Wednesday, 4 July 1990
Dáil Éireann Debate
Mr. Rabbitte: When on the Adjournment of the debate, I was referring to the undertakings given by the Minister for Finance to the ICTU and the main union involved in Irish Life, the MSF, to the effect that by use of the golden share he could assure them that the substantial stakeholding by the State in Irish Life would be retained. The Minister claimed that his retention of a golden share in this company would limit the size of individual private shareholdings after flotation and safeguard against hostile takeover attempts. According to the Minister, legal advice from the Office of the Attorney General confirmed that the exercise of such a golden share option would not contravene EC laws provided  it did not discriminate against EC citizens on the grounds of nationality.
I want to ask the Minister to tell the House whether forthcoming EC legislation will alter this opinion. There is currently a proposal from the EC Commission on the 13th Council Directive on Company Law concerning takeovers which may already change the basis on which the Minister gave the assurance on the golden share option. Article 4 of this Directive would oblige any shareholder holding or bidding for in excess of one-third of the voting rights in a company to make a bid for 100 per cent of the shares in that company. For example, if a shareholder had 15 per cent of the shares and made a bid for a further 20 per cent which would bring the total holding up to 35 per cent, then the shareholder would be compelled to offer to purchase all the shares held by others. As I understand it, the Minister for Finance intends that the golden share proposed for Irish Life would prohibit any shareholder bidding for more than 15 per cent in the first instance. If this Directive becomes law will the ceiling and the golden share itself be open to challenge?
One of the things that worries me most about the whole development of the Irish Life privatisation saga is the misleading impressions that were given out from time to time and communicated to the public. For example, if you were to ask the man in the street why the Government propose to privatise Irish Life he would say it has something to do with enabling them to expand into the US market. We now know that is nonsense. Similarly, on this question of the golden share, I was led into a false sense of complacency, believing that if the political battle is lost in this House — as, regrettably, seems likely to happen — at least the Minister through the use of the golden share could retain this substantial holding. Now it turns out from the Minister's speech delivered this morning that that is no longer the intention. The Minister spells out the purpose of the golden share and then goes on to say: “A special share will be held by the Minister for  Finance to enforce this limitation and the arrangement will continue in place for at least five years after flotation.” That is completely different from the impression I had from what the Minister was saying about the use of the golden share, and I know from very recent discussions with the main union involved, the MSF, that they understood they had commitments from the Minister to the effect that the golden share would enable them to retain this interest. Now it looks, as Deputy Noonan described it this morning, as if the whole option of the golden share is in any event no more than a temporary little arrangement.
Mr. Rabbitte: I know he has had correspondence quite recently on this very matter from the MSF and they have specified certain questions which the processing of this Directive in the European Parliament threatens. It seems that, depending on the priority the Italian Presidency give that Directive, it may be law later this year or in 1991. Therefore, I look forward to hearing the Minister on this point. I wonder whether he is familiar with the text of an article by Mr. Colin Browne, political correspondent of the British newspaper, The Independent of 24 October 1989. I quote the relevant section:
EUROPEAN directives on company law could block Labour's controversial plans for taking some of the privatised public utilies back into public ownership, according to John Redwood, the Under-Secretary of State for Trade and Industry.
for 100 per cent of the stock. Mr. Redwood said this would make it impossible for Labour to carry out its policy for some utilities, such as water and electricity, of taking a majority 51 per cent stake by taking back only 2 per cent of the shares which had been sold off. It could also rule out Labour's option of creating a “golden share” to give the Government a controlling interest.
It would appear that Mr. Redwood is ready to argue, according to this article, that a statutory system must have a time limit for bidders to make their moves and that he will be seeking equivalent treatment to protect the small shareholders.
Mr. Rabbitte: The writ of our European paymasters runs on the neighbouring island just like it does here, whether we like it or not. If this EC Commission's 13th Council Directive on Company Law concerning takeovers and other general bids becomes law, then golden shares which give governments a controlling interest in companies could be illegal, according to the British Minister. I would like to hear our Minister address that point because the Directive, as I understand it, requires bidders who are making a bid for extra shares in a company to bid for 100 per cent of the shares, if their existing holdings plus the shares they are bidding for, exceed a threshold of 33.3 per cent of the voting rights. Member states may reduce this threshold — in Britain it is 30 per cent — but they cannot increase it.
