Monday 19 February 2018

Coke and smokes to fund new giveaways by Government

Breon Corcoran isn't wasting any time in extracting cost savings at Paddy Power Betfair Photo: Adeline Pericart/Photocall Ireland
Breon Corcoran isn't wasting any time in extracting cost savings at Paddy Power Betfair Photo: Adeline Pericart/Photocall Ireland
Richard Curran

Richard Curran

It is called a 'New Partnership Government For A Fairer Ireland'. If the policy programme of this new Government delivers everything it says on the tin, you could argue that it will be a fairer outcome for many people.

But even if politics can be very complex, economics is actually a lot more straightforward. The new programme is very weighted and specific on the expenditure side, but with very little to say about the revenue side of the Exchequer's finances in the coming years.

There are promises there on additional spending on health, tackling disability, child development, more gardai, care services, public sector pay, suspension of water charges and a whole lot more.

Other measures that will have an Exchequer cost include not indexing inflation personal tax and credit bands.

So what will finance all of these new measures, which could run into an expected €3.1bn above commitments already made? Well, there is going to be a sugar drinks tax and an increase in tobacco taxes.

A can of Coke and a packet of fags would need to sky-rocket in price to pay for this lot.

Creating a fairer society costs money. That is a fact. The Government must either increase the money it has available through economic growth, or take money away from somewhere else to fund these things.

Apart from sugar drinks and fags, there is little sign of taking more money from others, so it appears to be taking economic growth for granted. There is hardly anything in the new programme that is specifically aimed at growing the economy, increasing jobs and supporting businesses which are needed to create those jobs.

In fact, there is very little about business in there at all.

Take AIB for example. The Government programme has just reduced the value of AIB overnight. By committing not to sell any more than 25pc of the State-owned bank before 2019, it has reduced the price it will get for the initial 25pc when it does sell.

Private investors will be willing to buy 25pc - but they will want to know very specifically what the Government's intentions are in relation to further share disposals, dividends and the creation of liquidity so they can sell their shares - and when all of this might happen.

It is no coincidence that the State-owned AIB has cut interest rates more than the privately controlled Bank of Ireland and has also offered more debt write-offs.

If a second 25pc of AIB is sold in 2020, it will have been almost a decade in state control. There is nothing wrong with that, if it was the original plan to develop a state bank. But it has not developed a long strategy, based on functioning as a state bank.

Private investors are happy to sit on a share register alongside the State, but they are reluctant to do so as minority shareholders for any length of time.

The State is valuing AIB on its books at somewhere around €14bn, about €6bn short of the €20bn in State money that went into it. The decision to hold off on privatising at least 50pc of the bank will undermine the value of the business.

In order to achieve fairness, the programme appears to commit to taking all "necessary action" to tackle exceptionally high variable mortgage rates.

This would make things a little fairer for those affected, if actually achieved, but would further reduce the value of AIB into the future for all citizens.

There is a clear message about promoting fairness, which is a good thing. But funding that fairness is riding almost exclusively on further economic growth - despite the enormous uncertainty and risk in the wider economic environment.

Issues such as Brexit, the China slowdown, global economic uncertainty and deeper problems with our Eurozone partners - from banking to economic growth - all mean that we cannot take economic growth for granted.

Yet that is exactly what this plan has done.

A new rainy day fund sets the clock back to 2001

One interesting note in the new Government plan is the plan to create a "rainy day fund".

It sounds very familiar, in that we set one up in 2001. The National Pension Reserve Fund was specifically geared towards funding future State pension requirements - a very wet rainy day that is coming.

Unfortunately it had to be raided to fund the bank bailout. What is less-known is that the value of the fund is now higher than it ever was in the past. It has assets currently valued at nearly €22bn. This includes €7.9bn controlled by the Irish Strategic Investment Fund and stakes in banks, including the €14bn valuation on AIB.

By the end of 2008, the fund had fallen in value to €16.1bn, despite the State having put €16.9bn into it. A 30pc fall in the value of its investments in 2008 due to the financial crisis put a big hole in it anyway.

The €22bn rainy day fund is still there in terms of assets, but there are two problems.

One is that we need it to help reduce our ballooned €200bn national debt. The other is that much of it is tied up in shareholdings that may or may not realise their current value. Some will come good, others may not.

So in the meantime, we will set the clock back to 2001 and start building a new fund up all over again. Sisyphus comes to mind.

Even Cheltenham can't trip Paddy Power Betfair

The Paddy Power Betfair merger is out of the gate nicely with its first quarter trading update. It seemed to get everything right - except predicting the winners at Cheltenham. Well, you can't win them all.

Cheltenham punters cost the bookmaker £20m which is not to be sniffed at. But bookmakers aren't that unhappy about headlines saying they were fleeced at Cheltenham - because it makes the punter think they have a chance over the long run.

The Cheltenham result left the merged group more or less in line with market expectations for the first quarter and brokers were pretty much sticking to their full year profit numbers.

The share price dipped slightly on the week, but over the long run the stock is still, shall we say, "heavily fancied".

The biggest long-term threat to Paddy Power Betfair growth won't be an unusual Cheltenham, but growing competition, especially online. The Revenue Commissioners said last week that under a new licensing regime put in place in Ireland last year, there are now 42 licensed remote entities operating in the Irish market - 35 remote bookmakers and eight remote betting intermediaries.

It also said the State received €8.27m in the first five months of collecting a betting tax from online gambling.

In the UK, there are 719 remote gambling activity licenses held by 427 operators.

According to Paddy Power Betfair, mobile now accounts for around 76pc of online bets. It is now the biggest bookmaker in Europe and has the fire-power to develop the best mobile offering in terms of ease of use and overall attractiveness. But at the end of the day, placing a bet is placing a bet.

Customer stickiness might not be that big when it comes to online. The big challenge for betting companies is to make sure punters know they are there. This involves a huge spend on marketing and advertising. And few companies do marketing and advertising better than Paddy Power.

Group CEO Breon Corcoran was able to update the market last week on how the merger integration is going, and he doesn't appear to be wasting any time in extracting those cost savings and synergies between the two businesses.

But he did say first quarter performance had been delivered in a very competitive market and the group's marketing and advertising spend shot up by 22pc in the first quarter to around £72m. It leaves Paddy Power Betfair spending close to £300m per year in this area.

Online revenue accounted for £135m of the £339m group total. This was up 17pc. The performance of the retail operations in both Ireland and the UK has remained resilient and the group is still adding to number of betting shops - so much for them dying out.

The Australian operation continues to grow apace but it seems, that a bit like Ireland, Australia still has a way to go in bringing its legal and regulatory framework for gambling up to date.

Sunday Indo Business

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