COMMITTEE of PUBLIC ACCOUNTS debate - Thursday, 21 Jun 2001

Finance Accounts 1999 - Department of Finance.

Mr. J. Hurley (Secretary General, Department of Finance) called and examined.

Chairman

We will take these items in sequence, starting with the President's Establishment and the Office of the Minister for Finance. I apologise for the delay and welcome Mr. Hurley and his colleagues. I remind you that, as and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997, grants certain rights to the persons identified in the course of the committee's proceedings. Notwithstanding this provision in the legislation, I remind members of the long-standing parliamentary practice to the effect that they 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.

Mr. Hurley, will you, please, introduce your officials?

Mr. J. Hurley

I am accompanied by Mr. Tom Considine, Secretary General, public service management and development; Mr. EricEmbleton, assistant secretary, centre for management and organisation development; Mr. Finbarr Kelly, Government accounting, and Mr. David Hurley, accountant, Paymaster General's Office.

Chairman

Thank you.

Paragraph 9 of the report of the Comptroller and Auditor General reads:

The annual expenditure incurred by Government Departments on Air Travel is about £6.1m, of which an estimated £1.9m is recouped from third parties, mainly the EU.

In order to address concerns that Departments were obtaining value for money (VFM) in air transport, that the selection of Air Carriers was fair and reasonable and that there was an adequate level of expertise within Departments to manage their air travel requirements, the Department of Finance, in March 1998, issued a Travel Policy document to Departments, which laid down certain principles and guidelines which were to be followed in selecting Air Carriers. These related mainly to issues of VFM, use of economy fares where possible, and fair competition and lack of bias in the selection of Air Carriers. It was decided that each Department would appoint a travel agent who would provide agreed services in relation to foreign travel for agreed remuneration.

The contract for all Departments was awarded to one travel agent following a tender competition. The term of the contract was initially for one year with effect from February 1999, with provision for an extension of up to two years.

In order to monitor the success of the new arrangements and to deal with any difficulties which might be arising, the Department of Finance also decided to appoint consultants to carry out reviews of the operation of the new arrangements in the various departments. The first review covered the year ended August 1999 and was completed in October 1999, a second review covering the year ended August 2000 is currently under way and it is intended that a further review covering the year ended August 2001 will be carried out in 2001.

The consultants made a number of recommendations for action by the various parties involved in the agreements, viz. the Department of Finance, line Government Departments and the travel agent. My staff reviewed the recommendations and the action taken by the Department of Finance in relation to them. The chief findings and recommendations of the consultants and the action taken in relation to them are as follows:

The contract with the travel agent as an incentive to minimise costs, provided for the payment to the travel agent of a proportion of the savings effected by him. The contract provided that the savings should be calculated by a comparison of fares obtained by the agent and certain benchmark fares and routes to be agreed between each Department and the agent. The basis on which benchmark fares and shared savings were calculated had not been agreed between the Department of Finance and the travel agent and many Departments had expressed strong reservations in relation to the amounts computed by the agent.

The consultants also noted that the benchmark fares applied by the agent included commission and so savings were being calculated by comparing a net fare to a gross benchmark fare, which resulted in higher savings being computed and a correspondingly higher payment to the agent being made than if net benchmark fares were taken.

The consultants recommended that the agent should put in place an arrangement whereby the Department of Finance or an independent body reviewed the benchmark fares in detail and approved these fares for circulation to Departments. They also recommended that the shared savings arrangements needed to be structured so that like-with-like comparisons of fares were made.

The Accounting Officer of the Department of Finance informed me that a detailed agreement on the setting of benchmark fares and the calculation of the ensuing savings was concluded with the travel agent on 8 June 2000, which provides that: benchmark fares should exclude commission; benchmark fares should not exceed the fares which Government Departments could have expected to pay prior to, or outside of, the contract; the benchmark reference fare for the "net negotiated fares" (i.e. fares negotiated by the travel agent for Government Departments) should be the lowest equivalent published fare less commission; the savings sharing arrangement will only arise in the case of net negotiated fares for the ten top destinations, which on the basis of figures for the three month period March-May 1999 represent about 28% of total expenditure; the savings sharing will be calculated on a ticket basis comparing like with like. Thus the net negotiated fare will be compared to the published fare, less commission, for the same class of ticket, on the same airline, on the same date of travel, at the time of booking the flight.

He stated that the agreement also included conditions about the verification of fare levels and billing arrangements to be agreed with Departments.

The consultants noted that the Department of Finance travel policy requires that VFM assessments be carried out on frequently travelled routes. None of the Departments had formally addressed this requirement and documented their findings. However, it was evident that VFM considerations were taken into account in arriving at non-recoupable travel decisions.

The consultants recommended that such VFM assessments be carried out and also expressed the view that Departments may not have sufficient guidance or expertise to carry out such assessments.

The Accounting Officer informed me that a workshop to assist Departments in carrying out VFM assessments of their foreign travel, on the basis of their most frequently travelled routes, was organised by his Department in June 2000. The workshop produced a template which can be used by Travel Officers in doing VFM assessments. It was agreed that the four central VFM considerations were effectiveness, efficiency, economy and equity (to both carriers and travellers).

