Friday, 5 July 1996
Seanad Éireann Debate
Minister of State at the Department of Finance (Mr. Coveney): As Senators will note from the explanatory memorandum circulated with it, the Borrowing Powers of Certain Bodies Bill, 1996, is essentially a technical one. It is designed primarily to remedy what appears to be a deficiency in existing laws governing the borrowing powers of State bodies whose borrowing is subject to the consent of the Minister for Finance. This apparent deficiency came to light fairly recently when the legal advisers to a State body queried that body's authority to engage in a finance lease and the legal validity of any State guarantee associated with it. As a result and until the legal situation is clarified, financial institutions are reluctant to contract any further finance leases with those State bodies which do not have express statutory power to transact such leases.
In general terms, a finance lease is a contract under which an asset is purchased by a party other than the lessee, usually a financial institution, which, by availing of capital allowances, etc., can reduce the cost of financing to the lessee. The lessee in such an arrangement assumes all the risks and rewards of ownership other than legal title to the asset. Because of their cost effectiveness,  such leases are widely used as a means other than direct borrowing to acquire assets. A number of State bodies have in recent years funded some of their capital investment by way of finance leases. The total value of outstanding finance leases for commercial State bodies at the end of 1995 was £575 million; of this, £72 million carried a State guarantee.
On receipt of the inquiry concerning the doubt about the legality of the contracting by a particular State body of a finance lease, my Department consulted the Office of the Attorney General. Following detailed consideration of the issue, that Office advised that express statutory power is required for State bodies to enter into finance leases and that a similar power is required if the Minister wishes to guarantee the resultant obligations of State bodies.
Against that background, Senators will appreciate the need for the present Bill, if only to confirm the validity of those existing finance leases whose legality is in doubt. Up to the time the legality of the involvement of some of these bodies in finance leases was queried, everyone involved in such transactions, including financial institutions, had accepted that the legislative authority was there. My view is that it would be regrettable if I were now to pass over the opportunity the present Bill affords to put beyond doubt what precisely the borrowing powers of State bodies are.
There has been a rapid evolution of financing techniques. That has been accompanied by an ever-increasing complexity in the financial instruments which have been developed in response to the requirements of market participants to reduce the costs of borrowing and to minimise the risks caused by fluctuating interest and exchange rates. This process of refining existing instruments and inventing new ones is likely to continue and it behoves us to take account of it in this Bill. It is for this reason that I make provision for the Minister for Finance, after consultation with the Central Bank and the Revenue Commissioners, to be able to prescribe other  capital financing mechanisms which the State bodies may avail of. Otherwise, we could be faced in the future with a situation of either having to deny a State body access to new financial instruments or else bringing in fresh primary legislation for every new kind of transaction or class of transactions that a State body may wish to avail of.
In this context I would like to assure Senators that what is being proposed in this Bill is not of major significance. In the first place, all it is doing is effecting through legislation that which a private sector company established under the Companies Acts could do through amending its memorandum and articles of association.
There are other assurances I would like to offer in relation to the Bill. The Bill does not in any way give any more powers to State bodies than are at present conferred by or under statute, it simply removes a doubt. The powers being clarified in this Bill can only be exercised in accordance with specifications laid down by the Minister for Finance, after consultation with the relevant Minister, where appropriate. The Bill lays down strict procedures for the calculation of a State body's financial exposure to a transaction for the purposes of the statutory limits on its borrowing and any related State guarantee. In preparing the Bill, my Department had detailed discussions with organisations likely to be affected by it, including the State bodies mainly concerned, the Irish Bankers' Federation and the Irish Finance Houses Association. All of them found the Bill acceptable. Finally, I would like to reassure Members of the House that the published figures for the debt of State bodies and any associated guarantees include the liabilities arising from finance leases.
This Bill also provides for an increase in the limit on the borrowings of ACC Bank. At present the limit is £1,400 million and the Bill proposes to raise it to £2,400 million. The agricultural sector was hard hit by the economic difficulties of the early 1980s and this had severe  knock-on effects on the finances of ACC. In fact, the corporation sustained heavy losses in 1987 under the weight of accumulated bad debts and increases in arrears. The Agricultural Credit Act, 1988, was introduced to address these problems, in particular through broadening ACC's remit with a view reducing its dependence on a single economic sector.
The finances of ACC improved over the following years. The ACC Bank Act, 1992, removed all remaining restrictions on its lending. That Act also changed the name of the corporation to ACC Bank plc to signify the more diversified nature of the its activities. It also raised the authorised share capital from £35 million to £50 million and increased the limit on borrowing from £800 million to £1,000 million. Another important feature of the Act was that it made the bank subject to the prudential supervision of the Central Bank. This means that ACC Bank must obey the same rules and regulations as other credit institutions supervised by the Central Bank.
Over the past five years ACC Bank has grown rapidly, with deposits more than doubling to reach almost £1,000 million at the end of 1995. The bank's total borrowings, including deposits amounting to nearly £1,230 million, are quite close to the present borrowing ceiling of £1,400 million. This rapid growth in the bank's activities was due to its success in attracting new business, particularly in the home and commercial mortgage sector. Unlike more established mortgage providers, however, the bank does not have a portfolio of maturing mortgages to offset against new mortgage growth. Thus, because all mortgages undertaken by the bank are mostly new business, this business generates a higher rate of asset growth. If the existing ceiling of £1,400 million on borrowing is not raised, the bank's growth will effectively be halted. It is for this reason that I am now proposing to raise the ceiling, and the amount I have in mind is £1,000 million. At the average rate of growth which has  been realised in recent years, this should cover the bank's requirements for the next four to five years. The financial performance and growth of ACC Bank over the past few years, in an increasingly competitive market, is due mainly to the effort and commitment of the board, the management and the staff of the bank. I would like to thank them all for their contribution to this success.
