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

INDUSTRIAL CREDIT COMPANY, LIMITED

CONTENTS OF THE REPORT

ELEVENTH REPORT

INDUSTRIAL CREDIT COMPANY, LIMITED

I INTRODUCTION

1.1 Background

1. The Industrial Credit Company (or the ICC as it is known) is one of the longest-established of our State-sponsored bodies. It was set up in 1933 under the Industrial Credit Act of that year to underwrite capital issues and to make long and medium term capital available particularly for the establishment of new industries. At that time the development of manufacturing industry had become a major aim of national economic policy. Since its establishment the Company has fulfilled a vital role in the financing of industry. Although in recent years other institutions have been established which offer similar financial services, the Company retains a very special relationship with Irish industry. It provides a comprehensive range of financing facilities for the setting-up of new industries and the expansion of existing enterprises. A measure of its significance is that up to 31 October 1979 the Company has provided over £274 million directly to enterprises in the manufacturing, distribution and services sectors of Irish industry.¹ Proposals for the financing of small scale projects receive special attention. In the year ended 31st October 1979 about 90 per cent of loan approvals were for concerns employing fewer than 100 workers.² The Company has been associated with a number of concerns during their development from small to major enterprises.

2. The financial requirements of industry and business have changed considerably since the establishment of the Company—it is now operating in a more complex, more sophisticated and more competitive environment than in the past. By way of extension of the earlier facilities of underwriting share issues and providing long term loans, the Company has introduced arrangements for the provision of plant and machinery on hire purchase and the leasing of property and equipment. It provides finance for distribution enterprises and for the tourist sector. It has also in recent times extended its scheme of special loans to assist small and medium sized manufacturing firms with weak capital structures. It has a subsidiary which provides advice and facilities concerning mergers between firms—Mergers Limited—and another subsidiary, Shipping Finance Corporation Limited, which provides finance for the construction of ships in Irish shipyards. A third subsidiary, Irish Film Finance Corporation Limited, which had been dormant for a number of years, went into voluntary liquidation in July 1980.

3. The rapid growth in the Industrial Credit Company has imposed considerable pressure on its resources but it has successfully expanded and diversified its sources of funds. Deposits from the public have been particularly buoyant in recent years and now represent over 40 per cent of total borrowing. The Company has borrowed from the World Bank and the European Investment Bank and has arranged credit through other financial institutions abroad. It also borrows from the Exchequer. The amount of £52 million, which was set aside for the Company in the Public Capital Programme in 1979 and which includes provision for ICC’s financing activities for shipbuilding, was a record figure. In that year the actual ICC expenditure under the Public Capital Programme was £69.33 million. In the 1980 Public Capital Programme £75.0 million was set aside, almost exclusively for industrial investment, to enable the Company to increase significantly its volume of business, thus ensuring that no worthwhile project would be rejected for lack of funds.

1.2 Legal Character

4. The Minister responsible for the ICC is the Minister for Finance who holds virtually all of the issued share capital and appoints the directors. Issued share capital comes to £8.83 million of which 640 1£ shares are in private hands (Appendix 1). The Minister does not intervene in the day to day operations of the Company but is, of course, concerned with overall policy, the Company’s annual budget, its general financial performance, interest rates on loans and deposits, foreign borrowings, guarantees of borrowing, approval of form of annual accounts, presentation of accounts to the Houses of the Oireachtas and amending legislation.

5. The Industrial Credit Act, 1933 gave the Minister for Finance the power to subscribe for shares in the ICC, which was incorporated in October 1933. Its shares were 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 per cent. A number of private shareholders did not accept the Minister’s offer. They and their successors between them now hold less than one per cent of ICC’s equity. ICC still retains its Stock Exchange listing.

6. The Industrial Credit Act, 1933 has been amended on six occasions to either increase share capital or guarantees on borrowings. The amendments were made in 1958, in 1959 and on four separate occasions during the 1970’s. In the 1971 amendment the authorised share capital was increased to £12 million and borrowing powers were increased to £30 million while at the same time Ministerial guarantees were increased to £30 million. Under this amendment the ICC was permitted to provide finance for activities outside Ireland on the condition that such activities directly benefited Irish trade and industry. Through amendments to the Act in 1974 and 1977 ICC’s borrowing powers were increased to £200 million. In December 1979 another amendment was passed which raised the statutory limits on the power of the Minister for Finance to guarantee borrowings by the ICC. This amendment also raised the statutory limits on the borrowing powers of the Company itself. Under this amendment the ICC’s borrowing limit has been raised to £400 million.

1.3 Historical Development

7. While the Industrial Credit Act, 1933 and the Memorandum of Association gave the ICC 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, the ICC would acquire them. During the 1930’s, the ICC floated 29 companies, including the Insurance Corporation of Ireland, Comhlucht Siúicre Éireann Teoranta, Cement Limited and Irish Ropes Limited.

