I welcome this Bill. As part of the Government package to deal with unemployment it is to be welcomed. Last week there was an announcement in relation to private sector aid — relief from employers' PRSI, constituting a boost to the construction industry and an employment incentive scheme. This Bill provides a vehicle not already existent.
It is estimated that annually £1,000 million of investment is required in terms of replacement of fixed assets and working capital in order to sustain industrial output at its current level. I am not talking about an increase in industrial output or in industrial employment but rather a sustainment at its present level. All the indicators, whether through the stock exchange, the venture capital market or loan finance available through the banks, show that the present investment level is approximately two-thirds of that, somewhere between £600 and £700 million per annum which is leading to a shortfall. Some of this can be explained by the current recession in certain blue chip industries. But there is no doubt that there is a need for this country to develop a proper investment policy. We have seen notable progress and shall see more. First, in terms of the investment market, there has been the operation of section 84 loans. There has been also the introduction of the business expansion scheme, allowing the taxpayer to underwrite investment in manufacturing industry over a three to five year period. We are also seeing the development of a third tier of small business stocks to be quoted on the stock exchange, a very welcome development.
By far the biggest problem of investment in manufacturing industry is that there exist other lucrative opportunities in the form of gilts that the Government are selling through the stock exchange, whether in the form of investment bonds, such as the Housing Finance Agency, the Trustee Savings Bank or others of a whole variety of different equity markets. The rate of return and the tax rate on those investments are much more generous than those pertaining to investment in industry. We must ask ourselves: what can be done to reverse this trend? How can we get the billion pounds per annum into industry and more to create employment and jobs?
The first problem that must be confronted is the present profitability of manufacturing industry. It is important to realise that the profit from indigenous manufacturing industry dropped from 5.5 per cent in 1978 to 1.5 per cent in 1982 and to 1 per cent in 1983. Therefore, when one invests in manufacturing industry not only does the tax treatment of the profits not favour that type of investment — it favours gilts and so on — but the rate of return on that investment is not good. Our industries today are under-capitalised. The resources, whether by way of pension funds, private investment, banks, are not being invested in manufacturing industry. We must ask: how do we solve that problem? But there have been welcome improvements.
I view this National Development Corporation as a vehicle to get investment into manufacturing industry that does not exist at present, to sustain industrial growth and job creation in that sector. Having said that, it must be earmarked specifically for a certain subsector of industrial activity. For instance, in the Joint Committee on Small Business we find the most common problem confronting small businesses in the manufacturing sector is that they can have a full order book, be trading profitably and still go out of business because of starvation of equity finance. Many companies, whether exporting, producing for the domestic market, whether in the natural resource area, in the food processing area or in secondary production, find their biggest problem is that their ratio of loan capital to equity capital is all wrong. The most desirable ratio is 1:1. But we see that the debt equity ratio of many companies is up to 14:1, in other words, they are totally over-dependent on loan capital, the interest charges on such loans forming an albatross around their necks. Therefore, we must find a means of injecting equity into these companies. That must constitute the starting point of the need for this National Development Corporation. The IDA can put in money only in the form of a gift of grant aid. It does not constitute share or equity capital; it constitutes an injection of a gift of capital at the start up or expansion stage and bears no relationship to the cash flow problems of that company. Bearing in mind the need for this Bill, the need to fill the void in the Irish investment market I should like to see a certain tightening up of certain loose ends of the Bill that I fear exist on Committee and Subsequent Stages. In welcoming the Bill my only reservation is that we may be embarking on a policy that will establish a whole new generation of semi-State bodies which would be undesirable.
In the course of the summer I spent a lot of time studying the current state of our semi-State bodies or, as they are officially known, Irish commercial semi-State sponsored bodies. If one analyses the situation carefully one will see that there are problems obtaining here. The December 1984 figures show that the Irish public sector debt, which is the Exchequer and semi-State debt, amounted to £22½ billion. Semi-State bodies, or State industry, accounted for 18 per cent of this public sector borrowing figure of £22½ billion. In other words, Irish State owned industry, as it stands at present, accounted for £4 billion of borrowings at December 1984. What is even more disturbing — if one looks at the six worst semi-State bodies — is that they managed to lose in the years 1979 to 1983, a total of £1,000,000,036. This would include subventions in the instance of CIE for losses. If tax levels at present are 36½ per cent of GNP, basically the taxpayer cannot afford to underwrite that level of loss again. Through the policies of the Government there has been a rapid improvement in the balance sheet performance of many State bodies but the figures, nevertheless, are quite startling. It is incredible to think that CIE were allowed to lose £776 million between 1979 and 1983. It is a national scandal and should not have been allowed to happen. It will not recur because the Government are insisting that it does not happen again.
