Progress Report on Reforming Product and Capital Markets in Ireland 2003 - Department of Finance

Progress Report on Reforming

Product and Capital Markets in Ireland

2003

Department of Finance

Dublin

October 2003

Foreword

In line with the conclusions of the Cardiff European Council (1998), each EU Member State prepares an annual report on the liberalisation of product and capital markets. The purpose of the report is to review progress in the past year on the implementation of structural reform in so far as it relates to product and capital markets. Structural reform, which involves the liberalisation of product, capital and labour markets to maximise efficiency, productivity and improve competitiveness, has been receiving increasing attention at EU level. The Conclusions of the Spring European Council in Lisbon in March 2000 emphasised the importance of the structural reform process and highlighted the need to enhance multilateral surveillance and co-ordination of economic policy. The annual Spring Meetings of the European Council focus on progress by each Member State in achieving the aims of the Lisbon Agenda.

This report has been compiled by the Department of Finance in consultation with the Department of Communications, Marine and Natural Resources, the Department of Enterprise, Trade and Employment, the Department of Environment and Local Government, the Department of the Taoiseach and the Department of Transport. The report will be taken into account in the preparation of the 2004 EU Broad Economic Policy Guidelines, which will contain recommendations on product, capital and labour market reform measures.

Table of Contents

Foreword Page 2

Executive Summary Page 4

I Introduction Page 6

II Assessment of Market Performance and Structural Reforms Page 8

II.A Product Markets Page 8

II.A.1 Opening New Markets to Competition and Furthering Page 8

Economic Integration

II.A.2 Public Policies having an Impact on Product Markets Page 10

II.A.3 Utilities and Other Network Industries Page 12

II.A.4 Foster a Knowledge–based Society Page 18

II.A.5 Environmental Policies Page 19

II.B Capital Markets and Financial Services Page 22

II.B.1 Legal, Regulatory and Supervisory Framework Page 22

II.B.2 Market Developments Page 23

III Statistical Indicators Page 24

Executive Summary

During the past 12 months, significant progress has been achieved in continuing the liberalisation of product and capital markets in Ireland. Some of the key developments are as follows:

Measures to improve regulation and increase competition in product markets:

§ As a result of recommendations made by a review group examining the regulation of the pharmacy sector, legislative proposals are currently being considered.

§ The Competition Authority is currently conducting studies of (1) the medical, legal and construction professions, (2) competition in the provision of banking services and (3) competition issues in the non-life insurance market. On completion of these studies (expected in 2004), recommendations will be made for changes to practices that are limiting competition in these areas.

Measures to continue the liberalisation of the utilities markets:

§ A three-person Commission for Communications Regulations was established in December 2002.

§ In a bid to boost competition, mobile phone subscribers can now retain their existing mobile number and prefix when they switch network operators.

§ A phased commencement programme will see fibre optic networks created in 19 towns and cities by mid-2004.

§ Flat Rate Internet Access Call Origination was introduced in July 2003.

§ 40% of the electricity market is now open to competition. This will rise to 56% in February 2004 and 100% in February 2005.

§ Since January 2003, public service obligations relating to electricity generation from indigenous peat and renewable energy sources have been imposed on the Electricity Supply Board (ESB).

§ Consolidation of all existing electricity legislation is currently underway. The new legislation will also provide for the conversion of the ESB into a public limited company and transpose relevant provisions of the new EU Electricity Directive into Irish law.

§ The Government has decided to proceed with arrangements to establish Shannon, Cork and Dublin airports as independent authorities under state ownership.

§ Proposals for reforming the regulatory and institutional frameworks for the delivery of public transport services are currently being discussed by the social partners.

§ In line with a recommendation in the Broad Economic Policy Guidelines 2003 – 2005 regarding infrastructural development, investment in the national roads programme in 2003 will amount to €1.2 billion – its highest level ever.

Measures to promote competition and improve regulation in Irish capital markets:

§ The Central Bank and Financial Services Authority of Ireland Act was brought into effect in May 2003. It established the Irish Financial Services Regulatory Authority and provided for a re-organisation of the Central Bank. A companion Bill is currently being prepared. This will provide for the establishment of a statutory financial services ombudsman.

Key Challenges Remaining:

Although significant advances have been made in the past year, a number of challenges remain. These include:

§ Facilitating greater competition in certain sheltered sectors of the economy, e.g. professional services.

§ Advancing the reform of the regulatory and institutional frameworks governing public transport services.

I Introduction

This Report[1], Ireland’s sixth annual Progress Report on Reforming Product and Capital Markets, describes advances made in structural reform in 2003 and identifies challenges which remain to be addressed.

The Irish Government remains committed to structural and regulatory reform and the Programme for Government[2] promises to:

“vigorously pursue a programme of regulatory reform with particular emphasis on removing unwarranted contraints on competition in all sectors of the economy and placing the consumer at the top of the policy agenda”.

