are complying with NAMA. I have looked through some of the reports and found that NAMA has paid €18.8 billion for non-performing loans. Of these, €17.3 billion are essentially defaulting, in the sense that there is either insolvency or it is over 120 days since any payment has been made. That amounts to 96% of the non-performing loans. According to the quarterly and annual statements, throughout 2011 NAMA continued to take on defaulting loans. It is still valuing the loans it took on through 2011 at November 2009 prices, due to the legislation with which it is dealing. When NAMA took on these loans, did anybody inform it that these loans are not performing to the degree that they are defaulting? When NAMA gets into discussions with debtors or banks, do they tell NAMA to stay away from the loans as some of them are dead ducks and are defaulting to that degree? Does NAMA just take them on regardless?
We must differentiate why the situation appears to be getting worse based on the figures Mr. McDonagh has given us. Is it because NAMA is selling off the performing loans that the figures look worse? We need to know this. If NAMA is only selling on performing loans, it will be left with the dross of the Celtic tiger property market at the end of 2013, and the ability to recover any great amount of funding after 2013 could be very poor. Mr. McDonagh talks about the board’s strategy but, and Deputy McGrath was making this point as well, one can see that it is not so much low hanging fruit but rotten fruit on the ground that will be left after a period.
On the socioeconomic front, how easy would it be for a sports organisation in Wexford town, for example, to acquire land from NAMA? On another issue, does NAMA have access to a large greenfield site co-located with a major hospital that could be used for a new children’s hospital? Does NAMA actively seek out these types of opportunity when it sees them, such as on an issue like the children’s hospital?
Mr. Daly referred in his statement to commentary about NAMA. However, we have heard on the grapevine that NAMA nearly lost a few opportunities because its expectations were considered to be excessive. We hear these stories too. Mr. Daly might say that people have an agenda but does he feel under pressure to deliver because, perhaps, NAMA paid too much for these loans? Unlike other asset management agencies, NAMA is the only one that has a legal obligation to deliver under section 10(2). Does that put an excessive demand on the agency or put it under excessive pressure? Perhaps what is also keeping the agency very much in the public eye is the fact that it is the only asset management agency of the three currently in the market that has a statutory role. I asked a question previously which I will ask again, in case it cropped up at the last board meeting. Does Mr. Daly believe changes are necessary in any aspect of the National Asset Management Agency Act on the basis of problems the agency has encountered in the last 12 months?
According to the quarterly report, a €400 million loss was made on derivatives. Will the witnesses explain what that loss means? The witnesses say NAMA is helping the individuals with regard to Priory Hall. NAMA considered taking over Priory Hall but it rejected the loan. We had some correspondence with NAMA at the time and NAMA basically implied that only two properties were sent back to the banks because they did not fulfil NAMA’s legislative obligations. The annual report states that of the €2.6 billion NAMA was considering taking over after April 2011 it only took on €1.9 billion. It did not acquire €400 million of those loans, and an additional €250 million of the loans were considered to be ineligible. That appears to be contradictory in that NAMA only found it necessary to send back two loans to the banks in September, yet it seems to have deemed millions of euro worth of loans to be ineligible in that period of time. Will the witnesses clarify that for me, as my understanding of it is probably not great? Perhaps it has something to do with the due diligence that NAMA had not completed at that point.
Chairman: A number of members wish to ask questions. Can I suggest that there should be a principal respondent in each case if possible, but if it is necessary for an additional matter to be discussed by another respondent, that could be done? In circumstances where a member directs a question to one or other of the witnesses, they would obviously have to answer but we need to make progress if possible. It is a very useful engagement.
On the socioeconomic front, it is our policy to engage with local communities and local authorities. Whether it is a field in Wexford or elsewhere for a local club, we are certainly well disposed towards facilitating that. Obviously we have a commercial mandate but there are numerous examples of where NAMA has been able to work with the debtor and with whatever local community requirement that exists and get a result. On the children’s hospital, the minute the issue came to the fore again recently, NAMA would have been active in identifying any sites it has. We have a number which we believe would be suitable and we are in the process of identifying them and feeding them to the Government and into the process. I stress that NAMA is not taking a view, one way or another, on where the hospital should be located but if we have properties, we will identify them.
The Deputy spoke about the grapevine and asked if we feel under pressure to deliver because of the legal obligation under section 10. I referred specifically to the particular site in south County Dublin. The couple of other stories that were around recently which I was referring to included one that related to BSkyB jobs. What was in the public domain certainly did not give the story from NAMA’s viewpoint. We were in a process of negotiation which, from our point of view, was always going to come to a positive result, both for the client and for NAMA. There was a similar one relating to an earlier case which I do not wish to mention because it is still in play but, again, it is a question sometimes of a little negotiating being done in public and pressure coming on us from that point of view. However, we are not under pressure because of section 10 of the Act. We are not being unrealistic in what we wish to seek simply because we have a commercial remit. I will make no bones about the fact that we are, to a certain extent, disadvantaged with regard to other banks or entities which might be in the same business, that is, deleveraging in the property market. As we are a statutory body there are certain requirements on us in that area.
We have not identified any legislative change at present. It might not be popular to say it but, for example, the restriction in the Act which bars us from selling assets back to a defaulting debtor is a restriction that does not apply to any other body in the same business or space as us. I do not know if that will be a problem in future but it is something we must consider. I offer it as an example. If we find something that is a legislative barrier, we will identify it for the Government.
Mr. Brendan McDonagh: The Deputy’s first question was about performing loans. He is correct that they were valued by reference to November 2009. Under the Act and the regulations prescribed by the Minister, certain types of assets were prescribed for NAMA to acquire, primarily land development loans and the associated loans of those same debtors. We had to acquire them.
The Deputy raised the issue of performing loans. The loans’ level of performance was pretty constant all the way through 2010 and into the second quarter of 2011. The relevant figure for 2011 was 23% but it has decreased to 21% at present. It is clear that as one sells one’s better loans, one’s cashflow will start to disappear. We are countering that by capturing the income on debtors’ other loans. Many of the debtors we inherited were collecting their rental income but were not using that income to meet their loan obligations. We have sought mandates on the rents directly from the tenants. The tenants pay us directly into our bank account. That money is then used for the loans. That is how we are countering that. Our objective is to maximise the cashflow. We have to look at each of the assets. As part of the business plan process, we get to know the asset, find out what the debtor is up to and get a handle on that.
The Deputy also mentioned the €400 million loss on derivatives. That is known as a mark to market assessment of where interest rates are at a point in time. The Deputy is right to say there was a €400 million loss in the third quarter. That loss had become a positive figure of €8 million by the end of 2011. It is a question of the movement of interest rates on the market. We use interest rate swaps to hedge our interest rate to lock in long-term interest rates at low yields. Our cost of funding is close to 2%. That gives us security in terms of the future funding costs of NAMA bonds. We are not trading them. They are there for a long time. If interest rates go up and down in the market, that is what happens.
The Deputy also referred to Priory Hall. It was one of the loans identified to come to NAMA. When the due diligence on that loan was presented, serious defects were identified. That caused an issue under section 85(3) of the Act. It had a negative value because the cost of rectification was going to be greater than the value that would be put on the loan. Under section 85(3), we were not allowed to acquire those loans. Another example might relate to a piece of land where serious contamination issues were identified when the due diligence was carried out. The field might be worth €1 million on the face of it, but the rectification of the serious contamination issues might cost €2 million. It would have negative value, in effect. Under section 85(3), we would not be allowed to acquire it.
Deputy Liam Twomey: NAMA seemed to acquire a load of loans towards the end of the year in question. Was the same reasoning, relating to the long-term economic value of these loans, used when they were being acquired?
Mr. Brendan McDonagh: No. Two matters arose in that context. A Supreme Court decision in April 2011 stated that there was an implied right of representation of debtors before the loans could be acquired. In the cases of debtors who were entitled to make representations to us with regard to loans that were supposed to be acquired, we wrote to the debtors in question to ask whether they wanted to make representations setting out why their loans should not be acquired. When those representations were made, we had to assess them and go to the board on a loan-by-loan basis. We said that the debtor did not want NAMA to acquire a specific loan for certain reasons and asked the board to determine whether those reasons were valid. We accepted the debtors’ representations with regard to some loans that they did not think should be acquired. In some cases, it transpired that the loans put forward by the banks were not eligible.
Deputy Pearse Doherty: I welcome our guests from NAMA. I listened with interest to their opening statements. I particularly liked the assertion that NAMA welcomes questions from the media and public representatives. That is very important, given that the operating cost of NAMA is approximately €531,000 every single working day. I assume NAMA works at weekends and on bank holidays.
It is important that NAMA is scrutinised properly. We do not want the representatives of NAMA to feel vulnerable, but to have a chance to give as much information as possible to the public and to public representatives on what is happening under the hood of NAMA. To that end, I published a Bill today that proposes to apply the provisions of the Freedom of Information Acts to NAMA.
One of my first questions relates to a request that has repeatedly been made by the Office of the Information Commissioner. I would like to hear the views of the officials on the dispute between NAMA and that office, which is before the courts at present. It is disappointing that the taxpayer is paying the legal bills of the Office of the Information Commissioner and NAMA. The case centres on whether an Internet blogger should be able to access information. I feel it should be available.
I will run through my other questions as quickly as possible. Can the witnesses tell the committee how much NAMA incurred in costs on the Paddy McKillen court case? A year after the Supreme Court proceedings ended, is it still the case, as NAMA has suggested previously, that it is too early to say how much those costs will be?
Can the officials tell us how the qualified investor funds will operate? I am sure they are following what we are all saying in the Dáil and in the media. I have previously expressed my fear that the funds will lead to further valuations costs, legal costs and charging costs. Is it the case that a “mini-me” or mini-NAMA is being operated here? Can the officials explain how the taxpayer will be protected in this instance from the high fees we have already seen NAMA pay to people in the legal profession and others?
Mr. McDonagh has already dealt with the question of the effective interest rate methodology, which I have raised with NAMA and with the Minister previously. I understand that NAMA is using this methodology as part of international practice. I suggest that from now on, NAMA’s annual reports should show not only the effective interest rate calculation, but also the actual interest rate calculation. I have asked the Minister to ask NAMA to ensure that is done in the quarterly reports as well.
The lay person who does not understand the effective interest rate will assume that NAMA is making €250,000 more in interest than it is actually taking in. It is obvious that the effective interest rate is based on projections of property values in future years. Can the witnesses tell the committee what the projections are for one, two, three, four, five six and seven years’ time? It is obvious that those projections must be a factor in the effective interest rate. If the officials can give those figures to the committee, I would appreciate it.
I wish to congratulate the chairperson of NAMA as I understand he has become a member of the special advisory board to NAMA. I was surprised by the appointments that were made. I do not understand the role of the advisory board. Perhaps the chairperson can explain it. I understood its role was to give the Minister independent advice on the operation and functioning of NAMA and to help direct NAMA.
I do not understand how the chairperson of NAMA can be on an advisory board that is supposed to be independent in directing and advising NAMA. It may be a question of giving executive powers to the chairperson. I do not mean to cause any tension between Mr. Daly and Mr. McDonagh when I ask them to explain that to the committee. I understood that the terms of reference of the advisory committee were to be published alongside the list of appointees. I am not aware that those terms have been published.