The purpose of this Directive is to stop partial speculative bids for companies and to ensure equal treatment for all shareholders. I submit, therefore, that this development very significantly changes the understanding that, for example, the staff of Irish Life and a great many members of the public have about the comfort that is provided by the golden share. They will, of course, have a great deal more discomfiture when they read the Minister's address today which explicitly states that the use of the golden share is for a limited period, probably five years. That is a matter that the staff in Irish Life will want to consider seriously as well as the rest of the public on whose behalf the Government currently hold the shares. I am all the more suspicious about the motivation behind the privatisation of Irish Life when that kind of misleading inference can be drawn from official statements. After all, this campaign has been running now for some time.
I happen to have a copy of a press release, two paragraphs of which I will read, that I issued in a different capacity in 1987 when the word abroad was that  we were considering the expansion potential of Irish Life because of its 90 per cent-plus ownership by the State. We were told that we could not expand into the US because of the commercial laws applying to the US. It became “the man in the pub” economics that the reason we were doing this was to facilitate expansion to the US. At that time I made this statement on behalf of my union:
Irish Life's upper management's major plank in its drive for privatisation is that it wants to expand into the world's largest life insurance market. The ITGWU would support such a move but the union is critical of the twist that upper management is placing on this ambition, which is that half of the States prohibit companies with more than 51 per cent State shareholding from operating in their jurisdiction. This is a spurious argument in favour of privatisation. The US economy is 170 times larger than Ireland's, and if Irish Life got a toehold in even one or two states it would be doing very well. It is patently ludicrous to say that it must be privatised in order to trade in this vast economy of 239 million people. Even if it is true that half of the 50 states do preclude companies with more than 51 per cent State involvement from establishing subsidiaries in them there are still the other 25 States where per capita income is two and a half times higher than Ireland's.
Shortly after that the chief executive again made his statement emphasising the necessity to be seen to expand into  the American market and so on, and that became the folklore about the necessity to privatise Irish Life. From the Minister's script today we find that that was all a bag of wind that had little or nothing to do with the motivation behind Irish Life. The description by the Minister of how Irish Life, such a uniquely successful Irish commercial State company, came into the ownership of the State or into public ownership, was that it was an historical accident.
I know this Minister is given to describing historical accidents like coalitions as “a temporary little arrangement” but one could scarcely describe the roots and origins of Irish Life as an historical accident. What actually happened was that Irish Life had its roots in the failure of the private sector and a number of private companies. The State was forced into the general insurance sector by the failure of the PMPA and the Insurance Corporation of Ireland and that is what happened in the case of Irish Life. The State were forced in by the imminent collapse of three Irish Life insurance companies and the threatened withdrawal from the market of a number of British companies. I would not describe that as an historic accident. I would take certain lessons from it, lessons that would induce me to believe that it is desirable that the State retain a majority stakehold in this company.
In 1938 a new company was set up to take over the business of nine of these offices. It was known as the Industrial and Life Assurance Amalgamation Company. The Government promised to make good any deficiency and got 18 per cent of the equity for its trouble. The promise eventually cost the Exchequer just over £1 million. Five British offices held 72 per cent of the shares and four Irish companies the remaining 10 per cent. Irish Life was set up as a subsidiary to underwrite new business but took over all the business in 1945 when the parent company was wound up. In 1947 the Government bought the 72 per cent stake owned by the British companies for the princely sum of £110,000, bringing its stake to 90 per cent, which it has since  slightly increased. The remaining shares held by the old Irish companies are now distributed among the private shareholders. The largest single shareholder after the State, with something less than 5 per cent of the shares, is the Irish Life Staff Pension Fund.
By any measure Irish Life has been a success and is by far the market leader in Ireland with subsidiary interests in banking through its stake in Irish Inter-continental Bank and in general insurance through its stake in Church & General Insurance. It has recently acquired an insurance company in the United States of America and is planning further expansion abroad. It employs almost 1,700 people and is of strategic significance in the economy given that it is a substantial stakeholder in some of the major companies quoted on the stock exchange. This morning I instanced the role it played in the Roadstone struggle for the control of Irish cement and, subsequently, in the Irish Distillers case.
Life insurance companies operate on a number of levels. At the basic level they accept risk promising a payment on death in return for premiums and at other levels they manage the savings of those looking ahead to their own needs in the future, for instance on retirement, or the needs of their dependants in the event of death. The basic insurance role of life insurance companies is now a minor element in the total. They are, essentially, the managers of people's savings. The bulk of the funds under the control of life insurance companies at any time belong to the policyholders and they must share in the returns on those funds.
The division of the profits between shareholders and policyholders is at the heart of the argument for capital restructuring. It has been claimed that the rights of shareholders must be enhanced if the company is to raise the fresh capital it is said to need to fund expansion. This would mean a reversal of the capital restructuring initiated by the Irish Life board in 1972. They did exactly the opposite — Deputy Noonan dealt with this matter at length this morning — in  that they reduced the rights of shareholders and enhanced those of the policyholders.
