COMMITTEE of PUBLIC ACCOUNTS debate -
Thursday, 24 Feb 2000

Vol. 2 No. 7

1998 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 30 - Department of the Marine and Natural Resources.

Mr. T. Carroll (Secretary General, Department of the Marine and Natural Resources), and Mr. J. O'Connor (Chief Executive, Central Fisheries Board) called and examined.

Acting Chairman (Mr. McCormack)

The relevant documentation of copies of letters forwarded to the Department of the Marine and Natural Resources, dated 7, 14 and 15 February has been circulated. There was correspondence dated February 2000 from the Department of the Marine and Natural Resource on consultants engaged by the Department.

Witnesses should be aware that they do not enjoy absolute privilege. The attention of members and witnesses is drawn to the fact that, as and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privilege and Immunities of Witnesses) Act, 1997, grants certain rights to persons identified in the course of the committee proceedings. These rights include the right to give evidence, the right to produce or send documents, the right to appear before the committee either in person or through a representative, the right to make a written and oral submission, the right to request the committee to direct the attendance of witnesses and the production of documents, and the right to cross-examine witnesses. For the most part, these rights may only be exercised with the consent of the committee. Persons being invited before the committee are made aware of these rights. Any persons identified in the course of proceedings who are not present may have to be made aware of these rights and provided with a transcript of the relevant parts of the committee's proceedings if the committee considers it appropriate in the interests of justice. Notwithstanding this provision in legislation, I remind members of the long standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I ask Mr. Carroll to introduce his officials.

Mr. Carroll

I am accompanied by Mr. Tom Power, Assistant Secretary in charge of forestry, Ms Sarah White, Assistant Secretary in charge of fisheries, Mr. Brendan Buckley, who works in the finance division of the Department and Mr. Patrick MacHale, who works in the inland fisheries division.

Acting Chairman

I ask Mr. John O'Connor, chief executive of the Central Fisheries Board to introduce his officials.

Mr. O’Connor

I am accompanied by Mr. Cecil Keaveney, who is the Director of Finance in the Central Fisheries Board.

Acting Chairman

We will take the paragraphs one at a time. Paragraph 26 of the Report of the Comptroller and Auditor General reads:

Since July 1997, the Department of the Marine and Natural Resources is responsible for the operation of the EU Afforestation Grant and Premium schemes introduced in 1989. (Up to 1993 the former Department of Energy was responsible while the Department of Agriculture, Food and Forestry was responsible until 1997). The purposes of the schemes are to promote and support afforestation as an alternative use for agricultural land and to encourage the diversification of agricultural land to forestry related activities. The schemes are co-financed, 75% by FEOGA and 25% by the State. Under the schemes, grants in general were paid to farmers and non-farmers who complied with the conditions of the schemes by way of a 75% first instalment grant at establishment stage and a 25% second instalment grant four years later, subject to proper care and maintenance of the plantation. Under the CAP Afforestation Grant and Premium Schemes, which have applied since 1993, a yearly premium is also payable.

For a large number of hectares planted and grant aided each year, grant applicants employed contractors to carry out the forestry development work on their behalf. In most of these cases the applicant mandated or assigned the grant payment to the forestry contractor as consideration for the development work. The mandating system administered by the Department also facilitated planters in borrowing money from financial institutions to cover the cost of carrying out development works themselves. However, the yearly premium is payable to the landholders.

In April 1992, when increased grants were introduced, a flat rate administration charge of 5% of the value of grant payments to beneficiaries was introduced. This charge continued until December 1995. In the period April 1992 to December 1995, £4.5 million was collected in charges in respect of 6,221 applicants.

During audit it was noted that:

- The charge was introduced without the advice of the Chief State Solicitor's Office (CSSO) or the Attorney General (AG). In January 1993, the Department of Energy was made aware by the CSSO that the legal basis for the collection of this charge was doubtful. Contrary to the advice the charge was continued.

- The charge was dropped in December 1995 following an EU audit which identified it as being contrary to EU regulations. In addition the EU Commission made it known that it would impose a financial correction if the amounts were not repaid.

- The pre-planting approval letter stated that an administration charge would apply to beneficiaries of grants and would be calculated by reference to the value of the grant payment at the rate of 5%. Payment was subsequently made to the Department, directly by the applicant or in many cases by a contracting company on behalf of the applicant.

- Department of Finance sanction was obtained in November 1997 to refund the charges on condition that legal advice was obtained from the AG's Office on the matter of appropriate entitlements to refund. The charges were repaid in 1997 (£3.4m), 1998 (£1.1m) and 1999 (£0.04m) on the following basis:

- To the afforestation contractors where the contractors had been invoiced for the charges (£3.25m to 30 contractors). The contractors were required to sign an indemnity to refund the amount to the Department should another party prove better title to it .

- Direct to the grantee where the grantee had been invoiced for the charge (£1.25m).

The Accounting Officer informed me that:

- The introduction of the administration fee arose as a consequence of Government policy in the late 1980s to reduce the national debt. An aspect of that policy, developed by the Department of Finance, was the introduction of charges for services which were being supplied free by the State. In that connection, charges in respect of tree-felling licences and repeat visits by Forestry Inspectors were introduced in 1990. The 5% administration fee was introduced early in 1992 in conjunction with increased rates of grants and premia. The concern at that time was to frame the administration fee in such a way as to be acceptable to the EU. The prevailing wisdom was that, if the administration fee was set at a level below the actual costs of administering the scheme and was treated as a separate transaction rather than as a deduction from the grant payment, it would be acceptable to the EU. The view was taken within the Department that the Appropriation Acts and the Forestry Act, 1946 provided the legal basis for introducing the fee. Legal advice to substantiate this interpretation was not secured at that time.

- In 1993, the CSSO and the AG's Office raised doubts about the legality of the fee under national law. The position was not clear cut, however. For example, the AG's Office pointed out that whether or not the Department could justify the 5% charge by reference to actual administrative costs incurred would have a bearing on the matter. There followed lengthy internal consideration of the issue and correspondence within the Department and with the CSSO and the Department of Finance. The CSSO and the AG's Office gave their definitive view in late 1994 that the Minister did not have the power to introduce the administration fee as it stood. Consideration then focused on whether the administration fee could be reframed in line with the comments by the AG's Office and also on the possibility of amending legislation. However, events were overtaken by the development at EU level in January 1995 when the Commission informed all Member States of its view that the imposition of offset and administration charges on payment to beneficiaries was unacceptable. Following consideration of the matter within the Department, it was decided to abolish the administration fee from the end of 1995.