As I said in my introductory remarks, this Bill is essentially a technical one designed to fill a gap in existing law governing the borrowing powers of State companies. Section 1 specifies the definitions to be included in the legislation and is a standard provision. As the definition of “capital value” relates to section 7, I propose, if Senators agree, to deal with it when treating of that section.
Section 2 defines the bodies to which the Bill applies. Section 3 contains the main provisions of the Bill. Section 3 (1) confirms the powers of the bodies concerned to engage in the specified list of capital financing transactions and enables the Minister, after consulting the Central Bank and the Revenue Commissioners, to prescribe by order other capital financing transactions which these bodies may conduct. The latter provision is designed to take account of the continuing development of financial mechanisms and the possibility that State bodies may in future wish to avail of an instrument not yet developed. Section 3 (2) enables the Minister, again after consultation with the Central Bank and the Revenue Commissioners, by order, to amend or revoke any previous order made under this or the preceding subsection. Section 3 (3) relates exclusively to the class of transaction known as finance leases and is designed to give the Minister the authority to take account of any changes in definition which may be made to it as accountancy practice evolves. Section 3 (4) defines the terms “finance lease” and “body” for the purposes of the section.
Section 4 gives the bodies concerned  the power to provide indemnities and to charge their assets in respect of any of the specified transactions. Section 5 provides that all existing provisions in respect of borrowings and guarantees, including requirements in relation to ministerial consent, will apply to all the transactions authorised by the Bill. It also enables the Minister, after consultation with a relevant Minister where necessary, to determine the terms and conditions under which a State body may engage in any of the specified transactions. Section 6 extends all existing guarantee powers, rights and obligations of Ministers and State bodies respectively to the transactions specified in the Bill.
Section 7 specifies the manner in which the borrowings of State bodies and any related State guarantees are to be calculated for the purposes of the statutory limits imposed by the Oireachtas. These limits set ceilings on the financial exposure of State bodies in the case of borrowings and of the State in the case of guarantees. To this end it is necessary to ensure that any financial exposure or potential liability arising from a transaction authorised by this Bill is recorded by the State body concerned as borrowing for the purposes of the statutory limits in question. The section relies on a specific definition of “capital value” in this regard, namely, the total value of the transaction less any inherent interest amounts and any amounts which do not constitute a legal liability on the body concerned.
Finance leases do not comprise separate principal and interest payments as in the case of a normal term-loan. However, in pricing a leasing contract, there is effectively an imputed or inherent interest element included in the repayments. For the purposes of determining the level of borrowing under the Bill, it is proposed that the amount borrowed will be calculated by reference to the nominal value of the repayments less the inherent interest amounts.
In the case of certain structured finance leases, a State body may secure the  lease payments by making a deposit with a third party who takes over the payment obligations of the lessee. Generally, these structures do not allow the lessee assign to the third party its legal liability for the lease payments. Thus, if for any reason the third party were to default on its payment obligations, the liability to make the payments would fall back on the lessee. The Bill requires that any such potential liability or exposure be recognised for the purposes of both the borrowing limit and, where appropriate, the guarantee limit.
Section 8 confirms that State bodies may contract leases other than finance leases. The leases in question are operating leases and relate mainly to normal rentals such as office space and equipment. As such, the section provides that they are exempt from the requirements specified in the Bill in relation to finance leases and other capital financing instruments.
Section 9 provides for an increase in the borrowing limit of ACC Bank to £2,400 million from its present level of £1,400 million. Section 10 is a standard provision in Bills which alter the powers of State bodies, and sections 11 and 12 are standard to all legislation.
Mr. Daly: As has been outlined by the Minister of State, this technical measure before the House has two main provisions — first, to confirm the legal powers of State bodies to engage in capital financing transactions and, second, to increase the borrowing limits of the ACC Bank plc. The measure is necessary to clear up any doubts or questions which may have arisen or may arise about finance leases with State bodies, as financial institutions were reluctant to conclude such leases until the legal position was clarified. The Bill enables that to be done. The existing borrowing limit of the ACC will be reached later this year and the provision in the Bill is  necessary to allow the bank to continue to expand its operations and secure its future limits for the next four years. Fianna Fáil will not oppose this legislation and will not propose amendments to it. We also support the comments of the Minister of State.
Nevertheless, while we support the progressive expansion and development of State bodies and the necessity to enable them to engage in capital financing and leasing arrangements, there is growing concern about Government financing and borrowing generally. The Minister of State is aware of the evidence of deterioration in State finances and perhaps in his Second Stage reply he will avail of the opportunity to give the House a brief account of current Government borrowing, including that of State companies. We have heard much concern in the past about State borrowing, and any indications of a deterioration in that regard would be serious for the long-term prospects of the Irish economy and would cause public worry.
In the run up to the next election, which is about a year away, there is no question but that the Government will endeavour to make itself popular by engaging in a public spending spree. The Minister knows the long-term consequences of allowing public spending to get out of control. Too many sacrifices have been made in the past in an attempt to manage public borrowing, and it has been successfully achieved at great inconvenience to many people and much personal discomfiture to many politicians. If the Government believes it can embark on a spending bonanza which would have to be paid for later, it is gravely mistaken because the public will not be fooled a second time.
