Northern Ireland Assembly Flax Flower Logo

Session 2009/2010

Second Report

Public Accounts Committee

Report on the
Review of Assistance to Valence
Technology: A Case Study on
Inward Investment

TOGETHER WITH THE MINUTES OF PROCEEDINGS OF THE COMMITTEE
RELATING TO THE REPORT AND THE MINUTES OF EVIDENCE

Ordered by The Public Accounts Committee to be printed on 10 September 2009.

Report: 02/09/10 Public Accounts Committee

This document is available in a range of alternative formats.
For more information please contact the
Northern Ireland Assembly, Printed Paper Office,
Parliament Buildings, Stormont, Belfast, BT4 3XX
Tel: 028 9052 1078

Membership and Powers

The Public Accounts Committee is a Standing Committee established in accordance with Standing Orders under Section 60(3) of the Northern Ireland Act 1998. It is the statutory function of the Public Accounts Committee to consider the accounts and reports of the Comptroller and Auditor General laid before the Assembly.

The Public Accounts Committee is appointed under Assembly Standing Order No. 56 of the Standing Orders for the Northern Ireland Assembly. It has the power to send for persons, papers and records and to report from time to time. Neither the Chairperson nor Deputy Chairperson of the Committee shall be a member of the same political party as the Minister of Finance and Personnel or of any junior minister appointed to the Department of Finance and Personnel.

The Committee has 11 members including a Chairperson and Deputy Chairperson and a quorum of 5.

The membership of the Committee since 9 May 2007 has been as follows:

Mr Paul Maskey*** (Chairperson)
Mr Roy Beggs (Deputy Chairperson)

Mr Patsy McGlone** Ms Dawn Purvis
Mr Jonathan Craig Mr George Robinson****
Mr John Dallat Mr Jim Shannon*****
Mr Trevor Lunn Mr Jim Wells*
Mr Mitchel McLaughlin

* Mr Mickey Brady replaced Mr Willie Clarke on 1 October 2007

* Mr Ian McCrea replaced Mr Mickey Brady on 21 January 2008

* Mr Jim Wells replaced Mr Ian McCrea on 26 May 2008

** Mr Patsy McGlone replaced Mr Thomas Burns on 4 March 2008

*** Mr Paul Maskey replaced Mr John O’Dowd on 20 May 2008

**** Mr George Robinson replaced Mr Simon Hamilton on 15 September 2008

***** Mr Jim Shannon replaced Mr David Hilditch on 15 September 2008

Table of Contents

List of abbreviations used in the Report

Report

Executive Summary

Summary of Recommendations

Introduction

The Project Appraisal

The Provision of Factory Accommodation

The Monitoring and Management of the Project

The Costs and Benefits of the Project

Appendix 1:

Minutes of Proceedings

Appendix 2:

Minutes of Evidence

Appendix 3:

Correspondence

Appendix 4:

List of Witnesses

List of Abbreviations used in the Report

IDA Industrial Development Authority

IDB Industrial Development Board

PAC Public Accounts Committee

DFP Department of Finance and Personnel

VLA Valuation and Lands Agency

DETI Department of Enterprise Trade and Investment

RCA Resource Cost Analysis

C&AG Comptroller and Auditor General

Executive Summary

Introduction

1. This report examines the 14-year history of a major inward investment project, handled by the former Industrial Development Board (IDB). Announced as the biggest single investment ever made in Northern Ireland, the project was promoted by Valence Technology, a US-based company incorporated in 1989.

2. In 1993, IDB offered Valence a package of capital and employment grants of over £27 million, together with a factory investment of almost £5.6 million, to establish a new large-scale manufacturing facility at Mallusk. In return, the company was to invest £147 million in Northern Ireland and create 660 jobs at the plant, by March 1998. The aim was to develop and manufacture batteries using a new, lithium-based technology.

3. However, Valence experienced persistent difficulties, and the anticipated technological breakthrough did not materialise. In 2003, some 10 years after its first contact with IDB, Valence advised Invest NI that it was re-locating its manufacturing operation to China, leaving only a small sales and development facility in Northern Ireland. Invest NI entered into a protracted clawback process which ultimately concluded in July 2007, when it recovered some £5.1 million of the £15 million which it had spent.

Overall Conclusions

4. The Committee has profound concerns about the way in which the Valence project was handled by IDB. In particular, the widespread nature and extent of the shortcomings, occurring over such an extended period of time, mark the project as one of the most disturbing cases that the Committee has examined. Well-established procedures designed to protect taxpayers’ money were repeatedly ignored, and important lessons from earlier failures were not taken on board. There was a worrying lack of transparency on several issues, including gaps in the documentary records, most notably around the acquisition of the factory accommodation. In addition the work of the Board Casework Committee, a key control in the risk management process, was undermined by IDB’s over-optimistic and ambiguous submission in support of the project.

5. At several key points in the life of the project, IDB failed to take the opportunity to renegotiate its offer, or to withdraw from the project and invoke clawback, even when the evidence pointed overwhelmingly towards the need to do so. All too often, IDB gave in to the demands of the company and failed to take the hard decisions when required. It is not surprising, therefore, that in the final analysis, the project represented a very poor return for taxpayers’ money.

6. Given the lapse of time since the inception of this project, it has not been possible for the Committee to assign individual culpability to the extraordinarily poor handling of Valence. Nevertheless, it is clear that, from beginning to end, there were serious lapses at a senior level in IDB’s handling of the project. As such, the Valence case is an indictment of a management culture within IDB which acquiesced in ignoring the rules, set aside crucial lessons from earlier projects and circumvented its own controls.

7. It has proved a particularly valuable exercise to examine the handling of a major inward investment project from beginning to end. This has enabled the Committee to identify serious recurring weaknesses which, had they been considered more narrowly, might simply have been interpreted as individual errors or episodic lapses. However, the Committee is conscious that the longer than usual span covered by this inquiry presented the witnesses with a considerable challenge. None of the current senior management team in the Department or Invest NI had direct experience of the early stages of this project. We are grateful, therefore, to the Accounting Officer and the Invest NI team for their clear presentation of the evidence, their recognition of shortcomings and for sharing with the Committee how they believe a similar case would be handled differently today.

8. The Committee has noted the assurance from the Department that lessons have been learned. The credibility of this assurance is crucial if Invest NI is to earn the confidence of elected representatives. The recommendations in this report are intended, therefore, to reinforce the process of cultural change and underline the key lessons which the Committee expects Invest NI to have taken on board.

The project appraisal

9. IDB failed to apply many of the most fundamental elements of its appraisal guidelines. For example, while the Chief Executive agreed to Valence’s 6-week deadline to carry out the appraisal, it was on condition that no corners were cut in the appraisal process. The evidence clearly shows, however, that corners were cut with many aspects not being fully investigated. There were also failings on the assessment of the viability of the project, a key appraisal objective. At the time the project was assessed, Valence had not even developed a commercial product and so could not produce a proper Business Plan, despite this being an absolute necessity for any meaningful appraisal of viability.

10. As regards the economic potential of Valence, the project passed the economic efficiency test, but only marginally. However, the Head of the Department’s Economics Branch described the assumptions evaluated by the test as “clearly not a meaningful basis on which to appraise the project"; pointing out that more realistic assumptions, on both sales and costs, would have caused the project to fail the test. The Committee is left with the impression that IDB’s consideration of the test was contrived.

11. Prior to the Valence project, there had been a number of other high profile inward investment failures, including De Lorean and Lear Fan. A wide range of important lessons had been drawn from these cases, with a view to preventing similar shortcomings in the future. It is extremely disappointing to the Committee, therefore, to find that a number of these lessons were blatantly disregarded by IDB in its handling of the Valence project.

12. It is of particular concern that the project was scrutinised at the highest level within IDB and yet, despite the many warning signs, it was still recommended for assistance. This suggests that, institutionally, a “blind eye" was turned towards the very obvious limitations of the project. In the Committee’s opinion, this gives a disturbing insight into the management culture at that time.

The provision of factory accommodation

13. The C&AG’s report revealed a worrying lack of transparency on the part of IDB, whereby it used a local building company as an intermediary to purchase a factory for Valence on IDB’s behalf. Apparently this was in an effort to avoid potential criticism, since IDB had actually disposed of the same factory some years earlier. The Committee finds IDB’s behaviour extremely disturbing, not least because its explanation for using an intermediary lacks plausibility. As a result, the Committee is far from convinced that it has got to the bottom of this matter.

14. The Committee also noted a number of serious control failures around the provision of the main factory. Contrary to established procedures, IDB did not consult with the Valuation and Lands Agency about the value of the main factory, prior to agreeing a price with the vendor. In the event, the Agency’s valuation was £175,000 less than the sum IDB agreed to pay. Also, DFP’s approval to the package of assistance for Valence required IDB to ensure that, should the project fail prematurely, ownership of the main factory would revert to IDB. Unfortunately, this was not acted upon, an error that was to prove costly when the project eventually did fail. The fact that such fundamental failings could all occur in one project, and in areas where there were well-established procedures, points towards an extremely lax management regime having operated in this area of IDB.

The monitoring and management of the project

15. In recognition of the high-risk nature of the project, IDB formed a Project Monitoring Group, to meet on a monthly basis. Although it met for the first time in November 1993, there is no record of it ever having met again. This is totally unacceptable. What the Committee finds particularly worrying is that, although the Project Monitoring Group was recommended at the highest level within IDB, the absence of reports from the Group did not trigger any senior management response.

16. Over the nine-year period to 2003, there were several critical points at which IDB should have called a halt to the project to re-appraise it and, if necessary, either renegotiate the contract or terminate it. However, on each occasion, IDB failed to do so and continued to provide funding. The Committee recognises that calling a halt to a major project is a difficult step and one that requires careful judgement. Nevertheless, it seems staggering that, for so long, IDB maintained an almost blind faith in a project that was so obviously in trouble.

17. In early 1998, Valence requested that the cap on financial assistance be raised from £3 million to £5 million. Following a marketing review and financial appraisal, IDB agreed to do so, despite Valence not yet having a commercial product, firm contracts, sales or marketing infrastructure or a proper Business Plan. Moreover, Valence now had three alternative sites to manufacture batteries, while the Northern Ireland plant had not yet started commercial production. IDB also accepted as reasonable, Valence’s projections that it would, within three years, achieve sales of $384 million per annum and an employment level of 776. Given Valence’s poor track record in the project to date, the Committee finds it astonishing that IDB could have given any credence to the company’s claims.

18. In March 2001, IDB again agreed to raise the grant cap, this time from £5 million to £11 million. This was despite Valence having accumulated losses of $250 million, doubts about the company’s “going concern" status and a manufacturing cost of $57 per battery compared with a selling price of only $12. Further, there was an inadequate marketing plan and no marketing team, poor controls over capital expenditure, inaccuracies in financial figures presented to IDB, and difficulties with production quality. Again, in view of the persistently poor track record of the company throughout the project, the Committee fails to see how the increase in grant cap could properly be justified. Confirmation that this was a serious error in judgement came just 17 days after IDB had paid £3.9 million of the raised cap, when Valence announced 320 redundancies at Mallusk, leaving only 97 workers in the plant.

The costs and benefits of the project

19. Over the 10 years from IDB’s offer in 1993, to the company’s announcement that it was relocating to China, IDB paid grants totalling £10.3 million to Valence. Of this, £5.8 million was still recoverable in 2003. However, the sum actually clawed back was substantially less, at £2.5 million. Unfortunately, Invest NI’s efforts to recover the monies owing by Valence were significantly undermined by IDB’s failure to properly secure its assistance. The Committee finds this deplorable.

20. Although Valence was to create a total of 660 new jobs by March 1998, employment peaked at 417 in 2001. Moreover, this was for a relatively short period during that year, with average annual employment levels being much lower. Also, a very substantial proportion of the workforce comprised agency staff rather than permanent employees, due to the uncertain future of the project. Overall, the Committee considers that job creation levels were very disappointing.

21. The Committee was also disappointed to learn that only around one quarter of the Valence workforce came from areas of economic and social disadvantage. In the Committee’s opinion, Invest NI must do much more to ensure that people from disadvantaged areas have an opportunity to benefit from inward investment.

Summary of Recommendations

The project appraisal

Recommendation 1

1. One of the recurring lessons of past industrial development failures is that weak project proposals may well be accompanied by demands for quick decisions. It is a particular responsibility of senior management, therefore, to ensure that previous experience is not overlooked under the pressure to secure a project. The Committee recommends that Invest NI re-examines its control procedures to ensure that sufficient time is always devoted to project appraisals and that all aspects are thoroughly assessed, with any weaknesses properly addressed (see paragraph 11).

Recommendation 2

2. The Committee recommends that, when selective financial assistance projects are appraised in future, Invest NI insists on the provision of credible Business Plans as an absolute requirement for manufacturing projects. The Committee also recommends that Invest NI reviews it procedures to ensure that, in future, no selective financial assistance application will be recommended for support until the financial viability of the project can be satisfactorily demonstrated (see paragraph 14).

Recommendation 3

3. In cases where the Departmental economists express reservations about the test, these must be addressed and satisfactorily resolved by Invest NI (see paragraph 18). The Committee recommends that Invest NI reviews its appraisal procedures to ensure that the assumptions used in RCA tests are realistic and that all relevant factors are included.

Recommendation 4

4. The Committee recommends that where Invest NI is assessing the technical viability of a new product for a manufacturing project (as distinct from an R&D project), it insists on testing the proposed commercial product, not a prototype. The Committee further recommends that, in a situation where it proves impossible for Invest NI to objectively confirm the technical viability of the proposed commercial product – for example, through direct testing or via independent corroboration - no offer of financial assistance be made (see paragraph 22).

Recommendation 5

5. The Committee recommends that, in future, the existence of the proposed commercial product be confirmed, as a necessary prerequisite to undertaking a production capability review (see paragraph 25).

Recommendation 6

6. The Committee recommends that in cases where Invest NI negotiates a package of financial assistance with promoters who substantially dilute the ownership of the project, it carefully considers, and closely monitors, the effects of the change in structure on the management of the project (see paragraph 29).

Recommendation 7

7. The Committee is most disturbed by the pattern of repeated failure to observe lessons agreed with PAC in the wake of previous industrial development disasters. We recommend Invest NI ensures that, unlike IDB, commitments to previous PAC recommendations are implemented. PAC’s role in holding Government Departments and Agencies to account is an important element in the stewardship of public funds and undertakings given in response to PAC reports must be taken seriously and acted upon (see paragraph 31).

Recommendation 8

8. It is important that submissions to the Casework Committee are properly balanced, free from bias and that all relevant facts are included and given an appropriate level of prominence. The Committee recommends that senior management take a personal responsibility for ensuring that casework submissions meet these important requirements (see paragraph 39).

Recommendation 9

9. It is a matter of deep concern that the Valence project exposed what appears to have been a management culture within IDB that acquiesced in ignoring and circumventing its own controls. No organisation can function effectively on that basis. The Committee recommends that Invest NI’s Board reviews this case study and satisfies itself that there is an appropriate management ethos within the current organisation (see paragraph 43).

Recommendation 10

10. The Valence project highlights a startling catalogue of shortcomings in the handling of a major inward investment project. The Committee recommends that Invest NI reviews each of the shortcomings highlighted in the case to consider how they might best be avoided in future cases. Its review should encompass not only the appraisal function, but also the various elements of project monitoring and management (see paragraph 44).

The provision of factory accommodation

Recommendation 11

11. The Committee wants both the Department and Invest NI to be in no doubt that it regards the lack of transparency in IDB’s handling of the acquisition and adaptation of the factory accommodation to be wholly unacceptable. The Committee recommends that Invest NI ensures that the shortcomings in this case, together with the procedures that should have been followed, are fully understood by the staff currently serving in its property services unit (see paragraph 52).

Recommendation 12

12. The absence of explanations for the serious lapses in control surrounding the provision of the main factory is unsatisfactory. The Committee recommends that, in future, Invest NI maintains a record of all control failures. The Committee further recommends that where these failures are caused by negligence and result in significant additional costs or loss to public funds, disciplinary action is taken (see paragraph 56).

The monitoring and management of the project

Recommendation 13

13. The Committee recommends that Invest NI ensures its arrangements for releasing grants to projects are sufficiently rigorous to prevent payments being made until all pre-conditions of the assistance offer have been met (see paragraph 60).

Recommendation 14

14. The Committee recommends that Invest NI reviews its monitoring arrangements for high-risk projects to ensure that roles and responsibilities are always clearly stated, that they are allocated to an appropriate level, and that monitoring meetings take place regularly, are formally minuted and outcomes reported promptly to senior management (see paragraph 63).

Recommendation 15

15. The Committee recommends that where a matter arises in the course of a project, which reflects negatively on the integrity of an assisted company or its principals, a formal review is carried out by Invest NI and its deliberations recorded on file. The Committee also expects the points at issue to be formally raised with the parties concerned. As well as providing them with an opportunity to respond, it will send a clear signal that Invest NI is not prepared to ignore such matters and is monitoring the situation (see paragraph 66).

Recommendation 16

16. The Committee recommends that Invest NI takes a much firmer line than IDB in cases of a significant shortfall in performance. The Committee recognises that careful judgement has to be exercised on whether or not to continue supporting such a project. But where, for example, it departs significantly from the agreed plan, or is likely to fall far short of its targets, Invest NI must reappraise it and be prepared to renegotiate the offer including, where necessary, initiating clawback (see paragraph 70).

Recommendation 17

17. While every reasonable attempt should be made to save a project that is in trouble, this should not involve throwing good money after bad. The Committee recommends that when using caps on offers of financial assistance in future, decisions to raise the cap should be taken only on the basis of a positive appraisal of a proper Business Plan (see paragraph 76).

The costs and benefits of the project

Recommendation 18

18. The Committee recommends that Invest NI reviews the adequacy of its arrangements for taking security on funds provided to client companies. In particular, it must ensure that taking security is not overlooked and that the extent of a company’s liability is adequately covered. The Committee further recommends that Invest NI examines the scope for greater use of “minimum net worth covenants" (see paragraph 86).

Recommendation 19

19. The Committee recommends that Invest NI takes a firm line with assisted companies to ensure that Northern Ireland assistance is not being used to support job creation opportunities elsewhere, to the detriment of job creation in Northern Ireland (see paragraph 91).

Recommendation 20

20. In the Committee’s view, Invest NI must do more to ensure that people from areas of economic and social disadvantage have the opportunity to benefit from inward investment. It is recommended that this become a quantified target for Invest NI, with performance publicly reported. The Committee also recommends that when prospective investors view potential investment locations, these always include a number in disadvantaged areas. The objective must be to increase the proportion of inward investment projects located in areas of greatest unemployment which, on past performance, has not been high enough (see paragraph 96).

Introduction

1. The Public Accounts Committee met on 18 June 2009 to consider the Comptroller and Auditor General’s report on “Review of Assistance to Valence Technology: A Case Study on Inward Investment" (NIA 86/08-09). The witnesses were:

2. This report examines the 14-year history of a major inward investment project, handled by the former Industrial Development Board (IDB). Announced as the biggest single investment ever made in Northern Ireland, the project was promoted by Valence Technology, a US-based company incorporated in 1989.

3. In 1993, IDB offered Valence a package of capital and employment grants of over £27 million, together with a factory investment of almost £5.6 million, to establish a new large-scale manufacturing facility at Mallusk. In return, the company was to invest £147 million in Northern Ireland and create 660 jobs at the plant, by March 1998. The aim was to develop and manufacture batteries using a new, lithium-based technology.

4. However, Valence experienced persistent difficulties, and the anticipated technological breakthrough did not materialise. In 2003, some 10 years after its first contact with IDB, Valence advised Invest NI that it was re-locating its manufacturing operation to China, leaving only a small sales and development facility in Northern Ireland. Invest NI entered into a protracted clawback process which ultimately concluded in July 2007, when it recovered some £5.1 million of the £15 million which it had spent.

5. Given that the primary focus of the Executive’s Programme for Government 2008-2011 is on growing a dynamic, innovative local economy, and that inward investment forms an important element within that programme, this is an opportune time to review this project. New, internationally competitive companies offer many benefits to the existing industrial base; as well as creating new jobs, they can bring in new products and technology, world-class production techniques, technical innovation and managerial skills which can, in turn, be transferred to local companies. They can also provide local sourcing opportunities for existing businesses. It is vital, particularly in view of the current economic downturn, that the limited public funding available is aimed at the right type of projects and that these are properly managed.

6. In taking evidence, the Committee focused on four key areas. These were:

The Project Appraisal

7. A sound appraisal is likely to be the single most important element in the handling of a major inward investment project. It underpins a number of key decisions, including whether the project should be financially supported, the extent to which public funds should be provided and the appropriate terms and conditions of that support. It is, in effect, a means of assessing risk, determining whether that risk can be managed and, if so, how this can best be done.

Well-established appraisal guidelines, designed to protect taxpayers’ money, were ignored

8. Over a number of years, IDB developed a very detailed project appraisal process, designed to assess and manage risk. Unfortunately, it did not properly apply that process in assessing the Valence project, a failing which proved costly to the taxpayer. What the Committee finds particularly disturbing, however, is the nature and the extent of the shortcomings – IDB failed to apply many of the most fundamental elements of its appraisal guidelines. Key areas of concern noted by the Committee are set out below.

The time taken to appraise the project

9. While IDB’s Chief Executive agreed to Valence’s 6-week deadline to carry out the appraisal – an extremely tight timetable in the circumstances – it was on condition that no corners were cut in the appraisal process. The evidence clearly shows, however, that corners were cut with many aspects not being fully investigated. Indeed, the appraisal report itself highlighted that “the time constraints imposed on the appraisal team together with the very limited information provided in the “business plan" have inevitably resulted in our work being limited in some respects". The report went on to list company management, marketing and the technological aspects of the project as particular areas considered not to have been fully investigated.

10. While the Department and Invest NI commented that additional resources were applied to the appraisal to compensate for the shorter timeline, they conceded that “some areas" were not adequately covered as they should have been. Given the weight of evidence of shortcomings in IDB’s appraisal, this seems to the Committee to be a substantial understatement.

Recommendation 1

11. One of the recurring lessons of past industrial development failures is that weak project proposals may well be accompanied by demands for quick decisions. It is a particular responsibility of senior management, therefore, to ensure that previous experience is not overlooked under the pressure to secure a project. The Committee recommends that Invest NI re-examines its control procedures to ensure that sufficient time is always devoted to project appraisals and that all aspects are thoroughly assessed, with any weaknesses properly addressed.

The appraisal of project viability

12. A key objective of an appraisal is to assess the viability of the project and IDB’s guidelines listed a range of important factors to be considered. While Invest NI accepted that IDB’s appraisal had not “met the guidelines fully", this again seems to understate the seriousness of the failings. For example, at the time the project was appraised, Valence had not even developed a commercial product and so could not produce a proper Business Plan, an absolute necessity for any meaningful appraisal of viability.

13. In the Committee’s view, the reality is that the Valence project in 1993 was not a manufacturing enterprise – it was, at best, a research and development venture, that was wrongly treated by IDB as a manufacturing project. Although DETI and Invest NI have said that, in order to address the attendant risks, IDB capped the initial level of assistance that would be paid, this still involved an initial outlay of some £6.6 million (including the main factory provision), the majority of which was paid up-front. This was not a prudent and effective means of providing public funds support to such a project – it was a huge and wholly inappropriate gamble.

Recommendation 2

14. The Committee recommends that, when selective financial assistance projects are appraised in future, Invest NI insists on the provision of credible Business Plans as an absolute requirement for manufacturing projects. The Committee also recommends that Invest NI reviews its procedures to ensure that, in future, no selective financial assistance application will be recommended for support until the financial viability of the project can be satisfactorily demonstrated.

The review of economic efficiency

15. The efficiency test is concerned with the net economic benefits of the project and is assessed using a “Resource Cost Analysis" (RCA). As a measure of value for money, the analysis requires that the net gain produced by the project should exceed the gross cost of assistance. In the case of Valence, the project passed the test, but only marginally. However, the Head of the Department’s Economics Branch described the assumptions evaluated by the test as “clearly not a meaningful basis on which to appraise the project", pointing out that more realistic assumptions, on both sales and costs, would have caused the project to fail the test.

