Committee Reports > List of Committees > Joint > 1980 > Committee on Commercial State-Sponsored Bodies > Report No. 11 - Industrial Credit Company, Limited

APPENDIX 1

PRINCIPAL MEMORANDUM FROM THE INDUSTRIAL CREDIT COMPANY, LTD

I—BACKGROUND

Formation

Development Banks are an integral part of the institutional framework in many countries. They are formed or strengthened when the nation is emerging as a sovereign unit or when considerable growth in industrial development is regarded as essential. The practice of setting up Development Banks is not confined to the less economically advanced nations of the World. The nine EEC States all have such institutions.

Most Development Banks, including Britain’s ICFC, were set up after 1945. With the establishment of ICC under the Industrial Credit Act* 1933, Ireland was one of the first in the field.

The environment of the early 1930’s was very different to the Ireland of to-day—few manufacturing industries, no entrepreneurial class, a low income per head, high emigration and a difficult external trade environment. The preconditions for industrial development were, however, present—an adequate transportation and communications system, a large reserve of adaptable labour and quite a sophisticated financial system.

While the banking system was efficient in the collection of savings and servicing of the financial requirements of trade and commerce, it was understandably not an institution for the provision of capital to new industrial enterprises. In 1933, the Dublin Stock Exchange, which listed only 20 public companies, acted largely as a channel for savings to London. With the exception of Guinness & Mahon, there were no Merchant Banks with offices in this State.

The establishment of industrial self-sufficiency was regarded as a national priority. The primary instrument for the attainment of this aim was the placing of quota restrictions and tariff barriers on manufactured imports to this country. The Government recognised that for the implementation of its policy considerable amounts of capital would be required.

At the time of setting up ICC, public share flotations were an important source of finance for industrial enterprise in most of the English speaking countries. Accordingly, when contemplating the establishment of a new financial institution in the 1930’s, the authorities envisaged an organisation which would encourage the development of a local market in the shares of public companies.

The Industrial Credit Act was passed in July, 1933. This Act gave the Minister for Finance the power to subscribe for shares in a new public company, The Industrial Credit Company, Limited (ICC). ICC was incorporated in October, 1933 and its shares offered to the public in November of that year. The Minister for Finance as underwriter took up most of the shares. In two subsequent issues during the 1930’s, the Minister again took up most of the shares. Following an offer by the Minister to buy out ICC’s private shareholders in 1958, the State’s holding increased to over 99%. A number of private shareholders did not accept the Minister’s offer. They and their successors between them now hold under 1% of ICC’s equity. ICC still retains its Stock Exchange listing.

Development of the Company

1933 to 1940:

While the ICC Act, 1933 and the Memorandum of Association gave it the right to provide loans and finance in a variety of ways, it fulfilled the objective of channelling capital to industry in the 1930’s, mainly by encouraging enterprises to offer their shares to the public through the Stock Exchange. If shares were not purchased by the public, ICC would acquire them.

During the 1930’s ICC floated 29 companies, including Insurance Corporation, Irish Sugar Company, Cement Limited and Irish Ropes Limited.

1940 to 1958:

During the Emergency, there was little activity in ICC. The small staff was engaged mainly in the supervision of a portfolio of shares, which had been acquired largely through the exercise of underwriting obligations. From time to time, these shares were disposed of through the Stock Market, when market conditions were suitable.

Issuing and underwriting house activities were resumed in 1946. Companies such as Gypsum Industries, Roadstone Limited and Irish Glass Bottle Limited were floated during that period.

1958 to 1968:

Following the publication of the First Programme for Economic Expansion in 1958 the Company expanded steadily both in terms of capital provided to industry and in staff numbers. Advances increased from £0.5 million in 1958 to £4.3 million in 1968. Apart from developing existing services, ICC introduced the following new services during the period:

—1959, the introduction of a Hire-purchase Scheme for plant and equipment.

—1960, the provision of finance towards the cost of film making at Ardmore Studios in Bray through a subsidiary company Irish Film Finance Corporation Limited (IFFC). The activities of this subsidiary, now dormant, are outlined in Schedule B.