In supporting the measures in the Bill, I advise the Government to exercise caution. It should not allow borrowing by semi-State bodies or the Government to lead to a deterioration in Government finances and cause repercussions for economic progress and development. Strict financial management must be maintained. The Minister  for Finance and the Government may believe that because of an impending election they can embark on excess expenditure. If they do, it will be a serious matter for our long-term economic prospects, so it must be avoided.
There are indications that Government borrowing is beginning to rise again. The Minister for Finance has recently drawn attention to that and we support his efforts to tackle it. However, there is a risk that he will be overruled, as he is in a three-party arrangement in which pressures are building up from different areas. We could find ourselves back to the bad days of borrowing to gain popularity or favour, when at the end of the day the bills must be paid and the costs met.
I note the success of the ACC Bank. In 1995 its total assets were £1.3 billion, which is a healthy financial position; its customer deposits increased by 33 per cent and loans to customers increased by about 20 per cent. The ACC Bank, which is a relatively small institution, makes a valuable contribution to the overall development of the economy and provides a stable means of financial support, especially to the agriculture sector. It employs about 550 people at present. It also provides valuable employment in the regions. I am glad to see from the ACC's annual report for last year that it has opened new outlets in Cork and Dublin. The extension of the branch network is important and should continue as the bank grows in the future. Since the legislative change in 1989 which gave the bank the freedom to engage in various financial transactions, it has made a valuable contribution in some of the niche market areas, such as the provision of film finance and home and commercial loans.
My colleague, Senator Rory Kiely, will deal with the importance of the ACC to the agricultural sector. The ACC should be reminded that the backbone of its business — about 30 per cent of its business — is in the agricultural sector. The agricultural industry faces a serious situation at present. Reference  was made in the House recently to the critical situation facing many of the small farmers hit by penalties for the overproduction of milk. The ACC, in conjunction with the Department of Agriculture, Food and Forestry, should put a package in place to assist small producers, of whom there are about 500 in my constituency, who have been hit with a bill of £1 million in penalties for the oversupply of milk last year. That bill has to be met by small farmers who are already financially stretched.
We should send a message to the ACC that it should continue its interest in the agricultural industry, which has been the backbone of its business. Although successful and expanding, it should keep in mind that many of its initial customers were from the agricultural sector. There remains a large demand for capital finance in that sector. In the efforts to create employment there is a need and an opportunity to use banks like the ACC to establish small agriculture related businesses. Cooperation between the development agencies, such as the LEADER groups and the county enterprise boards, the farming agencies and the ACC, could help to halt the decline in agriculture and provide jobs in the farming areas which are most in need of employment.
Agriculture is faced with a grave challenge at present. Apart from the crises in the beef and milk sectors, there are long-term structural problems which cause a decline in the small farming sector, a fall off in the number of small family farms and a continuing drift from agriculture. There is a need for co-operatives, banks and politicians to find a mechanism whereby the decline can be slowed or stopped. Over many years the ACC has played a valuable role in the small farming sector, and with its new powers I look forward to it continuing to look to the future with confidence.
Will the Minister of State give an indication of the present levels of borrowing in the ESB and Bord na Móna, especially in the ESB for additional generating capacity? The new challenges facing the ESB in electricity generation  have been referred to on a number of occasions in the House. With competition from Europe there is the possibility of foreign operators entering the generating business in Ireland. How does the Minister of State see the ESB's future borrowing requirements to face the challenge of competition being met? Will its borrowing powers be strengthened to allow it to provide the additional generating capacity essential for the ongoing development of the economy?
We are deeply concerned at events in Bord an Móna. I do not know if the Minister of State can offer any clarification in the debate on this Bill, but the future of Bord na Móna is threatened unless the squabbling at board level can be resolved quickly. I am aware the Minister for Transport, Energy and Communications has demanded information from the board on the events concerning the chief executive. Bord na Móna is an important semi-State body with a mandate to undertake certain responsibilities. The company should endeavour to meet the challenges it faces for the future and there is no time for the public squabbling we have seen over the past few weeks.
The matter needs to be finalised. We should send a clear message to the board to resolve its differences with its chief executive officer, to get back to the responsibilities given to it by the Government and to stop the disgraceful public squabbling of late which has brought the board and its personnel into disrepute. This House expects Bord na Móna to carry out the functions assigned to it, including those being provided for in this Bill.
Mr. Daly: I will be the last to stray down a bog road. I keep away from bog roads because they cause trouble for  politicians. However, in the case of this bog road it is time the pot holes were filled. We support the Bill and do not propose to amend it. I look forward to the Minister of State's replies to the issues I raised.
Mr. Burke: This is a technical Bill which has the main objective of confirming the powers of State bodies to engage in capital financing transactions, including, in particular, finance leases. Over the last decade or so there has been a phenomenal growth in financial services in Ireland and abroad. This has resulted from many factors, including the worldwide liberalisation of financial markets, international payments and capital movements. Helped by constantly improving technology, it has been accompanied by an ever-increasing sophistication in the financial instruments developed in response to the requirements of market participants to reduce the costs of borrowing and to minimise the risks caused by fluctuating interest and exchange rates.
Ireland has benefited from these developments as witnessed by the growth of our own financial sector and the success of the International Financial Services Centre. In regard to the latter, the direct incremental employment created by the IFSC now stands at over 3,000, most of it highly-paid, and many more jobs have been created in ancillary areas such as accountancy and law.