Mr. Purcell

The Department, through its forestry service, is responsible for the promotion and support of afforestation, using various grants and premium schemes. The Department took over this role from the Department of Agriculture in 1997. Before that, the former Department of Energy was in charge. The schemes are mainly co-financed, with 75% from the EU and 25% from the Exchequer.

Paragraph 26 relates to a decision made in 1992 to introduce an administration charge for the processing of applications for grants and premia made under the EU afforestation schemes, which had been introduced in 1989 to promote tree planting. The charge was set at 5% of the value of the grant and was sought up front by the Department. The charge was dropped in 1995, following advice from the EU Commission that it was contrary to EU law.

In order to stave off the possibility of a financial penalty from the Commission, the Department decided in 1997 to refund the amounts collected. As members will see in the paragraph, a total of £4.5 million or so was repaid between 1997 and 1999, mostly to contractors who had carried out the planting work on behalf of landowners. I think about £30,000 remains to be refunded.

The Accounting Officer informed me that the decision to introduce the charge was a consequence of Government policy in the late 1980s to reduce the national debt. However, legal advice had not been obtained prior to the introduction of the charge. Subsequently, in 1993 both the Attorney General's office and the Chief State Solicitor's office cast doubt on its legality.

The paragraph serves to highlight the importance of obtaining sound legal advice before decisions of this nature are taken to ensure, as far as possible, that the decisions are legally correct in the first place and that the likelihood of the State being exposed to significant additional costs in correcting such decisions is minimised.

Deputy Gildea

Will Mr. Carroll fill us in on the refunding of fees and the failure to comply with the law?

Mr. Carroll

As the Comptroller and Auditor General explained, this charge was introduced in April 1992 by the then Department of Energy. It then went to the Department of Agriculture and came to the Department of the Marine and Natural Resources in 1997. At that stage we picked up the baton and a decision was quickly taken to refund the fees, which has been done.

These fees were imposed by the Department which was under extreme pressure to raise money given the state of public finances at the time. The imposition of the fees was not questioned by the people who had to bear them - they bore them without question. The fees were never disputed or claimed back by those who bore them.

The State reviewed the matter on the basis of various legal advice becoming available. Legal advice is often not clear cut and there was much discussion and examination of the question. The prime driver, if you like, in the decision to suspend and refund the fees arose from an EU decision. The EU was funding 75% of these programmes and that decision arose from an investigation of similar practice in other member states. The initial decision related to a similar scheme operating in Denmark. This was fairly common practice.

Arising from that review in Denmark, the Commission circularised all member states stating that, where the EU funds schemes, it should not be indirectly financing the administration charges being levied by the State. I suppose in economic terms what was happening here was that the fee was being shifted on to the costs of the scheme. That was being paid to the Exchequer and the EU was funding it indirectly in an economic sense. The EU said that was not on.

On foot of that, the fee was cancelled. When the question of EU audits and accounts for the various years came up, there was a question of perhaps disallowance and penalty arising from the EU. On foot of that, the decision was taken to refund the fees and those refunds were made. That is the history of the issue.

On the question of legal advice, I have read the correspondence on the files which go back a long time. The Department at the time, and those involved, acted on a bona fide basis. One must remember that the way the courts now monitor the State and its powers is quite different to ten years ago. We have had major landmark decisions, such as the Mullaghmore planning decision. The State previously took decisions to develop property outside the planning process and that was accepted for many years. There was a fundamental change in how the courts saw the State operating. Nowadays, it is difficult to see how a Department would move to do something like this unless it had cast iron positive legal advice that it was absolutely clear cut. Ten years ago when these things were being thought about first there was a different view, that is, that unless the State was almost prohibited from doing something, it could do it. There has been a philosophical change there.

When the legal advice was got, it came after the event questioning the imposition of the fee. There was room for argument. It was not entirely clear cut. As I said, what drove it, the final decision to end the fee and refund it, was the possibility of disallowance by the European Commission. I hope that explains the history of it.

Deputy Gildea

The gist of your reply would suggest the Department was more concerned about the European Union's attitude than it was with penalties it had imposed on the applicants.

Mr. Carroll

Was there a penalty on the applicants? That is an interesting question. Where is the incidence of this administration fee? It was levied and borne without question. What did the administration fee do? In economic terms, I presume it was pushed through to the costs and was recouped through the grants system. There was no penalty. It is open to argument that there was no penalty on anybody. The EU, having analysed the operation of these schemes in Europe, said that the State's administration of the scheme was being funded indirectly by the EU in a circular process and that this was not the purpose of these schemes. The EU ruled it out generally. That brought the matter to an end.

Deputy Gildea

Am I correct in thinking that the fee was imposed on applicants for afforestation grants, especially farming applicants, and that the applicant had to pay the fee out of his grant and, therefore, as such, it could only be regarded as a charge on the applicant's grant? That brings me back to my previous statement that the Department was more concerned with pleasing the EU than it was about any penalties unfairly imposed on the applicants.

Mr. Carroll

It was not a penalty. The question is, who bore the economic cost of the fees? Where do the incidence of that lie? We nearly need to do a PhD on that. I would not say it was a penalty. The question is, what happened the costs of the scheme? The bulk of afforestation planting is done by contractors. The bulk of farmers mandate the contracting grant, the grant for planting, to contractors. The grant was supposed to cover the full cost of the plantation and if one said the incidence of the 5% was on the contractor, 5% on the contractor's margin would have been an enormous burden and penalty if he could not increase his price accordingly. If one says the profit margin is 10% or 15% and if one had to bear the cost of that and that the pre-administration cost charge and the post-contracting charge were the same, then the incidence of 5% would be on the contractor. There was not a squeak about this, so I do not think there was a penalty.

Deputy Gildea

I put it to you that the reason there was not a squeak was that people, in general, are afraid to take on Departments.

Mr. Carroll

I wish that was true.

Deputy Gildea

Would you agree it was bad practice?

Mr. Carroll

After the event, it was clear it did not work and was a mistake. It was brought in by the Department, by people who were under intense pressure to find budgetary measures to reduce their net budgets. It was not done for the hell of it; it was done to finance Government expenditure and probably prevent some cuts in schemes. It was not done to penalise any individual but to meet overall Government financial parameters.