16. Invest NI told the Committee that the RCA test was only one element of IDB’s consideration of economic efficiency. It said that there were also other elements, such as the number and quality of jobs and the advancement of Northern Ireland’s global standing in research and development. The Committee is not persuaded. Given that the project did not yet have a commercial product or even a Business Plan, any assessment of such wider economic benefits could be no more than mere speculation and certainly not a firm basis on which to judge the value of the project.

17. The Committee is left with the impression that IDB’s consideration of the efficiency test was contrived. Rather than regarding the assessment of economic efficiency as an important value for money test that had to be passed, it looks as though IDB bypassed the essential rigours of the test in its desire to capture the Valence project.

Recommendation 3

18. In cases where the departmental economists express reservations about the test, these must be addressed and satisfactorily resolved by Invest NI. The Committee recommends that Invest NI reviews its appraisal procedures to ensure that the assumptions used in RCA tests are realistic and that all relevant factors are included.

The technical appraisal

19. IDB’s technical appraisal, carried out by a Northern Ireland-based academic, was largely based on a desk review of reports and papers made available by Valence. However, the IDB appraiser did not visit the company to inspect its facilities in the United States. Moreover, the principal report studied was an assessment of the Valence technology that had been commissioned by Valence’s share underwriters. It was prepared by the Director of a US university research centre who undertook public relations work for Valence. In preparing his report, there was no evidence that the Director had conducted his own trials, and he appeared to have accepted the Valence and other figures at face value. In the Committee’s view, the technical appraisal lacked depth and could not be considered objective.

20. Invest NI explained that, because the company did not yet have a commercial product, the technical element of the “product" could not be examined, but the underlying science could. It also said that the difficulty with commissioning another report, over and above the US Director’s review, was that, given the nature of new technology, there was an extremely limited number of people who knew it and had tested it.

21. The Committee accepts that IDB faced difficulties in assessing the technology, given the reported innovative nature of the science involved. However, the fact remains that the technology was far from “proven" through the appraisal, which clearly lacked depth as well as independence. As such, the technical assessment fell markedly short of the standard expected. What the Committee finds especially worrying is that this was the most important single element in the appraisal process as a whole - it was the key to determining whether there was in fact a project at all.

Recommendation 4

22. The Committee recommends that where Invest NI is assessing the technical viability of a new product for a manufacturing project (as distinct from an R&D project), it insists on testing the proposed commercial product, not a prototype. The Committee further recommends that, in a situation where it proves impossible for Invest NI to objectively confirm the technical viability of the proposed commercial product – for example, through direct testing or via independent corroboration — no offer of financial assistance be made.

The review of manufacturing capability

23. IDB’s appraisal of Valence’s manufacturing capability, essentially to cover the move from prototypes to commercial production capability, was produced at short notice by consultants. They made the point that it was a brief review, based on only one day spent at Valence’s US premises. Working on a ‘best efforts’ basis, the consultants concluded that Valence was probably on target for achieving limited production at its US pilot facility, but considered that the company’s longer-term scale-up projections should be treated with caution.

24. The Committee asked whether this was a sound basis on which to assess Valence’s manufacturing capability. The Department said that it would have been beneficial to allocate additional resource to this element of the appraisal, but pointed out that the consultants involved had been chosen for their experience in this area. It is clear, however, that IDB’s consultants themselves considered that they were limited in what they could assess. Moreover, even allowing for the fact that time was too short, the scope for a proper production review appears to have been limited, given that the company was still trying to develop a commercial product. In these circumstances, the Committee can only conclude that IDB’s assessment of Valence’s manufacturing capability lacked the necessary quality and depth that might reasonably have been expected, to underpin a major offer to a greenfield project.

Recommendation 5

25. The Committee recommends that, in future, the existence of the proposed commercial product be confirmed, as a necessary prerequisite to undertaking a production capability review.

The share dealings of the project promoters

26. Another area of concern noted by the Committee related to the share dealings of the project promoters. In November 1992, some 10 months before IDB made its offer of financial assistance, Valence held its second share offering. Around 20 per cent of the shares on offer were sold by the two project promoters, netting them over $16 million. While the Department said that the realisation of part of their investment by the promoters had been clearly flagged in the share prospectuses, the very substantial personal gains made by the project promoters, at such an early stage of the company’s development, raises a question in the minds of the Committee as to the strength of their personal commitment to the project. Indeed, it appears that the promoters effectively transferred the financial risk of the project to IDB and the other investors.

27. The Department commented that one of the promoters, the entrepreneurial investor, continued to provide funding to the company at various times over the period that Valence was located in Northern Ireland. However, the Committee notes that he appears to have done so under very advantageous arrangements.

28. The Committee recognises that IDB’s share of overall project funding was substantially less than the company’s. Nevertheless, the lack of personal financial risk being borne by the project promoters was far from ideal in a project beset with so much uncertainty and one in which, at times, funds appear to have been applied in an almost reckless fashion by the company.

Recommendation 6

29. The Committee recommends that in cases where Invest NI negotiates a package of financial assistance with promoters who substantially dilute the ownership of the project, it carefully considers, and closely monitors, the effects of the change in structure on the management of the project.

Important lessons from previous IDB projects that failed
were not taken on board

30. Prior to IDB’s appraisal of the Valence project, there had been a number of other, high profile inward investment projects which, regrettably, had failed. However, a wide range of important lessons had been drawn from these cases, with a view to preventing similar shortcomings in the future. It is extremely disappointing to the Committee, therefore, to have found that a number of these valuable lessons were blatantly disregarded by IDB in its handling of the Valence project. For example:

One of the key lessons from the De Lorean project was that

“IDB must insist on adequate time in which to carry out a full and detailed assessment of the viability of a potential project, even if this results in its loss".

As can be seen from paragraphs 9 and 10 above, the evidence clearly shows that IDB failed to apply the lesson.

The Westminster PAC concluded that

“the risks involved in committing substantial public funds to a project which depends for its viability on a product yet to be developed are unacceptably high".

Again, it is clear that IDB did not apply the lesson. The Committee notes the Accounting Officer’s comments that there should be a measure of discretion when considering such cases. The Committee is not convinced. While having a measure of discretion may not appear unreasonable, it is worth noting that, in the Valence case, the exercise of discretion gave rise to a project that turned out to be an irreparable failure. In the Committee’s opinion, it is not a mere coincidence that history repeated itself – the Lear Fan lesson is sound advice.

The Report noted that

“only in exceptional circumstances should IDB assist a project which seeks to establish a greenfield project at a level which would normally represent an advanced stage in its natural course of development. A quantum leap in the size of an organisation, with all the finance, production, marketing and other problems which that involves should be recognised as being beyond the capacity of most management teams".

Given that Valence was forecasting one-sixth of the world market within five years, at a time when it did not even have a commercial product, IDB again appears to have had scant regard for the lessons of the past.

The Gibson Report also advised that

“extreme caution should be taken in encouraging the establishment or expansion of small companies in high technology industries requiring continual investment in research and development".

The evidence strongly suggests that the level of caution applied in this case fell far below what was required.

Recommendation 7

31. The Committee is most disturbed by the pattern of repeated failure to observe lessons agreed with PAC in the wake of previous industrial development disasters. We recommend Invest NI ensures that, unlike IDB, commitments to previous PAC recommendations are implemented. PAC’s role in holding Government departments and agencies to account is an important element in the stewardship of public funds and undertakings given in response to PAC reports must be taken seriously and acted upon.

The role of the Board Casework Committee was undermined by IDB’s over-optimistic and ambiguous submission

32. As a greenfield project, the Valence case had to be reviewed by the IDB Board Casework Committee. IDB’s guidance on submissions to the Casework Committee stated that the objective was to present as clear and comprehensive a picture as possible of the project, setting out the “pros and cons" which should be considered, thereby enabling the Committee to make a proper assessment of the case and reach a reasoned judgement. The evidence shows, however, that the Casework Committee’s capacity to fulfil its role was effectively undermined, because certain of the concerns and reservations about the project, noted during the appraisal, were not clearly drawn to its attention.

Project viability

33. The Committee was not explicitly told about the absence of a Business Plan and that the financial appraisal report had made the point that, as Valence was a development stage company, it was not possible to reach conclusions on viability. Nor had the submission pointed out that the management of the company, its marketing and the technological aspects of the project were particular areas considered not to have been fully investigated. The Department and Invest NI said that, in their view, IDB’s submission had been over-optimistic but contended that the Casework Committee had not been “substantially" misled. They said that the submission made clear that the project was high risk and had drawn attention to Valence not having “confirmed orders for its product" and there being “no certainty that the mass produced battery will offer the same performance advantages as the prototype".

34. The Committee disagrees. The submission to the Casework Committee stated that the company had “successfully developed a rechargeable lithium polymer battery" and “was poised to launch a potentially revolutionary product". This was a gross exaggeration of the actual situation. Indeed, even IDB’s references to the risks of the project appear questionable – to refer to “no confirmed orders for its product" when there was no product implies a level of development that could not be justified.

The Resource Cost Analysis test

35. Another area of concern on IDB’s submission to the Casework Committee was the section on economic efficiency. The Casework Committee was told that the Resource Cost Analysis (RCA) test was very positive, albeit likely to fail when recalculated to reflect the steps being taken to minimise UK tax. However, it was not told about the Chief Economist’s reservations (paragraph 15 above). The Accounting Officer’s view was that, because the Casework Committee had been told that the project would fail the efficiency test, it was not misled on what he believes to have been the fundamental point. He did consider, however, that the information presented to the Casework Committee was not as clear and as explicit as it should have been.

36. Given that the project would have failed the RCA test if realistic assumptions had been applied, it seems a complete contradiction for IDB to have said in its submission that the outcome of the test was “very positive". Added to IDB’s failure to attribute the reservations about the assumptions to the Chief Economist, it appears that the Casework Committee was being asked to choose one of two mutually exclusive options, against a background in which it was under intense pressure, due to time and competition considerations, to secure the project. It seems to this Committee that the process was being manipulated.

Additionality

37. IDB told the Casework Committee that the proposed offer of some £27 million to Valence was the minimum amount necessary to persuade the company to locate in Northern Ireland, in view of a competing offer from the Republic of Ireland’s Industrial Development Authority (IDA). IDB claimed to know that the IDA offer was $20 million, but did not declare that this information had, in fact, come from Valence. The Department said that, for the sake of greater transparency, it would have been preferable for the casework papers to have stated the source of the IDA’s competing offer information. It added, however, that the fact that IDB and IDA were direct competitors in the marketplace meant that Casework Committee members would have been well aware that the information would not have been forthcoming from the IDA itself.

38. In the Committee’s opinion, IDB’s submission should have been explicit, not only in stating that the source of the alleged offer was Valence but also by making clear that IDB had no independent confirmation that an offer had been made.

Recommendation 8

39. It is important that submissions to the Casework Committee are properly balanced, free from bias and that all relevant facts are included and given an appropriate level of prominence. The Committee recommends that senior management take a personal responsibility for ensuring that casework submissions meet these important requirements. We call on the Department to state clearly how this recommendation can be implemented.

Overall conclusions on project appraisal

40. The Committee has a wide range of concerns about IDB’s project appraisal. In a number of key elements of the process, the standard fell far short of what was required. The Committee’s concerns are compounded by the evidence surrounding the Casework Committee process. IDB’s submission suffered not only from a lack of balance and clarity, but also by the omission of important information and a gross exaggeration of progress, all of which undermined the Casework Committee’s ability to arrive at a reasoned judgement. Moreover, it is profoundly disappointing that important lessons from earlier failures seem to have been ignored. The Committee’s overall impression, given the nature and extent of the shortcomings, is that the outcome of the appraisal and review process was manipulated by IDB.

41. It is of particular concern that the project was scrutinised at the highest level within IDB and yet, despite the many warning signs, it was still recommended for assistance. This suggests that, institutionally, a “blind eye" was turned towards the very obvious limitations of the project. In the Committee’s opinion, this gives a disturbing insight into the management culture at that time. Looking ahead, there is a particular responsibility on senior management within Invest NI to ensure that they encourage a culture of compliance with good practice throughout the organisation.

42. The Committee would like to emphasise that it does not want Invest NI to operate as a risk-averse organisation. Indeed, the Committee supports risk-taking in appropriate circumstances, but only where it is properly assessed and effectively managed. It is recognised that supporting industrial development is a risky business and that judgements have to be exercised. The Committee also accepts that some projects are likely to fail. However, the appraisal guidelines and the lessons from the past are key elements of the risk assessment and management process and must never be ignored or sidestepped.

Recommendation 9

43. It is a matter of deep concern that the Valence project exposed what appears to have been a management culture within IDB that acquiesced in ignoring and circumventing its own controls. No organisation can function effectively on that basis. The Committee recommends that Invest NI’s Board reviews this case study and satisfies itself that there is an appropriate management ethos within the current organisation.

Recommendation 10

44. The Valence project highlights a startling catalogue of shortcomings in the handling of a major inward investment project. The Committee recommends that Invest NI reviews each of the shortcomings highlighted in the case to consider how they might best be avoided in future cases. Its review should encompass not only the appraisal function, but also the various elements of project monitoring and management.

The Provision of Factory Accommodation

45. Because of Valence’s declared need to start production quickly, the Committee was advised that IDB was obliged to seek a factory that was available for immediate occupancy. It identified a vacant factory at Mallusk. This was situated on a 14-acre site and also included a second factory building, said to be in a poor state of repair. Both buildings had been sold by IDB in 1985 to another company (Company A) on a 99-year lease for £360,000. They were subsequently bought by Company B in 1991 for £750,000. Company B also paid IDB £430,000 to convert the leases to 999 years.

There was a worrying lack of transparency surrounding the acquisition and adaptation of the factory accommodation

The Main Factory

46. The C&AG’s report revealed a worrying lack of transparency on the part of IDB, whereby a ‘prominent local building company’ was used as an intermediary to purchase the factory for IDB in 1993. The Committee is led to believe that IDB took the view that any re-acquisition and onward sale to Valence could lead to criticisms of IDB’s actions, especially if Company B realised a profit; therefore, the building company was asked to acquire the property on IDB’s behalf. It bought the whole site for £1.2 million and then sold the main factory to IDB for £925,000.

47. Following IDB’s acquisition of the main factory, it was extended and adapted to Valence’s requirements at a cost of £2.695 million. This work was undertaken by the same building company that had facilitated the purchase. However, it was selected by IDB without competition, using single tender action. Invest NI said the records indicated that the company had been chosen because it had previously delivered for IDB; given the time constraints, it was felt that they were capable of delivering. While a single tender approach is permitted under the regulations, it requires written approval from the Chief Executive. The Committee notes that this approval was never obtained.

48. The Department readily accepted that IDB’s handling of this matter had been inappropriate and said that the lack of transparency would not be tolerated now. This assurance is welcome. Nevertheless, the Committee finds IDB’s ploy of using an intermediary in the factory acquisition extremely disturbing, not least because its explanation for doing so lacks plausibility. As a result, the Committee is far from convinced that it has got to the bottom of this matter.

The Second Factory

49. In 1999, Valence sought to increase its manufacturing capacity by buying the second factory at the Mallusk site. This was still owned by the local building company who had purchased it for £275,000 (paragraph 48 above). Invest NI told the Committee that the arrangements for this acquisition did not involve IDB; it was a private transaction whereby the building company sold the second factory to a “property developer" for £1.2 million. Following adaptations costing a further £450,000, the property developer leased the second factory to Valence for a period of two years. In 2001, Valence purchased the premises from the property developer.

50. There are a number of matters surrounding the transactions on the main and second factories that give the Committee a sense of unease, not least the number of unanswered questions. It is clear that the transactions proved very lucrative for the local building company. As well as being awarded the £2.695 million adaptation contract for the main factory in 1993, it also made a profit on re-sale of the second factory, in 1999, of almost £1 million. And while the building company may have had a good track record on delivery, it seems likely that a number of other contractors who had worked for IDB had a similar capacity to deliver on time. It is not clear, therefore, why this particular company was chosen and who, within IDB, was responsible. The Committee’s unease in this respect is heightened by the failure to obtain the Chief Executive’s approval to the single tender arrangement. Again, it is not clear who within IDB was responsible. The Committee is left with the impression that there was an unduly “cosy relationship" between IDB and the building company.

51. The 1999 and 2001 transactions on the second factory proved profitable for the property developer. In correspondence sent after the evidence session, the Department told the Committee that there is no record of direct involvement by IDB in any negotiation surrounding the acquisition of the second factory in 1999, either with the local building company or with the property developer who later sold the factory to Valence. Unfortunately, there is no indication as to how the property developer was selected, or by whom and, specifically, whether IDB had any input to that process.

Recommendation 11

52. The Committee wants both the Department and Invest NI to be in no doubt that it considers the lack of transparency in IDB’s handling of the acquisition and adaptation of the factory accommodation to be wholly unacceptable. The Committee recommends that Invest NI ensures that the shortcomings in this case, together with the procedures that should have been followed, are fully understood by the staff currently serving in its property services unit.

53. In 1993, the second factory occupied a site of 7.17 acres. However, the site was reduced to 4 acres in 2001, when the ‘local property developer’ sold the premises to Valence. The Department has said that the balance of 3.17 acres remains in the hands of the developer. This raises an issue as to whether, in the past, IDB was overly generous in the size of sites being allocated to factory developments and whether a more prudent approach would have provided better value for the taxpayer. The Committee recognises that Invest NI’s property portfolio and sales of land and buldings are much reduced, compared with IDB. However, it is still worth emphasising that the Committee expects Invest NI to maximise the value for the public purse of any land and buildings that it may handle in the future.

There were other breakdowns in control

54. The Committee noted a number of other serious control failures around the provision of the main factory:

(i) Late valuation of the Main Factory

Contrary to established procedures, IDB did not consult with the Valuation and Lands Agency (VLA) about the value of the main factory, prior to agreeing a price with the vendor. Whereas IDB agreed to pay £975,000, VLA advice was that the value was only £750,000. Although Invest NI accepted that IDB had failed to follow proper procedures, it suggested that this may not have made much difference to the outcome; the factory was on the market at the price that was agreed and it was the only facility that met Valence’s requirements. While the Committee notes these comments, the issue nevertheless remains that this is yet another example – one of many in this report – of standard operating procedures being set aside.

(ii) Failure to secure the Main Factory

The Department of Finance and Personnel (DFP) approval of the package of assistance to Valence required IDB to ensure that, should the project fail prematurely, ownership of the main factory would revert to IDB. Unfortunately, this requirement was not acted upon, an error that was to prove costly when the project eventually did fail. Invest NI could not explain why the condition had not been included in the agreement, but suggested that administrative oversight was the most likely reason. It beggars belief that a supposedly professional organisation such as IDB could have overlooked such a basic safeguard on a project of this importance.

(iii) Non-completion of contracts

Following completion of the alterations to the main factory, IDB allowed Valence to occupy the premises without completing the purchase contract and without executing the Licence Agreement, which was to cover the period until the purchase contract was completed. Invest NI was unable to provide an explanation as to how this happened.

55. The fact that such fundamental failings could all occur in one project, and in areas where there were well-established procedures, points towards an extremely lax management regime having operated in this area of IDB. In the Committee’s opinion, the negligence shown in these matters – particularly the first two points above, each of which is likely to have resulted in significant additional cost to the taxpayer – should have led to disciplinary action against the officials responsible. In such circumstances, the absence of even a record of how the control failures arose and who was responsible is completely unacceptable.

Recommendation 12

56. The absence of explanations for the serious lapses in control surrounding the provision of the main factory is unsatisfactory. The Committee recommends that, in future, Invest NI maintains a record of all control failures. The Committee further recommends that where these failures are caused by negligence and result in significant additional costs or loss to public funds, disciplinary action is taken.

The Monitoring and
Management of the Project

57. Following its offer of financial assistance to Valence in September 1993, IDB’s role was to monitor the company’s progress and ensure that its own investment was properly managed. Unfortunately, this did not prove to be the case. The Committee noted several areas where IDB’s performance fell below standard.

IDB paid grant before all offer pre-conditions had been met

58. Pre-conditions are attached to an offer as a means of protecting public funds. However, in March 1994, IDB paid £1 million to Valence before the company had met all of the offer pre-conditions. Valence had not provided the £12 million share or loan capital required and had also failed to register as a company in Northern Ireland.

59. Invest NI accepted the Committee’s view that, in contravening its own rules and creating an unnecessary additional risk to public funds, IDB sent out the wrong message to Valence – in effect, that IDB was equivocal about enforcing the terms of its offer. This was an early display of weakness that would later become characteristic of many of IDB’s dealings with the company.

Recommendation 13

60. The Committee recommends that Invest NI ensures its arrangements for releasing grants to projects are sufficiently rigorous to prevent payments being made until all pre-conditions of the assistance offer have been met.

The Project Monitoring Group quickly ceased to function

61. In recognition of the high-risk nature of the project, IDB’s Casework Approval Committee (which comprised the Chief Executive and his two Deputies) recommended the formation of a Project Monitoring Group. The Board Casework Committee was told that the Group would meet on a monthly basis, following which it met for the first time in November 1993. However, there is no record of it ever having met again.

62. Invest NI agreed that this was totally unacceptable. However, it said that a number of “informal meetings" took place among members of the Group as the project proceeded. In the Committee’s opinion, informal meetings were not an acceptable substitute. Effective monitoring must include a formal record of proceedings and the reporting of progress. What the Committee finds particularly worrying is that, although the Project Monitoring Group was recommended at the highest level within IDB, the absence of reports from the Group did not trigger any senior management response. Clearly, good governance failed at more than one level within IDB. The Committee notes Invest NI’s comments that, following a substantial review of project monitoring conditions by internal audit in 2007, it is confident that this area of work is now being undertaken properly and professionally.

Recommendation 14

63. The Committee recommends that Invest NI reviews its monitoring arrangements for high-risk projects to ensure that roles and responsibilities are always clearly stated; that they are allocated to an appropriate level; and that monitoring meetings take place regularly, are formally minuted and outcomes reported promptly to senior management.

US investors took an action against Valence

64. In 1994, Valence faced a “class action[1]" from US investors who claimed that it had issued a series of false and misleading statements with regard to the company’s business and future prospects. The case was eventually settled out of court in 2001, at a cost to Valence of $30 million. Surprisingly, there was no record of any consideration by IDB of the impact of the class action on its relationship with the principal shareholders. Invest NI accepted that it would have been better had IDB documented its considerations. However, it also explained that, at the time, there was an element of greyness around how substantial the claims were and that a number of the accusations were ruled out by the US court.

65. In the Committee’s view, it was a fundamental mistake not to formally consider the impact of the class action on its relationship with Valence and not to raise the issue with the project promoters. Indeed, the Committee is reminded of one of the De Lorean lessons which highlighted the importance of taking extra care in assessing the personal qualities and commercial reputation of individual entrepreneurs, particularly where a new company is involved. Even though this matter arose after the offer had been made, it was still sufficiently early in the life of the project for IDB to highlight its concerns.

Recommendation 15

66. The Committee recommends that where a matter arises in the course of a project, which reflects negatively on the integrity of an assisted company or its principals, a formal review is carried out by Invest NI and its deliberations recorded on file. The Committee also expects the points at issue to be formally raised with the parties concerned. As well as providing them with an opportunity to respond, it will send a clear signal that Invest NI is not prepared to ignore such matters and is monitoring the situation.

At several keys points in the life of the project, IDB failed to take the opportunity to renegotiate its offer, or invoke clawback

67. The Committee notes that, over the nine-year period to 2003, there were several critical points where IDB should have called a halt to the project to re-appraise it and, if necessary, either re-negotiate the contract, or terminate it and initiate clawback. However, on each occasion, IDB failed to do so and continued to provide funding:

68. The Department accepted that these were key points at which IDB should have taken much more decisive action, but added that, at times, there had been some positive indicators on the project - substantial funds were being spent by Valence and it had entered into business agreements with some major companies. However, the Department considered that the position reached in mid-1996 was the major turning point. The fundamental change in the nature of the product at that time should have led IDB to insist on a revised Business Plan and a complete re-appraisal; had these not been satisfactory, IDB should have renegotiated the offer and/or initiated clawback.

