Former head of IDA calls for IFSC-style enterprise-generation model
Padraic White
The editorial in the October edition of Village magazine denigrated the achievements of the Irish business sector. This is to under-recognise the underlying dynamism and pioneering track record of many small Irish businesses that contributed much to our quality of life over the last decade. The sector is, however, under threat.
Elsewhere, I have read numerous economic analyses and forecasts – Central Bank, ESRI, OECD and many more – but nowhere have I noticed any discussion of the role of the Enterprise sector in the revival of the Irish economy. Up to now, the Government has focused on public finances and saving the banking system as the two key elements in our economic recovery. But this is not enough and, without a strategic action-oriented approach to sustain and boost the Enterprise economy, our path to recovery will be more painful and prolonged than is necessary.
The revenue forecast by the Department of Finance in the supplementary budget as recently as last April will be out by €1.8 billion by the end of the year. The shortfall reflects a more severe economic contraction than expected and a faster deterioration in the enterprise economy. I believe that Government revenue will continue to fall short of forecasts unless strategic action is taken to revive the Enterprise economy. Our economy continues to decline by an estimated 7.5%-8% this year and we are not in sight of the quarter-to-quarter increases in economic activity now emerging in most of our trading partners. I simply do not understand the basis on which the Department of Finance in the recent Budget Statement predicts a return to positive growth within the next six-to-nine months – by September 2010.
Why is the enterprise sector important?
The bubble boom which ended in 2008 was fuelled by property and consumer spending derived from annual increases of up to 30% a year in bank lending.
The contribution of exports to our economic growth declined as we lost a massive 35% in our trade-weighted competitiveness between January 2000 and April 2008 – when the current recession started. The recovery of our economy will be soundly based and will come quicker if we take imaginative steps to support the Enterprise sector.
The current difficulties
Cash Flow
There is a chronic lack of cash in the enterprise sector; lending to the private sector by banks has gone from a 30% annual increase to a 3% decrease at the last count as State spending at central and local levels has contracted. Prompt Payment of Accounts legislation requires payment of bills in the time specified in a contract, or otherwise within 45 days of receipt of an invoice. The State delays by nine months in paying to firms the rebates of redundancy monies due to them. By definition, enterprises that have to make staff redundant are under pressure and they badly need the rebate of 60% of the redundancy payments. It is doubly disappointing that it is the very Department which is charged with promoting Enterprise in Ireland that is responsible for processing the redundancy payments.
Credit Flow
We need to get credit flowing again from the banking system to enterprises, now that NAMA is due to be in place shortly. The overwhelming experience of enterprises has been that the banks have been cutting back on overdrafts and that it is extremely difficult to get funding for any new project. This is reflected in the contraction in overall lending to the private sector implied by recent bank financial reports. The Irish Small and Medium Enterprises Association (ISME) has consistently highlighted discrepancies between the reported experiences of its members and the statements of the Bank Groups. I very much welcome the decision of the Minister in his recent Budget statement to use his new powers under the NAMA legislation to set up an independent review of credit refusals to SME companies by banks as well as of the credit policies and practices for this sector. Significantly, he intends to publish the results of these reviews. It remains to be seen how many of the banks not covered by the NAMA legislation but benefiting from the Government guarantee will take up the Minister’s invitation to participate in this credit review.
Cost of Business
The costs of doing business in Ireland need to be aggressively tackled in a campaign led by Government. ISME has been to the fore in highlighting the adverse impact of our loss of competitiveness on the SME sector. The National Competitiveness Council has set out an agenda for reducing costs in its publication, Costs of Doing Business in Ireland 2009. The Report benchmarked Ireland against 15 other countries competing for trade and investment, and found the following:
- Ireland has the second most expensive electricity costs
- waste disposal costs are highest in Ireland
- the cost of an on-site IT service was the second most expensive in Dublin at €155 per hour compared with €91 in Boston and just over €20 in Copenhagen
- Dublin was the most expensive for legal fees.
An up-to-date analysis of the competitive issues facing the Export Sectors – whom we depend on for real economic recovery – was set out in the Council’s publication this month entitled “Driving Export Growth.”
