Committee Reports > List of Committees > Dáil > 2007 > Committee of Public Accounts > Report No. 19 - First Interim Report for 2004, MediaLab Europe

Dáil Éireann

An Coiste um Chuntais Phoiblí

An Chéad Tuarascáil Eatramhach don bhliain 2004

(Éisteachtaí an Choiste sa tréimhse Deireadh Fómhair 2005 go dtí Iúil 2006)

MediaLab Europe

Eanáir, 2007

Dáil Éireann

Committee of Public Accounts

First Interim Report for 2004

(Hearings of the Committee in the period October 2005 to July 2006)

MediaLab Europe

January, 2007

(Prn. A7/0051)

Contents

Chairman’s Preface

Members of the Committee of Public Accounts

Orders of Reference of the Committee of Public Accounts

MediaLab Europe

Appendix – Massachusetts Institute of Technology: Submissions

Chairman’s Preface

This interim report of the Committee of Public Accounts continues the process of the Committee, which commenced in 2005, of reporting periodically on a thematic basis. The matter was brought directly to the attention of the Committee by way of the chapter on the Department of Communications, Marine and Natural Resources in the Annual Report of the Comptroller and Auditor General, 2004. The subject matter of this report details the Committee’s consideration of that Chapter.

In compiling this report the Committee met with the Secretary General of the Department as it is he who is the Accounting Officer, as well as with officials from the Department of Finance. In addition, the Committee received three written submissions from the Massachusetts Institute of Technology. These submissions were considered at length by the Committee during its deliberations and have been included in full in the appendix of this report.

This is the fist of the Committee’s interim reports on the 2004 report of the C&AG. It details the role played by the various agencies in the establishment of the Media Lab project, the funding arrangements that materialised, the governance issues that evolved and the lessons to be learned. The Committee made a number of findings and has, in addition, proposed recommendations for ventures involving substantial levels of State funding in the future.

We recommend this report to the Houses of the Oireachtas.

Michael Noonan, T.D.,

Chairman.

January, 2007

Members of the Committee of Public Accounts

Orders of Reference of the Committee of Public Accounts

156. 1. There shall stand established, following the reassembly of the Dáil subsequent to a General Election, a Standing Committee, to be known as the Committee of Public Accounts, to examine and report to the Dáil upon—
        
        1. the accounts showing the appropriation of the sums granted by the Dáil to meet the public expenditure and such other accounts as they see fit (not being accounts of persons included in the Second Schedule of the Comptroller and Auditor General (Amendment) Act, 1993) which are audited by the Comptroller and Auditor General and presented to the Dáil, together with any reports by the Comptroller and Auditor General thereon:
           

           Provided that in relation to accounts other than Appropriation Accounts, only accounts for a financial year beginning not earlier than 1 January, 1994, shall be examined by the Committee;

           
           
        2. the Comptroller and Auditor General’s reports on his or her examinations of economy, efficiency, effectiveness evaluation systems, procedures and practices; and
        3. other reports carried out by the Comptroller and Auditor General under the Act.
     2. The Committee may suggest alterations and improvements in the form of the Estimates submitted to the Dáil.
     3. The Committee may proceed with its examination of an account or a report of the Comptroller and Auditor General at any time after that account or report is presented to Dáil Éireann.
     4. The Committee shall have the following powers:
        
        1. power to send for persons, papers and records as defined in Standing Order 83;
        2. power to take oral and written evidence as defined in Standing Order 81(1);
        3. power to appoint sub‑Committees as defined in Standing Order 81(3);
        4. power to engage consultants as defined in Standing Order 81(8); and
        5. power to travel as defined in Standing Order 81(9).
     5. Every report which the Committee proposes to make shall, on adoption by the Committee, be laid before the Dáil forthwith whereupon the Committee shall be empowered to print and publish such report together with such related documents as it thinks fit.
     6. The Committee shall present an annual progress report to Dáil Éireann on its activities and plans.
     7. The Committee shall refrain from—
        
        1. enquiring into in public session, or publishing, confidential information regarding the activities and plans of a Government Department or office, or of a body which is subject to audit, examination or inspection by the Comptroller and Auditor General, if so requested either by a member of the Government, or the body concerned; and
        2. enquiring into the merits of a policy or policies of the Government or a member of the Government or the merits of the objectives of such policies.
     8. The Committee may, without prejudice to the independence of the Comptroller and Auditor General in determining the work to be carried out by his or her Office or the manner in which it is carried out, in private communication, make such suggestions to the Comptroller and Auditor General regarding that work as it sees fit.
     9. The Committee shall consist of twelve members, none of whom shall be a member of the Government or a Minister of State, and four of whom shall constitute a quorum. The Committee and any sub-Committee which it may appoint shall be constituted so as to be impartially representative of the Dáil.