69. The Committee recognises that calling a halt to a major project is a difficult step and one that requires careful judgement. Nevertheless, it seems staggering that, for so long, IDB maintained an almost blind faith in a project that was so obviously in trouble.

Recommendation 16

70. The Committee recommends that Invest NI takes a much firmer line than IDB in projects where there is a significant shortfall in performance. The Committee recognises that careful judgement has to be exercised on whether or not to continue supporting such a project. But where, for example, it departs significantly from the agreed plan, or is likely to fall far short of its targets, Invest NI must reappraise the project and be prepared to renegotiate the offer including, where necessary, initiating clawback.

Despite Valence’s failure to deliver, IDB more than doubled the Grant Cap

The first increase in the cap, 1998

71. In early 1998, Valence requested that the cap on financial assistance be raised from £3 million to £5 million. Following a marketing review and financial appraisal, IDB agreed to do so, despite Valence not yet having a commercial product, firm contracts, sales or marketing infrastructure or a proper Business Plan. Moreover, Valence now had three alternative sites to manufacture batteries, while the Northern Ireland plant had not yet started commercial production. Despite the company’s poor track record in the project, IDB also accepted as reasonable, Valence’s projections that it would, within three years, achieve sales of $384 million per annum and an employment level of 776. Also, contrary to its guidelines, IDB’s decision to raise the cap on grant assistance was taken without involving the Board Casework Committee.

72. Given Valence’s poor track record throughout the project, the Committee finds it astonishing that IDB could have given any credence to the company’s claims. The only explanation the Department could offer for IDB’s behaviour was that Valence itself was continuing to invest funds in the project. However, it conceded that IDB should have completely re-appraised the project and referred it back to the Casework Committee.

The second increase in the cap, 2001

73. In March 2001, IDB again agreed to raise the grant cap, this time from £5 million to £11 million. This was despite Valence having accumulated losses of $250 million, doubts about the company’s “going concern" status and a manufacturing cost of $57 per battery compared with a selling price of only $12. Further, there was an inadequate marketing plan and no marketing team, poor controls over capital expenditure, inaccuracies in financial figures presented to IDB, and difficulties with production quality.

74. Again, in view of the persistently poor track record of the company in the project to date, the Committee fails to see how the increase in grant cap could properly be justified. Confirmation that this was a serious error in judgement came just 17 days after IDB had paid £3.9 million of the raised cap, when Valence announced 320 redundancies at Mallusk, leaving only 97 workers in the plant.

75. The Committee is also concerned about the role of DFP in the raising of the cap. The Committee is surprised that DFP approved the case, especially on the understanding that a detailed Business Plan demonstrating viability was not a pre-requisite to the release of any funds from the raised cap. Indeed, it agreed that a Business Plan would not be required until after the £11 million had been spent. DFP has a key control function in cases like this and the Committee expects it to ensure that proper standards of appraisal are maintained. It is extremely disappointing, therefore, to find that DFP failed to apply the standard of oversight expected.

Recommendation 17

76. While every reasonable attempt should be made to save a project that is in trouble, this should not involve throwing good money after bad. The Committee recommends that when using caps on offers of financial assistance in future, decisions to raise the cap are taken only on the basis of a positive appraisal of a proper Business Plan.

77. The Committee noted one other area of concern connected to IDB’s raising of the grant cap. In July 2001, concerned by several management changes in the company, IDB hired an information and investigations agency to seek “discreet intelligence" about Valence. The agency’s report noted a concern in relation to a series of financial transactions, involving Valence, of around $30 million. The question was raised within IDB as to whether this had anything to do with the pre-condition in IDB’s agreement to raise the grant cap, which required Valence to raise a further $30 million in funding. IDB wanted to know whether the net effect of the financial transactions had indeed been to release funding to Valence – if not, IDB’s pre-condition would not have been satisfied. The C&AG reported, however, that there was no record on file of this important issue having been satisfactorily resolved.

78. The Department told the Committee that, from a review of other records, it now believes that the $30 million pre-condition had been satisfied. The Department accepted, however, that a documented reply, or an explanatory note, should have been placed on file to record how the question had been answered. The Committee accepts the Department’s explanation but would again stress to Invest NI the importance of maintaining proper standards of documentation.

The Costs and Benefits of the Project

79. Against the background of widespread weaknesses in IDB’s project appraisal, monitoring and management, the Committee sought to assess the costs and benefits of Valence to the local economy. It was no surprise to find that the results indicated the project had provided very limited value for taxpayers’ money.

The costs of the project:

The net cost of the project to the taxpayers was substantial

80. Following Valence’s announcement in 2003 that it was relocating its manufacturing operation to China, Invest NI (which had replaced IDB the previous year) initiated clawback proceedings. Over the 10 years from IDB’s offer in 1993, to the company’s announcement that it was relocating to China, grants totalling £10.3 million had been paid to Valence. Of this, £5.8 million was still recoverable in 2003. However, the sum actually clawed back was substantially less, at £2.5 million.

IDB’s failure to properly secure its funding undermined its later clawback efforts

81. Invest NI’s efforts to recover the monies owing by Valence were substantially undermined by IDB’s failure to properly secure its interests. The Committee finds this deplorable.

(i) The Main Factory

82. DFP’s 1993 approval to the offer of assistance required IDB to ensure that, should the project fail prematurely, ownership of the factory would revert to IDB. Crucially, IDB failed to do so; when the project ceased, ownership of the factory lay with Valence. The company sold the premises for £5 million, of which £3.73 million was used to partially clear the sums owing to IDB – £1.52 million towards the grant clawback (paragraph 80 above) and £2.21 million to clear the amount still owing on the factory. While it is impossible to predict the overall value of clawback had ownership of the factory reverted to IDB as intended by DFP, it is likely to have been significantly higher than the actual outcome. The Committee considers IDB’s failure to secure the factory asset an appalling oversight.

(ii) The 2nd charge on the Second Factory

83. IDB had decided that, when Valence purchased the second factory in 2001, it would seek a second charge (the Bank held the first charge) on the factory, to strengthen its overall security. However, this was never done. The Department told the Committee that the time at which the interest should have been registered coincided with a change in the IDB Client Executive responsible for Valence and this appears to have been the reason for the oversight. In the Committee’s opinion, such a poor standard of administration again points towards an extremely lax regime within the former IDB.

(iii) The parent company guarantee

84. DFP’s approval to the 1993 assistance offer also required the Valence parent company to provide a written guarantee in respect of any liabilities to IDB which may arise. This was provided, but when the company ceased operations in Northern Ireland, Invest NI found that the guarantee was effectively worthless. The Department said that the value of the guarantee had, from inception, been dependent on the very substantial cash reserves held by the US company, following its public share offerings. The expenditure on the Northern Ireland plant, together with ongoing operational losses, gradually eroded those cash reserves.

85. When asked whether this situation could have been prevented, the Department told the Committee that it would have been possible, through the introduction of a “minimum net worth covenant" in the guarantee, to limit the erosion of value in the US parent. However, IDB appears to have decided against this option. In the Committee’s view, it was a mistake not to have introduced such a covenant, especially in a project where the parent company had been so cash rich. Moreover, IDB should have been monitoring the value of the parent guarantee on an ongoing basis.

Recommendation 18

86. The Committee recommends that Invest NI reviews the adequacy of its arrangements for taking security on funds provided to client companies. In particular, it must ensure that taking security is not overlooked and that the extent of a company’s liability is adequately covered. The Committee further recommends that Invest NI examines the scope for greater use of “minimum net worth covenants".

The benefits of the project:

Although large sums were spent by Valence, there is no evidence of a significant spend in Northern Ireland

87. During the evidence session, the Department referred to the substantial sums invested in the project by Valence, stating that, in total, the company had spent some $346 million by 2004. However, it was unable to indicate how much of that had been spent in Northern Ireland. In follow-up correspondence, the Department said that the accounts for the Northern Ireland company showed a total of $141 million having been invested between 1993 and 2004. Again, however, there is no indication of what proportion was actually spent locally. Given that Valence’s spending appeared to focus heavily on research and development in the US and on equipment and machinery sourced outside of Northern Ireland, the Committee can only conclude that the net financial impact of the project on the local economy was very limited. Bearing in mind the nature of the charges under the class action, the Committee is left wondering whether the principal attraction of the Northern Ireland project to Valence was more to do with ramping up demand for its share offers in the US, than about operating a manufacturing facility here.

Jobs created fell far short of the target level of 660

88. Although Valence was to create a total of 660 new jobs by March 1998, employment peaked at 417 in 2001. Moreover, this was for a relatively short period during that year, with average annual employment levels being much lower. Also, a very substantial proportion of the workforce comprised agency staff rather than permanent workforce, due to the uncertain future of the project. Overall, the Committee considers that job creation levels were very disappointing.

89. The Committee was also concerned to learn that, by 1996, Valence had entered into joint ventures with companies in Korea and the US to manufacture batteries using IDB-assisted Valence technology. In effect, Northern Ireland taxpayers’ money was being used to develop a product that was creating manufacturing jobs elsewhere. Invest NI said that IDB had seen the joint ventures as a positive move, helping Valence to enter other markets. The fact remains, however, that Valence had promised to create 600 manufacturing jobs in Northern Ireland, yet many of those jobs were going overseas. This is unacceptable.

90. The Committee notes Invest NI’s comments that, currently, it is trying to create research and development opportunities in Northern Ireland, both to increase the knowledge base and create jobs. However, Invest NI considers that it would be difficult to prevent a large multinational that has been given money to research and develop a new idea here, from taking the benefit of that to other countries in which it operates. The Committee acknowledges this. However, the key point is that where the assisted company has also promised to create jobs in Northern Ireland, Invest NI must make every effort to ensure that the company delivers.

Recommendation 19

91. The Committee recommends that Invest NI takes a firm line with assisted companies to ensure that Northern Ireland assistance is not being used to support job creation opportunities elsewhere, to the detriment of job creation in Northern Ireland.

Tackling economic and social disadvantage

92. The Committee would have liked to know how many of the Valence workforce came from designated areas of economic and social disadvantage, but this was not possible because Invest NI does not hold records relating to individual employees of client companies. However, the Department produced indicative estimates using 2001 census data on labour mobility. It estimated that, of Valence’s peak employment of 417 people in March 2001, 54 employees (13 per cent) came from disadvantaged areas and a further 46 (11 per cent) from special status areas (essentially, pockets of disadvantage in non-designated areas). The Committee finds it disappointing that this was such a modest proportion of the overall workforce.

93. The Committee was also keen to know why Mallusk had been chosen to site the project, rather than a location within a disadvantaged area. The Department said that Valence’s requirements had been highly specialised and, at the time, only one factory was identified as meeting those requirements. Also, due to the time pressures, a new build was not an option. In the Committee’s view, this is not altogether convincing; the evidence shows that the manufacturing project was still at an embryonic stage and, therefore, time was not such a crucial factor.

94. The Committee asked, more generally, how the locations for visits by potential inward investors are currently determined. Invest NI explained that once investors specify their requirements, it will offer a range of locations, including New Targeting Social Needs areas. The Department has since provided the Committee with an analysis of Invest NI facilitated visits, by constituency, over the past three years. In the Committee’s view, the analysis, while incomplete, appears tohighlight a distinct under-representation of disadvantaged areas. For example, of the visits to the four Belfast constituencies over the three-year period, only 17 per cent included North and/or West Belfast.

95. The Committee also asked for a comparison of the siting of inward investment projects, with areas in which unemployment levels have been highest. An analysis provided by the Department, based on District Council areas, did indicate some correlation between project locations and areas with higher rates of unemployment. Unfortunately, the figures for Belfast, which had the largest number of projects, were not subdivided into different areas; also, there were significant pockets of unemployment, such as Strabane and Craigavon, where inward investment has made little or no impact.

Recommendation 20

96. In the Committee’s view, Invest NI must do more to ensure that people from areas of economic and social disadvantage have an opportunity to benefit from inward investment. It is recommended that this become a quantified target for Invest NI, with performance publicly reported. The Committee also recommends that when prospective investors view potential investment locations, these always include a number in disadvantaged areas. The objective must be to increase the proportion of inward investment projects located in areas of greatest unemployment which, on past performance, has not been high enough.

[1] A “class action" is a civil case brought against a company by a group of persons (the class) similarly affected by the alleged misconduct of the corporate officers and directors. The class action against Valence was taken by those who had purchased the company’s shares between May 1992 and November 1994.

Minutes of Proceedings
of the Committee
Relating to the Report

Thursday, 11 June 2009
Room 144, Parliament Buildings

Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Jonathan Craig
Mr John Dallat
Mr Mitchel McLaughlin
Ms Dawn Purvis
Mr George Robinson
Mr Jim Shannon
Mr Jim Wells

In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Mrs Gillian Lewis (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)

Apologies: Mr Thomas Burns
Mr Trevor Lunn

The meeting opened at 2.00pm in public session.

3. Briefing on the NIAO report ‘Review of Assistant to Valence Technology: a Case Study on Inward Investment’.

Mr John Dowdall CB, C&AG; Mr Robert Hutcheson, Director; Mr Alan Orme, Audit Manager; and Mr Joe Campbell, Audit Manager; briefed the Committee on the NIAO Report, ‘Review of Assistance to Valence Technology: a Case Study on Inward Investment’.

2.08pm The meeting went into closed session.

The witnesses answered a number of questions put by members.

2.37pm Mr Shannon joined the meeting.

2.38pm Mr Wells joined the meeting.

2.45pm Mr Robinson left the meeting.

2.55pm Mr Wells left the meeting.

3.15pm Mr Wells rejoined the meeting.

[EXTRACT]

Thursday, 18 June 2009
Senate Chamber, Parliament Buildings

Present: Mr Paul Maskey (Chairperson)
Mr Trevor Lunn
Mr Mitchel McLaughlin
Ms Dawn Purvis
Mr George Robinson
Mr Jim Shannon
Mr Jim Wells

In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Mrs Gillian Lewis (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)

Apologies: Mr Roy Beggs
Mr Thomas Burns
Mr Jonathan Craig
Mr John Dallat

The meeting opened at 1.35pm in closed session.

2.23pm The meeting went into public session.

6. Evidence on the NIAO Report ‘Review of Assistance to Valence Technology: A Case Study on Inward Investment’.

The Chairperson welcomed Mr John Dowdall CB, Comptroller and Auditor General; and Mr David Thomson, Treasury Officer of Accounts (TOA) to the meeting.

The Committee took oral evidence on the NIAO report ‘Review of Assistance to Valence Technology: A Case Study on Inward Investment’ from Mr Stephen Quinn, Accounting Officer, Department of Enterprise, Trade and Investment; Mr Alistair Hamilton, Chief Executive, Invest NI; Mr Mel Chittock, Managing Director, Corporate Services, Invest NI; and Mr Brian Dolaghan, Director, Engineering and Business Services Division, Invest NI.

The witnesses answered a number of questions put by the Committee.

3.35pm Mr Lunn left the meeting.

3.49pm Mr Wells left the meeting.

Members requested that the witnesses should provide additional information to the Clerk on some issues raised as a result of the evidence session.

4.50pm The evidence session finished and the witnesses left the meeting.

[EXTRACT]

Thursday, 25 June 2008
Room 144, Parliament Buildings

Present: Mr Roy Beggs (Deputy Chairperson)
Mr Jonathan Craig
Mr John Dallat
Mr Trevor Lunn
Ms Dawn Purvis
Mr Jim Shannon

In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Mrs Gillian Lewis (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)

Apologies: Mr Paul Maskey (Chairperson)
Mr Thomas Burns
Mr Mitchel McLaughlin
Mr George Robinson
Mr Jim Wells

The meeting opened at 2.15pm in public session, the Deputy Chairperson in the Chair.

6. Issues paper on evidence session on NIAO report ‘Review of Assistance to Valence Technology: A Case Study on Inward Investment’.

Members discussed and agreed the issues paper as the outline for its report.

Agreed: Members agreed to write to Mr David Thomson, Treasury Officer of Accounts; and to the Accounting Officer, Department of Enterprise, Trade and Investment for further information.

3.10pm The meeting went into closed session.

3.11pm Mr Dallat left the meeting.

[EXTRACT]

Thursday, 10 September 2009
Room 144, Parliament Buildings

Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Jonathan Craig
Mr John Dallat
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Ms Dawn Purvis
Mr Jim Shannon

In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)

Apologies: Mr George Robinson
Mr Jim Wells

The meeting opened at 2.02 pm in public session.

7.Consideration of the draft Committee Report on Review of Assistance to Valence Technology

Paragraphs 1 - 13 read and agreed.

Paragraph 14 read, amended and agreed.

Paragraphs 15 - 17 read and agreed.

Paragraph 18 read, amended and agreed.

Paragraphs 19 - 26 read and agreed.

Paragraph 27 read, amended and agreed.

Paragraphs 28 - 30 read and agreed.

Paragraph 31 read, amended and agreed.

Paragraphs 32 - 38 read and agreed.

Paragraph 39 read, amended and agreed.

Paragraphs 40 – 44 read and agreed.

Paragraph 45 read, amended and agreed.

Paragraphs 46 – 49 read and agreed

Paragraph 50 read, amended and agreed.

Paragraph 51 read and agreed.

Paragraph 52 read, amended and agreed.

Paragraphs 53 – 54 read and agreed.

Paragraph 55 read, amended and agreed.

Paragraph 56 – 58 read and agreed.

Paragraph 59 read, amended and agreed.

Paragraphs 60 – 70 read and agreed.

Paragraphs 71 – 72 read, amended and agreed.

Paragraph 73 read and agreed.

Paragraphs 74 read, amended and agreed.

Paragraphs 75 – 80 read and agreed.

Paragraph 81 read, amended and agreed.

Paragraphs 82 – 83 read and agreed.

Paragraphs 84 – 93 read and agreed

Paragraph 94 read, amended and agreed.

Paragraph 95 read and agreed

Paragraph 96 read, amended and agreed.

4.45 pm Mr Craig left the meeting

Consideration of the Executive Summary

Paragraphs 1 – 5 read and agreed

Paragraph 6 read, amended and agreed.

Paragraph 7 read and agreed.

Paragraph 8 read, amended and agreed.

Paragraphs 9 – 21 read and agreed.

Agreed: Members ordered the report to be printed.

Agreed: Members agreed that the report would be embargoed until 00.01 am on Thursday, 1 October 2009.

Agreed: Members agreed to launch the report with a press release to be agreed at a later meeting.

[EXTRACT]

Appendix 2

Minutes of Evidence

18 June 2009

Members present for all or part of the proceedings:
Mr Paul Maskey (Chairperson)
Mr Trevor Lunn
Mr Mitchel McLaughlin
Ms Dawn Purvis
Mr George Robinson
Mr Jim Shannon
Mr Jim Wells

Witnesses:

Mr Mel Chittock
Mr Brian Dolaghan
Mr Alistair Hamilton

Invest Northern Ireland

Mr Stephen Quinn

Department of Enterprise, Trade and Investment

Also in Attendance:

Mr John Dowdall CB

Comptroller and
Auditor General

Mr David Thomson

Treasury Officer
of Accounts

1. The Chairperson (Mr P Maskey): We now move into the evidence session on Valence Technology. Today, we are considering the Audit Office Report ‘Review of Assistance to Valence Technology: A case study on inward investment’.

2. I welcome Stephen Quinn, the accounting officer of the Department of Enterprise, Trade and Investment; his officials Alistair Hamilton, who is the new chief executive of Invest NI; Mel Chittock, acting manager director of corporate services for Invest NI; and Brian Dolaghan, director of the engineering and business services division for Invest NI. I also welcome John Dowdall, the Comptroller and Auditor General, and Mr David Thomson, the Treasury Officer of Accounts.

3. The Valence report makes for unhappy reading. It catalogues a string of poor judgements and a failure by the Industrial Development Board (IDB) to apply and have regard for many of the guidelines that the board itself implemented after having to learn key lessons that previous cases highlighted. Mr Quinn, can you set the scene for us and tell us how this case was handled?

4. Mr Stephen Quinn (Department of Enterprise, Trade and Investment): Thank you. I am grateful for having the opportunity to make some opening observations on the case.

5. First, paragraph 4 of the preface of the report states that:

“the project fell markedly short of its expected investment and job creation levels."

That is a fair, balanced and soberly expressed conclusion that we agree with. Secondly, given how the project is described in the report, the same project would not be recommended for support in contemporary circumstances. It seems clear to us that the IDB had a significantly higher at-risk appetite in 1993 than Invest NI has today. In February 1993, there were 105,000 people on the unemployed claimant count. In May 2009, there were 48,000 people on that count.

6. Paragraph 3.14 of the report records in vivid terms the risks that were associated with the project. It was a very high-risk project. The report rightly refers to the material that was available at the appraisal stage prior to the September 1993 offer being made. Paragraph 3.6 identifies the limitations of that material. However, I think that the problems in bringing Valence’s technology to the mass-production stage were fundamental to the development history of the project.

7. Given the situation, it is striking that IDB was not alone in supporting this high-risk project. In 1992, the company raised $87 million from the capital markets. It raised a further $45 million from the markets in December 1993 and a further $65 million by public offering from 1998 onwards. Paragraph 7.12 refers to the company having invested some $250 million by February 2001.

8. It is worth noting that a huge amount of private investment went into the project, doubtless in the expectation that high risk would yield high reward. Moreover, companies such as Delco, Motorola, Hewlett-Packard, Eveready, Bellcore and others entered into business arrangements with Valence between 1992 and 2000.

9. I think that it is fair to infer from that that investors and business partners saw potential value in the company and the project. Indeed, the report makes it clear that, although the loss to the taxpayer was undoubtedly material, the private investors bore the greater part of the risk and the losses. Therefore, I suggest that it would be wrong to conclude that the Valence project was an obviously hopeless case from its inception, or that all the indicators were negative at every point in its history. However, in the conditions that prevailed in 1993, the project was supported, and the report refers to a series of key decision points at the various stages of the project’s development.

10. In our view, the project should have been subject to a comprehensive reappraisal no later than July 1996. At that point, Valence had decided to outsource three stages of production and to cancel its plans for a research and development facility. Those were fundamental changes to the project, and if the project were being handled by Invest NI today, those changes would trigger reappraisal. Furthermore, given the very high-risk nature of the project, it is clear that it is possible that support for it would have been terminated at that point. However, the project continued, and the report goes on to describe a number of subsequent key decision points including raising the assistance cap to £5 million in 1998 and to £11 million in 2001.

11. It is difficult to put oneself in the shoes of the decision-makers at the time, but it seems likely that, at all the key points, they were conscious of a mixture of negative and positive indicators. On the negative side, there were continuing difficulties in getting the technology to the point of mass production; there were changes in the company’s strategy; progress towards the employment targets was very slow, particularly in the early years; and the company was burning cash. On the positive side, there appeared to be progress on the technology; the company and other investors continued to fund the losses in the hope of a return; reputable companies continued to enter into business relationships with Valence; and by 2000-01, about 400 people were employed at Mallusk, and sales revenue was being generated. Therefore, some economic benefit was being obtained. It is our view that decisions to continue to support the project could have gone the other way, but those decisions were complex rather than clear-cut.

12. The report also refers to a number of departures from best practice, including a failure to enforce preconditions and to obtain appropriate authorisations. Those and other departures from best practice were unacceptable. Paragraph 1.20 of the report sets out developments that have been made in the control environment since 2002. I hope the Committee can take some assurance from those. However, the reality is that Invest NI is a funder of last resort and intervenes only in cases of market failure. As a consequence, some projects will succeed and some will fail, but the risks must be, and they now are, mitigated by effective appraisal and monitoring.