The consultants noted that consolidated fares, which were purchased in bulk by the travel agent's wholesale division from the different Air Carriers, were cheaper than carriers' published fares but that these savings were not passed on to Departments, as contractual arrangements between the agent and the carriers prohibited this.

The consultants felt that the profit being generated by the travel agent on consolidated fares, and which were not being passed on to Departments, did not appear to be in compliance with the agreements between the travel agent and the Departments and that the matter should be taken up with the agent by the Department of Finance.

The Accounting Officer informed me that the prices paid by Departments to the travel agent for these tickets were the minimum which the travel agent was allowed to charge under his agreement with the Air Carriers. This price would be higher than the price paid to the Air Carriers by the travel agent and he accepted that it was in breach of the agreements between the travel agent and the individual Government Departments. However, he pointed out that these fares only accounted for 5% of total expenditure and stated that in the light of the contractual position between the travel agent and Air Carriers, his Department had agreed to pay the travel agent the minimum selling price for these tickets excluding commission, but reserved the right to review the position following the next audit by the Department's consultants.

The consultants noted that no Department had reported a decrease in administrative costs even though such a decrease might be expected as a result of routing all travel arrangements through a single travel agent. They also noted that travel insurance was not provided as standard by the travel agent and that where this was required it was an additional cost which was separately invoiced. This created additional administrative work for Departments and there was also some uncertainty among Departments as to whether or not they should avail of insurance cover.

The consultants recommended a single billing arrangement for insurance costs and shared savings, as a way of reducing much of the administrative burden and cost. However, they also expressed the view that both Departments and the travel agent had to go through a learning process in the early stages of the new arrangements which would give rise to higher administration costs.

The Accounting Officer stated that his Department was arranging to obtain information from Departments in relation to administration costs. He pointed out that equity considerations (i.e. the need to be open and transparent in all dealings with suppliers) could diminish efficiency and that there would appear to be administration costs associated with the operation of the travel policy which may not have arisen previously. However, he felt that administration costs would decrease once certain initial teething difficulties had been resolved.

He also stated that his Department had with effect from July 2000 negotiated travel insurance cover for all Departments to cover such matters as medical and accident costs and loss of baggage, but excluding death gratuities as these were provided for in the Civil Service superannuation schemes.

The consultants noted that Departments were generally not aware of the quantity of frequent flyer points which may have accrued to individual flyers and in those instances where the flyer selected the carrier it was not clear whether or not the accumulation of flyer points had an influence on the selection of carrier.

The Accounting Officer informed me that the position on frequent flyer points was being considered in the context of a Code of Ethics currently being prepared for the Civil Service.

Inquiries made by my staff in the Department of Finance and a selection of other Departments indicated that a number of other issues also raised by the consultants were being satisfactorily addressed.

Mr. Purcell

There are three paragraphs, of which we will deal with paragraph 9 first. In February 1999 new arrangements were put in place for managing air travel by civil servants. Following a tender competition a travel agency was appointed to provide agreed services in relation to foreign travel under specified terms. Hitherto, Departments had always made their own arrangements, but it was felt there were benefits to be gained in terms of cost and service by linking up with travel specialists.

The contract was for one year with provision for an extension of up to two years. The Department appointed consultants to monitor the new arrangements on an annual basis and paragraph 9 outlines the main findings and recommendations of their first review. As might be expected, they found it was taking time for the new arrangements to bed down satisfactorily and several operational problems were emerging. Since the date of my report, as recently as last week, the consultants' report on their second review of the arrangements has come to hand and it might be more meaningful for the committee to consider the position from that perspective.

Their overall current assessment is that Departments were in compliance with the travel policy, which laid down certain principles and guidelines to be followed in the selection of air carriers, and had endeavoured to obtain best value for money. However, they express concern that Departments had not carried out value for money assessments on whether they were achieving realisable savings under the new arrangements and that many Departments had not developed and promulgated their own travel policies. Another cause for concern was that there had been no reported decrease in the cost of administering the travel management function in Departments, which was one of the main aims of the initiative. They also reported that there appeared to be more scope for the use of economy class tickets, particularly where the costs were being met by third parties such as the European Union.

The message seems to be that savings are being achieved, but more has to be done before it can be said with any confidence that best value for money is being obtained from the new arrangements.

Chairman

Mr. Hurley, do you wish to make a brief opening statement? We have had a policy in recent times where we request Departments to send in an opening statement to members. Sometimes we get long, rambling dissertations which hold up meetings. We are anxious to speed up the process for everybody. Have you some opening comments?

Mr. J. Hurley

I do not propose to make a long opening statement, but to take each item as it arises. On travel policy, the Comptroller and Auditor General referred to what has taken place over a number of years in seeking to get better value for money in this area. Undoubtedly, the travel policy that has been adopted and put in place across the Civil Service is giving better value for money. The savings have been increasing. We have, probably, saved about £500,000 per year. These are significant figures. As a consequence, we have moved away from a single carrier. We have appointed travel officers in different Departments and gone to tender for a single travel company to deal with Civil Service travel. That contract is due for renewal shortly, when we will go to tender again.

The consultancy report on how these arrangements are operating across the Civil Service is carried out by independent consultants. Any of the points raised by them are taken up and corrected or improved. The Comptroller and Auditor General said the system is bedding down. That is true. It is taking a little time to bed it down because it was a significant change. However, the benefits are already being seen in terms of better value for money.