In pursuit of this aim, a High Level Group on Regulation continued its work throughout 2003. It is expected that the Group will submit a draft White Paper to Government before the end of 2003. The Paper is expected to set out key principles which will guide decisions regarding policies on regulation in the economy.

According to the OECD (2001) Report on Regulatory Reform in Ireland, Ireland is one of the ‘less regulated countries in the OECD’. Nonetheless, the OECD highlighted key areas where further progress was needed, and set out recommendations for change. In particular, Ireland was advised to:

§ Remove licensing constraints on free entry to product, labour and financial markets, particularly those with quantitative limits;

§ Strengthen implementation of the regulatory reform policy and strengthen the accountability of sectoral regulators;

§ Strengthen the application of competition policy economy-wide;

§ Eliminate the restrictions on pharmacists educated in other EU countries, and the location restrictions on pharmacies;

§ Move the control of education and entry of legal professions from the self-governing bodies, but maintain close ties as regards quality of entrants and content of education and training, and maintain the freedom of solicitors to advertise their fees and areas of specialisation;

§ Complete the process of introducing competition, and the application of general competition policy, in traditional monopoly sectors, including electricity;

§ Take a number of steps to complete the regulatory framework in the telecommunications sector.

There has been progress in many of these areas since this Report was published in 2001.

More recently, the Economic Policy Committee’s Annual Report on Structural Reform 2003 identified the following challenges for Ireland:

§ Strive to foster competition in sectors such as professional services, retail distribution and insurance;

§ Ensure that competition is effective in network industries.

Finally, the Broad Economic Policy Guidelines published in June 2003 includes the recommendation that Ireland should:

§ Increase competition in the network industries and in certain sectors of the economy, such as retail distribution (including the liquor trade), insurance and the professions.

II Assessment of Market Performance and Structural Reforms

II.A Product Markets

II.A.1 Opening New Markets to Competition and Furthering Economic Integration

The view that Ireland has an open and competitive market economy with low levels of Government regulation is supported by a number of international surveys. For example, the IMD World Competitiveness Scoreboard 2003 ranked Ireland 11^th out of 29 countries / economic regions with a population of less than 20 million; the World Economic Forum Global Competitiveness Report for 2002-2003 ranked Ireland 24^th (of 80 countries) in its growth competitiveness index and 20^th (of 80 countries) for microeconomic competitiveness; and the Heritage Foundation’s index of Economic Freedom ranks Ireland 5^th of 156 countries.

The graph below illustrates the openness of the Irish economy and reflects the country’s integration into the global economy.

Graph 1: Openness of the Irish Economy

Source: CSO

Services Sector

Despite this, Ireland’s inflation rate has exceeded the euro area average continuously since the beginning of Stage Three of Economic and Monetary Union. The high rate of Irish inflation, relative to that of the euro area as a whole, largely reflects the rapid catch-up growth phase that characterised the Irish economy since the 1990s. However, it also reflects inadequate competition in some more sheltered sectors of the economy. The Forfás Consumer Pricing Report produced in May 2003 (by Price Waterhouse Coopers) noted that catering services / public houses and insurance were two of the major contributors to the rate of inflation in Ireland in the year ended January 2003.

While the rate of inflation in Ireland remains relatively high, it should be noted that it has moderated somewhat over the course of 2003, falling from 5.1% in February to 3.8% in September (HICP basis). In conjunction with this, the gap between Irish inflation and the euro area average has narrowed significantly and is now around 1.7% compared to 2.7% at the start of the year. However, while services sector inflation has also eased somewhat in recent months, in response to easing demand, it continues to be the driving force behind the rate of inflation in Ireland.

In February a new social partnership programme, Sustaining Progress, was agreed by the Government and the social partners. A key element of this programme is an Anti-Inflation Initiative through which the Government, in cooperation with the social partners, aims to bring the rate of inflation down towards a target of 2%. The Anti-Inflation Initiative Group, which has responsibility for coordinating the Initiative, is examining way of addressing domestic inflationary pressures such as inadequate competition in certain sectors, excessive pricing and insurance costs and is due to produce its first formal report shortly.

Graph 2:Price Increases, Sept. ‘02 to Sept. ‘03

(in particular service sector categories, compared with overall HICP increase)

[image1]

Source: EuroStat

The 2003 Broad Economic Guidelines recommended that Ireland increase competition in certain sectors of the economy, including retail distribution (including the liquor trade), insurance and the professions. Over the past 12 months, the Irish Government has remained committed to making progress in these areas.

A review group set up to examine the regulatory framework relating to the pharmacy sector reported in January 2003. The Minister for Health & Children is currently considering legislative proposals on foot of the recommendations of the review group which he proposes to bring to Government in the near future.

The Commission on Liquor Licensing issued its final report in April 2003. While some of its recommendations have already been enacted by the Minister for Justice, Equality and Law Reform, the Minister has stated that the structural reforms recommended by the Commission will be addressed in the codification of the licensing code. It is expected that an outline of such a codification Bill will be available by mid-2004.