I would like to refer to some other conflict of interest issues. As a small State, we can have difficulties with such issues. Is NAMA satisfied that it can avoid conflicts of interest when it makes legal and auditing appointments? We have heard of two cases of legal firms and individuals representing NAMA while also representing others who are taking actions against NAMA. In the case involving the Office of the Information Commissioner that I mentioned, the legal team that NAMA has appointed to represent it is also representing Treasury Holdings, with which NAMA is also in dispute in the courts. I could mention McCann Fitzgerald as well.
Can the officials explain how the legal and auditing tendering process is taking place? Is it transparent? How are the appointments made? I am aware that a number of smaller provincial legal firms feel excluded from this process. According to information provided to my colleague, Deputy Adams, some €27.5 million has been spent on legal fees to date. A significant portion of that has been paid to some of the larger legal firms.
Does NAMA have sale or disposal targets that are set by the troika? Does it accept that its rate of sales and disposals is slowing down as we approach 2013? What is the explanation for this year? NAMA is selling on average €500 million worth of assets each month by reference to its original loan value. Given that it will not release details of individual sales and that it is a new, untested and unproven entity, what proposals has the agency to reassure the committee it is discharging its role competently? In regard to NAMA’s profit and the disposal of the €6.9 billion worth of assets, where is the profit shown in NAMA’s quarterly management accounts? What profit has been made so far in respect of the sale of those assets given that these are low lying and that some of the best assets have been sold?
In regard to NAMA’s precise plans for taking back the administration of small loans, as mentioned by Mr. McDonagh in his opening statement, in his review Mr. Michael Geoghegan said the loans should be brought back into NAMA. Will NAMA bring back these small loans to NAMA? The representatives mentioned that 15 individuals would be appointed to oversee the loans but they are within the banks. If NAMA takes back these loans, what profit will it make, given that it is providing 0.1% of the loan values to the institutions? What would happen to the staff who are dealing with the 500 loans in the institutions? If Mr. Michael Geoghegan’s recommendation is not being taken on board, will the 15 appointments be sufficient to deal with the issue?
The representatives have cleared up the perception in respect of NAMA’s involvement in some of the larger premises that could have risked jobs in the State. There was also the suggestion that a number of Ministers lobbied NAMA on this matter. I think we all know those involved - the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton, the Minister for the Environment, Community and Local Government, Deputy Phil Hogan, and the Minister of State at the Department of Finance, Deputy Brian Hayes. Will the representatives confirm if lobbying took place in respect of NAMA on that matter or by any other politicians on the sale of assets by NAMA? Is the lobbying of NAMA prohibited under the Act? If there was lobbying in respect of that or any other matter, would the representatives be duty bound to report it to the Garda?
Mr. Daly mentioned that NAMA is supporting 9,500 jobs. Will he give the committee an indication of where those jobs are located? While it has advanced €147 million in the past three weeks to debtors, only 46% of advances, more than €1 billion, are in Ireland. Are the 9,500 jobs in Ireland or are we supporting jobs in London and elsewhere as a result of the €1.1 billion that has been extended to debtors?
In regard to the European Commission, NAMA was supposed to have acquired all its loans and undertaken due diligence of the loans by February 2011. It is understood the European Commission has approved the valuation and due diligence of only one third of NAMA’s loans. When does NAMA expect to have approval for 100% of its acquisitions and what is the reason for the delay?
My final question is a follow-on to a question by Deputy Michael McGrath. In regard to the agreements between the debtors and NAMA, how many of the agreements allowed debtors have salaries in excess of €200,000? The representatives say that 550 are agreed, 180 are enforced, 60 have yet to be assessed and a large number have been assessed.
I remind NAMA that when it addressed the Committee of Public Accounts in November 2010 it explained there were three processes involved in regard to agreements: a memorandum of understanding; the heads of term; and the final agreement. Each of the documents needed to be signed by NAMA, the developer and, in some cases, the developer’s spouse. Will the representatives explain again to the committee how many of the three documents have been signed by NAMA, the debtor and the debtor’s spouse? I understand that assessments have been carried out. As explained previously to another committee, it is a three prong process, the final agreement being the third part. How many loans out of the 790 debtor cases have an end in sight?
Mr. Frank Daly: I will deal with a few of the questions but we will have to divide them between us. The Deputy asked about the advisory board, and I thank him for his congratulations. I understand the terms of reference were laid before the Houses of the Oireachtas last week.
Mr. Frank Daly: It is relevant to a question the Deputy asked because he referred to its role in the operations and functions and direction of NAMA which is manifestly not the role of the advisory group. The role of the advisory group is confined to advising the Minister on NAMA strategy, as proposed by the board of NAMA, advising the Minister on appointments to the board of NAMA, advising the Minister on the remuneration of senior executives of NAMA and advising the Minister on any other matters as he considers appropriate. Those are the terms of reference which are focused on strategy. In respect of my appointment, it is useful to have a conduit in that group from the NAMA board, but my role as chairman of NAMA and as a member of the board is distinct. It is made clear in the terms of reference that the advisory group does not have decision making powers under the NAMA Act. Therefore, its purpose is solely to advise the Minister. We had our first meeting yesterday morning and the evening before and it worked without any difficulty because of my presence.
The Deputy asked if NAMA can assure the committee it is undertaking its role properly. Today is part of that role. However, more important, is the role the Comptroller and Auditor General plays in NAMA with a permanent staff in the building who have full access to every paper, decision and e-mail that NAMA sends and he reports back to the Committee of Public Accounts. I understand he will soon publish another special report on NAMA. There will be the normal annual reporting plus special reports, as decided by the Comptroller and Auditor General. That is in his gift and his remit.
In regard to the management of small loans, the Deputy referred to Mr. Michael Geoghegan’s view that these should be taken inhouse and asked some consequential questions on the bank staff. The view is that while Mr. Michael Geoghegan identified risks attaching to those loans and made it clear that NAMA needed to keep a tight oversight on them, an issue about which we were well aware, the view of the board is that we should not take them into NAMA at this stage but should continue the arrangement in place and increase the oversight arrangements. That is what Mr. McDonagh referred to as embedding teams of five staff on a rotating basis in each of the three banks to oversee the management of the NAMA loans. We have also said that is an issue we will keep under review and if that is still a concern we will revisit it.
The perception of NAMA and jobs is an issue we want to put before the committee in respect of our attitude, our approach and our record. On the question of Ministers lobbying, Deputy Liam Twomey referred to the arrangements we have put in place for engaging with members of the Oireachtas. Certainly that is useful to us. It is a matter of any member bringing to our attention the concerns of a local community or a constituent. It is not lobbying because one is not advocating any particular approach. Certainly in that context, from time to time, everybody draws our attention to something that is going on.
In respect of lobbying and whether there has ever been a need for us to consider reporting anything, whether it be from a Minister, a Member of the Oireachtas or whomever, this has not occurred. As the Deputy is aware, it is an offence under the Act. In fact, it is an offence if we fail to report something we perceive to be a breach of the rules. It has not happened and we have not had reason to consider reporting anything.
The Deputy inquired about the 9,500 jobs. These jobs are located in Ireland. It would be true to say that ensuring that the companies involved remain in business would consequently ensure that the many other jobs which are supported down the line would be retained. We have injected €500 million into Irish companies and we are also injecting funds into companies which operating in Britain and Northern Ireland. I came before the Joint Committee on the Implementation of the Good Friday Agreement and I made the point that whereas our direct injection of capital to Northern debtors is something of the order of €45 million because we are also injecting capital into projects in Britain, in which those same debtors are involved, the real injection of funding to Northern Ireland is double that figure. Something similar is happening here as well. We have actually put €1.127 billion into the construction sector. I will not say that we are the only game in town but we are certainly the principal one.
Mr. Frank Daly: As Mr. McDonagh stated earlier, most of it has been invested outside the State. That is because this is where said capital, and the productive use of it, is most required at present. As we move down the line and as the economy recovers, we would expect to be injecting capital expenditure here in Ireland on an increasing basis. In the context of Northern Ireland, I was making the point that because most of our assets there are land, it is the one area where there is currently no demand for capital. I see that ratio changing. It is very much driven by where the projects are located, that is, where is it useful or commercial for us to inject the capital.
Mr. Brendan McDonagh: On the other questions posed by the Deputy, if the Government makes a decision that NAMA should be subject to the FOI legislation, then that will be something with which we will be obliged to deal. It will be a Government decision.
Mr. Brendan McDonagh: It is not FOI in the way that is understood by most people. It is a particular aspect of using European environmental regulations and trying to apply them to NAMA in respect of the underlying properties. We own the loans but we do not own the underlying properties. Those properties are held by the receivers or by the debtors. There is a technical legal point around that. The matter is before the courts so I would appreciate not having to go into detail on it. My understanding is that the senior counsel we have used in recent court case is the same senior counsel we used in respect of the environmental regulations. I am not aware of him being on the other side.
In respect of the case relating Mr. McKillen last year in the Supreme Court and the costs involved, as I informed the committee previously we still have not received costs. Those costs would go to the CSSO because the case was defended by the Attorney General. I understand it is the intention of the CSSO and the Attorney General to refer them to the Taxing Master. I checked the position approximately ten days ago and we still have not received them. That is my latest understanding of the matter.
The Deputy referred to the qualifying investor fund, QIF. Effectively, this will be an independent fund in which people will be able to invest. They will actually buy the assets involved - at arms length - from NAMA. I assure the Deputy that, in that in light of the level of due diligence we carried out in respect of acquiring the loans from the banks, when these assets are being sold by the QIF - which will have its own independent board - the information and the quality of the due diligence will be a lot less. I assure the Deputy that it will be much cheaper than was the case when we originally got the assets from the institutions.
Mr. Brendan McDonagh: Yes. Effectively, the QIF will be like any other company and the assets will have to be valued by reference to what the person involved wants to pay for them. That board will be buying them by reference to what is the current market value.
Mr. Brendan McDonagh: There is one final point. On disclosures relating to the effective interest rate, EIR, this is an extremely technical issue. The Deputy is correct that this is not easily understood by people who are not accountants. Even accountants who are not fully versed in international financial reporting standards, IFRS, have difficulty with it. We are involved in discussions with the Comptroller and Auditor General in respect of making additional disclosures in order to try to make matters easier in this regard.
Deputy Pearse Doherty also referred to the target sales disposals by NAMA that were set by the troika. As Mr. Daly said, I appear before the troika every quarter and it wants us to repay €7.5 billion of our debt by the end of 2013. We estimate that to do this we will probably have to realise sales of just over €9 billion. Effectively, we probably have approximately €4 billion of sales to complete by the end of 2013.
The Deputy referred to the European Commission. I cannot control the Commission, which receives the data after it has been subjected to due diligence. The Commission’s own advisers then sign off on it. I expect that matters will continue to proceed in this way. The Commission has indicated that it is quite happy to date and it has not raised any issues.