The Report

MediaLab Europe

1. Proceedings of the Committee

1.1 The Committee heard evidence from Mr Brendan Tuohy, Secretary General, Department of Communications, Marine and Natural Resources (the Department) and his officials; from officials of the Department of Finance; and from the Comptroller and Auditor General on 13 October 2005. In addition, the Committee received three written submissions from the Massachusetts Institute of Technology (MIT) dated 10 October 2005, 23 February and 5 December, 2006.

2. The Background

2.1 MediaLab Europe (MLE) was established as a company in May 2000 and went into liquidation in early 2005. The operation of the company was governed by a series of collaborative agreements involving the Government, MIT and the company itself. On foot of these agreements, the State made payments totalling €35.5 million, that is, €10.6 million directly to MIT and €24.9 million to the company. It also made a property which had cost €22.5 million available to the company for its operations at a nominal rent. MIT is a charitable non-profit educational institution that depends on endowments to pursue its mission. It provided management expertise and technical support, and was to help to secure sponsorship and private contributions. At no stage did MIT commit to provide funding for the venture. It was envisaged that the level of sponsorship would grow as MediaLab Europe’s reputation and output increased with the expectation that the company would become self-sufficient in due course.

2.2 The work to be undertaken by the company, which is referred to as blue sky or non-directive research, was inherently high risk. Some members of a State task force expressed concern about the disproportionate risk to be borne by the Exchequer. The initial period of operations coincided with a severe downturn in the technology market, with a consequential negative effect on attracting sponsorship for research. The scale of the unprecedented global downturn in the ICT industry, after early 2000, undermined the MediaLab model at an early stage of its development in Dublin and it became increasingly difficult to attract corporate sponsorship for research and development. The crisis in the technology sector is reflected in an almost 70% reduction in the value of the Nasdaq Stock Exchange between 2000 and 2001. Large ICT manufacturers and service providers sharply curtailed their research and development activities. The value of ICT venture capital investment declined by over 50% in the 2000-01 period.

2.3 The business attitude to the model of non-directed research also changed during the 2000 to 2004 period. Principally, the downturn in the technology market in the latter half of 2000 and also the tragic events of September 11, 2001 had a direct and negative effect on the technology companies whose sponsorship was expected to underpin MLE. As a result, funding was not forthcoming from the corporate sector. As companies attempted to correct their financial position, corporate research and development focused more and more on the commercialisation of research. MLE failed to adapt sufficiently quickly to the new environment. By late 2001, just over one year into MLE’s operations, the Government liaison committee noted that the company was not achieving its funding targets and expressed concerns about the finances of MLE. It was clear to the Department by 2003 that MLE was significantly under-performing. Corporate income was significantly below projections. MLE appeared not to display the ability to work its way quickly enough through the difficult environment, even though this would have meant a re-evaluation of the basic business model of the organisation and probably a new strategic direction.

2.4 By the end of 2003 serious questions were being asked about the financial sustainability of the company and these led to a demand for a strategic plan. The Department appointed financial consultants in May 2004 to review the strategic plan and later commissioned an expert in the field to carry out an assessment of the company’s performance against its funding objectives. The financial review confirmed that the company would be unable to implement a strategic plan without significant further funding from the State, was highly critical of the company’s performance and very pessimistic about its prospects. For example, the strategic plan included an assumption for revenue growth in the order of 32%, a rate that had never been achieved previously. The new strategic plan required €9 million over three years in Government funding. In contrast, MIT would receive payments of more than €11 million in the period 2004 to 2010, having already received almost €22 million since the foundation of MLE. A financial analysis of the strategic plan suggested that the Government funding requirement could be as high as €35 million if the optimistic assumptions for revenue were not met. In the latter part of 2004 the State attempted to negotiate a restructuring of MLE to place it on a long-term viable path. The Department was disappointed with the level of MIT’s commitment to MLE, particularly its unwillingness to agree to commercially driven research or to commit finances to a restructured company. MIT, for its part, maintain that it was unable to agree to commit its faculty to the pursuit of commercially driven research in view of its mission to focus on education and basic research to increase knowledge for the public good. Also, as a charitable educational research university, which primarily depends on endowments to pursue research activities for the public good, it could not commit funding. The Committee acknowledges that MIT fulfilled all of its legal and contractual obligations as a result of agreements entered into with the Government.

2.5 Oversight of MLE by the Government was the function of a liaison committee but its oversight role was effectively circumscribed by the agreements in place between the Government and MLE. There were limited actions that could be taken under the agreement but the liaison committee did monitor the financial performance of MLE which led ultimately to the decision not to provide further funding.

2.6 There were positive aspects to the MLE project. The lab attracted significant international interest and the presence of MLE facilitated the early growth of the Digital Hub. The presence of Media Lab Europe acted as a magnet for the Digital Hub. It enabled Enterprise Ireland to attract international organisations including Google and Yahoo to the location. The Digital Hub was seen as an important component to an industry which was worth €50 billion to the economy. There are now approximately 50 companies located there. A number of collaborative research projects with students from Irish third level institutions were also successful. There was also a positive social benefit to the local community with the establishment of the Intel clubhouse in the grounds of MLE.

