International
Tuesday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Aug 14, 2007, 06:11

Yesterday morning, ISME called on the Government to revamp the public sector tendering system because it was "biased" against small businesses.

The group's chief executive, Mark Fielding, added his members should be getting at least half of the tenders, since they made up about half of the country's economy. However, a spokesman for the Department of Finance then told the Irish Independent that small businesses were already getting "over 50pc" of public service tenders.

Mr Fielding later rejected the figure.

"I doubt if those figures are accurate," he said.

"I wonder where they're getting those figures from, because they weren't able to give the figures to us when we asked, so it looks like this is just something they've said off the top of their head."

Mr Fielding said that ISME's research found that 30pc of small businesses had decided against applying for public sector business because the application process was too complex and demanding.

Businesses are also concerned at agencies' decisions to bundle several contracts together, therefore putting the projects out of reach of smaller companies, Mr Fielding said.

"There seems to be a concerted effort across the board to make it as difficult as possible for SMEs to tender for public contracts," he added.

However, the spokesman for the Department of Finance said that the department is "anxious to see greater involvement by SMEs and also small and micro enterprises in public sector procurement". Meanwhile, Mr Fielding said that the bias against small business could be detrimental for the taxpayers, as the competitive field becomes whittled down to a few larger players. He added that a drastic overhaul of the tendering process was needed. Key points in the proposed overhaul include making the language in tender documents "jargon-free and understandable" as well as making sure the tendering process is "appropriate to the size and complexity of a tender".

ISME wrote to the public procurement section of the Department of Finance in June calling for this review; Mr Fielding said he had yet to receive any feedback on the matter.

The Irish Independent also reports that ICI's fall into foreign hands marks a dramatic decline in the status of a company once seen as the bellwether of British industry.

For many, Imperial Chemical Industries was more than a company. It was an institution, counting Nobel Prize winners amongst its scientists and responsible for advertising icons such as the Dulux paint sheepdog.

In 1984, ICI became the first British company to post more than £1bn in full-year pre-tax profits under the chairmanship of Sir John Harvey-Jones, who later found television fame as a business trouble-shooter.

But following repeated overtures from Dutch suitor Akzo Nobel, ICI now faces a similar fate to Hanson, the former conglomerate bought for £8bn by German firm HeidelbergCement earlier this year.

ICI was first formed in 1926, from the merger of four British chemical companies to challenge the rest of the world's producers.

ICI, which reported profits of £4.5m in its first year of trading, would at its peak be a global giant spanning plastics, chemicals, pharmaceuticals, paints and fibres, employing around 110,000 people in the UK.

The company has been behind revolutionary advances. Following a laboratory accident in 1933, its scientists created polythene, the first plastic - now used in items ranging from food wrapping to squeezy bottles.

Another famous name was soon to follow with the development of perspex, first used in windscreens for cars and aircraft.

But following the recession of the early 1990s, the group overhauled its strategy.

The Irish Times reports that nearly 500 pilots at Aer Lingus are to stage a 48-hour strike next Tuesday and Wednesday in protest at what they said were moves by the airline to employ pilots at its new base in Belfast on less favourable terms and conditions than those applying to staff in Dublin.

The pilots, who are members of the Irish Airline Pilots' Association (Ialpa) branch of the trade union Impact, are understood to be considering further industrial action if the dispute is not resolved.

Impact said last night it had been informed by the company that it did not intend to honour existing collective agreements for new pilots to be based in Belfast.

Assistant general secretary of the union Michael Landers said it had been informed by the airline that the new pilots would not be given access to the company pension scheme. Impact also believed that the basic pay on offer in Belfast would be lower than the existing rate for pilots.

Mr Landers said collective agreements currently in place, which the company did not intend to honour for the Belfast base, covered issues such as days off and rest period between flying duties.

The planned strike next week was covered by a ballot held in June which allowed for industrial action in the event of the company seeking unilaterally to change pilots' pay and conditions, he added.