8. During the Second World War, 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 house and underwriting house activities were resumed in 1946. Companies such as Gypsum Industries, Roadstone Limited and Irish Glass Bottle Limited were floated during this period.

9. Following the publication of the First Programme for Economic Expansion in 1958 the ICC expanded steadily both in terms of capital provided to industry and in staff numbers. The Second Programme for Economic Expansion pointed out in 1964 that “The demand for the facilities offered by the Company has increased so much in recent years that over one half of the total capital provided by it since its incorporation in 1933 has been provided during the past five years”.³ Advances increased from £0.5 million in 1958 to £4.3 million in 1968.⁴ Apart from developing existing services, the ICC introduced a number of new services during this period. 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.

10. The rapid rate of industrial investment and economic growth during the late 1960’s and early 1970’s led to significant changes in the environment in which the ICC operated. The commercial 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 U.K. merchant banks and North American banking groups were operating here. Subsequently several EEC groups established offices in Dublin. During this period ICC activities expanded considerably. Between 1968 and 1979 advances by the ICC increased from £4.3 million to £66.2 million. In addition, this period saw the introduction of many additional services such as the finance for distribution scheme, the opening of branch offices, the setting up of Mergers Limited, the raising of World Bank and European Investment Bank loans and the introduction of the Company’s Venture Capital Scheme.

1.4 Company Objectives

11. 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.

12. Originally the ICC channelled capital to industry by encouraging enterprises to offer their shares to the public through the Stock Exchange. Over the years, the Company has arranged for 84 public issues which is approximately 50 per cent of all industrial companies launched on the Dublin Stock Exchange since the ICC was founded.⁵ Encouraging the public to invest in Irish enterprise through share purchase on the Stock Exchange is still of primary importance to the ICC even though in recent years institutions have taken over to a great extent in equity investment. The Joint Committee acknowledges that the reasons why there have been very few public issues related to ICC activities in recent years and why institutions rather than individuals have been involved have been due to factors outside the control of the Company such as high personal taxation, Stock Exchange regulations, fear of takeovers and the alternative uses for money.⁶

13. The original objective of the Company was to promote industrial development by providing capital to industry. However, the Company’s powers have been extended by the 1971 Amendment Act and now the ICC provides loan facilities to enterprises in many sectors. Furthermore, virtually every application examined by the Company is for an expansion of existing industry which means that working capital requirements are part of such applications. The ICC distinguishes between “hard core” and seasonal working capital. In normal circumstances the Company does not provide the latter type of capital.⁷

14. In recent years the ICC has shifted its emphasis very considerably towards the small business sector. This sector now accounts for about 90 per cent of ICC loans.⁸

1.5 Company Activities

15. Since its incorporation in 1933 the ICC, with its wholly-owned subsidiary Shipping Finance Corporation Limited, established in 1961, has provided over £274 million capital for Irish industry and commercial undertakings directly, by way of loans, share investment, hire purchase, equipment and property leasing, guarantees, etc., and, in addition, has underwritten capital flotations by Irish companies to the extent of approximately £30 million.

16. The main activities of the ICC group may be found under the following headings: term loans, share investment, capital underwriting and issuing house services, hire purchase, equipment leasing, finance for distribution, finance for tourism, special loans, industrial property, advisory services, loans to shipowners and mergers and takeovers. These activities are described in greater detail in Appendix 1. Apart from the special loans scheme and loans to shipowners the activities of the group are conducted on commercial terms.

II OPERATIONS

2.1 Industrial Sectors Served by ICC

17. For a number of years after its establishment the ICC concentrated its support activities in the manufacturing sector of Irish industry. More recently, however, the Company has accepted proposals from enterprises in the tourism and distribution sectors as well. The historical development of the services provided by the ICC is set out in Appendix 1. A high proportion of the Company’s total lending is advanced for fixed assets (premises, plant and equipment) and the balance is accounted for mainly by “hard core” working capital. ICC differs from the commercial banks in that all its advances go to the business community for developmental purposes and many ICC loans have a longer repayment period than bank term loans. ICC activity tends to reflect the industrial investment needs in the country. In this regard the Government has recently arranged for the Company to provide an additional £50 million to small and medium sized manufacturing concerns which are experiencing difficulties in obtaining credit; these loans will be made available at concessionary rates of interest.⁹

18. Between 1975 and 1979 there were a number of shifts in the proportion of funds allocated to the various industry sectors. The more traditional industries, including food and food processing, textiles, footwear and clothing, furniture and wood products and the printing industry, generally absorbed proportionately less of ICC funds in 1979 than they did in 1975. On the other hand the newer industries including those in chemicals and chemical products and metals increased their share. During the period there was a marked shift toward supporting enterprise in the distribution sector generally. In 1979 this group of industries, which includes hotels and catering, the distributive trades, transport and ancillary services and other services, absorbed 37.2 per cent of ICC invested funds (Table 1).