Deputy Gildea

I put it to you bluntly that it was a case of the Department looking at an EU grant and saying we will get a cut of that.

Mr. Carroll

There was a large volume of grants going through. Many of the grants came through in the late 1980s and early 1990s at a time when there was strict staff restrictions and limitations on administering new schemes. Everybody was being pushed hard and resources were being stretched to administer the schemes without the necessary addition of administrative resources. One way to lighten the burden on the Department and of easing up the administrative budgets was to get additional administrative revenue, and this was a way to do that. Coillte is planting and is engaged in contracting. A lot of other contractors are involved. They would have borne the levy and would have been refunded in the same way as any other contractor.

Acting Chairman

Did they finish up with a plus or a minus?

Mr. Carroll

That comes back to the question. It is really an economic question: Where is the incidence of this?

Acting Chairman

I do not understand the answer to that. Did they finish up with making, balancing or losing money as a result of the schemes they administered?

Mr. Carroll

You would have to be able to compare how they would have fared had this not been imposed. One does not know the answer to that because one does not know what would have happened the costs of the contracting grant.

Acting Chairman

If you do not know, I do not know either.

Deputy Ardagh

What sort of acreage is forested by Coillte and managed and owned by it?

Mr. Carroll

I will just source the figure. It is a very large estate. As you know, afforestation in Ireland up to effectively the 1980s was carried out almost solely by the State, originally through the Forest Service, which was there since the early 1900s. Coillte took over that estate when it was established. It is a very big estate. I will get the precise figures.

Deputy Ardagh

At what stage of development would the timber be on those acres?

Mr. Carroll

At various stages. Some of it is being harvested and is in the market as we speak, while some is being planted. It goes through the whole cycle. Depending on the species it is a 40, 50 or 60 year cycle.

Deputy Ardagh

Is most of it evergreen or hardwood? What sort of timber is on it?

Mr. Carroll

Most of it would be conifers.

Deputy Ardagh

What is the market for conifers and what is the market for Coillte's product?

Mr. Carroll

Coillte sells its product through an arms length kind of sales system on the Irish market, through the processors on the Irish market, which are Irish sawmills. It also sells to Louisiana Pacific in Waterford, while different elements of the estate are sold to the boardmills.

Deputy Ardagh

Does it have a monopoly or near monopoly with regard to timber?

Mr. Carroll

It has monopsony in relation to——

Deputy Ardagh

A what?

Mr. Carroll

A seller is a monopsony

Deputy Ardagh

That is a new one.

Mr. Carroll

We must not have gone to the same economics classes. The private estate is now growing and at present 80% of new planting is non-Coillte. The size of the estate is 400,000 hectares.

Deputy Ardagh

That is very big. Could you reference that to the size of, say, a county?

Mr. Carroll

I do not know off-hand. Somebody will research that.

Acting Chairman

Or a constituency?

Deputy Ardagh

Take the size of Ireland, which is so many square miles.

Mr. Carroll

I am told that 1.2 million hectares amounts to 17% of land area, 400,000 hectares is one third of that, so it is 6% of the total land area.

Deputy Ardagh

We are referring to the 26 counties. Is that correct?

Mr. Carroll

Yes.

Deputy Ardagh

The average size of a county would be 4%, so it amounts to a county and a half in terms of size?

Mr. Carroll

Yes.

Deputy Ardagh

It is owned and managed by Coillte?

Mr. Carroll

Yes.

Deputy Ardagh

That is a very valuable resource.

Mr. Carroll

How do you value a timber resource in the ground which will be taken down 40 or 50 years later?

Deputy Ardagh

You tell me. Surely there is a way to value it.

Mr. Carroll

Yes. The valuation conventions for standing timber estates is a tricky business. The Coillte balance sheet is approximately £1,000 million, or £1 billion.

Deputy Ardagh

How much does that work out at per hectare? Is the sum of £1 billion arrived at on the basis of valuations done by experts in the valuation of timber or is it a ballpark figure taken out of the sky? How is it done? How did you get a valuation of £1 billion on your balance sheet?

Mr. Carroll

A valuation was put on the transfer in 1989 and the addition to the estate since, but in the Coillte accounts, which I do not have with me, there is a note on the valuation methodologies applied. The question of the valuation of timber estates is a difficult area and it can be controversial because of the length of time. If you take a view on what the price of timber will be in 40 or 50 years time and if you take a conservative as against an optimistic approach you can get enormous variations in the valuation of the assets of timber companies.

There are various ways of valuing. There is an ongoing exercise which will be completed in the next couple of months. A major strategic study review of Coillte is being undertaken by the Department. In that exercise various alternative methodologies are being applied to what Coillte would be worth if it was to be put on the market as an estate for sale, apart from its assets as detailed in the accounts. Depending on the valuation methodology adopted you can get enormous variations in the value, from quite low to quite high.

Deputy Ardagh

Are there benefits to be derived from considering privatisation of Coillte?

Mr. Carroll

That is one of the options being analysed. The submission to the Government on the basis of the consultants' report will be available within a month or so and it will give a view on that.

Deputy Ardagh

Would you expect that the value set out in the report will be in excess of the sum of £1 billion on the balance sheet at present?

Mr. Carroll

No.

Deputy Ardagh

What is the current value of a hectare of mature timber, of conifers?

Mr. Carroll

I can find out for you.

Deputy Ardagh

People often ask how they can reduce their tax liability and a common response is to go into forestry. How does one reduce a tax liability by going into forestry?

Mr. Carroll

The profits from woodland development are exempt from income and corporation tax.

Deputy Ardagh

What about the capital cost involved? Is there any allowance against that?

Mr. Carroll

It depends on whether it is a transferable allowance. If there is no tax the allowance is not worth anything. The only question that arises is whether it is a separate trade or whether there is a capital allowance which can be transferable, which I very much doubt.

Acting Chairman

What about paragraph 26?

Deputy Durkan

Paragraph 26 states:

In April 1992, when the increased grants were introduced, a flat rate administration . . . .

During the audit it was noted that:

The charge was introduced withoutthe advice of the Chief State Solicitor'sOffice . . . .

This was referred to by Deputy Gildea already. The paragraph further states:

In January 1993, the Department of Energy was made aware by the CSSO that the legal basis for the collection of the charge was doubtful. Contrary to the advice the charge was continued.