The idea of the National Development Corporation is a good one because it fills a void in the investment market. It allows equity injections into companies which need it. However, if the Bill is taken literally, particularly in its open ended emphasis in section 10, my fear is that we could be setting up another generation of semi-State bodies. Therefore, we must look at the options which arise through setting up the NDC. If we look at European experience, leaving out the UK, the whole policy relating to State industry is changing. For example, this year West Germany propose to raise $700 million through the sale or part sale of State industries to finance a tax cut of 16 per cent. In Holland two major proposed sales of part shares were in relation to Hoogovens and VSM and there was also a part sale in Sweden. A number of Deputies mentioned that Sweden is a success story in relation to State industry and this year they are in the process of selling part of Luxor, P K Banicon and a number of others which vary from holding companies, all in the trading sector, as well as banking companies.
In Italy the parent State company of ENI sold 20 per cent of a subsidiary so there seems to be a European shift towards denationalising and part selling of certain companies. In Britain there has been a crusade of privatisation which I do not support, but there have also been successful part sales of Britoil, Sealink, Amersham, British Sugar, National Freight, British Telecom, British Rail Hotels and British Aerospace. There is a shift in all these countries of different political hues. There are socialist Governments in Sweden and in France. Perhaps the State's level of activity, its absorption of GNP in taxes, expenditure and debt as a proportion of GNP and the servicing of that debt needs to be rolled back. We may be going in the other direction and setting up a whole new generation of semi-State bodies.
Many of our semi-State companies were set up 30 or 40 years ago. The life cycle of their business has changed and it is time for them to finance new, partial State enterprise. Aer Lingus are a statutory corporation set up in 1937; the ACC were also set up in 1937; Bord na Móna were set up in 1946; B & I were set up in 1965; Ceimicí Teoranta were set up in 1938; the Irish Sugar Company were set up in 1933; CIE were set up in 1945, the ESB were set up in 1927; and Irish Life in 1939. Times have now changed and we need a new impetus towards industrial development. We need a National Development Corporation, but surely it is better to finance them from companies who are 40 and 50 years old, who have been given a fair crack of the whip and who are now looking to the Exchequer for more injections of equity. They should be told to go to the private sector for equity, that the Government are not going to flog them off as Margaret Thatcher did, but that the cash will be raised for the National Development Corporation.
If we look at the alternative sources of finance for the National Development Corporation, it is clear that we could get a flotation on the Stock Exchange for the corporation, but I suspect there would be no takers unless it was State guaranteed. The next option is to raise an Exchequer loan to pay for it through the public capital programme. Our national debt stands at £22.5 billion and has breatly increased since December 1984. There are limitations in regard to that course and the means of equity investment are such that we should pursue this corporation thoroughly and positively but we should look at ways of raising the money other than from the Exchequer.
I wish to seek clarification with regard to section 3(1) of the Bill which provides that every body specified in the First Schedule shall be a State-sponsored body for the purposes of this Act. Subsection (2) provides that every body specified in the Second Schedule to this Act shall be a State-sponsored commercial enterprise for the purposes of this Act. Does this mean that every company aided by the National Development Corporation will be an Irish commercial State-sponsored body? If so, will we set up another generation of semi-State bodies? Are we perhaps embarking on a repeat performance of what has proved very costly to the taxpayers so far?
Section 10 outlines the principal objects of the corporation and the paragraphs run from (a) to (k). They are very open ended although that is not necessarily bad in terms of the sector the corporation can support. All the up to date reports recognise that we cannot rely exclusively on the manufacturing industry and that there is a huge area in tourism which needs to be looked at. Would it not be better — and this is my personal preference — to specify in the Act what we want the National Development Corporation to do? No investment in any company should be greater than the sum of £150,000. It should also be specifically earmarked for companies with less than 100 employees and of course I include in that any company just starting up. There should be an insistence on management expertise in these companies and we should invite and actively headhunt people who are employed by multinationals or large companies who wish to set up in business on their own. Thus, we would have a programme for small business development through the National Development Corporation. My fear is that if the NDC take on a very large enterprise — for instance, an electronics or pharmaceutical company — a sum of £100 million could be a drop in the ocean. As the NDC are a private limited company there is the danger that if one very large project ran into difficulties the whole NDC would have to be liquidated because they would be the parent company of this new semi-State large venture. The potential of the NDC is enormous and I should hate to see it jeopardised by one failure. There will be failures and that is right because we are entering a high risk area. If we had a success ratio anywhere between four and six per ten enterprises it would be very good. In America two successes out of ten is considered very acceptable.