The private commercial sector has been very quick to exploit the potential benefits of new financial instruments for their capital financing needs. However, our big commercial State bodies have been equally adept in this area. Indeed, given their need to finance sizeable capital programmes, these bodies have developed a particular expertise and sophistication in the use of capital financing instruments. One of the mechanisms they use to this end is the finance lease, a contract under which an asset is purchased by a party other than the user, usually a financial institution, which, by availing of capital allowances, etc., can reduce the cost of financing to  the user, the lessee, who, in such an arrangement, assumes all the risks and rewards of ownership, other than legal title to the asset. Such leases are commonplace and widely used as an alternative to direct borrowing to acquire assets because it is more cost-effective.
A number of State bodies have acquired assets in recent years by way of finance leases. The total value of outstanding finance leases for commercial State bodies was £575 million at the end of 1995. This is largely a technical Bill which confirms the power of State bodies to employ modern capital financing instruments. Effectively it is to make explicit what we have assumed was implicit and to add for future requirements. That is something any private company can do simply by changing its memorandum and articles of association. In the case of most State bodies, however, their powers are established in statute and as such require a change in statute.
The reason for this Bill is not that the specified transactions are ultra vires— the State cannot tolerate State bodies being a little bit ultra vires but rather that there is a question of legal doubt specifically over the issue of finance leases. The existence of this doubt has resulted in a situation whereby financial institutions are reluctant to conclude any finance lease contracts with State bodies who do not have explicit statutory power to engage in finance leases in their own legislation. The purpose of the Bill, therefore, is essentially to reassure the market and to put the question of the scope of the borrowing powers of State bodies beyond question.
The ACC borrowing limit has been increased five times since the bank was founded in 1927. This current increase, the sixth, represents the largest single increase in both monetary and percentage terms and arises from the success of ACC Bank in the provision of mortgage finance. Because all mortgage business currently represents new lending, this mortgage finance has a major impact on the borrowing and asset base of the  bank, in that the bank does not have a mature position whereby new mortgages would be offset by maturing mortgage debt.
I congratulate the ACC Bank as over that last number of years it has expanded out of all recognition. It has done great work in local communities and for farmers — on which it should be congratulated — but I concur with Senator Daly that it has moved slightly from what it was set up to do, largely to look after farmers. However it is now moving into the mortgage and financial end of it and the house market in particular. It should concentrate more on the agricultural sector which was what it was set up to do. It still provides a great service for farmers and local communities but should concentrate more on farming needs.
I draw the attention of the Minister of State to bank charges, in particular for small businesses which have been fleeced by the major banks here over the last number of years from both interest and bank charges. There is a huge difference between the A rate, at which the big business people borrow and the AAA rate. The majority of small businesses borrow at the high rate and there is a significant difference. It puts them at a huge disadvantage to the big business people who can borrow competitively. I ask the Minister of State to address this because there is great scope here. We have seen our exports grow in leaps and bounds over the last number of years in particular.
This country is geared to small businesses which are the life and soul of this country. If we are to expand further, more consideration from a financial point of view should be given to small business in terms of bank and interest charges. It behoves the Government to take this on board and to put it up to the banks to do something about it. Various schemes have been introduced over the last few years by the Government and the banks where special — and welcome — interest rates were set up for new small businesses. The small business pays a huge price for all those  schemes because it is paying the high interest charges and charges that the banks have imposed.
I congratulate the Minister of State and the Government on the way the economy has grown over the last number of years. Senator Daly has no need to worry about the way the country is being run. The economy is going well, it is in good capable hands.
Mr. Burke: I have no doubt we will see another attractive budget next year from the Government which is performing well. There has been an escalation in the property market over the last number of years which also benefits the financial institutions because when the property market is buoyant, the banks do extra business which helps the economy.
I will have a few questions on Committee Stage but, again, I congratulate the Minister of State and the Government on the economy. Will he take the few issues I raised on board in relation to the bank charges for small businesses?
I have a press release here from the Small Firms' Association stating that there is a 33 per cent difference in basic charges between the six major banks and there is a 57 per cent differential in interest rates charged between small and large business. The SFA quarterly survey of bank charges has established extreme variations in the cost of banking in the area of bank charges and interest rates. The survey conducted in association with Chapman, Flood Chartered Accountants established that for the same services the typical small firm will incur a quarterly charge of between £90 and £120 depending on which of the six banks the enterprise deals with. On borrowings the survey establishes that small firms may pay up to 57 per cent more in interest charges than large corporate businesses. This bears out what I have said.
I recognise and accept the need for the Bill. Perhaps the ACC Bank will acquire some of the financial leases to be used by the State sector, so maybe there is a connection between the ACC Bank and the State companies who will use these instruments.
I am worried at the extent to which it is possible to expose the State to a liability by the use of some of these instruments. I accept the State sector should be allowed operate on a competitive and commercial basis but if banking or leasing facilities are available to companies within the commercial sector, the State sector should have the same capacity to use those instruments but in a controlled system.
To highlight control or the lack of it, one could cite the controversy in Bord na Móna. Without getting into the rights of the individual case, a degree of close monitoring, accountability and control must permeate the State sector. I sometimes wonder how significant that control has been in the past. If these instruments are not used prudently, where we are talking about large sums of money — the Minister has mentioned that £570 million had been taken on by way of lease and only part of that is guaranteed by the State — there is a capability to run a company into fairly serious difficulties.
