Creating a panic environment for homeowners, investors and the public only increases our problems, writes Denis O'Brien
WHEN I READ media coverage on the current state of the Irish economy, I wonder whether most of the younger economists are more interested in building their own profiles than engaging in any constructive analysis. Meanwhile, the Sunday Independent takes cheap shots at the Taoiseach and the Minister for Finance and publishes highly inflammatory "The End Is Nigh" banner headlines each week.
Many of these articles are written by political writers, not economists. There is no constructive or reasoned suggestion from these commentators on how we can trade our way out of where we are.
We are fortunate that we have had very able ministers for finance in succession (Quinn, McCreevy, Cowen and Lenihan) and they are to be commended for not caving in to media pressure, particularly where vested interests are at work. (The issue of State funding for Waterford Wedgwood comes to mind).
Yes there are problems, but talking down every part of the economy every day will not do anything for us. The creation of a panic environment for homeowners, investors (small and large) and the public at large only increases our problems and prompts people into making wrong decisions.
We are in a classic Anglo-Saxon credit bubble and we have become closer to New York in thinking than to Berlin. The French and Germans are not as leveraged compared to the UK, Ireland and the US, hence, they are not suffering to the same extent. There is no big bang idea to solve the downturn in the economy. It is all about holding the head, doing the right things and instilling confidence in consumers and the economy at large.
Personal or corporate investment is as much about confidence as it is about capital. In this downturn we need leadership and there is no better way to show it than by example. If Ireland was a company, the CEO would be gathering all their key managers together to rework the plan to boost revenues and reduce costs.
I believe that Brian Cowen has the ability and the team to inspire this confidence but they must be seen to take charge and be decisive:
• Every Cabinet Minister should be back at his desk on Monday, September 1st;
• All Cabinet Ministers should be involved in selling Ireland, be it in trade, agriculture, tourism and so on;
• There should be a 12-month pay freeze for the Cabinet and senior civil servants to show example;
• Agreement to reduce public expenditure by 5 per cent.
In the part of our economy devoted to property, the question is, are we in denial? Many of the people who have bought homes in the last two years or more are under water on their investment. The value of these homes won't stabilise and start to rise until first-time buyers get the confidence to start to buy houses again.
People who have invested money in property funds (Irish and overseas) can't cash in their units. This will be compounded later in the year when fund managers will have no option but to sell assets to create liquidity, so that they have money available to pay the redemptions.
All of us are looking at our property investments and hiding behind the historical price level we paid for these assets, but, when comparable properties are sold, then we will know the value impairment that is there. Banks in particular will be the first to realise this. The big five lenders have about €100 billion lent on commercial property. You can do the sums and percentages and see the pluses and minuses.
The key here is to try and ride it out, ie keep mortgages current. There is a strong moral code in Ireland of paying your debts, whereas in the US, homeowners and commercial property owners have been throwing the keys in like at a swingers' party. The number of new houses being completed this year is drastically down, ie 40,000-45,000 from 77,000, and it is very likely that because of this there could be a shortage of houses within a few years.
Fashion retailers, car dealers and service providers have seen a 15-20 per cent drop in sales, but it has been like Klondike for the last five years. Year on year, it's bad, but year on three years it looks good. Also, we all know that most businesses, because of their success, have become lax about their overhead structures.
New everything has been the order of the day - new offices, shops, factories, equipment and staffing levels. Now everybody is trying to get euro out of the consumer and it has become extremely competitive. People in the short-term will have to forgo some margin to get volume. For a long time, we have seen a drop in the standards of service: this new competition for sales will change that. This is a positive.
The significant positive is that government debt is only 25 per cent of GDP. Therefore, the State has a huge capacity to play a most important role. I would advocate expanding the role of the Housing Finance Agency (HFA) and this could be overseen by the National Treasury Management Agency (NTMA). The HFA could be expanded and its criteria for funding home ownership dramatically changed. Effectively, right now, a bank looking to make a mortgage would want a margin of up to 250 basis points over Euribor (three months/4.9 per cent) to make a home loan. [Euribor, the Euro Interbank Offered Rate, is the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to another prime.]
The HFA can raise money at a tenth of this margin. By reducing the cost of mortgages, then a lot of unsold housing stock becomes a lot more affordable to first-time buyers.
By reducing the cost of mortgages to circa 5 per cent to first-time buyers, this would, in turn, provide liquidity for developers and things would begin to move again, (albeit more slowly). It would also have a big impact on trade-up homes. It must be realised that the housing market is one market and that trading up and down are as important to the liquidity of the sector as the first-time buyer.
The crunch now is that with loan-to-value ratios retreating to 70 per cent, stamp duty will have to be overhauled as buyers have to fund more equity.
Rightly, the Government is trying to reduce public expenditure. Two weeks ago I met the Latvian prime minister who said his government was reducing its budget by 6 per cent. Obviously, this is drastic, but I believe 5 per cent could be achieved in Ireland, similar to what is happening to overheads in the private sector. Contrast this with the fact that public expenditure increased by 25 per cent in the two years to June 2007. In 1987, Ray MacSharry cut spending by 10 per cent. There is also an opportunity to review businesses that the State controls which could be privatised, ie the ESB, Dublin Port and other ports around the country, CIÉ in its entirety, Bord Gáis, Coillte, VHI, the Dublin Airport Authority and the RTÉ network assets.