In a strong reaction last night, Aer Lingus said it was "angry and disappointed that pilots would choose to attack customers in an act of self-centred brinkmanship".

A spokesman said the recruitment of new staff at local rates had always been a fundamental element of the plan to establish new bases outside the Republic of Ireland.

The airline also warned that passengers were likely to face disruption to services next week and said management was working on alternative arrangements and contingencies.

Advertisements for pilots to be based in Belfast were placed on the Aer Lingus website yesterday. They did not set out the terms and conditions on offer.

Speaking after a meeting of pilots at Dublin airport last night, Ialpa president Capt Evan Cullen said the move by Aer Lingus was a flagrant breach of its collective agreements and of solemn commitments made by the airline to its employees in advance of last year's stock market flotation.

"We are not going to allow Aer Lingus treat its Belfast-based pilots as second-class citizens who can be paid less and treated worse than their colleagues in Dublin.

"Aer Lingus has freely entered into collective agreements that cover all pilots employed by the airline and we just want the company to honour its commitments," he said.

Aer Lingus said it had been in negotiations with pilots for some time on a range of efficiencies that were essential to maintain the competitiveness of the business.

"Earlier this year both the Labour Court and the related Flynn report recommended that the company be allowed open new bases outside the Republic of Ireland on local pay and conditions.

"In calling this strike action, the pilots are directly ignoring those recommendations. This cynical attempt to use a new base as a veto on essential progress towards competitiveness is unacceptable and is deeply regrettable given the need to grow the company as an independent force in the market," the airline said.

It advised customers seeking information about the impact of the dispute to call 0818-365044. "Aer Lingus will offer free change of flight details or a free refund for customers should they desire it," the airline said.

The biggest trade union in Northern Ireland, Unite, also responded angrily to Aer Lingus's plans. The union's regional secretary for Ireland, Jimmy Kelly, said it would not tolerate Aer Lingus "parachuting into Belfast" and using workers' wages and conditions in the drive to push down costs.

The Irish Times also reports that European shares posted their largest one-day rise in 15 months yesterday, recovering some of last week's losses as further injections of cash by the European Central Bank (ECB) helped calm investors' nerves.

In contrast to events on Friday, financial stocks were the top-performing sector on the European equities market yesterday, with Royal Bank of Scotland, HSBC and Barclays all among the top weighted gainers on the FTSEurofirst 300, pushing the broader European banking sector up 2.5 per cent.

This positive sentiment flowed through to the Irish banks, which also put in a strong performance and helped to push the Iseq index of Irish shares up 2 per cent on the day.

Anglo Irish was particularly in demand with almost six million shares changing hands as the stock jumped 4.9 per cent, to end the day at €14.05. While the other banks were slightly quieter, they still fared well, with Bank of Ireland added 3.8 per cent and AIB gaining 4.4 per cent.

Elsewhere the FTSEurofirst 300 index of top European shares had its largest daily percentage gain since May 2006, closing up 2.3 per cent. This followed a decline of 3 per cent on Friday when it had its worst one-day slide in over four years.

In the UK, the FTSE 100 ended 3 per cent higher, while in France the CAC 40 gained 2.2 per cent. Germany's DAX was also healthy, closing up 1.8 per cent.

"It's going to be volatile, as credit markets sort themselves out, but we believe that the underlying strength of the global economy and attractive global equity valuations will stop markets short of meltdown," said Tim Harris, markets strategist at JPMorgan Private Bank.

The FTSEurofirst 300 is up 1.7 per cent so far this year, having briefly wiped out all of this year's gains on Friday, but is still nearly 8 per cent down from this year's peak.

A host of central banks pumped yet more cash into the banking system yesterday after doing the same last week to support the financial markets amid extremely volatile share prices.

The ECB injected €47.67 billion into money markets, following the €61.05 billion it had provided to money markets on Friday. It also pledged to keep on supporting the markets.

"The ECB notes that money market conditions are normalising and that the supply of aggregate liquidity is ample," the ECB said in a statement.