A review of the Retail Planning Guidelines is currently underway. The review will consider the limits regarding floor space which are contained in the current Guidelines. It will take account of the need to ensure effective competition in this sector of retailing while ensuring proper planning and sustainable development.

The Restrictive Practices (Groceries) Order, 1987 which prohibits certain practices and includes a ban on below cost selling of grocery goods is to be reviewed. The review will bear in mind the views of all interested parties, particularly consumers.

The Competition Authority has embarked on a comprehensive study of the medical, legal and construction professions, specifically: medical practitioners, dentists, veterinary surgeons, optometrists, solicitors, barristers, engineers and architects. In August 2003, the Authority released its Consultation Document on Engineers. It is envisaged that the entire process will be concluded in 2004.

The Authority has also published a consultation paper as part of a study of competition in the provision of banking services (excluding investment banking) in Ireland. The markets which have been chosen for study are (1) Personal Current Accounts and (2) Loans to Small and Medium Sized Enterprises. As regards barriers to entry, the study will identify these, analyse their origin, their intended effects and their actual effects and, where appropriate, make recommendations to have disproportionate barriers to entry removed. The study will also identify and analyse industry practices, legislation and / or administrative practices that limit the degree of competition in the market place to the detriment of consumers.

The Competition Authority, in conjunction with the Department of Enterprise, Trade & Employment, has undertaken a study of competition issues in the non-life insurance market, with particular reference to motor insurance, employers’ liability and public liability. These three sectors (motor insurance, employer’s liability and public liability) are being analysed both from the perspective of barriers to entry and the degree of competition. The bulk of the work will be completed by end 2003, with a report to be published early in 2004. The main aim of the study is to make recommendations for change to any enactment or administrative / industry practice that is limiting competition in the State to the detriment of consumers.

Transposition of EU Directives

The target set for the transposition of Internal Market Directives is a 1.5% transposition deficit. The latest Commission figures (end June 2003) place Ireland in joint 11^th position with a transposition deficit rating of 3.4%.

II.A.2 Public Policies having an Impact on Product Markets

Competition Policy

New competition legislation in Ireland (the Competition Act, 2002) has consolidated previously separate competition and merger control statutes. Part 3 of the 2002 Competition Act, which deals with the control of mergers and acquisitions, commenced on 1 January 2003. Under the new provisions, responsibility for examining and deciding upon mergers other than “media mergers”, has transferred from the Minister for Enterprise, Trade and Employment to the Competition Authority. Since 1 January 2003, therefore, decisions on all non-media mergers are made solely on the basis of competition criteria and are taken by the Competition Authority.

Public interest criteria were introduced in 2003 (via the 2002 Act) in relation to merger regulation of media businesses. In this regard the Minister has retained a public policy role in the decision making process. In the case of a merger involving a media business, therefore, the Competition Authority determines the impact on competition while the Minister carries out a public interest review. However, the Minister cannot overturn a determination of the Authority on competition grounds. The public interest criteria on which the Minister makes a decision are listed in the legislation and, essentially, they relate to media plurality and cross media ownership issues.

Action being taken by the Competition Authority to challenge anti competitive arrangements include (a) initiating legal actions via its enforcement role, either on its own initiative or on foot of complaints, and (b), in a wider role, studying various sectors of the economy from the perspective of competition. In deciding what sectors to study, the Authority takes account of the importance of the sector for the economy, indicators of the level of competition, the existence of public or private barriers to entry, and the public interest generally.

State Aid

The European Council Conclusions at Stockholm in March, 2001, called on Member States to 'demonstrate, by the year 2003, that their public aid will be directed downwards compared to GDP, taking account of the need to refocus aid on horizontal objectives of common interest, including cohesion objectives’.

The overall level of national State aid in the EU fell from €102 billion in 1997 to €86 billion in 2001.

The level of State aid as a percentage of GDP decreased in twelve (including Ireland) of the fifteen Member States between 1997 and 2001, in line with the undertaking at Stockholm. The trend in Ireland's State aid as a percentage of GDP is downwards, with the percentage dropping from 0.93% in 1998-1999 to 0.73% for 1999-2001.

Graph 3: Sectoral and ad hoc State Aid (% of GDP), 2000

[image2]

Source: EuroStat

Public Procurement

The share of Irish public procurement which is sourced abroad is among the highest in the EU. The Government is harnessing the potential of Public Private Partnerships to help deliver the conditions needed to sustain output and employment growth in the Irish economy over the medium term. PPPs are a key element in the delivery of the National Development Plan 2000-2006 which has a minimum indicative target for PPP investment of €2.35 billion.

There are currently some 40 projects at various stages of procurement ranging from roads to environmental services, public transport and third level education. Possible projects in the Courts, non-acute health services, social housing and other sectors are also being explored.

eProcurement

The strategyfor promoting and facilitating eProcurement in the Irish public sector agreed bythe Government in April 2002 is being implemented. The strategy covers the central Government sector, the health, education and local authority sectors, and non-commercial state-sponsored bodies. These represent about 60% of the total public procurement market. It is recognised that most savings and benefits arise from more effective procurement management rather than from the use of electronic commerce alone. The current emphasis, therefore, is on procurement management reform. This includes developing structures and organisational capacity from within existing resources to manage procurement in a way that maximises savings and benefits and increases efficiency through the use of cost effective technologies.