On what basis was the charged continued, given the legal advice which was made available at the time and the degree of liability which could arise in the event of similar legal advice being ignored in an analogous situation?

Mr. Carroll

From my reading of the papers and my discussions with the people who were involved on this, the view of the people involved was that the legal advice was not clear cut. They introduced it without legal advice, which would not happen nowadays given the way these things have gone and the whole new culture which is there. Having introduced it, when the legal advice or legal soundings became available that it was doubtful, clearly people were quite slow to act on that and I think they satisfied themselves that there was a basis for it. Under the Appropriations Acts and the Forestry Act, 1946, they felt they had a basis for it and that is how they acted.

Deputy Durkan

It is interesting though that, first, the system was introduced without legal advice and, second, when the legal advice became available, it was ignored. Paragraph 26 states, "Contrary to the advice the charge was continued." Therefore, having received this legal advice, somebody in the Department must have said they were to continue to levy this charge regardless. For all we know, that could apply to a multiplicity of other issues also. This is just one which the Comptroller and Auditor General has identified. I put it to Mr. Carroll that in those circumstances there is not much sense in having the legal advice, unless of course the Department felt that the legal advice was not soundly based.

Mr. Carroll

I see lots of legal advice. The one thing fairly clear about legal advice is that it is often not clear. It is a balance of probability.

Deputy Durkan

In this case it was unclear, was it?

Mr. Carroll

No. If the Deputy reads my comments on the next page of the Comptroller and Auditor General's report, I stated:

In 1993, the CSSO and the AG's Office raised doubts about the legality of the fee . . . [and the view taken was that] The position was not clear cut, however. For example, the AG's Office pointed out that whether or not the Department could justify the . . . charge by reference to actual administrative costs . . . would have a bearing on the matter.

There was a lot of consideration of that and correspondence about that, and there was consideration of whether it could be reframed. This went on for some time. It took a long time admittedly. They had the charge in place, it meant a lot to them to have the money from it, there was obviously legal advice which caused them a lot of trouble——

Deputy Durkan

It caused them no trouble because it was ignored.

Mr. Carroll

No. They took this very seriously. A lot of work was done on it.

Deputy Durkan

Chairman, will the Secretary General inform the committee how the Department reacts when it takes advice seriously, if it continues for a further two years after it was given legal advice to the effect that this was not legally applicable? That was what the Department, by Mr. Carroll's own admission, was concerned about it. If the Department was not concerned about it, what would it have done? Would it have gone on indefinitely?

Mr. Carroll

They were very concerned about it. Let me talk about legal advice for a moment. The legal services of the State are excellent but, like all other services at present, they are extremely stretched. One can find it very difficult to get legal advice on a timely basis and decisions often have to be made.

Acting Chairman

The Deputy is asking about legal advice which had been received. It was not difficult to get; it had been received at that stage.

Mr. Carroll

Yes, but the Deputy asked me a general question about how the Department handles legal advice.

Deputy Durkan

It was not a general question.

Acting Chairman

Deputy, please repeat the question.

Deputy Durkan

In this situation, the Department was given legal advice, which was clear and precise.

Mr. Carroll

No.

Deputy Durkan

The Comptroller and Auditor General seemed to think otherwise. Somebody did not take any action for two years, yet Mr. Carroll states that the Department was very concerned about the legal advice. If the Department was concerned about the legal advice in this particular case, how come it took the Department about two and a half years to react, and only then when a further bulletin came from the European Commission to the effect that it was going to take action?

Mr. Carroll

The definitive legal advice was received only in late 1994. That is when the thing was absolutely put beyond doubt.

Deputy Durkan

From whom?

Mr. Carroll

From the Attorney General's office.

Deputy Durkan

Did that agree with the previous legal advice?

Mr. Carroll

I think all the doubts were gone at that stage - all the possible "outs", if you like.

Deputy Durkan

There was no way out at that stage.

Mr. Carroll

There was no way out.

Deputy Durkan

The Department was cornered at that stage. Did it have to change its mind?

Mr. Carroll

Yes.

Acting Chairman

The committee notes paragraph 26. Is that agreed?

Deputy Durkan

It should be noted that, whereas the particular legal advice was received in a Department, action was not taken despite the fact that it was obviously sound advice and the advice was not taken on board and acted upon until such time as there was no other avenue.

Acting Chairman

That is noted, and paragraph 26 is noted. Is that agreed? Agreed.

Paragraph 27 of the Report of the Comptroller and Auditor General reads:

Forestry Failures due to Shell-Marl Soil and Related Conditions.

Under the various forestry schemes, the Department operated an advisory service whereby at application stage the site to be planted was examined by the Department's inspectors who advised on the suitability of the site and the prescribed and most suitable species. Based on this report an approval letter issued allowing the applicant to proceed with the plantation. The second instalment becomes payable following a further inspection of the plantation, usually within four years.

Since 1992, certain afforestation plantations which were planted in the late 1980s and early 1990s were discovered, mainly at second instalment stage, not to have thrived. Following soil testing, it was established that these plantations would not produce a commercial crop and in fact the trees would die due to the presence of shell-marl in the soil. The geological condition had been known to exist since the 1950s on certain lands purchased by the State as it had been found that such lands planted in the 1950s and 1960s had proved unsuitable for forestry.

During audit the following was noted. First, many of the inspecting staff who carried out field assessments at pre-planting approval stage were not aware of shell-marl condition.

Second, in order to identify and prevent the planting of shell-marl sites at approval stage, soil testing in general was introduced in 1994.

Third, a number of sites had been planted when Coillte, the State body, acted as agents for the Department on advisory/inspection work but there was no formal written contract covering Coillte's responsibilities and role in regard to the inspections and advice.

Fourth, following advice from the Chief State's Solicitors Office, Department of Finance sanction was sought in 1997 for the payment of second instalment grants under the afforestation grant schemes in cases affected by shell-marl conditions and not to recoup the first instalments already paid as it was understood from discussion with the EU Commission that it would not seek recoupment of its contribution towards the cost of the first instalment. The Department of Finance was also informed that the Department had come to an agreement whereby Coillte would undertake a soil survey of the sites concerned - at Coillte's expense - and, where appropriate, return the land to agricultural use - again at Coillte's expense. The survey would show whether certain of the sites concerned could produce commercial crops of broadleaved species and those sites deemed unproductive would be returned to agricultural use and the owners would be encouraged to enter the FEOGA scheme of REPS grants. Department of Finance sanction was given in June 1997 on the following conditions: the write off of first instalment grants already paid was limited to a total of £67,000; payments of second instalment grants were also limited to a cumulative total of £67,000; and these arrangements were to be in full and final settlement of 36 cases involved.