TABLE 1

Allocation of Investment Funds 1975 and 1979

Source: ICC Company Accounts 1975 and 1979.

2.2 Loan Services

19. The principal objective of the ICC is to promote economic growth throughout the country through the provision of capital to the industrial and service sectors of the economy. In doing this the ICC offers a wide range of financial and other services as listed in paragraph 16. The Company states that it was among the first institutions to respond to the major opportunities created by the quickening pace of industrial investment in the period since 1968.¹⁰

20. About three quarters of the facilities provided by the ICC are in the form of loans which carry repayment periods of up to 15 years. The rate of interest can be either fixed or variable. In periods of high interest rates, as at present, the demand for fixed interest rate funds tends to exceed the supply. In periods of low interest rates, borrowers tend to favour variable rate loans. At present more than half of ICC loans are made at a fixed interest rate but this proportion is declining.¹¹

2.3 Enterprise Development

21. Enterprise development in Ireland is of paramount importance to the economy. The development of a fund of entrepreneurial talent in the country is one of the central objectives of the ICC. One of the greatest difficulties facing entrepreneurs is that of obtaining adequate finance to float projects. To service this need the ICC has developed a Venture Capital Scheme under which funds may be either in the form of share or loan capital.¹² The scheme has been in existence for about three years and to date 18 propositions have been submitted and the ICC has provided a total of £500,000. Only 10 per cent of the total was provided in the form of share capital. The response to the scheme has not been as great as anticipated.¹³

22. Participants for the scheme are identified in a number of ways. In general, prospective entrepreneurs approach the ICC but the Company has attempted to advertise the scheme through the newspapers and one entrepreneur was identified through an award scheme the Company established. A number of private sources also make recommendations to the ICC. The number of participants referred to above do not include entrepreneurs assisted by the IDA.

23. The Venture Capital Scheme is very broadly based and a wide range of services are provided under it. An entrepreneur may approach the ICC with an idea, at which stage the Company will refer the applicant to the IIRS and CTT for technical and marketing feasibility reports. The ICC itself provides the financial service to develop the project. The Joint Committee commends this scheme and recommends that ways should be sought in which to broaden its application and publicise it more widely to make it better known and more accessible to potential participants.

2.4 Small Business Sector

24. One of the areas which has always received much attention from the ICC and now receives considerably more attention is that of small business. A central function of the ICC is the attainment of growth and development among small and medium sized firms. The Joint Committee welcomes this trend since it reflects a recognition of the need for financial incentives to indigeneous enterprise with the potential to grow and contribute significantly to the attainment of output and employment targets. Recent research in this country and abroad has shown that there is considerable potential for the development of entrepreneurial capability and job creation in the small business sector and that this sector requires sizeable amounts of developmental assistance. During 1979 ninety per cent of loans approved by the ICC were for small and medium sized firms (firms employing less than 100 people).

25. The re-orientation of international lending agencies such as the International Bank for Reconstruction and Development (World Bank) and the European Investment Bank (EIB) to the view of promoting small business has ably assisted the ICC in its support for this sector through the provision of finance on preferential terms. The access the ICC has to sources of finance earmarked for small business strengthens the Company’s hand in this regard. Under the terms of a special agreement with the Government and the EIB, the ICC provides up to 50 per cent of individual company capital requirements for manufacturing projects in the small scale industry sector at a special low fixed rate of interest (12.5 per cent for the term of the loan).¹⁴ Under this scheme the ICC has received 509 applications for £36 million worth of business. As at March 1980, the ICC had approved almost 400 applications for £27 million while the EIB had approved 334 applications for £23 million.¹⁵ The loans must be approved both by the ICC and the EIB. More recently the ICC has arranged for an additional £10 million loan from the EIB at preferential fixed interest rates to be made available to finance new fixed assets in smaller enterprises.¹⁶

26. The balance of the capital requirements comes from other sources, usually an IDA grant, promoters’ equity and bank loans. In some instances the ICC itself will provide part of the balance required. The Joint Committee is fully aware of the fact that unless the finance available to small business is provided on very favourable terms many candidate enterprises will regard it as too expensive and will not expand in the desired fashion. The ICC sees the financing of the small business sector as an essential part of its function as it is the bank established to provide capital which might not otherwise be available. The ICC takes the view that the small business sector is less profitable than other sectors.¹⁷

27. The Joint Committee recognises that one of the major problems in dealing with small businesses is that very often the lending institution must take non-financial factors into account in any assessment—factors which may be ignored by other financial institutions. In this regard the Joint Committee endorses the move by the ICC into joint ventures in the segment of the industrial property market which deals with the provision of small factories and warehouses in the more neglected areas. In order to establish and support small businesses the ICC was forced to become involved in the industrial property market.¹⁸ Lending institutions are generally not prepared to provide small industries with finance to acquire factories. By going into partnership with a number of developers of industrial estates the ICC is able to provide factory space which would otherwise not be available to small businesses. This programme complements the activities of the IDA in that small units are provided in inner city areas and for the distributive trades as well as for manufacturing.

