A management information system being used on a trial basis by the IDA and Enterprise Ireland takes into account for the first time the cost of Government funds, the distortion effect created by immigration and the willingness of companies to make investments irrespective of whether they receive aid or not. Prof Patrick Honohan, of the Economic and Social Research Institute, presented his formula for assessing industrial development yesterday, saying the model being used since the early 1970s fails to take account of these factors.
"In fairness to the IDA and Forbairt (Enterprise Ireland's precursor), they have had a system that has been in place for a number of years and, although they have neglected these points and have exaggerated these benefits, they have allowed themselves a margin of error. They said they would not go ahead with a project unless the ratio of benefits to costs was four to one," he said. Prof Honohan said the four to one margin was "about right" under the old scheme and "serious mistakes" had been avoided.
His publication, "Key Issues of Cost-Benefit Methodology for Irish Industrial Policy", notes that cost-per-job grant aid averaged £10,400 for indigenous companies in 1989-1991, increasing to £13,300 in 1992 and to £15,000 in 1993. His formula gives an undistorted cost/benefit ratio of one to one, he said, and had provided encouraging results on a sample of projects. It did not drastically reorder most projects but could "credibly contribute to a worthwhile incremental policy change". "If it comes up two to one on this, just go for it. Give them the grant and send them out the door. But the 0.9 and 0.8s, you have to ask `Why are we going for it, when the numbers are against it'."
He said the cost of Government funding had been unrecognised in the past when the focus was on job creation. But all grants had eventually to be paid for out of taxpayers' money and the new formula favoured projects with a substantial profit component. "For example, lower wage, labour intensive jobs which looked attractive before look less attractive now," he said. In recent years, immigration had become a unique factor for Ireland which meant that job creation did not automatically mean a consequent drop of Live Register numbers. Central Statistics Office figures released this week show that 44,000 immigrants took up residence in the State in the year to April, 1998. Prof Honohan added that when giving "discretionary grants", the appropriate policy for State agencies was "to shade the maximum grant rate below what a naive cost-benefit calculation would indicate". "You are in a bargaining situation with them. You have to assume in some instances that the project will proceed anyway."