The national public procurement portal II.A.3 Utilities and Other Network Industries

The supposition that competition is a simple concomitant of privatisation and market liberalisation does not necessarily hold. Market failure or a sluggish market response may hinder economic performance/potential. To assist in promoting competition, the power of giving policy direction to regulators in relation to key strategic issues should be held by Government.

Telecommunications Sector

The Commission for Communications Regulation (ComReg) was established on 1 December 2002 in accordance with the provisions of the Communications Regulation Act, 2002. The Commission consists of a three person regulatory authority which replaced the earlier one person structure. There has been substantial growth in the regulatory workload and the nature of the tasks and rulings which have to be implemented have become increasingly complex and qualitative.

The electronic communications market is changing with ever-increasing speed in terms of market developments, in particular the convergence between telecommunications, broadcasting and IT sectors, evolution in technology and changes in user demand. The balancing of different interests, not only among industry players and between the industry and consumers but also between the short term and long term economic and social interests of the State often requires that difficult judgement calls have to be made. A three-person Commission is in a better position to bear the burden of making such decisions than an individual.

Market Developments

The Irish mobile penetration rate stood at 81% in June 2003, an increase of 5% from the previous year. Ireland ranks 11^thin the EU in terms of penetration rates, four places behind the EU average.

Graph 4: Ireland’s Mobile Phone Penetration Rate

[image3]

Source: ODTR, Quarterly Key Data, Sept 2003

According to the latest published statistics, two companies have a 96% market share combined, whilst the third retains the 4% market share it held last year.

Graph 5: Mobile Operators’ Market Share – Ireland

[image3]

Source: ODTR, Quarterly Key Data, Sept 2003

In a bid to boost competition in the market, since July 2003, mobile phone subscribers can keep their mobile number and prefix when they switch network operators. The changeover process is free of charge.

The latest survey commissioned by the Commission for Communications Regulation (ComReg) in September 2003 found that 39% of Irish households with a fixed line have access to the internet. According to the results of the European Commission’s Flash Barometer report, Ireland was 4^th in terms of internet penetration in the EU in November 2002. New entrants’ market share of the fixed telecoms market stood at approximately 20% in June 2003, 1% lower than a year previously.

The Table below details developments in price competitiveness from June 2002 to May 2003.

Table :Tariff baskets

(1^st indicating lowest, in terms of tariffs, for 15 countries compared)

	OECD Ranking (EU 15) May 2003	OECD Ranking (EU 15) June 2002
National Residential	6^th	11^th
National Business	6^th	9^th
International Residential	6^th	7^th
International Business	7^th	9^th
National Leased Lines	4^th	7^th
International Leased Lines	1^st	1^st

Source: ComReg, 2003.

Infrastructure Developments

Following the Report of the Interdepartmental Working Group on Telecommunications in March 2002, a major programme of investment in telecommunications infrastructure was undertaken.

Two calls for proposals were held, the first of which saw investment by a number of private companies, with assistance from ERDF funding, in a number of advanced infrastructure projects. The second call for proposals will result in the creation of fibre optic networks, with funding assistance from the ERDF, in 19 towns and cities across the country in partnership with the local authorities. A phased commencement programme will see all networks under construction within 2003, and all completed by mid-2004. Grant claims payable in respect of the Metropolitan Area Networks and the private sector contracts are expected to reach €32 million for 2003.

The advanced provision of broadband is absolutely essential to delivering the Lisbon Agenda and the e-Europe programme. It is equally central to Ireland’s future prosperity.

Eircom is the dominant player in both the leased line and digital subscriber line (DSL) markets. It claims that 900,000 of the total 1.6 million lines are now DSL-enabled. The company intends to have 1.2 million lines enabled by March 2004.

Energy

Electricity Sector

The generation and supply of electricity were first opened to competition on 19 February 2000. Currently, 40% of the electricity market is open to competition and this will rise to 56% on 19 February 2004. Both the markets for “green” energy and for electricity produced from combined heat and power (CHP) have already been fully liberalised since February 2000 and April 2001 respectively. The market will be fully opened to competition on 19February 2005 when all electricity consumers will be free to choose their supplier. This timetable exceeds the July 2007 deadline set down in the new EU Electricity Directive 2003/54/EC. By June 2003, 657 out of 1,600 eligible customers had switched to licensed suppliers, and 24,545 customers had switched to “green” suppliers. By September 2003, the Commission for Energy Regulation (CER) had issued 69 authorisations to build power stations and granted 74 licences to generate and 30 licences to supply electricity.

