Inside Invest NI, Part III: Too big to fail?

In the final instalment of his explosive series on the Northern Irish government’s attempts to kick-start a tech ecosystem in the region, David Kirk delivers a searing indictment of InvestNI.

The previous two articles in this series have taken a critical look at two of the fundamental tenets of Invest Northern Ireland’s strategy for reviving the country’s flagging investment ecosystem. One of these tenets, called subordination, uses taxpayers’ money to shore up the failures of underperforming venture fund managers, perpetuating their failures.

The other, an accounting concept represented as “IRR=0%”, specifically stipulates that fund managers are not required to make or return any profit to taxpayers, leading them to gouge startups for exorbitant fees to add to the exorbitant fees already paid to them.

All in all, we’ve seen that InvestNI’s meddling in venture capital is proving disastrous for start-ups, for the taxpayer, and for Northern Ireland, despite being very lucrative for its top fund managers. Unfortunately, the full extent of the havoc it is wreaking on the start-up community in Northern Ireland is almost three years away from full public disclosure.

Because the money that InvestNI is squandering in their inept attempts to play at venture capitalism is dwarfed by their attempts at job creation, local business support and “foreign direct investment”. The briefest look into their efforts in each of these areas will illustrate this. So that’s what we’ll do.

Foreign Direct Investment (FDI) is economist-speak for enticing non-Northern Ireland and non-UK multinationals to establish a base of operations in Northern Ireland. InvestNI attempts this by establishing offices in strategic regions around the world, and placing VPs of Business Development in those offices with the mission to “sell” Northern Ireland as a destination for expansion.

It’s often said in the technology industry that the greatest natural resource in Northern Ireland is its software designers and developers. Having managed, either directly and indirectly, over 2,000 software engineers in some of the world’s largest companies, on every continent, I believe that the quality and professionalism of software talent in Northern Ireland is equal to most in San Francisco and Silicon Valley.

And yet, since 2009, while San Francisco and Silicon Valley have experienced hyper-growth with Google, Facebook, Twitter, LinkedIn, Square, eBay, and many others, InvestNI has not won a single competitive bid for Northern Ireland. In fact, in the marquee multinationals, they didn’t even get into the game. The organisation spends a fortune maintaining offices in San Jose, CA and Boston, MA, but produces virtually no investments.

The US is undoubtedly the biggest target market for software FDI for Northern Ireland, but since Invest NI doesn’t track how many jobs have actually been created, it’s impossible to gauge real performance. Nonetheless, in July, enterprise minister Arlene Foster opened a new InvestNI office in… Erbil, Kurdistan. Perhaps we’ll see some significant uptick in jobs created and a reduction in the cost of generating those jobs?

Why, when the equivalent Irish body (IDA) has attracted Google, Yahoo, Facebook, Twitter, Salesforce, Cisco and many others to the Republic of Ireland, has InvestNI been so hopeless?

The excuse

“It’s the corporate tax, stupid.” Northern Ireland is linked to the UK’s tax policy, with respect to the rate that corporations’ profits are taxed. In the UK, that rate is up to 26 per cent, falling to 25 per cent in 2012/13. In Ireland, the equivalent corporate tax rate is 12.5 per cent. So is that the reason Ireland got all of those multinationals and Northern Ireland didn’t?

No. Google, Facebook, Apple and so on are not in Ireland because of its tax rate.  They’re there because, through Irish tax laws and tax treaties, foreign multinationals can avoid almost all tax on their worldwide profits. That’s why, if Northern Ireland’s corporate tax rate was 0 per cent and Ireland’s was 100 per cent, Google would still choose Ireland.

So the vigorous discussion about lowering corporate tax rate to enable Northern Ireland to “compete for high value FDI jobs” is fairy dust by folks that should know better.

Equally flawed are the claims that this reduction in corporate tax will result in £1 billion per annum in investment and 54,000 new jobs over a twenty year period. Of course, there are folks inside InvestNI that do know better. Here’s a recent email from a senior executive in InvestNI:

I think its a good thing. I don’t think the EU HQs will come running quickly. The jobs/investment is a long term estimate and nobody ‘really’ knows. Not many people in the NI ecosystem understand Corp tax (even the tax lawyers!!), so many have a very simplistic naive view.

So why are InvestNI and DETI pushing for this, knowing that it will not work, and that it will reduce Northern Ireland’s funding from the UK? Remember that, as of 2011, Northern Ireland was $9 billion in debt.

Well, it’s probably more about the power struggle between Stormont and Westminster than any economic judgment that there will be real economic gains from this gimmick. (To be clear, there are several real benefits to a lower corporate tax rate. But the scam here is that a lower corporate tax rate will magically help Northern Ireland win the huge multinationals that Ireland has attracted.) It will be several years before the failure becomes obvious.

It is also likely to enlarge InvestNI’s already obscenely large budget. Here are few extracts from a recent news report about InvestNI’s expenditure:

• Since its formation in 2002, Invest NI spent almost £1.5bn of public money supporting local industry and creating jobs
• The jobs body analysed numbers in client companies between April 2002 and March 2007 and reported 28,873 job gains and 28,545 job losses – an increase of 328 jobs
• On the basis of this analysis, Invest NI… acknowledged that net job movement of 328 (0.4%) was “only a marginal change in employment”

The truth

If a lower corporate tax rate is the smoke screen for InvestNI’s ability to secure jobs from San Francisco and Silicon Valley, what’s the real reason? It’s important to note that the product (Northern Ireland’s digital technology talent) hasn’t changed. If anything, it has improved and become even more attractive.

