Deputy Tomás Mac Giolla gave me notice of his intention to raise on the Adjournment the subject matter as to the findings of the report of the Comptroller and Auditor General that the £66.7 million of tax revenue foregone under the business expansion scheme has led to little net gain in terms of job creation and the manner in which the Government intend to respond to this finding. The Deputy has some five minutes to present his case and the Minister has five minutes to reply.
Adjournment Debate. - Business Expansion Scheme.
In the short time I have I am tempted to simply read some extracts from the report of the Comptroller and Auditor General for 1989, because he provides as damming an indictment of the operation of the business expansion scheme, and the failure of the Government to monitor and supervise it, properly, than anything I could say.
It is a well named scheme, near enough to BSE to call it the mad cow disease of the tax system. The Workers' Party have long known that the BES was little more than a hidden subsidy for the private sector and the Comptroller and Auditor General's report provided compelling evidence that this is the case. Every accountant and lawyer in the country knew of it and the captains of industry were quite aware of it and they queued up to take advantage of the Government's generosity which, of course, the ordinary taxpayer — especially the PAYE taxpayer — had to fund. The specific case referred to in the report, where the foregoing of tax revenue of £13 million created only seven jobs, is a particular scandal. This was the case of Shannon International Leasing where two people, Cormac Crawford and Martin Hawkes, took in £23 million investment at a cost to the taxpayer of £13.3 million. This is a cost of £2 million per job created to the taxpayer.
Those who took best advantage of the BES were not small fly-by-night investors or the small person but major players in the financial markets. The report points out that in 1989-90 alone, £78 million was invested at a cost to the Exchequer of £41.3 million in tax foregone and that 19 companies accounted for £56.5 million of this investment, an average of £3 million per company investment.
One of the most serious findings of the report of the Comptroller and Auditor General that as a direct consequence of the BES as it developed the relative share of this type of State aid going to various sectors of the economy was to a large extent being dictated by investment advisers and fund managers rather than by the Government. It is a terrible indictment of this House that we have no say in how taxpayers money is distributed. The people who make these decisions are investment advisers and fund managers and we are not even told what is happening.
The report of the Comptroller and Auditor General raises many serious questions about the failure of successive Governments to monitor and assess such schemes. Money was handed out in the form of tax reliefs but, as the report points out, there was an absence of procedures necessary to evaluate properly the success or otherwise of the business expansion scheme.
The Minister did, belatedly, acknowledged that the BES needed to be tightened up to deal with what he described as Disneyland schemes and some steps were taken in the 1989 and 1990 Finance Acts to tighten up. No sooner had the Minister tightened up in one area but these companies had their accountants, tax experts and lawyers working round the clock to find new loopholes they could exploit and use to continue to avoid paying their fair share of taxation. This is precisely what happened in all of the tax relief schemes.
There is big money involved here. The Comptroller and Auditor General confirms what we already knew from Dáil Questions, that £66.7 million in the form of tax foregone was lost to the Exchequer since the scheme was established. This money could have been used for so many things. Everybody in the House can point out areas that could do with the money lost.
The BES is just one of a range of generous tax reliefs made available to private industry on the basis that they would provide jobs, but instead they put the money in their pockets and no jobs resulted. The very least that should be done is comply with the recommendations of the Comptroller and Auditor General who reported:
The same criteria should apply to tax expenditures as would be applied to direct State expenditure and mechanisms should be put in place which systematically measure and record the cost of schemes financed by tax expenditures and which evaluate the economy, efficiency and effectiveness of such expenditures and report on them to Dáil Éireann.
I have noted the report of the Comptroller and Auditor General on the business expansion scheme, contained in his annual report published yesterday. My Department will be studying the report in consultation with the Revenue Commissioners. There are however, a number of points I wish to make about it at this stage.
The first concerns the nature of the report itself. Deputy Mac Giolla has implied that it found that the tax forgone under the scheme had led to little net gain in terms of job creation. This is not so. The report is not a review of the effectiveness of the business expansion scheme, nor does it purport to be one. The report sets out the results of an examination by the office of the Comptroller and Auditor General of the operation of the BES. The scope of the examination was:
...to establish whether procedures were in place which would evaluate the extent to which all the objectives of the scheme were being met and which would evaluate whether the financial cost of the scheme...can be regarded as a cost effective means of achieving the stated objectives to the extent that they may have been achieved.
The report certainly concluded that the procedures were lacking; but it was a report on the procedures, not an evaluation of the scheme.
The second point I want to make is that a review of the scheme's effectiveness has been underway for some time. My Department in fact initiated a review of the scheme during the summer, not recently, as the report says. The business expansion scheme, which was introduced in 1984, was in 1986 extended until the end of the current tax year, that is, until 5 April 1991. It was always implicit in the deadline placed on the scheme that it would be reviewed before the deadline, and that is exactly what has been happening.
The third point I want to make is that the £66 million cost of the scheme mentioned in the report refers to the six tax years from 1984 to April 1990. I would also point out that this cost arose mainly in the 1988-89 and 1989-90 tax years. In those tax years it was the availability of BES projects with guaranteed returns that attracted the high level of investment. As the House is aware I took steps in the Finance Acts of both 1989 and 1990 to deal with abuses of the scheme. In the 1989 Finance Act I introduced provisions to outlaw guarantees and options for purchase of BES shares at the end of the five year BES holding period at other than market price. When experience showed that the intent of this provision — to restore the BES to its original purpose of generating genuine risk capital was being circumvented. I again took steps in this year's Finance Act to remove from relief BES schemes where arrangements exist to eliminate risk from the BES shares.
While I am on this issue, I would like to point out that I ensured there would be no recurrence of the case quoted in the Comptroller and Auditor General's report of a single company raising £23 million. I did this by placing a limit of £2.5 million on the amount of BES funding a company can obtain; I also excluded financial services companies from eligibility under the scheme.
I want to emphasis, in particular, that in looking at the BES we must consider its overall impact and effectiveness. As I have said, the BES was intended to provide genuine risk capital for companies in selected sectors of the economy and funds invested under it have gone to some 600 Irish companies. It would be naive to expect that every one of these companies would survive and flourish; after all, risk is risk. At the same time it would be ridiculous to suggest that the scheme has had no impact. Some 600 Irish companies have received BES funds and jobs have been created.
My Department initiated the review I spoke about some months ago, long before anybody had brought it to anyone's attention.
It did not work.
A primary focus of this review will be the employment performance of the scheme. I expect to have the results of the review shortly and I will then consider with the Government what the future of the scheme should be.
I want to take this opportunity to thank Deputy Mac Giolla for raising the issue of the BES report even though his description of the scheme was far from the reality.
It lost £41 million in 1989.