In terms of the agreements with debtors, some of the debtors effectively do not require full restructuring. They might have loans from three or four institutions and the loan documentation in respect of two of these institutions could be absolutely fine, while in respect of one of the others it might not be fully correct. These are the types of cases in which we would be obliged to carry out a partial rather than a full restructuring. Most of the 530 debtors would fall into the latter category where effectively there is a letter of support with the debtor which states that the loan documentation is fine, that we do not need to restructure but that we do require reverse asset transfers, a mandate to rent and additional assets as security. Essentially, it is additional security documentation that we need rather than requiring that the existing security documentation be redone.
Chairman: I accept that these are all key questions and I like to encourage engagement. However, Deputy Pearse Doherty has had the floor for approximately 30 minutes and there are 13 other members waiting to pose questions. I really must be fair to others. I ask Mr. McDonagh to do the best he can to provide brief answers to the Deputy’s remaining questions.
Mr. Brendan McDonagh: On the question the Deputy just asked, our original plan with the major debtors was to put memoranda of understanding in place and then carry out full restructurings. We discovered that when we got past those debtors - these were the top 30 - we decided it would be more efficient to consider the documentation and then draft letters of support where the documentation is fine. We only fix documentation which needs to be rectified. It was about streamlining the process and getting everything done much quicker.
Deputy Arthur Spring: I welcome our guests' opening statements, which go a long way towards dispelling a great deal of the misinformation which surrounds NAMA. In the context of the provision of services, when did NAMA put its tendering process and policy in place? To what quantitative amounts are legal tendering and accountancy tendering subjected? How many firms does NAMA currently employ in respect of this work?
On the provision of funding, asset-based finance is very difficult to come by at present. I am sure this affects the ability of NAMA to put some of its stock onto the market and obtain the best price for it. Has NAMA worked with the Central Bank in respect of the provision of funding? If so, what has been the latter’s reaction?
Brief reference was made to the transfer of assets. What was the investigation policy in this regard? Did NAMA deploy its own staff in the banks in order to engage in a historical search? It was stated that there was a five-year timeframe in respect of the transfer of assets. How did NAMA proceed in this regard? Anecdotal information that has been provided to us indicates that there was a great deal of carry on in respect of the transfer of assets. Our guests have indicated that they are going to pursue this matter. Have they identified the extent of these asset transfers? What investigative process was used?
Rents were being filtered to a different area rather than to the lending providers or NAMA. What investigative process was used in this regard, particularly in the context of non-Irish core assets such as shopping centres and office blocks. Rent was being filtered off into personal loans and not brought back to the country. Has NAMA got to the bottom of that and can it assure the public of that? How did it do that?
Mr. Frank Daly: I will take one question on funding and the asset base. It is one of the risks I pointed out earlier in response to Deputy Michael McGrath. It is very difficult and is one of the challenges for NAMA. We did not engage specifically with the Central Bank but have made it very clear that the provision of finance by the banks in this country is vital to our success.
Mr. Frank Daly: In some cases they have. It would be fair to say the appetite for banks outside Ireland in recent times in regard to development properties, particularly those in Ireland, is constantly decreasing. Some no longer provide such lending. It is a challenge for us. The vendor financing to which Mr. McDonagh referred is part of our response to that.
Mr. Brendan McDonagh: We have always advertised publicly for tenders for services on etenders.gov.ie, even before the legislation, When we started in May 2009, we were looking for additional advisers and the posts were advertised. I do not have the figures to hand on the number of firms involved, but they are all published on our website under the procurement section, and I am quite happy to send the information to the Deputy after the meeting.
Deputy Spring asked about the transfer of assets. We asked the banks for the historic net worth statements provided to them when customers drew down loans in 2005 and 2006, a time when people were somewhat boastful about the amount and type of assets they had. We received those statements. As part of the business plan we asked for updated sworn net worth statements and did a comparison to determine what assets were in place and where others had gone. When we had suspicions about cases, we engaged specialist firms to do asset searches. They have not shown up much.
Deputy Arthur Spring: I worked in asset finance. One issue is where a group’s security is examined. An asset might have been purchased by a group but an individual might be outside it. The security is in place as a loss in the bank but the asset is outside it. That would not show up in a net worth statement.
Mr. Brendan McDonagh: We have talked to the banks about it. Where we have had suspicions we have told them something does not look right, asked them what they think and spoken to individuals in the banks who might have dealt with certain debtors. We do everything we possibly can to find out whether assets have gone missing. Sometimes it is very obvious that a certain type of asset is no longer available, but in other cases it might not be obvious. To date we have not found a huge amount of difference between what people swore in their net worth statements and what information they provided. They are able to produce evidence, including bank statements, showing what money came into the bank when assets were sold. We have done forensic work.
On rents for non-Irish assets, as part of the business plan we get a list of every property and a full tenancy schedule. We find out what rents are being paid. I can give the Deputy assurance that NAMA has gone after any building with a tenant to get the rent mandated.
Mr. Brendan McDonagh: Absolutely. We have a specialist asset search team comprising three people, including a solicitor who worked as a forensic accountant for the UK Revenue, dealing with that. It is not something one does once, rather it is done constantly.
Deputy Stephen S. Donnelly: I want to ask about three areas. The first concerns the transparency and performance of NAMA. The second concerns the haircut and the liability potentially being incurred. The third is the calculation of public value.
Regarding transparency and performance, in terms of the scale of NAMA, the programme for Government target for the sale of State assets was €2 billion and now €3 billion has been mentioned. NAMA will dispose of €32 billion worth of State assets, a figure 16 times that of the Government. However, the level of public scrutiny and investigation of the €2 billion of State assets such as Coillte or Bord Gáis will be hundreds of times more than the level of public scrutiny and parliamentary oversight into the €32 billion worth of assets.
That is not to say NAMA is not doing a cracking job. As a Member of the Dáil, I find there is very little transparency and oversight. One cannot ask parliamentary questions or submit freedom of information requests about NAMA. Information on what decisions have been made is withheld because of commercial sensitivity or other reasons. It is very difficult, therefore, for the Oireachtas, as a proxy for the people, to track performance.
I am not saying NAMA is performing badly but it is very difficult for us to know how well it is doing. For example, if it manages to recover the full €32 billion, will that be good? What if the amount is €40 billion or €50 billion? We do not know what will happen because we do not have any targets. The figure of €32 billion is very dangerous. It happens to be what we bought the assets for, but there is a very dangerous mindset that one could have, namely, as long as we get that amount back we have done a good job. A delegate made that point earlier. It is about maximising recovery, and the €32 billion figure is largely irrelevant.
How does NAMA track its performance against the best possible outcome for the people? Are there independent audits of individual lending and evaluation decisions and the amount of money that was recovered? How can we, the Minister, the Oireachtas or the body politic hold the agency to account? How are complaints dealt with? I spoke to a credible source who pointed me to a deal which did not go through. A foreign asset was to be sold by NAMA for significantly below market value. It may or may not be true. When credible claims arise, how does anybody investigate them? Does Mr. McDonagh or Mr. Daly think the process should be more transparent? Would they welcome more transparency and openness?
My second question concerns the haircut. If it turns out that, through no fault of NAMA, it only manages to recover €25 billion, can it explain to the committee who is liable for the €7 billion shortfall? Is there a clawback clause whereby it can revert to the banks because it did not recover all the money? Can bonds be written down or are the people, via NAMA, on the hook?
Can the delegates explain the process by which public value is included in decision making? I engaged with NAMA regarding a NAMA-owned loan in Greystones, my home town. NAMA responded to me very quickly and it was a good process. I pointed out to NAMA that there was real public value and I urged it to consider, when thinking about the matter, the public value in addition to the commercial value. Is public value monetised? Is there a value placed thereon in euro? How is it brought into the decision-making process?
Mr. Frank Daly: I will take the first point. With regard to transparency and scrutiny, I totally accept the Deputy’s point. NAMA is a huge organisation and has a balance sheet of €32 billion. The level of scrutiny is dependent to a great extent on our coming to this committee, the Committee of Public Accounts and any other committee of the Oireachtas to explain in so far as we can what we are doing. It is largely a matter of scrutiny. The Comptroller and Auditor General’s scrutiny of every NAMA decision is very extensive.
We have our own internal auditors and the normal structures every organisation has, such as an audit committee and delegated authorities reporting to the board. It is safe to say that no decision in NAMA is made by a single individual. There is a system of delegated authority, with checking and cross-checking. It is part of the function of the board to certify every year that the systems are in place.
I acknowledge there is a demand for greater transparency in regard to NAMA. Ultimately, it probably relates to specific information in regard to particular sales or actions. It is very difficult because we ultimately have a commercial remit and must achieve the best possible return for the taxpayer. I will not bore the members with this argument because I have articulated it at this committee several times.
This matter is related to the complaint referred to. The complaint was that we were selling an asset for a price significantly below its value. Despite this, some of these examples I adduced show the opposite, that is, that we were actually playing hardball and not facilitating clients who wanted to buy assets. In some ways, we can probably never get it right.
We are very happy at any stage to investigate a complaint such as the one in question. We have had some complaints referred to us by Deputies and Senators and we have investigated them. There has been none that stood up to scrutiny. I, as chairman, regard it as part of the process of ensuring we are doing our work properly that this should happen. I could go into much more detail on this but I know we are stuck for a time.
Mr. Frank Daly: As chairman, I am a believer in transparency and freedom of information, but the real difficulty in NAMA is associated with its commercial objective. We are akin to a commercial State body, bank or asset management company. We are competing with the entities referred to by Deputy Twomey.
Given that NAMA must raise €7.5 billion under the troika objective, which requires the raising of €32.1 billion, at a minimum, we cannot really afford to be hamstrung vis-à-vis our competitors. This is not to say we do not believe in transparency. My point needs to be taken into account.
Mr. Brendan McDonagh: With regard to the second question, on the haircut, the overall haircut is in the region of 57% on the completion of full due diligence. I was asked where one would go if a sum less than €32 billion were recovered. Under legislation, there is a first loss for the banks. Some 5% of the consideration, €1.6 billion, NAMA sub-debt, is the first loss for the banks. Any loss after that is for the Exchequer because, effectively, the Minister for Finance has guaranteed the NAMA bonds. The reason is to ensure they are effectively eligible for use by the banks in terms of the ECB when they are trying to attract liquidity. I hope that answers the question.
I was asked how public value is monetised. We are very clear about this and published details thereon in June 2010. When an asset is of interest to the public, it is independently valued. This is how we monetise its worth. With regard to the asset in question, for example, we had evaluated it by reference number for 2009. We considered its current value and we hope we are very close to concluding a deal on the asset that will be in the public interest.
Deputy Stephen S. Donnelly: What I mean by public value is not the commercial value of the asset. To a developer, for example, it may be worth €20 million. Leaving it dormant is costing the town €1 million per year. There is a very significant cost to the town accruing from leaving the asset dormant in its current state, given the brown-field site comprises many acres. This is what I mean by public value. Is the second-order cost or benefit factored into the value when the decision is made on whether to release further funding?
Mr. Brendan McDonagh: Our objective is to ensure assets retain or increase in value. One does not want to have an asset that is depleting in value over time. If there is funding required to protect or enhance the asset, we will make it available.
While the Deputy understands the matter, some do not understand that a debtor has an obligation to repay his debts in respect of every property. One cannot ride roughshod over him and ask him to give up an asset for free only to have him ask whether his loan will be written off. There is a trade-off but I assure the Deputy his point is taken into account.
