Committee Reports > List of Committees > Joint > 1981 > Committee on Commercial State-Sponsored Bodies > Report No. 17 - Fóir Teoranta

SEVENTEENTH REPORT

FÓIR TEORANTA

I INTRODUCTION

(a) Background

1. The tariffs on imports, initiated in the 1930s, protected the home market for Irish manufacturing industry until the late 1960s. The signing of the Anglo Irish Free Trade Area Agreement (AIFTA) in 1965 signalled a change in trade policies and the prospect of more competitive conditions for manufacturers. The progressive reductions in tariffs on UK imports and the possibility of Ireland joining the European Economic Community indicated the possible need for the restructuring and the reorganisation of some Irish firms. By the early 1970s, a number of the traditional industries were beginning to show signs of difficulties. Examples were the textiles, clothing and shoe industries. The Government had provided some ad hoc financial assistance to some firms through a State body knows as Taiscí Stáit Teoranta. This approach helped tide some of the firms over their immediate difficulties and averted redundancies. From this experience the Government felt there was a need for some form of ‘last resort’ body which would help deserving firms in difficulties on the basis of orderly established procedures if the effective recovery of such firms was to be achieved. Fóir Teoranta¹ was to become the new State body which was to engage in company rescue activity.

(b) Legal Character and Development

2. Fóir was established under the Fóir Teoranta Act, 1972. With a share capital of £100 it was incorporated on the 28th March 1972. In accordance with section 19 of the Act, Taiscí Stáit Teoranta was dissolved and Fóir took over all its assets, liabilities and commitments at the 31st March 1972. The investment portfolio of Taiscí Stáit Teo amounted to £8.5 million, of which £5.7 million represented loans to firms and £2.8 million was in share investments. This portfolio was financed primarily by Exchequer advances.

3. The function of Fóir is to assist potentially viable industrial concerns which are in difficulties and unable to raise capital from the normal commercial sources. In order to obtain assistance, applicant firms must comply with certain stated social and commercial criteria as specified in the Fóir Teoranta Act, 1972. (These are discussed in Section II).

4. The effects of freer trade conditions in combination with the economic recession during 1974-76 resulted in a high level of activity in Fóir’s early years. In its first year of operation, Fóir approved financial support to an average of one firm per week. Its borrowing powers were quickly overtaken by such a demand for its services that in 1973 they were raised from £7.5 million to £17.5 million. In 1976 Fóir’s borrowing powers were increased to £35 million. The economic recovery in the late 1970s was reflected in a reduction in demand for Fóir’s assistance. The deterioration in general economic conditions in 1980 saw a sharp resurgence in requests for substantial funding from Fóir. From April 1972 to December 1979 Fóir had approved the provision of £34.3 million to 258 firms employing a total of 28,473 people. In the first ten months of 1980 it approved financial assistance for 31 new applicants employing 7,900 people; in that period the sum involved in approvals was £12.9 million. Fóir’s current level of borrowing powers is expected to be insufficient shortly. Legislation to deal with this problem is expected in the near future. All external funding of the Company to date has been provided by Exchequer advances.

5. At the end of each year the Company is required, under the 1972 Act, to make a report to the Minister for Finance of its activities and to submit to him a copy of its audited annual accounts. The Minister is obliged to place this information annually before each House of the Oireachtas.

II OBJECTIVES AND CRITERIA

(a) Objectives and Criteria for an “Eligible Concern”

6. The primary objective of Fóir is to provide, or enable the provision of, finance for industrial firms in financial distress. Financial support can be made available through investment in the ailing firm by way of share capital, debentures, secured or unsecured loans, bill finance or guarantees in respect of borrowing by such firms. To obtain financial support distressed firms have to be, in the opinion of the Company, “eligible concerns” under the criteria laid down by the Fóir Teoranta Act. These are as follows:

“a concern shall be an eligible concern … if in the opinion of the Company—

(i)it is engaged in an industrial activity (including any activity ancillary to industry),

(ii)the employment involved and total capital employed in it are significant either nationally or locally,

(iii)the proportion of its owners’ contribution to its total capital is reasonable,

(iv)it has reasonable prospects of profitability on a permanent basis, whether as for the time being constituted or after adaptation,

(v)its continuance is in doubt because of inability to obtain its financial requirements from commercial sources, and

(vi)its failure to receive financial assistance would have serious repercussions either nationally or locally.”

