Expenditure Review of IDA Ireland's Property Programme

Preface

In general terms the objectives of an Expenditure Review are to analyse, in a systematic manner, what is being achieved by Exchequer spending and to provide a basis on which more informed decisions can be made on priorities within and between programmes. The Expenditure Review process is an integral part of the Strategic Management Initiative (SMI), which requires that each expenditure programme should be subject to a review every three years. In this context the Government approved an expenditure review of IDA Ireland in April 2002.

Chapter 1 - Context, Focus and Terms of Reference of the Review

This chapter details the formation of the Steering Group in September 2002 comprising representatives from the Department of Enterprise, Trade and Employment, Department of Finance, Forfás, the Office of Public Works and IDA Ireland. The initial task of the Steering Group was to decide on whether the review should encompass IDA Ireland in its entirety or should focus on a specific programme. It was agreed that the review should concentrate on the IDA Ireland Property Programme covering the period from 1998 to 2002.

The IDA Ireland property programme consists of the acquisition and disposal of land, the development and servicing of land and the provision of building solutions. The programme has been designed specifically to support the promotion of Ireland and its regions as a suitable location for FDI by providing tailored property solutions. These solutions also include the construction of flagship business parks, the stimulation of the private sector to build advance offices and factories on them and the construction of strategic sites for key industries.

The next task of the Steering Group was to agree the Terms of Reference, to be approved by the Secretary General of the Department of Enterprise Trade and Employment. In summary, these terms required:

• a review of the rationale and validity for the programme in the context of prevailing economic strategy,
• an examination of the activities of the property programme,
• the identification of overall outcomes and trends in outputs,
• an examination of costs and efficiencies achieved,
• an evaluation of the degree to which the objectives warrant the allocation of funding, to be informed by comparison with similar provision in comparable jurisdictions, and
• the identification of any additional or alternative performance indicators.

While individual members of the Steering Group were tasked with providing specific material for input it was recognised that there were two areas where external expertise was required. One area was a comparative analysis of the role of property in attracting FDI in other comparable jurisdictions and the other was the requirement for peer review by an external evaluator. External consultants were engaged to contribute to the work of the Steering Group in these areas.

Chapter 2 - The Economic Environment, Enterprise Development and theFDI contribution

This chapter presents an overview of the main economic developments in Ireland over the last two decades. Comparisons are made with other EU countries and the specific contribution made by FDI to Ireland's economic development is highlighted. Reference is also made to the relevant policy frameworks at national and regional level, which underpin this development. Finally the role played by IDA Ireland in contributing to these policy objectives is outlined.

The Steering Group noted that IDA has operated within an environment that saw the Irish economy almost double in size during the 1990s. This growth has continued into the current decade and despite a slow-down in 2003 both the OECD and ESRI predict that the growth rate will recover again in 2004 and 2005. Ireland's per capita GDP also converged on the European average during the nineties, and by 2003 it was 42% above the average for the EU-15 according to European Commission data. Employment growth has strengthened and average unemployment rates have been maintained at relatively low levels.

Part of the recipe for Ireland's success centres around policies designed to attract high productivity foreign companies to locate here and export their goods abroad. The availability of relatively low wages and an educated and flexible workforce, combined with a low corporate tax rate, made Ireland a prime location for multinationals to set up and export into the EU and elsewhere. Increasing quantities of direct investment, mainly from the United States, have flowed into Ireland in the past two decades. This has had a significant economic impact to the point where FDI now accounts for three-quarters of manufacturing output, nine-tenths of manufacturing and services exports and around half of total employment in manufacturing and international services. Also, greater integration of overseas firms into the Irish economy has been achieved through improved performance by Irish sub-suppliers.

A number of policy documents and strategy statements have re-stated the need for Ireland to remain competitive if it is to continue attracting FDI. Specifically the policy advice is that the shift towards higher productivity sectors, which can sustain higher income levels, should continue. Also the niches in which Ireland is currently successful should be reinforced in order to achieve world-ranking status.

Due regard must also be taken of the need to address balanced regional development. The Government's National Spatial Strategy, with its framework of gateways and hubs, was designed to broaden the number of areas that can offer viable locations for internationally competitive enterprise. The Steering Group observed that the property programme, while only a part of the overall package offered by IDA Ireland, contributes significantly to this important national objective.