28. The Joint Committee recognises that an additional problem in dealing with small businesses arises due to their misperceptions of, and attitudes towards, State-sponsored agencies charged with the task of providing assistance in one form or another. For this reason and the other reasons previously listed, the ICC’s industrial promotional role is of paramount importance and its success will depend on how well it links its activities with other support agencies. The relationship with other State support service agencies such as CTT, the IIRS and the Industrial Development Authority greatly concerned the Joint Committee since many of the non-financial services required by applicants from the small business sector were provided through, rather than by, the ICC.¹⁹ The Joint Committee welcomes the well established working relationship the ICC has with other State agencies such as the IDA, the IIRS and CTT.

2.5 Relationship with Central Bank and Associated Banks

29. The Central Bank operates a system of liquidity ratios for all licensed banks as a means of implementing monetary policy. By specifying changes in liquidity ratios the Central Bank is able to influence the growth in monetary aggregates. As the ICC is not a bank within the meaning of the banking legislation the Central Bank has no direct control over its activities.²⁰ ICC activities are controlled by the Department of Finance and therefore the Company does not have to adhere to the liquidity ratios prescribed for financial institutions, nor is the Company required to abide by any quantitative credit guidelines which may be in force from time to time. The fact that the ICC does not have to meet the primary and secondary ratios laid down for the Associated Banks, and therefore does not have to tie up resources in cash or less profitable lending to the Exchequer, can be seen as an advantage, equivalent either to a subsidy to the ICC or, as a tax on the Associated Banks.²¹ The ICC has stated that it operates its own scheme of liquidity ratios which is much the same as that operated by the commercial banks.²² Nevertheless, the Joint Committee agrees that similar financial institutions should compete on an equal footing and the question therefore arises as to whether the ICC should be formally placed under Central Bank control with an obligation to meet Central Bank requirements. The Joint Committee recommends that when the ICC’s objectives in regard to profitability have been achieved, the advantages and disadvantages of placing the ICC under the formal control of the Central Bank should be examined by the Department of Finance and the Central Bank.

30. On the question of the relationship between the ICC and the Associated Banks, the ICC sees itself as the provider of longer term credit. In general the ICC complements the functions of the Associated Banks. Each provides a distinct package of services and the choice is left to the borrower and depends very much on his specific needs. Many ICC fundings have a commercial bank element involved as well.²³ Loans may consist of an ICC portion which has a repayment period of, say, 10 years and a portion from the private banking sector with a repayment period of, say, five years. While there is a certain amount of overlap and competition between the two sectors in this regard, the services offered to industry in general are complementary.²⁴ With the exception of propositions that are eligible for specialised low interest EIB finance, there is no conclusive evidence that the ICC meets loan requests which the commercial banks are unable to take up because of restrictions imposed on them.²⁵ The Associated Banks, however, have recently suggested that the State banks enjoy a privileged position in regard to the Government protection afforded in the underwriting of exchange risks on borrowings in EMS currencies. They believe that the exchange protection should be extended so as to allow the Associated Banks to compete on an even footing with the ICC and to ensure that the complementary work of banks in both sectors continues.

31. On the question of providing the full range of banking services the Joint Committee acknowledges that there is no immediate necessity for the ICC to expand on its present activities. The ICC does not provide a current account service, foreign exchange services and portfolio management services. The setting up of a current account service would require a large branch network and other related investments and such a departure is at present unnecessary as far as the ICC’s clients are concerned since these services are already adequately provided for by the commercial banks.²⁶ The Joint Committee acknowledges the complementary functions of the ICC and the private sector banking system in this regard.

32. The Joint Committee was very much concerned that in a period of scarce funds and high interest rates, applicants for high risk loans to the commercial banks would be referred to the ICC. However, there has been no evidence that the commercial banks have manoeuvered the ICC into providing finance that it would not normally provide in following its objectives as a development bank.²⁷ The Joint Committee sought to determine whether there are any social constraints on the commercial nature of the ICC’s operations which might influence its profitability and affect its ability to attain its financial targets. In situations where applicants to the commercial banks are refused accommodation and turn to the ICC, the Company, recognising its higher social responsibility, may fund such applications under its special loans scheme which is underwritten by the Department of Finance.²⁸ There have been very few failures under this scheme though a number of the beneficiaries have been slow to meet interest payment deadlines. Even in these cases the commercial banks are very likely to be involved in the working capital side. In practice every proposition made to the ICC will have a commercial bank associated with some other part of the proposition with the result that the ICC and the commercial banks share in the developmental work.²⁹