7. The above criteria are general in nature and are broadly based. They include tests from social, commercial and national interest standpoints. No precise definitions are provided as to what is meant by the terms used. Consequently, the eligibility depends, to an extent, on the interpretation and application of the criteria by Fóir.

(b) The Company’s Interpretation of the Criteria

8. In its evidence to the Joint Committee the Company stated that the applicant firm must comply with all the criteria.² In interpreting the criteria the Company explained:

“…The first is that the applicant concern engages in industry. That is fairly straightforward. That is a question of fact. Then, employment involved and total capital employed must be significant. Again these are largely questions of fact. Any employment is regarded as significant. Even at the best of times we would regard any employment as being significant, particularly outside of Dublin. Even in Dublin at present small employment is regarded as being important. Owner’s contribution as a proportion of total capital, must be reasonable. Again, a fairly liberal interpretation is given by the Board to this. They would give credit for money which had been put in previously by the proprietor and which may have been lost in bad times. The most important one is the one where the judgement element enters into it. This is the question of reasonable prospects of profitability on a permanent basis. This is where the element of judgement comes in. Given help from Fóir Teoranta, will the company be able to survive and prosper, meet its commitments and give employment on a continuing and permanent basis? That is the crunch one in all of these. Another criterion is, is the firm’s continuance in doubt? Its inability to get its requirements from commercial sources can be readily demonstrated by the company itself and by our speaking to the bank and other financial institutions. Finally, would its failure to receive financial assistance have serious repercussions on a local or national basis. This would have to be interpreted in relation to what the effect there would be on the community if a particular factory were to go out of existence. Applicants might have most difficulty in satisfying the Board that they will have a permanent on-going situation if given the assistance they are seeking, and obviously that is a question of judgement”.

9. In evidence the Company stated it assessed applicants fairly liberally. “If there is any doubt we usually give it to the applicant”.³ It was explained that industrial activity related to manufacturing industry and the mining industry.⁴ The Committee was advised⁵ that “profitability”, for the purposes of the criteria, was viewed as

“… a fair return so that the company can fund its borrowings including its borrowings from Fóir Teo … and generate sufficient working capital to allow for expansion”.

(c) Possible Changes in Criteria and Objectives

10. In evidence, Fóir advised the Committee that its Board had looked at the criteria to see if changes would be appropriate. It felt, after a number of discussions, that the criteria were “clear and easy to work with”.⁶ The Board did not recommend any major change in the criteria.

11. The Committee notes the failure rate (35%) of firms supported⁷ and the continuing difficulties of a large proportion of existing cases. The Committee is aware, from the Annual Reports of both Fóir and the Industrial Development Authority, that many of the factory closures are subsequently replaced by takeovers of the assets by new principals or by the substitution of new industrial projects in the factory buildings. Market forces, with some State support and co-ordination, can often achieve an alternative form of industrial reorganisation that may have stronger prospects of survival and growth. The overall cost of industrial rescue is relevant — particularly when the cost of Fóir and IDA financial assistance is combined. These issues are considered in more detail in subsequent Sections.

12. The Committee reviewed the need for Fóir to have a wider range of sectors eligible for its support. At present it is confined to manufacturing and mining. The Committee noted that firms assisted included agricultural processing co-operatives. Possible other sectors in the economy that might be considered are construction, distribution and services. In evidence, the Chairman of Fóir argued that widening the scope of the sectors that might be assisted would “not help”. He said that “if there are problems in the service industries or those which the Act does not cover or if a gap occurs, it will be filled by normal competition within the country”.⁸ The Company advised the Committee that it had received very few applications from firms that were ineligible.⁹ In the circumstances the Committee saw no reason why the Company should change from the existing limits to the sectors it is permitted to support.