3. The Accountability Issues

3.1 The issues considered by the Committee were:

• Formation of MediaLab Europe
• Key formative issues
  • Risk-taking
  • Nature of work at MLE
  • Corporate funding
  • Commitment to non-directive research
  • Degree granting programme
  • Intellectual property
• Governance issues
  • Role of the Department
  • Role of the Department of Finance
  • Board of Directors
  • Government liaison committee
  • Analysis of governance issues
  • Governance – Salary information
  • Review of strategy in 2004
  • Decision to liquidate
• Overall assessment
  • Positive achievements
  • Value for Money obtained
  • Limited achievement of objectives
  • Discrepancies over measured outputs
  • Lessons learned

4. Examination of the Issues

Formation of MediaLab Europe

4.1 The model of getting people into Ireland interested in establishing a leadership position was successfully used in the past in financial services when the IFSC was set up and in electronics, software, pharmaceuticals and bio-pharmaceuticals. The need for innovation is important for the economy in the future. The economy grew by 70% in the 1990s and the productivity within this was phenomenal by any standard. There was a huge upside if the MLE project worked out right and a downside, particularly a financial downside, if it did not. It was thought that MLE would be one part of the broader area of the digital hub which is a site of about nine acres in the Liberties.

4.2 The Department of the Taoiseach had a co-ordinating role and holds responsibility for information society issues. It took the lead in establishing MLE. In March-April 1999 an ad hoc steering committee was set up involving all the different Departments and agencies. In April 1999 the first draft memorandum of understanding (MOU) was prepared. In May-June 1999 discussions took place between the steering group and MIT. In July 1999 the Government made its first decision indicating a willingness, in principle, to establish MLE but a lot of other issues needed to be negotiated. A further Government decision was taken on 30 November to proceed with MLE on the basis of an MOU, to establish a task force and to broadly consider this concept of the digital hub in that context. From December 1999 to May 2000 a series of legal contracts had to be drawn up. In February 2000 there was a Government decision to approve funding for MLE. On 11 May 2000 the collaborative agreements were signed. The company was set up by way of sets of agreements between the Department, MIT and Media Lab Europe. There is no shareholding.

4.3 In its submission to the Committee, MIT acknowledge that MIT Media Lab and the Government approached the MLE negotiations in good faith with an understanding that MLE involved significant risks. MIT agrees that all the risks were clearly identified. In communications with the Government, MIT asserts that it indicated it could take as long as ten years for MLE to become a self sufficient, world class research organisation capable of attracting its own private funding. However documentation relating to the agreed contract which was examined in the course of the audit process clearly indicates that it was anticipated that MLE would become self financing after five years.

4.4 At the time of the formation of MediaLab Europe, MIT Media Lab was in discussions with the Indian Government and subsequently set up a collaborative project there in 2001. Although MediaLab Asia was a very different project, there were some similarities with the arrangements MIT made there and with the Irish Government. Reports suggest that the Indian Government felt it was investing but getting very little in return and its involvement with MIT MediaLab ended in 2003. Some comments that characterised that episode could be transferred to the Irish environment, for example, the project was full of high ambition rather than specific outcomes. MIT disagree with this and argue that MLE cannot be fairly compared with other MIT – Government endeavours.

4.5 The main feature shared between MLE and Media Lab Asia is that the corporate funding failed to materialise. In fact no funding materialised in India. MLE at least received something in the region of €7 million in corporate sponsorship.

Key formative issues

Risk-taking,

4.6 The Committee considered that part of the reason for the current situation was that the business risks were not managed properly and that the risk to the Government was not reduced at the outset. On the positive side, there was a huge potential, bearing in mind the economy and the opportunities in the ICT sector at that time. When the task force reported to the Department of the Taoiseach, one of its responses was to hire a consultant who reported back before the agreement was signed with MIT. In the opinion of the consultant, MIT could deliver the facility along the lines proposed but this should have been conditional on a number of factors, including a full commitment by MIT, securing brand identification for MLE, substantial commitment of MLE staff, collaboration between MIT and MLE staff and students and clear agreements covering fundraising. The consultant did not consider the proposed financial arrangement to be important, despite the fact that the cost of providing the number of places was 80% higher than in a third level setting. The consultant’s report dealt with the MLE project as being in a rapidly growing sector, as being very important for the economy and as offering significant opportunities. The link with MIT was a brand recognition issue because a brand cannot be bought and built up in a short space of time.