"With this fine-tuning operation, the ECB is further supporting the normalisation of conditions in the money market."

Separately, the Federal Reserve injected some $2 billion (€1.47 billion) into the money markets while the Japanese central bank, the Bank of Japan, injected Y600 billion (€3.7 billion) into its system.

Traders said that the more positive sentiment yesterday showed the banks had made the right decision following revelations that a number of financial institutions outside of the US had exposure to the sub-prime mortgage market.

The sub-prime market sees homeloans being advanced to customers with poor credit histories.

The rollercoaster ride that saw billions wiped off the value of shares around the world last week stemmed from worries that problems in this market had started to spread to other jurisdictions. Still, while things did look much better yesterday, traders were quick to point out that investors still remained cautious.

Shares in Germany's Postbank fell nearly 1 per cent after the bank said it had taken on to its own books €600 million in exposure to two investment vehicles which have been run by crisis-hit German peer IKB.

Closer to home, Ryanair lost 2.3 per cent as the recent sharp falls in share values deterred investors from buying contracts for difference, a trading mechanism that becomes increasingly risky in declining markets

The Irish Examiner reports that as the 5pm deadline of next Friday draws near there are no signs that the two contenders to buy car ferries group ICG are attempting to hammer out a deal.

Last week independent directors called on the two sides, Moonduster and Aella, to find a resolution to the takeover impasse.

Each has enough votes to block the other’s bid and so the process is grounded in a stalemate with neither side prepared to give ground.

Each has offered €22 per share to buy the business, valuing it at €561m.

Aella, led by Eamonn Rothwell, initiated the bidding when he offered €18.50 to take the company private under a management buy out.

Moonduster, the takeover vehicle of One 51, led by businessman Philip Lynch and Doyle Shipping of Cork, topped that bid with an offer of €22 per share which Aella then matched.

Property tycoon Liam Carroll then muddied the waters further by building a 17.64% stake in the group, converted into ordinary shares in the company.

At his stage Moonduster holds 20.38% of ICG and Aella 19.14% of the group’s equity.

Mr Carroll recently attempted to buy out Moonduster’s stake in the business but was emphatically rejected.

He has his eye on the substantial 33 acres of land, regarded as prime development land, if Dublin Port is moved further out the harbour.

That could be a 15 to 20-year play but Mr Carroll looks prepared to take the longer view.

Last week Mr Lynch said, following his group’s annual general meeting, that he was happy to take a 15 to 20 year view on this project as well.

He said One51’s joint venture with Dublin Port in Greenore in Co Louth and Doyle Shipping’s long tradition in stevedoring and port activities made ICG “core” to both group’s long term interests, he said.

Mr Rothwell, who floated ICG in 1988, is believed to be in no mood for compromise and some believe the deadline will pass without resolution when both sides will be then prevented from making a new bid for the group for the next 12 months, under Stock Exchange rules.

In that even Mr Carroll could attempt to woo either side with a bigger offer than the €22 per share currently on the table.

The Financial Times reports that the prospect of Germany’s first all-out rail strike may have faded but the boldness of a rebel union’s challenge to the management of the state-owned operator Deutsche Bahn has underlined the rise of the country’s militant splinter unions.

The rise of GDL, the engine drivers’ union, which represents only 6 per cent of Deutsche Bahn’s employees and yet threatened Germany’s most bitter labour conflict in years, is part of the broader trend towards more decentralised wage negotiations in the country.

For decades, Germany’s trade unions, set up after the war along industry lines, have sat down with the relevant business federations at regular, highly scripted gatherings to hammer out deals that set pay and working conditions for entire sectors of the economy.

But since 1996, the number of employees covered by these “blanket tariff agreements” has sunk rapidly. Statistics from the Federal Labour Agency’s research institute show only 34 per cent of all companies and 56 per cent of workers are now subject to such deals. While companies have been leaving the business federations in droves in order to negotiate deals with their own works councils, trade unions have seen their membership steadily eroded.