By May 1999, I noted that the number of shell-marl cases had risen to 58 involving 373.5 hectares. The conversion cost of returning these lands back to agricultural use is estimated at £740 per hectare. I requested information as to the extent of this problem and its possible financial effect on the Exchequer. I also inquired whether any further cases had come to light of crop failure on sites planted since the new procedures were introduced in 1994 and whether the revised soil testing procedures had proved effective.

The Accounting Officer informed me the following. First, grant and premia amounts paid/payable in respect of the 58 cases totalled £575,182.

Second, a further four cases covering 11.3 hectares were awaiting confirmation of existence of shell-marl. Amounts paid/payable in these cases total £17,761.

Third, compensation claims totalling £154,806 in respect of 12 cases covering 85.1 hectares were being dealt with. Compensation totalling £8,328 in respect of three cases covering 27.5 hectares had already been paid.

Fourth, no legal proceedings for compensation were pending.

Fifth, the Department of Finance has been advised of the additional cases which have come to light since 1997. It is now estimated that the necessary write off/payment of first and second instalment grants respectively will be approximately £90,000 each, instead of £67,000 each as previously approved. The necessary additional sanction is being sought.

Sixth, Coillte's survey of the sites was on-going and discussions were under way between the Department and Coillte regarding its responsibility in the matter.

Seventh, only one further case - 5.6 hectares - of crop failure had come to light for trees planted since the revised procedures were introduced in 1994 out of a total of 10,000 files processed. The revised testing appeared to be working effectively.

Mr. Purcell

Paragraph 27 relates to the discovery by the Department that certain afforestation plantations which were planted in the late 1980s and early 1990s had failed because they had been planted on land which was unsuitable due to the presence of shell-marl in the soil.

Arising from this, the Department agreed to allow the landowners retain the grants and premia paid to them, and to pay any remaining grants which the landowners would have been entitled to if the plantations had been successful. It also agreed to restore the lands to their original condition. The presence of shell-marl in the soil went undetected because prior to 1994 the Department did not analyse the soil into which the trees were to be planted, but since then soil testing has been performed and the problem does not arise.

The latest information available to me indicates that the total area of land found to be unsuitable was 400 hectares, on which grants and premia totalling £670,000 were either paid or payable. The costs of restoring the lands to their original condition are estimated at £350,000. As Coillte was involved in advising the Department on the suitability of the land, the matter of the apportionment of these costs between Coillte and the Department is the subject of ongoing discussion between the two parties.

A number of landowners have claimed compensation for loss of earnings and the Department reckons that the overall cost of compensating the affected landowners will be in the region of between £250,000 and £300,000.

Deputy Gildea

What is the standing of Coillte? Is it a semi-State body? Is it independent or under the control of the Department?

Mr. Carroll

Coillte is a semi-State body which, under the legislation, is also registered as a private company under the Companies Acts. The board is responsible for running the company and it is accountable to the Minister in the same way the ESB is accountable to the Minister for Public Enterprise.

Deputy Gildea

Is this another example of a failure by staff to identify that the marl in the soil would not allow for the successful planting of trees? Mr. Carroll stated that soil testing was not introduced until 1994 but it should have been obvious that such testing was necessary.

Mr. Carroll

That is a good question. When I saw this for the first time, it was the same question I asked, namely, how could it happen? This condition has been known since the 1960s and how could it happen that 20 years later 400 hectares of land could be planted where the condition existed. The answer is understandable but complex. In the 1960s when it was discovered first, Coillte did not exist but there was the Forest Service. Planting was only being done by the State. The way the system worked was that when the State acquired land, there was a centralised acquisition section the staff of which knew about shell-marl and I am informed by friends of mine who are involved in farming that most farmers would know whether land would be suitable for planting and whether it contained marl.

A test was being carried out over the years by the acquisitions branch of the Forest Service when it was acquiring new land for planting. From the 1960s through the 1970s and into the 1980s there was no instance of planting on land which contained shell-marl because even though the Forest Service did not have a specific protocol test, it actually did carry out tests. A number of things happened at the end of the 1980s. First, grants for private planting were introduced for the first time, second, Coillte was established and, third, initially when Coillte was set up, the quite extraordinary decision seems to have been taken that the forestry inspectorial functions of the then Department of Energy were transferred to Coillte. The Department, which was administering the grant systems, had no inspectors of its own and it was a number of years before this problem was rectified.

When Coillte was established, a massive reorganisation took place. There were large scale staff lay-offs, restructuring, etc., and the entire system changed. As a result, the centralised system of land acquisition broke down and the people who knew about shell-marl probably retired or left and responsibility was delegated to staff at a much lower level in the organisation. A large volume of private planting then began to take place. Unlike the 1960s and 1970s when land was very expensive and you could not afford to buy it for forestry purposes with the depression in agriculture, it was much more attractive to plant on peat lands. This is a problem which is most prominent in the midlands.

Forestry suddenly began to take off at a great rate in the midlands for the first time in a long period on lands where shell-marl was prominent. The system that was designed to deal with the problem had broken down. Therefore, a peculiar concurrence of events led to this happening. In retrospect it should have been spotted but that explains how it arose. Of course it should not have happened but members can see that it happened because of the extraordinary set of circumstances I have outlined.

Acting Chairman

It is a pity someone in a position of power did not leave word about shell-marl when they retired or left the Department.

Mr. Carroll

It was well known, people seem to have known all about it. However, it appears to have just fallen out of the system.

Deputy Cooper-Flynn

Will Mr. Carroll outline the procedure which is undergone before planting takes place?

Mr. Carroll

As of now there are two separate procedures. An individual who is applying for a forestry grant must complete various forms in respect of heritage, archaeological and standard environmental matters.

Deputy Cooper-Flynn

Who is responsible for doing that?

Mr. Carroll

The primary obligation is on the applicant. The Department is no longer involved in an advisory capacity. Forest Service inspectors will carry out a desk study on the application and through their own knowledge they will have a fair idea of the location of land. They will visit the site before they approve the application.