—1961, the provision of capital towards the cost of financing vessels built in Irish dockyards, particularly the Verolme (Cork) Dockyard Limited, through a new subsidiary Shipping Finance Corporation Limited (SFC). Over the years, SFC has financed 15 ships with loans totalling £38.75m for owners based in Ireland and abroad.

—1967, an Equipment Leasing Scheme was introduced to complement the Hire-purchase facilities.

While the provision of finance through share issues remained important, the provision of capital by way of loans and hire-purchase became the principal activity. With regard to funding, all ICC’s additional capital came by way of Exchequer advances.

1968 to 1979:

The rapid rate of industrial investment and economic growth during the late 1960’s and the early 1970’s led to significant changes in the environment in which ICC operated. Banks took an increasing interest in advancing funds to the manufacturing sector and set up a number of merchant banking subsidiaries. By 1968, a number of UK merchant banks and North American banking groups were operating here. Subsequently, several EEC groups established offices in Dublin. ICC was among the first institutions to respond to the major opportunities created by the quickening pace of industrial investment. Advances increased from £4.3 million in 1968 to £66.2 million in 1979.

The main developments during this period are outlined below:

—1968, the expansion of services to cover wholesalers and retailers, through the introduction of a finance for distribution scheme.

—1969, the opening of the first Branch Office in Cork.

—1969, the setting up of Mergers Limited (See page 85).

—1969, the introduction of a Special Loan Scheme, to provide finance for undercapitalised firms (See page 84).

—1970, the introduction of arrangements for the acceptance of deposits by ICC (see page 85).

—1972, the raising of concessionary finance under a British Export Credit’s Guarantee Department Scheme. This finance was used to fund a substantial portion of ICC’s hire-purchase activities during the mid-1970’s.

—1972, the raising of a $10 million loan from the International Bank for Reconstruction and Development (The World Bank). This loan was used to finance a significant increase in advances to the manufacturing sector. A second loan of $30 million was raised in 1975.

—1973, variable rate loans were introduced. In recent times, variable rate lending has become an important part of ICC’s activities.

—1974, the opening of a branch office in Limerick.

—1975, to cater for the increasing demand for services from clients located outside Dublin, regional teams based in Head Office were established.

—1976, the acquisition of property for lease to industrial and commercial tenants.

—1977, the extension of services to cover hotel and tourism projects.

—1977, the introduction of a Venture Capital Scheme.

—1978, the first European Investment Bank (E.I.B.) global loan was negotiated. (See page 84).

Role of ICC to-day

ICC advanced £66 million to Irish business during 1979. 90% of loans approved were for medium and small sized firms (firms employing less than 100 people). ICC offers the business community a wide range of banking services. In quantitative terms, the importance of ICC may be seen from the fact that advances last year went to 1,500 separate projects. ICC’s facilities are spread over many sectors of the economy as shown in Schedule C.

In recent times, a relatively declining proportion of ICC’s borrowing came from the Exchequer—during the period 1975-1979, the size of Exchequer advances increased by £29.3 million while total invested funds went up by £90.9 million. The activity of our Shipping Finance subsidiary tends to give the impression that ICC is more dependent on Exchequer sources than it is. Finance for ship construction is at subsidised rates and all loans advanced by SFC are funded by advances from the Exchequer. If Exchequer advances relating to ship construction are excluded, the gross increase in ICC advances from the Exchequer over the last five years was £23.5 million. The exercise in Schedule D shows that in net terms, ICC drew even less than this figure when capital repayments to the Exchequer, taxation and dividends are taken into account.

All Exchequer advances to ICC carry the normal Exchequer lending rate and are repayable. No grant-in-aid is received except for SFC loans which are subsidised to the extent allowed by OECD rules governing the financing of ship purchases—the subsidy is passed on to the borrower in the form of a rate of interest which is internationally competitive.

ICC operates side by side with the commercial banking sector. The level of its advances in any year is provided for in the Government’s capital programme. ICC differs from the commercial banks in that all its advances go to the business community for developmental purposes.