13. The Committee considered whether it would be appropriate for the Company to widen its involvement under its existing operations. For example it could adopt a less passive role to the principle of rescue. Rather than wait until firms in difficulties actually come to it and deal with applicants on an individual basis, it could adopt an interventionist approach. This policy could be reflected in reviewing industries and groups of firms with the aim of effecting reorganisation and rationalisation on a wider basis (possibly through mergers) so as to achieve greater industrial efficiency. Fóir “sees itself as a specialist organisation to help individual concerns that find themselves in difficulties … We come across situations where the problems of individual firms suggest that the difficulties are general to a particular sector. There we tend to co-operate and slot in with the other State agencies in existence rather than try to duplicate or overlap with them … rather than set up a whole paraphernalia of people engaged in research and sectoral studies [Fóir] can, quite readily, call upon the resources of larger organisations, particularly the IDA, who have a more direct interest in industrial sectors”.¹⁰

III OPERATIONS AND PERFORMANCE

(a) Appraisal and Decision Process

14. In its submission to the Committee the Company stated “in its day-to-day operations Fóir functions as a normal finance house, subject to its special statutory criteria. All applications are fully investigated, premises and production facilities are examined, and applicants must submit all relevant information … Particular attention is paid to management problems. Views are also sought from all relevant Government Departments and State agencies.” Executives of Fóir submit reports on distressed firms’ affairs to the Board. On the basis of the information available to it, the Board of Fóir makes the decision as to which firms will be supported.

15. In his evidence before the Committee, the Chairman of Fóir emphasised that the Board of the Company made its decisions on the basis of the statutory criteria and independent of representations of Government Ministers.¹¹

16. Where the application is for an amount of funds in excess of £250,000, approval for the Board’s decision has to be obtained from the Minister for Finance and the Minister for Industry, Commerce and Tourism. This limit was established in 1972.¹² In evidence to the Committee, the Company explained that Ministerial approval for decisions has been arising more frequently recently. According to the Manager of Fóir, consent is forthcoming “reasonably readily” from the Ministers. The Company suggested that the limit of £250,000 be raised on the occasion of the last Fóir Bill [1976] but the suggestion was not accepted.¹³ The Committee noted that, in the case of the Industrial Development Authority, the limit on grants which may be paid without Ministerial approval has been raised from time-to-time. Having regard to the rate of inflation since 1972 the Committee recommends an upward revision of the limit in the case of Fóir to ensure that the rate of increase is broadly equal to that of the IDA.

(b) Support Activity and Failure Rate

17. An analysis of Fóir’s operations is contained in Table 1 as follows:

TABLE 1

Analysis of Activity of Fóir 1972-1979

Source: Submission and Annual Accounts of Fóir.

18. The foregoing Table indicates some interesting facts. 47 (18%) firms that sought assistance did not take up the offer of help. Fóir explained that this was “usually because required loan conditions were not complied with or because funds were obtained elsewhere”.¹⁴ The total number of new applications at 476 (the equivalent of about five a month) is high. A little under one in two requests for support are turned down.

19. Fóir has stated that 33% of firms assisted had returned to profitability. 14% of the firms helped had paid off Fóir in full. 35% of the firms helped closed down subsequently. Within these contrasts of failure and success are almost one third of the assisted firms which occupy a ‘twilight zone’. Of these, some were “trading marginally” and the majority were “having serious problems”.¹⁵ In view of the current economic recession, this information suggests that there is unlikely to be an improvement in the success rate for some time.