In a certain sense we are regularising something which, on the face of it, is illegal. Certainly, there is a significant doubt about its legality. The Minister referred to that in his speech. How did we get to a point where the commercial State bodies had outstanding finance leases of £575 million at the end of 1995 without its potential illegality being spotted. The Minister said the deficiency came to light fairly recently  when the legal advisers of a State body queried its authority to take up a finance lease. Which State body was involved or who were the legal advisers to the State body? If I am correct in my assumption about the £575 million in outstanding finance leases, it seems this matter had escaped the attention of the legal advisers to quite a few State bodies. I accept what we are doing is correct, but it strikes me the matter had gone on longer than it should have before it came to light.
The other matter is to do with the ACC. I would echo some to the points made by the two previous speakers. The ACC did a huge service to Ireland, the people and the economy by what it did for farming in the 1960's and 1970's, because there was a need to expand agriculture. Certainly, the ACC made huge investment to bring agriculture into a competitive and modern era. The quality of farming is testimony to the fact that funds were made available at reasonable rates and periods of repayment which allowed people who did not have large cashflows to avail of credit, invest in their businesses and expand. We owe a tremendous debt to the people who created the ACC and worked in it in the early days.
That agricultural ethos is still apparent in ACC Bank, but the bank must operate in a competitive and commercial environment. I welcome its diversification into other areas, that it is lending to commercial business, providing mortgages and conducting private banking because that has helped the bank to survive within a competitive environment. The Minister has outlined the growth in the bank's business and that is to be welcomed.
Fortunately, the fifth banking force has not loomed as an issue in this debate. I would not like to embarrass the Government parties by raising the matter here because it might lead to dissension. The way forward for the ACC Bank is not through amalgamation with TSB or other Irish financial institutions to create the fifth banking force but  through linking with like-minded European businesses such as Credit Agricole. That is where alliances should be sought rather than in the creation of a fifth banking force.
Having welcomed the diversity of the ACC Bank's activity and its growth, its core business should remain that of financing good commercial propositions from the agriculture sector. It still has a significant contribution to make in that area and can do much to develop farming, forestry and other alternative farming enterprises which can lead to growth. ACC Bank understands the farming business probably better than any other financial institution. From that point of view alone, ACC Bank is in a good position to judge the merits of cases and their funding.
I am interested to hear the Minister's clarification on the matter. To my mind, it almost permits the Minister to allow the bank to do things which the Central Bank would not allow in terms of liquidity. In other words, if the Minister consults the Central Bank, he might then be in a position to set aside certain rules of the Central Bank which would apply to the banking sector in general. I do not think that is the intention of the Bill, but it is a matter which needs clarification. I am interested in an explanation of the role of the Central Bank within the control which would be exercised on ACC Bank and how that control might differ from other commercial banks.
Returning to the State sector aspect of the Bill, I do not understand why one would not include “interest amounts” and “amounts which do not constitute a legal liability on the body concerned” in the definition of “capital value” in  section 1. In looking at the viability of the business and its annual accounts, it would be important to have those matters integrated into the “capital value”. Perhaps they are treated under separate headings in the accounts of the company. I do not understand why they are not taken into account. We have concentrated on the finance leases but there is a range of other instruments under section 3. I say that by way of comment rather than asking the Minister of State for an explanation.
I am fascinated by the term “finance lease”. Having read the section, I still do not know what a finance lease is. The section purports to explain and clarify what a finance lease it, but it does not. There seems to be tautology in the definition in section 4(a). My suspicious mind has come to the conclusion that this is a device created by lawyers because if they make the language impenetrable enough they will be able to dine off it for years to come and have these matters redefined in the courts.
The Minister of State gave us a very clear explanation of a finance lease in his speech. There is also a very clear explanation in the explanatory memorandum accompanying the Bill. The average, well informed citizen who reads the legislation should be able to understand what it says. This section is extremely difficult to understand, although I am sure the financial experts and lawyers understand it.
A finance lease is a contract under which an asset is purchased by a party other than the lessee, usually a financial institution, which, by availing of capital allowances etc, can reduce the cost of financing to the lessee. The lessee in such an arrangement assumes all the risks and rewards of ownership other than legal title to the asset.
 Senator Burke referred to the charges imposed by the banks. I agree with him in terms of the very high level of charges which small businesses must pay. However, I find certain encouragement in the survey to which he referred, in that there appears to be some difference between the rates charged by different banks. There is now a degree of competition in the banking sector in respect of their charges and interest rates.
In my bitter experience of dealing with banks, 15 years ago one could go down any street in Ireland and get exactly the same deal from every bank on that street. That was wrong and I am pleased that there appears to be some level of competition. At that time I banked in England and it was very evident that the cartel which operated in Ireland was absent there and that one could get different deals by shopping around. That is how commercial life should be. I accept the level of charges is very penal on small businesses. However, I welcome the development of a difference in the rates charged by banks, which I hope will continue so that there will be meaningful competition in the banking sector.
Mr. Calnan: I welcome the Minister of State, Deputy Coveney, to the House and congratulate him and the Minister for Finance, Deputy Quinn, on their stewardship of the economy. The latest economic figures published this week confirm this country recorded the highest rate of growth in the European Union last year and that we are well on course for achieving the same feat this year. We are a long way from the days when certain politicians and financial commentators used to claim that the Labour Party could not be trusted to handle the economy.
