Item No. 5 on our agenda is the 1998 Annual Report of the Comptroller and Auditor General and Appropriation Accounts: Vote 34 - Department of Enterprise, Trade and Employment, paragraph 34. Item No. 6 is Enterprise Ireland (Forbairt) - Annual Financial Statements 1998. I welcome Mr. Paul Haran, Secretary General, Department of Enterprise, Trade and Employment, and Mr. Dan Flinter, Chief Executive Officer, Enterprise Ireland. Will they, please, introduce their officials?
1998 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.
Vote 34 - Department of Enterprise, Trade and Employment.
Enterprise Ireland (Forbairt): Annual Financial Statements 1998.
Mr. P. Haran (Secretary General, Department of Enterprise, Trade and Employment), Mr. D. Flinter (Chief Executive Officer, Enterprise Ireland) and Mr. D. Quigley (Principal (PED), Department of Finance) called and examined.
Acting Chairman
Mr. Haran
I am accompanied by Mr. Roddy Molloy, Assistant Secretary, head of corporate services division; Mr. Martin Lynch, head of finance unit, and Ms Sandra Hogan, finance unit.
Mr. Flinter
I am accompanied by Mr. Paddy Hopkins, head of corporate services, and Mr. Jim Daly, head of finance.
Mr. Quigley
I am accompanied by Mr. Gerry Kenny, assistant principal, Vote control.
Acting Chairman
There are also some observers from Enterprise Ireland present. Witnesses should be made aware that they do not enjoy absolute privilege and should be apprised as follows: the attention of members and witnesses is drawn to the fact that, as and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997, grants certain rights to persons identified in the course of the Committee's proceedings. These rights include the right to give evidence; the right to produce or send documents to the Committee; the right to appear before the Committee, either in person or through a representative; the right to make a written and oral submission; the right to request the Committee to direct the attendance of witnesses and the production of documents and the right to cross-examine witnesses.
For the most part these rights may be exercised only with the consent of the Committee. Persons being invited before the Committee are made aware of these rights and any persons identified in the course of proceedings who are not present may have to be made aware of these rights and provided with a transcript with the relevant part of the Committee's proceedings if the Committee considers it appropriate in the interests of justice. Notwithstanding this provision in the new legislation, I should remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.
Paragraph 34 of the report of the Comptroller and Auditor General reads:
34. Drawdowns from the European Social Fund
Enterprise Ireland is financed by way of grant-in-aid from the Vote and by moneys received from the European Social Fund (ESF) and the European Regional Development Fund.
Enterprise Ireland provides financial support for training and management development activities carried out by client companies. 75% of amounts spent by Enterprise Ireland on such financial supports are eligible for funding from the ESF under the Human Resources Measure of the Operational Programme for Industrial Development. The total amount available for any year is set in accordance with the Operational Programme as adjusted by the Monitoring Committee. Based on these amounts, advance payments of 50% and 30% are received from the ESF by Enterprise Ireland via the Department of Enterprise, Trade and Employment. The balance is received following submission of a final claim.
Client companies are approved to carry out training and/or management development activity, usually as one element of a financial support package. Client claims must, in accordance with ESF requirements, be based on activity in a given year. When claims are received, they are examined and verified and then paid. Such claims are, in a large number of cases, received after the year end.
The Department of Enterprise, Trade and Employment issued an instruction that Enterprise Ireland must submit final claims for funding based on 1997 activity under the Human Resources Measure by 5 June 1998, as claims for ESF recoupment have to be made by 30 June. The final 1997 claims were prepared and submitted based on payments to client companies up to the 3 June 1998. The amount paid at that time was £1.7 million Subsequently, further claims based on 1997 activity were received and paid by Enterprise Ireland. The total paid by October 1998 was £2.9 million and by March 1999 was £3.4 million.
Given that many client companies submitted claims for payment subsequent to the submission of the final annual application for ESF funding and as a result would not qualify for ESF recoupment, I sought the views of the Accounting Officer and Enterprise Ireland as to whether the Exchequer was carrying the total cost of grants as a result.