2.6 Relationship with Industrial Development Authority

33. The nature of the services provided by the ICC means that it must involve contact with many other agencies, State and semi-State. The circumstances under which it works closely with agencies such as the IIRS and CTT are outlined in paragraphs 23 and 28 above. The agency with which the ICC is in most contact is the Industrial Development Authority which was established to promote industrial development in this country. As the ICC’s principal function is that of providing the finance for such development the issues of co-operation and conflict arise and the need to constantly monitor and to dovetail services is ever present. In some countries the functions performed by the ICC and those performed by the IDA are performed by one authority. The Joint Committee raised the question, therefore, of the wisdom of having two separate agencies, particularly when the IDA has recently become involved in very large capital injections into major industrial developments.³⁰ The question being addressed is: “Since the industrial investor has a package of financial requirements, why not provide these within one agency rather than two as at present?”.

34. There are a number of advantages to each system of developmental banking and there are examples of each in different parts of the world. Developmental banking has two aspects associated with it which can be carried out by one or more agencies. Firstly, there is the function of industrial promotion which involves all those activities necessary to attract industry to the country. Secondly, there is the strictly financial dimension which requires a detailed commercial assessment of all financial propositions arising out of any new industry which might be attracted to the country. The ICC believes that a promoter of industry is always under great pressure to provide loans and the pressure is greater when both functions are provided by one agency than if two separate agencies are involved.³¹ By keeping the functions separate the ICC believes that it is possible to maintain the required level of independence while at the same time, through a good inter-agency communications system, ensure that an industrial development programme is efficiently carried out.³² Good communications between the ICC and the IDA are guaranteed since the ICC is represented on a number of IDA committees including the small industries committee, the re-equipment grants committee and the enterprise development committee. On particular projects there would also be a direct exchange of information subject to banking confidentiality. The ICC has a much greater financial role than the IDA and frequently the ICC advises the IDA on financial matters. While the Joint Committee recognises that there are advantages to both systems it is nevertheless concerned that the separation of functions between two separate State-sponsored organisations could give rise to inefficiencies, in the servicing of industry, particularly in the small business area.

III MANAGEMENT AND PERFORMANCE

3.1 Management

35. At the end of the 1979 financial year ICC staff numbered 226 of whom 125 were management and executive staff which reflects the high skill and training required to effectively carry out the Company’s functions. Employment in the Company has increased significantly in recent years—since 1975 total staff numbers have been increased by 91. The extra staff were required to support the increased activity in the Company’s three offices in Dublin, Cork and Limerick.

36. While total staff numbers have increased in recent years, staff turnover has also increased.³³ The increased rate in staff turnover causes the Company considerable problems in regard to maintaining sufficient experienced staff to carry out the functions of the Company. In recent years the ICC has been acting more or less as a training ground for executives who, after a number of years with the ICC, are hived away into the private sector and particularly the merchant banking sector.³⁴ The Joint Committee recognises that in order to maintain a high level of banking service to assist industrial development in the country it is essential that staff are of sufficient calibre and properly remunerated for the task. In this regard the Joint Committee recognises that the ICC’s competition for staff is not with the rest of the public sector but with the private banking sector.

37. The Company recognises that to keep its staff it does not have to match the conditions offered in the commercial banking sector because of security of employment and similar factors, but it does have to acknowledge the constraints imposed on it by the market in which it operates.³⁵ The Company has stated its objections to a rigid interpretation of the principle of unity in the Public Service and argues for a recognition of the dictates of the market place.³⁶ The Joint Committee accepts the view that, like other areas in the Public Service, the ICC must have access to specialised skills in order to function properly. The recent recommendations of the Review Body on Higher Remuneration in the Public Sector (Report No. 20), if implemented in full by the Government, should ease this situation. At this stage the Joint Committee can only reiterate the recommendation it made in its recent reports on Bord na Móna and The Agricultural Credit Corporation, Limited that the salaries of senior managers be kept under continuous review, particularly with respect to the effect present policy has on the quality of recruitment to senior managerial positions.

3.2 Relationship with Department of Finance

38. Every year the ICC submits estimates to the Department of Finance of what the Company plans to do for the coming year and following a discussion with that Department a figure is agreed for the public capital programme. Rarely is there any disagreement as to the precise amount involved and the Department of Finance does not curtail the activities of the Company.³⁷

39. Because the amount of funds available to the ICC through the Public Capital Programme is determined on an annual basis and because there are no projections as to the public funds which might be available in future years it is difficult to decide what the ICC’s minimum likely disbursement would be in any future period.³⁸ However, a factor which substantially mitigates this difficulty is the declared objective of the ICC of reducing its dependence on the Exchequer as soon as possible. The ICC hopes to be able to do so by increasing the proportion of its funds which are borrowed abroad.³⁹

