Strategic Investment Funds

In principle, the policy objectives of an investment should be expressed in terms of its ERR estimated in accordance with one of several accepted methodologies (see appendix B). Although externalities can be hard to identify and objectively quantify, the ERR provides a single estimate of the social and economic impacts of an investment project. In practice, however, most SIFs use simpler, albeit less comprehensive measures. For example, the GEEREF measures its policy achievements in terms of the amount of clean power generated. The EFSI's main policy success benchmark is the amount of external investment unlocked by its guarantees for investment in the fund's defined priority sectors, with the aim to generate a 1:15 multiplier on its investments. The ISIF measures its policy objectives against the triple criteria of additionality, no displacement, and no deadweight, as illustrated in box 5.

Box 5. The Double Bottom Line of the Ireland Strategic Investment Fund

The Ireland Strategic Investment Fund (ISIF) started operations in December 2014 with €7.6 billion capital from the National Pensions Reserve Fund. The overarching purpose of ISIF is to invest on a commercial basis in a manner designed to support economic activity and employment in the State. The fund has a stated target of a 1:2.6 multiplier on its invested capital.

ISIF's act of establishment lists the following investment criteria:

The investment performance goal is to exceed the average cost of government debt.
No withdrawals shall be made from ISIF for budgetary purposes before 2025. Thereafter a dividend-type payment of up to 4 percent per annum may be paid to the exchequer.
Investments shall not have a negative impact on the net borrowing of the general government of the state for any year.

ISIF measures the economic impact of its investment activity by applying the following three concepts:

Additionality, that is, the additional economic benefits to the gross value added /gross domestic product that are likely to arise as a result of an investment over and above what would have taken place anyway.
Displacement, or a reduction in the additionality generated by an investment when measured at the level of the overall economy, due to a reduction in such benefits elsewhere in the economy.
Deadweight, as when the economic benefits generated by an investment would have been achieved without such investment being made.

The ISIF seeks to allocate the majority of its capital (80 percent of its portfolio over time) to priority sectors that are likely to have high potential economic and employment impact, while also ensuring that all investments satisfy the fund's commercial return objectives. The remaining capital is invested in assets that provide shortterm gains, accelerate market activity, or address instances of market dysfunction. Some of the sectors with the lowest levels of deadweight and displacement and highest levels of additionality would be those involved in exports, manufacturing, and internationally traded services.

Investment opportunities that lead to economic additionality and have low levels of displacement and deadweight are likely to result in a high economic impact at the overall economy level over the long term. Economic additionality can come in many forms, including increased output (turnover), profits (operating surplus), employment, net exports, and capital expenditure. The supply of enabling infrastructure also creates additionality in the future, by facilitating future competitiveness of the economy. Similarly, innovation and investment in research and development have long-term additionality that may not be immediately evident but is necessary for long-term sustainable economic growth.