13. Finally, I want to comment on the property transactions that are referred to in the report. Paragraph 1.18 makes it clear that neither the Department nor Invest NI regards the handling of those transactions as satisfactory. The report does not draw adverse inferences, but there should certainly have been greater transparency. I assure the Committee that such transactions are now dealt with satisfactorily.

14. I hope that the Committee finds those opening observations helpful; we will of course try our best to provide further information and explanations in response to your questions.

15. The Chairperson: Thank you Mr Quinn. Obviously, the Committee is examining a wide range of factors, and members will have a great deal of questions to ask. You stated that Valence attracted other investment of $87 million in 1992, $45 million in 1993, $65 million from 1998 onwards, with the final investment figure being over $200 million. How much of that money was spent in the North of Ireland?

16. Mr Quinn: I believe that all of it was spent in Northern Ireland. Paragraph 7.4 of the reports concludes that the company sustained losses of $250 million, and paragraph 8.4 refers to losses of $346 million. I assume that all those losses where sustained when the project was here.

17. Ms Purvis: I do not think that that is the case.

18. The Chairperson: I do not think that that is the case either. You seem to be making assumptions, Mr Quinn, and although these events occurred long before you were in your current post, I do not think that the right answer to give to the Committee is that you have made assumptions.

19. Mr Quinn: I accept that. I should have made the point that, in referring to the $250 million and the $346 million losses, I was trying to illustrate the extent of Valence’s commitment to the project.

20. You are absolutely right to correct me. It does not follow that all that money was spent in this region. The money that was spent is a significant measure of the company’s commitment to the project.

21. The Chairperson: I will ask you the question again: how much of that money was spent here?

22. Mr Quinn: I do not know.

23. The Chairperson: You started by saying that a lot of investment was brought in. The clear answer is that you do not know how much that was, yet you were willing to quote figures of $87 million, $45 million, $65 million and over $250 million. That is the wrong way to start off discussing this case, and I think that it is sad that your opening remarks began in that way, given that you are not sure of all the answers.

24. Mr Quinn: I apologise, Chairman. I really meant to use those figures to illustrate the company’s commitment to the project.

25. The Chairperson: Was that commitment to the project in North of Ireland?

26. Mr Quinn: Yes, as I understand it.

27. The Chairperson: I disagree with some of that, but we will look at that further. Dawn, do you want to ask about that point?

28. Ms Purvis: No; it is OK.

29. The Chairperson: Perhaps someone else could answer that question; it is a relevant point. We must learn from that and find out whether IDB threw good money after bad. We need answers as to whether economic benefits were being achieved for here.

30. Mr Brian Dolaghan (Invest Northern Ireland): The definitive answer is that we do not know the exact amount that was invested here. At certain points, the research and development activity to try to take the battery forward was carried out largely in the US. Undoubtedly, some of that cash burn is attributable to the activities that were taking place during 1994 and 1995 in the US. The bulk of the capital investment, which was substantial, was made in Northern Ireland, albeit that some of it subsequently had to be written off. There is no doubt that substantial amounts of money were invested in Northern Ireland. In fact, we have records to show that at least £20 million was spent in Northern Ireland with local suppliers of capital equipment. Although I cannot give a definitive figure, substantial amounts of money were spent in Northern Ireland.

31. The Chairperson: You said £20 million, but figures of $300-odd million were given earlier.

32. Mr Dolaghan: To clarify that, £20 million was spent with Northern Ireland suppliers, but much more than that was spent with suppliers of equipment to Northern Ireland. Companies that were actually located in Northern Ireland got the benefit of at least £20 million of expenditure from the company to purchase goods and services from them.

33. Mr David Thomson (Treasury Officer of Accounts): In February 2001, a minute from the IDB to the Department of Finance and Personnel (DFP) stated: “The company has been here for over 7 years, has invested substantially over ($250m) at Mallusk and currently employs 420 people."

34. The Chairperson: Could we have further detail on that? You may not have all the answers to hand today, but we would like a breakdown of where that money was spent to be recorded in our report.

35. Mr Quinn: Yes, I am happy to do that.

36. The Chairperson: My next question concerns the share dealings of the two project promoters. Paragraphs 2.7 and 2.8 of the report highlight the substantial personal gains that the project promoters made at a very early stage of the project. Did that not call into question the strength of their personal commitment to the project?

37. Mr Quinn: It is very hard to track the net effect on the net worth of the individuals concerned over the period of the project. Paragraph 8.9 makes the point that the entrepreneurial investor was still funding the company on a “drip-feed basis" in May 2004. Allied with the point that is made in paragraph 8.4 that the company had lost $346 million by that stage, that provides some evidence that the company was committed significantly to the project. Mr Dolaghan might have some more observations to make on that.

38. Mr Dolaghan: I have two brief points to make. First, the fact that the entrepreneurial investors were realising part of their investment was clearly flagged in the prospectuses for both the public offerings in 1992. Both the share offerings were oversubscribed in the market. That demonstrates that it was not unusual that founding investors would look to crystallise some of their investment at a particular point in time for their own liquidity reasons.

39. Without going into all the detail, the first example that is given in paragraph 2.8 shows that a share price of 53 cents was the position on the earlier deal. That example also describes a $10 million investment in the company, for which the investor got 6·2 million shares. In that six-month period, the share price moved from 53 cents to $1·90. If, in the next six months, that same movement had happened in reverse, the entrepreneurial investor would have invested $10 million in hard cash and hold shares to the value of $3·28 million. I am trying to demonstrate that, although there was an obvious up side to the market, there was also a potential significant downside for investors. They were putting cash into the business and accepting share certificates against that that had the potential to gain or lose value in the marketplace.

40. The Chairperson: I want to set the context, because I know that other members will want to go down that line of inquiry. It is strange that, when the share price increased so quickly from 53 cents right up, bells did not ring in the IDB. That needs to be looked at. By cashing in huge quantities of shares at the start, did not the project promoters transfer all the risk to the IDB?

41. Mr Quinn: To go back to the big numbers, I do not think that the risk was transferred to the IDB. If you consider the history of the project, paragraph 8.4 makes the point that the company had lost $346 million. Figure 4 on page 62 shows the best measure of the loss to the taxpayer or the IDB representing the taxpayer. That shows that the difference between what was paid and what was recovered is about £7·8 million. We would argue that the taxpayer got some economic benefit from that £7·8 million. It seems to me that the substantial investment risk here was carried by private investors rather than by the IDB.

42. The Chairperson: Members will address that in their questioning. The project promoters cashed in huge quantities of shares at the start. Are you definitely saying that you do not believe that that looked as though most of that risk was being put on to the IDB?

43. Mr Quinn: I do not think so; I do not think that the report is saying that. I think that the individual investors may have been looking for a profit, but that was trailed in the prospectus. It is not unusual for shares to be sold in that context. The other observation that I would make is that if they were selling, someone was buying. Therefore, people saw value in those shares at the material time.

44. The Chairperson: That report highlights that. You mentioned paragraph 8.4 on a number of occasions. However, paragraph 2.9 reads:

“The Department has commented that, in undertaking the funding outlined above, the entrepreneurial investor had accepted a significant degree of financial risk."

Does that not say something other than what you are saying?

45. Mr Quinn: I do not think so. It says the same thing. Brian Dolaghan’s evidence was that there was potentially a downside and an upside at that stage. To broaden the point, I think that the entrepreneurial investor was still drip-feeding the company in 2004. It is difficult to suggest that that individual just cut and run.

46. The Chairperson: This is a case study on inward investment, which is important, and obviously questions have to be asked about it. With regard to targeting social disadvantage, one of the questions that emerges is that paragraph 7.16, shows that in March 2001 Valence had some 417 workers. How many of those workers came from disadvantaged areas?

47. Mr Quinn: I do not know.

48. The Chairperson: Can you come back to us with an answer?

49. Mr Dolaghan: I have to say that the records do not show that; we do not have the company’s records to show how many of the workers come from disadvantaged areas. We have the records to show how many were employed, but not from where they came.

50. That said, the records that were kept when the project was secured for Northern Ireland show that representatives from north and west Belfast and from Newtownabbey undertook extensive work with the Training and Employment Agency to provide advanced training so that opportunities would be made available for people from disadvantaged areas who could take up employment in the new factory.

51. The Chairperson: Do you not have figures at all to show how many of those people came from disadvantaged areas?

52. Ms Purvis: Did the Training and Employment Agency not hold figures for the people that it trained that say whether they got employment in that factory?

53. Mr Dolaghan: I would have to follow that up with the Training and Employment Agency, to be honest. When it submitted claims for the grant payment, it would have had to have been able to show that people were trained. There is a question mark over whether it has details of where those people were from, but we can try to find that out.

54. Mr Quinn: I will respond to the general concern. Obviously, inward investors, like every other employer, had to comply with the requirements of employment law in Northern Ireland, which is, by common consent, fairly exacting.

55. The Chairperson: IDB also had a responsibility to target social disadvantage. If new inward investment were available now, would you know whether those jobs were going to people in disadvantaged areas?

56. Mr Dolaghan: It is difficult to know where people come from until they take up employment. We are conscious of travel-to-work areas. At the same time, we actively target areas in which we believe social disadvantage exists. That is borne out by a number of our current policies.

57. The Chairperson: How do you do that?

58. Mr Dolaghan: We look to try to introduce investors into areas where there is potential to set up factories.

59. Mr Quinn: Invest Northern Ireland’s corporate plan sets targets for locating investments in or within a range of disadvantaged areas.

60. The Chairperson: I appreciate that. How many inward investment projects have been located in disadvantaged areas in the past five years, which is a relatively short period, and what proportion of the jobs that they provided went to people in those areas?

61. Mr Mel Chittock (Invest Northern Ireland): I do not have that information readily to hand, but we have it on file, and we can provide it to the Committee.

62. The Chairperson: You say that this is something that you are promoting actively, yet you do not have the details. This is about inward investment.

63. Mr Chittock: I am sorry; I do not have the details with me today.

64. The Chairperson: I will take that for granted, but perhaps you could provide that information to the Committee in writing.

65. Mr Alistair Hamilton (Invest Northern Ireland): The targets that were set in the Programme for Government are not set for five years, but after the first year — the year just past — we are well ahead of the target that was set for investment in disadvantaged areas. We will provide the Committee with the additional information.

66. The Chairperson: It would be good to see how many inward investment projects were created and how many jobs were promoted in disadvantaged areas.

67. Valence chose to site its project at Mallusk. Were any other areas or locations visited before the Mallusk site was chosen?

68. Mr Dolaghan: There was one key driver in the decision to locate at Mallusk. As the report points out, the IDB was late in the day in entering into that competitive environment to try to secure the project. The company was looking actively at factories in Cork at the time. The one factory in Northern Ireland that had a competitive advantage, if you want to call it that, was that at Mallusk. That factory had a significant roof height, which was a requirement of the inward investor for some of the plant and equipment that it was bringing in. No other factories were available that had that advantage; the Cork factory would have had to have been adjusted to suit. The feeling was that the Mallusk location had a competitive advantage in the marketplace with which to pitch the project. It was the only show in town, for want of a better phrase.

69. The Chairperson: Was Mallusk not built to spec?

70. Mr Dolaghan: No. It was a pre-existing factory that met the requirements. There was plant and equipment on order at the time, which meant that a factory had to be ready within a certain period. A newbuild was not a possibility, because it would have taken too long to build.

71. The Chairperson: You are stating clearly that there was no other building — no other show in town — that would have been capable of housing the Valence project.

72. Mr Dolaghan: Yes.

73. The Chairperson: I find that hard to believe. Were any other areas looked at?

74. Mr Dolaghan: I am just quoting from the records.

75. The Chairperson: Was any other research done? You said that the IDB came into the project late. Was any other research done that would have allowed the IDB to scope the rest of the North of Ireland?

76. Mr Dolaghan: The IDB would have had information on all the available factories from its records and those of the various agents in Northern Ireland. That information was reviewed with a view to putting the best foot forward for Northern Ireland within the project parameters.

77. The Chairperson: Is there a set of procedures that must be followed if an inward investor is going to come here?

78. Mr Chittock: If an inward investor is visiting Northern Ireland, we show them several different locations around Northern Ireland. Beforehand, we would have specified the factory requirements based on the company’s business plan and identified not only the stock of which we were aware but the stock of buildings held by developers, so that we could show potential investors a range of options. We keep that information on our website up to date, and it is available 24 hours a day.

79. The Chairperson: Was research conducted on how that process was carried out? I return to the point that the IDB became involved later: was research done in that particular case?

80. Mr Chittock: We can go only on the records available from that time. They show that the requirements for that company were highly specialised. At that time, only one factory was identified that met the requirements. Due to the timescale involved, a speculative build would not have been possible.

81. The Chairperson: May the Committee have a copy of the records, including the spec and the other firms or buildings that were available in the North of Ireland at that time?

82. Mr Quinn: Yes, we can make the relevant records available to you.

83. The Chairperson: The INI facilitates visits to the North from potential inward investors, and you have touched on that subject. How are the locations of those visits determined?

84. Mr Chittock: Ultimately, the company determines the location. It specifies its requirements, and those could range from a specific location because of access to materials, access to transportation links, ports, airports, or access to major conurbations for necessary skill sets. Location choice, therefore, is driven by the individual company. We then offer a range of options, including New TSN areas, because we have clear targets to promote such areas to inward investors. We actively seek to market all of Northern Ireland.

85. The Chairperson: A year and a half ago, I was in Boston with a trade delegation from the greater Shankill and west Belfast. We spoke to many influential people who wanted to invest in the North of Ireland. They had been to the North on many occasions with the INI. Our first question was whether they would be willing to invest in the Shankill or west Belfast, to which they said yes. When asked how many times INI had shown them around those areas, the reply was “not once". That fact about areas of disadvantage must be put on record. Alistair, I know that you are new to your role, but, as the chief executive of INI, you will have to investigate and ensure that what happened in the past is not replicated in the future. We must learn from past mistakes.

86. How do areas in which unemployment levels have been highest compare with other areas when it comes to the siting of inward investment projects in the past three years?

87. Mr Quinn: We will have to refer to the results of Invest NI. I apologise for our not being able to give you a direct answer. However, in mitigation, those issues do not arise directly from the report. If you are interested in that additional information, we will be happy to provide it. However, we will have to provide supplementary notes.

88. The Chairperson: I appreciate what you are saying, Mr Quinn. However, although the report concentrated on a case study, it also covered inward investment in general, so that point must be clarified. Perhaps when you submit the additional information to the Committee you could also detail the number of the visits from inward investors to each constituency over the past three years.

89. Mr A Hamilton: We can provide that information.

90. The Chairperson: Thank you. We shall move on now to questions from members.

91. Mr Lunn: Paragraph 2.6 of the report states that, in 1994, Valence:

“faced a class action which claimed that Valence had issued a series of false and misleading statements…with regard to the company’s business and future prospects."

That case subsequently cost Valence approximately $30 million to settle. It appears that the IDB did not even consider how the question of Valence’s integrity might impact on its relationship with the company, which came to light about eight months after the initial investment made by the IDB. In his opening remarks, Mr Quinn referred to large amounts of private investment going in, but the project was hardly off the ground before a group of investors in the United States was taking class actions alleging those things. Why did the IDB not consider how the question of the company’s integrity might impact on the IDB’s relationship with it?

92. Mr Dolaghan: There is no doubt that it would have been better had the IDB documented its considerations at the time. The subsequent records of the company and the IDB show that there were various rulings-out of those accusations by various parties at the time. Indeed, in November 1997, the case was dismissed by the court in California and reinstated again in 1999. There were a lot of grey areas around the allegations being made and the charges taken against the company. However, I agree absolutely; it would have been preferable if there had been documentary evidence of the IDB’s thought processes at the time, but there was not.

93. Mr Lunn: The year 1997 was three years down the line. Mr Quinn referred to the need for a reappraisal in July 1996. There appears to have been problems with the project from day one. Valence was highlighting problems almost from the very start. Given the class actions and its apparent failure to observe the conditions of the contract that it had signed with the IDB, it seems that an opportunity was missed to put the thing on hold.

94. Mr Quinn: Yes, when we went through the matter we identified about 10 or 11 key decision points in the history of the project. We thought that there was a real break point in July 1996, when the company was taking decisions about the nature of the project that we thought were of such a fundamental nature that they required a complete reappraisal of the project and its support.

95. I will go back to my opening remarks. At any given point, we found that there were a mixture of negative indicators; worries about the technology; slowness about getting up to the employment targets; the class action, or whatever. There were also corresponding positive aspects, such as the involvement of Motorola or Delco-Remy, or the agreement in July 1995 with Bellcore, and so on. The decision-makers were faced, not with a clear-cut, all-bad-news picture, but with a mixed picture of positives and negatives. Perhaps Mr Dolaghan will respond on the class action question.

96. Mr Dolaghan: There is also the issue of the litigious nature in the US, and the fact that actions are often taken by various people against most of the large corporates in the US. As I said earlier, between 1994 and 1996, the records show that there were various adjustments and various rulings-out of claims that were made by various parties here. There was an element of greyness around how substantial the claims were. To hark back to a point that Mr Quinn made, in May 1994 Eveready entered a fairly substantial agreement with Valence Technology, so companies of that ilk were dealing with this company significantly, which gave it a lot of credibility from the IDB’s point of view. However, it goes back to weighing positives and negatives at any point in time, and making decisions.

97. Mr Lunn: Without reading the whole report again, I am not sure how much the good news information, such as involvement by those other companies, such as Motorola, and so on, came from Valence. A lot of information came from Valence.

98. Mr Quinn: The points that we are referring to have been taken out of the report and they refer to actual business arrangements that other companies entered into with Valence. In 1994, which is the year that we are focusing on, Hewlett-Packard, Goldtron Ltd, Eveready and Delco-Remy all entered into business arrangements. Not all of them worked out as well as one would have wished. Nonetheless, there were some positives as well as the worrying indicators that you mentioned.

99. Mr Dolaghan: It is worth noting that the IDB did not just accept the company’s points on most of those issues; as part of the assessment of the project at various stages, it visited Every Ready, Motorola and Delco-Remy. The IDB satisfied itself that those relationships were real relationships.

100. Mr Lunn: I am glad to hear that it satisfied itself about something, because it appears that it did not do so during the initial stages, which was the problem.

101. Paragraph 3.3 highlights the important lessons in the Gibson Report and the reports on the DeLorean and Lear Fan cases. Do you agree that IDB failed to apply those lessons?

102. Mr Quinn: I do not agree with that as an absolute proposition. Addressing each report in sequence, paragraph 3.14 clearly echoes the Gibson Report:

“As with all green field ventures, and particularly those which involve new technology and first time manufacture, the project falls into the high risk category."

The IDB tried to structure the offer in a way that mitigated the risks. One of the key lessons from the DeLorean case was the need to minimise the amount of public funding. If you compared and contrasted the report from the DeLorean case and the Valence report, you would find that the balance between private and public funding is radically different. On the Lear Fan case, the memorandum of reply given to the PAC at the time made the point that each case should be considered on its merits. I have a slight worry that, if the second bullet point in the Lear Fan box on page 17 was applied without qualification or discretion, one would never do any research and development projects:

“the risks involved in committing substantial public funds to a project which depends for its viability on a product yet to be developed are unacceptably high."

Strategically, that is not a place where we want Northern Ireland to be. It is quite difficult to produce rules and guidelines that are applicable in every case without some scope for discretion.

103. Mr Lunn: I agree with you to a certain extent; you cannot take the risk out of what you do or what the IDB was trying to do in those days. However, from reading the report, it does not seem that the IDB exercised the necessary level of caution in the project, the viability of which depended on a product that had not been developed. I am not particularly accepting what you said about the recommendation of the three reports, which can be interpreted in different ways. How do you answer the accusation that the IDB did not exercise the necessary level of caution?

104. Mr Quinn: To return to your earlier question, which you are following up, the one area in which I have a question mark in my mind is on whether the DeLorean lessons on appraisal were absorbed and applied as thoroughly as they should have been. There has been considerable debate about that in the team. Paragraph 3.6 is a very powerful paragraph in the Valence report and sets out the appraisal executive’s residual concerns, even though he concluded positively on the project. Paragraph 3.14 contains one of the most important quotes:

“However the reality of the moment is that the company has not confirmed orders for its product; has never produced a battery under commercial conditions and there is no certainty that the mass produced battery will offer the same performance advantages as the proto-type."

It seems that the board casework committee was put on notice that the project was very high risk. Its status and nature were not substantially disguised in the appraisal papers.

105. Mr Lunn: You touched on the appraisal process, but the IDB’s chief executive at the time agreed to meet Valence’s demand for an appraisal within six weeks. It would take one six weeks to get new paper clips in this place.

106. Mr McLaughlin: That is only if you are in the Alliance Party.

107. Mr Lunn: Ah now.

108. Paragraph 3.5 states that the chief executive agreed to that demand as long as:

“no corners were cut in the appraisal process."

One could not complete an appraisal of that size in six weeks without cutting corners. Paragraph 3.6, to which you referred, makes it perfectly obvious that corners were cut. Therefore, why on earth did the IDB allow itself to be pressed into such an unreasonable arrangement?

109. Mr Quinn: Brian will describe the resources that were applied to the appraisal, after which I will make a concluding remark.

110. Mr Dolaghan: In such an appraisal, one executive normally spends 10 days over a four-week period undertaking the appraisal and is supported by appropriate specialists from various fields such as marketing, production, and so on. The IDB recognised the timelines and assigned two senior appraisal executives — one internal and one external — to the project along with the technical, marketing and production specialists. Although the timeline was shrunk to some degree, the resources used to address the appraisal issues were not out of the ordinary compared with those used on a normal appraisal. Additional resources were applied to compensate for the timeline, which, at that time, was a competitive reality in the marketplace.

111. Mr Lunn: It may have been a competitive reality according to Valence. I cannot help but think that the IDB allowed itself to be pushed around. If you think that it conducted a proper appraisal inside six weeks, fair enough. However, one key lesson of the DeLorean report, which was published 10 years previously, is that one must insist on adequate time to carry out a full assessment even if it results in the loss of the project. Do you agree that the IDB ignored that advice?

112. Mr Dolaghan: With hindsight, as the project progressed, some areas definitely caused difficulty. With that knowledge, it is fair to say that, potentially, some areas were not as adequately covered as they could have been.

113. Mr Quinn: The DeLorean lesson was not ignored. Paragraph 1.11 and the paragraphs from 3.17 onwards show that a fair bit of effort was put into the appraisal. As Brian said, additional resources were allocated. However, paragraph 3.6 leaves a lingering question in my mind about whether the process could have been conducted more thoroughly. Most elements were examined, but the question is whether it was done as thoroughly as possible. That concern informs the observation in my opening remarks: in contemporary circumstances, we would not support a project in that condition.

114. Mr Lunn: You said that in your opening remarks, and I am glad that you repeated it, because a similar presentation would not get out of the starting blocks now. Therefore, even given the economic conditions, I am amazed that the situation was so different then.

115. Mr Quinn: I deliberately mentioned the difference between then and now because it is facile to look back and say that we would have acted differently. However, I am glad that I have never dealt with such a project or proposal in the context of an unemployment count of 105,000 people. The total increased to 48,000 last month. Almost two years into the credit crunch, the figure is still less than half of that in February 1993. Therefore, some sympathy or empathy with the decision-makers in 1993 would not be entirely out of place.

116. Mr Lunn: Paragraph 3.10 says that the IDB’s submission to the casework committee did not mention the lack of a proper business plan or the reservations about the appraisal that are set out in paragraph 3.6. Do you agree that the casework committee should have been explicitly told about such fundamental issues?

117. Mr Quinn: Yes; there are several points on that matter, such as the way in which the economic efficiency test was dealt with in the appraisal papers. Its treatment might have been more explicit. Moreover, the reference to the business plan and the appraisal executive’s reservations are set out in paragraph 3.6. It is worth recording that the appraisal executive attended the casework committee to be questioned. You have put your finger on an issue.

118. Mr Lunn: Would you say that by not unambiguously drawing these matters to the committee’s attention, that the IDB misled it and undermined its role?

