In announcing its 80/20 negative equity insurance scheme, Nama management could have, but did not, provide estimates of the implicit cost of the insurance component of the package product. The cost is hidden in the package sales prices, which Nama management describe as “fair value prices” for the property. With a bit of work, it is possible to reverse-engineer the insurance-component cost from the scanty information provided by Nama.
Category: Competition policy
I have written about this before, twice, but now some more details have emerged and the Nama scheme has gone live. Nama has announced that it will providing “free” insurance against price falls for selected properties, in order to help sell its Irish residential property portfolio.
From the information provided, it seems Nama will hide the insurance premium in the recorded property sales price, thereby simultaneously distorting Nama’s published accounts, CSO property sales price statistics, and the soon-to-be-released property price sales registry.
Wonkish paragraph: Hiding the insurance premium in this way also has a knock-on effect on the “moneyness” of the embedded option. Since the actual sales price includes a hidden insurance premium, and the eventual valuation of the property (used to determine the insurance pay-out) does not include any insurance premium, the insurance scheme is immediately “in the red” as soon as the property is sold. Nama has to hope for price increases, not just the absence of decreases, in order to claw back the embedded insurance premium which is hidden in the distorted sales price. This knock-on effect can be quite substantial.
Venue: The ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2
Date: 18/04/2012
Time: 8.30 – 13.00
The fourth ESRI Renewal Conference will examine the best available domestic and international evidence relating to the need for rapid economic adjustment. Papers will address:
- What explains the apparent inflexibility of wages in the Irish labour market?
- How can competition and regulatory policies help in economic recovery?
- What does evidence tell us about designing a property tax?
Papers will be followed by a response from an expert in the field and an open Q&A session.
Programme
8.30 Registration & Refreshments
9.00 Opening remarks: Frances Ruane, Director, ESRI
9.05 Explaining Changes in Earnings and Labour Costs During the Recession
Adele Bergin, Elish Kelly, Seamus McGuinness (ESRI)
9.35 Response: Kieran Mulvey, The Labour Relations Commission
9.45 Audience discussion
10.10 Troubled Times: What role for Competition and Regulatory Policy?
Paul Gorecki (ESRI).
10.40 Response: Cathal Guiomard, Commission for Aviation Regulation
10.50 Audience Discussion
11.15 Coffee
11.45 Property Tax in Ireland: Key Choices
Claire Keane, John Walsh, Tim Callan, Michael Savage (ESRI)
12.15 Response: Dr William McCluskey, University of Ulster
12.25 Audience Discussion
12.50 Close
Booking
To book a place at this conference, please register here
For further information please email renewal@esri.ie.
The Economic Renewal Conference Series is supported by FBD Trust.
If you would like to receive our monthly eNewsletter with news of ESRI activities and publications, please subscribe here.
The Minister for Public Expenditure and Reform has announced the Government’s plans for the sale of state assets. Interestingly, rather than sell a minority stake in the ESB the plan now is to sell non-strategic power generation capacity – in my view a more sensible approach.
In December, I blogged about the peculiar pricing rules for the gas interconnector with Scotland. (The current rules would grant substantial market power to importers of LNG.
The CER has been aware of this for a while, and has now published a draft decision. The proposal boils down to the following elements:
- The interconnector will be moved, legally, from offshore to onshore. It remains to be seen that this would satisfy the European Commission, which is not happy either about the current regime.
- Interconnector capacity will be auctioned.
- There is a reserve price for the auction.
- The reserve price is the long-run marginal cost.
- If the auction do not cover the costs of the pipe-formerly-known-as-the-interconnector, the difference will be split over ALL gas suppliers.
Shannon LNG is understandably cross. They publicly fume about point 5, which will impose a cost on them that rises as they are more successful, but privately they must have hoped that the rules would not change. While I have argued that the rules should change, the current proposal can easily be spun as the regulator protecting a state-owned company from a private competitor.
Point 4 is worrying too. In the decision document, the CER goes back and forth between OPEX for the reserve price and OPEX+CAPEX. In the end, they opt for OPEX+CAPEX. Essentially, they propose to perpetually reward Bord Gais for what increasingly looks like a bad investment decision in the past.
Nothing has been set in stone yet. Let us hope that the CER will reconsider.