I was informed that:
In line with practice over many years, Enterprise Ireland, in the interests of facilitating companies to develop their skill base and minimising the related bureaucracy, does not put explicit pressure on companies to submit claims within any designated period.
To the extent that claims were received and payments made by the agency but not included in submission of the final claim to the Department of Enterprise, Trade and Employment, the amount which was re-couped was reduced. This, however, represented no loss to the Exchequer since any surplus ESF moneys were allocated, under the Operational Programme, to be recouped against other programmes where Exchequer funds had already been committed.
As a result of work undertaken to enhance the level of client service, Enterprise Ireland is putting in place a series of process improvements designed to facilitate and encourage clients to drawdown funding in a faster and more efficient manner. This may be expected, inter alia, to improve the proportion of ESF funds which can be recouped by Enterprise Ireland.
Mr. Purcell
Paragraph 34 reflects my concern about the effectiveness of the arrangements for receiving or recovering moneys from the EU under the human resources measure of the operational programme for industrial development. Financial support for training and management development carried out by indigenous firms is provided by Enterprise Ireland, and 75% of it is eligible for recoupment from the European Social Fund. There is no cut-off date for the claiming of grants by companies towards the cost of undertaking the relevant training activity in a particular year. However, the Department must submit its claim for recoupment from the EU no later than six months after the end of the year in which the activity took place.
Many grant applications from companies are not submitted by that time, with the result that they cannot be included in the recoupment claim. The example quoted in the paragraph takes the June 1998 claim in respect of 1997 training activity. That was based on £1.7 million in grant payments. However, it did not include a further £1.7 million representing grants to companies after June 1998, the cut-off date. In a nutshell, instead of getting 75% of £3.4 million from the EU, Enterprise Ireland gets 75% of £1.7 million. Effectively, the shortfall in Enterprise Ireland's accounts is met by the Exchequer. The Accounting Officer explained that, while the EU funding was lost to Enterprise Ireland, it did not represent a loss to the Exchequer, because unused EU funds from one part of the operational programme can be redirected to other measures in this and other programmes by the industry monitoring committees.
On that basis, my fears that EU moneys may have been lost to the Exchequer appear to be groundless though, from experience, one can never be absolutely sure about this until all the loose ends are tied up when the operational programme outturn is finalised, which I reckon should be some time later this year.
The committee will note that Enterprise Ireland was putting improved procedures in place which should go some way towards addressing the issue.
Mr. Haran
I accept the Comptroller and Auditor General's observations on the issue. Clearly, when money is committed by Enterprise Ireland to client companies, problems can arise where the client company does not incur the expenditure. If the bill has not arrived by June of the following year, preferably March, we can no longer allocate the bill to ESF expenditure.
We have procedures in place, and there is a monitoring committee that looks after the social fund and the level of commitment. It has the authority to re-profile expenditure and to allocate it to different programmes, not only the industry operational programme but other human resources development programmes. At a meeting in June 1999 a proposal concerning the unspent money from the European Social Fund that had not been drawn down, not only in the example quoted by the Comptroller and Auditor General but in the total unallocated moneys that needed to be re-profiled, was put to the committee and the committee agreed to a re-profiling of that money. The unspent moneys went to different areas which the Exchequer would otherwise have had to subvent. There is no loss to the Exchequer. It is primarily a reallocation of funding to different programmes and the use of the Exchequer, and re-profiling therefore as well, in parallel, of Exchequer funding. Whether it is 50% Exchequer funding and 50% ESF funding, in one programme one might find that, because of a shortfall of ESF moneys one uses more Exchequer funding, but in reality there is less Exchequer spending in the alternative programme. If the committee wishes I can give details of re-profiling. I am not sure it will be of much value, but I have the data with me.