The move made at that time seemed to make sense. Like Deputy Noonan, I am not questioning the wisdom behind the commercial decision taken at that time. To understand why it is necessary to know a little about the different types of policy issued by life insurance companies. At this time the most popular are those linked to unit funds. Part of the customer's premium goes to cover the life insurance element of the policy, the risk part, while the remainder is invested in the unit-linked fund which is simply a fund of money managed by the life insurance company. Each company could have any number of such funds, some devoted solely to shares, others to property, to high risk, to low risk, and to a wide spread of investments across all areas.
It is proposed to railroad this Bill through after a debate lasting only one day. There is also the ludicrous suggestion that we complete the Committee and Final Stages in three hours next week. According to the 1989 balance sheet of the company the assets of the company stand at £4.214 billion. If we put this sum of £4.214 billion against GNP, and I know it is not entirely reasonable to make this analogy, one would get some idea of the size of the assets of this company. As I said, this sum is made up as follows: Mortgages and loans, £24 million; fixed interest securities including, I presume, Government stock and other debentures, £1,355 million; ordinary shares most of which, but not all, are quoted, £1,860 million; property, including, ironically, ground rent — an issue which has been raised in this House on many occasions — £437 million; unit trusts £268 million and, deposit and short-term interest, £619 million.
We are all supposed to put up our hands and say, after the minimum discussion, that we agree with handing over to someone else control of this substantial asset which has been built up under public ownership through the work and ingenuity of Irish workers and managers during  the years. In all probability, it will pass out of the control of Irish hands. This is inevitable once the company is floated. This morning Deputy Noonan asked the Minister to indicate in what way will the company be floated and what proportion of the shares will be offered on the Dublin and London stock exchanges as compared with the percentage offered on the Tokyo and New York stock exchanges. If someone does not have a great deal to say and supports the thrust of the Bill I suppose they can put that question to the Minister as a major issue. I do not believe it is a major issue.
The major issue is whether ownership and control should pass out of Irish hands. Fianna Fáil instead of using Irish Life, as they claim they have done ever since the Lemass era, as a strong, major, indigenous company to create jobs in Ireland are now abandoning that tenet of Fianna Fáil economic philosophy and are going to allow this major public asset to pass out of the control of Irish people. This is most regrettable and marks a major development in Fianna Fáil economic policy. In 1987, the leader of Fianna Fáil said to the Irish Congress of Trade Unions that Fianna Fáil did not in the past and would not in the future tamper with the major State commercial companies. The shopping list of hit companies for privatisation announced some months ago by the chairperson of the Progressive Democrats has proved to be true. This list includes Irish Steel, the Irish Sugar Company, the Great Southern Hotels Group and Irish Life. If one of the scale and significance in the economy of Irish Life is allowed to get through the net — and it looks as if this will happen — anything is possible. Unfortunately, that will be the decision of this House after the minimum discussion.
I have made reference to the pressure which was brought to bear within Irish Life to complete the mutualisation of the company in 1972 which would enable it to compete more effectively. There was a certain moral basis for this. After all, policyholders had provided the funds during the years. Therefore why should  they not get the surplus earned on these funds? From the point of view of the management, mutualisation had much going for it since it would leave them in total control, answerable to no master other than a diverse group of policyholders who would never be able to take any concerted action. That desire to remove any vestige of State control may have been a stronger motivation for pushing for change than any need to compete more effectively. I ask the Minister to address this question.
If the company is privatised will it become more effective and has there been a problem with its competitiveness? I ask the Minister to give us some specific figures as it is extremely difficult to deal with a company with assets of £4.5 billion without them. On what basis are we being asked to agree to the sale of the company? Will a multiple of the normal price earnings ratio, depending on the industry, apply? We do not know. Will it be based on the net worth of the company as stated in the balance sheet? We do not know. On 14 March 1990 I asked the Minister for Finance — column No. 82 of the Official Report — in a parliamentary question whether he would make available to us the contents of the report of the consultancy that studied this question in terms of what would be a reasonable valuation to put on Irish Life. In his reply, at column No. 84 of the Official Report, the Minister for Finance, Deputy A. Reynolds, said:
...I am sure the Deputy appreciates that before one attempts to float any company on the market they would not be foolish enough to publish a sensitive and confidential financial report, especially when one considers the effect this could have on the market when one gets around to flotation...