4.7 On the other hand, in a 1999 report from the task force on the proposal to establish MLE, words such as “dismal”, “surprisingly weak”, “inexplicably dismal”, “mediocre”, “flaky”, “not sufficiently industry focused”, “very mediocre” and “disappointing” are used. The task force considerations were brought to the attention of the Government in weighing up the balance in making the decision. The Government was made fully aware and balanced the information. Negotiations between the Government and MIT were very detailed and took place over a period of more than a year before they were concluded. The Committee felt that once the decision to proceed was made there was an onus to ensure the Government side would not be hamstrung by the contractual arrangements. In a certain sense, what emerged was that the State viewed itself as being restricted by the lack of flexibility from MIT on the terms under which it was willing to proceed. MIT for their part maintain that during the negotiations there were concessions made on both sides. There is a further need, in any project evaluation with a built-in optimism bias, to discount for that bias especially where matters of sponsorship are involved. This had not happened in the case of MLE. Nobody predicted the massive downturn in the technology sector. Of all the issues, this was the single biggest trigger of the subsequently disastrous ripple effect.

Nature of work at MLE

4.8 A benefit from the project was the presence of a hard working and committed work force and the emphasis on technological issues which was relatively new to Irish academia. There was no previous tradition of this in Irish academia, although there is a tradition of publishing papers. That was one of the issues which arose when the conflict took place between MediaLab Europe and the traditional academics. Academics traditionally publish in learned journals, but much of what they did in MediaLab Europe involved the demonstration of technologies. It held an open day every month which was attended by hundreds of people at which researchers demonstrated their technology. It regarded this as a more practical and pragmatic approach.

Corporate funding

4.9 There was a commitment given in the legal agreement that MIT would assist with fundraising for MLE. The original idea was that there would be an opportunity for MLE to draw on companies in Europe. There were no specific targets set but the reality is that there was little fundraising. MIT indicated that MIT MediaLab personnel raised private gifts and pledges of over IR£3.5 million. Whilst other sponsorship payments amounted to US$168,750 the Department felt that the amounts raised did not match what had been projected. It also notes that MIT did not in any way reduce its demands for payments from MLE allowed for under contracts even when it was clear that the company was not going well.

4.10 MLE’s perspective was that the funding model and the company’s objectives were realistic as they were based on the MIT view that private funding for non-directive research is a viable model. This was the prevailing view in the late 1990’s. The Department does not share that view now. It notes that until recent years MIT was funded primarily by the private sector, by investment from companies. Subsequent to the downturn in the technology sector, funding was provided much more by the Government and this is the general international experience. The MIT disagrees with this view. It has indicated that MIT Media Lab continues to operate with private funding to support its non-directed research programme and pointed out that it has the benefit of a broad private sponsor pool developed over 20 years.

Commitment to non-directive research

4.11 MIT is very committed to non-directive or blue sky research. The Government initially found this appealing because many of the most productive technological advances come from research activities that are founded in basic intellectual curiosity and free inquiry. It believes that innovation comes from non-directive research. This is based on the idea from Professor Friedman (MIT) that if you know what you are looking for, you are limited by what you know.

4.12 The Department’s view on the changes that have occurred between 1999 and 2004 is that a model based on purely private funding for non-directed research is unlikely to be viable in light of radically changed commercial and research environments. The focus on private sponsored research has shifted towards commercialisation of research and development. In this new environment, it is unlikely that significant levels of non-directed research can be conducted without public funding.

Degree granting programme

4.13 MLE was not originally set up to be a degree awarding institution but there was an aspiration that it would eventually develop degree-granting programmes. However, Section 9 of the Collaboration Agreement between MIT and MLE recognised that in the early years MLE would not be able to grant degrees and so would need to collaborate with Irish universities. MIT recommended that MLE should be affiliated with Trinity College Dublin from the outset. The Government did not favour affiliation to one university as it preferred collaboration with many universities. During the negotiations, and later when the company was up and running, there were discussions about having an MIT qualification. Part of the problem MIT faced was that if people could get a cheaper version of their qualifications in Dublin, it would undermine its programme in the United States. During the discussions, MIT indicated that MLE students would have to spend time in the United States to gain the qualification. The Department made the point that MIT had facilities that enabled people to spend time on campus at MIT in short bursts and, therefore, they did not need to live on campus for two or three years. There was no willingness on the part of MIT to go beyond exploring the idea. The Department tried to address the issue and get MIT to grant qualifications on its own or in conjunction with Irish universities.

4.14 A view was sought from Irish universities and from the Department of Education and Science and the HEA. An evaluation done by the HEA on the MLE proposal was very positive. Some universities were very vociferous in stating the money should go to Irish universities. On the other hand, €1.25 million was allocated to 83 collaborative projects between MLE and Irish universities and this had a positive impact.

Intellectual property

4.15 MIT operated a collective intellectual property based on the idea of undirected research. This involved people putting money into a collective pot and being given access or licence, albeit not exclusively, to any of the intellectual property to emerge from the project. If ten companies invested money, they all would be given access to everything to emerge from the venture. MLE had access to the intellectual property of MIT in Boston.