A high proportion of ICC’s total lending is advanced for fixed assets (premises, plant and equipment) and the balance is accounted for mainly by hard-core working capital. Many ICC loans have a longer repayment period than bank term loans.

As a State development agency, ICC maintains close links with State, Semi-State and National organisations. It is represented on the IDA Domestic Industries, Small Industries, the Equipment and Modernisation and Enterprise Development Committees. It is also represented on the Department of Industry, Commerce and Tourism, Industrial Re-Organisation Consultative Committee. ICC is represented at Council and National Executive level in the Confederation of Irish Industry and the Irish Management Institute. It serves on DEVCO (the State Agencies Development Co-operation Organisation) and the Shannon Free Airport Development Company’s Industrial Buildings and Grants Committee. ICC’s Chief Executive is currently a member of the Public Service Advisory Council.

An important aspect of ICC’s role today is to act as a link between medium and small sized firms and international developmental agencies, e.g. the World Bank and the European Investment Bank.

II—OBJECTIVES & PRINCIPAL SERVICES

The main objective of the Company is to perform the functions of a national development bank i.e. to promote economic growth throughout the country through the provision of capital to the industrial and service sectors of the economy while seeking to earn a reasonable return on shareholders’ funds. In pursuance of this objective, a wide range of financial services, including term loans, hire-purchase, property and equipment leasing, equity and corporate financial advice, is provided.

The principal services of the Group are summarised below:

Loans

About three quarters of the facilities provided by ICC are in the form of loans. Loans carry repayment periods of up to 15 years. The rate of interest can be either fixed or variable.

Loans are normally secured by a mortgage on some or all the assets of the borrower. Frequently, security is shared with the client’s bank.

The rate of interest for fixed rate loans is determined by the Board in relation to market conditions, including the cost of funds to ICC.

Variable rate loans carry a maximum repayment period of ten years. Interest rates on these loans are related to a margin above the cost of short term money to ICC on the Dublin Inter-Bank market.

Under the terms of a special agreement with the Government and the E.I.B., firms may finance up to 50% of the cost of manufacturing projects at a special low rate of interest—-currently 12½% fixed per annum—provided employee numbers do not exceed 100 and fixed assets are not more than £600,000.

Special Loan Scheme

Frequently, small or medium sized firms have development plans with good prospects of success, but experience difficulty in raising their external capital requirements from commercial sources—primarily because their equity base is too small. This problem has become more acute as a result of high inflation rates in recent years. To meet this situation, ICC operates a Special Loan Scheme to help manufacturing companies whose equity base is not strong enough to enable an expansion programme to be undertaken.

The Scheme involves a two tiered loan system described as Loan A and Loan B. Loan A is provided on normal ICC terms. Loan B provides for the deferment of principal repayments and in some cases deferment of interest payments.

Machinery Finance

Hire-purchase facilities are provided in respect of plant and equipment. Under a hire-purchase agreement, the client normally makes a 25% deposit. The balance is provided over the term of the hire agreement which normally varies from two to five years depending on the nature of the equipment and the repayment capability of the client.

Equipment Leasing

A machinery and equipment leasing service is provided whereby ICC acquires the equipment and the client rents it over a primary leasing period of up to five years.

Share Investment

ICC is prepared to subscribe for share capital in both public and private companies. It does not normally seek a majority shareholding and does not involve itself with the day to day management of companies. There is sometimes an agreement that the shares will in due course be offered to the public or purchased by the promoter or client company.

Some of ICC’s term loans carry equity options. These typically give it the right to subscribe for a minority of a client company’s shares in the event of that company being taken over or “going public”. The equity option may be exercised at a pre-arranged price or in accordance with a pre-arranged formula.

From time to time, applications are received from promoters of small businesses where the risk of commercial failure seems uncertain and where the promoters are able to subscribe little capital themselves. Despite these drawbacks some of the projects appear to have some chance of success on a long term basis. A project of this kind may be financed from a special Venture Capital scheme. The funds advanced under this scheme can be either in the form of share or loan capital.