40. In recent years the arrangements described in paragraph 38 have worked well. The ICC has not experienced the need for extra capital and valid investment needs of industry and distribution have not been refused because of lack of funds on the part of the ICC.⁴⁰ However, the Company believes that the situation is rapidly changing and that in future funds will not be so readily available. The Company has begun to seek substantial finance in the form of foreign borrowings from the EIB. The Company recognises that it will not be able to follow the desired expansion path by relying solely on funds available domestically.⁴¹

41. While the ICC expects to reduce its dependence on the Department of Finance for funds, nevertheless, it will increasingly rely on the Department to guarantee the exchange risk involved in borrowing funds abroad. The ICC’s policy with respect to foreign borrowings is not to accept such funds unless the exchange risk is guaranteed. The Government has guaranteed all exchange risks to date and the ICC believes that if this practice is continued the Company could probably get very substantial foreign currency borrowings over the next few years which could be passed on to Irish industry. In this endeavour the Joint Committee supports the ICC and agrees strongly with its policy on exchange risk protection.

3.3 Growth and Planning

42. The ICC has increased its lending by 83 per cent in real terms during the period 1975-79.⁴² In 1979 advances by the Company exceeded £66 million. The Company believed that it held 10 per cent of the relevant market.⁴³ Because it operates in an area dominated by the Public Capital Programme, ICC planning activities are confined to the preparation of detailed budgets for one year at a time. During the year actual performance is monitored regularly against the budget. For the longer term the Company operates a five year planning system based broadly on the indicative approach to planning. Targets have already been set for the period 1981-84. The Company follows an open-ended approach in its planning as it attempts to provide as much finance as possible given the level of interest rates prevailing.⁴⁴

43. In arriving at budgets and targets the Company takes cognizance of available economic comment, anticipated growth rates for the economy, the Company’s existing market share and the likelihood of holding that share and any detailed plans available from agencies such as the IDA.⁴⁵ The absence of a public capital programme for periods longer than one year can give rise to planning difficulties for the Company. Knowledge of anticipated national expenditure or national investment would enable the ICC to judge what its minimum likely disbursement would be for the period in question.⁴⁶

44. The ICC recognises that if it has to rely on the Public Capital Programme as a source of funds the Company will not be able to maintain the level of expansion desired; hence, the importance to the ICC of alternative sources of finance. While the Company has a set of priorities it follows in a tight money situation, it has not had to face a strict regimen of rationing of funds in recent years. Were such a situation of scarce funds to arise, the lending activities of the Company would be heavily influenced by the employment factor and a set of priorities would have to be established.⁴⁷

3.4 Source of Funds

45. Almost 39 per cent of ICC’s capital is supplied by the Exchequer either through share capital or advances. Loans from international institutions such as the World Bank, the European Investment Bank and the European Coal and Steel Community are responsible for a further 13.5 per cent of the Company’s capital. In July 1979, deposits were responsible for 34.4 per cent of the total capital (Table 2).

TABLE 2

Sources of Capital—ICC and Wholly Owned Subsidiaries, 31 July 1979

46. The £640 share capital from other sources represents, apart from qualifying shares held by directors, the balance of shares held by the public which the Minister for Finance has not acquired under the Industrial Credit (Amendment) Act, 1958. A total of £2 million in shares was offered to the public in 1933, 1936 and 1952, but of this only £8,607 was taken up by the public. The Minister for Finance was obliged to take up the remainder in accordance with the underwriting arrangements. The 1958 Act authorised the Minister to buy out the shares held by the public.

47. The introduction of a deposits scheme by the ICC was approved by the Minister for Finance in December, 1968. The minimum initial deposit is £1,000. Deposits are guaranteed by the Minister as to principal and interest. Interest rates applicable on 1 June 1980 were as follows:

Recent trends in the deposits scheme are shown below (Table 3).

TABLE 3

Deposits Outstanding at 31 October, 1975-1979

48. The Joint Committee recognises that in some instances there is a direct relationship between the number of branches a bank operates and the number of deposits made with the bank. In the case of the ICC, however, it is recognised that the nature of the Company’s activities does not at present require an extensive branch network nor a change in its deposits policy.⁴⁸ The Joint Committee fully accepts the ICC’s view that branch offices should only be opened when they can generate sufficient business to pay their way.

49. As was seen in paragraph 45, the ICC obtains its capital from a variety of sources. The Company’s funding policies are designed to maintain an appropriate relationship between the term and the nature of its liabilities and assets and to avoid significant exchange risks on borrowings. In recent years, the importance of the Exchequer as a source of funds has declined and the importance of deposits and international institutions has increased. The ICC states that as a matter of policy it wishes to become less dependent on the Exchequer and consequently it seeks out new sources of finance which can be used to the advantage of Irish enterprises.⁴⁹

50. A significant source of funds for the ICC in recent years has been the EIB. The EIB as a source of funds for the development of small and medium sized enterprises has been discussed in paragraph 25 above. Under the scheme whereby EIB funds are made available to Irish enterprise two sets of criteria are relevant. The Government lays down the overall conditions under which it provides an exchange risks guarantee in circumstances where candidate firms employ no more than 100 people and fixed assets do not exceed £1 million.⁵⁰ The EIB conditions restrict the loans to an amount not exceeding 50 per cent of an individual manufacturing company’s fixed assets requirements. A number of sensitive industries are excluded.⁵¹ While the Government guarantees the exchange risk associated with these loans, the ICC accepts the full commercial risk. The Joint Committee welcomes the initiatives taken by the ICC in regard to finding new sources of funds.