119. Mr Quinn: I depart with you on the matter of degree, because it seems to me that anyone who had heard the quotation that I gave from paragraph 3.14 a few moments ago could not be under any doubt that this was a very high-risk project. Anyone who was told that the project was going to fail the efficiency test could not be under any doubt on that point. The point is whether the appraisal papers should have been a bit more explicit about the Department of Economic Development’s economists’ views and the appraisal executive’s residual concerns. There is a question mark there, but I do not think that that justifies the proposition that the casework committee was substantially misled.

120. Mr Lunn: “Substantially" misled?

121. Mr Quinn: It is better to have more information than less information. In my opinion, it is always better to get information out to people. Here we are talking about it 16 years later. I think it is better if these things are explicitly exposed.

122. Ms Purvis: Possibly, conflicting evidence was given to the IDB casework committee. Paragraph 3.10 states that: “the company had ‘successfully developed a rechargeable lithium polymer battery’ and ‘was poised to launch a potentially revolutionary product’."

123. That seems a wee bit contradictory. Was the casework committee given contradictory evidence, and did it therefore have to make a judgement on what was presented?

124. Mr Quinn: I will ask Brian to answer that, but it seems to me that, as a minimum, that could be regarded as an over-optimistic presentation to the casework committee.

125. Mr Dolaghan: To take an optimistic tone, it is worthwhile noting that, during the appraisal process, Motorola, which had been testing the product, was very positive about its performance characteristics. Paragraph 3.10 also goes on to state that the main reservation was not necessarily about the product in its prototype form, it was whether that product could be mass-produced in a battery form that gave the same ongoing performance criteria in a mass-produced scenario. That is the step that is different.

126. It was not unreasonable to conclude that the product had very good performance characteristics; however, the question as was flagged quite clearly, was whether that could be moved into mass production. That was the big risk factor. I do not think that the casework committee was materially misled in that sense as to the position of the product and its risks at that time.

127. Mr Lunn: Were they given an over-optimistic analysis of the prospects?

128. Mr Dolaghan: We may be splitting hairs over words, but I think that the prospects were significant. There was a huge market opportunity for the product, as demonstrated by where the market has gone in the interim with mobile phones and portable computers and so on. The market opportunity was huge.

129. Positive signals were coming from fairly major players who believed that the product was significant. Subsequent to the investment, the likes of the Hewlett-Packard contract — which was won ahead of Sony, another major player in that marketplace — and the fact that Eveready wanted to work with Valence because of its technology, were very clear signs that Valence had something that was very special and was of real interest to those companies.

130. A significant opportunity existed in the market place. The issue was that of mass-production at a commercial price. The picture must be seen as a whole; as Stephen has said, those issues need to come into the balance when making a decision on judgement.

131. Mr McLaughlin: Would the enormous potential that people believed that they could see justify setting aside all of the lessons that had been learned from previous mistakes, or the very clear guidelines that IDB was required to follow?

132. Mr Dolaghan: I would argue that they did not set those guidelines aside.

133. Mr McLaughlin: Would the potential justify doing so?

134. Mr Dolaghan: No, it would absolutely not. The idea of a capped level; that certain criteria, performance characteristics and sales had to be attained — to at least two customers — demonstrated that the risk was being managed.

135. Mr McLaughlin: The report deals with what appears to be some very strange decisions, which we will come to. I am not going to anticipate the questions, so it is a very blunt question. It does not justify setting aside those clear guidelines.

136. Mr Wells: Paragraph 3.13 notes that a key objective of an appraisal is to assess the viability of the project, and the requirements are set out in appendix 3 of the report. It has been referred to earlier, but do you consider that IDB’s appraisal fully met those guidelines?

137. Mr A Hamilton: I do not think that they met the guidelines fully. If we follow paragraph 3.13 across to paragraph 3.14 to which Mr Quinn referred, which states:

“There is little doubt that if the product can be adequately mass produced in terms of cost, quality and volume, then viability will be unquestioned",

then there is doubt as to whether viability could be proved at that stage. Paragraph 3.15 states:

“the absence of a proven commercially-viable product should have been explicitly and unambiguously stated in the submission to the Casework Committee".

As we follow that trend through, viability could not be proved because there was no product: it was a prototype; there was no product to prove viability against, and that is why, as Mr Dolaghan said, the caps were put in and the conditional offer was made. Two of the conditions in paragraph 3.14 state:

“1. Volume production capability has been achieved."

and

“3. The Company prepared a detailed operating plan demonstrating viability."

138. Mr Wells: That is a fair comment, but why did it go ahead and achieve IDB support, which involved a large amount of taxpayers’ money?

139. Mr A Hamilton: It was because, at that stage, the project was being treated as an R&D-type project in which those caps were inserted to get the prototype product to the point were it could be mass-produced.

140. Mr Wells: You had been down that road already with Lear Fan, yet you seem to have made the same mistakes. Obviously Mr Hamilton has been with Invest Northern Ireland only six weeks, so I am referring to his predecessors.

141. Mr A Hamilton: I understand my accountability too, so I am trying to work my way through the details.

142. Mr Wells: You have already referred to paragraph 3.14, which states that it was a development-stage company. Given the fact that the project had to satisfy the viability criterion and, again this is a bit circulatory, but why was such a fundamental shortcoming not explicitly drawn to the attention of the casework committee?

143. Mr A Hamilton: I think that paragraph 3.14 states that it was. With regard the Valence project it states:

“the IDB Client Executive made the point that, as Valance was ‘still a development stage company’, it was not possible to reach conclusions on viability."

I am trying to explain what was presented to the casework committee. Three points were made in paragraph 3.14:

“the company has no confirmed orders for its product; has never produced a battery under commercial conditions and there is no certainly that the mass produced battery will offer the same performance advantages as the proto-type."

144. Valence was not trying to hide the fact that it was not viable; it was explaining that it could not prove viability at that stage and, to address that, it put the two conditions into the initial cap that would address the viability question.

145. Mr Wells: One almost gets the impression that the casework committee were desperate, because paragraph 3.15 highlights that Valence’s submission to the casework committed stated:

“Valence had not brought the technology to ‘readiness for market entry’".

Surely that is a gross exaggeration of the actual situation?

146. Mr A Hamilton: That goes back to the earlier point that was made about the difference between the prototype that was developed and something that was ready for mass-production. I agree with you; those words sounded very optimistic in the way that they were put together. However, if that is balanced against the direct comments made in paragraph 3.14, nobody on the casework committee could have been under any illusion or in any doubt that that was either a company that had a product that was ready to go, or that would deliver the same characteristics when mass-produced. Those facts were pointed out clearly.

147. Mr Wells: I will be coming back. I have just been listening.

148. Mr McLaughlin: I want to pick up on the point that Mr Lunn and Mr Wells have been examining. Paragraph 3.19 states:

“the Head of Economics Branch wrote to IDB expressing his view that the figures provided for the RCA were ‘clearly not a meaningful basis on which to appraise this project’. More realistic assumptions would cause it to fail the test."

Was it an expedient process, or is it a requirement that one satisfies the criterion laid down?

149. Mr Quinn: One is certainly required to carry out the efficiency test. However, I think that it would have been better if the head of the economic branch’s remarks had been brought specifically and explicitly to the attention of the casework committee. Nevertheless, let us not lose sight of the fact that the casework committee was told that the project would fail the efficiency test; it was not misled on that fundamental point.

150. Mr McLaughlin: Was the committee manipulated, in that case? We have asked you twice about how the casework committee was equipped to carry out its vital function. Paragraph 3.20 states:

“The Casework Committee was told that the RCA test was ‘very positive’".

Who told it that?

151. Mr Quinn: It is important to complete that quotation:

“although likely to fail when recalculated to reflect the steps being taken to minimise UK tax."

The fundamental point is that the project did not pass the RCA test, and the committee knew that.

152. Mr McLaughlin: Nevertheless, according to the report — I can consider only the evidence that we have — the casework committee was not told about the chief economist’s reservations. Is that not a case of engineering a particular outcome?

153. Mr Quinn: One could say that with greater force if the committee had not been told that the project would fail the RCA test. However, it was told that that would happen.

154. Mr Dolaghan: I think that it would have been better if that point had been restated when the casework committee was considering the part of the submission that addressed economic efficiency. However, the speed of market uptake and the fact that the product was a prototype were the chief economist’s key reservations about why that was a questionable way to judge the project. Although both those issues were highlighted in the casework papers, they were not attributed to the Department’s chief economist. Therefore, although the casework committee was aware of the departmental chief economist’s concerns, they were not attributed directly to him. I think that they should have been, and it would have better had they been. Nevertheless, in my opinion, the casework committee was aware of the departmental economist’s core concerns at that time.

155. Mr McLaughlin: In hindsight, considering that we now know the outcome, was the casework committee being manipulated? Given that the project would have failed the RCA test if different criteria had been applied, saying that the resource cost analysis was “very positive" seems to be a complete contradiction. Moreover, you do not attribute the chief economist’s other reservations, which he had put formally to the IDB in writing. Therefore, I see a situation in which the casework committee had to choose one of two mutually exclusive options, in a general ambience in which it was under intense pressure, due to time and competition considerations, to make the project happen.

156. Mr Quinn: Subject to being corrected by Brian Dolaghan, his second point was the trump card. The fact that the casework committee was told that the project would fail the RCA test trumped the “very positive" point.

157. Mr McLaughlin: We are all considering this matter retrospectively, and I appreciate that the people with whom we are dealing now are not the people who made the decisions at the time. However, based on what you said, Stephen, the inescapable conclusion appears to be that the casework committee fell down on its task.

158. Mr Quinn: It exercised its judgement. The committee was told that the project would fail the RCA test when the tax treatment was changed, which, to be candid, should not have been the only factor to shift the result of the efficiency test. For instance, the assumptions underlying the “very positive" assessment were too optimistic. I think that the information that the casework committee received was not as clear and as explicit as it should have been. I am disinclined to say that the committee fell down on the job. It is there to exercise its discretion, taking account of all factors, including whether the project might pass the efficiency test.

159. Mr Dolaghan: It is also worth noting that the RCA test is only one element in judging economic efficiency. Another key element is the number and quality of jobs that are associated with a project. Consideration must be given to whether a project will move Northern Ireland’s position with universities and in the global marketplace up the research and development curve. Theoretically, such positive points would have emanated from the project.

160. In the interim period, Invest NI has developed that area significantly, and a much more fulsome economic efficiency assessment that reflects more of those issues is now done in casework. However, that is not to say that those issues were not in the heads of the people who were on the casework committee when they made the decision.

161. Mr McLaughlin: There seemed to be a specific requirement that identified Mallusk as a unique location for the factory. However, all the evidence so far suggests that the project was embryonic — the company had no product at all, or even a workable prototype. How could the company be so specific about its production requirements when it had no idea of what it was going to produce?

162. Mr Dolaghan: It is an exaggeration to say that the company had no idea.

163. Mr McLaughlin: It did not have any idea.

164. Mr Dolaghan: It had 110 people employed in the United States at the time, and it had produced prototype products that were out for testing with companies such as Motorola. There was a time driver that said that under its agreement with, for example, Motorola, it had to produce a product of a particular standard by a certain date. Therefore, there was a drive for it to have a factory that was able to produce the product by a certain date, just as the prototype had been produced by a certain date. The company had to have various parts of the jigsaw put together, so it had to work on equipment.

165. Mr McLaughlin: My understanding is that the project was at such an underdeveloped stage that the battery cases with which the company was experimenting were exploding. Is that why it needed a factory with a high roof?

166. Mr Dolaghan: Some of the alterations that were made to the factory were more to do with the explosive nature of lithium, which was the product with which the company was dealing, than the battery case. However, there is no doubt that those working in the factory had to be careful when handling the product.

167. Ms Purvis: Page 16 of the report summarises the Gibson Report, which was published in 1983. The report states:

“extreme caution should be taken in encouraging the establishment or expansion of small companies in high technology industries requiring continual investment in research and development."

168. The NIAO report quotes the Lear Fan Public Accounts Committee report, which was published in 1986. That stated:

“the risks involved in committing substantial public funds to a project which depends for its viability on a product yet to be developed are unacceptably high".

169. I bear in mind what you said about flexibility and taking risks. I think that you would agree, therefore, that a comprehensive appraisal, a business plan and a comprehensive technical report would have needed to have gone to the casework committee.

170. Paragraph 3.30 refers to the IDB’s technical report. That was based largely on a desk review of the work of a US academic, who undertook public relations work for the company. From what the report says, it appears that he accepted the Valence, and other, figures at face value. How could a technical review be considered to be comprehensive and objective when first, it was based on a desk review, and secondly, the data source was on the Valence payroll?

171. Mr Dolaghan: It might be a little strong to say that he was on the Valence payroll.

172. Ms Purvis: He was undertaking work for Valence.

173. Mr Dolaghan: He was undertaking work of a PR nature for the securities company that handled Valence’s share issues. However, the issue of professional standing in the academic world must also be borne in mind.

174. The technical report dealt with the underlying science and how reasonable it was for the battery production that was being proposed. It reviewed the reasonableness of the claims that were being made and whether the combination of sciences could produce a battery that was sustainable and competitively ahead of the rest of the market. The company had yet to reach the point of mass production; therefore, it could not examine the technical element of the product. However, it could examine the underlying science.

175. It is also worth noting that, in the submission to the casework, the IDB conceded that the report itself could be biased for some of the reasons that you referred to already. That is explained at the end of paragraph 3.31. Therefore, there was an attempt to reach a balanced judgement.

176. The difficulty with any new technology is that those who actually know about it are those who are bringing it forward. Therefore, it is very difficult for others to second-guess what is a truly a different technology. That is why there was an element of having to rely on the information that was available from the company’s testing of the product, rather than on the information that was available elsewhere on the market. Otherwise, by its very nature, it would not have been a new technology.

177. Ms Purvis: The Northern Ireland academic who took the view that the director was well placed to assess a number of different technologies also noted that the technology that is involved in the manufacture of batteries was outside the director’s field. I take what you said about the IDB conceding that the report could be biased, but why did it not commission another report?

178. Mr Dolaghan: In preparing the manufacturing scale-up report, which dealt with the manufacturing aspect of the battery, consultants were employed who were specialists in the field of battery manufacture and who had done quite a lot of work in that area.

179. Ms Purvis: I accept that manufacturing is one element of battery technology. However, the concern is the technology of the battery and a director who was able to assess a number of different technologies. The IDB conceded that the report could have been biased, and a comprehensive technical report is part of the appraisal that we just described. Why did the IDB not look beyond that? If the technical report was based on a desk review, it is obvious that it should have gone beyond information that was published on the Internet and elsewhere.

180. Mr Dolaghan: With respect, the point that is made in paragraph 3.32 is that the academic questioned the battery manufacturing technology, not the technology of the battery itself, which was, in fact, what he was examining. The technology for the battery manufacturer, which the other consultants were examining, was the technology that could be brought to the manufacturing processing as opposed to the battery itself. Therefore, it was the role of the other consultants who were involved to assess whether the manufacturing of the battery was reasonable from a technological point of view. I hope that that is clear.

181. Ms Purvis: Yes, it is. However, if one wants comprehensive reports in order that a proper appraisal can be made, and the IDB conceded that a report could be biased, why did it not commission another report? You have not answered that question.

182. Mr Dolaghan: The difficulty with commissioning another report was that given the nature of its having been a new technology, there was an extremely limited number of people who knew it and who had tested it. That is why Motorola’s interaction was so important during the appraisal; it had taken test samples and was conducting tests on those samples from its point of view. Therefore, positive feedback from Motorola fed into the overall assessment and helped with the conclusion that, technologically, there was something in that space that looked as though it made sense. Furthermore, as I said already, the subsequent interactions from Eveready and others suggested that the technology had legs.

183. Ms Purvis: You made that point; I find it incredible that the IDB conceded that a report could be biased on the basis that the principal report came from someone who was deemed to have a conflict of interest. I will leave it there.

184. Mr G Robinson: I appreciate that these events happened before the chief executive of Invest NI and the other witnesses were in post. However, paragraph 4.4 states that the IDB’s first payment of £1 million was made before some of the preconditions of its offer had been met. Why did the IDB breach its own controls?

185. Mr A Hamilton: The answer to that is straightforward — it should not have done. That has been referred to already. Brian can discuss the detail, but appendix 3 shows that two conditions were only partially met. I can only assume that those were that first, the company had £12 million of share or loan capital, and, from the records, I understand that 50% of that was in place, and secondly, the company had to be registered in Northern Ireland. The first part of that process had been completed, and the Dutch holding company was registered. The process to register the Northern Ireland company had been started but not completed. However, that in no way mitigates the situation. Mr Robinson is absolutely right; it was wrong to release the money.

186. Mr G Robinson: That happened even before the business plan had been created.

187. Mr A Hamilton: That is correct.

188. Mr G Robinson: I agree entirely, especially given that public money was used.

189. Mr Chittock: I will reassure the Committee about what happens at the moment. Any preconditions in a letter of offer must be satisfactory enough to be signed off by our office team, which is part of a finance function and has an independent role in the organisation. The team must be satisfied that a precondition has been met.

190. Mr G Robinson: Do you agree that entirely the wrong message was sent to Valence?

191. Mr A Hamilton: The records show that it was not a straightforward case of ignoring the conditions. At the time, a discussion took place with Valence to indicate that those two conditions were not met or had been only partially met. Nonetheless, the money was released. To a certain extent, one could conclude that the IDB did not hold its line in those conditions and could have sent the wrong message.

192. Mr G Robinson: The conclusion at paragraph 4.5 states: “IDB’s decision to make payments to Valence, before a proper Business Plan was in place and prior to all of the offer pre-conditions having been met, contravened its own procedures and created an unnecessary additional risk to public funds."

Do you agree that the process was haphazard?

193. Mr A Hamilton: At this stage, I can only assume that of the five conditions, three were met and two were partially met. Moreover, I can only assume that the IDB must have had a conversation with the company and was assured that the two other conditions would be met fully in a short time period, after which the money could be released. However, it is not justifiable to release the money before the preconditions were met fully.

194. Mr G Robinson: That is right.

195. Mr McLaughlin: Turning to the project management, paragraph 4.16 outlines that the casework committee was told that a project monitoring group would be set up and would meet monthly. That group was subsequently set up, but it only met once, two months later. What happened?

196. Mr A Hamilton: Brian will deal with the details of that. The records show that you are absolutely right; the monitoring group met formally only once. However, quite a few informal meetings took place among the members of the group as the project proceeded.

197. Mr Dolaghan: I cannot add much detail to that. The records show that one formal meeting took place that involved representatives from the Training and Employment Agency, the building side of the former IDB, and the client executive.

198. Mr McLaughlin: Who chaired the project monitoring group?

199. Mr Dolaghan: The client executive who was in office at the time.

200. Mr McLaughlin: Is that the person to whom the chief economist wrote to express his worries about the RCA?

201. Mr Dolaghan: No, he wrote to the appraisal executive about that. However, the appraisal executive was involved in the committee. Although only one formal meeting took place, there were numerous written and verbal interactions between the members. The lack of further formal meetings is totally unacceptable.

202. Mr McLaughlin: Did formal terms of reference require the group to meet monthly?

203. Mr Dolaghan: Only in so far as they had undertaken to the committee to do so. There were no formal terms of reference other than to monitor the project’s progress.

204. Mr McLaughlin: I know that you were not involved, but I can ask questions only of the panel that is here. At that stage, everyone recognised, through the various reports and reservations, that the project was high risk. The project monitoring group was one mechanism that was put in place to protect the public interest. Although that commitment was explicit, the group met only once.

205. Mr Quinn: I endorse what Brian said. That casework committee stipulation should have been met — full stop. The fact that there were probably fairly extensive, but less formal, monitoring activities does not mitigate that. The conditions should have been met fully.

206. Mr McLaughlin: Who decided that the group would not meet again after November 1993? It met once formally, and it had a project team leader. Who decided that the group could continue its work informally? Where was that decision made?

207. Mr Dolaghan: In fairness, I do not believe that such a definitive was decision made.

208. Mr McLaughlin: However, the group did not meet formally.

209. Mr Dolaghan: It did not meet.

210. Mr McLaughlin: Who would it have reported to? Did that individual notice that the group was not meeting?

211. Mr Dolaghan: As I said, the client executive would have been responsible for pulling that group together and for making sure that it operated.

212. Mr McLaughlin: Yes, but he was on the group, so he was not reporting to himself. Who up the chain of command would the group have reported to had it been functioning as it was expected to and was reporting on the project’s well-being or on emerging problems? I presume that we agree that it would have had a very valuable role in managing a high-risk project.

213. Mr Quinn: Absolutely.

214. Mr McLaughlin: People were being hung out on the project and were taking a substantial risk. We have had authoritative and graphic explanations of the potentials that people could see. Those potentials did not work out in that case, but, you have painted a scenario in which people had optimism bias — I think that that is the term. The expression that people were over-enthusiastic has also been used. Who were those people reporting to, and did that layer of governance let us down as well? I presume that someone should have noticed.

215. Mr Dolaghan: In the first instance, they would have reported to my equivalent. The client executive would have reported to the then director of international investment. That may have meant that he would have seen formal minutes of a meeting as opposed to a verbal update on the stage that the project had reached, which could well have been the case; however, I cannot imagine that he was not kept briefed fully. In fact, I know from notes that both my predecessor and the person whom he was subsequent to were kept fully briefed, although not —

216. Mr McLaughlin: Who gave the commitment in the first place? We want that point to be fairly reflected in our report. How definitive was the commitment that there would be a project monitoring group?

217. Mr Dolaghan: It was a recommendation of what was called a casework approval committee. As part of the control procedures in the IDB at that time, before a case went to a full casework committee, it went to an internal casework approval committee that performed a quality control function. Having recognised from previous issues and from lessons learned, that committee suggested that such a group would be useful in the project.

218. Mr McLaughlin: I am not misreading the scenario as you have presented it, which is a historic scenario, in thinking that it was a high-risk situation. The project monitoring group was intended to provide additional protection and reassurance. That it was not an optional extra is the point that I am coming to. Is that not the case?

219. Mr Dolaghan: Yes, that is correct.

220. Mr McLaughlin: Are you telling the Committee that it was the chief executive of international investment who had ultimate responsibility for the fact that the group simply withered on the vine?

221. Mr Dolaghan: I do not think that I could be as definitive as that.

222. Mr McLaughlin: Could I be as definitive as that? It looks that way.

223. Mr Dolaghan: That would not be an unreasonable assumption to make.

224. Mr McLaughlin: OK; thank you.

225. Mr Chittock: If I could give the Committee some reassurance on that point, monitoring is very important in what Invest NI does. It is a good way of checking progress that has been made on projects and company developments. Therefore, it is an important part of what we do. Generally speaking, the client executive is the lead who has responsibility for monitoring. However, every now and again, we invite internal audit to review monitoring conditions. The previous time that we did that was in October 2007, and that was a follow-up to an exercise two years prior to that. The internal auditors looked at 158 monitoring conditions and tested all of them to make sure that there was a satisfactory performance level on monitoring. Their report, which is a matter of record, says that monitoring was carried out and completed satisfactorily. We are reasonably confident that monitoring is undertaken properly and professionally. In the past, if we have come across instances in which major monitoring has not been completed, we have disciplined staff, and we would continue to do that should there be serious shortcomings in monitoring in future. Therefore, monitoring is an important element of our current work.

226. Mr McLaughlin: That is reassuring; thank you for that information.

227. Mr Shannon: I am old enough to remember Westerns, one of which is ‘The Man Who Shot Liberty Valance’. The film and the Valence case are similar in name and result; however, neither is here today.

228. Paragraph 5.3 of the report states that in 1994, only one year after the IDB’s offer, Valence wrote off a plant that was valued at £7·8 million, including machinery worth £2·35 million, for which the IDB provided grant aid. In all honesty, should that not have prompted the IDB to call a halt to proceedings and to undertake a major appraisal?