I will be happy to respond to questions.

It has been done. The Comptroller and Auditor General commented on it. In addition, it has been dealt with by the external auditor of the company who came in to look at this. The point at issue was in relation to consolidated fares. There is a legal obligation on the agent to charge a particular fare to the client. We asked the consultant when he was examining it if that was a legal requirement and in his latest report he indicated that it is a legally binding requirement on the agent.

To deal with the point you raise, we will have to see, in the context of the negotiation of the next agreement with the agent, whether we can get credit on that point. It appears that, legally, the carrier is bound to charge those fares and the consultants, Deloitte and Touche, who looked at this independently, have confirmed that that is the position. The only arrangement we can make is, possibly, in the context of the next contract which will be put out to tender in the second half of this year.

Deputy McCormack

In other words, you were tied into the contract for three years and that could not be changed. However, as I pointed out in my previous question, the agreement between the travel agent and the Department was not complied with, given that the consolidated profits being generated by the travel agent were not passed on to the Department.

It is accepted that administrative costs have not reduced. There are two reasons for this. One is the point made by Deputy McCormack. He was talking about the commission initially and how these fares were to be determined. The policy I gave in answer to him was not in place at the time. It has taken a significant amount of administrative time.

The second area where there has been an improvement - I may have touched on this in response to Deputy McCormack - is that initially we did not have a travel insurance policy negotiated centrally. We had to enter into a type of ad hoc arrangement. When we discovered this in the centre we entered into one contract to cover all travel insurance arrangements.

In relation to these two aspects, there, probably, was an administrative burden on Departments initially which, probably, is not on them now. Those aspects should improve the situation.

The other point to note is that we did insist that all Departments would have a new single officer involved in dealing with all travel arrangements. As I said in answer to Deputy McCormack, the purpose was to take the decision away from individuals and ensure there was fair play in terms of how these decisions were made as between different carriers. We put in place a single post in each Department to ensure that happened. That was an additional administrative cost, but I argue it was necessary to make sure the system was above board, that individual travellers were not making the decisions themselves in terms of how they would travel and that they were made centrally on the basis of the criteria we have discussed. My feeling is that we would need to look at the administrative arrangements again because we have made changes in the meantime which should help Departments. It remains to be seen whether these can bring about greater efficiency in terms of administrative resources.

Taking all this into account, we still have the type of savings which I mentioned. We have given the business outside the Civil Service to a travel agent, which is not unusual internationally. Overall, we have a much better and healthier mechanism now for placing travel arrangements across the Civil Service.

Chairman

It is understandable that business would be placed outside and a good contract obtained from a carrier. The point is that it does not appear to have affected administrative costs between Departments. You have conceded that one person has specific responsibility for travel in each Department. That means a large Department, such as Agriculture, Food and Rural Development, only has one person involved in travel.

Mr. J. Hurley

I cannot say there is only one person involved in travel, but there is one person in charge of the operation. They are, probably, in the accounts area and there may be more than one person involved, but I cannot say that for definite. The fact that the administrative burden has not gone down would suggest that there is more than that involved.

In the latest report from the consultant from Deloitte and Touche, when he specifically examined the point you are making, he understood the point made about the changes that I have just mentioned, but did say there was a greater capacity or potential to use information technology to reduce the administrative burden. He has asked in the period going forward that greater attention be given to this. As far as the Department of Finance is concerned, that is what we will be trying to do now in the light of the report that has emerged and which the committee will shortly be getting from the consultant.

Chairman

We would be interested in that report. I will leave the point except to say that in March 1998 you introduced a policy for value for money. You have achieved this on the contract side, but, if anything, the administrative burden appears to have increased rather than decreased. Whatever savings have been made on the contract side may have been eliminated on the administrative side. You are not aware of how many people are involved in travel in Departments.

Mr. J. Hurley

What the consultant says in his report is that the administrative burden has not reduced.

Chairman

Yes.

Mr. J. Hurley

It is a fair point. The point I am making is that this was an extremely complicated system to introduce across all Departments and Offices. It took a while to get up and running. There were the teething issues that I mentioned and discussed with Deputy McCormack which were resolved. We now have to focus a little more on administrative costs. Looking at the system overall and given the complexity of what it was necessary to implement, the savings are significant. In most cases the consultant has validated what we have been trying to do with the point that, in relation to administrative costs, we have more to do. I would accept that and we will do so.

Chairman

It would be important also to have some central control because a big Government Department could easily get out of control. Perhaps that will come up in the report.

Deputy Bell

The reason I am asking the question is that a number of my colleagues who travel abroad and try to recoup their expenses from the EU must now wait for a considerable period before recouping the money they have expended. Previously they could recoup the money at the meetings. Therefore, I am interested in receiving that information.

A computerised system is in operation for processing POs. Details of all POs issued by Government Departments are notified to the PMG each day on Issue Schedules which are entered on the Payable Order Reconciliation System (PORS).

