I move:
That a sum not exceeding £221,632,000 be granted to defray the charge which will come in course of payment during the year ending on the 31st day of December, 1987, for the salaries and expenses of the Office of the Minister for Industry and Commerce, including certain services administered by that Office, and for payment of certain loans, subsidies, grants and grants-in-aid.
The Estimate before us, provides, as indicated, for net expenditure of just under £222 million in 1987, as compared with an outturn of almost £240 million, in 1986, an overall decrease of £18 million.
This Estimate contains the major share of the public expenditure allocations for the development of industry. As Deputies will be aware this is by no means the full extent of State assistance to industry, a considerable part of which arises indirectly in the form of the various tax measures and incentives available.
The provision of monetary incentives, however generous, whether direct or indirect, will not, in itself, result in a satisfactory development of our industry. Indeed, as we have found, to our cost, the high level of Government borrowing which is required to fund this assistance leads, in itself, to the very stultifying of growth in the industry.
This is an issue which we have already started to tackle in the recent budget and which we will vigorously pursue. Already the benefits can be seen.
The role of Government in improving the industrial environment is crucial, but it is not the only factor governing the approach to development. In this country — and I am not suggesting that we are unique in this — we see too often an immediate resort to a confrontational approach. We have got to get away from this — to work together — to act as partners rather than adversaries. The Government can help in this, as we have done, by ensuring that there is equity in the way people are treated.
In my own case, I am very conscious of the obligation to strike a reasonable balance between the needs of industry and the rights of consumers. Later in my speech I will touch on some areas where steps are being taken which will be of benefit to the consumer.
Many recent reports on science and technology including my Department's Review of Industrial Performance, 1986 conclude that much greater attention needs to be paid on a continuing basis to innovation, enhancing the technological capacity of firms, and to the raising of technical and quality standards. Urgent action in these areas is essential if this country is to face up to one of its major challenges — the building and sustaining of a strong indigenous industrial base. We need to pay far greater attention to the application of technology in industry in order to help our good firms survive and expand, and to encourage the growth of new high technology Irish companies on the international market.
We need to strengthen and make much better use of our R and D infrastructure to enable Irish firms and Irish products attain an increasing percentage of the keenly competitive world market in both goods and services.
Recent reports from the sectoral development committee, the OECD, and the Oireachtas Joint Committee on Small Businesses have commented on the low level of research and development in Irish industry, and the low use of State R and D facilities, which in turn reflects on the poor capacity of indigenous firms to innovate and expand. I intend to initiate a programme of action to increase the innovative capacity of Irish industry. I want to bring about a situation where our best graduates in science and engineering will use their skills and talents within Irish firms. It is there, within industry that they can apply their talents most directly to the question of developing new products and new markets for this country.
The importance which this Government attach to science and technology was outlined in the Fianna Fáil policy document "A policy for Science and Technology". Due to the present economic constraints, it is not possible in this financial year to initiate a full programme of activities. Nonetheless, it is important to make an initial commitment to this important development activity. I indicated recently in this House that I was establishing a programme for priority action in the area of science and technology. As I mentioned to the House only last Thursday, I am now finalising my consideration of this matter and expect to announce my decisions thereon very shortly. This will be done by a reallocation of funds within the Estimate of the Department of Industry and Commerce.
Referring to growth and job creation, in 1986, industrial output increased by 2.8 per cent and industrial exports rose by nearly 4 per cent in real terms. This level of output was achieved through the recovery in the chemicals sector and the expansion in the office machinery and data processing sector. The poor performance of the more traditional industrial sectors was due largely to increasing import penetration of our market combined with a fall-off in domestic demand. An analysis of the domestic market indicates that about one-third of the loss of output of domestic manufacturers in the period 1980-85 was due to a fall in domestic demand and about two-thirds due to increased import penetration.
During 1986 over 11,000 first time jobs were created in IDA-supported industries, while SFADCo created over 900 jobs in the Shannon free zone and in small indigenous industry in the mid-west region.