Deputy Olivia Mitchell: I thank the delegation for the presentations. I regarded Mr. Daly’s presentation as quite defensive. I understand the need to defend oneself against media criticism and what Mr. Daly called urban myths. We do so all the time. I appreciate that criticism varies, positing on the one hand that NAMA is too ready to sell at a low price to bring in cash and on the other, that NAMA will not come to the table to deal with certain parties. The reality, which NAMA must appreciate, is that the organisation is a really secretive body. None of us can ask a parliamentary question about it or ring up Mr. Daly and ask why a certain individual was not dealt with in our effort to obtain understanding.
NAMA, it is said, has the biggest property portfolio in the world. It has the potential to make considerable losses and gains and, therefore, it must understand that the taxpayer has a really intense interest in it, and that everything the organisation does has considerable consequences for the taxpayer, yet nobody really knows what it is doing or its targets. Quite often, it seems as if what NAMA is doing on the one hand is conflicting with what it is doing on the other. Inevitably, when there is so much at stake and so little is known about how NAMA is operating and its targets, there will be questions, speculation, scepticism and accusations.
My main concern is over vendor financing and the 20% subsidy. I realise the delegates will not call it a subsidy. It concerns the disposal of NAMA houses and the effort to get the market going again. This proposal purports to be an insurance for buyers, and I presume the banks, against a fall in price over the next five years. My concern is that this will significantly distort the housing market to the extent that we have one and devalue privately-owned houses in NAMA developments, as well as across the market. It will also expose the taxpayer to additional risks. No matter how it is dressed up, it is still a subsidy and represents a double hit for the taxpayer who had to buy the loans in the first place and now has to subsidise the selling of them. This is an incentivisation that resembles the root of our problems in the first place.
Deputy Olivia Mitchell: Such an incentive caused the property bubble, the consequences of which we are now living with, when we really need to return to a real market. We are again replicating a property bubble this time with taxpayers’ money. Other countries, such as Britain, are introducing similar arrangements but they have not had the experience we have had.
How many housing units will NAMA dispose of through this device? Why not just release them a few at a time, the way a normal market might operate, and find out what the market will bear? I appreciate NAMA may not sell as many through such a release but in the long term the damage would not be as great under the scheme. Will NAMA clarify the deal with the banks in this regard? How much finance will be made available by NAMA and the banks? The banks have limited finance for mortgages. Will it all be soaked up in selling NAMA properties at the expense of other hapless homeowners who may want to sell?
Here we have a State body engaging in a risky process. Is this what an assets management agency should do? NAMA spoke about social responsibility. It has a responsibility to other people who want to sell their houses. A house next door to a NAMA house, the sale of which was effectively subsidised by 20%, itself has effectively been devalued by 20%. The owners of such property are probably in negative equity and will have significant difficulties selling their houses in any event.
Senator Aideen Hayden: I must admit I believed the proposal questioned by Deputy Mitchell was one of NAMA’s better initiatives. The delegation stated NAMA’s core duty is at least to return the minimum of the price it paid for an asset. Today’s Irish Independent carried a report that the housing market is so far into freefall that we do not know when we will see the bottom. I noted in Mr. Daly’s opening statement that it was his view that the market has overcorrected and overshot in the other direction. He also stated it was his opinion that it was the lack of finance in the market which is the serious impediment to its recovery. Given that NAMA is both a player and a recipient in the market, does Mr. Daly believe the Government is doing enough to stabilise the housing market?
What we have is a market that is completely distorted. Calling it a market is a misnomer. To have a market, one must have active vendors and purchasers. In the current market, we may have active vendors but not have active purchasers. In spite of budgetary measures and the fact the Taoiseach and the Tánaiste have called in the pillar banks, does Mr. Daly believe there is any real movement in the property market? If not, apart from the measures put in place by NAMA such as the pilot residential mortgage initiative - other countries have similar schemes for low-income homeowners such as the Netherlands - what other measures can be introduced?
The forthcoming personal insolvency legislation will have the impact of crystallising some of the housing debt in the market. Many will accept that most of the banks are reluctant to draw a line under such debts and are happy to let them carry on almost indefinitely. The legislation will bring the housing market down further when debts are crystallised. Has NAMA any views on this and how it will impact on its portfolio?
On what is termed loosely as the “social dividend” and the 2,000 housing units offered by NAMA, I consider it to be quite paltry given the level of social housing construction during the mid 2000s and that there are over 100,000 people on the housing waiting list. It has been reported to me that NAMA made properties available to local authorities but that they were unwilling to take NAMA stock. Will Mr. Daly elaborate on this?
When NAMA legislation was going through the Dáil, it was explained that the basis behind the agency was to set out a long-term economic value and to stabilise the housing and property market. It was also supposed to establish a formula whereby the banks got IOUs from NAMA which they could use as security with the European Central Bank to get credit into the banking system. My understanding was NAMA was to set about recovering the full amount of loans that were taken over, not the actual amount paid but the value of the loan itself. What is NAMA’s existing policy on debt recovery? Is it to recover the value paid for the loan or the full amount? How many loans have been written off since NAMA was established? What is the additional rolled up interest to date in respect of the loans taken over by NAMA? What percentage of loans has NAMA never received any repayment for and what is their value? The witnesses touched on my next question. Has NAMA become an entity in itself or does it have a broader remit in terms of Ireland Inc.?
Recently, Mr. Daly has come out in forceful fashion concerning the public and media’s perception of NAMA. Some of his comments were reasonable and some did not stand up to scrutiny. Many issues need to be addressed. If we are to have a discussion, it must be robust. The witnesses would not expect otherwise. Will they answer my questions?
NAMA has become a process in itself. The danger is that it has become like a factory churning out cogs. I need to see the stronger, broader vision under which we were told that NAMA would be established at the outset. Where does this vision sit in terms of the thinking behind NAMA’s board and policy?
Mr. Frank Daly: I will start with Deputy Mitchell’s questions. For me, her main point was that I sounded defensive. I did not intend to be. This relates to Deputy O’Donnell’s request that we explain what NAMA is doing so that we can put to bed some of the incorrect stories and reports of recent times. I accept that there is intense taxpayer interest in NAMA. This is as it should be. We are handling €32 billion of taxpayers’ money. As much as we possibly can, we have endeavoured in recent times, starting with our annual report last year, to put more and more information into the public domain. This approach will be enhanced yet again this year in our annual report. We will put as much information into it as we can. It will fall short in terms of specific information on specific debtors, as we are a commercial operation in a competitive environment and we cannot show our hand to our competitors. I assure the committee that we will do all we can to make ourselves as transparent as possible.
I will tie this issue with Deputy O’Donnell’s last point on NAMA becoming a process. Of necessity, there is a great deal of process in NAMA. We have explained our views on asset management and initiatives to help the property market to get going. Indeed, there are many views on our housing initiative. This is the sort of attitude present on NAMA’s board. It is not just a process of taking loans across, selling assets and so on. It is focused on the wider economy. I was at pains today to try to point out that this includes a focus on investment, jobs and anything else we can do. I accept that some of my recent comments might not stand up to scrutiny. I would welcome a debate on that point with anyone. I was about to say that I would agree with myself, but I would say that anyway.
Mr. Frank Daly: I was asked about our policy on how to set about recovering the full value of the loans. Our policy is that the debtors still owe the full value of their loans. No one should be in any doubt on this matter. Although we will try to collect as much as we can of the amounts in question, I am realistic, and it is realistic to say that we will not collect the €74 billion that was the par value of those loans. Were a full collection possible, it could be said that there was no reason for NAMA in the first place. What has happened in the market to debtors and banks has happened.
Deputy Kieran O’Donnell: I will ask a quick question. If NAMA can sell an asset for more than the loan was valued at the time NAMA took it over, is it NAMA’s policy to view this figure rather than the loan’s value as the benchmark?
Mr. Frank Daly: No. It must relate to the what the asset is, the offer and what financing is available. We judge each asset on the basis of the best return that we can get on it. In some cases, we will receive more for a loan than we paid. In other cases, we will not. In light of the possibility of a loan’s value decreasing further, we must make a judgment call as to whether we should conclude the sale for less than we originally paid. Our aggregate sales to date, particularly in the UK, have shown a gain on what we paid. This is not to say that it is the case with every sale, but we are well there in the aggregate.
Deputy Mitchell stated that Deputies cannot ask parliamentary questions about NAMA. They can. There are Deputies present who ask quite a lot of parliamentary questions about NAMA. What they will not get in the responses will be specific-----
Mr. Frank Daly: They will. I am sorry, but they get detailed answers. I hope that Deputies appreciate that they will not get debtor-specific information. These were the two particular points that I wanted to make.
Mr. Frank Daly: As part of our objective, an initial issue relates to the €7.5 billion for the troika. While this presents us with a challenge for 2013, the real challenge is to ensure that, in achieving the €7.5 billion, we maximise the possible outcome from every other asset. This is what asset management is all about. Mr. Mulcahy on my left is concentrating on asset management so that, right up until the end of NAMA, we will have yielding assets. There is no conflict, but I agree with the Deputy that the issue must be managed carefully. I will hand over to Mr. McDonagh concerning the housing initiative.
Mr. Brendan McDonagh: Deputy Mitchell and Senator Hayden raised the issues of vendor finance and the mortgage initiative. Regarding the former, I assure the Deputy that we will retain our first charge in terms of the assets of the person being paid. That is to say, we will retain the assets. We are looking for a better class of counter-party than the counter-party we have currently. I will put it this way. If we own a building worth €10 million and the debtor cannot repay the loan, we will sell it for €10 million and get €3 million upfront. Effectively, we will have reduced NAMA’s balance sheet by €3 million and we will have a counter-party who is able to repay the €7 billion loan.
As to who makes the finance available, the bank provides the mortgage as normal. The bank agrees a contract with NAMA whereby, if the value holds up in five years time, it will give us the other 20%, which is effectively the bank’s security. I do not see it as being distorting in any way. It is going to be targeted at making the best use of stock. A large proportion of our residential units are currently rented by people who want to purchase them but cannot get mortgage finance. Perhaps some of these individuals will convert into homeowners as opposed to renters.
Senator Hayden referred to the personal insolvency legislation, which will undoubtedly have an effect on the market. A small number of the debtors that NAMA is dealing with are going to other jurisdictions to declare bankruptcy. However, they do not always realise that even after they get out of bankruptcy they must complete a two-year probation period and if they do not make full disclosure they will be put back in to bankruptcy for a long time.
Senator Aideen Hayden: My wider question concerned the interrelatedness of the housing market rather than the specific impact of the personal insolvency legislation on NAMA. One arm of the market impacts on the other.
Senator Aideen Hayden: The market is currently unstable and in freefall. This measure may destabilise it further, which will clearly have an impact on values in the market generally, including NAMA values. Has Mr. McDonagh taken that into account? What is his view of the measures introduced by the Government to date to stabilise the housing market?
Mr. Brendan McDonagh: We are obviously interested in the implications of the insolvency legislation. The biggest implications will be for residential owners who are sitting in negative equity. While some want to keep living in their houses, others want to move but are trapped by negative equity. The outcome will depend on how the legislation is framed but I am sure the Government will be careful to ensure it avoids moral hazard.