20. In regard to the success of Fóir in meeting its objectives, its Chairman told the Committee:

“… We have been successful in that of the number of companies that we have helped, at least 50 or 60 per cent have continued to operate although in some cases things are not working out as well as they should. We have approximately a 30 per cent failure rate. The type of firm that comes to us needs capital which they cannot get elsewhere; they have probably been badly run and cannot get finance from normal sources. Fóir Teoranta are in a high risk business, and therefore there are bound to be a certain number of failures. If the number of failures dropped considerably, or if we did not have any failures, we might be construing the criteria too severely”.¹⁶

The Committee is of the opinion that the failure experience of Fóir to date is not unreasonable, bearing in mind the ‘last resort’ nature of its operations and the general economic climate since Fóir was established.

21. The demand for financial support by distressed firms has tended to fluctuate with the general change in the health of the Irish economy. The Company was much more active during the period 1974-1976 than during the period 1977-1979 (see Appendix 1). Rescue activity quickened sharply in 1980. In evidence to the Committee the Company advised that for the ten months to the end of October 1980, 45 cases were approved of which 31 were new clients and 14 were existing cases; and that the aggregate financial assistance involved amounted to £12.9 million. The 31 new cases involved a total employment of 7,900.¹⁷ It is noticeable that in 1980 the numbers of employees involved and the level of financial assistance required were, on average, more than double the levels experienced with firms in previous years. It is understood that a partial explanation of this change was the number of very sizeable rescue operations mounted for larger firms. In the period 1972-79 the average amount of financial assistance approved per firm was about £133,000 and the average number employed was 110. In evidence the Company stated that most of the firms assisted are “small to medium sized and generally tend to be owner-controlled and owner-managed.”¹⁸

(c) Relevance of Support Activity

22. To establish how relevant has been the rescue activity of Fóir, its efforts were compared with overall factory closures, gross industrial job losses and total unemployment statistics. The comparisons are set out in the following Table:

TABLE 2

Data on Industry: 1975-79

Sources: Annual Reports of The Industrial Development Authority and of the Central Bank; and the Submission of Fóir to the Committee.

The Table shows that the greater number of jobs lost are through reductions in numbers employed in continuing firms rather than the impact of loss of jobs through factory closures. The number of people employed by firms approved by Fóir for financial assistance is high in relation to the number of jobs lost through factory closures. From the foregoing, the Committee concludes that the Company has made a reasonable impact in stemming the level of factory closures and consequent increased unemployment.

23. Two-thirds of the funds provided by Fóir have been invested in the following four industrial sectors: Furniture and Wood Products; Textiles, Footwear and Clothing; Electrical Goods; and Metal Products.

(d) Nature of Financial Support Provided

24. The Company makes available financial support to distressed firms mainly through the form of secured loans, cumulative redeemable preference share capital or ordinary share capital. Assistance in most cases is provided by way of secured loans as evidenced by the following Table:

TABLE 3

Fóir—Analysis of Invested Funds, 31 December 1979

Source: Annual Accounts of Fóir, 1979.

25. In general, loans are secured by way of a second charge on assets ranking after an existing charge in favour of a bank for financial facilities already advanced.¹⁹ Interest is charged by the Company at a rate “somewhat below current commercial rates” on all loans.²⁰ On the basis of the amount of interest received, as shown in Fóir’s accounts, it would appear that not all firms pay the amount of interest due to Fóir. Loans are repayable over periods of up to 12 years. In some cases, repayments of principal are deferred in the early years in order to reduce the borrowers commitments during the initial recovery phase.

26. In its evidence to the Committee the Company stated its attitude to the forms of finance it provided.²¹ It was not keen on providing equity as most of the firms supported were small to medium ones. Investing in the small distressed firm by way of equity would dominate existing equity capital and could result in Fóir becoming virtual owners of the firm. The Manager of Fóir explained, “… [we] do not wish to control or even negatively control, a company which is in competition in the private sector. There is the negative side of it too. If, having got involved in an equity situation, we find that a mistake was made in giving help in the first instance, and that probably the right thing to do was to wind up the company, it could become very difficult to do so if the State, through a State organisation, had an equity interest in it. It could become very difficult to close down a company even if it is patently clear that that is the right course of action to take. Further, providing money by way of secured loan in many instances affords a measure of protection for the State’s money because, if, unfortunately, things do go wrong, there is a prospect of recovering some of that money.”

