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No room for complacency

Despite fears that the Irish economy may be over-reliant on foreign investment, the country has fared well in a traumatic year for the world economy. Victor Timon of William Fry looks at Ireland's efforts to expand its technology base and attract new investment.

While much has been made of the ‘Celtic Tiger' in recent years, there is no doubt that during the past 18 months or so it has been yawning rather than roaring. As you would expect in an economy heavily reliant on foreign investment, and US investment in particular, Ireland has not been immune to the downturn in the US and global economies.

In the technology sector, however, while IPO activity is virtually non-existent, private equity investment continues to be strong. Total investment in 2001 was estimated by Ion Equity at approximately E400m (£246m). This compared with an estimated total of E385m (£237m) in the previous year, which suggests that Ireland continues to have a strong and resilient technology sector even in the more uncertain economic climate.

Venture capital activity in the sector is strong, with international names like Accel Partners, Benchmark Capital and Doughty Hansen investing in Irish companies. The ability of Irish companies to attract international funding is due to a combination of factors including proximity to London (where many of the international funds have European bases), access to US funds, language and culture and the favourable fiscal environment.

Ireland continues to position itself to take advantage of the new and emerging technologies. One could ask, though, whether Ireland is doing enough compared with other countries and whether it is relying too heavily on the latest fad of public-private partnerships (PPPs) to fund our technology infrastructure.

A couple of new initiatives demonstrate the Irish Government's commitment to new technologies. Firstly, Ireland did not go down the auction route for 3G licences, which has contributed to the problems in the technology sector in the UK. Instead Ireland opted for a beauty parade. The Government hopes that by keeping costs low, Ireland may become a test bed for 3G applications, before they are rolled out to other countries.

A major problem in Ireland is the minimal access to broadband capacity. In the EU Ireland is currently joint last with Greece in terms of domestic broadband connectivity. The Government and the ODTR (the Irish regulator) are anxious to remedy this and to encourage the take-up of broadband.

As part of this strategy, the Government has recently announced a new broadband program to invest E200m (£123m) in creating high-speed fibre optic ring networks around regional cities and towns. It is proposed to use PPPs to fund part of this work.

But doubts are already being raised as to whether this is a viable strategy. It does not cover the ‘final mile' and Ireland's poor record to date on unbundling the local loop and the virtual unavailability outside the capital of DSL technology and cable modem access, may well deter investors.

The Government certainly likes to hype up its commitment to a digital future for Ireland (especially in an election year), but its investment pales into insignificance compared with other centres.

For example, it proposes to turn a small section of the Liberties — an underdeveloped area of central Dublin — into a digital media business zone, to be known as the Digital Hub. The financing will again be under a PPP scheme. But in contrast, cities such as Seoul in South Korea and Kuala Lumpur in Malaysia are investing vast amounts of public money in creating ‘digital cities'. It will be interesting to see how the Digital Hub can compete for major foreign investment against these heavily marketed and government subsidised schemes.

Events in the UK have certainly not helped Ireland's fledgling digital television market. There was only one bidder in Ireland to run the national digital television service and the demise of ITV Digital and the massive debts crippling NTL are unlikely to attract further investors. Already the consortium It'sTV is looking to shift the emphasis from pay-TV to internet services.

Times are not easy for IT services companies either. When the economy is in a downturn, you would expect industry to look at outsourcing IT as a way of saving money. However, a recent survey in Ireland by Cap Gemini Ernst & Young concludes that there is a lower take up of outsourcing in Ireland and even lower awareness of its benefits, than in other European countries.

However, it is not all doom and gloom. The market is expected to pick up this year and recent ‘elevator' conferences for high-tech companies (such as SummIT 2002 run by Goodbody Stockbrokers) have been well attended by venture capitalists. There is also a growing interest and government commitment to the development of a biotech and life sciences industry in Ireland.

Substantial government funding is available for biotechnology firms, especially those starting up.

This sector has been identified as a priority for the continued development of a knowledge-based economy in Ireland. It is likely there will be strong growth in business activity relating to biotechnology. Wyeth has announced it is committed to a $1bn (£690m), four-year investment in the construction of the world's largest biotechnology campus on the outskirts of Dublin.

So not a great year for Ireland, but not a terrible one and not a great year for anyone else either. Confidence is returning and while the hectic activity of the late '90s may be over, the relentless march towards deregulation and economical broadband availability (not to mention the drive to apply the Celtic Tiger model to the biotech industry) will keep technology lawyers busy in Ireland for some time to come.

Copyright © 2002 William Fry

Victor Timon is a consultant with William Fry in Dublin.

William Fry is one of Ireland's largest and most experienced law firms. With a staff of over 250, the firm specialises in corporate law and has significant capabilities in mergers & acquisitions, financial services, technology, litigation, commercial property and taxation. For more information please visit www.williamfry.ie