Partly in reaction, unions have changed tactics, accepting low or no wage increases in return for job guarantees. Escape clauses giving individual businesses some latitude to diverge from the headline agreements also became standard in blanket wage deals.

The result was 10 years of real income stagnation. For economists, wage moderation was key to the radical restructuring German companies undertook in the period to recoup the competitiveness lost in earlier decades. But it caused frustration among workers and it is now boiling over as the economy powers ahead.

“We have a situation where despite strong unions, wage agreements are no longer working,” says Gerhard Bosch, trade union expert at the Institute for Labour and Technology. “Groupings that represent special interests are aware of this, they observe the trend towards decentralisation and see a chance to challenge this wage stagnation.”

Smaller and more militant unions, such as Cockpit, which represents 8,200 airline pilots and is now striking for a 6 per cent pay rise at LTU airline, are the main beneficiaries.

Seen in this light, the support the free-market Free Democrat party offered last week to GDL’s eye-popping demands makes sense. The FDP sees rebel unions as a weapon against blanket wage agreements and the Tarifeinheit, a legal principle which states that different wage agreements cannot co-exist within one company.

It also explains the lukewarm, occasionally hostile, reaction of mainstream trade unions, whose power lies in their ability to dictate pay for large parts of the economy.

Some people close to business, however, warn against encouraging a trend that could backfire. “The problem with splinter unions is that they represent those workers with the highest potential to inflict damages by striking,” says Thomas Ubber, the partner at Lovells LLP law firm who represents DB.

The result, he says, will be not just a widening of Germany’s flat pay structure – the difference between a company’s lowest and highest earners – but “a situation as in pre-Thatcher Britain, when unions in the same companies competed against each other for the most ridiculous demands”.

The FT also reports that North Americans are turning their backs on the UK as the strong pound and weak dollar persuade them to choose cheaper holiday destinations, official figures showed on Monday.

Total visitor numbers to the UK were down 3 per cent to 8.1m in the three months to June compared with the previous quarter, while the amount they spent was also down 3 per cent to £3.9bn.

But the main concern is the fall in visitor numbers from the US and Canada – down 6 per cent on the same period last year, following a 4 per cent year-on-year drop in the first quarter of 2007.

Tour operators and analysts cite “Heathrow hassle” and the increase in air passenger duty as contributors to the fall.

But the dollar’s weakness against sterling has had the biggest impact. The pound has been hovering close to the $2 mark since the end of last year and broke the psychological barrier in April. Elliott Frisby of Visit Britain, the national tourism agency, said: “We do think the exchange rate is biting now.”

American tourists are by far the biggest spenders and the focus of much of travel agencies’ marketing budgets.

Agencies had been battling to restore the number of US tourists to pre-9/11 levels with some success. In 2006 there were double digit increases from the US and Canada, as North Americans rekindled interest in the UK as a tourist destination. But the past six months of data show North American visitor numbers going into decline, the first since September 2005.

Mr Frisby said US tourists were attracted by new and emerging destinations, particularly in Latin America, which offers them better value for their dollar and a “brag” factor that traditional destinations lack.

Stephen Dowd, chief executive on UK Inbound, which represents incoming tour operators, said the decline in North American visitors would continue until at least the end of the year. It recorded the lowest increase in visitor numbers for a year in June and a significant drop in forward bookings.

While the weak dollar was the main cause of the decision to stay away, it was compounded by the government doubling air passenger duty, distortions in visa requirements and Heathrow’s continuing bad image abroad, Mr Dowd added.

“We could lose our position as one of the primary destinations in the world. That would be serious, not just for the people who work in the tourism industry, but for the economy,” he said.

The scenes of last summer’s chaos at Heathrow had left their mark on the US, Mr Dowd said. “I have got messages from people who are appalled by it. One thing travellers will not tolerate is incompetence.”

Tim Helliwell, head of hotel finance at Barclays business banking, said. “The strength of the dollar appears to be having an increasing impact on US tourists, with consecutive falls in the first two quarters of this year.”