(i) to confirm the legal powers of State bodies to engage in capital financing transactions, including finance leases, and to make certain other  provisions in relation to such transactions by these bodies, and
Certain difficulties have arisen for State bodies in transactions concerning financial leases. These difficulties have led to a reluctance on the part of some financial institutions to entertain leases with State bodies. The Minister of State explained clearly what is involved in the Bill when he stated:
It is designed primarily to remedy what appears to be a deficiency in existing laws governing the borrowing powers of State bodies whose borrowing is subject to the consent of the Minister for Finance. This apparent deficiency came to light fairly recently when the legal advisers to a State body queried that body's authority to engage in a finance lease and the legal validity of any State guarantee associated with it. As a result, and until the legal situation is clarified, financial institutions are reluctant to contract any further finance leases with those State bodies which do not have express statutory power to transact such leases.
Losses are often incurred by State bodies in such situations. We do not want to see State bodies losing money because the proper legislation is not in place. As the Minister of State stated, the opinion of the Attorney General has been sought as to whether specific statutory provisions need to be made to resolve these difficulties. The Attorney General's view is that some statutory intervention is necessary.
I commend the Minister on moving so quickly towards resolving this difficulty. He and I believe in doing everything to improve State bodies. They should be able to compete on a par with private companies. Only then can we be expected to judge how well they are serving the State. This means that any doubts about finance leases already  entered into by State companies should now be removed. Whatever legislation is necessary to allow State companies access to a wide range of capital support should be introduced.
As the Minister of State pointed out, what is involved here is very limited. In effect, we are doing no more than a private company does when it alters its memorandum and articles of association. Nonetheless, it is important that it is done. The Minister is committed to resolving all outstanding matters with this legislation, so that future Ministers for Finance will not have to draw up similar legislation. I cannot see how any Member of this House could not support this aspect of the Bill. The Bill only applies to State bodies whose borrowing powers are subject to the consent of the Minister for Finance. As the Minister of State informed us, there are only about 50 such bodies.
The Bill also seeks to increase the limit on borrowings allowed by ACC Bank. The threshold increase appears to be in the region of £1 billion. As a Member from a rural area, I know well the role played by the ACC over the years. I am particularly pleased that in recent years it has turned around its fortunes and is now heading for is ninth successive year of profitability. The passing of the ACC Bank Act, 1992, in effect made ACC a commercial bank subject to the supervision of the Central Bank. At that time, the limit on the bank's borrowing was £1,000 million. However, so strong has the bank's performance been in the meantime that borrowing is now close to its upper limit.
This performance has been generated by the bank broadening its range of activities outside its traditional agricultural base. As the Minister pointed out, the mere fact that he is coming before this House today seeking to extend the ACC borrowing limit is a testament to the bank's success in the last decade. I compliment the work of the management and staff of ACC in turning around its fortunes. It would be churlish of any Senator to oppose that section.
I now wish to refer to the exchange  rate rip-off. Exchange bureaux have different rates for buying and selling currencies and they charge commission. These rates are too high. Tourists to this country and our young emigrants returning home are being ripped off. They are feeling the pinch now because the punt is stronger than sterling. This means that in exchanging every £100 sterling they may end up with only £93 or £94. Variation in buying and selling rates is one thing, but it is unacceptable to include commission charges. We should be providing an exchange rate service within the EU rather than making it difficult for people to travel.
The difficulty with Bills of this kind, which involve little or no substantive political or philosophical disagreement, is that it is not easy to elaborate on them at length unless one is opposed to State participation in commercial activities. I compliment the Minister of State and the Minister for Finance, Deputy Ruairí Quinn, on their handling of the economy and the good job they are doing with the ship of State.
(i) to confirm the legal powers of State bodies to engage in capital financing transactions, including finance leases, and to make certain provisions in relation to such transactions by these bodies, and
... is designed primarily to remedy what appears to be a deficiency in existing laws governing the borrowing powers of State bodies whose borrowing is subject to the consent of the Minister for Finance. This apparent deficiency came to light fairly recently when the legal advisers to a State  body queried that body's authority to engage in a finance lease and the legal validity of any State guarantee associated with it. As a result and until such legal situation is clarified, financial institutions are reluctant to contract any further finance leases with those State bodies which do not have express statutory power to transact such leases.
It is strange that such leases as were conducted did not appear to be legal. However, if there is any doubt the situation should be remedied and I congratulate the Minister of State for introducing this Bill.
A finance lease is a common form of asset financing in the private commercial sector. In a finance lease, the asset is purchased by a party, other than the lessee, which, by availing of capital allowances etc., can reduce the cost of financing to the lessee. The lessee in such an arrangement assumes all the risks and rewards of ownership other than legal title to the asset. Such leases are commonplace and are widely used as an alternative to direct borrowing to purchase assets because it is more cost-effective. A number of State bodies have raised finance in recent years by way of finance leases.
Was the doubt about the legality in respect of the State bodies raising finance by way of finance leases, or was it about, for example, a farmer purchasing a tractor from ACC Bank plc or another bank by way of lease? In such transactions the farmer will accept the responsibility of ownership but the bank will own the tractor until the terms of the lease are met, when the farmer will have the option to purchase. Is legislation necessary for these types of transactions?
Mr. R. Kiely: I welcome the provisions in the Bill which will rectify this anomaly. I also welcome the provision to raise the borrowing limit of ACC Bank plc from £1,400 million to £2,400 million. The bank was founded in 1927 to help the agriculture sector and proved to be most valuable. Under the ACC Bank Act, 1992, the bank widened its scope to deal with other sectors in addition to the agriculture sector. This was necessary to make the bank more competitive and structure it in such a way as to ensure its continued successful existence.