229. Mr Quinn: That was a significant change in the nature of the project, although perhaps not quite as significant as that which occurred in July 1996. However, the IDB should have pressed for the detailed operating plan at that stage. We must recognise, however, that the development stage of the project would have involved that operating plan relying on assumptions and scenario planning. It would not have been as definitive or reliable in its forecasting as an operating plan in a more stable manufacturing environment.

230. Mr Shannon: What perturbs me is that, even after the IDB was made aware that Valence had written off a plant, it still paid out another grant of £1·64 million. That was after it had been announced that the commencement of manufacturing had been deferred. The IDB got it wrong the first time, and to compound that, it gave Valence £1·64 million to help it along. Is there not something terribly wrong there?

231. Mr Quinn: I think that there was a decision to be made at that stage. In hindsight, one could take the view that that was one of the key decision points at which the IDB could and should have pulled the plug. I think that we are slightly reluctant to reach that stark conclusion in that context because, although people may be unhappy about that particular transaction, it took place in the same year — 1994 — that Eveready signed up to a deal in May and Delco entered into a new arrangement in September. Therefore, positive indicators were still available to the IDB, and it appears to have taken a balanced view that that was not the appropriate point at which to pull the plug.

232. Mr Shannon: That is disputable, which is why I raised the point. I really cannot get my head around it. I suspect that many Committee members have the same problem, Chairperson, including you. They are asking themselves why, when things were going wrong, delivery was late and timescales were not being met, did the IDB give Valence more money.

233. Mr Quinn: As a minimum, in my view, the IDB should have pressed for the detailed operating plan at that stage. One could take the view, and it is true, that at a number of key decision points throughout the history of the project the plug could have been pulled. That would have been the nuclear option, but, as I say, we are disinclined to reach that stark conclusion. It is a conclusion, however, that applies to July 1996, when there was a more fundamental change to the nature of the project.

234. Mr Shannon: Would it not have been more appropriate to have tied in the payments to the results?

235. Mr Quinn: There were certain milestones to reach, such as employment targets. A relatively low proportion of the money went on employment grants; it was, as you know, a heavily capital-intensive project. Perhaps Brian will say something about the relationship between payments and milestones.

236. Mr Dolaghan: A large proportion of the moneys were not released until after the IDB had visited the senior vice-president of product development at Eveready and had a significant discussion with him about his judgement as to whether Valence was likely to reach the position of having marketable product within a reasonable time. On the basis of those conversations, the IDB withheld payments to the company, but it took a degree of comfort from being told that the project was likely to move into a reasonable period of production in the not terribly distant future.

237. With the benefit of hindsight, that was over-optimistic. The IDB officials carried that out before payments were released.

238. The Chairperson: I remind people to switch off their mobile phones.

239. Mr Wells: I have some sympathy for the IDB and its successor, Invest Northern Ireland. We are always telling you to take risks on new technologies, and then when things go wrong, we bring you in and regale you with examples of how much risk you have taken with public money.

240. The difference with that project is that alarm bells were ringing in the corridor, and yet the IDB continued to walk down it. Alarm bell number 16 is alluded to in paragraph 5.8 of the report. By 1996, Valence had entered into joint ventures with companies in Korea and the USA to manufacture batteries using Valence technology. Surely our taxpayers’ money was being used at that stage to create jobs overseas before production had even started here. Was that an appropriate use of the IDB’s funding? Did the IDB know about that at the time? Did the IDB try to take steps to stop it from happening?

241. Mr A Hamilton: From the records, it is clear that the IDB knew about that. Strangely, it took some encouragement from the fact that efforts in Korea were benefiting the Northern Ireland facility, because the Korean company would source laminate from Northern Ireland. The IDB also took comfort from the fact that Valence wanted to get into the important military market. Paragraph 5.8 refers to that fact. Brian has more detail on that.

242. Mr Dolaghan: I do not have an awful lot more detail than that. For the reasons that Alistair has just outlined, those moves were seen as largely positive. I do not know how familiar Committee members are with the US military market, but the huge qualification period means that it is extremely difficult to be able to sell in it. Therefore, Valence’s joint venture with Alliant was seen as a positive move, because it allowed Valence to enter that market

243. Mr Wells: However, Northern Ireland taxpayers’ money was being used to pay for production and R&D.

244. Mr Dolaghan: As Alistair rightly said, full battery production would not take place in those other locations. A number of processes involved in battery production, including laminating, were to be carried out in Northern Ireland, thereby protecting and using the technology. The batteries were then to be finished and manufactured in the various markets concerned. However, that was not seen as a negative development; rather, it was seen as quite a positive one.

245. Mr G Robinson: My first question of three questions revolves around paragraph 5.12. It explains how, by mid-1996, Valence had completely changed the technology, written off almost £19 million of equipment, outsourced the first three stages of production and cancelled the planned R&D facility at Mallusk. Why did the IDB not claim breach of contract and claw back its funding, or at least attempt to renegotiate the terms of the offer? That seems very strange.

246. Mr Quinn: In my opening remarks, I identified that point as the fulcrum on which the history of the project turned. That was a fundamental change in the nature of the product. Looking back, the IDB should have insisted on a revised business plan and a complete reappraisal. If those were not satisfactory, the IDB should have initiated a renegotiation of the letter of offer and/or clawback, whichever was appropriate in the circumstances. We share your view of the seriousness of that development.

247. Mr G Robinson: It is important that you recognise that fact, given that £19 million of taxpayers’ money was involved.

248. Mr Quinn: Figure 4 on page 62 of the report shows that the maximum amount that was paid was £10·3 million and that the amount recovered was around £2·5 million. At that stage, the company was still the principal funder of the project; however, the IDB was, undoubtedly, investing money. We share your view of the seriousness of that.

249. Mr G Robinson: Paragraphs 4.6 and 4.7 reveal a worrying lack of transparency on the part of the IDB, whereby a prominent local building company was used an intermediary to purchase the factory for the IDB. How was that building company selected for the task, and who selected it?

250. Mr Quinn: To echo a point that I made in my opening remarks, I do not think that the transaction was handled properly. The lack of transparency is not acceptable, and it would not be tolerated now.

251. Mr Dolaghan: The company was chosen because it had delivered for the IDB before. Given the time constraints, it was deemed that it could do a good job again. The records do not show anything other than that it was felt that the company was capable of doing a good job.

252. Mr G Robinson: It almost seems as though the company’s name was pulled out of a hat.

253. Mr Chittock: I will give the Committee some further information on how we would handle such a transaction today. We always take the advice of Land and Property Services (LPS), which is successor to the Valuation and Lands Agency (VLA), and that independent body always determines the price. We have dedicated Land and Property Services personnel in our building. It would be a very serious matter for our personnel if the advice of the Land and Property Services were ignored or contravened, but that does not happen. Land and Property Services sets the price. If the seller demands a higher price, we either walk away or seek approval from the Department of Finance and Personnel (DFP).

254. Mr Quinn: One of my worries about the transaction is that a large contract was awarded by single-tender action, as outlined in paragraph 4·9. Single-tender action must have been justified by reference to the urgency of the case, but it is a large value contact to be handled by single-tender action. There should be greater transparency and more rigorous record-keeping than was the case in that episode. One possible source of reassurance is that the figure of £2·695 million for the extension and refurbishment was validated at the time by professional staff in the Department of Environment (DOE). Therefore, it can be inferred from that that the taxpayer received fair value.

255. Mr G Robinson: The main factory was extended and adapted under a single-tender contact by the same building company that was used to make the purchase. Why was that company given favourable treatment? Why was the IDB chief executive’s approval of single-tender action not obtained? Those are two very important questions.

256. Mr Dolaghan: I hark back to Stephen’s comment that there was comfort that “super-profit" — for want of a better term — was not made in the transaction. The transaction was subject to review by DOE quantity surveyors at every stage of payment. It was chosen because of expediency and the competitive nature of the market at that time. We are all in agreement that it would have been preferable for signed approval from the chief executive to have been available. Various parties, not just one individual, recognised the need for that approval to be obtained. The Audit Office report notes the reference to verbal permission, but we do not accept that as sufficient. There is no question that approval at the time was needed, and it is unfortunate and unacceptable that there is no record of that.

257. Mr G Robinson: Paragraph 4·7 highlights the failure of the IDB to obtain Valuation and Lands Agency advice about the value of the main factory before agreeing a price. That breach of well-established procedures cost an additional £175,000. How did that happen?

258. Mr A Hamilton: Mel Chittock has already touched on how Land and Property Services works with us now. No excuse can be made for the breach of procedures. The Valuation and Lands Agency should have been brought in earlier, and a valuation should have been performed. However, I am not sure that that would have made much difference to the outcome. The factory was on the market for £1·2 million, and it was the only facility that met the company’s requirements.

259. The Valuation and Lands Agency report produced a figure that was £175,000 lower than the market price at that time. However, if the process were to have been followed, I suspect that the IDB, as Mel Chittock explained, would have gone down the route of seeking approval from DFP, because the company was not prepared to take a price lower than £1·2 million.

260. Mr McLaughlin: Did the guidelines that dealt with the acquisition or selling-on of assets such as factories include an absolute requirement to involve what was then the VLA?

261. Mr A Hamilton: Yes.

262. Mr McLaughlin: Was any discretion allowed with that?

263. Mr A Hamilton: VLA had to be involved. The only room for discretion would have been if a valuation were reached at the end of the process —

264. Mr McLaughlin: You would argue that with DFP. The VLA was bypassed on that occasion.

265. Mr A Hamilton: It was brought into the process too late, and its input was null.

266. Mr Dolaghan: Having said that, Mr McLaughlin, DFP’s approval was sought and obtained for the purchase transaction. Although VLA’s valuation was not attained in advance, the overall transaction was ultimately put to DFP for approval.

267. Mr McLaughlin: The theme of standard operating procedures being set aside runs throughout the report. Whether people covered themselves retrospectively by getting approval from the Department or by bringing in the VLA when it was too late to influence the decisions, the issue remains that senior management failed to follow its own procedures.

268. Mr Quinn: I agree with that, and you echo a point that I made in my opening remarks. We accept that a number of departures from best practice took place, which is unacceptable.

269. Mr McLaughlin: The factory at Mallusk made a journey from IDB ownership to ownership by a prominent local building company to ownership by another company and transferred, through the auspices of a local developer, back to the IDB.

270. The factories were located on a 14-acre site. Were only the factories brought into IDB ownership on their way to their transfer to Valence? What happened to the 14 acres of land?

271. Mr Dolaghan: Are you referring to the first property transaction? There were two factories on the site. Ultimately, Valence occupied both of those. Only one of the factories was ever owned by the IDB. The other factory was always owned by either the building company or by a private developer, on to whom it was sold.

272. Mr McLaughlin: At the time of the first transaction out of IDB ownership to the local building company, did the IDB own the factory plus 14 acres, or did it own a factory that occupied 14 acres? I do not think that it was the latter.

273. Mr Dolaghan: I cannot give an honest answer to that. I understand that the IDB owned the full site on a shorter lease, but I am not sure about that.

274. Mr McLaughlin: Can you come back to us on that? That information may be significant.

275. Mr Dolaghan: Just to be clear, are you referring to the original sale?

276. Mr Quinn: Are you referring to the 1993 transaction, Mr McLaughlin?

277. Mr McLaughlin: Yes. At the time, the IDB had a strategy of divesting itself of the advanced factories and sites over which it had control. The site at Mallusk was one such site that was part of the IDB’s strategic and planned project.

278. Mr Dolaghan: The IDB did not own the factory at that stage.

279. Mr A Hamilton: Mr McLaughlin’s question is, in fact, about the 1985 transaction, when the site was sold.

280. Mr McLaughlin: When Stephen asked whether I was referring to the 1993 transaction, I said yes. Sorry, I should have been listening more carefully. I am talking about the point at which the IDB was the owner of the factory and the 14 acres. I have lost track of the various transactions, and I cannot find the information on who now owns the 14 acres. Can someone come back to me on that? It is relevant, because a global sum transferred the ownership of the factory and the 14 acres out of IDB ownership, and a sum was then involved in selling it on and bringing it back into IDB ownership.

281. The IDB ended up with a factory but not its 14 acres, and then passed the factory on to Valence. From a value-for-money point of view, there is also a financial equation to consider. Have I made it clear what information I am looking for?

282. Who was the local building company? I presume that that is not a state secret.

283. Mr Quinn: It is not a state secret. The Audit Office did not choose to name the company. We do not routinely name companies. There are two options: we can give you a note to inform you of the name; or we can tell you now. We can do whichever you prefer.

284. Mr McLaughlin: I will ask a couple of supplementary questions that may help you to decide what you want to do. I would prefer that you tell us who it was.

285. Was that company awarded any other single-tender contracts by IDB or Invest NI before the Valence contract and has it been awarded any since?

286. Mr Chittock: I am not aware that Invest NI has awarded any single-tender contracts to that company.

287. Mr McLaughlin: Can anyone give me the IDB’s historical record in that regard?

288. Mr A Hamilton: I cannot, I am afraid. I will have to take that question away.

289. Mr McLaughlin: Can you tell me whether there was anyone in the middle — in a senior management position in the IDB or in the Department — who had any personal connection with the company?

290. Mr Dolaghan: I cannot be definitive on that, but I am not aware of anyone.

291. Mr McLaughlin: Can you tell me whether anyone in the IDB or the Department subsequently worked for that company, either directly or in some form of consultancy capacity?

292. Mr Dolaghan: Again, the answer is that we do not know definitively, but we will take the question away.

293. Mr McLaughlin: I am content to defer my request for the name of the company, providing that you write to the Committee with answers to those three questions.

294. Mr Dolaghan: Of course.

295. Mr McLaughlin: Paragraph 4.11 of the Audit Office’s report states that DFP required of the IDB: “should the project fail prematurely, the factory will revert to IDB".

The project did fail, but that requirement was not acted on. Why was Valence allowed to occupy the factory without completing the licence agreement and, subsequently, the purchase contract, as the report indicates in paragraph 4.13?

296. Mr Quinn: Would you point me to the paragraphs in the report that outline the DFP condition?

297. Mr McLaughlin: It can be found at paragraphs 4.11 and 4.13 of the report.

298. Mr Quinn: The DFP condition should have been applied. As far as we are aware, it was not.

299. Mr McLaughlin: I am sorry —

300. Mr Quinn: The DFP condition was not complied with, and it should have been.

301. Mr McLaughlin: I am trying to understand why.

302. Mr Quinn: I will ask Brian to answer that, because he has made the most detailed examination of the historical records.

303. Mr Dolaghan: There is nothing, other than an administrative oversight, that can explain why that condition was not acted on.

304. Mr McLaughlin: It is very hard, no matter how sympathetic one wishes to be, to put that in the context of what is a catalogue of explicit setting-aside of operational guidelines and requirements. Those are the ABCs of what is required to happen between a client and a development agency such as Invest NI.

305. Mr Quinn: The issue is clear: it should have been done.

306. Mr McLaughlin: Yes, but it should not have left anyone’s desk. Why did the various levels of management oversight in the IDB and the Department not call a halt to the project until those basic conditions were satisfied? Was anyone ever sacked for not doing the basics?

307. Mr Chittock: I cannot disagree with your comments about that particular decision. I will reassure you about what happens today. We have very few cases today that require the support of the Financial Services Authority or DFP approval. Any ministerial or DFP approvals that are not given are communicated to our strategic management branch. Although the client executive is responsible for ensuring that conditions are included in the letters of offer, the letter of offer is drafted by agreements branch, which is independent from client executives. The agreements branch also ensures that all preconditions are met and that general conditions are included in the letters of offer. Those preconditions are checked for completeness by the agreements branch.

308. Again, I refer back to the monitoring arrangements that were in place, and the fact that internal audit services staff from the Department undertook a monitoring review in October 2007. I hope that such an oversight cannot happen again. I cannot promise that it will not, but I hope that it would not happen in this day and age.

309. Mr McLaughlin: You are well aware that the Hansard reporter is listening to every word that you say. That is a very important commitment that you have made, but a welcome one, and I take it in the most positive way. I also recognise the extent to which we have developed our accountability procedures. Stephen Quinn made a vital statement at the beginning of the evidence session, when he said that the project would not pass the test today and that it would not have been offered funding. I suspect that, with the fraud awareness that has developed, we might be asking questions now that were not asked then. There is so much in some of the actions of the time that tells me that there seemed to be a fairly cosy relationship. However, those are issues of which we will have to be conscious when we come to make judgements about the role of the individual officers in the IDB. I also think that that extends into the Department, as it has overall responsibility.

310. I will move now to paragraph 6.7, which deals with the local building company that the IDB used in 1993 to purchase the factory for Valence. The same company later sold an adjacent second factory, and I think that Brian referred to that. The building company made a profit of almost £1 million in that transaction. Was the VLA part of the process in 1999, or was that a second occasion, in which it played no part?

311. Mr Dolaghan: That was a private sector transaction between two organisations. The VLA was not involved.

312. Mr McLaughlin: Even though the transaction was contrived? A mechanism was used for a project that Department’s development agency was sponsoring. It was a private sector transaction to that extent, but was that meant to be a flag of convenience? Ultimately, the entire project was to be financed through the application of public funds.

313. Mr Dolaghan: In fairness, it would not have been possible to know in 1993 that the factory would need to be expanded six years hence. The first factory was acquired by the third party in 1993 for £275,000. It paid that sum and held it as a private asset. The arrangement at the time was that the third party could have asked IDB to repurchase within 12 months, but it chose not to do so, and kept the factory at its own risk. Subsequently, a transaction took place six years later, as is outlined in the report. It was a purely private sector transaction between two parties, in which the IDB played no part.

314. Mr McLaughlin: Did the IDB not worry that the public would misunderstand the nature of the transaction or would view it as an incompetency on the part of the IDB? The IDB sold the factory, and then bought it back, and it introduced a third party to disguise that fact. Is that not the reality?

315. Mr Dolaghan: We have already stated, as does the report at paragraph 1.18, that the lack of transparency in that transaction is unacceptable.

316. Mr McLaughlin: Is that the logic that informed what was clearly a more expensive route to go down, but one that would have provided some cover? I do not think it is providing very much cover now, but the IDB’s judgement at the time seemed to be that that it was preferable to go down that route.

317. Mr Dolaghan: I am not sure that it was a more expensive route from the point of view of cost to the public purse. Essentially, in the first transaction, the public purse paid out the £925,000 for the factory. The remainder of that site was not acquired out of the public purse at that time. With the benefit of hindsight six years later, it might have been better if it had been, but the IDB would have had to hold that asset, when, at that time, as is noted in the report, it was trying to dispose of some of its land holdings. It was not in the process of buying pieces of land that it did not consider to have economic value. That site was bought at the risk of the private sector.

318. Mr McLaughlin: Do you see the relevance of my question about what happened to the 14 acres?

319. Mr Dolaghan: The point is noted.

320. Mr McLaughlin: I have a question about the mechanisms used. The property developer refurbished the factory at a cost of £450,000. Was the developer selected through open competition?

321. Mr Dolaghan: The IDB had nothing to do with that transaction. It was conducted among the developer, the company that bought the factory in 1993 and the private sector. There was no IDB involvement.

322. Mr McLaughlin: The factory had to be brought up to specification in order to meet the requirements of the lease.

323. Mr Dolaghan: That was between Valence and the private developer. The IDB was not involved in that at that time.

324. Mr McLaughlin: You see no difficulty with that approach?

325. Mr Dolaghan: I see it as an arm’s-length transaction between two parties not associated with the IDB.

326. Mr McLaughlin: “Arm’s length"? They would be better described as “hands off" transactions. Thank you.

327. Ms Purvis: I refer you to part six of the report and the decision to raise the cap on the grant assistance. Paragraph 6.4 states that, in its bid to have the funding cap raised to £5 million in April 1998, Valence forecast sales of $384 million a year by 2000-01 and an employment level of 776. The IDB concluded that those projections were reasonable, despite the fact that Valence had neither a marketing or sales infrastructure nor a commercial product.

328. I bear in mind what you said at the start about the negatives and the positives, and the faith of private companies, but this is on the back of Valence’s inability to meet the specification for Motorola; its pulling out of a contract with Hewlett-Packard; its writing off of more than £18 million worth of plant; and its failure to meet previous employment targets. In the light of the company’s track record and, given what you said earlier, that the caps were imposed as protections, how could the IDB have given any credence to the company’s claims? If the cap was there as a protection, based on the letter of offer, where did it all go wrong at that point?

329. Mr Quinn: I refer you to the proposition included in my opening statement. By no later than July 1996 the project should have been completely reappraised. That was a couple of years before this point.

330. An explanation for why the IDB behaved the way in which it did at this time may be found in the company’s continued willingness to invest. Marketing and financial appraisals were still broadly positive, but they were still qualified. That is your point: there were still negative indicators. Had the IDB not done it in July 1996, it should have done it at this point, before the cap was lifted. That is my view. On a point of detail, it seems self-evident that the decision to raise the cap should have been referred to the casework committee.

331. Ms Purvis: I see that, at paragraph 6.5, Valence’s own bank insisted on firm orders as a precondition to affording it the $15 million to $20 million credit facility. The IDB did not exercise the same standard of financial stewardship as the company’s own bank. You have referred to 1996, but can you explain why, in the light of the company’s track record, the imposition of the cap at the start as a protection and all the negatives, which outweighed the positives at that time, the IDB agreed to raise the cap? Did Valence threaten to withdraw?

332. Mr Quinn: I do not think that that point is made in the text of the report.

333. Ms Purvis: I am asking whether Valence threatened to withdraw.

334. Mr Quinn: Not to my knowledge. On the question of bank funding and whether the taxpayer should have had similar protection, of course that should have been the case. We should protect the taxpayer as best we can.

335. I will go back to a point that I made in my introductory remarks. Invest NI, or as it was then, the IDB, is a funder of last resort. Although Invest NI is seen as a risk-averse organisation, it actually has a high-risk appetite. It does things that shareholders, investors and banks will not do. It comes in as a funder of last resort, so it may have seen itself in that context in 1998. Perhaps Brian will comment on the circumstances that prevailed at the time.

336. Your point about the negatives and positives was correct. The negatives were piling up, but the introduction of a further $10 million from an entrepreneurial investor was at least one positive, in that he demonstrated a continuing appetite to invest in the project.

337. Mr Dolaghan: I have very little to add to that. The final point in paragraph 6.5 indicates that there were still market forecasts predicting that there was about to be a significant uptake in the company’s value. However, that was really the only other indicator at the time.

338. Ms Purvis: It seems that either the IDB’s cups of tea were being spiked at every meeting with the company or opium smoke was being blown into their faces. Although financial safeguards were put in place, the caps, for example, there was a point at which the company wanted the funding cap to be raised. That was despite the fact that it had not met its employment or sales targets. In fact, the company did not even have a commercial product, but the IDB said that it would give it more money.

339. Mr Quinn: I think that we are with you on that point. We think that the reappraisal of the project should have taken place at least two years earlier. Logically, that must also apply at that stage.

340. Ms Purvis: Paragraphs 7.1 to 7.3 highlight that Valence altered the project radically again in 2000. It decided that Mallusk would no longer be the site where batteries were mass produced; it would simply be a testing ground for new products. It also decided that employment would not reach the promised level of 660 manufacturing and R&D jobs.

341. That was a fundamental breach of the 1993 offer and was another in a series of disappointments that spanned six years. Valence’s employment figures indicate that it struggled to keep people. At one point, it had to bring in agency workers in the hope that they would become permanent. Even the members of staff knew that the company was going nowhere. They actually knew more about the company’s sustainability than the IDB did. After six years of disappointments, should the IDB not have cut its losses and invoked clawback at that stage?

342. Mr Quinn: Yes; I think that we are in agreement with you on that point. I go back to the fact that we see July 1996 as a fulcrum. Looking back, we are in agreement with the Committee. That was a very fundamental change in the nature of the project, and the IDB should have initiated a review of the letter of offer and almost certainly invoked clawback.