Despite the increasingly competitive environment for mobile international investment, the IDA negotiated over £550 million in planned new investment in 1986 which reflects a substantial increase in investment from overseas. It is expected that 15,700 jobs will be created as a result of this investment; 12,400 of these jobs are in new projects or the expansion of the overseas industrial base already in Ireland. In addition 3,300 jobs were negotiated through technology transfer agreements with Irish companies which include takeovers and joint ventures approved by SFADCo and Údarás na Gaeltachta.
On the home front considerable activity has also taken place. Small Irish firms committed investment of some £42 million in 1986, and 450 firms of the 800 approved for assistance are start ups which augurs well for the entrepreneurial spirit in the country.
There is also a renewed effort to encourage development among mature Irish firms. In 1986 the level of investment negotiated with such firms of £110 million was disappointing. I believe the potential for development of our major firms is enormous and I will be referring to this later in my speech.
As to performance in 1987, the latest economic commentary from the Economic and Social Research Institute predicts that the volume of manufactured exports and production will continue to grow during 1987 by 5 per cent. Investment in industry is expected to continue at a slightly higher level than in 1986 resulting in the creation of about 11,000 new jobs in IDA-backed firms and 1,200 jobs in SFADCo firms.
The IDA will intensify their industrial promotion strategy in the Far East where significant projects were approved from Taiwan and South Korea in 1986. The recent expansion of the IDA's Tokyo office and the establishment of an office in Seoul were part of the drive to promote Ireland as a suitable investment location for Far Eastern countries where there is considerable potential for industrial expansion.
On industrial policy, for some time now I have been concerned about the emphasis being placed on the interventionist approach to industrial policy in the form of State agencies, industrial grants and tax concessions. I have long held the view that the role of the State in supporting industrial growth required a balance to be struck between the level of direct support and the creation of a positive environment in which industrial activity would flourish and lead to improved economic performance in all sectors.
The net contribution of the existing interventionist regime has not led to the degree of industrial growth we hoped for when we first embarked on this policy. Manufacturing employment in 1986 was only 20,000 higher than in 1963, when the country was in a pre-industrialised state. Of the 20 largest indigenous plants in Ireland in 1973, four have closed and the employment in the remainder at the end of 1985 was only half of its 1973 level. Output growth — which has slowed to below 3 per cent in each of the last two years — has been concentrated in the modern subsectors of electronics and chemicals which are dominated by overseas companies. Profitability in indigenous industry is extremely poor and investment is at very low levels.
While the budget involved reductions in the levels of direct State support for industry, these reductions have, I believe, been well understood by industry generally. This is because they realise only too well that the substantial Exchequer investment in industry — between £370 million and £400 million each year since 1984 and tax incentives and allowances of £250 million per year — cannot be preserved in a situation when general cuts in expenditure elsewhere are demanded by the economic circumstances which we face.
The Government's basic strategy towards industry is to boost investment and confidence through addressing the critical imbalance in the public finances which is at the root of such problems as unemployment, high interest rates and penal levels of taxation. These are the critical obstacles preventing growth and enterprise in our country. The budget strategy has already paid off with interbank interest rates having fallen by 2.5 per cent and with significant declines in the rates to business. There is still a long way to go in order to stimulate the growth in our economy that is so badly needed. I believe that a greater level of commitment in tackling the business environment is urgently required if we are to take advantage of the great opportunities that will be afforded us in the wake of the completion of the internal market within the Community by 1992, and, indeed, opportunities which exist even now for Irish products further afield.
Industrialists realise only too well the benefits which can accrue from a more positive overall environment for investment. They know that interest rate reductions of the order which I have mentioned — and indeed with the prospect of more to come — are much more beneficial to them in terms of competitiveness, market share and profitability than a relatively small reduction in the aggregate level of direct Exchequer grants to industry which would at worst impact only marginally on the level of job approvals achieved.
Despite the major decline in the rate of inflation in recent years, the benefits which should have come our way were severely reduced by the lack of a similar level of decline in interest rates. This, together with the volatility in exchange rates and a lack of confidence in the economy presented a serious setback to growth in the economy. These are the reasons we must concentrate more on the importance of the environment for industry and why the need for cuts in public expenditure, including the levels of direct support for industry, become fully apparent.