Deputy Cooper-Flynn

If anything goes wrong, with whom does the responsibility lie? Does it lie with the applicant, with the person who carries out the desk study or the field study or with the person who carries out the site visit?

Mr. Carroll

Landowners make the commercial decision, therefore, the primary responsibility is on the landowner to make the right decision. The purpose of the inspection and approval process is to rule out unsuitable areas but it is not designed to exonerate the landowner from the primary responsibility of making a commercial decision.

Deputy Cooper-Flynn

In this case, when the shell-marl problem arose, with whom did the responsibility lie?

Mr. Carroll

In those days, the inspectorate provided an advisory service.

Deputy Cooper-Flynn

And that does not happen anymore?

Mr. Carroll

No.

Deputy Cooper-Flynn

With regard to the case which occurred in 1994, am I correct in assuming that no responsibility lies with the advisers and that the applicant will be held responsible?

Mr. Carroll

No, I am not aware of the particular details of that case. However, I suspect it emerged after the event. It probably involved an advisory function.

Deputy Cooper-Flynn

When did the advisory function cease?

Mr. Carroll

Approximately three or four years ago.

Deputy Cooper-Flynn

And there have been no problems in the past three to four years?

Mr. Carroll

If you are planting 15,000 hectares - 35,000 acres - per year, the odd failure will occur. If the Forest Service is at fault, we will accept that. However, the primary responsibility must lie with the applicant.

Deputy Cooper-Flynn

The case in question involved 400 hectares, is that correct?

Mr. Carroll

The estimated amount at present is 400 hectares.

Deputy Cooper-Flynn

In what part of the country did this problem arise?

Mr. Carroll

They are fairly widely distributed. There are 63 cases, the biggest of these involves 112 hectares in Galway, another involves 58 hectares in Kildare, there are 91 hectares in Kilkenny, 32 hectares in Tipperary and there are individual cases in Carlow, Clare, Donegal, Sligo, Waterford and Westmeath.

Deputy Cooper-Flynn

Am I correct in assuming that the same person was not responsible for carrying out all the inspections?

Mr. Carroll

No, different people would be responsible for doing so.

Deputy Cooper-Flynn

Different people would have carried out inspections throughout the country over a number of years.

Mr. Carroll

It was not one person. Because the people involved moved from a centralised system under a different regime to a localised system, the shell-marl protocols were lost in the changeover.

Deputy Cooper-Flynn

Given that everyone was aware of the problem since the 1950s and 1960s, is it not unusual that it could re-emerge in various places throughout the country when different people were carrying out the inspections? I could understand if an inspector in one area had slipped up but it seems unusual that all of them could have slipped up.

Mr. Carroll

It was well known but it was not a live problem for 20 years. It had not arisen in the 1970s or 1980s and it had disappeared from many people's memories. It was no longer a live issue. A small number of people in the acquisitions unit dealt with it on acquisition and ruled it out but there was a gap as regards its transmission to the general inspectorate. Fundamental organisational changes were taking place with the setting up of Coillte, a semi-State body, and there was a gap because we were going from a centralised system to a local one and there was a large turnover in staff. If things had been done properly and there was enough time for proper planning, this issue would have been picked up and highlighted down the line. This did not happen; it was an obvious omission.

Deputy Cooper-Flynn

Coillte provided the advisory service on this matter.

Mr. Carroll

Coillte was the name over the door of the Forest Service - the Forest Service became Coillte.

Deputy Cooper-Flynn

It was the same thing.

Mr. Carroll

Yes.

Deputy Cooper-Flynn

It was mentioned earlier that negotiations are ongoing between the Department and Coillte on who has to pay what. Perhaps Mr. Carroll will update us on those negotiations. How long will they take to finalise?

Mr. Carroll

The negotiations concluded in recent days. There is a grey area. Coillte was carrying out, under a rather imprecise arrangement at the time, an inspectorial function of the Department on an agency basis. It is unusual for a semi-State body involved in forestry to be given an inspectorial function. This has been reversed in the meantime.

Deputy Cooper-Flynn

Why was that unusual?

Mr. Carroll

A semi-State body was carrying out a regulatory function.

Deputy Cooper-Flynn

It was not at arm's length.

Mr. Carroll

Yes, there was a conflict of interest. There have been ongoing discussions with Coillte and a pragmatic arrangement has been reached whereby it makes some its staff available for survey work and pays 50% of the cost.

Deputy Cooper-Flynn

Of the compensation costs?

Mr Carroll

Compensation is not the right word, as the Comptroller said. It is the cost of restoring the lands to their original condition.

Deputy Cooper-Flynn

Has that been done?

Mr. Carroll

Yes, in a number of cases. There are a number of cases outstanding.

Deputy Cooper-Flynn

What is the total cost of restoring the lands to their original condition?

Mr. Carroll

It could be up to £350,000.

Deputy Cooper-Flynn

Coillte is paying 50% of that?

Mr. Carroll

Where it had an involvement. In some cases it did not.

Deputy Cooper-Flynn

If Coillte was carrying out the inspections on an agency basis, why was it not involved?

Mr. Carroll

A number of cases arose after the inspectorial function moved back to the Department.

Deputy Cooper-Flynn

When was that?

Mr. Carroll

End 1991.

Deputy Cooper-Flynn

Is that the same time to which Mr. Carroll referred, when the procedures changed and after which no further cases of shell-marl were found?

Mr. Carroll

It only became apparent that there was a problem in 1993 or 1994 because it became evident that plantations were failing. At that point the inspectorate introduced a test for it.

Deputy Cooper-Flynn

Mr. Carroll said there were 63 cases. In what year did these occur? Was it before 1992, before the function was returned to the Department? If it was before 1992, Coillte was involved in all the cases.

Mr. Carroll

The cases happened predominantly in 1991, 1992, 1993 and 1994. The decision may have been taken to plant, one might have a two year wait for a four year plant——

Deputy Cooper-Flynn

They were discovered at that time. It was as a result of advice given before 1992. Coillte would have been involved in giving advice in all 63 cases?

Mr. Carroll

Yes.

Deputy Cooper-Flynn

Why is it only paying 50% of the cost when it is completely responsible?

Mr. Carroll

It was carrying out an agency function for the Department and the parameters of the agreement on that were unclear.

Deputy Cooper-Flynn

What were they?