Foreign Revenue
Ireland’s export performance this year, in the words of the ESRI, has been “ remarkably resilient by international standards…in spite of the collapse in world trade”. The segments of our economy which bring in foreign revenue – merchandise-exports, diverse services and tourism – are forecast to bring €150 billion into the Irish economy in 2009 – comprising €83 billion merchandise exports, €63 billion services and €4 billion from tourism. The diverse-service exports deserve more visibility and attention because of their significance. But crucially the figures mask the reality that the bulk of the growth in merchandise exports has come from the multinational companies in the life-sciences sector – which are largely immune to global economic downturns. The indigenous Irish companies – faced with shrinking export markets, depreciation of the pound Sterling and the US dollar against the Euro, and lack of export credit insurance – have lost, and continue to lose, thousands of jobs. In the three months to the end of September, the Irish Exporters Association calculates that Irish exports to the UK were down 23% – much worse than the 11% decline in the first six months.
Recommendations
Export-proofing
At a minimum, any expenditure and tax proposals should be ‘export proofed’ to assess and minimise any adverse impact on the exporters. This process should have started before the recent Budget. Export Credit Insurance – designed so that the Irish exporter gets paid if the overseas customer defaults on payment – must be introduced so that our exporters can compete with the UK, Germany, France, and Denmark.
Export Credit Insurance
Designed so that the Irish exporter gets paid if the overseas customer defaults on payment – must be introduced so that our exporters can compete with the UK, Germany, France, and Denmark.
State Agency Funding
The Government should boost the funds available in 2010 to the State agencies which are encouraging Irish enterprise start-ups and expansions, principally Enterprise Ireland, Údaras na Gaeltachta and the City and County Development Boards. It is not encouraging to discover in the Annex to the recent Budget that the total capital funding available to Enterprise Ireland in 2010 including the Stabilisation Fund will be €76m. This is totally inadequate for the key development agency charged with encouraging Irish industry to discharge its role in a positive way .
Industries of the Future
Two Task Forces have been established by the Government to bring forward recommendations on the industries of the future which Ireland should promote. The Green Economy Task Force under Chairman Joe Harford submitted its report in early December and The Innovation Task Force is to advise the Government on positioning Ireland “as an international innovation hub”. What the business community will want to see is real action to implement the imaginative proposals emerging from these Task Forces – supported by the necessary funding.
Once-Off Government Investment
I propose that the Government should establish a special funding allocation of €1 billion next year and a further €1 billion in 2011 as a once off enterprise-generation investment to get our economy moving again. This would include the €500million ‘Innovation Fund Ireland’ which is in the Renewed Programme for Government. There is a striking disproportion between the availability of billions of special funds for recapitalising the Banks and funding of NAMA on the one hand and on the other the lack of urgency and limited extra funds allocated to sustaining and developing the Enterprise sector. I am sure that the ingenuity displayed by the Department of Finance in sourcing the Bank recapitalisation and NAMA bonds and keeping them off the State’s balance sheet of national debt could be equally applied, given the will, to sourcing the €2 billion I am recommending for enterprise-generation over the next two years. For example, it is expected that NAMA would pay €54 billion to the Banks, but final decisions on the amount will be made “only after exhaustive bottom-up valuation“. I would not be surprised if the case-by -case evaluation resulted in a valuation much less than €54 billion. Surely, it would be an excellent use of the funds not required by NAMA in that situation to invest €2 billion of them in enterprise and export generation?
The benefits to Ireland of the improving economic outlook in other countries will be restricted in the absence of dramatic action to cut our costs and in the face of a weak Sterling. All this adds up to a very tough environment for business over the next two years, at least. The Enterprise-generation agenda I have set out cannot succeed without a powerful political commitment and the instigation of a new transparent mechanism at Central Government linked with the private sector in a common cause. I suggest that the political and organisational approach adopted by Government in promoting the IFSC during the last major recession provides a useful model to start with.
Padraic White is an entrepreneur and former Managing Director of IDA Ireland. He is also Chairperson of seven diverse Irish SMEs.