However, I would not wish to convey the impression that the level of direct investment in industry is not providing a good return to the Exchequer, nor would I wish to suggest that the valuable contribution of the State agencies involved in this work is somehow redundant in favour of the approach I have outlined here. Rather I would prefer to think in terms of a simultaneous attack on the way we have pursued our industrial policy heretofore, where we recognise the importance of the contribution of both approaches and ensure that they are applied in a co-ordinated and logical way to the overall benefit of industrial growth and employment.
It is undeniably true that the structure of our industrial base is such that we need to offer direct support to industry seeking to develop in competition with overseas firms for world markets and also to attract new overseas projects to Ireland in the face of very strong competition from other European countries with the advantages of better strategic location. This situation is not going to alter radically in the medium term but we must, nevertheless, examine how we can secure a greater proportion of inward investment at a better return to the Exchequer. We must also aim to develop the necessary skills and resources to develop a strong forward-looking, export oriented, indigenous industry skilfully exploiting the expertise that is needed today in areas such as marketing and technology. These were amongst the areas which were analysed in the Review of Industrial Performance 1986, published recently by my Department.
The review concluded in the case of overseas industry that the Irish incentive package is still attractive by international comparison and that a push for a better return for State assistance to such projects was fully justified. Already a certain amount has been achieved in that promoters are accepting performance related clauses and parent company guarantees in grant agreements without any undue concern about such projects locating elsewhere. I am in full agreement with the further decision in the review to reduce the level of State support for fixed asset investments in overseas projects to 45 per cent and 30 per cent in designated and non-designated areas respectively, leaving the excess to be made up by the use of State equity, loan guarantees or deferred grants or a combination of any or all of these. This decision will not only lead to a better Exchequer return on its investment, it will also encourage the location in Ireland of better quality projects where overseas promoters would include their key business functions in Ireland, such as marketing and R and D, thereby creating a more long term and fully integrated operation here. These are the overseas projects in which we need to concentrate our resources.
However, foreign industry alone will not be sufficient to realise our ambitions for growth and employment. The key to a strong and developing industrial sector is indigenous Irish industry. However, it is also this sector which has been our Achilles heel when it comes to gearing up for international competition. The problem with many such firms is that they operate in traditional low cost product segments or they depend on the small domestic market and are increasingly being plagued by competing imports.
In current value terms, competing imports increased their share of domestic consumption from 34 per cent in 1980 to 41 per cent in 1985. The Programme for National Recovery indicated that, side by side with vigorous export development, we will strengthen manufacturers in the home market by import substitution within the public sector. There is considerable scope for improvement in this area consistent with our EC obligations.
The increasing level of import penetration in the consumer products market also is striking evidence of the failure on the part of indigenous industry to counter competition from abroad in key product areas such as food, textiles, clothing, footwear and furniture. It is difficult to see how the full potential for the development of indigenous industry can be secured unless there is a major concentration on assisting Irish firms to retain and regain domestic sales.
There are a number of initiatives in place to support Irish firms in this area including the marketing support services of the Irish Goods Council designed to assist smaller companies, the national linkage programme, which is aimed at developing a successful industrial sub-supply base and the initiatives aimed at encouraging major purchasers, both private and public, to adopt a more supportive attitude to indigenous manufacturers by providing easier access to their buyers, facilities for merchandising activities and arrangements for feedback of information on likely demands and products. In the public sector particularly there is considerable room for improvement in the level of information provided in relation to purchasing intentions and a number of further initiatives in that regard will be introduced shortly.
Many of our medium and large indigenous firms suffer from management weaknesses and only one-third, approximately 200, are estimated to have significant growth potential in internationally traded markets. These are the companies that are appropriate to the company development programme. The programme was initiated with the intention of redressing the problems which have inhibited the development of indigenous companies, helping them in turn to identify and implement strategic initiatives and programmes. In 1986, 45 firms completed the company development exercise and a further 50 firms will be covered in 1987. While the review highlighted problems of co-ordination with the programme I am satisfied that these problems can be ironed out in the context of my Department's examination of the most appropriate means of operating the programme in the future.