Mr. Carroll

The Comptroller noted that when the inspectorial function was transferred, the precise terms and respective responsibilities were not carefully defined.

Deputy Cooper-Flynn

So the Department entered an arrangement, which resulted in a conflict of interest, with a semi-State body without clear terms?

Mr. Carroll

It was not satisfactory.

Acting Chairman

Did the £670,000 in grants drawn down for the failed shell-marl areas have to be refunded?

Mr. Carroll

No.

Acting Chairman

Who got that £670,000?

Mr Carroll

The afforestation grants would have been awarded depending on whether the farmer or a contractor arranged the planting.

Acting Chairman

The grants were drawn down and the forests failed because of the failure to detect the shell-marl. Who paid those grants?

Mr Carroll

The scheme operates on the basis of 75% EU recoupment.

Acting Chairman

Was the 75% of the grants given to these failed areas recouped from the EU?

Mr. Carroll

The agreement with the EU was for the first instalment - it had no difficulty with it. The second instalment was fully financed by the Exchequer and was not recouped from the EU.

Acting Chairman

The hectares of failed ground did cost the Exchequer?

Mr. Carroll

Yes.

Acting Chairman

It is also costing £350,000 in restoration and may cost another £250,000 in compensation for the loss of the land.

Mr. Carroll

No, the £350,000 includes that figure.

Acting Chairman

It is over £1 million.

Mr Carroll

Around £1 million, yes.

Acting Chairman

Slightly over £1 million and all because some inspector did not detect shell-marl.

Mr. Carroll

It would be unreasonable to blame an inspector.

Acting Chairman

Many inspectors?

Mr. Carroll

No, there was a system failure. How and why it happened is clear. Of course, it should not have happened.

Acting Chairman

One cannot blame the system because it comprises those who work in it. Was anyone called in or are they retired? What happened?

Mr. Carroll

The inspectors on the ground were not properly trained, instructed or briefed on this issue by the management of the day. That is what happened.

Acting Chairman

It would appear there was a deliberate attempt to ignore the rules. It was decided to plant the area anyway and to draw down the grants. It did not make much difference whether they grew or not.

Mr. Carroll

No.

Acting Chairman

That is what transpired.

Mr. Carroll

That is not fair. The system clearly failed. A known soil condition which prevents the growth of plantations slipped through the system. A previous system detected it. The system failure arose from the concurrence of unusual events.

Acting Chairman

What part of the system detected this before?

Mr. Carroll

The acquisitions unit of the old Forest Service.

Deputy Gildea

It seems that Coillte has a large responsibility in this. It should refund the total loss.

Mr. Carroll

We have negotiated a pragmatic agreement where Coillte will make a 50% contribution to the cost - the £350,000 element.

Deputy Durkan

Regarding tree planting generally, what advice does the Department have, either from Coillte or elsewhere, about the suitability of ground generally for the growing of specific species of trees? For example, an oak tree will have a different requirement to a conifer.

Mr. Carroll

We have a high powered, highly trained forestry inspectorate with an academic background in forestry. There are also thriving forestry investment companies in the private sector. UCD has a forestry department. The protocols, both environmental and testing, are sophisticated.

Deputy Durkan

What is the chemical analysis of shell-marl?

Mr. Carroll

I am told it has an alkaline effect.

Deputy Durkan

To what degree?

Mr. Carroll

I do not know.

Deputy Durkan

Would that be known within the Department?

Mr. Carroll

It would, yes.

Deputy Durkan

Would it be known to Coillte?

Mr. Carroll

It would be known to individuals.

Deputy Durkan

Would it be known that there was a prevalence of it in certain regions?

Mr. Carroll

Yes.

Deputy Durkan

Notwithstanding that, no alarm bells rang or anything such as that?

Mr. Carroll

Obviously it did not become apparent until it failed.

Deputy Durkan

The tree failed?

Mr. Carroll

Yes.

Deputy Durkan

How many years of growth were concerned?

Mr. Carroll

About three or four years.

Deputy Durkan

Perhaps there may be other failures of which we are not yet aware.

Mr. Carroll

There is the odd failure. In the extraordinarily dry summer in 1995, some plantations failed which would otherwise have survived because of the water tables. I presume that was not anticipated when the decisions to plant were made. The frequency of failure, aside from shell-marl, is very small.

Deputy Durkan

Is shell-marl quarried in some parts of the country and used as a top dressing?

Mr. Carroll

Yes.

Deputy Durkan

It is known for its high lime content and it would also be known that certain species of trees, especially conifers, are not suitable for planting in those conditions. Were conifers planted in these areas?

Mr. Carroll

Predominantly. I spoke with my father about this, who is a farmer and who read about it in the paper. He said that the farmer should have known because they would know their land better than anyone else. If a person has had land for years and they have had to dig or plough it, they will be familiar with it. Itwas extraordinary that this got through thesystem.

Deputy Durkan

Senior people had advice and were conscious that there were high lime levels in certain soils and they would have given that advice over a number of years. However, when they moved on to pastures greener, that advice was not carried through. Surely someone in the Department or in Coillte must have said that there should not have been planting in those areas.

Mr. Carroll

A period of 20 years from the 1960s to the 1980s went by without anyone having any experience of shell-marl. It was not discussed at conferences because it was not a live issue so people did not know about it. With the massive staff changes and turnover - employment in Coillte fell from 2,500 to 1,200 - and the company undergoing massive change, many of the people who ran the systems no longer worked for the company. There was also a change from a centralised acquisitions system to a local advisory system. This combined to cause the chain of communication and store of knowledge to break down.

Deputy Durkan

It is very much like the tree of knowledge in this case. Does soil sampling and analysis now take place before plantation occurs?

Mr. Carroll

Yes, I would think so.

Deputy Durkan

We should be sure about that.

Mr. Carroll

The primary responsibility is on the landowners to make a commercial decision to invest.

Deputy Durkan

For how long if a grant is to be paid on foot of it?

Mr. Carroll

In approving the grant, we would ensure that the investment is suitable. The primary responsibility is on the landowner. It is a question of resources.

Acting Chairman

Perhaps what the Deputy is trying to say is that, if the landowner is to receive a grant and will not be recouped, he will not care if the project fails. That is what has happened. I am involved in a small urban forest park of less than one hectare which we will plant on Saturday, but we had to test the soil and lay topsoil before we could proceed, and that is only one hectare of land. Furthermore, it is on a voluntary basis.