IDA Ireland is primarily a marketing organisation that administers the incentives provided by legislation. The package of incentives offered has to comply with Irish legislation and EU Regulations, particularly those in relation to State Aids. They are offered in a marketplace which has seen the number of competing jurisdictions within Europe grow considerably under the enlargeme nt process. The task facing the Agency under the proposed review of State Aids is to seek the best possible outcome to enable Ireland to continue to support regional development.

The origins of IDA Ireland go back over 50 years and its role has evolved since then from a fairly straightforward task of marketing Ireland as a low-cost, high- grant location within Europe to the current more complex, multi-faceted job of trying to influence the attractiveness of the product when grants are less influential and competitors more sophisticated and more numerous.

Chapter 3 - IDA Ireland Strategy and Achievements

This chapter looks at the strategy adopted by IDA Ireland in order to achieve its high level goals. For the purposes of this review, IDA strategy can be divided into three major time periods: Pre 2000, 2000 - 2003 and 2004 - 2006.

From 1994 to 1999 IDA strategy focused on the recommendations of the Culliton Report. Following this period the Agency developed and implemented its "IDA 2000+" strategy. This strategy made winning the best in international investment a primary goal but also sought a better balance in the spatial and sectoral distribution of the jobs generated by this investment. As a result a strategy was formulated that aimed to deliver projects from specific sectors into a range of suitable regions. The Agency also responded to the regionalisation agenda by transferring Head Office Divisions and Departments to Waterford, Sligo and Athlone.

As part of the ongoing review of strategy in 2003 the Agency concluded that the existing focus upon enhanced FDI, identification of Strategic Business Areas, regional economic development and upgrading the education, skills and research capabilities of the economy, was correct and should be maintained out to 2006 at least.

This conclusion was reached following an assessment of the changes in IDA's marketplace over the previous five years, examination of potential future development scenarios and a visualisation exercise to identify a future vision for FDI in Ireland. Within this overall strategy, it was agreed that there was a requirement to set out plans identifying what IDA proposed to achieve over the period 2004-2006. These plans identify specific actions and targets in relation to clients, regions and infrastructure.

A central part of the strategy over the review period was to improve the quality of existing and new projects and jobs. A number of options for measuring the quality of jobs were considered. A primary objective was to ensure that projects setting up in particular locations did not pay less than the projects already established in those locations. Benchmark salaries, by sector and by region, were established at the beginning of each year and the objective was to try to ensure that every approved project met, or exceeded, the benchmark for the sector and region concerned.

Also central to the strategy over the period was an effort by IDA Ireland to influence the whole enterprise environment. This was done by upgrading the quality of its property programme and matching it to the objectives of more balanced regional development. The Agency also attempted to influence the provision of infrastructure and the skills agenda.

Chapter 4 - Rationale for the Property Programme

This chapter looks at the need, in the first instance, for a property programme as part of the overall incentives package promoted by IDA Ireland. International research indicates that the rationale for such a programme lies in the fact that the availability of a suitable property solution is a key element in the location decision process undertaken by prospective investors. Lack of a suitable property solution is a disqualifying factor in four stages of the five-stage decision making process undertaken by these companies.

This need for such property solutions is also evidenced by the findings of the consultants who were engaged by the Steering Group to examine the arrangements in place in similar jurisdictions. Of the nine areas examined all had some form of public sector provision for industrial sites and in most cases this is provided by national agencies similar to IDA.

In light of the above the Steering Group concluded that there was a need for the property programme within IDA Ireland. This conclusion was reached on the basis that past experience and international comparisons indicate that Ireland would be at a competitive disadvantage if such a programme were not in place.

Chapter 5 - Processes and Procedures of the Property Programme

Given the acceptance by the Steering Group of the need for the property programme, the Steering Group required confirmation that the way in which the programme was being administered was in accordance with best practice. To this end, the operating procedures employed by IDA Ireland in the administration of the property programme were subjected to review by independent experts. This review, which was conducted by the OPW Property Valuation Section, confirmed that the procedures and processes employed by the Agency were robust.

The Steering Group considered whether or not IDA should be given power to dispose of property for non-industrial undertakings without the need to obtain the consent of the Minister. On the basis that IDA Ireland is content that the existing arrangements work very satisfactorily, the Steering Group decided not to recommend any changes at this stage.

