IFSC faces ‘radical rethink’ as effects of crash become clear

Global financial crisis place financial services centre at a crossroads

 

It started in the 1980s as an idea promoted by financier Dermot Desmond and came to life through tax breaks and legislation enacted by former taoiseach Charles Haughey.

Since 1987, the International Financial Services Centre has been one of the success stories of the Irish economy over the past quarter of a century and was a key plank in modernising the economy and attracting high-end foreign direct investment.

It contributes more than €2 billion to the exchequer each year and employs about 32,000.

But the global financial crash in 2008 and other factors have inevitably affected the IFSC and placed it at a crossroads in terms of its future development.

This is highlighted in an internal position paper produced by the Department of Finance last year by Neil Ryan, a former banker who is now assistant secretary in the department and who was seconded to Irish Bank Resolution Corporation for a period. It highlights the challenges facing the IFSC and makes eight proposals that could help it grow.

The document has been seen by The Irish Times and states that the IFSC’s “offering” needs a “radical re-think”.


Crash
While the IFSC remains an “important” part of the financial landscape here, the global crash in the sector has resulted in some companies winding down their operations and others shedding jobs.

This has resulted in a lower corporation tax take and it is “unlikely that new capital will be invested in the banks”, according to the document.

It said the IFSC was becoming more reliant on a “small number of banks for the bulk of the jobs”.

Middle- and back-office operations are maintaining their position but “offer lower wages [and therefore lower tax take] to the exchequer”.

According to the document, the contribution from each banking job in the IFSC is roughly the equivalent of two jobs in each of the other activities carried out in the centre.

According to an FSI Accenture report from September 2010, the annual payroll generated by banking activities in the IFSC amounted at the time to €738.8 million out of a total of €1.966 billion for the centre as a whole. In the two years up to the publication of the position paper, 186 jobs had been lost at IFSC companies while another 409 were in companies in some form of wind-down, including DePfa, Dexia, DZ Bank and EAA Bank.

The document said the trend of banks in wind-down mode was “unlikely to be staunched in the short term”.

It also noted the challenge posed by moves towards tax harmonisation in Europe and the “potential tightening of US tax rules”.

Ryan’s paper makes eight proposals, including “relaunching the IFSC brand” along product lines – global asset finance, a global servicing platform and a global listing platform.

It suggests a “comprehensive review” of rival centres with the assistance of a number of bodies, including the IDA and the Clearing House Group, a steering committee comprising representatives from various parties involved in the IFSC that operates under the auspices of the Department of the Taoiseach.

The document recommends the creation of a JobsHub to allow firms seeking staff to “find people quickly and cost effectively”.

Better marketing is another proposed plank of the strategy, with a single website bringing together the activities of the various agencies, departments and other bodies trying to sell the IFSC as a location for investment.

It said one way to achieve this would be to “draw” in existing IFSC companies as “ambassadors” for the centre.

In addition, it is suggested that the larger players in the IFSC are targeted with a view to attracting more of their operations – “increasing the size of the pie” is how it is described.

“Some are working already such as Cantor [Fitzgerald] and Bank of New York without help but we need to harness these positive developments to see if there is more,” the document states.

It also highlights the potential to develop our own indigenous activities by co-investing in new funds to allow start-ups for those “with ambition to build small, niche financial services businesses in Ireland, using the NPRF [National Pension Reserve Fund] and other NTMA funds”.

It cites Singapore as an example of a successful co-investment strategy by a State.

This process has being acted upon to some degree following the Government’s recent decision to change the NPRF’s focus away from pensions and towards being a strategic investment fund for the State to help stimulate economic activity.

In terms of the banking model, Ryan suggested there might be legs to supporting “bad bank” models for managing distressed assets.

Significant expertise has been developed in the past few years at the National Asset Management Agency.

Certus, an Irish company formed by former employees of Bank of Scotland (Ireland) initially to manage that bank’s withdrawal from this market over a period of time, believes its offering can travel to the UK and other European markets, where banks and other institutions are working through large portfolios of problem loans.

A spokesman for the Department of Finance said the position paper was drafted to inform senior management – secretary general John Moran and the second secretary in the finance services division Ann Nolan – about the challenges and opportunities at the IFSC.

In spite of its name, responsibility for the IFSC actually falls into the orbit of the Department of the Taoiseach, a legacy no doubt of Charlie Haughey’s close involvement in its establishment a quarter of a century ago.


Property centre
Minutes from the January meeting of the Clearing House Group show that Moran spoke of the possibility of Ireland being developed as a global centre of excellence for property.

Moran sought the views of the group on the feasibility of the IFSC playing a role in the financing part of what might become known as the IPSC – presumably this stands for Irish Property Services Centre.

Given the depth and scale of the property crash here since 2008, it would be somewhat ironic if the country was to become a major hub for property services.

At the March meeting of the group, IDA chief executive Barry O’Leary and his colleague Kieran Donoghue suggested that Ireland could take advantage of lower property prices, construction costs and State ownership via Nama to create a “next-generation IFSC” in the docklands area of Dublin with the development of “signature buildings”.

Such a district would send a strong signal about recovery and Ireland’s intention to regain its status as a viable and growing European economy, the IDA officials told the group.

They also suggested building on our capability in aircraft leasing, possibly by developing Shannon Airport as a specialist centre for aviation-related activities.

Given that Ryan’s position paper was prepared some months ago, what progress has been made to grow the IFSC in the interim?

The IDA said that between January 2011 and June of this year it had won more than 70 investments that will bring 7,300 jobs into the international financial services sector.

“A significant proportion of these have gone to the IFSC,” a statement from the State agency added.

“It is also worth bearing in mind that the IFSC, like other international financial hubs, has been impacted by the global financial crisis.

“Despite this, the centre is growing again and has recovered any employment losses it suffered during the crisis.This is a commendable achievement.”

In relation to the Government’s stated strategy to create 10,000 new jobs by 2016 in the IFSC, the IDA said it is “on track” to achieve this target.

“Like other financial centres, the IFSC will inevitably evolve and change over time. It does, however, remain an integral part of Ireland’s offering to win investment and jobs from the industry on a global basis,” the IDA added.