The Senator mentioned a story in this morning’s Irish Independent which referred to the Goodbody report. I am on record as saying that, based on our experience of transactions, the CSO index is accurate for the Dublin market. It estimates that house prices have decreased by 55% to 56% and apartment prices are down 60%. However, it estimates that prices outside Dublin have decreased by 44% whereas our experience suggests that prices outside Dublin are down by way more than 44%. I do not understand why the index has not caught up. The index indicates a decrease of 48% overall but we believe the market has decreased by 57% or 58% on average. The index simply has to catch up because the transactions on the market reflect that.
Mr. Brendan McDonagh: In terms of the number of initiatives that the Government has implemented in the recent budget, the Minister for Finance announced the mortgage interest relief for people who buy------
Senator Aideen Hayden: I know what the measures are. I am asking Mr. McDonagh’s opinion of their effectiveness. Clearly the effectiveness of these measures will have an impact on the value of the commercial and domestic property market and, thus, on the NAMA portfolio. I am asking for Mr. McDonagh’s views on the effectiveness of the initiatives as they have been rolled out to date, which is only a short period, and their potential effectiveness. They will impact on the value of NAMA assets.
Mr. Brendan McDonagh: Absolutely. What the Government has done to date has aided the market. The commercial market is down 65% from peak. Mr Mulcahy may wish to add more but that is our view of the commercial market. The big impact in terms of personal solvency legislation is likely to be in the area of residential mortgages. It depends on the conditions surrounding the measure. I have not seen the legislation.
Chairman: The Senator has made herself clear. She asked her question three times and everybody understands it. She did not refer to any constraints that may arise under the Act in respect of commenting on policy. She did not invoke that. The question has been asked but I cannot compel the witnesses to answer it. I heard the question three times and it is up to the witnesses to determine how they answer it.
Mr. Frank Daly: Leaving aside the uncertainty surrounding the insolvency legislation, on which we cannot comment because it is not yet in place, the change in mortgage interest relief has to be a positive measure. The other big issue is the availability of finance. The Government is working with the banks on that. From our point of view it is a positive development and we encourage it. That is how we consider what is happening in respect of Government policy. If the Senator is asking me to say the Government is not doing enough or is doing something it should not be doing we will be entering into the policy areas to which the Chair referred. From our point of view, those measures - intervening to make sure additional finance is available and giving additional mortgage interest relief - are positive developments. Mr. Mulcahy may wish to comment on the property market or other areas.
Mr. John Mulcahy: In general terms, anything that eases the property market has to be beneficial. A student of charts in the history of the property market will note that relief measures usually take longer to have an impact than people believe. It is usually at least 12 months before one sees a serious impact. To take the reverse scenario, if the Government increases taxation in the property market it will impact negatively on value. It follows, therefore, that if it eases taxation policy on property it will help the market.
Where capital is constricted there will be a negative impact on property values. The reverse also applies. Similarly, where disposable incomes are decreasing, particularly in the housing market, there will be an impact on property values. Current market values are below the cost of reproduction of almost all real estate assets in this State. That does not necessarily mean there will be a recovery immediately or anytime soon. It simply means there will be no further development of this type of asset until their market value increases. Some of the issues that were addressed earlier, such as the assistance in the top 20% in residential property values, reflect an attempt to determine whether the market can be helped into life. That is only one aspect, however. The biggest aspect is the availability of credit.
Senator Thomas Byrne: The article describes an individual who is a director of Bridge Bar and Bistro, an upscale establishment on Grand Canal Quay run by his wife. They took over the operating company last year from Treasury Holdings in another soft deal. This individual stated that they all help each other. He came in to run it with a view to taking over the company and its creditors in a deal similar to the Bridge. He claimed that there will not be a need for much.
I do not know the background to that case but my blood boils when the expression “soft deal” is applied to arrangements made between friends of the directors of companies involved with NAMA. Are the witnesses aware of this case? I commend them for their efforts in regard to transfers among family members. With this type of thing happening, does NAMA have a role in it as I believe it should? I ask the representatives of NAMA to comment generally on this type of thing. Deputy Spring said they have dispelled many of the myths about NAMA. At the end of the day those working in NAMA are public servants and are doing a job for the public and taxpayer. Many myths were spread about NAMA - many of them by the Labour Party when in opposition. I am glad that party is now on board. I wish Mr. McDonagh and Mr. Daly well in their work, but we need some reassurance that when these articles are spotted, an investigation takes place to ascertain what is going on.
Deputy Kevin Humphreys: I must be dealing with the other 30. I ask Mr. McDonagh to outline the mechanism. In my experience they approach their landlord and get a negative response. They then approach NAMA and are referred back to the landlord. When they go back to the landlord, they again get a negative response and are left in no-man’s land. I ask Mr. McDonagh to outline the step-by-step approach for a business that is making a reasonable profit but is being dragged down by the rents. Many of their competitors who have moved in afterwards are on a much lower rent. The business is viable, but the rent is killing them and they seem to have nowhere else to go.
NAMA is a huge organisation dealing with billions of euro worth of taxpayers’ money and I believe freedom of information is relevant to NAMA. I accept commercial sensitivities are involved. Would the witnesses like to express a view? Has NAMA been approached for its views on upcoming freedom of information legislation?
Deputy Richard Boyd Barrett: I thank the representatives of NAMA. This session has been very enlightening and we have gathered much useful information in trying to understand more of what is going on in NAMA. There is still frustration at the lack of transparency and our inability to get detailed information about what is going on in particular cases within NAMA. The witnesses seem to be saying that NAMA’s inability to be, if one likes, more transparent in the way some of us would like, relates to the fact that it is competing with the commercial banks, which poses a difficulty for NAMA. Is that not a fundamental flaw with the concept of NAMA, which would logically lead one to think we should not have NAMA but should have a nationalised banking sector?
Given that both NAMA and most of the banks are financed by the State with the State as a majority shareholder in those banks, why do we need these two entities competing against each other with the consequence that we cannot have the same level of transparency and scrutiny of NAMA’s activities and its decisions on the assets of which it might dispose as we would have with fully publicly-owned assets as is the case, for example, with the State enterprises that are up for consideration for sale at the moment? While that is not NAMA’s call - it needs to do what it is mandated to do - is that not the logical conclusion one would draw about that difficulty? If we did not have these competing entities, all of which are essentially underwritten and financed by the public, we would not have that problem and would have more transparency and oversight.
I believe Mr. McDonagh indicated NAMA generated €6.6 billion in revenues and this year will incur just under €200 million in operating costs. I do not know what last year’s operating costs were, but let us assume they were similar. This means approximately €400 million in operating costs. Some €1.1 billion has gone out in working capital development costs. Would it be true to say that of the €31 billion NAMA is mandated to recover as a minimum, it has got €5 billion after operating costs are taken out? As the witnesses have indicated, that €5 billion would represent the easiest pickings in terms of getting money back on the loans and assets it has taken over. Mr. McDonagh has indicated that most of the money NAMA has got back has come from the UK where conditions are obviously far more favourable for generating revenue from sales. That would lead one to be very pessimistic about NAMA’s assets and loans in this country. If 80% is coming from the UK, would it be fair to say we are doing extremely badly in Ireland? I believe Mr. McDonagh indicated that €11 billion out of the €18 billion of assets and loans are in Dublin, which indicates we are doing extremely badly.
Given that, from where does the confidence come that NAMA will reach the €31 billion target? Most of its success to date is in the UK and is mostly the easy pickings. The property market in this country is in the doldrums, with no real indication that property prices have bottomed out. In addition, given the downgrading of growth projections for the economy that we have seen recently there is no real reason to believe there is any likelihood that things will pick up in any significant way. I am somewhat baffled as to why Mr. McDonagh would not believe that we are a hell of a long way from recovering the €31 billion. Many of us would believe that we should be looking to get considerably more given that the original loans were €76 billion and the balance went into the banks in the form of recapitalisation.
I would like to hear more about the Irish assets and loans. I take the point that many of the properties involved - hotels, ghost estates and so on - are not actually NAMA’s, which was enlightening information. Nonetheless €11 billion in Dublin is still a lot. My perception and that of many people is of large numbers of empty apartment blocks, empty office blocks, and half-developed or undeveloped lands that are just lying idle without any prospect of generating any revenue from renting or selling. Of the €1.1 billion NAMA has put out for development and working capital, 45% has gone to the UK and one might argue that NAMA has got or is getting good return on that. Half of it is going into Ireland, with presumably a very significant amount going into Dublin, and we are not getting a return on that. What is happening with the money? What is it doing? Is it simply spent on maintenance on buildings and sites that are sitting empty and which we have little prospect of selling? On what basis is NAMA extending working capital to the developers who are still managing these assets, when there is little, if any, prospect of NAMA realising a return on those assets?
This leads me to my last point. This is the sense I have - it is shared by many people - about the assets and loans in Ireland and in Dublin and it raises the question about what better use to which we could be putting these properties and assets. There is considerable, widespread frustration as a result of empty apartment blocks throughout Dublin given that there are tens of thousands of people on the social housing lists. I realise NAMA has identified 2,000 properties that could be transferred in lease arrangements. Will NAMA confirm that these are lease arrangements and not a transfer of ownership to the local authority? This seems like a small amount out of a portfolio of €18 billion. Will NAMA explain why this makes up such a small amount of the €18 billion portfolio? On what basis is NAMA making decisions about what is and what is not suitable?
Will the delegation comment on the wisdom or logic of NAMA, the Government and the local authorities entering into leasing arrangements and the transfer of properties to social housing for leasing arrangements? As I understand it, this will require local authorities to lease the properties concerned and it will require tenants to pay rent, all of which will go back, in most cases, to the developers who are still managing these properties. If and when they can repay their loans to NAMA, they will own the assets rather than us. This does not appear to represent good expenditure of public money. Would it not make more sense to transfer these properties fully to local authorities and for the value of the transactions to be written off against the targets that NAMA must achieve? After all, it is all State money. At the end of the process the State would then actually own the assets and properties and be in possession of valuable assets rather than the properties returning to developers, who are essentially bankrupt.
The same question arises in the case of community and small enterprise initiatives. To what extent can we discuss good management of this vast portfolio which NAMA appears to hold in Ireland and Dublin when many small businesses and community initiatives are desperate for space to develop either community projects or small enterprises? This is despite all of the office property sitting there empty.
I refer to the maintenance of NAMA properties and assets. In many cases, including several in my constituency such as those involving Dún Laoghaire Golf Club and the Iceland site in central Dún Laoghaire, issues arise and there is considerable concern, frustration and annoyance among local residents about the general upkeep of these properties. There has been a lack of response from the developers who are still managing these properties and the local authorities in terms of dealing with the maintenance and upkeep issues of these sites. Health and safety issues arise in many cases. What does NAMA believe can be done to improve this situation?