POs when cashed by a bank are returned to the PMG together with summary listings showing the amount the bank is claiming in respect of the encashed orders. Details from the returned POs are also entered on the PORS (PO number and amount). The PORS produces reports showing details and value of the POs which have been accepted for payment (i.e. those POs where values and numbers match those on the Issue Schedules). It also produces details of POs which have been rejected due to PO numbers not matching or cashed amounts not matching issued values and cancelled or out of date POs. These reports are used to compute the amounts due to the banks in respect of valid POs which have been cashed by them and to provide details of the amounts which are not being accepted for payment due to the POs having been rejected as invalid.

At the end of each month the PORS produces statements for each Government Department which detail POs cashed, those which have been cancelled, those which are out of date and those which have not been cashed. These reports are distributed to the Departments to provide them with a record of the status of the POs which they have issued and to enable them to reconcile their records with those of the PMG.

The PMG is committed to abiding by the Inter Bank Clearing Rules and, in particular, to the requirement to process POs and to notify the banks of any errors or invalid POs presented for payment within two days.

Since all POs are crossed and therefore only payable through a bank account and since banks will not normally allow cash for such POs to be withdrawn from the bank account until the two-day clearance period has elapsed, then any errors, irregular amendments or cancellations attaching to POs should be detected before cash has been paid out.

Compliance with the two day clearing period is a key control in preventing cash being obtained for unauthorised POs and is the primary protection for the banks and the PMG against the encashment of unauthorised POs. In this respect the availability in the PMG of a quick, accurate and reliable method of capturing the PO number and amount in an electronic format for each PO returned by the banks is vital.

An optical character-reading (OCR) scanner1 was installed in 1997 to electronically read the PO numbers and amounts and to produce this information in an electronic format to be loaded on the PORS. Prior to the introduction of the scanner this information was manually entered.

An audit by my staff of the PORS, compliance with the two day clearance requirement, and the purchase and performance of the scanner, noted the following:

While funds to the value of the cheques presented to and claimed by banks were being transferred to the banks on the same day in accordance with the inter bank agreement, the PMG was not processing and clearing POs within the two-day time limit for long periods during 1999 and, in fact, was taking up to 15 days to process POs and notify the banks of POs which it was not accepting. The failure to meet the clearance deadline was mainly due to the failure of the scanning equipment to perform to the expected standard.

The decision to acquire a scanner was made in September 1993, when a Request for Proposals (RFP) was issued to potential suppliers for a scanner with OCR software (and associated hardware) to process POs. The RFP was issued to 8 suppliers, 4 of whom replied. All proposals were greatly in excess of the GATT/EU limit for open tendering procedures; initial estimates, based on sample figures supplied by a number of vendors, had indicated that the Department would be within those limits. After discussions with a representative of the Government Contracts Committee, it was decided to place an advertisement in the EU Official Journal. Ten proposals were received by the due date (18 March 1994).

In the RFP a scanner was sought which was capable of reading POs produced using the 10 cpi OCRB font, in line with instructions issued to Departments by the PMG on fonts in 1989. In the course of evaluating the proposals the PMG sought confirmation from Departments that they were complying with the 1989 instruction. It transpired that many Departments were not conforming to the font requirement and the PMG experienced considerable difficulty in establishing what fonts were being used. Many Departments were unclear about the fonts in use, others were reluctant to incur the cost of acquiring new printers to meet this requirement, while the fact that the 10 cpi OCRB is considerably slower to print than other fonts was a major factor for some Departments. The PMG concluded that it would, therefore, be impossible to guarantee that 10cpi OCRB would always be used and, as a result, decided that a scanner capable of handling multiple fonts would better suit its requirements and avoid a situation whereby a scanner incapable of handling a large percentage of their throughput would be installed.

It was therefore decided to cancel this competition in August 1994 and on the advice of the Government Contracts Committee to open a new tender competition.

Following this tendering process, a company was awarded the contract in July 1996. The scanning hardware was delivered on 9 December 1996 and the software, after several months delay was received on 31 July 1997.

Payments to the contractor for the purchase of the scanner and related hardware, software and maintenance amounted to £508,330 (inc VAT) in the period 1996-1999.

The scanner has never performed at or near the levels specified in the contract. An exercise undertaken by the PMG in 1999 found that the performance of the scanner was such that it would take shifts of five operators a total of 12 hours to process 20,000 POs, compared to a standard in the contract of two operators processing 40,000 POs within five hours. The character recognition error rate ranged from 10% to 25% which compared very unfavourably to the target error rate of 2% stated in the contract. The poor performance of the scanner contributed to the difficulty which the PMG has experienced in the years 1997 to 2000 in complying with the two day limit agreed with the banks for clearing POs and to an increase in staff overtime and the need to contract out work to a data entry bureau. In tests carried out on the equipment prior to purchase, a character recognition error rate of 6% was indicated.

The staff complement in the Banking section of the PMG as at June 2000 was 27, compared to 25.5 in 1996, prior to the installation of the scanner. Staffing which was expected to decrease by about 6 due to the automation has instead slightly increased. Furthermore, figures received during the audit indicated that overtime, which was expected to reduce on the acquisition of the system, had in fact significantly increased. In addition, £38,155 and £75,437, respectively, was expended on contracting out data entry work in 1998 and 1999.