A small business development programme dealing with firms employing up to 100 persons would earmark £150,000 on a minority equity injection basis. That would be restricted to companies where the management satisfied certain criteria and, secondly, where the banks were exposed without any State guarantee on a borrowing ratio of one-to-one equity capital to loan capital. In addition, the entrepreneur would have to put in a substantial amount of equity, say, a minimum of 20 per cent. In that event the NDC would put in 40 per cent equity, the banks would put up 40 per cent loan capital with the entrepreneur putting in 20 per cent himself. There is little scope for abuse, there is involved the greatest and most dynamic potential of our economy, namely, the small business sector and we avoid having a new generation of semi-State industries.
A recent survey conducted by the CII indicated that one-quarter of Irish manufacturing firms were constrained from developing because of the shortage of finance. On the other hand, more than half of these firms perceived that they had little difficulty in identifying projects that were profitable. There is no State monopoly on good projects. The people in the areas concerned have the projects and the necessary expertise but they need to be helped in a certain way that will give them the right kind of finance that is available in terms of expanding and developing their ideas and bringing them to fruition.
There is no doubt that there is a problem in the venture capital market. If a person has a brilliant idea and takes out a patent there is no way he will want to sell 51 per cent of his idea. On the other hand, if the idea is not so good the banks or the venture capital agencies are not interested in acquiring 51 per cent. There is this divergence between the requirements of the financier and the entrepreneur. If there was an accepted norm, where 40 per cent equity capital could be available for companies employing between one and 100 employees provided the project satisfied the criteria, it would be much more successful than having the NDC scratch around for projects themselves. I do not believe there is this multitude of projects that the private sector has failed to exploit into which the State can move and make a success. My fear is that all that will be left will be the sour cream. Many good ideas are not getting off the ground because of shortage of finance. The IDA or the banks cannot fill this role at the moment but the NDC could fill it.
I should like clarification on one issue. In his speech the Minister said he would draw up operational guidelines to avoid an overlap between the NDC and the IDA. If a small firm propose to set up an enterprise making go-cars for children, if they purchase premises and machinery and if the NDC are involved, surely it is quite wrong that they do not qualify for IDA aid because they will have satisfied the criteria laid down by the IDA. If they went to a private venture capital agency for money they would get IDA support. It is quite anomalous that companies that are equity injected by the NDC will not be in a position to get IDA grant aid. Perhaps that matter could be clarified in the guidelines referred to by the Minister. If the project in question meets all the criteria of the IDA, the latter should be in a position to aid the company.
When we talk about the NDC setting up large industries, of the demand for this and of the failure of the private sector, we must ask the question how it is that the NDC are expected to succeed. I am saying the existing package available of IDA aid is so generous that what the NDC have to offer in respect of joint ventures probably will render it uncompetitive with the level of aid offered by the IDA.
If a person wishes to set up a large pharmaceutical company that proposes to market a drug for asthma and if all the necessary feasibility and viability studies have been done, he would be much more attracted towards the IDA for 45 per cent grant aid than to relinquishing any percentage of potential profits in the company by giving a stake in it to the NDC. There is what I would describe as blurred vision regarding what the NDC can do. I do not wish to throw cold water on the NDC. There is a void in the Irish investment market which needs £1 billion just to keep going at its present level and that void needs to be filled.
I see a role for the NDC but they should have much clearer terms of reference. To get the best response, aid should be restricted to companies of a certain size and there should be restrictions on the amount that can be written off. For instance, if 500 people came forward with projects and if each of them employed ten people on the basis of 40 per cent equity injection, there would be a dent of 5,000 in the unemployment rate of 230,000. This would be worthwhile. The IDA and the various Ministers are encouraging entrepreneurs to move into the area of the national linkages programme. There is tremendous potential in the area of State purchasing which will be best fulfilled by helping small companies which are filling a particular need on the home market to develop an export base.
I was particularly pleased to see clarification in the Minister's speech of the National Enterprise Agency. It must be recorded that Mr. Healy and his colleagues have served this country well and deserve our support. They did not see their job as setting up a quango which would involve huge tape cutting performances at the opening of big factories. They knew from experience that the biggest job creator is innovation. When the wheel was invented a whole new industry was created and when the micro-chip was invented a whole new industry was created. Large scale job creation is dependent on innovation. In my view, the fact that the NEA laid particular emphasis on high technology research and development projects was correct and I believe projects they helped will reap rich dividends for the small sum invested. The NDC absorbing the NEA can only strengthen that corporation but I hope the NDC will have the same modus operandi as the NEA. I would hate to see political pressure being brought to bear on the NDC to get big projects off the ground without having the most strict form of selectivity possible in terms of project evaluation.
