Cliff Taylor: AIB IPO must go ahead regardless of cash usage
State’s case to EU to loosen rules on infrastructure spending does not hinge on AIB
AIB headquarters in Ballsbridge: If the Government sells its stake too cheaply and shares rocket after the float, it will be criticised. Photograph: Bryan O’Brien
The debate on the sale of part of the State stake in AIB has got caught up in a row over how the proceeds should be used. The Government says it has no alternative under EU rules but to use the cash raised to pay down some of the national debt. Opponents of the sale say that this is crazy, at a time when we badly need to boost investment levels in houses, roads, water and so on. The Dáil even passed a motion calling for the sale to be postponed until the EU rules are changed, with Fine Gael TDs apparently so caught up in the excitement of their leadership contest that they forgot to show up.
Those calling for higher investment levels in the economy are absolutely correct. State spending on investment was slashed during the crisis, dropping from 4-5 per cent of gross domestic product GDP before the crisis to less than 2 per cent. This has left us with a huge deficit in areas such as housing, broadband, parts of the roads infrastructure and so on.
Even the Government itself concedes that it needs to increase its spending plans and promises a document shortly outlining increased capital spending to 2021. Part of this is likely to involve a push and pull with Brussels over what EU rules will and will not allow; the current rules are too restrictive for Ireland.
However, this did not provide a strong enough reason to postpone the AIB sale. If the time is right, then it is the right decision to start selling AIB shares.Opponents of the sale make the case that the €3 billion or so raised would only make a small dent in our €200 billion national debt. But every bit helps in a huge debt pile which still leaves us exposed. And floating AIB now not only raises cash, it also gives us a way to sell down further shares in the bank in the years ahead.
Central to leaving this opportunity of selling down further shares open will be the success of the IPO. And this comes down to timing and pricing. Timing is never easy. Who knows what market impact the UK election might have? With markets now strong after the French election, and Brexit risks ahead, now looks like a decent time to start the sell-off, recognising that the State will still hold not far off 75 per cent.
And then there is price. If the Government sells too cheaply and the shares rocket after the float, it will be rightly criticised. On the flip side, too high a price and a share price fall after the float would leave the big investment houses, which the Government is trying to lure in, sceptical of buying more AIB shares in future. The Government is paying its float advisers a bag of money – they need to get this right.
Then there is the debate over the proceeds. EU rules block the Government from putting this money into funding higher infrastructure spending. This is because doing so would increase borrowing – on the measure used by the EU.
Some latitude in these rules will be needed as we plan to hike investment in the years ahead. But the AIB cash is not the answer to this. Access to money is not the key problem. As well as significant ongoing cash holdings which fluctuate around €10 billion, the State has some €4.5 billion in cash or bond investments in the Irish Strategic Investment Fund – the former pension fund – and more in equities, as well as the bank shares. Right now the State can also borrow money very cheaply not only commercially, but from the European Investment Bank.
We need the Government’s revised plan to fit all these pieces together into a coherent plan – and then they can go and have the fight with Brussels, with the hit to Ireland from Brexit providing a key negotiating point. Crucially, this plan needs to focus on how we actually deliver – look at the delay in the National Children’s Hospital, the National Broadband plan and the Luas city centre link-up. It needs to make sure we avoid purely politically driven projects. And it needs to point out that, in the long term, financing investment will not all come from asset sales but will mean raising revenues through taxes or – yes – charges.
Ideally, we would be able to use at least some of the AIB proceeds to boost investment this year and next. Politically this would be welcome. But in financial terms the immediate problem is not lack of cash, it is the EU rules – and the need for a plan. There is not a strong enough case to delay the AIB sale.