Critics and observers of the economic scene in Ireland seem to be unanimous in their view that most businesses, new and old, small and large, are starved of investment funds in the form of share capital. They have to rely to an unhealthy extent on borrowed capital. The resultant disproportionate requirement to pay interest and repay capital on bank loans makes business unduly vulnerable to temporary setbacks and fluctuations in market conditions.
Clearly, if industry, and in particular small indigenous owned industry, is to flourish, there must be a shift away from this traditional reliance on bank borrowings as a means of financing start-ups and expansions. A much greater emphasis must be placed on the need for equity style investment. The development of an environment conducive to this form of investment will be a gradual process requiring a significant change of attitudes, not only on the part of investors, to encourage them to adopt a less conservative attitude towards risk taking, but also on the part of entrepreneurs and businessmen, to encourage them to be more receptive and understanding of the advantages of relinquishing part ownership of their business in return for equity finance.
Indeed much of the emphasis in this year's budget has been aimed at the creation of a better climate for investment in industry. Reduced rates of taxation on capital gains and dividend income will encourage more private investment in industry. A new tax incentive is being introduced to stimulate investment in research and development. Restrictions on capital allowances and section 84 loans will make it more attractive to meet increased demand through investment in new employment rather than fixed assets by making the fiscal advantages for capital less favourable; thereby making those for employment more so. The taxation of financial institutions should encourage a shift in investment by savers from the institutions into industry where it can contribute more directly to the process of job creation.
The Government recognise that direct State investment in industry has an important role to play in this overall process. The purpose of the Bill before the House, therefore, is to establish the National Development Corporation, which is an integral part of the Government's industrial and job creation strategy. It is a body with the task of investing in enterprises which might not otherwise develop or even get off the ground.
The corporation will not be confined to investing in the development or expansion of existing industries in the private sector. It will also have a role of investing in new and existing enterprises originating in the public sector. Likewise there will be investment opportunities in which the corporation itself alone can take a lead or set up an enterprise, given that its financial and developmental perspective is longer-term than that of any private sector venture capital agency acting on its own. The National Development Corporation is also designed as an intergral part of the Government's strategy for innovation. New products and new processes are essential to our national economic growth, because markets are changing constantly and a country or a firm which fails to adapt will quickly go into decline. New products need the investment of "patient money" which can wait for a profit while the product is being developed and tested. On its own, and in conjunction with others, the National Development Corporation will provide such crucial support to the process of innovation in Ireland.
I would like to stress from the outset that the National Development Corporation must be viewed as one important element of the Government's overall package to tackle the unemployment problem and to stimulate a greater level of investment in the traded sectors of our economy. The potential contribution of the corporation is enormous but it should not be expected to cure the problem of unemployment of its own accord. It is only part of that cure — but an important part. This legislation, therefore, must not be seen as a panacea for all the economic ills facing this country at present.
The principle function of the NDC will be to take an equity stake in industry by investing in suitable projects with a capability for providing sustainable and viable employment opportunities. The investment objectives of the corporation, which are enshrined in section 10 of this Bill, require the corporation to invest only in enterprises which are both profitable and efficient. Furthermore, the corporation has a general duty under section 13 of the Bill to assist in the creation of the maximum amount of viable employment in the State and to earn a reasonable return on any investment made by it.
These provisions underline the commerical orientation of the corporation and highlight its role in assisting in the creation of the type of industry which we require in order to ensure our future industrial prosperity.
Perhaps the greatest fear that has been expressed in regard to the establishment of the NDC is that it will become just another layer of bureaucracy and will be able to achieve nothing that is not already within the ambit of existing State agencies. In particular, it has been suggested that the functions of the corporation will overlap unnecessarily with those of other State industrial promotion agencies such as the IDA, ICC or Fóir Teoranta.
I would like to emphasise that the NDC is designed to be an investment agency. It will be precluded by virtue of section 10 (6) of the Bill from making grants available to industry such as the IDA does and the corporation's powers to give loans will be limited to the extent necessary to complement its overall effort and may be exercised only in the specific and quite narrow circumstances set out in the Bill.