The Minister said that NDC aided projects will be able to compete with other businesses, but I see a problem here. If it is decided by the NDC that the most profitable sector is the retail area, it would be totally improper for the State to get involved in that business principally because of its effect on its competitors. For example, if a price war can be underwritten by taxpayers' money, that will not make good sense because their competitors will also be paying taxes. In other words, they will be helping to undercut their own businesses. That makes no sense. There will have to be greater clarification of the sectors of business in which the NDC can operate.
If the NDC are to pursue a small business development programme, it will be far easier to operate the suggested time limits. I understand that before any project is aided, the Minister and the board will decide that in two, five or ten years they will be trying to sell their equity investment. As we already have a business expansion scheme which sets down a five year period, there is a precedent for stating that equity is only injected on a given basis under certain circumstances.
I hope private sector representation will be predominant on the board, somewhat akin to the membership of the board of Fóir Teoranta, and that there will be one or two representatives with considerable experience in the area of small businesses. We want this board to be seen as a friend of small businessmen, helping them to promote and develop their businesses.
There is much misinformation about our natural resources. Many people say they are totally neglected, that we have failed to develop them and that the NDC should specifically zone in on this area. I believe many of these people are unaware of the current level of activity. I have experience in the farm milling industry which is in the throes of competitive depression. The meat industry, which is based on our livestock, is extremely competitive and it is dependent on the slightest change in intervention and on the Common Agricultural Policy and there is surplus capacity in both industries.
As regards oil exploration, there is already a licensing procedure, a facility for the State to take a stake in companies which are involved in our oil exploration and a number of Irish companies are quoted on the Stock Exchange. There have been developments in the fishing industry with the setting up of co-operatives and a number of fish processing plants along the west coast in particular. Taking all these matters into consideration, it would be wrong to assume that the private sector have failed to exploit our natural resources. Admittedly, there have been some failures, not because of lack of exploitation but because of competitive pressures. To say that the NDC should focus on that area and that they will solve all the problems which people like Clover Meats or Ranks Flour could not do, would be very wrong.
In my opinion, it is better for the NDC to be in a responsive position rather than to initiate projects. The Revolving Investment Fund for Employment is good, but I think the emphasis on maximum employment is wrong. Everybody would like to employ the maximum number but that is no basis on which to base equity injection. The principle must be the rate of return.
That brings me to another point on which I should like clarification from the Minister. What will be the requested rate of return on equity injection by the NDC. I presume it will be preferential equity shareholding, that there will be an option to sell their stake after a given period. What is the rate of return being requested? Is it 2 per cent per annum and 10 per cent after a five year period, or is there any insistence on a rate of return? If the Minister's emphasis on profitability is to be adhered to there must be some guidelines in terms of the requested rate of return for any equity investment.
I should like clarification on a few matters. In the event of the equity shareholding being sold by the NDC will it be liable to capital gains tax? That may seem an unusual question, it is the same as asking if Bord Gáis profits are liable to corporation profits tax, on the basis that it is all State money and it is all going to the Exchequer. However, if, as the Minister outlined, the intention is that there will be a number of instances where the NDC will inject equity alongside private sector venture capital agencies that tax question might become very relevant. One cannot treat shareholders differently. If other companies are to be liable to capital gains tax there may be a problem in terms of capital appreciation of that shareholding or dividend.
If it is the intention — I hope it is not — that the role of the NDC is to acquire the likes of Bula, as was suggested in a press report, I fear that the opportunity for it will be lost. That would tarnish the reputation of State industry. State industry is not bad per se. It has its problems, such as the fact that there is a tendency by management to feel that there is a bottomless pit of money to underwrite any problem via letters of comfort, or whatever, and there is also the problem in relation to employees. Their demands on a State owned company in the event of rationalisation will be far more excessive than on a private company simply on the grounds of a disbelief of any argument of inability to pay. While State enterprise has its problems it must be the aspiration of all those who support it that the NDC is successful and seen to be so. Therefore, it must have clearer terms of reference than those outlined in sections 3, 10 and 15.
I hope that as a result of the debate we will have a strengthened National Development Corporation, one that is earmarked to do a particular job, to inject equity on a minority basis as part of a programme of small business development for firms of between one and 100 employees. The equity should be injected for a five year period along the lines of the business expansion scheme that raised £4.5 million in the 1984-85 tax year. I suggest that the NDC could easily inject £20 million to £30 million per annum along those lines and do a very good job at creating the order of 5,000 jobs per annum. If that is the goal and we move away from any fears of setting up a new generation of semi-State industries the NDC will be successful.