The purchase contract for the scanner provides for the archiving of POs and the storing of images of POs electronically. This would reduce the necessity for storage of copies of POs and facilitate retrieval. To date, archiving in the system has not performed to this standard and, for this reason, the final payment due to the contractor has been withheld. As a result the physical storage of POs has not been reduced.

The scanner was out of operation for the period 26 April 2000 to 11 May 2000 due to a computer virus (the so called Chernobyl Virus). This was a serious incident because if the virus had been passed to the PORS it could have seriously damaged it and could have travelled through the main Department of Finance server to all other departmental locations. It would appear that there was a risk that this could have happened due to the fact that certain anti-virus software had not been installed in the scanner or the PORS. Anti-virus software was subsequently installed. As a result of the virus all programmes in the scanner were replaced along with several pieces of hardware.

In or about February 2000 a number of POs presented for payment by banks did not accord with details on record in the PMG. It transpired that the POs had apparently been stolen and the amounts payable amended to much larger values. One PO for £244.68, dated 15 December 1999, had the amount payable changed to £7,244.68. The PO was lodged to a bank account on 17 February 2000 and sent to the PMG for payment on 18 February who transferred the relevant funds to the bank on that day. The PMG on processing the PO on 29 February detected the irregularity and notified the bank immediately. However, by that time £5,239 had been withdrawn from the bank account. The balance of £2,005 has been transferred to the PMG, who sought legal advice from the Office of the Attorney General on how best to pursue the £5,239 paid out by the bank. Ongoing consideration is continuing in light of that Office's advice. Successful action was taken in time in relation to the other POs irregularly amended so that no undue moneys were paid out by the banks. The Gardaí have also been notified.

I sought information from the Accounting Officer in relation to these matters and, in particular, the consequences and financial risks of not processing POs within the two day time limit, when compliance with the requirement was likely to be achieved and if it was likely that the performance of the scanner could be brought up to an acceptable standard. I also enquired as to previous irregularities in relation to the encashment of POs, the security procedures in place in Departments for the safe custody of POs and if any new measures were being considered to reduce the risk of irregular encashment of POs.

The Accounting Officer stated that:

The Clearing Rules were an administrative arrangement for the efficient clearance of cheques and POs and did not specify the consequences of failure to comply with the requirement. The right of the banks to retain payment collected for a customer did not stem from the Clearing Rules per se, but from the Cheques Act 1959, section 4 of which provides that:

Where a banker, in good faith and without negligence,

(a) receives payment for a customer of an instrument to which this section applies or,

(b) having credited a customers account with the amount of such an instrument, receives payment thereof for himself:

and the customer has no title, or a defective title, to the instrument, the banker does not incur any liability to the true owner of the instrument by reason only of having received payment thereof.

The practical implication of not returning unpaid items in time was that, so far as the presenting bank was concerned, the item was paid and it would not accept any attempt by the PMG to recover the money by adjusting a subsequent day's settlement. The procedure then was that the PMG should be reimbursed by the Department that issued the PO and the onus was on that Department to seek redress from the recipient of the money. To the extent that this was not successful, the loss was borne on that Department's Vote. In practice, the banks had been flexible about the timing provided funds had not cleared their customer's account.

No specific legal advice had been obtained by the PMG on the legal consequences of non - compliance with the two-day processing deadline in the event of disputes between the PMG and the banks on the question of liability for losses incurred from the irregular encashment of POs. However, advice from the Office of the Attorney General in relation to the irregularity in February 2000 indicated that the bank was liable for any unrecovered funds and, in seeking the advice, the Attorney General's Office was made aware that the PO had not been processed by the PMG within the two-day time limit.

The failure to meet the two day clearance deadline was due to increased volumes of work, significant variations in the level of work during the year, difficulties with the operation of the scanning equipment, staff turnover, diversion of resources to the introduction of a new computer system for processing POs, poor co-operation from some Government Departments in relation to the standardisation of PO formats, print quality and delivery of payment authorisations and a deterioration of the paperwork submitted by some banks.

The PMG was not complacent about the need to meet the clearance deadline and to this end work practices and problems were being actively reviewed and it was proposed to commission CMOD2 to carry out an in-depth study of the PMG banking operation before the end of October 2000. A range of options had been identified to improve performance which included, improving the performance of the scanner, employment of key punch operators, out-sourcing some or all data entry work, reducing the volume of POs by increasing the use of electronic payments, use of commercial bank accounts to pay farmers, shift work and use of temporary staff. The cost and feasibility of the different options would be explored and there would be full consultation with unions and staff as the changes required to ensure that the clearance deadline is consistently met may be radical. Two staff officers had recently been assigned to the PMG Banking section who had been given particular responsibility for training, the development and use of procedures manuals and examination of improvements in processes. Detailed instructions about the printing and cutting of cheques and the delivery of authorisations to the PMG have been issued to all Departments. Moreover, demonstrations of the scanner and other PMG processes were arranged for those handling POs at operational levels in all Departments. The response had been positive. The PMG's concerns about the standard of work from the presenting banks have been raised formally with the chief executives of the banks and meetings have been held to try to resolve issues, with positive results. An officer has been assigned to monitor the banks and Departments and to maintain standards.