Graph 6: Electricity Prices, Households (Euro per kWh), 2002 and 2003

[image5]

Source: EuroStat

In 2002, two new Combined Cycle Gas Turbine plants, owned by Synergen (an ESB/Statoil Joint Venture) andby Huntstown Power respectively came on stream, providing circa 700MW of additional capacity. A fourth Virtual Independent Power Producer (VIPP) auction for 400 MW of ESB capacity, to facilitate players other than ESB build market share in advance of new generation coming on line, will be launched in the third quarter of 2003. The contracts will last from 1 January 2004 to 31 December 2004 and the CER will continue to conduct these auctions until February 2006 at least.

The CER has recently made Regulations, with the consent of the Minister, for the purpose of establishing a new system of trading in electricity to take effect in a fully liberalised electricity market. The new system will comprise a centralised mandatory pool market, operated by EirGrid, subject to detailed rules drawn up by the CER. All electricity will be sold into and bought from this market, which will provide price signals toencourage new investment in generation when needed and in the most appropriate locations.

By virtue of the Electricity Regulation Act 1999 (Public Service Obligations) Orders 2002, public service obligations, which relate to electricity generation from indigenous peat and renewable/sustainable energy sources, have been imposed on ESB with effect from 1 January 2003 in the interests of security of supply and environmental protection respectively.

The CER continues to carry out a broad range of reviews in relation to the electricity industry, which are intended to enhance the economic circumstances for market entry, thereby increasing competitive opportunities and security of supply for customers. The CER is currently holding a competitive process to facilitate the entry of new capacity to the market at the earliest possible date, so as to address the projected shortfall in generation capacity from 2005 onwards. As part of the CER’s process to deliver fully cost reflective tariffs, it has approved increases in ESB’s electricity tariffs to those customers who are not supplied by the competitive market, with effect from October 2001, January 2003 and January 2004.

Primary legislation is currently being drafted which will consolidate existing electricity legislation, deal with the remaining regulatory and restructuring issues in relation to the electricity industry, provide for the conversion of the ESB into a public limited company under the Companies Acts and transpose the relevant provisions of the new EU Electricity Directive and the related Regulation into Irish law. Consolidation of electricity legislation in this way will make it more user- friendly and easier to access, in keeping with the Government’s programme of regulatory reform.

Gas Sector

On 1 January, 2003, an Order came into effect, which introduced a new consumption threshold of 500,000 standard cubic metres (reduced from 2,000,000scm), above which customers are eligible to source their own gas, and have it supplied to them at reasonable cost and on transparent and non-discriminatory conditions through the Bord Gáis Éireann (BGÉ) network. This reduction increased the level of market opening in the industrial/commercial sector from 62% to 75% bringing the total number of industrial and commercial sites eligible from 100 to 250. The total level of market opening in the gas sector now stands at 85%.

Graph 7: Gas Prices, Households (Euro per Gigajoule), 2002 and 2003

[image6]

Source: EuroStat

It is intended to have full market opening by 2005, ahead of the 2007 timetable agreed in the new EU Gas Directive 2003/55/EC, with full market opening for the industrial/commercial sector planned for 2004.

Since taking on regulatory responsibility for the natural gas sector under the Gas (Interim)(Regulation) Act 2002, the CER has carried out a number of reviews in relation to the natural gas industry. It has established two groups, the Gas Market Opening Advisory Group and the Gas Market Advisory Group, to ensure that the proposed industry processes and market arrangements will support the needs of the developing competitive market. The recommendations of these groups will help the CER develop proposals that will be workable, practical, fair, transparent and cost-effective for all existing and potential participants. The CER has also completed a full review of transmission and distribution tariffs, with the resulting tariffs to apply from 1 October 2003 and have opened a consultation process on proposals for a natural gas licensing regime. They have also issued eight interim gas supplier/shipper licences since July, 2002 and have published a Gas Capacity Statement, which forecasts customer demand for gas and related capacity requirements on the Irish natural gas system for the next seven years.

Work is now being carried out on the development of a revised regulatory framework to underpin the development of a competitive, multi-operator natural gas sector in Ireland. This draft legislation, entitled the Gas Regulation Bill, will replace all existing gas sector legislation (some of which dates back to the 19^th century) with a single up-to-date, accessible piece of legislation suited to a fully liberalised and competitive market. The Bill is to be in place prior to full market opening in 2005.

Transport

Airports

Two of the commitments in the Agreed Programme for Government (June 2002) relate to the future of the State airports company (Aer Rianta) and the three airports that it owns and operates.

Firstly, there was a commitment to examine proposals for a new independent terminal at DublinAirport and to progress such proposals if the evidence suggests that such a terminal will deliver significant benefits. In autumn 2002, the Government sought ‘expressions of interest’ from the market about this issue and thirteen responses were received from a range of national and international companies and consortia. Subsequently, a Panel of Experts was established to review the ‘expressions of interest’ and to advise on the proposals. The Panel found that such a terminal is both operationally and technically feasible, that an independent terminal is a viable strategic option for the development of DublinAirport and that it would elicit considerable market interest. However, it recommended that if the concept was to be further progressed, more detailed consideration would be required of all the issues raised in its report.