343. Looking at the situation from the company’s point of view, as distinct from us looking back now, one can still pick out some positives. From 1998 onwards, it raised a further $65 million on the markets. It had achieved commercial sales by that point, and it had acquired all the Bellcore licences. Bellcore, or Telcordia as it was then, acquired three million shares in Valence Technology. Therefore, Bellcore saw continuing value in the project. Although we agree that the balance of negatives clearly outweighed the positives at that point, others saw it differently. Some people were still prepared to put private-risk capital into the project.

344. Ms Purvis: At that stage, Valence was giving away shares to its employees. Each time, it gave away 500 shares that were valued at $2 each. It said to its employees that when they came to sell their shares, Valence wanted $2 back for each share. That means that shares were being given out willy-nilly to whoever would take them at that time.

345. Mr Quinn: A very high-profile company such as the former Telcordia was willing to buy three million of those shares or to take them in exchange for something else as a part of a business arrangement. It seems to me that, looking back, it is easy to pick out the negatives and give them superior weight to the positives. However, at the key decision points, others saw value in the company and the project. That continued until 2004, because we know from paragraph 8.9 that the entrepreneurial investor was still drip-feeding finance into the company.

346. Ms Purvis: The expression “rose-coloured glasses" comes to mind. The whole thing was about seeing product in Northern Ireland, job creation in Northern Ireland, and batteries being mass-produced for new technology. That has not happened.

347. The clawback was eventually reduced —

348. Mr Quinn: Do you mind if I go back to briefly to the subject of positive indicators? Alistair has reminded me —

349. Ms Purvis: Have you found another needle in the haystack?

350. Mr Quinn: There were 420 people employed. Think of it in constituency terms: if a factory in your constituency employs 420 people, and the IDB pulls the plug on it, people such as you, who act in a representative capacity, would like to know the reason why.

351. Ms Purvis: In this case, we did not know where the employees came from, so it would be hard to tell.

352. The Chairperson: Could that money have been given to other investment opportunities that would have provided employment that would have lasted to this day?

353. Ms Purvis: I acknowledged that fact, and I made the point that, because of the high turnover at Valence, many of the staff were agency workers. I have spoken to members of staff who worked in the company. They said that the idea of producing the technology was fantastic, but there were too many variables and that the attitude of management was to throw money into it without really caring what happens. The product was unstable. It looked like pop-out tablets. Mitchel has referred already to the soft-shell lithium technology. It was unstable and explosive. I do not know whether the IDB talked to any of the staff about attitudes to the company or where it was going. To me, the indicators were all there that something was seriously wrong.

354. Mr Shannon: I notice that you mentioned many of the positives, and we are not ignoring them. Paragraphs 7.4 to 7.10 refer to the December 2000 balance of accumulated losses of £250 million. Clearly, things were not going well, and to say that is an understatement. The company was manufacturing at a cost of $57 for each battery against a sale price of $12. That is a loss of $45 dollars for each battery.

355. One does not have to be Einstein to work that out. If you were getting your groceries home and you had £100 and the wife spent £170, you would have a wee word in her ear because the figures were not working out. The analogy is simple, but the point is the same no matter where you go.

356. The auditors at that time were concerned about the company’s status as a going concern. So am I, and I am sure that all the Committee members feel the same. The company had an inadequate marketing plan, no marketing team, an absence of proper controls over capital expenditure, inaccuracies in financial figures that were given to the IDB, and difficulties with production quality. Although it was losing so much money but doing so well with all those losses, the funding cap was raised from £5 million to £11 million. If anyone here had been given that evidence, they would have drawn the line in the sand at that point and said “no more".

357. Mr Quinn: I think that I am almost repeating myself. We should have got to the point of complete reappraisal in July 1996, if not earlier. What you are saying, what Ms Purvis said and what I agreed with is that at that stage it was clear that the negatives outweighed the positives. I refer to the positives not to argue that we made the right decision, but to point out that the IDB was not faced with a purely negative situation. As I said, the hard decisions should have been made some years prior to that point.

358. Mr Shannon: Paragraph 7.14 states that DFP approval to raise the cap from £5 million to £11 million was given on the condition that no further grant would be paid until Valence submitted a detailed plan to demonstrate its viability. Paragraph 7.15 states that Valence could not produce such a business plan. DFP was clear about the fact that it agreed to raise the cap on the basis of the submission of a business plan, but one was not submitted. Why was the DFP condition ignored?

359. Mr Quinn: Before today’s meeting, I discussed that with the Treasury Officer of Accounts to ensure that we had a common view on the matter. He can speak for himself, but our understanding is that the reference to “no further grant" in paragraph 7.14 means no further grant above the £11 million. In other words, the payment of £3·9 million on 13 March 2001 was not a breach of that condition. However, I do not want to put words into Treasury Office of Accounts’s mouth.

360. Mr Thomson: Paragraph 7.12 states that DFP raised that issue with the IDB because we were getting increasingly concerned about what we were hearing. There was a lot of correspondence between DFP and the IDB, but the final approval letter request that came from the IDB said that increasing the cap to £11 million was crucial. The original offer was £26·6 million. The letter goes on to spell out why that was crucial: “This will leave £15·6 million available under the Letter of Offer — drawdown, of which will be conditional upon receipt in due course of a satisfactory business plan reflecting the new strategic direction of the business."

361. The request that came to DFP was that it was crucial to increase the cap to £11 million and that any further grant would be conditional on the business plan. DFP approved that request, with reluctance.

362. Mr Shannon: Does that mean that the information in the report is not entirely clear?

363. Mr Quinn: Everything turns on the word “further". I think that the condition that “no further grant" should be paid, as is set out in paragraph 7.14, relates to grants beyond the £11 million cap.

364. Mr Thomson: If that were not the case, a cap would not have been set. What would have been the point of increasing the cap to £11 million if it was not going to be spent?

365. Mr Shannon: Paragraphs 7.22 to 7.24 highlight concerns regarding a $30 million funding arrangement that was connected to the IDB raising the funding cap from £3 million to £5 million in 1998. There was a concern that the IDB may have been misled by Valence and that the funding precondition had not been satisfied. Why was that issue allowed to remain unresolved? Did the IDB turn a blind eye?

366. Mr Dolaghan: Our view is that the issue did not remain unresolved. The question of when and how the issue was raised did not receive a documented response. However, the IDB, through use of an external financial consultant, satisfied itself that the underlying issue of the $30 million transaction that was introduced to the company was correctly a new $30 million funding line to the company. Therefore, the transaction satisfied the condition that was required for a trigger-of-grant payment, and the IDB saw no ambiguity in the satisfaction of that condition.

367. Mr Shannon: I think that you will probably be glad to hear that I have no further questions.

368. Mr McLaughlin: You agreed to write to the Committee about the local building company. Paragraph 6.7 refers to the local property developer that the IDB used to buy and adapt the second factory. Will you write to us to tell us who the local property developer was?

369. Mr Dolaghan: I want to be clear about the fact that the IDB did not use or have any interaction with the property developer. The transaction was a matter for the company that owned the land at that point. The IDB took an arm’s-length position and had no role whatever in the transaction; it was done outside either the IDB’s sight or involvement.

370. Mr McLaughlin: If we try to imagine the situation at the time, Valence indicated a requirement for extra factory accommodation. The IDB agreed to provide the extra accommodation, which had to be adjacent to the original main factory building. Was that the situation?

371. Mr Dolaghan: The IDB agreed to extend the first factory, which it owned. There was a separate transaction with the people who owned the adjacent factory to allow Valence to occupy it.

372. Mr McLaughlin: You are making a distinction, which might, at the end of the day, be valid, because you have a closer understanding of what happened. However, it seems that the IDB had a project to deliver and that it was still on that trajectory. The project, in which the IDB had invested already and to which it had committed further investment, required additional accommodation. I am not satisfied with the explanation that the extra accommodation had nothing to do with the IDB and that it was simply a coincidence that private-sector partners were involved who agreed amongst themselves to provide accommodation.

373. I think that it is reasonable for me to take the view that the IDB was involved and facilitated the acquisition of that additional accommodation. I ask you to reflect on whether it is reasonable to expect us to believe that there was no connection and that it was merely a coincidental and parallel process.

374. As you have accepted, the IDB’s original decision was that a local building company would be used to buy and adapt the main factory. Were the same personnel involved in negotiating — or, in my view, selecting — the local property developer for the second factory?

375. Mr Dolaghan: I go back to the point that the IDB was not involved in that process; that was between the company that owned the land at that time and the property developer. I accept that your view is that the IDB must have been involved at some point, but the records —

376. Mr McLaughlin: Can you imagine the discussion that took place when the IDB suddenly discovered that there were two factories where it had thought that there was only one? I do not find that credible. A conscious decision may have been made, but if you are pointing me in that direction, it seems to me that there has been a conspiracy.

377. Mr A Hamilton: It may be worthwhile for us to provide written clarification of the exact chain of events from 1985, which was when the 14 acres and two factories were sold. In 1991, the factories were separated, and one was sold to the IDB to meet the requirements of the project. The IDB became involved in that transaction to gain some competitive advantage over a factory that was being developed in Cork. At that stage, the only call that the IDB made on the second factory was that it gave the company the option to buy it back within one year for £275,000.

378. Mr McLaughlin: Was that because of access problems?

379. Mr A Hamilton: Yes. The company did not avail itself of that option. After the year had elapsed, the IDB no longer had any call over, or involvement in, the second factory. Therefore, six years later, when the second factory became a viable option for expansion, it was in the hands of a third party. The IDB was not involved and, in accordance with its policy of getting out of property, it did not seek to become involved, as the records show.

380. The company ended up with two completely different arrangements. Factory A was owned by Valence, and it was paying for it through an amortised loan from the IDB. Factory B was purchased six years later by Valence directly from a third party. A contract to enhance it was struck directly between Valence and the third party, and the IDB was not involved in that.

381. Mr Quinn: This is complicated stuff — it certainly is for me. I wonder whether we should take up Mr Hamilton’s suggestion that we provide the Committee with a slightly fuller explanatory note that might be of assistance when the Committee comes to frame its report.

382. Mr A Hamilton: I would not want to give the impression that we are trying to avoid naming the property developer or those people who were involved. We can probably get that information. However, it was not anything that the IDB was involved in. Nevertheless, we can put that in the note if you so desire.

383. Mr McLaughlin: OK; that would be helpful, and I accept that people are trying to be helpful.

384. Mr Quinn: Just to clarify something, at one point Mr Hamilton referred to 1991 when he should have said 1993.

385. Mr McLaughlin: In September 1999, Valence was moving to a position where it had decided that it would increase its manufacturing capacity, regardless of the delivery of the product. That involved buying the second factory on the site. Was IDB across all of that?

386. Mr A Hamilton: No.

387. Mr McLaughlin: Did the IDB not know?

388. Mr A Hamilton: You said “across", and I am sure that the IDB was aware of it, but it did not own the second factory. The only factory that the IDB bought in 1993 was factory A.

389. Mr McLaughlin: Are you saying that the owners of the site entered into an agreement with a local property developer, absolutely independently of any oversight by the IDB or of any involvement or promise to provide support?

390. Mr A Hamilton: Yes. That is my understanding. Can you clarify that, Mr Dolaghan?

391. Mr Dolaghan: Yes; that is what the records suggest. The only involvement is described in the latter part of paragraph 6.7, which was the rental grant for the two-year period. That was the only support. Pressure was put on the IDB to buy the factory and to provide it to Valence. However, the IDB refused flatly to do that. Valence had to do a private-sector transaction on its own.

392. Mr McLaughlin: Thank you very much.

393. Ms Purvis: I want to return to the issue of jobs and job creation. We know that Valence started to create jobs in Korea and the US at a time when it was committed to Northern Ireland. The IDB’s investment was about job creation in Northern Ireland. Mr Dolaghan said earlier that the expansion into Korea was seen as a good thing because the company was trying to break into the military market. Do you have any evidence of what was being developed in Northern Ireland but manufactured elsewhere? Is that an outcome of the case? For example, we have had the recent closure of Visteon, and the allegation has been made that Invest NI funds were going into Visteon and that the company was developing a product that was being manufactured elsewhere. In other words, public funds were being used to develop a product in Northern Ireland that was being used to create jobs in another country. Does the IDB have any evidence that that was the case, and if so, have lessons been learned for dealing with Visteon?

394. Mr Dolaghan: There is no evidence to suggest that that was the case. In the joint venture arrangements that were entered into in Korea and the US, both the parties involved provided all the funding; no Valence funding went into those ventures. Valence was providing technical support and its R&D capability; that is, its underlying understanding of battery technology. As we stated earlier, the understanding was that core parts of the battery were to be manufactured in Northern Ireland and provided to those markets for final assembly and completion.

395. Ms Purvis: Does that mean that they were something like composites?

396. Mr Dolaghan: Exactly; they were laminates or composites, or another such term.

397. To answer your question, there is no evidence to suggest that money that was put into Northern Ireland directly went on to create jobs in any other jurisdiction. However, perhaps that happened indirectly in the sense that the company was trying to expand its global position.

398. Ms Purvis: Would it be a condition of Invest NI funding now that if an international company were to come here and design and develop a product in Northern Ireland, that product would be used to create manufacturing jobs in Northern Ireland and not elsewhere?

399. Mr A Hamilton: I will let Mel discuss the details of that. As regards your last point about exclusivity, and as Mr Dolaghan said, we want to create R&D opportunities in Northern Ireland, first, to increase the knowledge base and, secondly, to create jobs. It is understood that it would be difficult to prevent a large multinational that has been given money to invest in the research and development of a new idea from taking the benefit of that to the other countries in which it operates.

400. Mr Chittock: We have a range of different intervention policies. Research and development is an important element of what we do today. The aim is to embed research and development in Northern Ireland. As Alistair said, once a company has completed its research and development, there are no restrictions on what it can do.

401. The aim is to develop a skills base here that will translate into longer-term sustainable jobs in research and development. Northern Ireland is not a low-cost-employment manufacturing centre; many companies in the Far East can manufacture products at a cheaper rate. We are looking to embed research and development in Northern Ireland in order to add to wealth creation. However, companies will apply R&D to manufacturing elsewhere in the world. We do not cement that directly; however, that is one of the consequences of doing that.

402. Ms Purvis: That concerns me greatly, given the shrinkage of the manufacturing base in Northern Ireland. The Department and, in particular, the Executive, must look at that and consider how to grow that base during this economic recession. Manufacturing and the export of products will help us out of that situation. I accept what you are saying; however, I am very concerned.

403. My last point concerns the urgency of some at the start of the project. You said that there was competition from Cork; however, it seems that the urgency and haste with which the IDB and others ran into that project were the cause of the subsequent problems.

404. For example, the IDB did not carry out a proper appraisal at the start; it did not have a business plan; it rushed into buying a factory; it tried to get one step ahead, and it threw the Gibson, Lear Fan and DeLorean reports out the window. It seems that the safeguards that exist for dealing with foreign direct investment and the creation of jobs in Northern Ireland went out the window in somebody’s eagerness to trail the company into Northern Ireland.

405. Mr Quinn: I am not sure whether I would adopt all the language that you used. A balance must be struck between economic development agencies being fast on their feet in competing for mobile foreign direct investment projects and doing things properly, such as producing prior appraisals. On the one hand, there is a question about whether that balance was struck appropriately in that case. Paragraph 3.6 leaves a lingering doubt as to whether that was done as thoroughly as it should have been.

406. On the other hand, there is a question about whether a more definitive appraisal could have been carried out at that stage of the development. We have been wrestling with that question in preparation for this session. The question is how to strike a balance between being fast on your feet to be competitive and doing appraisals properly. As I said in my opening remarks, in contemporary circumstances, any project that came to us in that condition would not be supported.

407. The Chairperson: Thank you. My final question deals with the issue of clawback and the lessons that have been learned. Less than 40% — £2·4 million — of the £5·7 million that was recoverable was clawed back from that project. It is very clear that a number of mistakes were made in securing the IDB’s position. What lessons have been learned? In recent times, there has been talk of clawback from Visteon and Seagate.

408. Mr Quinn: I will defer to my Invest NI colleagues, but I will say that one of the lessons that I have drawn from this experience is that we have to make the hard decisions when it is necessary to do so. We have focused, for example, on July 1996. It seems to me that matters progressed after July 1996 that might have crystallised in and around that time. The key message that I draw from this case is that when worrying indicators start to emerge on a project, one has to confront the negatives as well as the positives and take a cold-eyed, hard-headed view of what must be done for the welfare of the project and for the protection of taxpayers’ money.

409. Mr A Hamilton: I will make some personal remarks. I acknowledge the comments that were made at the outset about the short time that I have been in post, but on reflection, having prepared for this session, I have been drawn into detailed analysis of complex projects such as this from start to finish. People say that they would not wish to be appearing before this Committee after having been in the job for only two or three months, but I will probably look back on this as a really good opportunity to get into the fine detail of a complex case such as this.

410. There are three things that I learned very quickly as a result of examining this case. Needless to say, they have all been mentioned today. The first is the need for detailed appraisal of cases such as this at the outset, and questions have been asked about how that applies in this case.

411. Secondly, given my background in programme management of large and complex projects, detailed monitoring at every stage is necessary.

412. Stephen Quinn touched on the third point, which concerns making hard decisions. Stephen made a key point about the impact on jobs and what that might have meant, but the hard decisions should have been made in this case. At some points, they were not made. Those are three lessons that I have learned, having examined the case and prepared for this session.

413. The Chairperson: OK. Thank you. Mr Chittock mentioned taking action against people when mistakes are made. If the same mistakes were to be made now or in future, should people be reprimanded for it, given what happened in this case?

414. Mr Quinn: Mel made the point —

415. The Chairperson: Earlier on, he was saying —

416. Mr Chittock: We took action in one or two cases in which conditions were signed off but monitoring action had not been completed.

417. The Chairperson: If the mistakes that were clearly identifiable in this case were made in future, would Invest NI and the Department of Enterprise, Trade and Investment reprimand the individuals who were responsible?

418. Mr Quinn: They would be reprimanded at the very least. Mel referred already, although not in detail, to specific episodes in which Invest Northern Ireland has reprimanded people. I know, for instance that, arising from the Emerging Business Trust report, which went to the Westminster PAC in 2006, quite severe disciplinary action followed for exactly the kind of thing that you are talking about now. Invest Northern Ireland and the Department have a recent and substantive history of being willing to make those decisions and to take action.

419. The Chairperson: I appreciate that. What does “quite severe" mean?

420. Mr Quinn: It means demotion, and in one case, that meant by two grades.

421. The Chairperson: OK. Thank you for attending today’s session. It has been very interesting for us all. Having been in his post for only a short time, Mr Hamilton has been on a steep learning curve. I appreciate him saying that he will learn from this experience and that he hopes that mistakes will not be repeated.

422. We must recognise that many of the issues that we discussed today occurred many years ago. However, when we are examining cases such as this, it does not matter how long ago they happened, because we are still talking about the use of public money. We must ensure that investments are made properly, whether they occurred 10 or 15 years ago or whether they will happen some time in the future.

423. One of the most worrying features of this case is that well-established procedures that were designed to protect taxpayers’ money existed already, but, unfortunately, the IDB chose to ignore them. That became clear in some cases, and it is not acceptable. Inward investment is a very important element in strengthening our economy, and there is an obligation to ensure that public funding is aimed at the right types of project and that those are properly managed. The Committee will prepare its report, to which we expect you to respond. If we have any further questions for you, we will put them in writing. We all understand that you will have to submit a great deal of written material to the Committee in future, and we appreciate that.

424. Mr Quinn: It would be helpful if the Committee Clerk could provide us with a specification of what you want, and we will provide answers as soon as we can.

425. The Chairperson: That is not a problem. Thank you.

Appendix 3

Correspondence

Chairperson’s Letter of 19 June 2009
to Mr Stephen Quinn

NIA Logo

Public Accounts Committee

Mr Stephen Quinn
Accounting Officer
Department for Enterprise, Trade and Investment
Netherleigh
Massey Avenue
Belfast
BT4 2JP

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX
Tel: (028) 9052 1208
Fax: (028) 9052 0366
Email: pac.committee@niassembly.gov.uk

Date: 19 June 2009

Dear Stephen,

PAC evidence session on ‘Review of Assistance to Valence Technology:
A case study on Inward Investment’

Thank you for your evidence to the Committee yesterday. As discussed at the meeting, the Committee wishes that you provide the following information to inform its deliberations:

1. a breakdown of the amounts of private finance raised in the US which were spent locally;

2. how many workers employed by Valence in March 2001 lived in disadvantaged areas;

3. the specification of the other factories available to IDB at the time when the Mallusk site was chosen;

4. how many INI facilitated visits to the region have taken place, by constituency, over the past three years;

5. how the siting of new inward investment projects in the past three years correlates with the areas in which unemployment levels have been greatest;

6. what happened to the 14 acres included in the factory site bought in the 1985 transaction;

7. whether IDB or INI awarded the ‘prominent local building company ‘ used to purchase Valence’s main factory any other single-tender contracts, before or since the Valence contract;

8. whether anyone in a middle- or senior-management position, either in IDB or in the Department, had a personal connection with that company;

9. whether anyone within IDB or the Department subsequently worked for this company, either directly or in some form of consultancy capacity;

10. clarification of the chain of transactions from 1985 relating to the main and second factories required by Valence, specifically laying out whether IDB had any involvement in procuring the second factory.

You also agreed to reply to additional questions which were not covered during the session. I would be obliged if you should respond to the following:

1. Paragraph 3.12 deals with ‘additionality’. IDB told the Casework Committee about an offer of $20 million to Valence from the Republic of Ireland’s Industrial Development Authority. However, this information had, in fact, come from Valence. Why did the submission to the Casework Committee not make the source of the alleged offer clear? What did IDB do to test the validity of the alleged offer?

2. Paragraph 3.28 describes a one-day visit to Valence’s US premises by consultants to assess its manufacturing capability. They did not meet all the key personnel, had no time to make cost comparisons and admitted that some of their conclusions were based on assumptions. Was this a sound basis on which to assess Valence’s manufacturing capability?

3. Paragraphs 5.6 and 5.7 state that IDB accepted employment of 5 at Mallusk represented ‘best endeavours’ against a target of 300 by March 1996. This was in recognition of Valence having spent £9.5 million to that point. How much of that had the company spent in Northern Ireland? Did IDB put the interests of the taxpayer before those of Valence?

4. Paragraph 6.8 notes that IDB had intended to take a second charge on the 2nd factory, as additional security, but that this was never done. How was this overlooked?

5. Paragraph 6.9 notes that IDB built an extension to the main factory which it grant-aided by £300,000. It was intended that this grant would be tied to sales levels, but this was overlooked – how did that happen?

6. Paragraph 6.10 tells us that IDB considered the Valence parent company would be unlikely to have any cash or physical assets to meet an unsecured debt – the parent company guarantee was, in effect, worthless. Why was this situation allowed to develop - could it not have been prevented?

7. At paragraph 6.1 the report notes that IDB raised the cap on funding from £3 million to £5 million without referring it to the Casework Committee. How could such a key control be so easily ignored?

I should appreciate your response by Monday 6 July 2009.

Yours sincerely

Paul Maskey signature

Paul Maskey

Chairperson
Public Accounts Committee

Chairperson’s Letter of 29 June 2009
to Mr Stephen Quinn

NIA Logo

Public Accounts Committee

Mr Stephen Quinn
Accounting Officer
Department for Enterprise, Trade and Investment
Netherleigh
Massey Avenue
Belfast
BT4 2JP

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX
Tel: (028) 9052 1208
Fax: (028) 9052 0366
Email: pac.committee@niassembly.gov.uk

Date: 29 June 2009

Dear Stephen,

PAC inquiry into Assistance to Valence Technology

At its meeting on 25 June the Committee agreed to ask you for some further information to help it formulate its report.

At the Evidence Session on 18 June, Invest NI commented that, in its view, IDB had resolved the concerns raised in August 2001 and noted at paragraphs 7.22-7.24 of the C&AG’s report, in relation to the US$ 30 million funding facility.

The Committee notes that this seems to be at odds with the agreed report, and would like you to clarify Invest NI’s explanation and provide a copy of any supporting documentation.