In relation to the performance of the scanner, there were technical problems associated with its operation over which the PMG had very little control, due in large part to the number of organisations and people who handle POs and so affect their condition. Departments affected the read rate by faded print, using too small a font, incorrectly guillotining the POs and printing too close to the edge of the read area. Banks affected the scanner by stamping or writing on, or close to the read area. Finally, the payees caused difficulties by creasing the POs, tearing them and otherwise mishandling them. There were also difficulties caused by variations in PO layout and colouring. A major effort into revising PO layout had been made and the number of variants had been reduced from 22 to 5, but there had been poor co-operation from client Departments in adopting the new layout. For these reasons the recognition software had not lived up to expectations and it was exceedingly difficult for the PMG to exercise quality control because of the number of clients producing POs and the number of bank branches handling them.

Three years after its installation the performance of the scanner had not been anywhere near the expected standard. The archiving function was not operational at all and maintenance of the system was also unsatisfactory. Since the successful introduction of the new PORS computer system in 1999, it had been possible to devote more attention to the problems of the scanner and there had been considerable improvement in recent months but it was still not performing to specification. Concerted pressure had been brought on the supplier, who had carried out work on the system in recent months and, as a result, there had been a considerable improvement in the mechanical operation and character recognition rate. Concerted pressure had also been brought on Departments to improve print quality. The error reading rate had been reduced to 4%, and as a result the processing of POs has been within or very close to the two-day clearing deadline. It was hoped to effect further improvements in processing time through training of operators and closer monitoring of print and PO quality generally.

There were a number of reasons as to why the pre-installation tests of the scanner proved to be so inaccurate compared with full live operation, including non-use for security reasons of live current POs at the development stage, older POs not being suitable for use in tests because of variations in print and layout and problems associated with the handling of POs by payees and banks and with faint printing not being fully anticipated.

The effort required to implement the new PORS system within Year 2000 compliant deadlines fully stretched the resources of the PMG and entailed compromises with the timeliness of the daily processing and with the development of the scanner.

The planned decrease in staff within the PMG banking section did not take place because the productivity levels envisaged for the scanner were not achieved. Additional staff had also to be maintained to ensure that the PORS was Year 2000 and euro compliant. Staffing levels would be evaluated as part of the forthcoming CMOD review.

While the delay in acquiring the scanner and the failure of the equipment to perform to expectations might imply that there had been failures by management in planning and implementing the project, the reality was that many of the problems and difficulties encountered were outside the control of the PMG. In this connection the Accounting Officer referred to the unprecedented levels of staff turnover, increase in volumes of payments, a printing malfunction in the Department of Agriculture Food and Rural Development in 1997 which had caused chaos in the PMG processing system and in the bank clearing system generally, slow response by Departments to adopt the PO layouts devised for the scanner and delays in the completion of payroll replacement projects in Departments. The resulting disruptions had caused havoc with the implementation schedule for the scanning project.

There were serious technical difficulties in relation to the storing of POs electronically and while the supplier has tried a number of different solutions none have been successful. The supplier had assured the PMG that he was continuing to explore ways of resolving the problems and he was confident that a solution could be found. Payments of £38,000 had been withheld from the supplier because of the archiving difficulties experienced.

Anti-virus software was installed as a matter of course by Network Support staff of the IT Unit on all file servers and networked PCs in the Department. In addition, standalone PCs with anti-virus software are situated in all the Department's buildings, including the PMG office, and staff are instructed to use these to check any software received on diskette or CD-Rom. As the PCs attached to the scanner were not connected to the main Department of Finance network, input to the scanner system was possible only via diskette or CD-Rom. All such media should first have been checked on the standalone virus checking PCs. It is believed that the virus in question originated, not on a data diskette from any of the PMG's clients which were all virus checked, but rather on a system diskette used to update the scanner software itself. This represented a gap in the security procedures and anti-virus software had now been installed on all PCs and servers used in the scanner system.

As regards the possibility of a virus transferring from the scanner to the PORS, the PCs on the PORS are part of the Department of Finance network and therefore had virus-checking software installed in line with all other PCs on the Department's network. Any virus attached to files being transferred from the scanner system would therefore have been detected at the input stage.

The fact that virus checking software was not installed on the PORS servers until May 2000 was due to an oversight arising from the division of responsibility for such matters within the IT Unit at the time. It appears that lack of familiarity with the correct procedures arose due to changes in personnel and this had now been addressed. Network Support staff, who are responsible for the maintenance of the anti-virus software, now had responsibility for all computer hardware within the Department, regardless of source and a mechanism had been put in place to ensure that they were aware of all developments on this front.

The PMG had made it clear to the supplier that it was confident that the virus had not originated in its office and shortcomings in the supplier's virus-checking procedures were also pointed out.

There had been no other incidents in the past 5 years of the encashment of forged or altered POs. However, there had been cases of valid POs being stolen and encashed, and POs being encashed despite having been cancelled by the issuing Department. In those cases in which recovery was not made from the bank because of non-compliance with the two day processing period, follow-up action would have been taken by the issuing Department and the PMG would not necessarily be aware of whether or not the loss was subsequently made good. However, the perception was that the total number of such incidents was small and the level of complaints from Departments was low, which would seem to imply that losses were very few.