What’s failing Northern Ireland is InvestNI’s ability to comprehend, market and sell. You’d think with all the real advantages of its indigenous talent that this lavishly funded public body could come up with an appealing marketing message. How do you think the message “we’re smart people and we don’t change jobs often” would resonate with Silicon Valley executives? Exactly.

And sales are even worse.  You’d think that to be a successful VP of Business Development for InvestNI in the US, you need folks with sales experience of technology to larger corporations? Again, you’d be wrong. But then these folks are measured simply on the “number of meetings” they secure.

Perhaps the real issue is becoming obvious. InvestNI has no idea how to market and sell Northern Ireland’s technology talent.

Here’s an extract from the Barnett Report in 2009.

World class training in sales and marketing should be provided for relevant Invest NI staff (particularly those working in international offices). In addition, staff should be recruited with relevant experience to meet the demands of investment decisions that are increasingly based on Innovation and R&D

InvestNI are a disaster at venture capital and FDI investments. They have spent tens of millions of pounds in their efforts to grow Northern Ireland’s start-ups and to attract foreign multinationals. But that’s pocket change compared to the money they spend on local job creation. Remember that net 328 jobs created in a five year period? And, from recent news, the £25 million given to FG Wilson/Caterpillar for the biggest job loss in recent times?

In the past five years, InvestNI has spent over £603 million in “business support”. It had actually budgeted almost £734 million to create jobs. As the Northern Ireland Audit Office put it:

A number of targets set in the first two Corporate Plan periods were insufficiently challenging. Some targets were significantly over-achieved and some Operating Plan targets were set at substantially lower levels than previous performance. Given the relatively favourable economic circumstances at the time, this calls into question the strength of performance achieved in the first two Corporate Plan periods.

Running the numbers

InvestNI’s accounting is so arcane and obtuse that they can bury a multude of sins. To be fair, they have a challenging, but not impossible accounting problem: they need to budget for support of companies that claim they will create jobs, engage in development, or increase sales for specific, appropriate projects.

Some of those projects can last up to five years. And whilst InvestNI have to budget in advance, they only pay when those companies have fulfilled their commitment. At least, that’s the plan.

Because projects can span up to five years, it’s impossible to relate what has been budgeted to what has been spent. But, looking over a five year period, it is reasonable to assume that this will balance itself out and that one would expect to see that the budget and actual spend reconciled. Yet in the most recent five year period, InvestNI budgeted £130 million more than it spent.

(The nice people at InvestNI’s Corporate Information office are trying very hard to explain this, but, thus far, have been unable to reconcile the difference – at least to me. Perhaps the NI Audit Office will have more luck.)

Over-budgeting by £130 million isn’t good, but it isn’t necessarily bad. After all, that’s just money that doesn’t get spent, and can be handed back to the Treasury. Right? Predictably, the only account that has been published of InvestNI handing any money back was during the last year, and only to the tune of £39 million.

They also reallocated another £8 million outside of InvestNI. So that’s £47 million over-budgeted. But where is the other £83 million?

InvestNI has known it has an accounting problem for years. This from a report on InvestNI’s predecessor [IDB] in 2000:

A report by Westminster’s Public Accounts Committee, published in 2000, was extremely critical of how IDB measured job creation through FDI – the same way Invest NI continues to do it. One concern raised by the Committee was that by only measuring “jobs promoted”, the process could be easily manipulated.

Did a Westminster committee say “easily manipulated”? Twelve years later, the problem still isn’t fixed. And InvestNI executives still get bonuses paid according to measures that can be, in the Public Accounts Committee’s words, “easily manipulated”.

Here’s a more recent report, this time from the NI Audit Office:

Invest NI has reported jobs promoted (that is, those envisaged at the start of a supported project). It also attempted to estimate the proportion of promoted jobs which translate into jobs created. The most reliable estimate suggests a 75 per cent conversion rate. This would mean that 21,000 of the 28,000 promoted jobs between April 2002 and March 2008 were created. However, the latest additionality estimates for SFA (albeit dated) of 50 per cent mean that only around 10,500 of the 28,000 promoted jobs were created and fully additional.

Whilst performance in this area may have improved in recent years, there has been no updated analysis of additionality to confirm this.

Recall that InvestNI spent £1.5 billion over a five year period and created 328 jobs? Based on these findings by the NI Audit Office, should that be revised to say: “InvestNI spent £1.5 billion over a five year period and lost over 10,000 jobs.”

If the Audit Office can’t do anything other than estimate actual performance numbers, what chance do the rest of us have? And if DETI don’t understand the real lack of performance of InvestNI, how can they ever fix the problem?

Too big to fail

InvestNI is an egregious waste of taxpayers’ money. Exactly how much money has been wasted is not known since they perpetuate accounting procedures that defy even the bean counting boffins at the Audit Office and baffle their handlers in DETI.

The problem as we see it is threefold:

(a) InvestNI (and its predecessors) has successfully obfuscated their true performance for over a dozen years
(b) DETI – InvestNI’s handlers, are unable to ask the hard questions, or perhaps understand the ugly answers and chose to ignore them, and
(c) DETI is unable to hold InvestNI accountable

On the basis that you can’t fix a problem that you don’t acknowledge, DETI needs to perform a full audit of InvestNI – an audit that can’t be whitewashed away as has been successfully achieved with the every other critical report. This series of articles has generated a lot of questions that demand answers. At the very least, they should now be asked openly.