There is €8 to €12 billion of value in those combined assets alone to be unlocked. These proceeds could be recycled into new long-term State capital programmes within the National Development Plan. If these businesses are sold, employees should be given share options rather than an Esot [Employee Share Ownership Trust] option.
Within Government there is growing concern about the number of quangos that have been created, their annual costs and duplication. We have hundreds of quangos and this number should be reduced by at least two-thirds.
In the health sector successful individuals with international expertise and experience of large-scale organisations should be encouraged to become part-time executive chairmen of public hospitals by the Health Service Executive (HSE). People like Dermot Desmond, Seán Fitzpatrick, Liam O'Mahony, Philip Lynch, Jim Barry, Bernard McNamara, Ann Heraty and Leslie Buckley would bring a new dimension of expertise to this sector.
There are some signs that the HSE is making progress but only radical further management initiatives will overhaul the system. Gerry Robinson's example in introducing private sector disciplines to the UK public health service is the model and could make a major impact.
Vested interests have to be tackled and work practices need to be changed. People will argue that providing a health service is a complex organisational challenge but service and manufacturing businesses are equally complex. If you took Seán Corkery and four of the other senior managers out of Dell in Limerick and asked them to organise two or three hospitals in the Limerick region they would do it in jig time and this would be to the benefit of the people living in the southwest.
It is a fact that in the private sector, businesses are run more efficiently and capital projects do not go over budget. When Michael Smurfit was building box plants in the 1990s they were all built on time and on budget. Any deviation upwards on costs would see heads rolling.
Unfortunately in the State sector, this has become the norm. In future, successful private sector executives should be invited to oversee all medium and large scale Government-funded capital projects to ensure they are delivered within budget and on time. Major road building projects should be constructed on a 24-hour basis to accelerate completion.
The view that the funding of the National Development Plan is of paramount importance, particularly in infrastructure, is shared by many.
The key twin objective should be:
To continue to attract sustainable foreign direct investment; and
To expand and grow export opportunities for Irish companies, both goods and services.
To achieve this, a range of long-term initiatives including the following need to be embarked upon:
A radical overhaul of the Leaving Certificate curriculum with an increased focus on those skill sets that will be required for Ireland's future economic growth. In this regard, a review of subjects and options for students should be undertaken involving interests external to the Department of Education - eg the IDA should have a major say in this.
Concentration of funding on one or two of our universities with a serious amount of research money dedicated to the creation of world-class facilities. Peter Sutherland is 100 per cent correct in this. There has been a race to increase the number of third-level institutions in the last 15 years and while that was worthwhile, the focus now needs to be on one or two fourth-level institutions that could make their way into the world's top 25 universities list over the next two decades. Batt O'Keeffe was brave this week the way he opened up the debate on third-level fees. This is a welcome development.
Continued focus by the Department of Foreign Affairs in securing increased investment for Ireland by our embassies and opening doors for the IDA, Enterprise Ireland and private companies.
The Department of Foreign Affairs has achieved considerable success in this area and they should be asked to spearhead this enhanced drive. My own businesses overseas have benefited from the expertise of officials from the Department of Foreign Affairs. Having attended receptions hosted by Irish ministers, ambassadors and high-level civil servants, they really perform when selling Ireland overseas. People at home do not realise how good they are on the stump.
The Government should invest in a new long-haul corporate aircraft and several short-haul aircraft to ensure that the drive to increase foreign investment and grow exports can be achieved cost-effectively and as expeditiously as possible.
Buying a new plane will be a one-day wonder for the media. We need the Cabinet on the road selling. Political point-scoring in the Dáil over the use of the aircraft amount to just cheap shots.
Over the last 10 years, a considerable amount of investment has been allocated to the disability sector by the Government. There is one last piece of fresh thinking needed and that is for the provision of funding for applied behaviour analysis (ABA) professionals across the country.
Implementing this would ensure that every child obtains the necessary professional expertise, thus enabling them to reach their maximum potential. Taking action early when a child has autism will save vast amounts of Government money downstream and improve quality of life at an early stage.
It would appear that there exists a consensus on protecting the vulnerable and the lower paid in current circumstances. It is evident also that to chase inflation by seeking inflationary pay increases will return us to the same economic predicament that existed 20 years ago, when the social partnership model commenced and eased the crisis. A lower than inflation pay increase over the next two years would protect jobs and assist in maintaining living standards.
As I said at the beginning, there is no big bang idea to solve the downturn but we should remember that this is not 1987. We now in 2008 have a terrifically well-educated, entrepreneurial and young population.
I see this every day in our own businesses in Ireland and overseas. The young men and woman who work with us are truly inspirational.
There will be short-term pain because of cuts in expenditure which will impact the overall economy, but these young people will bring Ireland through these times.
Our political leaders must give them reassurances and reinforce their self-belief, I think they will.
• Denis O'Brien is chairman of Digicel, the mobile phone service provider in the Caribbean, Central America and the south Pacific, the founder of Communicorp Group which owns radio stations in Ireland and across Europe, and is also a major shareholder in Independent News and Media
• Series concluded