Chapter 6 - Property Programme - Evolution and Objectives

This chapter traces the evolution of the property programme;

• from the 1970s when it was the prevailing view that to facilitate widely dispersed job creation and regional development it would be beneficial to have IDA-built advance factories available throughout the country,
• through the 1980s when it was recognised that partnership arrangements between public and private organisations should be used to provide additional advance factory buildings,
• to the current situation where IDA has been disposing of its landlord interest in buildings throughout the country and concentrating on sites and site development.

In administering the property programme IDA has placed a strong emphasis on achieving better distribution of overseas investment in regional locations. World-class Business & Technology Parks and building solutions are being developed in regional locatio ns that complement the NSS with the aim of enhancing the overall development and potential economic gains of these locations.

The current objectives of the property programme have been identified as follows:

1. To ensure the availability of property solutio ns for Multinational Entities (MNEs) so that Ireland is considered to be a suitable location for FDI
2. To ensure an appropriate regional spread of property solutions
3. Provide Property Solutions for EI clients as required
4. Ensure that the IDA Property Function is managed in a Cost Effective manner
5. The evolving nature of the property programme has been a function of both Government direction and reaction to the prevailing and changing needs of MNEs involved in FDI. The shift towards a more regional focus, in addition to meeting the over-arching goal of attracting FDI to Ireland, indicates that IDA Ireland's property programme does reflect the goals and objectives of national policy.

Chapter 7 - Effectiveness of Property Programme

This chapter looks at the effectiveness of the property programme, and attempts to identify how well the programme is operating in order to achieve the overall objective of the Agency, that of securing FDI for Ireland and its own immediate objective of making property solutions available. A more precise articulation of these objectives, and the identification of the quantifiable outputs associated with them, has been one of the outcomes of this review process

To this end the income and expenditure data over the period under review is analysed and trends are noted. The outputs of the property programme are then identified and these are listed in a logframe matrix. The measurable indicators associated with each output and their source of verification are also identified. Specifically the outputs used to measure the effectiveness of the programme were identified as follows:

1. Timely provision of information on the availability of property solutions from both the private and public sectors.
2. IDA property solutions provided where no private sector solution is available
3. Occupancy rate of buildings maximised.
4. Targeted number of marketable buildings available by region
5. Targeted number of Flagship Business & Technology Parks with serviced lands availablefor promotion
6. Suitable services provided to IDA lands.
7. Planning permissions obtained for developments on IDA Business and Technology Parks
8. All remaining IDA owned buildings divested.
9. All IDA owned land deemed unsuitable for FDI divested
10. Holding costs of IDA owned and leased buildings minimised
11. Flagship Business & Technology Parks with serviced lands available for promotion on a regional basis
12. Number of buildings to be provided by the Private Sector is maximised
13. Serviced sites and/or buildings available in each region if required by EI clients.

Each output is considered in turn and performance over the period of the review is evaluated. The activities of the programme are listed separately at the end of the logframe. The adoption of the logframe matrix to record the outputs and associated indicators, together with their sources of verification, has helped to focus the Review. The Steering Group has made specific comment, and where appropriate, recommendations in respect of each output and these are summarised in Chapter 9 below.

Chapter 8 - Efficiency of Property Programme.

This chapter reviews the efficiency with which the property programme has been

administered over the period of the review by reference to the following operations and

considerations:

• Land purchased/disposed of to ensure appropriate number of serviced sites available in each region
• Land purchased at or below market rates
• All land acquisitions are suitable for IDA purposes
• Site development and construction works delivered at market rates
• The proceeds from land and building disposals should be at competitive rates
• Operational costs minimised
• Generation of rental income
• IDA Property Budget to be largely funded from disposal of land and buildings as agreed in the Annual Estimates process

The Steering Group reviewed the costs associated with the acquisition development, maintenance and disposal of IDA property. While it was noted with approval that the programme was largely self-financing the recommendations of the Steering Group dealt with the need to keep specific aspects of the programme under constant review. These recommendations are listed in Chapter 9 below.