4.16 Twelve applications for patents were filed in the name of MLE. There is not a long tradition in Ireland of the universities filing a great number of applications. The Department has discussed with the liquidator and Enterprise Ireland the maintenance of the patents pro tempore. It is very difficult to put a value on intellectual property until somebody commercialises it. The overall package is such that the assets would pass to the new entity. There is a facility for this on foot of the wind-up covered in the initial contract. The Committee noted that the liquidator had stated in an interview with The Irish Times in 2005 that the intellectual property and patents arising from MLE were worthless. According to the liquidator’s account filed at the Companies’ Office, patent filing costs of €7,366 were incurred and a sum of €20 was received in respect of patents sold. More recently and following the filing of the liquidator’s account a further sale was completed for the value of €40,000. This is expected to be shown in the accounts for the second year of liquidation.

Governance issues

Role of the Department

4.17 Responsibility for MLE transferred to the Department of Communications, Marine and Natural Resources (the Department) in June 2002. In October 2003 the Department asked MLE whether MIT was discharging its obligations and questioned the financial sustainability of MLE. The Department was concerned as the financial projections were not being met. In early 2004 more information was received and a strategic plan was specifically requested. This was a revival plan to see where the company was going. When the Department received this in May 2004, it was not happy with the content of the plan and had concerns about some of the assumptions made in it. The two areas of concern were the assumed growth rates which had never been achieved and the lack of a financial MIT commitment. The Department commissioned an external evaluation of the plan by financial advisers and had a review done of the quality of the work done in MediaLab. Final discussions were held in late 2004 when various proposals were made but neither MIT nor the department were prepared to move on certain issues.

Role of the Department of Finance

4.18 The Department of Finance was involved in the MLE project from the beginning through its participation in the Government liaison committee. It raised a number of concerns, all of which were put on the table when the decision to proceed was being made. MLE was not like a normal State company in which the Department could intervene. The Government liaison committee did not have that level of control.

Board of Directors

4.19 There were nine people on the board: three nominated by MIT, three by the Government, and three who were jointly agreed. The chairman, Mr. Nicholas Negroponte, was from MIT. He was also the founder of MIT MediaLab in the United States. On the Irish side, there were a number of eminent people, as were the joint appointees who were international.

4.20 The financial problems were originally flagged in 2001 and continued to be flagged as Exchequer funding continued through 2003. The Board changed its strategy a number of times to try to deal with the situation as it found it. It maintained the principle of non-directive research. As it evolved, the Department found the board was not fund raising. The Government liaison committee stated that the board was not raising revenue as predicted through the policy of non-directive research and that the issue should be examined, including the issue of granting degrees.

4.21 A review of MLE stated that, while the Exchequer was the main funding source for MLE, it effectively did not have control over the board which was under the chairmanship of a representative of MIT. Some decisions were taken without reference to the Exchequer. MIT strongly disagree with the assertions that it controlled the board or the management of MLE. It points out that board appointees served in their personal capacities and not as representatives of their appointing authority. While this is true, the Department feels that MIT had significantly more influence on the Board. It notes that MIT was unwilling to agree to a Government suggestion for one of the joint nominees to the board in 2004.

4.22 In August 2004 Mr. Matti Packalén from Finland was appointed co-chair largely at the initiative of the Government. His role was to deal with the Government’s concerns and those of the Government liaison committee about the functioning of the board because the Department wanted to see changes taking place. The Department was restricted in what it could do by the contracts in place, however, it tried to move within this and drive change particularly in terms of the strategies for funding and for non-directive research.

Government liaison committee

4.23 The Government liaison committee was set up in September 2000 comprising members of Government Departments, MIT Media Lab and MLE executives. The purpose of the liaison committee was to foster communications between MLE, MIT Media Lab and the Government. MLE was required to report on its operations and financial status. A financial sub-group was set up in autumn 2001. The Committee felt that because of the risk element involved with MLE, a mechanism for financial review and monitoring should have been in place at a much earlier stage. The Department accepted this point but noted that any new company or organisation such as this needs to be given the opportunity to set up.

4.24 MLE commissioned an external review in late 2001 which was made available to the liaison committee. There was concern that some of the income figures were not coming up to the level expected. The financial sub-group of the liaison committee met in November 2001 and reported that the model and plan as originally envisaged were not being adhered to. MLE had external reviews that were looking at what sort of model it needed going forward because the environment in which it found itself was not returning the revenue streams at which it was looking. The board of MLE was concerned and put a lot of work into getting a level of certainty around the type of strategy that it was pursuing. The Government liaison committee was expressing its concerns not just about the financials but about the general direction of MLE.

4.25 MIT consider that the Government received meaningful information about MLE’s progress and had the ability to oversee and influence that progress. MIT have stated that the arrangement whereby MLE was subject to a board, as well as being answerable to a separate Government liaison committee, proved to be ineffective and did little to facilitate direct and effective communication between MLE, the Department and MIT. The dual oversight structure, ultimately, did not serve MLE or the stakeholders well. There was tension between the Government liaison committee and MIT throughout the process. Because of the strategy being pursued, the Government liaison committee was very circumscribed in its role. The Department considers that the notion that the Government liaison committee provided “dual oversight” is a clear overstatement.