The IDA has been one of the most progressive and successful industrial promotion agencies, not just in Ireland but in Europe. In particular, its success in attracting mobile investment is unparalleled anywhere in the world. It would be insulting, not just to the IDA but also to the Government, to suggest that the NDC is designed to usurp the Authority's functions. Its functions are entirely separate.
The IDA has of course taken minority equity stakes in industry in a small number of cases where this was necessary to formulate an overall package of aid to a particular project. I am not particularly keen on the IDA doing this. If the project cannot be aided within the normal grant limits there is probably something the matter with it. This has been particularly so in the case of Japanese projects locating in this country. The Japanese often look for an indication of Government support for their projects by means of direct State participation. We should not forget, however, that the IDA's principal statutory function is to contribute to the industrial promotion effort by means of providing grant aid to industry.
I will not deny either that the Industrial Credit Company has also from time to time taken equity stakes in industry but it is primarily a State banking institution.
Fóir Teoranta is a State rescue agency which has an investment perspective which would be very different from that of the proposed National Development Corporation. It is a rescue prolongation body, whereas this is a development body.
However, notwithstanding these differences, I recognise that there are certain parallels between the proposed role of the corporation and the roles of existing industrial promotion bodies. It is for this reason that I announced in the course of the Dáil debate on this legislation that it was my intention that the NDC would draw up detailed operating agreements with the agencies mentioned so as to rule out any question of overlap. It will be necessary in these agreements, and in particular in the one with Fóir Teoranta. to elaborate the principle that the NDC will not be involved in industrial rescue of any kind. These operating agreements will, of course, be subject to my approval as Minister tor Industry, Trade, Commerce and Tourism.
In essence, the National Development Corporation is designed to be a State investment agency, whose primary method of operation will be substantially different from that of any other State industrial promotion agency other than the National Enterprise Agency, which it is intended to replace.
Venture capital is a very specialised area of industrial financing. It requires specialised and particular skills and expertise in order to be successful. A true venture capitalist must be prepared to take risks and to recognise that some of his investments are going to fail. Furthermore, a venture capitalist is not interested in making investments in order to provide a steady dividend income over the years. His primary aim is to invest in industry which will yield substantial capital gain.
All of these factors contribute to an investment perspective which is unique to the venture capital business. The main banking institutions, not only in Ireland but abroad, have recognised this and have established their venture capital activities within institutions which are totally separate to, and divorced from, their principle banking business.
Likewise institutional investors such as the pensions funds and life assurance companies have never involved themselves directly in venture capital activities. Their participation in this particular area of investment is by way of shareholdings in the private sector venture capital agencies. In setting up the National Development Corporation, therefore, the State is providing for a separate institution, similar to what is being done by the banks and the pension funds on the basis of those tried, tested and proven precedents.
I would like to explain why the Government are replacing the existing National Enterprise Agency with the National Development Corporation. The National Enterprise Agency has performed a very valuable function over the last two years. However, it has been inhibited by a number of factors. In the first instance, the NEA is a company set up by administrative means as a private limited company. It has no specific statutory remit. The NDC, on the other hand, is being established by law by the Oireachtas and will have specific statutory power to operate and invest in areas as defined in the Bill. This new statutory framework is a significant improvement in that it clearly outlines the NDC's remit and greatly enhances its potential to operate successfully. It crystalises the NDC's function and leaves no room for doubt as to its primary job creation role. Furthermore, it greatly improves the administration procedures involved and removes the uncertainty which has surrounded the operation of the agency in recent years. Also the existence of legislation gives the Oireachtas a major say in the operation of the corporation.
Secondly, the National Enterprise Agency was formed with only a nominal share capital and was required to draw down its capital funds under a grant-in-aid arrangement. This produced a degree of uncertainty and mitigated against the agency entering into long-term financial and investment commitments. On the other hand, this legislation is providing the NDC with an authorised share capital of £300 million. This underlines the Government's commitment to the NDC and greatly enhances the operating capabilities of the corporation.
I would like to dispel any suggestion that the experience gained by the agency to date or any of its investments will, in some way, go by the board. Section 32 of this Bill dissolves the agency and vests all its property, assets, debts, liabilities and so on in the corporation. This is a streamlined way of eliminating any difficulties that might arise in the transfer of responsibility and ensures that the corporation may step directly into the shoes of the agency. In this way the work of the agency to date will be built upon by the corporation and its role and chances of success greatly enhanced by the provision of a proper capital base and an adequate statutory framework.