We have also asked Enterprise Ireland, and it has agreed and has introduced mechanisms to try to address the generic problem of companies that have been allocated moneys and who have been told that they can spend moneys for certain activities and to close off the file on those. There has been a tendency for companies to hold open a promise of moneys. There could be a delay in spending it and there would then be a contingent liability on the Exchequer through European and Exchequer funding to pay this. It is undesirable to have an outstanding liability against the State. That has to be balanced. It is a prudential concern that we do not try to force companies to spend money quickly when it might not be appropriate for the company to encourage expenditure at the time. It is a matter of trying to balance the need for good accounting practice against the developmental needs of companies and the need to protect he Exchequer as well.
Mr. Flinter
I confirm to the Committee that we are going to institute revised procedures taking account of the issue referred to by the Comptroller and Auditor General by contacting companies to alert them directly to the time issue. Equally, we do not want to encourage companies to make claims for the sake of making them as opposed to ensuring that they carry out the appropriate training in a specific time frame. We have begun to institute new procedures.
In relation to the ESF funds under the operational programme, has 100% of the available funds been drawn down by the Government across all profiles in the business field in particular? The question arises because the Comptroller and Auditor General suggested that he is concerned that sometimes there are moneys that are not recouped. I want to know whether, even though the Government did not recoup all moneys that were spent on training by companies that were eligible for recoupment, at least 100% of the funds that are available were taken up by the country as a whole.
Mr. Haran
At this stage the account relating to the operational programme has not been signed off completely. When the ESF fund for the entire period is closed off we will have a definitive statement on the expenditure. As the Comptroller and Auditor General has said, loose ends can exist. When the final account for the entire period is signed off, we will have a final answer to the question he has raised. The re-profiling of these moneys and other moneys from the industry operational programme took place in a reasonable time to enable the draw-down to take place, and it went into areas where it was expected to be drawn down. Given that we do not have the audited account and the closed off account from the wider CSF at this stage, I cannot give a cast iron guarantee on that issue. It goes beyond my vote, but I understand the concern raised.
There is no guarantee, therefore, that all of the moneys will be drawn down. Because the account has not been finalised, you do not know whether or not it is all drawn down. One can understand the concern of the Comptroller and Auditor General that in relation to the discipline of this fund, there is a weakness.
Mr. Haran
I accept that there could be a potential weakness. Moneys might not be drawn down in a particular period. That is why we have monitoring committees and re-profiling exercises to try to ensure that moneys are re-profiled, spent and allocated, to protect the Exchequer. In June 2000 when the account will be finally closed off we will see the ultimate outcome.
Is this the 1997 account or is it the total up to 1999?
Mr. Haran
This is the full five-year account. There is movement between the years and between OPs as well.
However, if the Government has to claim the money that is spent in the prior year by June of the following year, why is it not a condition that a company that has spent the money must claim in sufficient time to be included in the June claim?
Mr. Haran
There is a legitimate concern there. Procedures are being put in place to try to address the weakness where companies have not claimed on time. It is perverse to chase after people for a bill, but it is the best way of doing business. We have to close off our liabilities properly from an accounting point of view and from a money management perspective. We accept this is an initiative——
Mr. Flinter, you say there are revised procedures for alerting companies about this. How can you ensure that the companies will claim the amount they have previously spent, not what they are being encouraged to overspend? Why is there not a condition that moneys spent in the previous year have to be claimed by, say, May of the following year? That seems to be a reasonable time in which to claim the training expense.
Mr. Flinter
I would not disagree with the Deputy's comment that it is a reasonable period. We have a provision in our legal agreements which gives us the capacity to cancel approvals if companies have not claimed within a reasonable time. We are now contacting companies directly by 'phone and letter to alert them specifically of the deadline by which claims must be in, in order to accentuate the proper claiming by companies so that we can maximise the drawdown of European Social Fund money. Just to give an indication of the dynamic - the most recent claim being prepared is for 1998 - the expenditure being claimed will amount to £8.6 million for that period although the amount provided for in the profile is only £8.1 million. This is an indication that we have the level of claims necessary to allow us maximise the drawdown by reference to the profile. We have to work very diligently with the individual companies to encourage them to make the proper claims. That is what we are doing on a one to one basis with the firms. In some cases they will not be as diligent as they might be or their priorities may be focused on issues other than filling in the claim forms. We are trying to get a balance between having the claims made speedily so that we can make the maximum claim as opposed to doing other things. That is the issue with which we are trying to come to grips.
