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

25 February 2009

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

Mr John Dowdall, Comptroller and Auditor General, reported today on his Review of Assistance to Valence Technology, a US-owned Inward Investment company which aimed to develop and manufacture batteries using new lithium-based technology.

Background

This is a case study of the handling of a major inward investment project from its beginning in 1993 to the end of clawback in 2007. In 1993, the former Industrial Development Board (IDB) offered Valence grants of over £27 million and a factory investment of almost £5.6 million to establish a new large-scale battery manufacturing facility at Mallusk. Valence was to invest £147 million and create 660 jobs at the plant, by March 1998. However, the company experienced continual difficulties and the anticipated technological breakthrough did not materialise. As a result, the project fell markedly short of its expected investment and job levels.

In 2003, Valence relocated its manufacturing operations to China. By this stage, some £15 million had been spent on the project by IDB. Clawback of grants by Invest NI amounted to some £5.1 million and was completed in July 2007.

Main Findings

On Project Appraisal (Parts 2 & 3 of Report)

In 1994, some eights months after IDB’s offer, Valence and its share underwriters faced a “class action” by share purchasers for issuing a series of false and misleading statements about the company’s business and future prospects. However, there is no record of any consideration, by IDB, of the impact of the action on its relationship with the company’s principals. In February 2002, Valence agreed an out-of-court settlement of over $30 million, but with no admission of liability by the company.

The Audit Office noted a wide range of issues which, in its view, called into question IDB’s decision to offer financial assistance, including:

IDB’s agreement to appraise the project within the company’s deadline of six weeks ran contrary to one of the key lessons of the De Lorean report, that IDB must insist on adequate time to carry out a full and detailed assessment, even if this results in loss of the project. It is clear that many key aspects of the appraisal were not properly assessed.

The investment market analysis, while in a number of cases carrying a “buy” recommendation, made the high risk nature of the project abundantly clear, referring to it as “best for adventurous”. In supporting the project, IDB appeared to have limited regard for its own guidance on high risk projects which highlighted the dangers of projects which involve products yet to be developed. The Department has commented that IDB had attempted to compensate for the high risk nature of the project through the structure of the offer which sought to balance the need for protection of public funds with the potential economic benefits to be gained.

The absence of a proper Business Plan – a key document in any appraisal process – precluded IDB from assessing the project’s financial viability. While the Department has said that Valence’s draft Business Plan, though limited, was supplemented by other documentation which, in large part, captured the plan for the business, the Audit Office considers that the documentation provided could not be regarded as meeting the IDB guidelines.

The economic efficiency test (assessing the net benefit to the economy), which was passed only marginally, was carried out using figures described by the Department’s economists as “clearly not a meaningful basis on which to appraise this project”. More realistic assumptions would have caused the project to fail the test.

Despite the inclusion of the appraisal Executive’s conclusion in the IDB Casework Committee papers, in the Audit Office’s view, certain of the concerns and reservations about the project, noted during the appraisal, were not explicitly and unambiguously drawn to the Committee’s attention. This undermined their ability to assess and manage risk. The Department has said that the Committee was explicitly informed that the project fell into the high risk category and measures were taken to manage risk through a cap on financial assistance.

On the Implementation and Operation of the Project (parts 4, 5 , 6 and 7 of the Report)
IDB’s decision to grant aid Valence before all pre-conditions had been met, contravened its own procedures and sent a message to Valance that IDB was equivocal about enforcement of the conditions of its offer.

IDB’s failure to obtain Valuation and Lands Agency (VLA) advice as to the value of the Valence factory, prior to agreeing a price, was a breach of well-established procedures. The fact that the VLA valuation was £175,000 less that he price already agreed serves to emphasise the poor practice involved in this transaction.

IDB accepted that an employment level of 5 at Mallusk represented “best endeavours” against the March 1995 target of 175 and released grant accordingly. Notwithstanding the company’s investment of some £9.5 million at this stage, releasing further grant when jobs were so far short of target was questionable.

In 1996, some three years after receiving IDB’s offer of assistance, Valence entered into agreements to use its technology in manufacturing operations in Korea and USA, despite not having begun manufacturing at Mallusk. The Department said this was in an attempt to gain access to the US military and Korean markets.

Despite the company’s decision to outsource the first 3 stages of the manufacturing process and to abandon its plans for an R&D facility in Northern Ireland, IDB did not press for a reduction in the amount of the offer.

In 2001, IDB increased the cap on financial assistance from £5 million to £11 million, despite worries about Valence’s viability – it was manufacturing at a cost of $57 per battery but selling at a price of only $12; an inadequate marketing plan and no marketing team; an absence of proper controls over capital expenditure; inaccuracies in financial figures presented to IDB; difficulties in achieving quality in production; and a lack of forecasts beyond 3 months.

Some 17 days after IDB paid £3.9 million of the raised cap, Valence announced 320 redundancies at Mallusk, leaving only 97 in the plant.

On Clawback of Assistance (Part 8 of the Report)

The repayment to IDB by Valence was substantially financed by the “profits” on resale of the factory – an asset which IDB had provided for Valence in the first place. Had an arrangement been put in place, as requested by DFP, for the factory ownership to revert to IDB if the project failed, then the value of the factory would have been secured in any case.

Invest NI and the Department of Enterprise, Trade and Investment accept that improved controls should have operated in a number of the issues highlighted in the report. They said that the control environment has evolved considerably over the period covered by the report and that changes implemented by Invest NI, since 2002, include – the introduction of a new Electronic Documents Records Management System; the discontinuation of new build/direct build factories (except in exceptional circumstances); the provision of Valuation and Lands Agency support through a dedicated co-located resource; and substantial development of those sections of its casework submissions that deal with economic efficiency and the wider benefits of projects.