There were also cases of what were originally valid POs being encashed after they had gone out of date, i.e. more than 6 months after the date of issue. These amounts were all recovered from the banks. There had been an inordinate number of these recently which was indicative of a lower standard of care being taken by the banks and this matter was being taken up with them.

The security features incorporated in the design of POs were currently being reviewed in view of the apparent sophistication of the alterations made to the POs in the February 2000 irregularity. At present POs had incorporated all features recommended by the Irish Banks Standing Committee, with the exception of one, which would interfere with the operation of the scanner. However, to compensate for this, the PMG had additional security features and its stationery was regarded as being generally more secure than cheques.

The PMG had met with its printers to explore what further additional features might be included in its POs and these were being costed but it was probable that new features would only be introduced for the new euro stationery.

Strictly speaking, POs were non-negotiable and non-transferable, but there was a long-established practice of POs being cashed by shopkeepers. Restricting this would be seen as detrimental to customer service and would also impact on payments made by the Department of Social, Community and Family Affairs and was therefore not a course favoured by that Department. However, there was a case for requesting the banks to exercise more care, especially for POs involving larger amounts and a joint approach from various public sector paying agencies should be considered.

There have been guidelines in place for many years about the safe custody of PO stationery, accounting for wastage, etc. These were clearly working well, as there had been no cases of stolen cheque stationery being used fraudulently in recent years.

The indications were that the stolen POs involved in the irregularity, which were issued by the Department of Defence, were not stolen from that Department's premises nor were any staff of the Department involved. Arising from the irregular encashment of the pension POs in question, that Department's Internal Audit Section undertook a review of the controls in operation in the production and issue of POs for the monthly pensions payroll of approximately 11,500 cases. The review concluded that, having regard to considerations of practicality and reasonableness, the controls in place were adequate and satisfactory.

Mr. Purcell

Paragraph 12 records the results of an examination by my staff of the processing of payable orders by the Paymaster General's office. It is a major operation involving a throughput of four million payable orders per annum, representing gross payment flows of £34 billion. It is a time-critical system because, under the inter-bank clearing rules, payable orders must be processed within two days of their having been presented for payment. Any errors or invalid orders must be made known to the banks within that period. This clearing period is the primary protection for the PMG and the banks against the encashment of unauthorised payable orders.

For long periods, the PMG was unable to meet the deadline. In some cases, it was taking up to 15 days to process the cash payable orders. The paragraph outlines the main factors that militated against the PMG meeting the two day clearing rule. A scanning machine failed to perform to the required standards and there was a high staff turnover. Occasionally there were sudden increases in the volume of payable orders to be processed. There were difficulties with the standardisation of payable order stationery used by Departments. The failure to meet the two day clearance deadline increases the risk that fraudulent payable orders will not be detected within a reasonable period.

This is what happened in February last year when a number of payable orders were stolen. The amounts were altered to much higher values and presented for payment. Fortunately, because of branch vigilance and other factors, only one altered payable order made it to the stage where cash could be obtained fraudulently. This resulted in the loss of £5,239 which, to date, has been met by the PMG. One could say it is not a huge amount, but it is probable that there are grounds for recovering it from the bank in question. However, that is not really the issue to which I am drawing attention.

I understand that the PMG's performance in adhering to the two day clearance improved in the second half of last year, but it deteriorated again in the first few months of this year. The main problem now causing the PMG not to meet deadlines is not the scanner, which is working satisfactorily, but the staff resource difficulties.

The CMOD section of the Department has undertaken a study of the PMG's banking operation, and the report is soon expected. A move towards the electronic transfer of funds, particularly regarding grant and premium payments to farmers by the Department of Agriculture, Food and Rural Development, would bring about an improvement. Such developments offer some hope of sustained improvement in performance without leaving the PMG and the State exposed to the kinds of problems that might arise in the event of fraudulent payable orders passing through the system that are not detected in time.

Mr. J. Hurley

The Comptroller has referred to an examination being conducted by our CMOD section. He referred to the huge scale involved - four million cheques per annum, which may now be closer to 4.5 million. About 40% of those cheques come from the Department of Agriculture, Food and Rural Development, a figure that has increased significantly in recent times. The difficulties the PMG operates under are the large scale and the volume of cheques. Hundreds of thousands can be issued at very short notice and it is very difficult to cope with them. This backs up the system.

The issues that have arisen in the report have largely been dealt with. The scanner is operating much better, as is the reconciliation system, but there are often glitches in computer systems. We have a 50% turnover in staff, which is not peculiar to our part of the Civil Service. The real problem is the fluctuating volume of cheques we receive, especially those coming from the Department of Agriculture, Food and Rural Development. When the volume of cheques increases substantially, we have great difficulty meeting the two day deadline. As regards doing something substantial to address the problem, we will be taking seriously the imminent recommendations that will be published in the report of the CMOD.

About a year ago, the Seán Cromien report was issued, which dealt with agriculture, the computerisation of the financial function of agriculture and the specification for dealing with the new financial arrangements. That system is expected to go on-line in July 2001. It has a facility for the electronic transfer of funds which will ensure that far fewer payable orders will be issued by the Department of Agriculture, Food and Rural Development. This must be achieved.