Secondly, the Programme for Government includes a commitment to ensure greater autonomy and independence for Shannon and CorkAirports. In this regard, in July 2003, the Government announced a major decision on the future of Irish airports and Aer Rianta that will have a far-reaching impact on the future growth and development of the aviation industry in Ireland. The Government has decided to proceed with arrangements (including the necessary changes to legislation) to establish Shannon, Cork and Dublin airports as fully independent and autonomous authorities under state ownership. It is envisaged that the airport restructuring will be completed during 2004.

Progression of both of these issues will entail further development of the regulatory regime for the airports sector in Ireland. The sector is already subject to independent economic regulation since 2001 when the Commission for Aviation Regulation was established under statute to regulate the State airports.

Bus and Rail

In November 2002, the Minister for Transport set out proposals for reforming the regulatory and institutional frameworks for the delivery of public transport services in Ireland. The key elements of the reform proposals are:

§ The introduction of controlled competition into the bus market in the Greater Dublin Area on a phased basis; and

§These awards go to researchers in Irish universities who can make Ireland an international leader in key strategic areas through collaborations with scientists and engineers in industry.

These investments will create a set of research partnerships connecting Irish universities with their counterparts from world-leading research corporations and some of Ireland’s most promising ICT and biotechnology companies. These are the most significant grants SFI has made to date in building Ireland’s new knowledge-based economy. They create global strategic value for Ireland by embedding industrial research efforts

leveraged with academic talent that will generate new ideas and products, train the research talent of the 21st century and produce the research and development from which high-wage economies around the world have grown.

Graph 9 : Researchers per 1,000 of the labour force (Average annual growth 1995 to latest available year)

[image8]

Source: Towards a European Research Area, Key Figures 2002

The total commitment by SFI, under five support programmes, at end September 2003, is more than €250m

Information Society

Ministerial Policy Direction

The Government issued a set of Policy Directions to the Commission for Communications Regulation (ComReg) in February 2003, designed to strengthen the alignment between the Government’s policy objectives for the communications sector with the regulatory executive functions of ComReg. Included in the Policy Directions was one mandating ComReg to do all within its powers to facilitate the early introduction of retail flat rate internet access services at reasonable prices. Flat Rate Internet Access Call Origination (FRIACO) was introduced into the Irish market in June 2003.

EU Regulatory Package on Electronic Communications, Networks and Services

Ireland was among the first five EU Member States to transpose the provisions of the first four Directives in the EU Electronic Communications Regulatory Package. The Framework, Access and Interconnection, Authorisation and Universal Service Directives of the EU Electronic Communications Regulatory Package were transposed into national law before the deadline of 25 July 2003. The Data Protection Directive is scheduled for transposition by the October 2003 deadline.

The reforms provided for in the new regulatory package are intended to strengthen competition in the electronic communications markets in the EU and to simplify and clarify the current complex regulatory framework by reducing the number of specific legal measures therein. The new legislative framework will provide for a lighter regulatory touch in those cases where markets have become more competitive, while ensuring that a minimum service offering is available to all users at an affordable price and that the basic rights of consumers continue to be protected.

II.A.5 Environmental Policies

As reported last year, Ireland continues to apply the polluter pays principle in the water services area in a number of ways, primarily through the development and implementation of a water pricing policy framework. This involves:

§ The recovery of average operational and marginal capital cost of water services from all non-domestic users;

§ The metering of all such users by 2006;

§ The reduction of capital grants by the Department of Environment and Local Government (at rates of between 25-40% of the cost) for water and waste water projects which are directed solely or primarily at providing services to commercial, industrial and residential users of new infrastructure;

§ Making the full cost of water and waste services to all sectors (domestic and non-domestic users) transparent.

The Polluter pays principle has also been applied through the provisions of the Local Government (Water Pollution) Acts 1997 and 1990 which provide for a discharge licensing system, fines for unlicensed discharges to waters, and the payment of the cost incurred in investigating, mitigating and remedying the effects of a discharge.

It is Government policy that the level of waste charges imposed on households and business should desirably be based on usage. Direct user charges for household waste collection are widely applied throughout Europe, particularly in the context of increasing awareness of the financial and environmental cost of waste generation and of encouraging waste reduction and recycling.

In light of the success of the environmental levy on plastic bags, the Agreed Programme for Government (2002) included a commitment to consider the extension of the plastic bag levy to other materials which may be problematic from a waste management and / or litter perspective. In this regard, a consultancy study was recently (September 2003) commissioned to consider the application of economic instruments, including environmental levies, on specific items with a view to minimising their environmental impact. The report is expected to be completed by end November 2003, and will be subject to consultation with the Department of Finance and a public consultation process before any formal proposals are submitted to Government.

A second levy of €15 per tonne on the landfilling of waste was introduced on 1 June 2002. The purpose of the levy is to incentivise the diversion of waste from landfill.