When speaking on the ACC Bank (Amendment) Bill, 1994, I referred to the great work done by the bank and commended the management and staff. The staff are very co-operative in giving loans, especially to the farming community. In his speech the Minister stated:
However, the sector was hard hit by the economic difficulties of the early 1980s and this had severe knock-on effects on the finances of the ACC. In fact, the corporation sustained heavy losses in 1987 under the weight of accumulated bad debts and increases in arrears.
One of my constituents found himself in difficulties in meeting his repayments to the bank. I had occasion to discuss his problems with the manager of the local branch and found the bank most helpful and understanding. It was prepared to meet the person, discuss the situation and come to an arrangement. When money is lent to a person the capacity to repay the loan must be taken into account. Similarly, it is good for people to obtain loans and they should  acknowledge this by repaying them promptly.
In 1992 the bank widened its scope to cover the commercial sector. The Minister of State should ensure that the bank will always look after the agricultural community. Senators Burke and Calnan referred to the great economic growth that is taking place. However, this is not reflected in agriculture. Farmers have experienced the worst period of their careers during the past six months because of depressed prices in the beef and meal sectors. The bank has the facility to provide subsidised loans which should be provided to farmers in trouble. Senator Daly referred to penalties farmers face. In the Golden Vale area they must pay big fines because of milk over production. Some of them may not be in a position to pay these fines and the bank should help them.
With regard to the issue of bank charges, farmers may exceed their overdraft limits and be subject to crippling referral fees. These fees are most unfair and can only be reduced if the overdraft limit is extended, which makes it more difficult to repay. I support Senator Calnan's plea regarding the exchange rate. People going abroad are penalised and it is most unfair. I welcome the Bill and I ask the Minister to ensure the agricultural sector is a priority of ACC Bank.
Minister of State at the Department of Finance (Mr. Coveney): I thank Senators on all sides for their support for the Bill. It is short, technical legislation designed to confirm what most people believe to be the case anyway.
The Bill does not confer any additional powers on Ministers, the State or the bodies in question in relation to their capital financing. While a private company can confirm that it has such powers by changing its memorandum and articles of association, the powers of most State bodies are established in statute. As such, the act of confirmation of powers requires a statute.
As I indicated earlier, the main bodies involved are the large commercial  State operations. Given the demands imposed on these bodies to become more efficient, to improve performance and customer services and to deliver services more cost effectively, it would be unacceptable that they could not take advantage of the full range of capital financing instruments which are available in the market. Senator Dardis referred to that aspect.
The types of financial instrument covered by the Bill are particularly important in accessing international capital markets. The removal of restrictions on capital movements between EU member states and between members states and third countries has significantly improved the availability of capital in Ireland. The development of the financial services centre has also had knock-on effects in that it brought Ireland to the attention of financial institutions worldwide in a manner which makes it easier for Irish companies seeking funds to tap into a much bigger pool of resources than heretofore.
The Bill will enable these bodies to continue securing cost effective capital to meet their capital financing requirements. I assure Senators that the inclusion of a guarantee provision in the Bill in no way commits the Minister to any increase in State guarantees, nor is it intended to provide any increase in the current level of guaranteed debt. The current policy is that State guarantees are given only where the body in question would otherwise be unable to secure access to credit or where the cost of such credit would be prohibitive. Since 1991, the percentage of commercial semi-State debt guaranteed by the State has fallen from 90 per cent to 60 per cent, or from £4.7 billion to £3.5 billion. It is expected that this trend will continue, it will be the policy of this Government and, I expect, its successors.
Senator Daly urged caution in relation to Government borrowing. However, at this point in the year the borrowing requirement, mainly for capital purposes, is expected to be approximately  £150 million less than the forecasted figure of £729 million on budget day. It appears the figure will be £579 million. The Government is conscious of the need to contain borrowing levels at or below its stated objectives at the start of the year. I am anxious to ensure public spending is kept under rigid control. Senator Daly also raised this point. However, some unforeseen problems emerged during the year, primarily in relation to the BSE crisis and the knock-on effects in the beef industry. There are also requirements regarding the measures to deal with crime and in the health area in terms of hepatitis C and these will cost additional money.
While I give a commitment regarding the Government's determination to maintain strict control on public spending, it would be dishonest not to refer to some of the difficulties which confronts it in that area. However, there is the overriding consideration of the Maastricht criteria. It would be irresponsible for a Government to fail to continue to meet or exceed the targets set under those criteria. The Government is determined to do that and it will. Although it is a matter of reasonable political debate, it is fair to point out that the Government operates in a prudent financial management mode and will continue to do so.
Senator Daly also mentioned the temptations facing Governments heading into general elections in relation to spending. However, we must resist those temptations if going down that road would damage our ability to meet and exceed the Maastricht criteria. Irrespective of an election, there is an imperative on whatever Government is in power to examine the issue of personal taxation in relation to a new national agreement, which is one of many major considerations. This point must be highlighted in responses to debates about the management of the economy. It will impact on the overall financial situation but such an examination must be carried out.
Senator Daly spoke at length about the ACC Bank and its focus on the agricultural  sector. Senator Burke went further in that regard, but all the contributors mentioned the bank. It is the case that 35 per cent of ACC Bank's business is focused directly on the agricultural sector; that is the biggest element of its operations. As Senator Dardis said, the diversification into which the ACC entered has made it a much stronger bank and enhanced its ability to respond to the difficulties in the agricultural sector at present. I hope it will do so.