Analysis of governance issues

4.26 The legal arrangement which established MLE turned out, in the view of the Department, to be a weakness in the project. The Department acknowledge that MIT Media Lab itself was set up in a similar vein and MLE was modelled on that. At the time there was a real belief that the market was going skywards and that there were huge opportunities. Concerns were expressed before MLE was set up. A risk was taken and there was ongoing monitoring. The Department view is that there seems to have been reluctance or an inability to change its business plan to survive and that the company appeared to ignore the input of the State. Eighteen months is a long time in that sector. The company may have felt it had a revenue stream from the Government that would take it through the period. Part of the problem was that it never really reached critical mass either as the problems emerged so quickly after its start. MIT had an issue with making a financial commitment. It was not prepared to put any of the money back into restructuring MLE. MIT, on the other hand disagree with this viewpoint, as they point out that MIT Media Lab has been successful for more than 20 years as it has built up a base of corporate sponsors which support its non-directed research programmes. MIT cite the down turn in the technology sector, whilst MediaLab Europe was in its infancy, as being the prime cause for the venture not being successful. In addition, MIT Media Lab point out that during the course of negotiations to establish MediaLab Europe and in subsequent talks, it emphasised its governing charter as a charitable educational research institution which is reliant on endowments to pursue activities for the public good. Whilst MIT were prepared to make an investment in terms of reputation, resources, staff, faculty, expertise and name at no stage was there a contractual obligation on MIT to make a financial contribution to the project. MIT was prepared to make similar commitments to a restructured venture but it pointed out that the Department changed its focus away from the original non-directed concept which had been appealing to the Government.

4.27 The Committee observed that monitoring performance depends on the quality of information available. The MLE experience is underlined by the lack of proper information being given to the Government. When it was run by the Department of the Taoiseach, reports on project monitoring were produced in November-December 2000. MLE commissioned two external reviews in 2001 and 2002 which were forwarded to the relevant Departments.

4.28 An organisation is only as good as its management. The first director left in 2001. Then there was an acting director for a period of approximately 12 months before another director was appointed. The management and the board were the hands-on people dealing with MLE. The Government liaison committee expressed its concerns, asked for specific information and called in these people. The Department’s ability to intervene in that was limited.

Governance – Salary information

4.29 In the course of the audit, the C&AG asked for details of staff numbers employed by MLE by year, average salary cost per staff member by year, annual remuneration of each chief executive officer/managing director and severance packages agreed in respect of each departing chief executive officer/managing director. The Accounting Officer indicated that the Department had requested this information on a number of occasions but, to date, the company secretary refused to release this information. Attempts to receive this information continued after MLE was placed in liquidation. Prior to the Committee hearing, the Accounting Officer had asked that the liquidator should bring the request for salary information to the attention of members. The MIT Board members signalled their support for releasing the requested information. Legal advice provided to the liquidator was that the provision of the information would leave him open to an action for breach of the Privacy/Data Protection Laws.

4.30 The remit of the C&AG does not extend to private companies and MLE was not a semi-State company so there was no automatic right of access to the information sought. As the activities of such a company are being publicly funded, the Committee felt there should be a degree of transparency about its operations. The C&AG had sought the information to establish value for money in the situation where there was a high turnover at chief executive level. The C&AG could only seek the information through the Department which had funded MLE to a large degree. The Department is totally in favour of the principle of making such information available. It has a principle of openness and transparency in that regard.

4.31 The liquidator provided extracts from the audited accounts of MLE for the years 2000 to 2003 which include details of aggregate directors’ remuneration and wages and salaries. The information provided was as follows:

As MLE was funded in excess of 50% by the Exchequer it fell within the remit of the C&AG to carry out an inspection in certain circumstances. However, the substance of legal advice received on this matter was that it would be inappropriate to undertake an inspection in this particular case.

Review of strategy in 2004

4.32 When the Department looked at the strategy in 2004, it was not prepared to sign off on future projections of approximately 30% compound aggregate growth rates for revenue when MLE did not have a track record of achieving such rates.

4.33 The Department held the view that a new strategy for research and financing was needed. It was unable to reach agreement with MIT on these two fundamental issues. MIT have stated that they supported the continuation of a restructured MLE and offered support on pursuing an affiliation with an Irish university and a withdrawal of their right to appoint board members. It asserts that it was willing to work with a restructured MLE. The Committee is of the view that the basis of the conflict in the negotiations between MIT and the Department was the future direction of the research to be undertaken. MIT was prepared to provide advice, expertise and support but was not prepared to have its faculty subject to direction by a third party in relation to research issues. In short, MIT felt it could not agree to the Department’s wish that MediaLab Europe commit to more commercially directed research.

4.34 From the start, MIT made it clear it could not commit funding to the MLE project. It points out that it was willing to commit other substantial assets.