My Department will also undertake a review of the small industry programme during the course of this year. The need for this review arises from the fact that while there are optimistic signs for this sector, in that it has achieved a net increase in employment, this increase can be attributed almost entirely to start-up activity leaving a vacuum in the area of expansion of new small firms. It seems to me that a partial redirection of State assistance is what is needed in order to provide help of a more directly operational nature. In this regard I have asked the agencies to adopt a more developmental approach to indigenous companies to help them focus on the strategic development aspects of their enterprises. However the long term initiatives to redress this imbalance can only be considered in the light of a full analysis which will identify the factors which impede small firms from growing into medium-sized firms. The small industry review will also identify the conditions under which a greater proportion of funding to small industry projects can be achieved by recourse to equity participation instead of an over-reliance on State assistance in the form of grants.
There is one final area of my Department's review of industrial performance on which I would like to comment briefly. This is the conclusion that there is a need to rationalise the institutional arrangements associated with industrial policy as it is currently organised and delivered. The move towards rationalisation has been greeted generally, both inside this House and outside, with much interest and a general desire to know more about the approach to be adopted in effectively implementing such a rationalisation programme. The House will appreciate the enormity of the task ahead when I say that there are at present 3,400 staff involved in 20 separate institutions engaged in supporting industry in one way or another. This fragmentation of resources, despite co-ordination efforts, must inevitably lead to duplication of effort and a waste of valuable and costly resources. Indeed the survey of attitudes of senior executives in the review showed quite a concern amongst industrialists about the duplication of agencies with a substantial number of them, 86 per cent, believing that there are too many agencies involved in this area.
I do not intend to rush headlong into an exercise involving the engagement of outside consultants to produce a quick fix solution which might do more harm than good. I have commenced the first phase of the exercise along the lines of (a) a clear statement of objectives which would include a longer term vision of the objectives of industrial policy combined with a concern to work within the public expenditure profile which is likely in coming years; (b) the optimal organisational arrangements to deliver these objectives; and (c) an indication of the implementation process.
The White Paper on Industrial Policy, published by the previous Government in 1984, set a target for growth in net manufacturing employment of between 3,000 and 6,000 a year. Not only was this target not achieved but there has been an average reduction of 6,000 jobs each year in manufacturing employment during 1983 to 1986. My principal objective as Minister for Industry and Commerce is to reverse that trend. I believe that the new Government have made a good start, that confidence is improving and developmental policies are being speedily introduced.
It is clear to everybody that the development of an Irish food industry will be the responsibility of the Minister for Agriculture and Food, the relevant sector of that Department having responsibility for the development of the food industry. I have already made arrangements in my Department to have officers who deal with the food sector there transferred to the Department of Agriculture within a matter of weeks.
The establishment of Bord Glas and the allocation of staff to that board is another clear indication of the Government's commitment and positive approach to tackling the scandal of the importation of vegetable and horticultural products.
In the other developmental area there was the announcement by the Government and their commitment to the establishment of an international financial services centre at the Custom House docks site. I expect that the development plans for the Custom House docks site will be announced within the next two weeks. I expect to be in the United States with the IDA in approximately two weeks' time to market this new financial services centre. I believe it has great potential in Dublin, with the right tax environment now put in place, and the supply of highly skilled graduates. Surely this must constitute the first step in stopping the brain drain from this country, to retain the people in whom we have invested our money at home in as large numbers as possible, ensuring their commitment to the development of our economy.
The National Development Corporation Ltd., commenced operations on 11 June 1986, the vesting date on which it took over from the National Enterprise Agency. The increased level of funding allocated to NADCORP for 1987 by way of grant in aid for administrative expenses reflects the fact that this year is the corporation's first full year in operation.
