Taxpayer expected to take £30m loss on Northern Ireland investment scheme
The taxpayer is expected to make a loss of almost £30 million from "high risk" but important investment schemes promoting small business expansion in Northern Ireland, the Audit Office said.
Private investors who signed up for the same venture capital and loan funds could achieve returns of up to 57% during the same period.
Government jobs creation agency Invest NI launched its Access to Finance initiative in 2009 in a bid to attract private capital where little had previously existed. Its intervention is expected to make some return from all investment and loan funds and may create or safeguard 5,000 jobs while boosting the economy by £1 billion by 2024, the watchdog report said.
Comptroller and auditor general Kieran Donnelly said: "The Access to Finance strategy is providing an important source of finance to local SMEs (small and medium-sized enterprises).
"However, it is a long-term initiative, involving inherently high risk investment activity, and whilst there is potential for longer term success, sufficient evidence is not yet available to demonstrate that it is delivering value for money."
His report predicted losses could be worth £29 million while private investors may enjoy a £44 million return.
Invest NI dividends have been ranked as a lower priority than those of private investors. That was intended to attract capital but also created a significant performance gap.
For example, in development funds where Invest NI and the private sector each invested £30 million, Invest NI forecasts that it could recoup £7.2 million and that private investors could receive £53 million.
The Audit Office called for more use of co-investment, meaning the equal sharing of investment risk and returns with private investors.
It added: "The fee structures provide little incentive for fund managers to deliver strong financial and economic outcomes, and instead focused heavily on the number and value of investments made."
Invest NI opted for an in-house method of overall management of the funds to avoid delay when the fees of an external manager may have been covered by a low interest loan from Europe.
It also became embroiled in a legal dispute over performance "concerns" about one fund manager, E-Synergy, in 2014. It was settled this year after Invest NI had paid the company £3.2 million in fees and incurred £240,000 costs.
The report said: "The selection of fund managers is critical to the success of funds.
"Invest NI must ensure that all appointment competitions rigorously test the ability of bidders to provide a high quality service.
"Invest NI must also ensure that its oversight of fund managers is capable of promptly identifying issues such as breaches of contract and potential conflicts of interest and of gathering sufficient evidence to take action to tackle poor fund manager performance."
The public body should clearly define the outcomes it seeks in developing the local risk capital industry, including targets for future levels of private borrowing for investment (leveraging), the report added.
An Invest NI statement said it was a 15-year strategy designed to stimulate economic growth and the report acknowledged it was too early to estimate value for money, even though thousands of extra jobs are expected.
"By next year, SME's supported through the loan funds are expected to have generated up to £175 million of Gross Value Added in the economy.
"Our equity funds are also having a positive impact with investments in Path XL and Ingresso realising a financial return of £2.8 million against an investment of £1.2 million.
"These are strong examples of how the funds will deliver good economic and financial returns for the Northern Ireland economy."
SDLP Assembly member John Dallat queried why the strategy exposed the taxpayer to much higher rates of borrowing that were clearly loaded in favour of private investors standing to make very significant profits.
"This is money that the small and medium-sized sector could have been doing with given the particular challenges that they face as they brace themselves for the unknown challenges following Brexit.
"This report illustrates more than anything the need for our assembly to be doing the business it is supposed to and that includes scrutinising government spending especially when strategies adopted bring about outcomes that are clearly not good value for money in any sense of the word."