Decision to liquidate

4.35 The decision to liquidate was made by the members when the Department made clear it would not provide further funding. The company went into voluntary liquidation because it could see that its immediate revenue stream would be insufficient to keep it afloat. It made the decision well in advance of the money running out.

4.36 The liquidator became involved in February 2005. It was a voluntary liquidation. A schedule of assets was drawn up. The liquidator’s account shows that receipts of €1,026,014 were obtained and payments of €579,425 were made, leaving a residual cash balance of €446,589. Intellectual property formed part of the assets. Under the terms of the agreement, the assets are to be used for charitable and scientific purposes after the liquidation. The agreement was that the assets would pass to the new National Digital Research Centre. MIT accepted this and the new body which will replace it will take over responsibility. The building was always in State ownership.

Overall assessment

Positive achievements

4.37 At the time the decision to proceed was made, nobody disputed the upside potential and nobody knew the abyss that lay ahead in 2000 when the technology bubble burst.

The digital hub would not have been developed without MLE. There are more than 50 companies involved which are employing in excess of 400 people. It involves a huge education and outreach agenda. It is about regenerating an area and using the digital backdrop to see what can be done through the use of modern technologies.

4.38 Ireland has a good track record for being ahead of the curve and this was the objective. A national digital research centre (NDRC) is set up in place of MLE which confirms that it remains an important policy area in which there is significant potential. There is also a clear recognition that Ireland needs to begin to commercialise more of the research. The Department felt a need to move from some of the blue sky thinking to develop the equally important side of commercialisation.

4.39 Another positive aspect of MLE was the considerable engagement with the local community. In the clubhouse model the students and postgraduates of MLE as well as students from other colleges were providing evening tuition for young people from the inner city. It was not just about the economic side, there is also the social side.

4.40 On the economic side, MediaLab was multi-disciplinary, which is important, given the research in which Ireland is trying to engage. Disciplines from one area are applied in others. The Irish have a strong track record in creativity but matching this with digital technologies and establishing a leadership position is important. That will come from the NDRC which will build on the MLE experience.

Value for Money obtained

4.41 The price was high at €35.5 million. The value obtained for this in the long term can only be seen in the perspective of the overall economy. The ICT sector, including the digital hub, is worth €50 billion to the economy. MLE’s role was positive at a difficult time. Many companies which set up in Ireland visited the MLE premises, including Yahoo, Google and others. The founders of Google cited MLE as one of the reasons their company came to Ireland. The sum of €35 million must be placed in the context of overall economic development.

4.42 The Department considers that overall and given the context, MLE has been a positive experience in the broad economic sense. It is easy to focus on the money spent but very difficult to measure the tangibles which occurred in the broader economy. It is difficult to place a value on some of the new concepts around demonstration, multi-disciplinary research and so forth. The Committee asked whether, on that basis, a case could be made for investing a further €35 million in MLE rather than liquidating it. It noted that the original contributors and sponsors did not stay engaged with MLE, even when circumstances were beginning to improve. Practically all of them did not renew their sponsorship. The Department indicated that the issue was one not only of money but also structures and the type of research to be undertaken. In negotiations between the Department and MIT there was a conflict of views between that of the Department which pushed the need for a more commercially driven strategy in relation to research whilst MIT felt that this was unacceptable and ran contrary to the basis that underpinned the project in the first place. The failure of the two sides to reach agreement on this point led to the closure of MediaLab Europe.

Limited achievement of objectives

4.43 An evaluation of MLE against the original objectives reached very negative conclusions. The original primary objective of MLE was to develop intellectual property through non-directive research. There were also secondary objectives, that the project would deliver research grant or contract income. A consultant’s report states that not alone was no contract or research income forthcoming but none was sought. Another objective was that the existence of Media Lab Europe would encourage inward investment such as in the case of Google. The consultant stated the effect was quite marginal in respect of high quality foreign investment. A further objective was to strengthen the prospects for emerging indigenous companies. The consultant said there was no impact on the development of existing indigenous enterprise or on the stimulation of new technology based start-ups as spin-offs from its research. An additional objective was the training of Irish and European graduates and postgraduates by providing research experience. The conclusion is that it made little more than a token contribution to this objective. A further secondary objective was that there would be beneficial co-operation with development agencies in universities. The consultant’s conclusion is that there is little evidence that MLE engaged in any significant way with either educational institutes or the development agencies. There was a consideration that the site would be an attractive conference centre. The conclusion is that only 11 MLE international conferences, which were non-research conferences, were held in the period under review. According to the consultant, on any fair evaluation of the project, it failed completely on all secondary objectives.