While I am on Enterprise Ireland, I will refer to the item in the Comptroller and Auditor General's report regarding exit strategy for investments?
Acting Chairman
The Comptroller and Auditor General wants to——
Will the Controller and Auditor General introduce that?
Acting Chairman
We will do that now.
There is one question I was intrigued about in relation to the Department. You were allocated money from FÁS from unspent money on the Luas. To what does that relate?
Mr. Haran
My understanding is that itwas capital expenditure for FÁS. I do not have the note in front of me. The capital unspentwas needed to build up the training capacity in FÁS and the Government reallocated moneys. The Department of Finance may be able to provide greater details on it. Part of the funding given to the Department in the supplementary was unspent moneys from the Luas project.
Does that mean that money cannot be spent on the Luas project? Does it mean that money is lost to it?
Mr. Quigley
No, it was money that was unexpended in that year on the Luas. It was not required in that year but there is no question of the money being lost to Luas. It is simply money unexpended that year that was available.
It was £608,000.
Mr. Quigley
That is correct.
In relation to the Luas project, who was it for? It is a large item.
Mr. Quigley
It is a smallish item in relation to the moneys that would have been available that year for Luas. We are talking about considerable sums of money. It was a small sum in the context of Luas. It was towards the end of the year and it was not necessary to spend it in that year. It was simply a normal transfer of moneys within the Exchequer.
To what did it relate? Does it imply that the project was behind schedule?
Mr. Quigley
It was expenditure for planning and design that was not going to be spent that year. There were certain delays in bills coming through. The moneys involved were available the following year. Money was available from the Luas for other purposes. It is a normal aspect of Government expenditure that towards the end of any financial year where there are savings in certain areas they are used for expenditure in other areas. It is a matter of moving moneys around.
May I have a detailed note as to why a certain amount of money was delayed? I do not understand why the money is not spent? I would assume a project with a tight deadline would want to spend money at the beginning rather than at the end. I have no further questions.
Acting Chairman
We move to the Comptroller and Auditor General who will introduce Enterprise Ireland's annual financial statement for 1998.
Mr. Purcell
In the supplement to my audited report on the accounts of Enterprise Ireland for 1998 I drew attention to an issue surrounding the management of the agency's portfolio of shares employing companies. Largely as a result of the actions of its predecessors, Enterprise Ireland has a sizeable portfolio of shares in client companies, approximately 250 holdings either in ordinary shares or in preference shares which have attaching conversion options. It also has about 230 holdings in redeemable preference shares which do not have attaching rights. The market value of quoted investments at the end of 1998 was £53.6 million. The shareholdings came about as a result of a gradual change from the exclusive use by the agency's predecessors of non-repayable grants as a means of giving financial assistance. It changed to a position where a degree of repayability would be built into the agreements. Throughout the nineties this policy was gradually refined to a point where the State agency would acquire shares in start-up companies which were seen to have high growth potential.
The overall goal of direct industrial policy is to help firms develop to a point where they no longer need State support. In line with this policy it is considered that once a client company has progressed from the stage of needing support to a position where it is trading normally and being quoted on the stock exchange there is generally no longer justification for Enterprise Ireland to retain its shareholding in that company. The agency should, therefore, seek to exit from these holdings as soon as practicable after that stage of development has been attained and should do so in a manner designed to achieve the best price obtainable, having regard to market conditions. It will also have to be careful that sanctions would not disrupt the market or cause any problems for the company. I was concerned that an exit strategy for investments falling into this category should be finalised and implemented as soon as possible. The need for such a strategy was identified by Forbairt in September 1997, but it had not been finalised at the date of my certification of Enterprise Ireland's accounts in June 1999. Bearing in mind the increasing value of the marketable shares and the volatility of their prices on the stock exchange, I corresponded with the chief executive and the accounting officer and referred to the matter in a supplement to my audit report.