Undoubtedly there is a threat to small family farms and the response of the ACC Bank is a small but significant element in slowing that down and making a contribution in that regard. Given its tradition and continuing focus on agriculture, the bank will do what it can in that area.
The less I say about Bord na Móna the better. It is not relevant to this debate, but the sooner this unseemly public squabble is brought to an end the better for Bord na Móna, its employees and the State. In so far as a signal can be sent from the House, I agree fully with the comments from all sides about the need to bring the unseemly squabble to an end, today if possible.
Senator Daly mentioned the ESB's borrowing. The borrowing of the ESB has fallen. It was £1,050 million in 1994, dropped to £929 million in 1995 and is scheduled to fall by a further £13 million in 1996. I will have to write to Senator Daly on the other matter he raised relating to the ESB's ability to borrow for increased generating capacity, which is important.
Senator Burke also spoke about ACC Bank and I have covered that point. It is not reasonable that ACC Bank should stick only to agriculture because the problems it had are now solved and it is a much stronger bank as a result of broadening its base. It is important that the broadening of the base be recognised as being worthwhile.
On the question of bank charges, one of the most significant aspects is the anger among small businesses on this  issue. I share that anger. Two matters will hopefully improve this situation. First, I concur with Senator Dardis's point on competition in banking. There are undoubtedly beneficial results from this. I well remember, like the Senator, when the idea of going from one of the two larger banks to the other — there was not much more available 20 or 30 years ago — was not an option. A person would not get a better deal from one than the other. A duopoly is nearly as bad as a monopoly and that is what was operating. That has certainly changed and I am happy to see that the banks are willing to cut each others' throats in the interests of the consumer. It is good that there are other players.
Mr. Coveney: It goes without saying that there are differences in approach between the partners in Government but they are being worked through. I ask the Senator to believe that none of the parties wants a compromise for the sake of philosophical differences which would not produce a new banking arrangement that increases competition for the consumer's benefit. I hope that will be the primary result when the proposals are seen.
Apart from the beneficial effects of competition on bank charges, the other big event in this area has not had time to show results. That is the Consumer Credit Act, 1995, which gives the Director of Consumer Affairs very wide and extensive powers to look into every aspect of bank charges. That came into effect only in May 1996, literally a month and a half ago. I have very high expectations of it and it should be a mouthwatering subject for the Director of Consumer Affairs and the public. I encourage the Director, who is independent of me, to involve himself quickly in this area. To put it mildly, this is a source of irritation not just amongst  businesspeople but all small borrowers. It is probably not reasonable in a competitive market to expect financial institutions to equate very large businesses with small ones because of the economies of scale. Nonethless, it is widely felt that small businesses and small personal borrowers are bearing a disproportionate amount of bank charges. That is unreasonable and should change.
I believe that the Director of Consumer Affairs, whose powers in this area are very wide, should also be able to look at currency exchange by banks. This also comes down to what are seen as charges above or below the table. I agree that one can enter different financial institutions with English or Irish currency and, irrespective of the parity between the two, one seems to finish with the same result. The story of the man with £100 starting in Dublin and touring the capitals of Europe doing nothing but changing his money is very sobering and the best possible argument for European Monetary Union, to which we are steadfastly committed. In that area I hope to see advances through competition, by the Director of Consumer Affairs and ultimately by our membership of European Monetary Union.
Mr. Coveney: Senator Dardis speculated on how the requirement for the Bill has come to light. I do not want to name any particular semi-State body but many of them have access to the best legal advice and those legal advisers are constantly questioning everything. It is not unusual that this has come up. It has not been confirmed as  being corrected. It has just been confirmed that there is a doubt about business between institutions and semi-State bodies. This Bill ensures that the doubt is removed.
On the question of how loans are reflected in balance sheets, in company accounts generally the loan principal is counted on the balance sheet. The interest amount is not. The treatment of these leases involves a separation of the capital value and a notional interest figure to comply with good accountancy practice. The definition of finance leases intrigues me. The simple definition in my opening remarks was much clearer but then that is sometimes the case. The definition of the finance lease in the Bill is that which is contained in standard accounting practice SSAP 21 and the Minister is satisfied to accept the current standard definition. However, the Minister reserves the right in subsection (3) to allow the definition of finance lease to evolve in line with accountancy practice. It would be inappropriate to allow the definition to evolve without some control being exercised nor would it be appropriate to fix the definition and not provide for the continuing evolution of these types of transactions.
Mr. Coveney: Yes, but the current definition SSAP 21 is widely recognised across the whole financial services sector. The other question concerns the Minister consulting with the Central Bank and the possibility that the Minister might ignore or modify the Central Bank's advice. There was never a question of the Minister taking a decision on the ACC which would be contrary to the advice of the Central Bank, though there is a theoretical possibility that he could, imprudently, do so. We could discuss this on Committee Stage but I do not think there is a serious problem with it. It is replicated in the Agricultural Credit Act, 1978, and in the ACC Bank Act, 1994, so it is consistent.
 Senator Calnan also raised the question of exchange rate abuses and I answered that. What Senator Kiely was describing as possibly a finance lease is in fact a hire purchase agreement and I have mentioned that to him. He also raised issues about ACC and bank fees and charges which I have already dealt with. I hope I have covered everything. I thank Members for their contributions.
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