I think it would be appropriate at this point to pay tribute to the chairman, directors and staff of the NEA. They have operated under a cloud of uncertainty as regards their future for some time but, notwithstanding this, their commitment and endeavour has never waned. Let me say also that, although the NEA had been established by a previous administration. I actively encouraged it to continue its work until something better was available. In this regard I would point out that the establishment of a National Development Corporation had been the policy objective of this Government since 1981. It is also worth highlighting that the NEA has made many good investments. During 1984 and 1985 20 projects have been approved committing over £2 million of capital funds. Some 150 or so jobs have been provided by these investments and a potential for even greater employment will hopefully be achieved as these projects begin to grow and expand.
I referred earlier to the principal duty of the NDC, which will be to assist, by means of investment in industry, in the creation of the maximum amount of viable employment in the State. It represents a new approach to State involvement in industry.
A key element of this new approach will be the fact that the corporation will not be confined to investing in existing industry or in new projects promoted by others. Where the NDC identifies a particular niche or gap in the market place which the private sector is not yet exploiting, it will be empowered to establish a business on its own initiative to meet that demand.
Another key element in the role of the NDC is that it will be required to establish a "Revolving Investment Fund for Employment" thereby enabling it to roll over its resources and continually reinvest in new enterprises offering new opportunities. It will achieve this by realising its investments as soon as it is commercially prudent and with a view to earning a reasonable return. The framing of this legislation is designed to take account of the fact that the State has limited resources and must aim to get maximum return in terms of employment from every pound it spends. As part of its normal investment criteria the NDC will set at the outset of each investment time limits for its involvement in that investment. They will further be required to notify me of the time limits so set and of any subsequent decision to extend them. The idea here is that the NDC by realising its investment will be able to use that money a second, third and fourth time, which will create additional jobs which it might not otherwise be capable of doing.
There has been a degree of ill-informed debate on this whole question of the NDC realising its investments. In the first instance, I would like to point out that there is nothing wrong with the corporation selling off its successful investments. This is the way any venture capital agency works. Where investments have proved successful and are no longer in need of the support of the National Development Corporation the disposal of the investment will involve an immediate and useful cash gain to the corporation. The project concerned will have built up a viable level of employment which will be sustained and expanded on exactly the same commercial grounds, no matter who owns it. On the other hand, by disposing of the investments, future profits will be brought forward and capitalised in the cash sale price, thereby making new funds immediately available to the corporation for reinvestment in another project. The creation in this way of a revolving investment fund for employment means that the corporation will not be a static body with an ageing portfolio of time consuming investments, nor a constant drain on the public purse, but a truly developmental body with a constantly renewable source of funds, and in later years, a high degree of independence of the Exchequer in the funding of its new operations.
What, Senators may well ask, will become of the corporation's less successful investments? Any venture capitalist will tell you that it is investments which limp along which create the greatest headache for any commercial organisation. They are a drain not only on money but, more importantly on the time of highly talented executives who ought to be employed in the most creative way possible. Such investments may have to be sold without profit, or even at a loss, in order to avoid a continuing drain or even greater losses. It would make no sense to retain loss makers just because the taxpayer is the nominal owner. One must apply strict commercial criteria in relation to the disposal of such investments.
This method of operation of the NDC will be a key factor in achieving the Government's employment objectives. I have demonstrated how the NDC will provide a constantly renewable flow of funding for selective investment in modern viable industries. It is important to remember that the new technology of the mid 1980's will be outdated by the mid 1990's. We cannot afford to tie up our resources permanently in the technology of today. We need to have a constant stream of funds available to invest in new technologies as they arise over the coming decades. The NDC by operating a revolving investment fund, will be in a position to stay on the frontiers of technology and provide the jobs required by our young and increasing population without the need for a continuous source of new funds from the taxpayer.
I would like to point out also at this stage that while the Minister of the day will be empowered to give directives to the corporation under section 31 of this Bill, he will not be empowered to issue such directives in regard to any particular investment in which the NDC is or is likely to become involved. In other words, I would not be able to give them any directions about investments in County Meath, much as I would like to do so.