Periods when cheques arrive in large volumes from the Department of Agriculture, Food and Rural Development do not occur very often, but when they do, we are put under enormous pressure in terms of adhering to the two day deadline. There have been significant improvements since the Comptroller's report and our own examination, and the long-term measures we are taking should also help significantly.

Deputy McCormack

How did a two day limit take up to 15 days? Perhaps it has partly been explained by Mr. Hurley. As regards the scanner that did not perform to the level specified in the contract, was there a reduction in the contract price as a result?

Mr. J. Hurley

Regarding Deputy McCormack's first question, when there is a pile-up of hundreds of thousands of cheques, the two day deadline cannot always be met, and one can go quite a number of days beyond it for a very short period before being able to meet it again. We have improved in this regard, with the possible exception of one period earlier in the year. The objective is to meet the two day deadline in all cases.

Deputy McCormack referred to the computer system. We held back a sum of money from the computer company concerning a particular function that was not satisfactory. We held it back until corrections were made, and then paid it. In terms of it not working to the expected standard before the computer system was installed, in retrospect the expected standard was probably unreasonable. The reason for that is that some of the tests done to determine the standard were on new, unsoiled or unmarked cheques. A real cheque goes through many hands and is stamped by one or more banks. The photographing equipment of the scanner found it harder to scan cheques that were bent and soiled.

We think we are as close as we could possibly get to what is reasonably expected in terms of operational efficiency. The supplier has put in an enormous amount of work to achieve that. Overall, we are now happy with the technology, but it is not so much the technology that is causing the difficulty but the volatility of the payments.

One area in which the Comptroller has been particularly helpful relates to the practice in the Paymaster General's office, as in the Exchequer, where we balance to the penny. Most financial institutions do not do that - they balance to the pound or the nearest 50p. In consultation with the Comptroller, we have established a pilot project to ascertain whether we can balance to the pound. In doing so, we discovered that one could cater for 40% of the discards. When one tots up the overall loss or gain to the Exchequer, one arrives at figures as low as £9 or £10. We could resolve the issue with the Comptroller and ease considerably the difficulties the PMG's office is facing if we were not as exact in terms of balancing to the penny. The rejection rate of the electronic equipment must also be considered. Going through the reconciliation system, if a cheque is just one or two pennies out, it is rejected. In other words, if there is a difference in the amount issued by the Department and the amount on the cheque - a couple of pence, which would usually be an error - it is rejected.

However, if we can establish a tolerance level concerning cheques, the process could be made more efficient. I do not think any bank is operating to the exactitude that is currently being applied in the PMG's office.

This issue can be addressed in a number of ways. There are the organisational issues to which the Comptroller has referred. There is a debate taking place with the Department of Agriculture, Food and Rural Development regarding the volatility in numbers of cheques and the electronic funds transfer - which is voluntary for farmers and must be encouraged.

Those particular cheques were followed up very quickly. If Deputy McCormack were referring to a particular incident, I would certainly follow it up. In this case, the cheques were followed up. There were other cheques issued very quickly. The banks were notified and all the cheques stolen were cancelled. One cheque went through.

Chairman

Only one?

Mr. J. Hurley

Deputy Bell

From reading the report, it would appear to me that you have made every conceivable effort to improve the system. If every Department had only one sin on its soul we would be in a better position.

Commentators have been saying to us for some time now that they fear wholesale fraud when we change over to the euro. I assume the CMOD has been involved in the changeover of the system. Are you satisfied that the necessary steps have been taken to ensure the Department of Finance, which leads our financial institutions, is geared up and ready to put the new system into operation?

Mr. J. Hurley

Each year the State pays out about £100 million in superannuation benefits to retired civil servants, their spouses and children through the Paymaster General's office. There are over 14,000 recipients in all.

Paragraph 13 records the results of an audit carried out by my staff last year which evaluated the controls in operation to ensure pensions and gratuities were correctly calculated, were paid only to valid recipients and were properly recorded. Our test checks indicated that pensions were being properly computed and that satisfactory accounting records were being maintained. That said, we found there was a need to improve control over the integrity of the computer data on which the payments are based and to produce reports from the system which would enable staff to better monitor the pension runs. I am glad to report that the Department acted swiftly in implementing these improvements and has almost completed an exercise in obtaining dates of births of pensioners where they were either missing or incorrectly recorded.

Other problem areas involving notification of deaths of pensioners and a continuing eligibility of children were not as easy to resolve as they depend to a large degree on the development of new computer systems or linkages with other systems. Some progress is being made. I appreciate the difficulties which have to be overcome in these areas.

Two cases accounted for £71,000.

Chairman

Two cases?

Mr. J. Hurley

Mr. J. Hurley

Thank you, Chairman. It cropped up last year and I am sorry it took a while to get responses.

Chairman

That is fine. We will begin consideration of this Vote.

The Vote is termed Secret Service and Ministers can apply for funding from this Vote in the course of the year. They sign a requisition which is sent to the Department and the Minister in question justifies it. The Minister for Finance must approve it and there is a special accounting arrangement attached to it which the Comptroller and Auditor General operates. His notation is different for this Vote from other Votes because he essentially certifies the processes have been fulfilled rather than the content of expenditure which he does not deal with.

I am sure the parent Ministers would be aware of the answers but the Department of Finance and the Comptroller and Auditor General do not have that information.