3.5 Company Performance

51. In regard to its financial record, the ICC has grown very rapidly during the past number of years and advances by the ICC to Irish industry have increased from £22.1 million in 1975 to £66.2 million in 1979. Advances for the six month period to 30th April 1980 were substantially greater than advances for the corresponding period in 1979. The ICC expects that advances in 1980 will exceed the record figure established in 1979. Between 1975 and 1979 the ICC has been responsible for the provision of capital as follows:

TABLE 4

Capital Provided by ICC, 1975-1979

Sources: ICC Annual Reports and Irish Statistical Bulletin, March 1980 (Consumer Price Index).

52. Between 1975 and 1979 ICC income in real terms increased by 86.7 per cent while profits after tax increased by 49.6 per cent in real terms.⁵² Thus, the growth in income has been accompanied by a similar growth in advances in broad terms. However, the critical factor in recent years has been the growth in interest payable by the ICC. During the review period the amount of interest paid out by the ICC increased by 128.6 per cent in real terms. Administrative expenses grew by 91.2 per cent in real terms during the same period thus marginally outstripping the growth in real income (Table 5). Profits after tax in 1978 were higher than the corresponding figure for 1979.⁵³ Continuing high interest rates are likely to put further pressure on ICC’s profits. Preliminary figures for the six month period to 30 April 1980 show that ICC’s profits measured in current terms have increased by seven per cent over the corresponding period to 30 April 1979. This represents a decrease of 7.5 per cent in real terms.⁵⁴

TABLE 5

Selected Trading Results 1975-1979^a

53. While profits increased during the period 1975-79 so too did Company costs and the number of staff employed. Real profits after tax per employee declined over the period, from £6,700 per employee in 1975 to £6,000 in 1979. However, growth in this ratio was achieved between 1975 and 1978. High interest rates and other factors tend to put considerable pressure on margins which directly relate to profitability.⁵⁵ The gross margin on lending was fractionally greater than three percentage points during the period 1975-1977. In 1978 a gross margin of 4.6 percentage points was achieved but this dropped to 2.8 percentage points in 1979. Given Company policy on retained earnings and the trends in margins and profits, the amount available for dividend purposes, while growing, is still relatively small (Table 6).

TABLE 6

Selected Performance Ratios

54. The ICC paid dividends on share capital at the rate of 2.5 per cent per annum from 1940 to 1947 and four per cent from 1948 to 1958 (five per cent in 1950). No dividends were paid from 1959 to 1968 as the Minister for Finance agreed to forego a dividend in order to facilitate the accumulation of reserves by the Company. Payment of dividend was resumed in 1968/69 at the rate of 2.5 per cent per annum which was the rate up to 1973 when a dividend of three per cent was paid. In 1973 and 1974 the rate was three per cent, four per cent in 1975 (equivalent to 2.6 per cent after tax) and 4.6 per cent in 1976 (equivalent to three per cent after tax). Dividend after tax for 1977 and 1978 amounted to 3.5 per cent and five per cent respectively. In 1979 the after tax dividend was 5.5 per cent.

55. The dividend rate is decided by the Board of ICC. In recent years the Department of Finance has stated that it wants a commercial return on its investment and has urged the ICC to increase dividends.⁵⁶ The Joint Committee recognises that a conservative policy in regard to the payment of dividends was very appropriate when the Company was building up reserves. However, now that that task has been achieved, the Joint Committee looks forward to the Minister for Finance receiving a commercial return on his investment.

56. In recognising the need for ICC to increase its dividend the Joint Committee also recognises that returns to developmental banking do not tend to be as great as the returns to commercial banking. At present the return on capital for banks in the commercial sector is in the region of 23 per cent compared to less than half that level for the ICC. During the review period, the return on capital employed by the ICC increased from 8.19 per cent in 1975 to 10.27 per cent in 1979. The Company expects to increase its return on capital in the years to come but it recognises that there is a trade-off between commercial and developmental lending.⁵⁷

IV CONCLUDING COMMENTS

57. The Joint Committee accepts that the ICC is fulfilling a useful and necessary function by providing specialised credit which would otherwise be unavailable to a number of sectors of Irish industry. This is especially true in regard to small scale business and new ventures of an entrepreneurial nature. In its approach to evaluating the ICC’s operations and performance the Joint Committee used commercial criteria while at the same time recognising that the conflicts between developmental banking and commercial banking had to be faced by the Company. Using these criteria the Joint Committee accepts that the ICC has successfully attained most of its objectives and is capable of carrying out the tasks facing a development bank.