I do not appreciate any such thing. I would like to know, as an elected representative of the people, on whose behalf the Government are holding their shares in Irish Life. How am I to make a valuation on Irish Life shares or will we  experience the pattern that is now evident in Britain where all the public utilities have been sold off at artificially low valuations? Within a very short time, in almost all cases, when the shares settled, it became clear that they were put on the market at artificially low valuations. Will that happen in the case of Irish Life?
I will return briefly to my submission that privatisation is a political rather than an economic question. Economic questions that were advanced for this privatisation apparently no longer demand the same credence. I would like to refer to a book entitled Does Privatisation Work Lessons from the UK by Bishop and Kay. That book is available to the Minister and the officials in the Department of Finance and shows very clearly that in the United Kingdom the shareholders gained substantially from the privatisation programme with extremely generous discounts — which averaged 14 per cent — five times the average private sector discount and 28 times that in the case of British Airways, according to Bishop and Kay. The extent of the loss to the taxpayer was difficult to perceive because it is a complex area where those with the requisite expertise are generally those who have much to gain, and because it involves the transfer of wealth from the passive total population to the active articulate minority. That is precisely what happens. It is a regressive transfer of wealth because this passive total population referred to are the people of Ireland.
The people of Ireland own the shares in Irish Life. What is going to happen? There will be a regressive transfer of wealth to what is decribed here as the “active articulate minority”. In other words, only those with the money can afford to buy the shares. This talk about a capitalist democracy, or a shareholding democracy has been shown to be a nonsense. Those holding shares in Britain have gone up from 9 per cent to 21 per cent, but studies have been done that show conclusively that within 12 months of the privatisation taking place, the share have reverted and again aggregated to the financial institutions. The banks  and the financial institutions got back the majority of shares in a very short period, because the ordinary people do not have the expertise, the inside knowledge, or the money, cannot afford to engage in dealings on the Stock Exchange. The professions which gained enormously, greatly assisting the big bang in the city and the development of the whole yuppie culture, included banks, stockbrokers, advertising agencies and public relations consultants. The most expensive flotation was British Gas which cost 3 per cent of the money raised. This may not appear to be a great deal until the absolute sum is revealed at £160 million sterling.
An examination of the UK privatisation programme shows that there were far greater efficiency gains in public enterprises prior to privatisation than since, and the remaining public enterprises outperformed private industry as a whole on a number of criteria. The transformation of public sector monopolies into private ones has not led to the expected improvements in services, but to higher profits at the expense of the consumer.
For example, last week it was revealed that the privatised British Telecom, whose service is constantly criticised, was over-charging its customers to the tune of stg £6,000 million a year. However, privatisation appears to be on the agenda in Ireland and it is not unrelated to the fact that the restructuring of many Irish public enterprises has been completed and most are now profitable. A minority of people may gain substantially, particularly if the sales are handled in the same say as in the UK.
I must say since this country has the good fortune to benefit from the experience in the neighbouring island, it is most distressing that we are rushing in where Thatcher has failed. It must be one of the ironies that the Taoiseach should be converted to the monetarist Thatcherite  position at this stage in his career. As the tide of Thatcherism ebbs in Britain, leaving a trail of human debris, poverty and unemployment in its wake, that it should be espoused so wholeheartedly by the recently retired — as Deputy Higgins calls him — President of all the Europeans, is most distressing.
Fianna Fáil always cherished the role of the leading commercial State companies in Ireland and were never in favour of going down this road. One could not say that about their partners in Government, or about the main Opposition party here who made very clear this morning, despite a fancy piece of footwork by the finance spokesman who asked a number of very intelligent cosmetic questions but did not conceal the fact that Fine Gael will be supporting the selling off of Irish Life.
In 1987 the major union involved in Irish Life — the ASTMS — referred to the rush to privatisation, or as it is sometimes called, the case for new capital restructuring. They pointed out that the arguments in 1972 — about which I spoke earlier — were turned on their head. The case has been made for increased shareholder participation in the company. The fact that a case for capital restructuring has been linked by its main proponents with a case for privatisation must raise suspicions about the motives of these advocates. I submit they are two different, distinct, separate issues. I might quote from the ASTMS document which says:
The capital of the company can be restructured without any of the State's shares being sold off to the private sector. The reason for linking privatisation to the proposed capital restructuring may simply reflect the fact that the case for a capital restructuring is a lot stronger than the case for privatisation but there are many people who have a vested interest in having the company's shares floated on the stock exchange.