27. The Committee notes that the Company has the power to give guarantees in respect of borrowing by distressed firms. This facility has only been used to a limited extent to date.

28. The Chairman of Fóir told us, “All the applications that are made to us are made after the banks say they are going no further”.²² He also pointed out, “A concern in difficulty can manage to keep its bank account in order for extended periods by stretching its creditors and by withholding payments to the Revenue Commissioners such as VAT, PAYE and PRSI which can run into very large figures.”²³ This information suggests that the debt/equity ratio of most applicants could be very high. The security for loans from Fóir could be thin in these circumstances. The losses on the value of loans and investments in relation to total advances were a similar proportion to the rate of failed cases. The provision of support funds in distressed cases by way of loan

The services of this unit would seem to be a vital complement to the provision of financial support, particularly where there is management weakness in the ailing firm which is frequently the case.

31. The number of general executive staff and management services specialists in Fóir seem to the Committee to be relatively low in relation to the volume of applications for financial assistance, the number of ‘active’ cases on hand and the managerial and other problems of the assisted firms.

32. The Committee believes that Fóir has fulfilled a useful role, at an acceptable cost, in supporting industrial and employment objectives in Ireland. As Ireland is a small open economy it is subject to the pressure of external economic fluctuations. The Committee believes there is a continuing need for the services of a ‘lender of last resort’.

IV BOARD, MANAGEMENT AND STAFFING

(a) Board

33. Under the Fóir Teoranta Act, 1972, the Company’s Board is limited to a maximum of seven members. The Chairman and other directors are appointed (and may be removed from office) by the Minister for Finance with the consent of the Minister for Industry, Commerce and Tourism. All of the directors are non-executive and the Board meets at least once a month. The Board comprises two managing directors, a business consultant, a chartered accountant, a rights commissioner, a financial director and a quantity surveyor. The Committee noted the absence of a trade union representative on the Board. When questioned on this matter the Company commented “we have had a trade union representative on the Board in the past and we found his input very helpful.”²⁷

34. Unlike many other commercial State-sponsored bodies, Fóir has no full-time executive on its Board. The Committee was advised in evidence that the Manager and the Secretary attend Board meetings and that it would be no great advantage to have an executive on the Board.²⁸

(b) Management—the Arrangement with the Industrial Credit Company Limited

35. Fóir operates with a total staff of 24 people including the six management specialists. The management and staffing arrangements for the Company are quite different from most State agencies. All the management, executive and administrative staff are employees of the Industrial Credit Company Limited (ICC) and are made available to Fóir under a formal management agreement between the two organisations. Only the management specialists in the management services unit are directly employed by Fóir. In evidence²⁹ to the Committee the Company explained that the arrangement with ICC was originally entered into in 1972 to enable operations to commence quickly after the Act was brought into force. The Board of Fóir has found that the arrangement has since worked very well from its standpoint. The agreement has been reviewed and extended on two occasions. ICC also look after all Fóir’s accounting records, the preparation of accounts for audit and accommodation requirements. Fóir claims that the arrangement provides considerable flexibility and back-up staffing as activity in Fóir can fluctuate from time to time.

36. Responsibility for the direction and control of the Company’s staff (including the management specialists) rests with its Manager (an ICC employee). The Committee understands that the Manager, Secretary and a number of other senior staff have been on secondment to Fóir since it was established.

37. The Committee sees advantages and disadvantages in the above management and staffing arrangements. The Committee notes the Company’s views on the advantages which flow from these arrangements; but would expect that the Board would review them (particularly at the top level) from time to time to check that they continue to meet the objectives and needs of the Company in the most effective manner.