58. The Joint Committee fully endorses ICC’s efforts in respect of small scale and new enterprises and acknowledges the importance of the links established with other State-sponsored agencies in these endeavours. As many small scale enterprises tend to be discouraged when they have to deal with many State-sponsored agencies in their efforts to grow and develop, the Joint Committee believes that the services provided by the ICC should continue to be focussed on the requirements of the potential users.

59. Until recently the ICC has devoted its efforts more to providing suitable finance in Irish industrial enterprise and to building up an adequate reserves base than to achieving an appropriate level of profitability. In recent years Company profitability has remained low, in part because of the predominance of fixed interest lending and the difficulties of obtaining high margins on a number of the Company’s activities. The Joint Committee recommends that improved profitability should be a key concern of the ICC Board and Management so that an adequate dividend can be paid to the Minister for Finance as remuneration for his investment in the Company.

60. Written submissions on its role and performance received from the ICC are set out in Appendices 1, 2 and 3.

61. Finally, the Joint Committee wishes to express its thanks to Dr. M. F. Bradley, Lecturer in Marketing in the Department of Business Administration, University College Dublin, who acted as specialist adviser for the purpose of this inquiry.

(Signed) EOIN RYAN

Chairman of the Joint Committee

17 September 1980

¹ICC Annual Report 1979, page 20.

²See Appendix 1.

³Second Programme for Economic Expansion, page 158.

⁴See Appendix 1.

⁵See Evidence (Question 1) and Appendices 1 and 3.

⁶See Evidence (Questions 1 and 17).

⁷See Evidence (Questions 3 and 13).

⁸ICC Annual Report 1979, page 6.

⁹See Appendix 2.

^aBetween 1975 and 1979 there were a number of changes in ICC classification scheme with the result that a number of changes occur in the headings used between the two years. In the above table the classifications used are those which appear in the 1979 accounts.

¹⁰See Appendix 1.

¹¹See Evidence (Question 81).

¹²See Appendix 1.

¹³See Evidence (Questions 61 through 64) and Annual Report 1979.

¹⁴See Appendix 1.

¹⁵See Evidence (Question 50).

¹⁶See Appendix 2.

¹⁷See Evidence (Question 56).

¹⁸See Evidence (Question 25).

¹⁹See Evidence (Questions 66 and 67).

²⁰See Evidence (Question 43).

²¹See Para 27 of Tenth Report of Committee (The ACC).

²²See Evidence (Question 45).

²³See Evidence (Questions 78 and 79).

²⁴See Evidence (Question 48).

²⁵See Evidence (Question 46).

²⁶See Evidence (Question 78).

²⁷See Evidence (Question 53).

²⁸See Evidence (Question 54).

²⁹See Evidence (Questions 78 and 79).

³⁰See Evidence (Questions 69 through 77).

³¹See Evidence (Questions 73 and 74).

³²See Evidence (Questions 75 and 76).

³³See Appendix 1.

³⁴See Evidence (Questions 86 and 87) and Appendix 1.

³⁵See Evidence (Question 92).

³⁶ICC Annual Report 1979, Page 7.

³⁷See Evidence (Question 21).

³⁸See Evidence (Question 33).

³⁹See Evidence (Question 34).

⁴⁰See Evidence (Question 22).

⁴¹See Evidence (Question 27).

⁴²In real terms, to eliminate the impact of inflation.

⁴³ICC Annual Report 1976—funds invested by ICC in manufacturing industry and distribution sectors as a share of the total provided by all licensed banks to those sectors.

⁴⁴See Evidence (Question 42).

⁴⁵See Evidence (Question 32).

⁴⁶See Evidence (Question 34).

⁴⁷See Evidence (Questions 28 and 30).

⁴⁸See Evidence (Questions 10 and 11) and Report of Committee on ACC.

⁴⁹See Appendix I.

⁵⁰See Evidence (Question 83).

⁵¹See Evidence (Question 85).

^a Presented in real terms (1975=100) to eliminate the effect of inflation when making comparisons between years.

⁵²It should be noted that part of this increase is attributable to increased capital gearing over the period.

⁵³In real terms, having adjusted for inflation.

⁵⁴Having adjusted for inflation.

^aMore detailed information on trading results is given in Appendix 1.

^bComparison is made on the basis of deflated figures using the CPI to show the real change over the period.

^cIt should be noted that part of this increase is attributable to increased capital gearing over the period.

⁵⁵See Evidence (Question 101).

⁵⁶See Evidence (Question 98).

⁵⁷See Evidence (Questions 59 and 60).