But he added that high occupancy and revenue rates in the hotels market meant that hoteliers would not be unduly worried. London occupancy rates are booming, driven by the limited supply and the attraction of London to European visitors.

Nevertheless, the decline in spending by all tourists – the first since June 2003 – could mean that “operators may find it difficult to continue to sustain rate-driven growth”, he said.

James Bidwell of the Visit London tourism agency said the figures were not surprising given the weakened US dollar: “However, the US remains London’s largest market and we’re seeing growth in visitor numbers from emerging markets.”

The strength of the pound against the dollar helped to increase UK trips to the US by 2 per cent in the year to July. But UK residents’ visits abroad were down 4 per cent in the three months to July compared with the previous three months.

Visitor numbers from “New Europe” – the European Union’s 12 newest members – were up 13 per cent in the three months to July, contrasting with a 2 per cent fall in visits from the 15 older member states.

The New York Times reports that The Blackstone Group, the private equity firm, said yesterday that second-quarter net income more than tripled over the period a year ago, as it made its first earnings announcement as a public company.

Revenue growth was strong across all four sectors of the firm, especially the core private equity and real estate units. But Blackstone acknowledged that the freeze in the credit markets could drag on earnings.

Blackstone reported net income of $774.4 million for the three months that ended June 30, compared with $224.1 million in the period a year ago. It reported revenue of $975.3 million for the quarter.

The private equity unit reported revenue of $426.1 million for the quarter, up from $125.6 million a year ago. Its real estate unit, which made some of the biggest deals of the last year, including Equity Office Properties Trust and Hilton Hotels, reported revenue of $320.2 million, up from $92 million in the period a year ago.

But both divisions may feel the fallout from the deteriorating debt markets. Investors have started to balk at the high-yield loans and bonds at the heart of leveraged buyouts, and banks have recently stopped committing financing for future deals.

During a conference call yesterday morning, Blackstone’s president, Hamilton E. James, acknowledged that the new environment could affect future profits. Blockbuster deals like those for Equity Office will be few and far between for now.

“In this environment today,” Mr. James said, “we’re not going to see lot of megadeals.”

But Blackstone is also shoring up other investment alternatives, including taking stakes in Chinese and Indian companies and buying buyout-related loans from banks at a discount, Mr. James said.

Even internal discussions within Blackstone on when the credit markets would stabilize have produced answers “as clear as mud,” he said.

Rival firms have also acknowledged the new credit landscape. In amending its registration for an initial public offering yesterday, Kohlberg Kravis Roberts said that if current market conditions persist, the firm will have to turn to alternative sources of financing for deals. That “may adversely impact” its returns, the company said.

Blackstone, led by Stephen A. Schwarzman, went public in June amid much fanfare. But its share price has since slid from a high of $38 to as low as $22.76. It has spent most of its time on the markets below the offering price of $31, making it one of the worst initial public offerings of the year.

Shares closed yesterday at $25.71, up 1.7 percent.

Even before it went public, Blackstone drew scrutiny as legislators began introducing bills aimed at more than doubling the tax rates that private equity firms pay on the bulk of their income. One piece of legislation has even been called the Blackstone bill or the birthday party bill, after Mr. Schwarzman’s $5 million celebration in Manhattan in February.

Without prompting, Mr. James carved out time during the conference call to address the tax issue specifically. “There’s considerable opposition to those bills in Congress,” he said. “No consensus has emerged.”

The NYT also reports that the rest of Europe may be deep into its annual summer idyll, but the European Central Bank has been a hive of activity since last Thursday, when it thrust itself into a market rattled by fears of a credit crisis.

On Monday, the bank injected 47.7 billion euros ($65 billion) into the financial system to keep European money markets from drying up. It was the third emergency operation in three business days, starting with a bold injection of 94.8 billion euros ($129 billion) on Thursday morning.

The moves have put a spotlight on the European Central Bank, which has traditionally played a supporting role to the United States Federal Reserve during global financial crises. This time, the Europeans acted earlier, and on a far larger scale, than the Fed or their Asian counterparts.