Apart altogether from the ultimate potential impact on the agency's balance sheet, all other things being equal, it would obviously be important to maximise the return. I am happy to be able to report to the Committee that an exit strategy was agreed with the Department of Finance - I think last month - and that the market value of the listed investments at the end of 1999 had increased to some £133 million. We are sitting on a nice pot of gold. That is the good news.
Acting Chairman
Thank you very much. Mr. Flinter, would you like to make an opening statement?
Mr. Flinter
The points the Comptroller and Auditor General has made reflect the reality we have experienced. I would add a point of information and a comment on the exit process. In 1999, on audited numbers, we realised about £21 million through exiting from various shareholdings, which compared with approximately £4.1 million in 1998. The process of beginning to realise value commenced quite significantly in 1999 and, as the Comptroller also said, the value of the holdings have also appreciated.
I want to highlight in particular that we are mindful of getting the best return possible, complying with market rules and being conscious of our developmental relationship with a company so that we do not impair the share price of a company in whatever exit strategy we adopt. We want to be mindful of that in the process but the process of implementing it has actively begun and is reflected in the outcome for 1999.
The Comptroller and Auditor General suggested that Mr. Flinter's agency should seek to exit as soon as possible. Is there a counter argument on whether one should show solidarity with the companies Mr. Flinter's agency helped to develop?
Mr. Flinter
I would probably separate the two issues. For unquoted stocks we should certainly stick with them. For quoted stocks, the balance we are seeking to achieve is reflected in my comments which is that we want to realise the value to the Exchequer and to the taxpayer on the basis of the investments but in a way that is mindful of the developmental needs of a company. It would not necessarily be a good outcome if we were to, for example, dump the stock of a company on the market, materially affect its share price and undermine the confidence of the market in the company. That would not be a good outcome in my view, given our developmental responsibility. We are seeking to do it as soon as possible, given that as a context, rather than saying we should exit at the very first minute, but we are mindful of that in doing so.
There has been a significant increase in the value of the stockholdings or the portfolio of shares held in various companies. As the Comptroller and Auditor General has said, the figure at the end of 1999 was £133 million, notwithstanding the £21 million worth sold during the year. Will Mr. Flinter tell the Committee the cost of his agency's current holding of shares in publicly quoted companies and the current value of those shares?
Mr. Flinter
I can give figures specifically for the companies from which we exited last year.
Right.
Mr. Flinter
The actual cost of the ordinary shares in those companies where we either exited in whole or in part was £1.5 million, and from that we realised £21.5 million. There are some companies where we have exited only part of our shareholdings so there is unrealised gains because we did not exit all our shareholdings in certain companies. I do not have the original cost of the other companies in front of me. I would be happy to provide it to the Committee, but it would be in the same order as my initial——
Could Mr. Flinter give me a list of the top five companies in value of the current shareholding?
Mr. Flinter
The top five include Trintec——
What is the value of the shareholding in that at the latest date?
Mr. Flinter
If we take up to 31 December, it is approximately £53 million. The figure for Iona Technologies is £44.5 million, for a company called Phone.com, it is £10.7 million, and for Icon it is £8.4 million. Sorry, I left one out, the figure for Kingspan is £12.3 million.
Does Mr. Flinter have the actual cost of entering into those shareholdings?
Mr. Flinter
I do not have it in front of me. I do not have the specific prices where we entered but, as a round guess, I would estimate that the cost of entering in those companies would have been less than £5 million. I would be happy to give the specific figures to the Committee, but it would be less than £5 million.
To move on to the developments, particularly in relation to broadband access, there appears to be a significant amount of fibreoptic cable laid throughout the country, and I understand efforts are being made to tie in the local loop with the cable to allow broadband access. Does Mr. Flinter see a quantum leap occurring in the potential for Irishbusiness in the future? How close are we to that?