Mr. Frank Daly: Most of the questions are probably best answered by Mr. McDonagh. I refer to points made by Deputy Kevin Humphreys and Deputy Boyd Barrett, both of whom asked about transparency and freedom of information. I will link these questions together. I have already outlined our approach in this regard. I fully accept the need for NAMA to be accountable to these committees and to the Comptroller and Auditor General. We publish as much as we can in our annual report and we are increasing this where possible. We have no problem with this and there is no issue for the board of NAMA in this regard. We are keen to be as transparent as possible. The argument between us comes down to discussions on debtor and deal-specific information. I adduce the same points I made earlier. We are a commercial organisation. The only way we can get the best possible return for the taxpayer is to be commercial. We are competing with other banks and institutions.
Deputy Boyd Barrett asked about whether there should be a nationalised banking sector and whether that would have been a better solution than NAMA. However, answering that question would get me right into Government policy and in conflict not only with the point made by the Chairman earlier but also with a specific prohibition in section 58 of the NAMA Act that precludes me from questioning or expressing an opinion on the merits of a policy of the Government or a Minister of the Government or the merits of the objectives of any such policy. It would be inappropriate for me to start to question whether NAMA was the right choice.
Mr. Frank Daly: I will make one point in this regard. Perhaps at the core of the Deputy’s suggestion is that the banks should be put in place to clean up this mess. We may all have views about whether that was the best outcome.
Mr. Frank Daly: I have no wish to run a State bank and I imagine my colleagues have no wish to run a State bank either. The other important point is that the competition is not simply with other Irish banks. The competition is with banks whose head offices are outside the jurisdiction. However, these banks are very active in this jurisdiction and they are now deleveraging at a fair clip. Whatever one does internally, that competition will still be there.
Deputy Humphreys asked whether we have been asked for views on freedom of information. We have. We have given these views via the NTMA to the Department examining this area. As Mr. McDonagh stated earlier we have reiterated that if we are made subject to freedom of information requirements and that becomes Government policy then we will abide by it absolutely. However, it is reasonable for us to make the points about transparency, commerciality and competition. It is also reasonable for us to make the point that given where the country is now and given the challenges it faces, anything that hamstrings us in terms of getting the best return for the taxpayer should be carefully examined. However, if the Government decides that NAMA should be subject to freedom of information requirements we will operate under freedom of information requirements.
Deputy Kevin Humphreys: I thank Mr. Daly for the clarification. Is Mr. Daly suggesting that subject to commercial sensitivity NAMA has no objection to freedom of information requirements? Up to €30 billion of taxpayers’ money is at stake. Therefore, it is important that there is a sense of transparency. I take Mr Daly’s remarks in the spirit in which they are given but it would be helpful if NAMA were subject to freedom of information requirements.
Mr. Frank Daly: The Deputy must also consider the requirement in the NAMA Act about confidentiality. Loans are transferred to us under banker confidentiality. The confidentiality provisions attaching to those loans come to us and we are then responsible for them. Any breach of these could be a cause for NAMA being sued and, ultimately, this would cost the taxpayer. All of this must be considered. However, if the Deputy is asking whether we are in favour of transparency, the answer is that we are, as far as we possibly can be. Whether we come under freedom of information requirements we will continue to do our best in this regard. However, when it comes to specific debtor or deal information there is a real difficulty for us which conflicts with our commercial mandate. Mr. McDonagh will deal with some of the other questions and if there are further questions I will come back in.
Mr. Brendan McDonagh: Deputy Humphreys raised the issue of rent reviews. As part of the Minister’s budget in December we published a guidance note. Sometimes people do not want to comply with the guidance note. If they provide all the information and follow the guidance note, we process their case. If they do not follow the guidance note, however, we do not process their case. The guidance and information is on our website. Evidence is that of 150 applications, 120 got a reduction, which goes to show that if people follow the process we set out, we will do our best to work with them. That said, I would urge debtors who will not engage to contact us at NAMA. They should call us or e-mail us at email@example.com. I assure the committee we will go back and try to sort out the problems.
Mr. Brendan McDonagh: The Senator will appreciate that if guarantees are given by individuals or companies and unencumbered assets are available, we will follow those unencumbered assets to ensure they are brought back to the table and made available to us as additional security. In some instances, some of those unencumbered assets are not available because there are no personal or corporate guarantees. I read these stories in newspapers too, and believe me they do not make for good reading on a Sunday morning. However, we follow up on everything that is in the public domain.
Deputy Boyd Barrett raised a number of issues to do with the social initiative. We are making ourselves available to the Department of the Environment, Community and Local Government to try to make as many units available as possible. The Department works through the Housing and Sustainable Communities Agency, HSCA, and it liaises with the local authorities. The question was asked earlier as to whether the local authorities were rejecting properties. From our point of view, until NAMA came along, units were not being made available. We are prepared to make as many units as we can available to help local authorities house people with requirements. I am conscious-----
Mr. Brendan McDonagh: We tell the Housing and Sustainable Communities Agency how many units we can make available in each county and provide the address and the number of units available within a particular development. The agency then matches that supply with the demand from the individual local authority.
Mr. Brendan McDonagh: Until we came along, none of these units was being made available. This is a process that will evolve over time. The figure of 2,000 is the starting point. We brought in an individual from the HSCA on secondment to look at our portfolio. We provided him with full access to the portfolio and asked him to pick out the units he thought would be suitable. He had full access to the portfolio and identified 2,000 properties initially. If more are identified as suitable, we are quite willing to have that discussion with the Minister. The current position is that there are 2,000 units available as a starting point now. These units were not available six months ago or two years ago and I hope as many of them as possible will be taken up.
With regard to the maintenance of assets or the likelihood that assets will become dilapidated, I assure the Deputy that we get lots of e-mails and phone calls advising us of assets that are becoming dilapidated and asking us what we are going to do about them. In probably at least 50% of those instances, those assets are not in NAMA. Everybody seems to think NAMA has all the assets in the country, but we do not. Where we are made aware of issues, whether through a public representative or community group, and if the debtor or receiver does not engage on the matter, we always revert to the public representative or community agency and talk to the debtor or receiver about how they can sort out the issue. We have a good track record on that issue.
The issue of our cash balance was raised. We dealt with that issue earlier and said the liquidity was in the overseas markets. I much prefer being here today having accumulated €6.6 billion in 22 months, which nobody expected us to acquire when we started off with a zero cash balance at the end of March 2010, and being able to say we have €4.3 billion in our bank account. This means we are meeting our targets. We are obliged to use that money as investment and working capital, or development capital as required to enhance and improve assets. We are also required to use that cash to meet the €7.5 billion repayment target by the end of 2013. That is something we are required to do.
Mr. Frank Daly: May I make a point on that? Deputy Boyd Barrett made two comments and referred to €1.1 billion gone out in capital or development expenditure and suggested that half of it was going into Ireland but we were not getting a return. That is not correct. That money is going out for assets which are being enhanced and which were already enhanced by expenditure during 2010 and 2011. In turn, these assets have brought good results and good sales for us. Lest there be an impression that it is lost money, that is not the case. When that money goes out, the spending is scrutinised by NAMA to ensure it will give us a return. Also, a point that is sometimes missed is that we have already paid down €1.6 billion of NAMA’s debt, €1.2 billion of senior bonds and the remainder to Government in the form of what might be termed “seed capital”.
Deputy Richard Boyd Barrett: Very briefly, Mr. Daly has still not answered the question as to why, given that most of NAMA’s liquidity comes from the United Kingdom, it is confident about its ability to realise a return from the Irish and Dublin portfolio.
I have one other brief question. It was mentioned that €74 million is paid annually to the banks to employ 500 staff within them to manage the assets. Why the hell are we paying the banks to pay their staff?
Mr. Frank Daly: On the first point on why we would invest in Ireland, we do so because we are confident that the assets in which we invest will bear fruit in the future. We also have confidence that, ultimately, the Irish market will return and stabilise. We must go on the same sort of expert view, opinions and projections as everybody else. Our view is that this country will bounce back, and while it may be slow to do so, it will happen. We can all argue about who is right or wrong, but we have confidence. I will leave the other question to Mr. McDonagh.
Mr. Brendan McDonagh: On the matter of the costs, the banks have sold the assets to us, but if the banks did not administer the assets, we would have to pay the money to somebody else to administer them on our behalf. We are talking about front-line bank services, such as collecting rent and the facility of documentation. The fee paid to the banks was approved by the European Commission. The fee is similar to that paid by similar entities in Germany. There is European-wide approval that one should pay the service provider a fee to service the assets. If the banks were not paid for that, they would probably let those 500 staff go. Already, the banking system will lose thousands of staff, but there would be another 500 let go if NAMA was not making use of them.
Senator Michael D’Arcy: Stated policy is that NAMA should achieve the best likely return for the taxpayer, and we have all accepted that. Any anecdotal conversations I have heard indicate that the perception is that if one of NAMA’s debtors is preparing to offload a number of units, it must get NAMA’s consent and that this is standard practice. What I have heard from people on this committee and others, on a number of occasions when debtors receive offers and consent to sell is requested from NAMA, consent is refused because, they are told, the price is not high enough and they are referred to the prices quoted in 2009. I have had a number of conversations with people who have said this when they did not get consent. In their mind, it was nuts for NAMA not to agree to the figures put on the table. When the matter is scoped further they discover that the people who say the price is not high enough are, primarily, Dublin-based auctioneers or people who do not have local knowledge of prices in small towns or rural areas.
Mr. McDonagh made the point that no one person would make such a decision and that it would go before a number of people. Is there an appeal process? If not, would NAMA staff who do not consent to a decision cross-reference it with people who have local knowledge, whether in Donegal, Cork, Wexford or elsewhere? If they have been doing that, what people are on that cross-referencing panel and how is the panel formed?
Senator Michael D’Arcy: NAMA owns 121 out of 900 hotels in the country. Mr. McDonagh made the point that this is not many. I think it is a lot. NAMA owns the biggest hotel group in the country. I get a lot of heat from hoteliers in my area who say NAMA is able to keep some hotels trading and undercut the other 779 hotels to a point where they are operating almost on a loss-making margin.
I would like to hear the views of the witnesses on some of the assets on NAMA’s books. They made the point that they are moving some of the better assets off NAMA’s books and will move some of the lesser assets that will come on stream in the future. I am concerned that the assets that will come on stream in the future will be less valuable, or the least valuable of NAMA’s property portfolio. Over a period, they will become loss makers because they will be the last to be placed on the market. They will be placed on the market last because they will be the least valuable. Does Mr. McDonagh see any context in which NAMA could do something to protect, if not increase, their value by, for example, investing in a road to give improved access or a community project to make a housing estate more desirable? Land attached to an estate of 500 or 700 houses would be in danger of returning to agricultural value. NAMA’s good business acumen must see that by using that land to build extra residential units or a playground, a small investment might protect the larger investment.
It was my interpretation that NAMA’s €500 million spend would be in the Irish market. I heard what the witnesses had to say about confidentiality, but could we have some form of breakdown of how that money was spent? Was it spent on the construction of roads or on community projects? It is a huge sum of money, and probably more than was spent by anyone else in Ireland this year. We have only the headline figure of €500 million. Is it possible to get a breakdown? I accept that the information may not be available here and now, but could it be disseminated through the committee so that we can see how it was spent, by county and by heading?