Chapter 9 - Overall Conclusions and Recommendations

In broad terms consideration of the trends in these outputs and costings suggest that the

property programme is being managed effectively and efficiently in that:

• A mix of property solutions is being provided to prospective clients across all regions
• Due regard is paid to prevailing market conditions in the acquisition and disposal of property solutions.
• The procedures in place for the management of the programme have been vetted by an independent body and have been found to be robust.
• Holding and refurbishment costs are being managed in an effort to minimise the long-term costs to the Agency and maximise the revenue generated. The programme of disposing of property that is no longer needed is progressing with due regard to the need to maintain a set number of properties available for promotion at any given time.
• The impact of the property programme is positive and it contributes to the realisation of the development or long-term objective of IDA Ireland.However, while there may be broad approval of the manner in which the Agency carries out its property function a number of conclusions and recommendations have been reached by the Steering Group and these are outlined as follows:
• The Steering Group accepts that there is a justified rationale for the existence of the property programme within IDA Ireland.
• The Steering Group notes that the procedures and processes employed by the Agency were comprehensive, clear and robust.
• The Steering Group is satisfied that information on the availability of property solutions is kept up to date and that procedures are in place to verify that updates are carried out on a regular basis.
• The Steering Group is satisfied that the current approach, which seeks to have the provision of buildings funded by the private sector, is appropriate but this approach should be reviewed regularly in the context of changes in the industrial property market.
• The Steering Group notes that the position in relation to occupancy rates is reported on a quarterly basis to the IDA Executive Committee and recommends that this practice continue. The Steering Group also recommends that IDA Ireland continues to make every effort to exit from leases or dispose of buildings that are no needed.
• It is considered appropriate by the Steering Group that targets be set annually in relation to the number of buildings that should be available for promotion on a regional basis and that this should be reported on a quarterly basis to the IDA Executive Committee
• The Steering Group notes that progress towards the goal of providing Flagship and Technology Parks in Gateway and Hub locations is satisfactory.
• The Steering Group notes that it is IDA policy to ensure that suitable services can be provided to any lands being considered for acquisition and subsequent development.
• The Steering Group notes the position regarding the number of planning permissions available in the two regions and recommends that the procedures in relation to obtaining planning permissions be maintained. The Steering Group recommends that IDA should continue with the policy of early disengagement from buildings, taking into account the need for value for money.
• The Steering Group recommends that IDA Ireland continue to make every effort to divest of lands deemed unsuitable for FDI and optimise the returns for these assets in so doing.
• The Steering Group no tes that the general trend in holding costs shows a reduction year on year with the exception of 2001 and exhorts IDA to continue to minimise these costs to the greatest possible extent whilst ensuring that the standard of IDA properties makes them suitable for promotion.
• With regard to the balanced regional provision of Flagship Business and Technology Parks the Steering Group acknowledges the shift that has occurred in favour of the BMW Region. The Steering Group also recommends that due regard should continue to be taken of the National Spatial Strategy and Regional Planning Guidelines.
• The Steering Group, while noting the net change in the value of lands held and the increasing value of net acquisitions in the BMW area, recommends that IDA continue to monitor and review their strategies to achieve regional balance in light of ongoing FDI requirements.
• The Steering Group notes that a competitive tendering process is in place for all works undertaken and that IDA should continue to try to minimise the costs associated with refurbishment.
• The Steering Group noted the welcome increase in the provision of private sector buildings in both the BMW and S&E Regions.
• The Steering Group recommends that IDA Ireland undertake an exercise to identify the risks that may inhibit the Agency from achieving each of the stated outputs of the property programme. The results of this exercise should be reported to the Department of Enterprise Trade and Employment and any follow-up action to address these risks should be decided upon within an agreed timeframe.
• The Steering Group considered the restrictive usage covenant that applies to IDA Property and recommends that the current position be maintained. It is the view of the Steering Group that current arrangements for the disposal of the freehold interest in property by the Agency, as provided for in the Industrial Acts, are sufficient.
• The Steering Group notes the high level of activity and resources committed to the property function within IDA and recommends that the position be kept under regular review.
• The Steering Group stressed the importance of regular rent reviews and recommends that such reviews take place at a formalized frequency. This should be at least every two years but more frequent reviews should not be ruled out when a need is identified by IDA.
• The largely self-financing nature of the property function was noted with approval by the Steering Group and it is recommended that this should continue to be a central part of financial planning within the Agency.

The Steering Group invites IDA Ireland to consider these conclusions and recommendations and to respond to the Department of Enterprise Trade and Employment within three months of the completion of this report. Where recommendations have been made that require action the Agency is asked to clarify its position and report on its plans regarding implementation.