The immediate priorities of the corporation in their earlier stages were the progression of proposals and the completion of investment commitments inherited from the NEA as well as the active management of a portfolio of NEA investments, including operational subsidiaries, which had been vested in the corporation on 11 June. At the same time the board had the task of putting in place the permanent staff structures and procedures to enable the corporation to fulfil their commercial and developmental role as set out in their legislation.
With the exception of the appointment of a managing director, these structures have now been established and NADCORP is fully operational and able to adopt a more active approach to identifying suitable investment opportunities. The provision in the Public Capital Programme for investment purposes by NADCORP in this year is £7 million.
To date NADCORP, of its own right, have approved investments totalling over £6 million as well as completing further investments in respect of commitments taken over from NEA. The corporation's report for the period 11 June 1986 to 31 December 1986 will be presented to me shortly and subsequently laid before the Houses of the Oireachtas.
It has long been recognised that a major problem facing many Irish-owned firms in the traded goods and services sector is their lack of an adequate equity capital base leading to an over-reliance on bank borrowings as well as a continued dependency on State aid. Up to recently, there has been a marked reluctance in our small to medium-sized companies to seek equity investment in their businesses from outside sources. With the general development in venture capital activity in recent years attitudes to outside equity investment are changing. Outside equity offers many advantages. It is free of interest and does not have to be repaid.
It gives a company that extra financial leeway that can at times mean the difference between closure and success. Outside investors can, with their investment, bring new expertise, experience, disciplines and new growth ambitions to a company which are so essential in the current competitive business environment obtaining today.
The business expansion scheme, which has encouraged the investment of over £12 million by way of new equity in 125 smaller companies by outside investors to date, has helped to change the attitude of promoters to outside investment. However, it is disappointing that so little use has been made so far of the facilities available in the Stock Exchange, particularly its smaller companies market, for the raising of capital. If our smaller indigenous companies are to become strong, it is essential that they be prepared to go out to the market to seek the investment funds that are available there so that their development will not be restricted by the lack of adequate capital.
NADCORP have an important role to play in industrial and job creation strategy. As the States venture capital agency it can complement the grant, loan and advisory functions of the other State industrial development agencies and either on its own account or by leveraging in other investors can act as a catalyst in the initiation of new projects that might not otherwise get off the ground.
There are several benefits perceived in having NADCORP as an investor, as opposed to private venture capital companies. As the State venture capital agency, and within its commercial remit, NADCORP can invest in higher risk enterprises of a national strategic nature. It is also a more patient investor than most private venture capital companies, and is prepared to wait somewhat longer for a return on its investment. A further advantage is that NADCORP is prepared to invest in smaller firms. Private sector venture capital companies tend to invest amounts of not less than £100,000 and enterprises seeking amounts of less than this figure can experience difficulty in obtaining equity capital. NADCORP is helping to fill this gap in the market.
I am currently considering NADCORP's business plan which sets out its strategy for the next few years.
Of course, production can be of no benefit to industry unless it can be sold, and at a profit. For us today, with an export oriented industry, it is crucial that we secure, and maintain, access to our foreign markets. A critical factor in this is our membership of the General Agreement on Tariffs and Trade.
The "Most Favoured Nation Clause", a fundamental principle of the GATT, enables Ireland to enter third country markets on the same footing as every other member including the more powerful trading countries. Because of our critical dependence on exports for employment and economic recovery we have a vital interest in maintaining and strengthening the GATT, which embodies the idea of a free international trading system.
Threats to the authority of the GATT and the ordered world trading system were posed by the increased protectionism, and threatened trade wars. Trends towards bilateralism, part of the armoury of US trade negotiations, are of particular concern of open economies such as Ireland, which are vulnerable because of our small size. Consequently Ireland was supportive of calls by the European Community and others for the launch of a new round of multilateral trade negotiations. This new round, destined to restore discipline to world trade and to contribute to its expansion, was launched last September in Uruguay. I am confident that an enhanced framework both for the trade in manufactured goods traditionally dealt with by GATT and the new and growing subject of services, which is something new in the negotiations, will emerge and provide a positive trading climate for the foreseeable future.