Am I correct in saying NAMA has €4.6 billion on account? I am. The troika has set a target of €7.5 billion by the end of 2013, which is 21 months away. If there was a different negotiation could NAMA use some of that funding better, perhaps to spend more than €500 million in 2012 and 2013? Like Deputy O’Donnell, I remember the discussion on the NAMA legislation. The overall context was that NAMA would be about more than simply gathering in money. However, the troika target is about gathering money. There is no conversation to be held there. There is no grey area. There is a target of €7.5 billion to be achieved. If that period was extended by another year could NAMA invest further funds in the Irish construction sector that would help to advance the value of the NAMA portfolio?
Finally, I share the concerns of Deputy Mitchell regarding the 20% incentive, which is not quite a subsidy, on the sale of residential property NAMA is placing on the market. Is enough property being placed on the market? Should there be more? I believe the market would be able to regulate this but I believe NAMA should be putting more property on the market. I would like to hear the views of the witnesses.
Deputy Peter Mathews: I appreciate the exposition by the witnesses of all the operations and hard work done by NAMA to date. My own experience doing restructurings and recoveries for a bank involved mainly in property, construction and investment lending in the 1980s was on a ripple scale by comparison. We had a recession in the 1980s but the tsunami that hit as a result of the wall of credit that came into the Irish economy between 2003 and 2008 was extraordinary. NAMA is left to try to sort out the debris. NAMA is doing a courageous job of work and I do not envy the witnesses.
The work of NAMA is operationally difficult because the banks are doing much of the operational hewing of wood and drawing of water under NAMA’s supervision, oversight and input. That is not easy either. Traditionally, where banks have had to do restructurings and recoveries there have been co-operative workouts and damage limitation programmes and strategies whereby the original promoters, where there was no malevolence or undue negligence, are harnessed in the recovery work and that earns them their right to the elimination of personal guarantees. The guarantees taken in the credit bubble were not really relied on when the loans were advanced. Now they are being super-relied on in the recovery. There is a paradox and an imbalance in the ethics of the whole thing.
I tried to get an overall summary of the NAMA loan book. The construct that was approved and enacted into statute was based on a model that would take over the then identified portfolios of about €77 billion of loans from, essentially, five banks, because Permanent TSB did not have any loans in that first listing, for €54 billion which would be paid for in issued bonds. This implied losses of €23 billion. What has happened in the first phase of transferred loans is that €74 billion of loans were transferred at write-downs, not of €23 billion but of €42.5 billion, which gave a net cost to NAMA of €31.5 billion. Broadly speaking, those loans can be divided into three classes-----
Deputy Peter Mathews: I will be finished in five minutes. Will the delegation agree that the €74 billion are classified into three main groups? These are the quality assets which represent about €18 billion out of the €74 billion; the limited liquidity assets, which are €20 billion out of €74 billion; and the illiquid assets which are €36 billion out of €74 billion. At the acquisition date, including a 10% long-term economic value premium, the €18 billion came in at €14.4 billion, the €20 billion of limited liquidity assets came in at €8 billion and the illiquid assets of €36 billion came in at €9.1 billion. This implies write-downs of 20% on the good loans, 60% on the middle ones and 75% on the worst ones. As at December 2011, those three categories of loans can be restated as the €14.4 billion becoming €13.7 billion, the middle category of €8 billion becoming €5.6 billion and the €9.1 billion becoming €5.9 billion. This implies write-downs of 5%, 30% and 35%, a total of €25.2 billion. I think it would be reasonable that at December 2012, there would be no further write-down needed on the good quality assets; a 20% write-down on the middle group and this is in line with forecasts, which would bring the €5.6 billion to €4.48 billion; and the illiquid assets would be written down by 30% on the €5.92 billion, bringing it to €14.14 billion. Adding up the restated recoverable or realisable values, this would suggest a €22.3 billion recoveries collection out of the original €31.5 billion. If one also adds to that about €200 million a year in operational costs for NAMA, there is the prospiect of a total loss of anything between €7 billion and €10 billion. If the delegates agree with those broad parameters, we should be saying that this is what we should be preparing for. If the delegation does not agree, I would ask them to explain why they do not agree.
Deputy Joe Higgins: I have a lot to say but I will not speak about NAMA and the whole disaster. However, I refer to one specific issue about which I will be brief but on which I really need specific answers from Mr. Daly and Mr. McDonagh. I understand that NAMA owns 80 properties in Belmayne in the north Dublin fringe. Major fire safety issues have emerged over the past year, unfortunately, in Belmayne. After resisting for almost a year, Dublin City Council fire authority and the developers now admit that there are substantial fire safety issues. Unfortunately, the admission which was dragged out of them seriously underestimates the extent of non-compliance with fire regulations in that area.
I note a press report from two weeks’ ago and I ask the delegates to confirm if it is true that NAMA is making loans available to Stanley Holdings, one of the developers, to carry out work related to trying to make good the fire issue problems. Is this true and what is the situation? What has NAMA done to establish the extent of the problem? Has NAMA asked engineers and experts to independently examine the situation to advise it or has it relied on the developers and their engineers or whatever? I have visited the site and I have had demonstrated to me the seriousness of the issues. It is not the relatively small changes that the developer and Dublin City Council fire authorities say are necessary, which even then require residents to move out for three or four days. I am afraid something far more radical and substantial is needed. This has been verified to me by a number of very different sources with knowledge of the situation.
In view of the seriousness of this situation, will NAMA agree to have independent experts in fire regulations and safety to meet in Belmayne with the advisers retained by a number of residents so that the full extent of the problems there can be agreed upon in an open and transparent and honest way? This is heartbreaking for the residents, as it has been for the residents of Priory Hall. The mess to which Mr. Daly referred, and from which NAMA arose, relates to the general financial mess that was created by the property bubble. Unfortunately, what is coming out now is of equal breadth and depth, I am afraid, not in the financial issue but on the building legacy that this period has left, such as pyrite, breaches of fire regulations and other issues. I believe NAMA has a responsibility. I do not mean to lecture the gentlemen but this is an issue of the most serious import and when it comes to fire, we do not play with it.
Mr. Brendan McDonagh: In reply to Senator D’Arcy’s questions, he is correct that before a debtor can sell an asset he must obtain the consent of NAMA and part of that consent is to ensure that NAMA is getting the best value for the taxpayer. We seek an independent valuation report on any assets and Mr. Mulcahy can deal with that. We take local market soundings if the valuation raises an issue. There is an appeals process whereby potential buyers have contacted NAMA to complain that a developer did not wish to sell property because he wanted too high a price or valuation. We are quite open to receiving any such representations and we will investigate them and report back to the complainant.
Senator Michael D’Arcy: I think we may be at cross-purposes. Is there an appeal process for persons who require the consent of NAMA but this has been refused and in their opinion, the price to be achieved was the market price?
Mr. Brendan McDonagh: If the debtor believes he has not received an appropriate response from the portfolio manager, it is open to the debtor to contact Mr. Mulcahy or myself and we are quite willing to investigate the matter.
Senator Michael D’Arcy: Unfortunately, I doubt that would happen, to be honest. I ask Mr. McDonagh whether in his opinion there should be an appeals process within the standard process. In my view, many people may not contact Mr. McDonagh or Mr. Mulcahy. A person may have received valuations and believes he is achieving the current market value, that he may have discussed the price with local auctioneers in a town or a county and they are of the same opinion, but the people in NAMA are not of the same view.
Mr. John Mulcahy: -----we usually reject the complaint when the property has not been openly marketed, when the debtor will say he has received an offer from a person who may well be local. If the offer looks low, my question is always whether this property has been put to the market and openly marketed through the normal process and bids taken and whether this is the best bid that can be got. We check it with a few local sources. However, if we start on day one and somebody says that it has not been put to the market and it looks low, I say “No”. There is no appeal from that. I say put it to the market and if the market will only bid X, then we have to take cognisance of that because what is our alternative if one thinks about it? Our alternative is to say “No” and the thing just sits there and we get no money for it. That is not a commercially viable alternative for us.
Mr. Brendan McDonagh: In regard to the question about the 121 hotels, I have no problem telling Senator Michael D’Arcy that only two of the NAMA hotels are in Wexford. Last year somebody made a complaint to the Competition Authority about the running of NAMA hotels. We provided full information on the hotels to the Competition Authority. It looked at the matter and was satisfied we were making sure the hotels were not trying to oversell or distort the market. I can assure the Senator on that.
In terms of the €500 million spent and giving a breakdown of it, I do not have the breakdown with me but I am happy to write to the committee with that. On whether NAMA could make better use of the cash if it was given another year, the reality is that we always try to maintain ourselves in a strong position and that it is not a constraint if more capital is required for good projects in the meantime. We are trying to generate as much cash as possible so that we have a surplus over the €7.5 billion available to us the whole time. If additional working capital or development capital is required, we are quite willing to make that available.
In terms of the mortgage subsidy scheme and whether 750 is enough, effectively, that is what we got approval for initially as a trial run. We will see how it goes. I accept the proposition that, effectively, the market is capable of absorbing and dealing with that.
Deputy Mathews raised issues about PGs. People give PGsin the good times and they are expected to be called in but they are part of the negotiation on restructuring in terms of trying to get people to put additional assets on the table if they have them. The sale in terms of the transfer of the assets, €74 billion of assets bought for €32 billion, there was a write down. In terms of the figures the Deputy produced, I do not know the genesis of his figures other than the fact that the board of NAMA and I do not accept that we are heading to the loss territory about which he is talking but I fully accept he has his own views on that.
Deputy Higgins mentioned Belmayne. As soon as we became aware of the matter, we liaised directly with the developer concerned and Dublin City Council and we sought an independent report in terms of what the issues were. We got assurance that the remedy that would be taken was sufficient to meet the fire regulations. I assure Deputy Higgins that matter was discussed all the way up to the board of NAMA. The board of NAMA has no hesitation in terms of making funding available if necessary to remedy that as quickly as possible.
Deputy Joe Higgins: Sorry. Mr. McDonagh said the developer and Dublin City Council. I do not say it lightly but Dublin City Council is compromised on this issue. I have the whole paper trail. Dublin City Council denied there was a problem until it had to admit one because the insurance company went in on a separate issue in January of this year and found that everything that had been said a year earlier was unfortunately true. I am sorry but it is compromised.
Deputy Joe Higgins: Dublin City Council denied in writing that there was any issue last July following meetings in April. In February the residents were written to and told they would have to move out for three or four days. There is a huge question here.
Mr. Brendan McDonagh: I cannot answer for Dublin City Council. All I can say to the Deputy is that, effectively, as soon as we became aware of the issue, we sat down with the developer and Dublin City Council and asked what the issue was, what it would take to solve it and how much money it would take to solve it. In terms of making money available to solve the issue, we have done that.
Deputy Joe Higgins: I am afraid various parties are compromised here because there was no due diligence. NAMA has a responsibility to the taxpayers and to the public it serves to have an independent assessment. I ask that it does that in association with other experts who will point out the extent of the problem.
Mr. Brendan McDonagh: My understanding about this is that there is a difference of opinion between the various experts involved in terms of what is required to remediate the problem. We sought assurance from Dublin City Council in terms of remediation and that it would meet the requirements. We saw the reporting required in terms of what it would take to remediate the problem, the works involved, the time involved and the cost involved. We have done everything to try to remediate the problem. I assure the Deputy of that.