V FINANCIAL PERFORMANCE AND CAPITAL STRUCTURE

(a) Financial Deficits

38. Between 1972 and 1979 Fóir has incurred net deficits (or losses) totalling £8.5 million. This aggregate deficit is before charging any interest on the £25.1 million Exchequer advances drawn down by Fóir to finance its operations. The Minister for Finance has not charged any interest to date or set any repayment terms for the advances.³⁰ As summarised in the Company’s submission³⁰ an operating surplus of £2.1 million was earned (before financing charges) over the period 1972-1979. However loan and investment losses amounted to £10.6 million over the same period — thus resulting in the overall deficit of £8.5 million. Admittedly Fóir cannot be appraised in the same manner as a number of other State-sponsored bodies, as it is not engaged in a trading activity. Its role could be more accurately described as socio/developmental. The costs and benefits of its operations are discussed in Section VI.

39. Ninety per cent of Fóir’s income consists of interest received on loans advanced to distressed firms. This amount of interest received represents a return of 5% of the net value of loans shown in the 1979 balance sheet. This low level of return on Fóir’s portfolio reflects the fact that not all the firms assisted are paying interest — mainly because of their weak financial position. The administrative cost of operating the Company was £611,610 in 1979. This figure was made up of the management fee payable to the ICC, other salaries, rent and rates, and travelling and other costs. The operating surplus (before finance charges) was £252,636 in 1979 compared with £326,895 in 1978. After the losses on failures, the net deficit was £1.5 million in 1979 compared with £3.2 million in 1978.

(b) Capital Structure

40. The capital structure of Fóir is unusual. Its authorised and issued share capital is a mere £100. The Company’s sole source of external funding has been by way of Exchequer advances.³¹ It could be said that the share capital and £8.5 million of the Exchequer advances have been lost because of the accumulated net deficits to the end of 1979.

41. Under 1976 legislation the borrowing powers of the Company were limited to £35 million. Recent activity suggests that these powers could be exhausted during 1981. (The Company has a small margin in hand because about £7.5 million of its borrowings were inherited from Taiscí Stáit Teo and are not accountable in the aforementioned figure.) In evidence,³² the Company advised the Committee that discussions in the matter are taking place with the Department of Finance. The continuance of Fóir’s current level of activity suggests a very substantial increase in borrowing powers may be required.

VI SOME WIDER ISSUES

(a) Links with Other Bodies — Early Warning System

42. Fóir works closely with a number of Government Departments and State Agencies. In many cases assistance to firms involves operating links with the IDA. The IDA has maintained a ‘rescue division’ since 1972. That division co-operates with Fóir in putting together ‘rescue packages’ for firms in difficulty. Apart from Fóir advancing funds, the IDA provides grant support. For example, in 1979 the IDA approved grants amounting to £893,000 towards ‘rescue packages’ for 23 firms employing 1,769 people and involving the creation of 135 new jobs.³³ In addition, where satisfactory ‘rescue packages’ are not possible and a closure is likely, the IDA seeks out replacement projects to take over some or all of the firms’ assets. 24 such replacement projects were negotiated in 1979, involving 985 jobs, with the potential of generating an additional 799 jobs. In its evidence to the Committee, Fóir stated that there was no duplication in services between it and the IDA.³⁴

43. Fóir, in conjunction with various agencies, has tried to devise ‘an early warning system’ to pinpoint firms running into difficulties so that support and corrective action could be mounted at an early stage. Fóir has admitted³⁵ that it has not been able to get the ‘early warning system’ working as well as it would have liked — though its efforts to improve it have met with some success. In discussing this problem and the reasons for it Fóir stated:

“… the fact is that we continue to receive requests for assistance at very short notice. The reason for this would seem to be psychological; many businesses experiencing financial difficulty will go to endless trouble to conceal their plight from creditors, bankers and financial advisers in the expectation that things will come right. The result very often is that irreparable damage has taken place before we become aware of the company’s problems.”