4.44 The Department informed the Committee that the founders of Google were very specific when they came to Dublin. They said part of the reason they came here was MLE, which they visited. In its contacts with different businesses and foreign direct investment multinationals, the Department is satisfied that the existence of MLE was positive at a time when there was a significant downturn in the sector. Companies were asking what was going on at MLE and this brought about an interest in Ireland. Whether it is Yahoo, Amazon, the Microsoft research and development centres, Xilinx, Dell Engineering or any of the companies that have come to Ireland in recent years, one cannot show the cause and effect between any one of these. However it was thought that MLE had a positive rather than a negative impact at the time.

Discrepancies over measured outputs

4.45 The consultant concluded that the scientific output of the laboratory could be only described as dismal, with just 24 publications in international scientific literature since its establishment. Productivity appeared to be very low. A total of 15 refereed papers were produced from 172 person years of research. Assuming MLE was not motivated towards publication of its work, it was difficult to see what alternative path was available or was being pursued by it towards international recognition in the world of science and technology. MLE demonstrated its technology as an alternative to publishing papers. MIT also claims additional refereed papers were produced over the period.

4.46 MIT disputes the figures quoted above. It claims that MLE produced 21 refereed journal articles, 59 refereed full papers for conferences, and 62 refereed shorter papers, giving a total of 142 refereed works, which is more than the 24 cited in the consultant’s report. This was a different type of research. It was practical in the sense that it was demonstrable research, rather than just refereed papers and MLE should be evaluated on that basis. MIT’s figures were based on data gathered by faculty members and from information forwarded to it by MediaLab Europe. The Committee noted that the consultant’s report was carried out with the full co-operation of MLE. One would expect there would be a level of intellectual property in the case of patents taken out and developed into real applications as a result of this kind of research. However, there is not much evidence of that.

Lessons learned

4.47 The Committee considered whether lessons had been learned from the warning sign references to MLE in the C&AG’s 2002 report. Once the revenue stream was not coming in on target, alarm bells began to ring. That is when the Department and the Government liaison committee began to push the board to take certain directions. It is much more courageous to take a decision to close something rather than let it continue. Within the controls available to it, the Department tried to put a structure in place to enable MLE to continue. It pushed through the strategic plan with performance indicators but there was a survival issue, together with a haemorrhaging of cash. MLE was burning cash at the rate of approximately €500,000 a month.

4.48 A lesson to be learned is that regardless of the nature of the activities the State involves itself, it must maintain control and ensure democratic accountability in whatever structures are established. The Department has learned this from MLE. It recognises that it would have had problems in such circumstances irrespective of how well the venture was structured or what control the Government exercised over it. There were ideological or philosophical differences between the Department and MIT about the research agenda and the questions of directive versus non-directive research and blue sky versus greater commercialisation. There is no doubt that internationally there has been a shift from blue skies thinking and research. The industry is now much more oriented towards commercialisation, which is at the opposite end of the chain to blue skies thinking.

5. Adoption of Reports

5.1 The Committee disposed of Chapter 11.1 of the Report of the Comptroller and Auditor General, 2004.

6. Findings and Recommendations

The Committee of Public Accounts:

1. Payments totalling €35.5 million were made in support of the MLE project and a property costing €22.5 million was made available to MLE.
2. The risks involved in going ahead with the MLE project were recognised by the Government in making its decision.
3. There were inadequate structures to provide for meaningful State influence in the affairs of MLE bearing in mind the scale of public investment.
4. The appointed liaison committee was not effective as a communication channel between the State, MLE and MIT.
5. MIT fulfilled all of its legal and contractual obligations under the agreements entered into with the Government in the formation of MediaLab Europe.
6. Whilst information regarding salaries in respect of individual executives and board members of MLE was not forthcoming figures provided by the liquidator from the audited accounts suggested that average staff and board remuneration was high.
7. The level of anticipated corporate sponsorship was not achieved, primarily because of a severe downturn in the ICT industry and the events of September 2001.
8. There was a difference of opinion between the State and MIT on developing degree programmes and links with Irish universities. No real progress was made in this regard.
9. There was very little interest in applications for patents resulting from MLE research. In the liquidation of MLE, one patent was sold for a nominal consideration of €20 while the others were sold for €40,000 to a group headed by a former employee who had been engaged by the liquidator to provide technical assistance and to protect the patent applications.
10. The Board of MLE did not respond adequately to the failure to meet business targets, especially financial targets.
11. The Government’s decision not to provide additional financial support for MLE was justified.
12. MLE served as a useful marketing tool for the IDA in attracting major ICT companies to Ireland.
13. MLE had a beneficial effect on the educational development of disadvantaged children from the area by giving them the opportunity to experience and learn from digital technology.
14. Collaborative research with Irish third level students was successful where it was undertaken.
15. MLE had only peripheral interaction with the other enterprises in the Digital Hub.
16. MLE was not subject to the normal code of corporate governance for State sponsored bodies.
17. Neither the Department of Communications, Marine and Natural Resources nor the C&AG could access information from the liquidator on MLE transactions. This prevented the Committee from fulfilling its role of reporting to Dáil Éireann on the funds granted to MLE and the C&AG from discharging his functions in a satisfactory manner.