Mr. Flinter
The broadband has two possible impacts. The first is in terms of creating business opportunities for companies in the information technology sector, primarily software companies but also companies in what is referred to as new media. There is significant growth potential. The interest level, particularly in terms of young entrepreneurs in developing new companies, is probably stronger now than it has ever been in the technology area. The real challenge is not so much the new start-ups but whether we can help them to achieve international scale because they are competing against major companies. I do not underestimate the challenge of encouraging new start-ups but if we were taking a five-year time horizon, the main business challenge we face in Enterprise Ireland, and the companies, is whether they can reach international scale so they can compete with international competitors. Some will, and we have seen some going on the stock market to reflect that. Others may be acquired - we have seen that during the course of 1999 - by international firms, and some will not succeed. The availability of broadband on the one hand and the emergence of the type of people with technological skills that we now see represent a resource that is stronger now than it has ever been. I would be quite optimistic about the future.
The other issue is that broadband creates the capacity for companies in more traditional industries to conduct business on an e-business basis, and that will be a significant challenge for companies, particularly those doing business to business transactions. It has significant growth opportunities. It has challenges for the traditional sectors but if they adapt, they can also benefit from it.
What about the timescale? Will they be lost in 18 months if they do not adapt?
Mr. Flinter
Some companies will feel pain over the next two years if they do not begin to adapt on the business to business relationship through e-business. They will find their competitors are better and that they, therefore, face the challenge.
On the subject of e-business, I understand that President Prodi and the Commission announced the e-Europe initiative in mid-December. Has Mr. Flinter's organisation or the department any views on that? Obviously I am not asking him to set them out in detail here but I would be interested in receiving a note in that regard. I presume Mr. Flinter does not have an off the cuff response to Mr. Prodi's initiative, or does he?
Mr. Flinter
I do not have a specific comment to make on the Commissioner's position on it. In conjunction with the Department of Enterprise, Trade and Employment, we have focused in recent months on developing and implementing a strategy to encourage Irish companies to use e.business as a way forward. That process began in the last quarter of last year with a series of seminars that took place around the country, which more than 700 firms attended. They got briefings on the challenges and opportunities presented and more of that activity will take place this year and beyond.
A basic tenet of President Prodi's initiative is to target small to medium sized companies.
Mr. Flinter
Yes.
It has been said that 60% to 70% of Irish companies are small companies. When Mr. Flinter refers to small to medium sized companies I presume he means companies with fewer than 50 employees. Is that correct?
Mr. Flinter
The EU definition of an SME is a company employing fewer than 250 people. About 3,200 companies are potential Enterprise Ireland client firms. At least 3,000 of those would come under the SME category and have fewer than 250 employees and of that figure probably 2,000 would have fewer than 50 employees.
Regarding the shareholdings, the purchase values are not shown. Is Mr. Flinter saying that taken as a bundle Enterprise Ireland's original outlay in its shareholdings in the top five companies was £5 million?
Mr. Flinter
I do not have the specific figures.
I mean as a group.
Mr. Flinter
My best judgment is that the acquisition cost of them was no more than £5 million.
That covers the initial investment in those five companies.
Mr. Flinter
Yes.
Was the investment made by direct investment or loan?
Mr. Flinter
We made a direct ordinary share investment in those companies or alternatively, as the Comptroller said, in some cases the shares were convertible preference shares and we had a right to convert a proportion of our convertible shares into ordinary shares. The investment was either an upfront ordinary share investment or the conversion of preference shares.
Is it correct that the organisation made £21 million in 1999 by realising some of its shares?
Mr. Flinter
Yes. The original cost involved in making that £21 million was £1.5 million.
If an organisaiton has a holding in a quoted company, it seems to be the policy that it should sell its holding early on. Is that the policy?
Mr. Flinter
The Comptroller's question posed the issue of how long we should hold shareholdings in publicly quoted stock and that was discussed by our board. Our view is that we should not hold them forever and ever and that we should devise an exit strategy because at some point in that process the company concerned matures. As companies can be significantly funded by the marketplace, the holding of these equities by the State, through Enterprise Ireland, for a very extended period was not necessary subject to the caveat of how we should exit without impairing a company's financial position or its position on the stock market. Getting to the marketplace is a signal of the emerging maturity of the company and that the private sector is prepared to invest equity in it.