The proceeds of the plastic bag levy and the levy on the landfilling of waste (introduced in June 2002) accrue to a dedicated central fund for use in support of waste recycling, litter and other beneficial environmental initiatives. Among the other initiatives and measures to be supported from the Environment Fund in 2003 are:

§ A new waste education and awareness campaign which will be launched in October 2003 and

§ Better enforcement of environmental legislation (€7 million has been allocated for this task and an Office of Environmental Enforcement (OEE) will be established shortly).

The Minister for Finance requested in Budget 2003 that all relevant Government Departments advance plans for a general carbon energy tax, with a view to introducing this from the end of 2004. A consultation process has been initiated to take account of all views in this area.

The Protection of the Environment Act, 2003 strengthens the Environmental Protection Agency (EPA) and local authority enforcement powers. It also confers more robust supervisory powers on the EPA in relation to local authority environmental protection activities. This provision, as well as the increases in fines and other matters related to environmental enforcement, will be commenced in tandem with the formal launch of OEE in October 2003, as a distinct and dedicated unit of the EPA.

II.B Capital Markets and Financial Services

II.B.1 Legal, Regulatory and Supervisory Framework

Single Regulatory Authority

The Central Bank and Financial Services Authority of Ireland (CBFSAI) Act 2003 was brought into effect on 1 May 2003. It established a new financial services regulator - the Irish Financial Services Regulatory Authority (IFSRA) - and provided for a re-organisation of the Central Bank, whose functions related to the European System of Central Banks (ESCB) would be co-ordinated with the functions of the regulator.

The Act

§ Established the Irish Financial Services Regulatory Authority (IFSRA);

§ Brings together into a single entity the supervision of the major sectors of the financial services industry: in particular, the supervision of insurance undertakings and credit unions is now being carried out by the same institution as the supervision of banks and the funds industry;

§ Places added emphasis within the supervisory structure on the consumer interest, including the appointment of a statutory Consumer Director;

§ Allows for the continued close co-ordination of financial services regulation and overall monetary stability policies, in the public interest.

The structure of the CBFSAI allows for unified regulation in which financial services regulation is being carried out within the structure of the renamed Central Bank, but with arrangements for direct accountability by the regulator – through its statutory officers – to the Government and Parliament. This involves a separate board and separate statutory executives operating as a distinct agency within the Central Bank and Financial Services Authority with specific responsibility for regulation.

In this way, an arrangement which imposes a strict legal obligation on all parties concerned to co-operate and exchange information within the revised structure has been established, and it also provides transparent structures for accountability of the regulator, thus dealing with any concern that the statutory independence of monetary authorities might be an obstacle to effective accountability on the part of the regulator.

A companion Bill is being prepared for publishing during the autumn 2003 Parliamentary session. This second Bill will implement other recommendations contained in the McDowell Report (Report of the Implementation Advisory Group on the establishment of a Single Regulatory Authority for the Financial Services Sector), such as the establishment of a statutory financial services ombudsman and of consultative panels of the financial services industry and of consumers. It will also address issues arising from the recommendations of the Report of the Review Group on Auditing. This will involve a significant strengthening of corporate governance requirements as they apply to financial institutions. The recent establishment of the Office of the Director of Corporate Enforcement has given an increased government focus on corporate governance standards in general.

National Development Finance Agency

On 1st January 2003, the Government established the National Development Finance Agency (NDFA). The NDFA will enable the Government to apply commercial standards to evaluating financial risks, costs and options associated with projects thereby ensuring that the best financial package is availed of in each instance. A further benefit is the centralising of commercial (including financial and legal) expertise thereby reducing dependence on external consultants with consequent cost savings to procuring authorities, and ultimately to the Exchequer. State authorities involved in the procurement of capital projects over a certain minimum cost (currently €20 million) are legally obliged to seek the advice of the NDFA.

II.B.2 Market Developments

Recent Developments in the Risk Capital Markets

Seed and Venture Capital Fund Scheme

Following on from the success of the Seed & Venture Capital Programme 1994 - 2000, the Government (under the National Development Plan 2001 - 2006) has committed €95 million to continue the development of the venture capital market for SMEs in Ireland. Enterprise Ireland, in partnership with the private sector, has now established 15 Funds that are specifically targeted towards:

§ SMEs at earlier stages of their development

§ Smaller investment amounts i.e. €75,000 (first round)

§ A greater regional perspective

§ Sectors which are traditionally difficult to finance, e.g. Biotech

Key findings of the Irish Venture Capital Association (IVCA) Annual Report 2002 are:

§ Irish venture capital companies raised €201 million in 2002 compared to €210 million the previous year;

§ Investment by Irish venture capitalists slowed last year to €105 million from €144m in 2001. While this represents a fall of 27%, it compares well with the five year average of €120 million per annum (to 31 December, 2001).