Let us first look at the case for capital restucturing. Irish Life claim that their  expansion plans will be curtailed unless they can increase their capital base. To date expansion has been funded by retained earnings and they have been substantial, but it is claimed that these may not be sufficient to fund the type of rapid expansion which the company now envisage. Another call on retained surpluses is the maintenance of required solvency ratios. Expansion has been rapid in the recent past. To date there has been no sign that the expansion has been curtailed because of a shortage of capital, but it is pointed out that these investments may need to be topped up as they themselves expand and further acquisitions are actively sought.
The case is made that the company may require fresh share capital to fund this planned expansion but, because of the existing capital structure, there is no incentive for shareholders to put up extra cash; the potential return is just too small. Since the restructuring in 1972 shareholders are entitled to only 2 per cent of any surplus distributed while policyholders must get 98 per cent. So, if more is to be paid out to shareholders then a lot more would have to be paid out to the “with profit” policyholders. There is an uncertainty over the rightful ownership of the company's internal reserves. A capital restructuring need have no major impact on either staff or policyholders. It could simply readjust the share-out of surplus between shareholders and policyholders. Any reduction in policyholders' rights would have to be compensated.
Ownership of the company's investment reserves would also have to be decided. It would take some time and make little or no difference to the bulk of Irish Life policyholders — those who do not have “with profit” policies. There is a suggestion that the company could be restructured with a holding company created so that new non-life subsidiaries could operate completely separately from the life company. This might have some implications for staff but they are hardly adverse ones.
After the restructuring the rights of  shareholders would be such that the company would have no difficulty in getting them to subscribe new capital. This would be the case no matter who are the shareholders. The case for privatisation is either an ideological one — based on a view that the State should not directly own profitable enterprises — or else it is based on a claim that State-owned companies are essential, inefficient, monopolistic or all of those things.
The important net point is that the capital restructuring which Irish Life is said to need can be achieved without privatisation. Without a capital restructuring, or the promise of one, no private investor would be likely to buy the shares. But that is no good reason the State should not maintain its 90 per cent stake, or at least a majority stakeholding, after such a restructuring. Privatisation is a completely separate issue.
The Minister and other proponents of the case for privatisation have advanced two arguments. The first is based on the need for capital restructuring with the implication that this can be achieved only through privatisation. But, as pointed out already, the company's capital can be restructured without any need to sell off shares.
The second argument points to the restrictions operated in the United States against state owned companies; I have already dealt with that. Indeed it is a particularly spurious reason to advance having regard to the protectionism operated within a good many of the states of the United States in this area.
The board have decided against expansion in Ireland. The company have such a lion's share of the life assurance market that further rapid growth is not possible but they could consider expanding outside of their core business. That is one of the main planks that those of us on these benches would like to advance — that there is no conceivable reason the marvellous public asset that is Irish Life could not be utilised for expansion purposes outside its core business.
We are now rapidly going down the  road of the other major private, indigenous companies, companies such as Roadstone and Smurfit, which have experienced unprecedented expansion but all of it outside Ireland, expansion providing employment in the United States and in other countries so that there is very little spin-off to Irish workers, to the generation of wealth in Ireland, or indeed to tax revenue from the fact that these companies are expanding outside of Ireland. It is a tragedy to see Irish Life going headlong down that road because, inevitably, that is what will happen. They cannot wait to get the shackles off so that they can expand into the American and other markets.
I should have referred to one animus for this privatisation I passed over earlier which is the question of what it does for the advocates of privatisation in senior managerial positions. For example, a recent survey conducted in Britain showed that, immediately on privatisation being implemented, the salaries of chairmen, chief executives and senior managers, on average, increased overnight by 78 per cent; that was the percentage increase in salaries of those former public sector managers. Indeed, I think on the front page of today's Financial Times— the Minister may wish to engage in some light bedtime reading tonight and check this out — Sir Trevor Holdsworth, head of National Power, one of the about-to-be-newly privatised companies in the electricity sector, has seen his salary as part-time chairman rise to £185,000, representing precisely a 70 per cent, increase on what the full-time chairman of the total company had been earning. That will give the House some insight into why there are chairmen, directors, senior managers and others feverishly arguing the case for privatisation — because their salaries will treble if not quadruple overnight. In addition they will have extremely attractive share options on which they will make a killing within a very short period.
Deputy Taylor referred this morning to some financial information in his possession, to meetings that took place  between officials and the then Minister, Deputy John Bruton, in, I think, 1986. I have been supplied with similar information which suggests that at one stage a document was put to Cabinet on this issue which valued Irish Life not at the £250 million ballpark figure that we have all been discussing in this House, not at the upper limits of that at £400 million, but the paper actually prepared for Cabinet listed a figure of £800 million. I do not think that the people outside of this House, the people who put us in here, appreciate the enormity of the decision we are about to make during the course of this debate.
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