44. Originally Fóir endeavoured to devise the early warning system in consultation with the Department of Industry, Commerce & Tourism and the IDA. In evidence the Chairman of Fóir told the Committee,

“… the membership of the inter-agency group³⁶ has now been extended to include representatives of the Department of Labour, the Department of Agriculture and CTT.”

and

“Under the aegis of the inter-agency committee … a fresh approach is now being made to the major banking groups and discussions have already taken place with one of the main groups.”³⁵

(b) The Cost and Benefits of Company Rescue

45. In its evidence,³⁷ the Company indicated the following benefits of providing financial assistance to firms in difficulties:

—Preserving jobs,

—Savings in redundancy payments,

—Savings in social welfare payments,

—Income tax which otherwise would not have been paid by employees in firms supported,

—Contributions towards the balance of payments,

—Supporting jobs in other sectors which are supplying the assisted firms with goods and services.

The Company estimated³⁸ the cost per job saved by it at between £976 and £1,731, depending on the basis of the computation. It claimed this was much lower than the IDA grant cost per new job created.

46. In contrast to the IDA (which provides grants) Fóir financial assistance is provided by way of repayable loans and share capital. However, to a large extent, the future value of these investments depends on the recovery of the assisted firms. Only a minority have repaid the loans advanced. In turn, Fóir has not paid the Exchequer interest on advances received and only £1.3 million out of £26.3 million of Exchequer advances were repaid by Fóir between 1972 and 1979.³⁹ At a minimum, the direct cost to the Exchequer of supporting Fóir has been the interest foregone on advances and the accumulated deficit of the Company. This basis assumes the recovery (and repayment to the Exchequer) of the remaining investments at some future date. Alternatively, to make a crude comparison between the cost per job saved and each new job created, the advances to Fóir (for the purpose of the exercise) could be treated as “grant-in-aid”. Computations on this revised basis indicate an average Fóir level of financial assistance of £1,205 per person employed⁴⁰ over the period 1972-1979. Adjusting for the failure rate of firms assisted produces an ultimate average outlay of £1,853 per job saved. The Committee noted that the cost of Fóir cannot be examined in isolation. Consideration must also be given to IDA grants in ‘rescue packages’ linked with Fóir. Over the three year period 1977-1979 these grants⁴¹ averaged £409 per job retained. Over the five year period 1975-1979 IDA average grants per job were £4,462 (New Overseas Industry), £3,623 (Domestic New Industry), £2,054 (Small Overseas Industry) and £1,881 (Small Domestic Industry). The failure rate of new industry would be significantly lower than that of Fóir assisted firms. The foregoing analysis excludes the opportunity cost of interest on the funds provided. The analysis reveals that though the cost per job saved is significantly lower than the cost of a new job created in a larger firm, it is close to the cost of a new job created in smaller firms — this may be a better comparison because of the average size of most Fóir clients.

47. The Committee has not examined the indirect costs and benefits of Fóir’s operations. The level of unemployment in Ireland indicates that job preservation and job creation activities are not mutually exclusive. Having regard to the foregoing and the social cost of unemployment, the Committee is of the opinion that the effective cost of Fóir’s activities has not been unreasonable in relation to its contribution.

(c) The Role of the Banks

48. The Committee sought to learn, from the experience of Fóir, the policies and arrangements of banks in financing firms in distress. The Chairman of Fóir, when asked whether Fóir was relieving the banks of their responsibilities in their more difficult aspects of trading, replied:

“… the banks have their criteria as to what is an acceptable risk. Prudence would not allow them to go any further in many cases. We do not see any evidence that the banks are pulling the rug from under companies in the hope that Fóir Teo will pick up the pieces. When a company comes to us, probably it has got as much from the banks as possible, and sometimes even more. We see no evidence of the banks shirking their responsibilities.”⁴²

It was confirmed to the Committee that Fóir funds were not advanced to pay off bank loans of distressed firms.⁴³ Sometimes small amounts of Fóir advances to firms are used to repay temporary additional bank facilities received by the firms while they were in the course of negotiations with Fóir.