III Statistical Indicators

Structural Performance Indicators

Table 1: Grocery Retail Market Share (%) – Ireland (July 2003)

Total Multiples	80.6
Top Three Multiples	65.6
Other Multiples¹	10.1
Discounters²	5.0
Total Symbols³	7.3
Independent Retailers/Other Outlets	12.1

Source: TNS Worldpanel 2003

^{1 Includes Superquinn, M&S, Iceland & Boots}

^{2 Includes Aldi & Lidl}

^{3 Includes Spar, Mace, Londis & Centra}

Table 2: Assets of all Credit Institutions resident in Ireland

€million	Total Assets	31 December 2002	% of Total Assets	31 July 2003	% of Total Assets
Clearing banks	Irish residents	83,874	65.62	90,134	65.07
	Total	127,812		138,524
Non-clearing banks with predominately domestic business	Irish residents	87,013	54.16	93,277	50.36
	Total	160,671		185,215
Non-clearing banks with predominately foreign business	Irish residents	26,210	14.08	28,513	13.84
	Total	186,146		205,948
Total credit institutions	Irish residents	197,097	41.53	211,924	40.01
	Total	474,629		529,687

Source: Central Bank of Ireland

Table 3: Venture Capital Investment by Members of Irish Venture Capital Association

Financing Stage	No. of Companies			Investment (€M)			% of Investment
	2001	2000	1999	2001	2000	1999	2001	2000	1999
Seed	3	30	31	0.76	22	11.3	0.61	10.58	6.38
Start Up	56	50	21	40.38	51.4	18.3	32.57	24.71	10.34
Expansion	46	58	63	64.48	116.4	50.8	52	55.96	28.7
Replacement Capital	1	2	3	0.95	3.8	1.9	0.77	1.83	1.07
Buyout	3	4	10	17.30	14.5	94.9	13.95	6.97	53.62
Total	109	144	128	124	208	177	100	100	100

Source: Third Annual Report on Irish Venture Capital Investment Activity, Sept 2002

Economic Indicators

Graph 1: The Openness of the Irish Economy – Trade as % of GDP

[image9]

Source: CSO

Graph 2: Price Increases, August 2002 to August 2003, in particular service sector categories, compared with overall HICP increase

Source: EuroStat

Telecoms

Graph 3: Ireland’s Internet Penetration Rate

[image3]

Source: ODTR, Quarterly Key Data, September 2003

Graph 4: EU - Internet Penetration Rates 2002

[image3]

Source: ODTR, Quarterly Key Data, September 2003

Graph 5: OECD National Residential Basket – August 2003

[image3]

Source: ODTR, Key Quarterly Data, September 2003

Graph 6: OECD International Residential Basket (EU15) – August 2003

[image3]

Source: ODTR, Key Quarterly Data, September 2003

Graph 7: OECD National Business Basket (EU15) – August 2003

[image3]

Source: ODTR, Quarterly Key Data, September 2003

Graph 8: OECD International Business Basket (EU15) – August 2003

[image3]

Source: ODTR, Key Quarterly Data, September 2003

Graph 9: OECD National Leased Line Basket (EU15) – August 2003

[image3]

Source: ODTR, Key Quarterly Data, September 2003

Graph 10: OECD International Leased Line Basket (EU15) – August 2003

[image3]

Source: ODTR, Key Quarterly Data, September 2003

Graph 11: Mobile Operators Market Share – Ireland

[image3]

Source: ODTR, Quarterly Key Data, September 2003

Graph 12: Ireland’s Mobile Phone Penetration Rate (Q1 2000 – Q2 2003)

[image3]

Source: ODTR, Quarterly Key Data, September 2003

Graph 13: EU Mobile Phone Penetration Rates

[image3]

Source: ODTR, Key Quarterly Data, September 2003

Graph 14: ICT Expenditure – Telecommunications (% GDP), 2000 and 2001

Source: EuroStat

Graph 15: ICT Expenditure – Information Technology (% GDP), 2000 and 2001

[image23]

Source: EuroStat

Graph 16: Price Level in Telecoms – Local Call (€), 2001 and 2002

[image24]

Source: EuroStat

Graph 17: Price Levels in Telecoms – National Call, 2001 and 2002

[image25]

Source: EuroStat

Graph 18: Level of Internet Access – Households (%), 2001 and 2002

[image26]

Source: EuroStat

Energy

Graph 19: Electricity Prices, Industrial Uses (Euro per kWh), 2002 and 2003

[image27]

Source: EuroStat

Graph 20: Electricity Prices, Households (Euro per kWh), 2002 and 2003

[image28]

Source: EuroStat

Graph 21: Gas Prices, Industrial Uses (Euro per Gigajoule), 2002 and 2003

[image29]

Source: EuroStat

Graph 22: Gas Prices, Households (Euro per Gigajoule), 2002 and 2003

[image30]

Source: EuroStat

State Aid

Graph 23: Sectoral and ad hoc State Aid (% of GDP), 2000

[image31]

Source: EuroStat

Research & Development

Graph 24: Research & Development Investment, Average annual % real growth, 1995 to latest available year

[image32]