There is no suggestion Enterprise Ireland should be forced to relinquish its holdings in companies. It is not a question that a time limit should apply to these holdings because they are quoted. I could see a weakness is such a requirement. When takeovers occur, as we witnessed with Esat and other companies, the State could be a beneficiary. An Post was a significant beneficiary from the Esat takeover. I hope Enterprise Ireland's policy is not predicated on the basis that it must sell its holding or that it is desirable to do so, particularly in the case of valuable companies whose share values are increasing,
Mr. Flinter
The word "must" does not apply in this case. There is not an absolute statement indicating that we must sell our holding after, say, three months. We must exercise reasonable judgment to ensure that we get a fair and good return for the State but be cognisant of a firm's development opportunities. That is the judgment balance we seek to exercise.
What happens to the money realised from the sale of such shares? Enterprise Ireland realised £21 million from such sales. Is that returned to the Exchequer or is it retained in Enterprise Ireland?
Mr. Flinter
At the beginning of each year our budgets are agreed and set by the Government. That makes an assumption about the organisation generating money, some of which will come from equity and some from services we sell to our clients. Where we exceed that performance, that money is remitted to the Department of Enterprise, Trade and Employment unless there is a different decision in terms of new programmes to be implemented. The surplus in terms of the extent to which we exceed our income targets, including the realisation of equity, is reverted to the Exchequer.
I would not suggest for one moment that Mr. Flinter would retain a shareholding rather than realise it in order to remit it to Mr. Haran. Is that not a weakness of the organisation's exit strategy policy? If Enterprise Ireland is clever enough to make a judgment to invest in companies like Trintech and Iona and if there is any fairness in the Exchequer system, would it not be more desirable from the organisation's point of view that it should be allowed to retain some this money?
Mr. Flinter
I am not sure that I am in a position to comment on the fairness of otherwise of the Exchequer. An exit strategy approach was developed and applied to make sure we had a rounded view of what is happening. If the outcome is that the money realised reverts to the Exchequer, that is the outcome. A key point from the organisation's viewpoint is that, if policies are agreed by our Department and the Department of Finance, the budget is available to implement that. If a surplus accrues, the Exchequer gains accordingly.
Has the Department a view on that? The NTMA was set up. If gains are made, would it not be more appropriate that they should be handled by the NTMA rather than by the Department? The organisation is making the judgment and the profit. If we are trying to create enterprise, surely we should start with Enterprise Ireland? There should be a reward for the risks taken orgranisationally in relation to moneys earned by wise investment policies.
Mr. Haran
I accept the Deputy's point. Enterprise Ireland is an agency and its job is to help develop Irish enterprise and to make up for failures in the system where intervention is required where companies cannot develop or might not develop. The Comptroller strives to bring the issue to our attention. Enterprise Ireland is not established as an investment company or a pension company. Its function is not to maximise profit for the Exchequer but to help develop companies. It is not good for an organisation to give client companies free money. In the post-Culliton era we have tried to move away from giving free money to companies. This has occurred in an environment where tax rates were decreasing and these companies were benefiting from low tax rates. It is reasonable to support the development of companies and part of that approach is to move away from giving companies free money and participating in the risk.
As well as Enterprise Ireland participating in the risk, taxpayers are participating in it. The money flows through our account. It does not come back to us, it goes to the Department of Finance. My experience of the Department of Finance is that where companies like Enterprise Ireland show that they use public funds well, there is a great willingness to consider the investment strategies of Enterprise Ireland. The proper management of its investments and the management of its funds benefits Enterprise Ireland on an ongoing basis.
We would agree with the Comptroller's remarks on this. We do not want to turn Enterprise Ireland into a holding company for stocks. It is a great statement of the success of Enterprise Ireland that the companies it has worked with have launched forth as adult companies which trade internationally and their share prices reflect this.