Property

ICC provides factory space to small and medium sized firms on a rental basis. It currently owns 562,000 sq. ft. in 46 industrial and warehouse units. It has firm commitments to purchase a further 31 units covering 532,000 sq. ft. 300,000 sq. ft. of this area (19 units) are currently under construction and include a number of larger units developed in co-operation with the IDA for long term lease to new industries. The properties are leased to clients on normal commercial terms.

ICC is also prepared to provide additional capital to businesses, which have premises in suitable locations, by purchasing their premises and renting them back on a long term lease.

Issuing House and Underwriting Activities

As mentioned earlier, this was an important part of ICC’s facilities in its formative years. For a number of reasons, public issue activity has been limited in recent times. However, ICC still underwrites public issues and, through its subsidiary company, Mergers Limited, provides an issuing house service.

Corporate Financial Advice

In addition to providing issuing house facilities, Mergers offers financial advice to firms involved in mergers or takeovers, both in regard to share valuation and in the mechanics of effecting a merger. It is also involved in the provision of financial advice to government departments and State and other companies.

Shipping Finance

As already indicated, SFC provides loans on concessionary terms to purchasers of ships built in Irish dockyards.

Deposits

ICC accepts deposits for amounts in excess of £1,000. Deposits are guaranteed by the State as to principal and interest and enjoy trustee status. Deposits are now an important part of funding and account for 40% of ICC’s total borrowing.

III—BOARD, MANAGEMENT AND STAFF

Board

ICC has seven Directors including the Chairman. The Minister for Finance nominates four of the Directors and the other three are elected by the shareholders. As the Minister holds 99% of the issued share capital, he effectively controls the appointment of all the Directors.

In accordance with the Articles of Association, one nominated and one elected Director retire each year and may be reappointed. The Board meets at least once a month. The Directors are non-executive apart from the Managing Director. Details of the Directors are given in Schedule E.

Management and Organisation Structure

The organisation chart is detailed in Schedule F.

Staff

On 31st October, 1979, staff numbered 226 including 16 in the Cork Office and five in the Limerick Office. A schedule of staffing for the period 1970-1979 is given in Schedule C.

The specialised nature of the Company’s activities requires the employment of highly skilled and trained staff. As a consequence there is approximately an equal number of executive and non-executive staff. The executive staff is representative of many disciplines—mainly Commerce, Economics and Business graduates in addition to members of accounting and other professional institutes.

Staff development policies are pursued by the Company. Staff members are encouraged to undertake relevant academic and professional studies to assist personal and career development.

The Company enjoys good relations with its staff. This has contributed to increases in productivity over the years, facilitating the Company’s expansion and operating efficiency. However, one aspect of staff relations, which is causing considerable concern at the moment, is the increasing level of staff turnover. This applies in particular to executive staff with a number of years experience of working with ICC. The Chairman expressed his concern about this situation in ICC’s 1979 Annual Report as follows: “ICC is proud to be part of the Public Service and I believe that it discharges an important function in national and economic development. ICC has shown itself ready to respond to new needs and to innovate where this has been appropriate. It could not have reached its present level of achievement without a well-motivated management and staff who take pride in their contribution to economic growth. My colleagues and I view with concern what seems to us to be an over-rigid interpretation in some quarters of the principle of the unity of the Public Service. We recognise that being part of the Public Service imposes certain disciplines on an organisation and we do not object to such disciplines, provided they are applied with flexibility. I would urge strongly that a dialogue should be undertaken as early as possible with the relevant Departments in the hope that it may be possible to evolve a method of approach to remuneration in our own and other State-sponsored organisations which will enable some measure of recognition to be given to the dictates of the market place. In the case of this company, we live in a competitive banking environment and the recruitment of properly qualified and experienced senior personnel must take account of this hard fact.

I do not believe that the general principle of the unity of the Public Service would be threatened by an acknowledgment of differing conditions obtaining in different organisations and of need to make proper allowance for such conditions”.