I am copying this letter to David Thomson in his capacity as Treasury Officer of Accounts.

I look forward to receiving the above information by w/c 20 July.

Yours sincerely

Paul Maskey signature

Paul Maskey

Chairperson
Public Accounts Committee

Chairperson’s Letter of 30 June 2009
to Mr David Thomson

NIA Logo

Public Accounts Committee

Mr David Thomson
Treasury Officer of Accounts
Department of Finance and Personnel
Room P4, 3rd Floor
New Building
Rathgael House
Balloo Road
BANGOR
BT19 7NA

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX
Tel: (028) 9052 1208
Fax: (028) 9052 0366
Email: pac.committee@niassembly.gov.uk

Date: 30 June 2009

Dear David,

PAC inquiry into assistance to Valence Technology

At its meeting on 25 June, the Committee agreed to ask you for further information to help it formulate its report.

Would you please provide a copy of the DFP approval, noted at paragraph 7.14 of the NIAO report, on raising the grant cap on the Valence project from £5-11 million?

I look forward to receiving the above information by w/c 20 July.

Paul Maskey signature

Paul Maskey

Chairperson
Public Accounts Committee

Correspondence of 1 July 2009
from David Thomson

DFP Logo
Treasury Officer of Accounts
David Thomson
Central Finance Group
Rathgael House
Balloo Road

BANGOR BT19 7NA

Tel No: 028 9185 8150 (x 68150)
Fax: 028 9185 8175
email: david.thomson@dfpni.gov.uk and jill.downie@dfpni.gov.uk

Mr Paul Maskey
Chairperson
Public Accounts Committee
Parliament Buildings
Room 371
Stormont Estate
BELFAST
BT4 3XX 1 July 2009

Dear Paul

PAC Inquiry into Assistance to Valence Technology

Thank you or your letter of 30 June.

As requested, I attach a copy of DFP’s letter to Mr Lawson McDonald, IDB of 2 March 2001, which gave approval to raising the grant cap from £5m to £11m.

If you require any further information don’t hesitate to get in touch.

Yours sincerely

David Thomson signature

David Thomson

Copy Distribution List:
Jack Layberry
Jim Drennan
Paddy Hoey
Julie Sewell

DFP correspondence
DFP correspondence
DFP correspondence
DFP correspondence

Correspondence of 30 July 2009
from Stephen Quinn

From the Permanent Secretary
Stephen Quinn

Netherleigh
Massey Avenue
BELFAST BT4 2JP

Telephone: (028) 9052 9441
Facsimile: (028) 9052 9545
Email: stephen.quinn@detini.gov.uk
janice.davison@detini.gov.uk

Our ref: PS DETI 246/09

Mr Paul Maskey MLA
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
Belfast BT4 3XX 30 July 2009

Dear Chairman

PAC evidence session on “Review of Assistance to Valence Technology: A case study on Inward Investment"

You wrote to me on 19 June 2009 requesting clarification on a number of points raised by the Committee during the evidence session of 18 June 2009 together with a number of supplementary questions relating to the case. I have been out of the office, returning 22 July, and am most grateful for the extension of time. I will address each point as it was raised in your letter for ease of cross-referencing.

1. Accounts for Valence’s Northern Ireland operations show that a total of approximately £90million ($141m) was invested in the company over the period 1993 to 2004 by US investors. This was used to fund cash trading losses of £34m ($53m) and acquire fixed assets totalling £56m ($88m). References to the $250m and $346m figures (within the NIAO report and in my oral evidence) related to the totality of investment by the company, at different points in the project’s history, within the Northern Ireland and wider US operations in attempting to bring the battery technology to the market.

2. As explained to the Committee during oral evidence, Invest NI (and it predecessor organisations) does not hold records relating to individual employees within client companies. Employment claims are vouched on the basis of total numbers employed as verified by an independent auditor’s certificate. Such records do not include any reference to the personal details of the employees concerned. As suggested by the Committee, we have liaised with the Department of Employment and Learning regarding any pre-employment training that may have been undertaken. Unfortunately, due to the passage of time associated with this case, it has no records regarding pre-employment training relating to Valence Technology.

However, while company specific statistics are not available, it is possible to produce indicative estimates of the proportion of this group that came from disadvantaged areas using 2001 census statistics on labour mobility. It is estimated that, of the 417 people employed at Valence in March 2001, 13% (54 employees) came from disadvantaged areas and a further 11% (46 employees) came from special status areas.

3. It has not been possible to locate records outlining IDB property availability dating back to 1993. In compliance with existing records retention policy, such general documentation would have been destroyed after five years unless it was deemed to have particular commercial significance.

4. Annex 1 to this letter outlines the detail of Invest NI facilitated visits to the region, by constituency, over the past three years. As highlighted during the oral evidence session, while Invest NI can suggest possible visit locations, the ultimate choice of destination for visits within Northern Ireland is made by the target investor themselves in light of their particular investment requirements.

5. I attach at Annex 2 a table showing the correlation between jobs created and project numbers from FDI activity against relative claimant count statistics by Local Council Area. The figures show a strong positive correlation between the location of new inward investment projects and the relative claimant count by Council Area.

6. The Committee has asked for detail regarding the transfer of land ownership relating to the 14 acre site originally sold by IDB in 1985. In order to ensure as comprehensive an answer as possible, we requested an analysis of the transfers of land as per the records held by Land Registry. In order to be consistent with the factory transactions, I think that it is useful to show transactions relating to the “front" land and the “back" land separately. Of the total 14.6 acre land site, 7.43 acres relates to the “front" portion and 7.17 acres to the “back" site. Land ownership transactions relating to each site are summarised below;

i. “Front" Lands – approx 7.43acres

Date Transferor Transferee Nature of Transfer
Dec 84 Department / IDB Company A
MPF Castings Ltd 		99 year lease
1991 Company A
(In Receivership)
MPF Castings 		Company B
FG Wilson 		99 year lease
1992 Department / IDB Company B
FG Wilson 		999 year lease
1993 Company B
FG Wilson 		Local Building Co.
Farrans 		999 year lease
1993 Local Building Co.
Farrans 		Department / IDB 999 year lease
1996 Department / IDB Valence freehold
2004 Valence Purchaser
J Mc Cann 		freehold

ii. “Back" Lands – approx 7.17acres

Date Transferor Transferee Nature of Transfer
Dec 84 Department / IDB Company A
MPF Castings Ltd 		99 year lease
1991 Company A
(In Receivership)
MPF Castings 		Company B
FG Wilson 		99 year lease
1992 Department / IDB Company B
FG Wilson 		999 year lease
1993 Company B
FG Wilson 		Local Building Co.
Farrans 		999 year lease
1993 Department / IDB Local Building Co.
Farrans 		freehold
1999 Local Building Co.
Farrans 		Property Developer
A Creighton 		freehold
2001 Property Developer
A Creighton 		Valence freehold – (4 acres)
2004 Valence Purchaser
J Mc Cann 		freehold – (4 acres)
3.17 acres remains in the ownership of Property Developer (A Creighton)

7. In responding to this question, a review has been undertaken of all financial records available to both Invest NI and the Department. This review uncovered no record to suggest that any single tender contract has been awarded to the “prominent local building company" since 1 April 1996. Unfortunately, given the passage of time, we cannot review prior to this date as the records are no longer available. In line with Government policy on the retention of information, records prior to this date have now been destroyed.

8. Our ability to address both questions 8 and 9 is limited both by the passage of time and also because we do not have any access to the employee records of the “prominent local building company". Those enquiries that we have been able to make, although by no means definitive, have not provided any indication that members of management within IDB or the Department had personal connection with the company or that they subsequently undertook work, either directly or in a consultancy capacity, for that company.

9. As per question 8 above.

10. The chain of transactions with regard to the ownership of the two factories on the Mallusk site is summarised below:

With specific reference to IDB’s role in the “back" factory transaction of 1999, records available suggest that IDB was approached, by Valence, to acquire and finance the purchase of this facility on a similar basis of amortisation as with the front factory. IDB declined to do this and suggested that the company may wish to look at a lease with an option to purchase transaction if outright purchase from the vendor was not possible at that time. That route was adopted by the company and, following negotiation, IDB agreed to offer rental grant support (as noted in paragraph 6.7 of the NIAO report) for the two year rental period. There is no record of direct involvement by IDB in any negotiation, either with the original owner of the back site, or with the subsequent “property developer" owner who entered into the arrangement to rent and then sell the factory to Valence.

As regards the additional questions not covered during the session, I would respond as follows. Again these are addressed in the order raised in your letter for ease of cross-reference.

1. The Department considers that, for the sake of greater transparency, it would have been preferable for the papers to state the source of the IDA’s competing offer information. However, the fact that IDB and IDA were direct competitors in the marketplace meant that the Committee members would have been well aware that the information would not have been forthcoming from the IDA itself. As experienced business people, they would have known that, just as IDB would not disclose details of its offers to competing development organisations, it is unrealistic to assume that the source of the competing offer would have been anything other than the company itself. That said, the reasonableness of the offer would have been judged in light of other prior offers made by IDA and the press coverage of such investments. Allied to this, the potential Valence investment had been carried in a number of the ROI papers including the Cork Examiner at the time.

2. The Department considers that it would have been beneficial to allocate additional resource to this element of the review. That said, however, it is important to say that the consultants selected were appointed, following a detailed search of a number of potential production consultants, on the basis of their knowledge of working in the field of battery manufacture and production operations. They therefore came to the assignment with significant knowledge of what was reasonable to expect in such a manufacturing process. Allied to this, the assignment itself was not an assessment of an actual physical production operation; but rather, a review of the quality and reasonableness of the plans that the company had produced for its forecast move to volume production. This included;

To this end, the interaction at the prototype line in San Jose and in-depth discussion with key management personnel enabled the consultant to ascertain a very significant amount of information which could then be crosschecked during the other 2 days of the assignment.

The rationale for requesting a meeting with the four individuals outlined was to explore the specific issues faced by each of the key operating areas. The non availability of the Director of Battery Operations did not prevent the consultants from obtaining the required material as that Director reported directly to the Vice President of Operations, who himself had an intimate knowledge of the battery operations and was able to answer the questions posed by the consultant. The consultant thus met three key personnel, including the Vice President of Operations and the Director of Laminate Manufacturing, which enabled him to reach his conclusions on the scale-up capability. Moreover cost comparisons, while not undertaken by the manufacturing consultants themselves, were undertaken separately by the financial appraisal consultant who verified over 50% of the estimates presented.

As was acknowledged in our evidence to the Committee, the area of manufacturing scale-up capability proved to present key challenges for the project. So, as indicated, it is for consideration whether the allocation of more time and resource would have proved valuable. However, given the stage of development of the project at the time and the experienced nature of the consultants employed, it is open to question whether a more detailed analysis would have concluded any differently from that presented. It would always have been dealing with an “on paper" scenario until equipment was actually installed, tested

3. It is worth restating that, important as they were, employment levels were not the only measure of “best endeavours" by the company. The NIAO report, paragraph 8.5 sets out clearly that the project was capital intensive and that employment grants represented a small proportion of the total paid. By September 1995, Valence had invested over £17.5m in plant and equipment installed in Northern Ireland. However, as noted at paragraph 5.3 of the report, £7.8m of this had been written-off due to the change in manufacturing approach. This left a net investment value at the time of approximately £9.5m, all of which remained as operative within Northern Ireland. This significant investment of over £17m in Northern Ireland together with the technology agreements negotiated with both Bellcore (July 95) and Eveready and Delco (Sept 94) appear to have given IDB grounds to believe that every effort was being made (both financially and technically), by the company, to implement the project. Moreover, the Bellcore agreement was believed to provide a significant element of the performance leap necessary to bring the product to a market acceptable readiness. For these reasons, the Department does not consider that the evidence suggests that IDB put the interests of the company ahead of the taxpayer. At that time, IDB believed that the economic benefits associated with the project remained attainable, albeit on a longer timeline than first envisaged.

4. The Department considers that a second charge should have been put in place on the second factory. Such a charge could not be taken for two years until the property title had passed from the renting landlord to Valence. It would appear that the arrangement of an initial two year rental period also coincided with a change of Valence’s Client Executive within IDB during this period. These appear to have been contributory factors in the charge not being registered. The Department does not offer these as an adequate mitigation, rather as circumstances that contributed to a serious oversight.

5. There may be some confusion regarding the content of paragraph 6.9 of the report. During discussion with the company, regarding potential support for the factory extension, the possibility of a £300,000 reassignment from the existing plant, machinery and equipment grant was documented. Had this occurred, it would have been linked to sales targets. However, this reassignment was never finally agreed and therefore did not form any part of the subsequent amendment to the original offer.

6. The value of the parent company guarantee had, from inception, been dependant on the very substantial cash reserves held by the US company following its various public offerings. The majority of its subsequent investment expenditure occurred in Northern Ireland, with the purchase of fixed assets for the manufacturing operations. The combination of such investment and the ongoing funding of operational losses meant that the cash reserves held by the US parent were gradually eroded in the Group’s attempts to bring a battery product to market. In effect, the cash value as noted in paragraph 6.10 had been transferred into assets held at Mallusk. The difficulty was that the bespoke nature of these assets meant that their resale value was limited, even though IDB held a first charge over them. It would have been possible, through the introduction of a minimum net worth covenant into the guarantee, to limit the erosion of value in the US parent. However the reality of such action would have restricted the ability of the US parent to invest in equipment and activities aimed at advancing the collective investment project at Mallusk. IDB appears to have concluded that this would have reduced the possibility of realising the economic benefit for Northern Ireland.

7. It is the Department’s view that, due to the Casework Committee’s use of a £3million cap as a key risk management tool, the revision of the cap should have been referred back to the Casework Committee. Under operating guidance at the time, approval for mobile projects receiving assistance in excess of £10m had to be sought from DFP. This approval was received in 1993 for the initial investment. In respect of amendments to accepted offers guidance at the time stated:

“Material changes to terms and conditions in accepted Letters of Offer and Executed Financial Assistance Agreements from those endorsed by a Casework Committee, should be referred back to that Committee for further endorsement." [19.2.1 (i)] and

“Where there is no increase in the total assistance offered, but there is a significant change in any of the parameters of the project … the relevant Casework Committee should be consulted" [19.2.1 (ii)].

However section 19.2.4 of the IDB Operating Manual stated that:

“Subject to Sections 19.2.1 to 19.2.3…….(a) Amendments in the following categories require Deputy Chief Executive approval;-……(v) relaxation of targets triggering release of grants".

With respect to the revision of the cap for Valance in 1998, it appears, from the records, that the amendment was processed on the basis of the Deputy Chief Executive’s approval alone. In the Department’s view, despite some positive developments with the project highlighted in the appraisal reviews undertaken at the time, the materiality of the amendment being proposed should have resulted in the amendments being referred back to Casework for approval.

We have endeavoured, from the records available, to provide as comprehensive answers as possible to the questions raised by the Committee. Unfortunately, due to the passage of time and the unavailability of some records, some of these responses have been necessarily qualified. Nonetheless I hope that the information provided will assist the Committee in its deliberations on this case. I am, of course, at your disposal if further facts or explanations are required.

A copy goes to David Thomson, Treasury Officer of Accounts.


Yours sincerely

Stephen Quinn signature

Stephen Quinn

Annex 1

Number of visits hosted by Invest NI over last three years

Parliamentary Constituency Area 2006-07 2007-08 2008-09*
Belfast East 42 36 85**
Belfast North 18 9 14
Belfast South 46 51 96**
Belfast West 15 6 14
East Antrim 14 6 4
East Londonderry 0 3 2
Fermanagh South Tyrone 0 0 0
Foyle 15 4 7
Lagan Valley 0 1 45**
Mid-Ulster 4 0 4
Newry & Armagh 5 3 3
North Antrim 0 0 0
North Down 1 0 44**
South Antrim 5 5 17
South Down 2 0 1
Strangford 0 0 1
Upper Bann 6 4 7
West Tyrone 5 1 2
Total 178 129 346

Notes:

* Figures for 2008-09 are provisional and are subject to change. Also includes USNI Conference in May 2008.

** Includes visits to locations specific to USNI Conference.

Annex 2

No of New Inward Investment Projects & Claimant Count Data 2006-07 – 2008-09
by District Council Area

  Inward Investment Claimant Count
  No of New
Inward Locations 		Jobs Promoted No of Claimants % of Working Age
District Council Area 2006-07 2007-08 2008-09 2006-07 2007-08 2008-09 2006-07 2007-08 2008-09 2006-07 2007-08 2008-09
Antrim - - - - - - 524 510 1,090 1.6 1.6 3.3
Ards 1 - 1 304 - 16 928 814 1,491 1.9 1.7 3.1
Armagh - - - - - - 577 607 1,291 1.6 1.7 3.7
Ballymena - - - - - - 681 626 1,217 1.8 1.7 3.2
Ballymoney - - - - - - 316 358 793 1.7 2.0 4.3
Banbridge - - - - - - 333 349 825 1.1 1.2 2.8
Belfast 11 10 14 1,354 430 2,211 6,527 5,925 9,052 3.9 3.5 5.4
Carrickfergus - - - - - - 471 421 886 1.9 1.7 3.6
Castlereagh - 1 - - 52 - 455 423 866 1.2 1.1 2.2
Coleraine - 1 - - 500 - 892 870 1,589 2.6 2.5 4.6
Cookstown - - - - - - 339 363 913 1.5 1.6 4.1
Craigavon - 1 - - 5 - 1,054 1,108 2,243 1.9 2.0 4.1
Derry 3 1 - 754 328 - 2,977 2,793 4,171 4.3 4.1 6.1
Down - - - - - - 856 842 1,643 2.0 2.0 3.8
Dungannon - 2 2 - 81 27 475 477 1,455 1.4 1.4 4.3
Fermanagh 3 1 4 141 88 15 890 793 1,499 2.3 2.1 3.9
Larne - 1 - - 235 - 388 321 722 2.0 1.7 3.7
Limavady - - - - - - 577 605 1,336 2.6 2.8 6.1
Lisburn - - 1 - - 10 1,414 1,298 2,481 2.0 1.9 3.5
Magherafelt - - - - - - 267 288 985 1.0 1.1 3.6
Moyle - - - - - - 280 303 561 2.8 3.0 5.5
Newry & Mourne - 2 3 - 57 43 1,257 1,193 2,598 2.1 2.0 4.4
Newtownabbey - - 1 - - 2 964 808 1,633 1.9 1.6 3.2
North Down - 1 1 - 63 163 833 766 1,275 1.7 1.6 2.7
Omagh - - 2 - - 27 632 638 1,222 2.0 2.0 3.8
Strabane - - - - - - 1,021 1,033 1,449 4.2 4.3 6.0
Total 18 21 29 2,553 1,839 2,514 25,928 24,532 45,286 2.4 2.3 4.2

Correspondence of 30 July 2009
from Stephen Quinn

From the Permanent Secretary
Stephen Quinn

Netherleigh
Massey Avenue
BELFAST BT4 2JP

Telephone: (028) 9052 9441
Facsimile: (028) 9052 9545
Email: stephen.quinn@detini.gov.uk
janice.davison@detini.gov.uk

Our ref: PS DETI 247/09

Mr Paul Maskey MLA
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
Belfast BT4 3XX 30 July 2009

Dear Chairman

PAC evidence session on “Review of Assistance to Valence Technology:
A case study on Inward Investment

1. I write with reference to your 29 June letter requesting some clarification and supporting documentation for points raised during the oral evidence session on 18 June in relation to paragraphs 7.22 to 7.24 of the NIAO Report.

2. As you may be aware, I spoke to the Comptroller and Auditor General on the day following the oral evidence session as I was concerned, on reflection, that the Committee should be alerted that the NIAO may not share our view of the matter.

3. Paragraphs 7.22 – 7.24 refer to a particular issue noted in the interim findings of the Private Investigation report. The issue relates to the assertion that Valence had “swapped its own stock for some of its own stock" in a complicated transaction regarding the provision of a $30million funding line to the company. This caused a question to be raised in IDB at the time of the interim report (August 2001) as to whether their $30m pre-condition for raising the cap from $5m - $11m ,in March 2001, had in fact been satisfied prior to the release of additional grant monies. The question was raised by way of an internal e-mail between two Directors within IDB and, as noted at paragraph 7.24 of the NIAO report, there is no documented record of a conclusion to this specific e-mail trail. The Department ‘s view is that a documented reply, or an explanatory note, should have been placed on file explaining how the question had been answered.

4. However, as reflected in oral evidence, the Department believes, from other records available, that the $30m pre-condition was properly satisfied. I attach, at Annex 1, a copy of a 18 January 2001 letter from McClure Watters, Chartered Accountants. This sets out the detail of the share issue transaction referred to in the Private Investigation Report ie Valence issued to West Coast Venture Capital Inc its own stock in return for a mix of"$11,348,273 cash and $18,287,581 of loans/advances (ie assets) to different entities". It transpired that within these “assets" were, as reported in the Private Investigation Report, stocks in several companies including 250,000 shares in Valence itself. However paragraph 4 of the letter goes on to explain that the company will then raise a credit line of $20m from Carl Berg, secured on the loans/advances. This transaction, namely cash of $11m plus an additional credit line of $20m, satisfied the $30m pre-condition in the offer by introducing over $30m to the company by way of available funding. The series of related transactions outlined in the letter are confirmed by the Company’s audited SEC filing document “Form 10-K" for the period to March 2001. I include, as Annex 2, a copy of page 21 of this filing which details the transaction in line with that outlined in the McClure Watters letter.

5. The Department concurs with paragraph 7.24 of the report that there is no evidence available of a conclusion to the internal e-mail trail within IDB. However, on the substance of the issue raised by the internal e-mail, the Department is content that IDB’s pre-condition was satisfied as outlined above. However, as your 29 June letter implies, the implications of the McClure Watters letter and the SEC filing may not have been brought out fully during the clearance of the draft report. For this, I apologise.

6. I hope that the above paragraphs and supporting documents adequately clarify the Department’s view on the question raised. However, should you require any further clarification, please do not hesitate to contact me.

7. A copy goes to David Thomson, Treasury Officer of Accounts.

Yours sincerely

Stephen Quinn signature

Stephen Quinn

Correspondence from McClure Watters
Correspondence from McClure Watters

Annex 2

[EXTRACT]

Valence SEC Filing Form 10-K (extract)

We May Have A Need For Additional Capital

At March 31, 2001, we had cash and cash equivalents of S3,755,000. In addition, effective Fehruary 13. 2001, we completed the acquisition of S30.0 million of assets consisting of cash and investment equivalent instruments from West Coast Venture Capital, Inc. in exchange for approximately 3.5 million shares of our common stock. During fiscal year 2001, Mr. Carl Berg (stockholder), extended a S20 million line of credit to (he Company to he secured by the assets acquired from West Coast Venture Capital. Inc.

In June 2001, Carl Berg provided us with a financing commitment letter pursuant to which he committed, subject to customary conditions, to providing (or causing another person or entity to provide) the Company with additional financing of up to $20 million during fiscal 2002, in the form of a secured loan, equity investment, or a combination of both.

After taking into account our cash and cash equivalents, projected revenues, receipt of funds, and financial commitments, we expect that we will have sufficient financing through fiscal 2002 to complete funding of required capital expansion, research and product development, marketing, general and administrative expenses and the costs of integrating the Telcordia licensing activities. Our cash requirements, however, may vary materially from those

Page 21

Appendix 4

List of Witnesses
Who Gave Oral Evidence
to the Committee

List of Witnesses Who
Gave Oral Evidence to the Committee

1. Mr Stephen Quinn, Accounting Officer, Department of Enterprise Trade and Investment (DETI)

2. Mr Alistair Hamilton, Chief Executive, Invest NI

3. Mr Mel Chittock, Acting Managing Director of Corporate Services, Invest NI

4. Mr Brian Dolaghan, Director of Engineering and Business Services Division, Invest NI

5. Mr John Dowdall, Comptroller and Auditor General

6. Mr David Thomson, Treasury Officer of Accounts.