Deputy Joe Higgins: If it is demonstrated to Mr. McDonagh with evidence, photographic and otherwise, that there is a much larger problem than he has been told about and if that is submitted to him, will he look at it again?
Mr. Brendan McDonagh: To assure the Deputy, a particular person who has been dealing with the matter has been in, has met a number of my senior staff, has had meetings with them and has talked them through the issue. If that person or any other person wants to come in and meet the portfolio manager if there is any additional information, we are quite happy to meet that person.
Deputy Michael Creed: I have a number of points which I will try to make as quickly as possible. Deputy McGrath, in his opening remarks, raised the question of the €4.3 billion on deposit. Where is that money on deposit? Mr. Daly or Mr. McDonagh made much ado that two thirds of the debtors were working effectively with NAMA. That masks the elephant in the room which is the fact that one third of the debtors are not working or co-operating with NAMA. What is the value of the NAMA loan portfolio the one third holds? What is the nature of the non-co-operation of the one third with NAMA? Obviously, it will be varied but are we talking about one third incurring the very substantial legal fees about which we talked? Are they the mega debtors?
On the issue of legal fees, it strikes me that the taxpayer is in a lose-lose situation because the taxpayer effectively funds both sides of the legal argument. What active oversight is taken by the board in respect of legal cases to make sure the public interest is protected?
I would like to take up a point made by Senator Michael D’Arcy. I have seen cases where account managers, in respect of individual debtors, have not been aware of refusal to sanction individual sales of assets in their account portfolios and where realistic offers, in respect of local knowledge, were made for properties which would not achieve the price they were being offered today and where the sale was denied. As stated on the front page of one of the national newspapers today, the market has been in freefall. I wonder about the effectiveness of the chain of command in respect of account managers and the clearing house for sale approvals.
Another point that strikes me in this regard is that we are paying for it. There is considerable adverse publicity about the fact we are paying salaries to developers to manage out their portfolio and assist generally. I do not have a difficulty with that. However, we do not acknowledge and recognise the skill-set such developers have in regard to their portfolio and we defer in terms of individual sale approvals to people who, from any indications of which I am aware, have short-changed both the taxpayer and NAMA. There is something about that process that needs to be looked at again.
My fifth point relates to the number of housing units NAMA proposes to make available to local authorities for social housing. The delegates will be aware that in the past the councils have worked to a target of a maximum of 20% of units in any development being for social or affordable housing. Will NAMA adhere to that? We need to know that if it acquires a loanbook of properties which have already met that target it will not off-load additional units to local authorities that would take them, not just marginally but substantially over the 20% threshold. People who, in many instances, paid top dollar in terms of prices at the peak of the boom now find their properties are being further devalued because of breaches of the 20% threshold.
I refer to vender finance. It sounds as if it may have been a good idea three years ago but now, when the average industrial salary multiplied by four will pay for the average family home, I do not see that we require it. What we require is finance being made available to people who want to buy. I am not sure we require NAMA to underpin the market in its proposals for vender finance.
I refer to the due diligence conducted on the initial loan book as it was transferred. I rarely find myself in agreement with Deputy Higgins but the due diligence originally performed for NAMA in respect of the loan for the Belmayne properties must have been faulty if it did not identify structural deficits in the asset. It begs the question as to what recourse there is in regard to the professional bodies which provided assurances that the assets that came with the loan book were structurally sound. How many other similar cases can we expect to surface in the near future?
I was not a Member of the Oireachtas when this legislation was passed, nor when the bank rescue occurred. I could not support it today. The entire episode is bizarre. It is counter-intuitive in regard to what the economy needs and is riddled with moral hazard, not least because many of the people who caused the problem are now working with NAMA, allegedly to provide the solution. These are the same developers, the same bankers, the same accountants, the same property consultants. To put it mildly, it is a bizarre situation. I would be worried if the Food Safety Authority hired staff on the basis they had already failed in the food business. I have the same worries about NAMA hiring these people to advise it.
We have created the world’s largest property company which now has a vested interest in keeping up the price of property. That is utterly bizarre, as several speakers observed. I appreciate the gentlemen who have come to see us today operate a policy and personally I have no animus against any of them - I know some of them. However, this policy is bizarre. We are trying to build an export-led economy but this policy is entirely based on internal demand and property. The export drive is beginning to work. I was pleased to hear there were 10,000 extra people at work in the past quarter. However, we have lost 300,000 jobs so the small number of jobs NAMA has saved, 230 as listed on the first page of the chairman’s report, plus the other 9,500, probably came about because of a fixation that originally cost us 300,000. Our rescue of zombie banks is also a part of that picture. The Irish economy needs falling property prices. Prices here went up more than in any other country. We won the unwanted gold medal in The Economist’s property price leagues. If prices fell further the Irish economy would start to become competitive again.
The chief executive’s statement is to the effect that the property market problems of this country are continuing to frustrate economic recovery. Measures to keep prices up, including some in the budget, will frustrate economic recovery. We are trying to be competitive on world markets yet we are bailing out people who paid hundreds of millions over value for places such as the Ringsend glass bottle company site. What should we do next? Pay out on losing lotto tickets or slow horses at Cheltenham?
On page 6 there is a reference to €506 million as a significant injection of capital into the construction sector. Why would we want to do that? The construction sector brought us to our knees. Yesterday, the Construction Industry Federation stated it wanted none of the new schools in the country to be built by people from Northern Ireland because it knew those people would win in competitive tendering. The Competitiveness Council shows industrial property is far more expensive in Ireland than in the UK. Why are we having another round?
The banks attended the committee last week and told us 60% of their lending still goes to property. NAMA is continuing the fixation of the Irish nation with property by preventing prices from falling. The answer to Senator Hayden’s question is found on page 6, in reference to the measures in the budget. It is stated that the substantial cost of stamp duty and new capital gains tax are likely to give the market a significant boost. For what purpose? That is how we got into trouble the last time.
I agree with Deputy Mitchell’s point about the vendor finance idea. On the following page of the report is a reference to the pilot residential mortgage initiative. NAMA is against fire sales, according to the second last paragraph. They are not fire sales. Ridiculous people made ridiculous decisions and the rest of society should not pay for them. Nothing went on fire. Stupidity manifested itself up and down the country.
On the social dimension, the delegates mentioned educational institutions and the city and county managers association. If we let property prices fall those entities would be able to acquire social housing in the market for much lower prices.
The whole exercise is fraught with dangers and lacks any underlying economic rationale. It is a far too slow attempt to get Ireland away from a mad and daft property fixation which brought this country to its knees. It will put up house prices - that seems to be the object - and also, though apparently unintentionally, the price of building. None of those factors facilitate what we are trying to do. Let the golf courses and hotels go.
I support the IMF in trying to get this thing over as soon as possible and get money back into the Exchequer. I hope NAMA does not hang around as long as the Irish Land Commission, selling farms for some 185 years. It must be wound up quickly. It was a second mistake, the first being the rescue of the banks. Ireland needs low property prices which will reflate the economy. These interventions are counter-productive.
Deputy Richard Boyd Barrett: How can I make an enquiry on behalf of some constituents in respect of a now derelict shopping centre that I believe is in NAMA’s portfolio? It is of concern to the community. A shop owner and prospective developer wants to know who to contact to discuss a possible and welcome development of the shopping centre. Who does he contact?
Mr. Frank Daly: Deputy Creed asked whether there was active oversight of legal issues and fees by the board of NAMA. A litigation report goes to the board every month and any major cases or legal issues or challenges come to the board and are discussed. Legal fees were referred to during the discussion on the McKillen case. That case was not all about NAMA; there was a constitutional challenge to the NAMA legislation and it had to be defended. It was successfully defended because there were successes for NAMA and successes for Mr. McKillen.
I have a difficulty with Deputy Boyd Barrett’s questions because they go into Government policy on the banks and NAMA. I respect his views. He says that the same individuals are working for NAMA as the banks or property sector. That is the reality because we are driven by our mandate in the legislation. We cannot question it or say that it does not make sense to us. In order to get the best results, we need to engage with people in the banks and with property developers. We need to employ experts, some of whom had worked in the property sector. I do not know the practical alternative. Deputy Boyd Barrett said that this amounts to only 9,500 jobs but every job is important. What would be the consequences if NAMA was unable to support businesses retaining 9,500 jobs and the consequential business that falls from it?
Mr. Brendan McDonagh: I will deal with Deputy Creed’s questions quickly. Of the €4.3 billion in cash, €2 billion is in the Central Bank and €2.3 billion is invested in short-term investments pending the use of the cash to redeem NAMA bonds, which we expect shortly. Deputy Creed pointed out that two thirds of debtors are working with us and implied that one third of debtors were not working with us. That is correct and almost the debts of 25% of our debtors have been enforced. As a percentage of the original value of €74 billion, 10% of those remain. The 60 business plans must be assessed in terms of that figure.
Regarding social housing, there was a Part V provision under planning legislation, whereby 20% of the development had to be provided to social housing. Deputy Creed questioned whether NAMA would add to this and my understanding is that local authorities have a policy that 20% is the limit. Some of the apartments that could be made available are unsuitable because there is already a social housing provision in the development. The policy perspective is being handled by the Department of the Environment, Community and Local Government and the local authorities.
Regarding the due diligence on Belmayne, the reality was that the units were certified as being compliant but the situation only becomes clear when one removes the plasterboard and sees that fire proofing was not in place. That only becomes visible-----
Deputy Michael Creed: With due respect, if I buy a house in the morning and I get my engineer to certify that it is compliant, I expect it to comply in every detail. If it goes up in flames, I expect that my insurance will enable me to claim against it.
Mr. John Mulcahy: A house would have to be deconstructed to provide the kind of report to which Deputy Creed refers. The engineer will say that the work covered up is certified as complying with fire regulations. I do not know of any engineer who will open up the ceiling and look inside, even with modern-day technology. The engineer will certify what he can see. When we talk about people’s property, we should be careful because one can stigmatise locations unfairly. If one buys a house, unless one opens up the whole building one cannot give it a 100% certification. Similarly, one cannot do a health check without scans and, even then, the limit of the investigation will be clear. We carry out a normal investigation. The State had its process of certification, which it changed to self-certification. Years ago, an official from the local authority inspected the work and, before it was filled in, he had to certify that it was okay. We ceased to have that system and some people say it was a bad day when we did that. Now that there are issues arising from the property boom and self-certification but they must be worked out in the years ahead.
Chairman: I thank Mr. Daly, Mr. McDonagh and Mr. Mulcahy. It has been a lengthy session and I thank the witnesses for their attention to the questions and for their presentations, which we will upload to our website.
|Barrett, Sean D.||Boyd Barrett, Richard.|
|Byrne, Thomas.||Crowe, Seán.|
|Doherty, Pearse.||Donnelly, Stephen S.|
|Dooley, Timmy.||Higgins, Joe.|
|McDonald, Mary Lou.||McGrath, Michael.|
|Hayden, Aideen.||Humphreys, Heather.|
|Humphreys, Kevin.||Mathews, Peter.|
|McNamara, Michael.||Mitchell, Olivia.|
|Sheahan, Tom.||Spring, Arthur.|
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