IV—FINANCIAL PERFORMANCE AND BALANCE SHEETS

The Group Accounts for the five years to 31st October, 1979 are detailed in Schedule H and summarised below together with Advances figures:—

Advances increased significantly over the period particularly during the last two years— an increase of 28.2% in 1978 and a record 71% in 1979. In 1978, there was a sharp increase in profitability arising from a number of favourable developments including the movement of interest rates that year. Despite a sharp increase in interest rates and a number of other factors which tended to limit short term profitability, the 1979 profit showed an increase over the previous year’s record level.

Dividends increased steadily over the period and were well covered by retained profit in each year.

Balance Sheets

The Balance Sheets for 1975 to 1979 are set out in Schedule J. The Balance Sheets as at 31st October, 1979 and 31st October, 1978 are summarised below.

SUMMARISED BALANCE SHEETS AS AT 31st OCTOBER

There was a very substantial increase in invested funds during the latest year. The largest element in Invested Funds (78%) is loans. The other elements are: Hire-purchase 12%, Property and Equipment on Lease 8% and Investments 2%.

ICC obtains its capital from a variety of sources. Its funding policies are to maintain an appropriate relationship between the term and the nature of its liabilities and assets and to avoid significant exchange risks on borrowings. As a matter of policy it seeks out new sources of finance which can be used for the advantage of Irish enterprises.

The trend in recent years has been for Deposits and International Institutions (such as the World Bank and the European Investment Bank) to increase in importance as a source of funds and for advances from the Exchequer to decline in relative importance.

The return on shareholders’ funds, and earnings per share, increased significantly over the period and stood at 18.95% and 25.4p respectively in 1979. Schedule K shows a detailed ratio analysis for the last 5 years.

V—FUTURE PLANS*

January, 1980.

SCHEDULE A-LIST OF ICC ACTS

SCHEDULE B

Irish Film Finance Corporation Ltd.

The Irish Film Finance Corporation Ltd. (IFFC) was incorporated as a wholly owned subsidiary of I.C.C. in January, 1960. The objective of this company was to provide ‘end money’ for films produced at Ardmore Studios.

The Corporation provided finance towards the cost of making 17 films; the most notable among them being ‘The Playboy of the Western World’ and ‘The Quare Fella’. Because of losses sustained it was decided to discontinue lending in 1966.

I.C.C. advanced a total of £365,000 in loans to IFFC, of which £38,000 has been repaid and £326,950 has been written off I.C.C.’s books. These loans were in effect interest free, as I.C.C. waived its right to interest each year. Only two films, ‘The Playboy of the Western World’ and ‘The Devil’s Agent’ are still providing an income to IFFC.

While on purely commercial grounds IFFC activities were not successful, it nevertheless played a significant role in the formation of the film industry at Ardmore and provided employment and training facilities for Irish technicians.

SCHEDULE C

CLASSIFICATION OF FINANCE PROVIDED BY THE GROUP AS AT 31st OCTOBER

SCHEDULE D

NET EXCHEQUER FUNDS TO ICC

ICC Disbursements and Exchequer Funds (excl. SFC) £m

Note (1) The net funds drawn from the Exchequer would be further reduced if allowance was made for taxation payable by ICC.

(2) Disbursements by SFC over the period were £25.2 million. Over the period SFC repaid £7.9 million to the Exchequer.

SCHEDULE E

LIST OF DIRECTORS

SCHEDULE F

THE INDUSTRIAL CREDIT COMPANY LIMITED

Organisation Chart

SCHEDULE G

ICC STAFFING 1970-1979

Year End 31st October

SCHEDULE H

CONSOLIDATED PROFIT AND LOSS ACCOUNT

YEAR AT 31st OCTOBER

SCHEDULE J

CONSOLIDATED BALANCE SHEETS AS AT 31st OCTOBER

SCHEDULE K

RATIO ANALYSIS

Year ended 31st October

*Details of ICC Acts, 1933 to 1979, are set out in Schedule A.

*This section of the Memorandum is not being published at the request of the Industrial Credit Company, Limited.