I agree with the Deputy that we must relinquish our holdings and in the process we sacrifice money. While there cannot be a requirement that we must sell our holding within a timeframe, ultimately it is desirable for Enterprise Ireland to concentrate on those companies that need its intervention. When companies like Iona and Trintech achieve the level of excellence they have achieved, it is a statement of success when Enterprise Ireland can ultimately exit from being a supporter of such companies. There is not a requirement that it must exit from them, so it need not do so at a cost to the Exchequer. It also need not exit at the time when it would damage a company as in the case of a possible takeover or when its stock is weak. Enterprise Ireland is happy about that and we are pleased that we are here today showing very buoyant figures for our stockholdings. If there were a stock market crash tomorrow, some of those holdings might go down but the ultimate success or failure of Enterprise Ireland's strategy in this area is the success or failure of those companies. This is just one measure indicating the success or failure of that activity.
I agree that we do not have absolutes. I hope Enterprise Ireland would not feel that the way the system works encourages them not to dispose of property. Enterprise Ireland gains strongly by its relationship with my Department and with the Department of Finance in showing that it is generating the funds and is treating and handling considerable Exchequer resources in a proper and prudential fashion.
You fail to see the logic. It is profitable centre but there is no reward. I am not suggesting you are cruel and harsh to the people in Enterprise Ireland in terms of the budget allocation but if it happens to be involved in an area that is highly profitable in terms of disposal of shares and the companies in which it has invested, there should be some measurement of that. It is measured in terms of money invested and money received but there should be some reward associated with that. I do not mean for the executives but the money could be tagged for reinvestment in other similar companies. In other words, the money should be ringfenced.
There was £20 million generated last year. I see no point in running that through the hoopla of sending it back to the Department of Finance. The best purpose for that money, instead of giving it to accountants to account for it, is to send it back for investment in companies. Is that not an encouragement?
Mr. Haran
I accept the logic of the point. In the future I could envisage a position whereby Enterprise Ireland might move off Exchequer subvention if it ends up being the type of investor that generates sufficient return to reinvest money in young stock coming forward. That might be an ideal. However, while the Exchequer is a co-financer on an ongoing basis of Enterprise Ireland, we must protect Exchequer resources. I accept your point about how one encourages people to make proper investments.
Could you envisage a situation where this organisation could be off the Exchequer payroll?
Mr. Haran
I could envisage it. If its portfolio were sufficiently highly performing, one would have to look at it as one of the options. I am not saying it is going to happen; I am not trying to fly kites or give the committee a wrong steer. I am responding to your question.
Would that be the investment side of it?
Mr. Haran
A lot of EI's ultimate expenditure is direct investment in companies by a variety of structures. If over the longer term such investment can yield a dividend response and if the dividend is sufficiently high, one could envisage it in that environment. We looked before at trying to put into portfolio a lot of the unquoted investment as a vehicle for raising money but we decided the time was not right. I am not trying to fly kites but I could envisage at some stage in the future structures whereby EI would be able to hold the revenues as a source of funding. SFADCo is one such company. It has a different profile of portfolio but its administrative expenses are covered by own resource income. You will see a notional Vote going through the account for Shannon Development - I should not have called it SFADCo - but it is generating own resources to pay for its administration.
There might be always a residual Exchequer requirement. Enterprise Ireland is going through a great deal of change and our policies are changing because corporate tax is decreasing but at the end there might be a point where we could have systems to reinvest that would not involve the money coming back into the Exchequer and going back out again. Your point is well made.
Thank you. I took a lot of time, Chairman.
Acting Chairman
There will be another occasion. I propose to adjourn further discussion on Vote 34 until 17 February. The Department will be due back before the committee on that date. Enterprise Ireland should also be represented on 1 June when a selection of enterprise boards will be before the committee. I hope you will make yourselves available on that date. We will adjourn further discussion on these accounts until 1 June.
The witnesses withdrew.
Acting Chairman
Item No. 7 concerns the agenda for Thursday, 3 February 2000 which is the 1998 Appropriation Account: Votes 19 to 23, Department of Justice, Equality and Law Reform, resumed; Vote 13, Office of the Attorney General; Vote 18, Office of the Chief State Solicitor; Vote 14, Office of the Director of Public Prosecutions and Vote 2, Houses of the Oireachtas and the European Parliament.
The Committee adjourned at 11.05 a.m.