49. The Committee believes that the activities of Fóir have relevance to the banking system in Ireland. Most, if not all, firms assisted by Fóir would also be clients of banks. To-date the financing of Fóir has depended solely on Exchequer resources. The Committee is of the opinion that the banks could play a role in helping finance Fóir’s operations, possibly by providing additional facilities to distressed companies on the basis of guarantees from Fóir.

(d) Management and Industrial Relations in Distressed Firms

50. The Committee noted the extremely critical comments of Fóir, in its Reports attached to the 1978 and 1979 Accounts, about the poor calibre of management and bad industrial relations in firms applying for financial assistance. One reason for this problem is a deficiency in management training. Fóir advised⁴⁴ the Committee that, to date, it had not had a formal association with the Irish Management Institute with a view to passing on the benefits of its (Fóir’s) experience with distressed firms. The Committee suggests that Fóir might initiate discussions with appropriate organisations in the management training field so that its experience and advice could be used to benefit the development of management standards in firms that would benefit from this information.

VII CONCLUSION

51. In the course of a submission to the Committee, the Department of Finance stated, “In summary, Fóir Teoranta performs a most valuable function, on the basis of rational criteria, by helping industrial firms in temporary difficulties to survive and recover profitability. Its services are of particular value in times of exceptional economic difficulties.” As a result of its review of the operations of Fóir, the Committee has come to the conclusion that the Department’s statement is fully justified.

52. For this inquiry the Committee appointed Mr. Edward Cahill, Senior Lecturer in Accounting and Finance at Trinity College, Dublin, as specialist adviser. The assistance he gave proved invaluable.

8 April 1981

¹Subsequently in this Report referred to as Fóir.

²Evidence (Question 14)

³Evidence (Question 14)

⁴Evidence (Question 5)

⁵Evidence (Question 48)

⁶Evidence (Question 3)

⁷The failure rate of 35% is based on the number of firms which failed (73) in the period 1972-1979 out of the total number of firms that received Fóir financial support (211) during that period. Fóir, in its submission to the Committee (see Appendix 1), indicated failure rates varying between 28% and 34% depending on the basis taken.

⁸Evidence (Question 5)

⁹Evidence (Question 6)

¹⁰Evidence (Question 4)

¹¹Evidence (Question 62 to 66)

¹²Appendix 2

¹³Evidence (Questions 33 and 34)

¹⁴Appendix 1.

¹⁵Appendix 1.

¹⁶Evidence (Question 2).

¹⁷Evidence (Questions 7 to 9)

¹⁸Evidence (Question 15).

¹⁹Evidence (Question 58).

²⁰Appendix 1.

²¹Evidence (Question 15).

²²Evidence (Question 18).

²³Evidence (Question 35).

²⁷Evidence (Question 52).

²⁸Evidence (Question 53).

²⁹Evidence (Question 54).

³⁰See Appendix 1. Fóir has made repayments amounting to £1.3m. (See footnote 40 to para 46)

³¹Details in Appendix 1

³²Evidence (Question 30)

³³IDA Annual Report, 1979

³⁴Evidence (Question 26)

³⁵Evidence (Question 35)

³⁶See Paragraph 43

³⁷Evidence (Question 69)

³⁸Evidence (Question 11)

³⁹The amount of £1.3 million reflected two transactions: an adjustment in respect of the refinancing of an assisted firm in 1975 and the return of funds surplus to immediate requirements during a slack period in 1979.

⁴⁰This calculation is based on job approval data supplied by Fóir.

⁴¹IDA Annual Reports, 1977-1979.

⁴²Evidence (Questions 15 and 16)

⁴³Evidence (Question 58)

⁴⁴Evidence (Questions 50 and 51)