Some market commentators have accused the bank of panicking, saying its intervention could send the wrong signal to hedge funds or other institutions engaged in high-wire investing: Namely, that they should expect a monetary safety net. Still, the remedy seems to have worked, at least for now, preventing the problems in the United States mortgage-lending market from draining broader markets in Europe. In a statement issued with its latest tender offer on Monday, the European Central Bank said “money market conditions are normalizing” and that the “supply of aggregate liquidity is ample.”

The Federal Reserve and the central banks of Japan and Australia also injected funds into the market.

Several economists who follow the European bank said it had little choice but to respond on a huge scale after it became clear early on Thursday that banks in Europe were unable to obtain credit.

“If they had done less, and we had a systemic crisis, they would have been blamed for it,” said Erik F. Nielsen, the chief European economist at Goldman Sachs in London.

To some extent, the bank’s central role was dictated by the clock. The crisis in confidence reached a critical stage in Europe on Thursday morning, hours before the markets opened in the United States.

The first players to feel the credit squeeze were European banks, seeking to borrow in dollars. The lack of liquidity drove the overnight borrowing rate to 4.6 percent, well above the bank’s benchmark rate of 4 percent.

For days, European investors had been unnerved by disclosures that banks and investment funds faced losses because of exposure to mortgage-related investments. Then, the announcement by BNP Paribas on Thursday that it would suspend operations of three funds tipped the market into chaos.

“The problem is, these funds looked like normal euro money market funds,” said Thomas Mayer, the chief European economist at Deutsche Bank. “That led to a loss of trust in the market.”

Like the Fed, the European bank is in daily contact with commercial banks. Through these contacts, central bankers became aware of the deepening market distress. Some observers, including Mr. Nielsen, suspect the bank’s top leaders were also warned about the crisis directly by their commercial bank peers.

The decision to intervene was made by the bank’s executive board, a six-member committee headed by Jean-Claude Trichet. Bank officials said Mr. Trichet has been closely involved in the recent operations.

In a sign of their success, the bank’s moves quickly brought the overnight borrowing rate back to 4 percent.

“It looks like a very successful operation to stabilize the money market,” Mr. Mayer said. “The Fed has had slightly more trouble. On Thursday, they injected too little, and on Friday, they overcompensated.”

After the European bank’s initial injection of 94.8 billion euros at a rate of 4 percent — its first such intervention since the aftermath of Sept. 11, 2001 — the subsequent tenders on Friday and Monday represent a type of mopping up, Mr. Nielsen said.

The bank is essentially rolling over a portion of the loans it issued on Thursday. The fact that it is injecting less money each day indicates that it is gradually withdrawing from the market.

The big question now is whether the bank will adjust its monetary policy to account for the market mayhem. After its last policy meeting on Aug. 2, when the crisis appeared less threatening, Mr. Trichet signaled that the bank would raise rates by a quarter-point, to 4.25 percent, in September.

Whether the bank opts to delay that increase will depend on whether markets calm down. On Monday, most European markets were up more than 2 percent. The Bank of England, in its first statement since the crisis began, said it did not plan to inject additional funds into the system, though it would lend funds at an interest rate above its benchmark.

“The climate of distrust could blow over with proper central bank action,” Mr. Mayer of Deutsche Bank said. “What will remain is a more sober calculation of credit risk. When a credit bubble deflates, you hit hard bumps.”

Mr. Mayer doubted the mortgage-related problems would, by themselves, undermine Europe’s robust economic performance. Deutsche Bank projects Europe’s economy will grow 2.8 percent in 2007, easily outstripping that of the United States, projected to grow 2 percent.

But he says a sharp slowdown in the United States would affect Europe, contrary to recent conventional wisdom.

“The good news is that real estate markets do not affect each other” directly, Mr. Mayer said. The bad news is, “as real estate financing tightens up, it affects all real estate markets, not just in the United States.”