Welcome as the new round of multilateral trade negotiations may be it is clear that, given our crucial dependency on exports to the European market, the growth and further liberalisation of that market is equally vital. It takes more than 70 per cent of our total exports.
Hidden protectionism in Europe in the form of physical and technical barriers to trade is probably the single most damaging obstacle to the further expansion of our exports and the attendant creation of much needed employment at home. Until these internal barriers are abolished, the full export potential of our membership of the EC — which is after all the largest single trading bloc in the world — will not be achieved and we will not be able to reap the full commercial benefits to which we aspire for our people. Neither will firms throughout other countries in the Community be able to achieve their full potential in competing efficiently and aggressively with US and Japanese companies both on the European and world markets. Given our dependency on exports to other more prosperous member states, we have a vital interest in maintaining their prosperity so that they may continue to increase their imports from us.
The creation of a true obstacle-free common market has been boosted by the acceptance of the Single European Act by the Irish people. Indeed, the fulsome debate we have just engaged in has clearly shown how the people realise that our commercial wellbeing in the future is dependent on our exports to the Community. With the hoped for improvement in decision making which will follow the Act's ratification and implementation, we can expect to see a distinct improvement in the environment for our exports and experience hand in hand further employment opportunities for our people.
The fact that growth in volume terms of 1 per cent to 2 per cent was recorded in 1986 represents a solid performance by exporters in the climate in which they have to operate. Merchandise exports, down from their record high of £9,744 million in 1985, were valued at £9,387 million in 1986. These figures, however, mask the upturn in economic activity in our main markets as a result of the decline in oil prices which became evident in the latter part of 1986. This improvement should gather momentum throughout 1987. The volume of world trade is expected to grow by about 4 per cent this year. In the OECD countries, which account for about 90 per cent of Irish trade, economic growth should be about 3 per cent and this should afford Irish exporters new opportunities for expansion in world markets.
In 1987 I expect that merchandise exports will approach the £10 billion mark for the first time ever. It is expected that the volume growth of Irish exports this year will be between 3 and 4 per cent and this will be combined with an increase in export prices of 1 to 2 per cent.
For the first four months of 1987 we have recorded a trade surplus of £162 million. It would be unwise to draw too many conclusions from these figures at this stage of the year but they do provide some grounds for optimism in that there was a discernable pick up in trade over the past six months. More recently, the CII's survey of business which records the level of a number of key business indicators, has shown that companies' order books are on the increase in the past six months and are now at their highest level since 1980. In addition production expectations are at their most buoyant since 1980 and companies' capacity utilisation is picking up. All these indicators bode well for the future. It is my intention and the intention of the Government to create the climate in which Irish exporters will be encouraged to go out and seize these opportunities.
Exports from Ireland currently represent 64 per cent of our gross domestic product compared with a figure of 15 per cent for Japan, 7 per cent for the USA and a European average of 32 per cent. Another indication of the importance of exports to the Irish economy is the fact that two out of every three jobs in manufacturing industry are export dependent.
In recognition of the critical role of exports in our economy the Government have allocated £24.272 million to CTT to enable them to carry out their activities in 1987. Of this figure, £23.022 million is being allocated to CTT's promotional and strategic marketing schemes and £1.25 million is being allocated to the market entry and development scheme.
In 1986 CTT were originally allocated a total of £25.336 million, of which £24.536 million was given to promotional and strategic programmes and £0.8 million to market entry and development. These budgetary targets were not fully met in some of CTT's strategic marketing schemes mainly because of the reluctance of firms to meet the new criteria for a strategic marketing approach. The actual 1986 outturn figures for CTT were £23.758 million for promotional and strategic programmes, £0.582 million for market entry giving a total of £24.340 million. The amounts not spent were returned to the Exchequer.
I think the House will agree that given the current economic climate and the 1986 outturn, the 1987 allocation represents a strong commitment to CTT and its activities vis-a-vis the demands by the various other State agencies and the need for major savings across the board. The overall allocation reflects the Government's commitment to improving the marketing capability of Irish industry, and is a clear indication of the Government's appreciation of the vital importance of export growth to our national wellbeing.