Mr. Carroll

You are behaving exactly as I would expect those making an investment in the area to behave.

Deputy Durkan

Do farmers behave that way?

Mr. Carroll

It is a major risk for farmers if they plant and it fails.

Deputy Durkan

It is not a major risk unless there is no subsequent claim. In the event of a major investment in forestry, surely some soil testing takes place to determine the suitability of the soil.

Mr. Carroll

It is by and large a self-assessment system at present. People have professional advisers to conduct the testing for them, and that is supervised. We have over 20 forestry inspectors who conduct spot checks on and analyse the applications.

Acting Chairman

Is it as simple as inserting a fork into the ground, taking a soil sample and pouring liquid on it to see if it bubbles, which means it is alkaline, or if it does not, which means it is sound?

Mr. Carroll

I am told the tests are very simple and that any landowner would be able to do it themselves.

Deputy Durkan

I would have thought that would be preliminary in all such cases. I am not satisfied. It should be a prerequisite in all such cases. It is daft that the Department or Coillte is proceeding without conducting soil analysis to determine the suitability of the soil. Were the failures individual landowners or were investors involved?

Mr. Carroll

I am not sure.

Acting Chairman

Could we obtain that information?

Mr. Carroll

Absolutely.

Acting Chairman

We note paragraph 27. Are there any questions on the accounts?

Deputy Durkan

May I ask a question on the general promotion and development of forestry?

Acting Chairman

Yes, on the accounts.

Deputy Durkan

What are the planting figures for the forestry programme on an annual basis? From the knowledge I have gained from parliamentary questions, it is a case of peaks and valleys and not one of a consistent annual rise.

Mr. Carroll

Regarding the planting figures in recent years in terms of hectares, the peak year was 1995 when 23,710 hectares were planted. There were 20,981 hectares planted in 1996, 11,400 in 1997 and just under 13,000 hectares in 1998 with about the same for 1999. The current figures are also running at about that level which is about 30,000 acres of land, which is a lot of land being taken out of agriculture into forestry. The targets set by the Government were much higher than that - 25,00 hectares. We had a brief discussion on this last year which involved two trains of thought. One was that we should be planting more while the other was that we were too zealous at planting, depending on the part of the country that came from.

Deputy Durkan

I might have a different line again on that.

Mr. Carroll

In recent years the economic decision to plant forestry is, at minimum, a 40 year decision and with broadleaf it could be 70 to 80 years. It is a very big decision. Forestry must compete with conventional agriculture and the REPS scheme. It has been clear to us in recent years that the relative incentives have moved more than slightly against forestry. It is not as attractive as it was and the rate of planting has fallen off. One might expect that with a scheme like this the initial takeup would be higher and would taper off over time.

Deputy Durkan

One thing Mr. Carroll mentioned is that 30,000 acres is a lot of land to take out of the agricultural sector, but surely some of these lands are not agriculturally useful? It may be better to grow trees on such land and there is a considerable amount of land in the country which is not suitable for use as in agriculture. Why is there not a greater concentration on that land?

Mr. Carroll

At the end of the day, forestry is an economic activity.

Deputy Durkan

I am aware of that.

Mr. Carroll

The barren land may not be suitable for trees and may not justify an economic growth - they may not get the rate of growth and so on. There is competition for fairly good agricultural land for forestry. There is competition between landowners for land to use for forestry and conventional agriculture and I have seen it myself in areas with which I am familiar.

Deputy Durkan

There may be competition.

Mr. Carroll

There is, absolutely. There are about 1 million hectares of wet marl soils in Ireland which are suitable for forestry and of less use for agriculture.

Deputy Durkan

That is what I was getting at.

Mr. Carroll

We have to target those better. There is no doubt about that.

Deputy Durkan

I do not want to prolong this. Of course prime agricultural land is better for forestry if someone can get it at the right price, but we are talking about a 100 year cycle in some cases and a minimum 40 year cycle. Unless there is some other tax clause or benefit involved, there is no way the two can compete.

On miscellaneous items, page 210 of the Vote states that £1 million, including over £300,000 in costs, was paid in settlement of a legal action arising from a decision not to renew a prospecting licence. Can Mr. Carroll tell us about that?

Mr. Carroll

This relates to the withdrawal of a licence for mining exploration on Croagh Patrick which went through the courts. The then Minister for Energy, in April 1990, decided to refuse exploration or mining on Croagh Patrick due to its religious and cultural significance. A mining company had already spent £1.8 million in exploring the area with favourable results and would argue that it had a legitimate expectation to get a mining lease. That went through the courts and the High Court upheld the Minister's decision, but in the Supreme Court the matter was settled for the amounts mentioned. The total State exposure, had the case been lost in the Supreme Court, would have been of the order of £3.5 million.

Deputy Durkan

What are the parameters for issuing a prospecting licence? I know there are quite a number of them issued in the country at present, both onshore and offshore, and is it to be presumed that a person with a licence granted by the Department could, in theory, be assumed to have a contract and a licence to continue as in this case?

Mr. Carroll

Subject to the planning and permitting processes that apply. If one discovered a major mine one would have to go through the EPA, a local authority planning process and the Department's planning process.

Deputy Durkan

What happened in this case?

Mr. Carroll

It did not proceed through any of those processes.

Deputy Durkan

Why?

Mr. Carroll

Because the decision was taken by the then Minister that mining in the vicinity of Croagh Patrick was unacceptable and——

Deputy Durkan

Who granted the prospecting licence in the first place?

Mr. Carroll

The Department issued the licence in the first place.

Deputy Durkan

In the first place and then revoked it?

Mr. Carroll

A policy decision was taken by the Minister of the day to revoke it.

Deputy Durkan

I do not want to get into the area of policy, I am trying to figure out what procedures were followed when the initial application for a prospecting licence was made. I presume normal channels were followed.

Mr. Carroll

Absolutely, yes.

Deputy Durkan

And were normal channels followed again afterwards? How otherwise would a liability arise on the State?

Mr. Carroll

Because the exploration licence was terminated and this company had raised money from the citizenry, let us put it that way, for a legitimate activity - to prospect with a view to a commercial return. Nobody will engage in prospecting if they do not have the prospect of a commercial return and the argument made by the company involved was that this had been arbitrarily cut off.

Acting Chairman

Do we note the accounts? Yes. I thank Mr. Carroll.