COMMITTEE OF PUBLIC ACCOUNTS debate -
Wednesday, 2 Apr 2003

Vol. 1 No. 14

Report of the Comptroller and Auditor General on Financial Control and Management in the Irish Blood Transfusion Service.

Mr. A. Kelly (Acting Chief Executive Officer, Irish Blood Transfusion Service) called and examined.

Chairman

I welcome everybody to the meeting. We are dealing with special report No. 4 of December 2002 by the Comptroller and Auditor General on financial control and management in the Irish Blood Transfusion Service.

Witnesses should be made aware that they do not enjoy absolute privilege and should be apprised as follows. Witnesses' attention is drawn to the fact that 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 persons who are identified in the course of the committee's proceedings. These rights include the right to give evidence; the right to produce or send documents to the committee; 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 be exercised only with the consent of the committee. Persons being invited before the committee are made aware of these rights and 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 with the relevant part of the committee's proceedings if the committee considers it appropriate in the interests of justice.

Notwithstanding this provision in the legislation, I remind members of the long-standing parliamentary practice that members should not comment on, criticise or make charges against a person outside of the House or an official, either by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions in Standing Order 156 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

Will Mr. Andrew Kelly, the acting chief executive officer of the Irish Blood Transfusion Service, introduce his officials?

Mr. Andrew Kelly

I am accompanied by Ms Sharon Bailey, director of finance, and Mr. Arthur Corrigan, our IT manager.

Chairman

Will the delegates from the Department of Health and Children introduce themselves?

Mr. Paul Barron

I am Paul Barron, assistant secretary in the Department. I am accompanied by Mr. Dermot Magan, principal officer, Dr. Richard Nolan, principal officer, and Mr. Chris Costelloe, principal officer.

Chairman

Mr. Purcell may make his submission.

Mr. Purcell

The Irish Blood Transfusion Service, previously known as the Blood Transfusion Services Board, has been in the news consistently over the past eight years or so for all the wrong reasons, ranging from the hepatitis C scandal to disputes over the location of blood related services. The process of responding to the concerns about the blood supply in terms of the absolute need to ensure the quality of products and components, while at the same time coping with the fall-out from tribunals and inquiries, predictably put a strain on the organisation while going about the day-to-day business of managing the service. It also led to a high attrition rate among senior management in the service.

The strain on the organisation also manifested itself in shortcomings in financial and project management, which came to light during my audit of the accounts of the service for 2000. That is the subject of the special report before the committee.

With regard to financial management, the service depends to a large extent on the revenue accruing from sales of blood products to fund its activities. We found that a comprehensive costing system was not in place that would extend to product pricing and costing of activities. In the absence of such a system, the service relied largely on incrementing the previous year's figures. The service has since introduced departmental budgets and cost centres, which have facilitated more accurate pricing across product lines.

The specific problem of cash flow that surfaced in 2000 was caused mainly by delays in recovering legal and capital expenses and the backlog in issuing sales invoices for the first quarter of that year. The upshot was a burgeoning overdraft and a failure to pay suppliers within the period set down in the Prompt Payments of Accounts Act 1997. The difficulty in making payments promptly was not overcome until the middle of 2001. By then, the service had incurred €321,000 in penalty interest. I understand that the service has eliminated its overdraft on a current basis, mainly as a result of increased cash flow from higher product sales and prices.

The other main issue in the report is the cost overrun on a new system to bring blood tracking and security and management up to best international standards. This project started in or around 1998 and was due to be implemented fully by late 1999 at a cost of €4.26 million. I am informed that the new system went into operation in Cork just two weeks ago and is due for implementation in Dublin next month. The current estimated cost is around €9.3 million.

Looking back at the project, it seems the service was, dare I say, naïve about what was involved in getting such a complex system up and running. This is reflected in the cost and time overruns when compared to the original estimates. The difficulties are set out on pages 10 and 11 of the report.

During 2002, financial management and controls were strengthened in the organisation and this was evident from our work during the audit of the accounts for 2001.

Mr. Kelly

I welcome the opportunity afforded by this meeting to respond to the issues raised by the special report of the Comptroller and Auditor General. It is important to set the context within which the Blood Transfusion Service operates. Blood transfusion is an essential part of modem health care. Used correctly, it can save lives and improve health. It is expensive and uses a scarce human resource. Everything we do is based on the provision of adequate supplies of safe blood to hospitals.

It is generally accepted that blood collected, processed and tested by the IBTS has never been safer with respect to the risk of transmission of infectious diseases. We collect approximately 145,000 units of blood per annum and issue them to hospitals throughout the country for the essential care of patients. This is vital work for the health care system and I believe we do it very well.

Let us consider the three shortcomings raised in the special report of the Comptroller and Auditor General, Financial Control and Management in the Irish Blood Transfusion Service, namely, the deficiencies in budgeting and costing, the lack of adequate cash management and project management deficiencies. In 1999 and 2000 the IBTS was planning to move its headquarters and processing and testing facilities in Dublin from Pelican House to James's Street. This decision had been taken in line with the recommendation of the Finlay tribunal that the IBTS's Dublin centre should be on the site of a teaching hospital. Considerable resources were devoted to the implementation of a number of IT projects, i.e., a new payroll system, financial control system, and a blood bank control system, to the establishment of a decentralised collection centre in Carlow and to the move to the headquarters in James's Street.

The IBTS had not implemented devolved budgeting to heads of departments or sections where cost centres would be assigned to specific areas of activity. However, for the financial year 2002, budgets were devolved to budget holders throughout the organisation and this has been continued into 2003. A capital expenditure budget is set at senior management level to meet the requirements of the IBTS in the upcoming 12 months and to ensure that priorities are appropriately resourced.

During 2000 there were some major issues concerning cash resources and cash flow difficulties. One was the carrying of the costs associated with the Lindsay tribunal, estimated at €2.4 million at the end of 2002. We still have not got paid to date for the costs of the tribunal. In the area of fixed assets there was a shortfall between the amount of assets purchased and capital grants received in that year, amounting to €3.7 million. There was also a timing delay between our having to incur costs and our being reimbursed by the Department once they had been incurred. The problem experienced with the integration of the new financial system with the existing blood control system meant that invoices could not be printed for the first quarter of the year, which had serious implications with regard to cash flow.

The serious comments in the report relate to the administration of cash. We have dealt with the issues raised and is important to emphasise that all transactions were clearly documented and there was no loss of money either to the organisation or the State.

There is little doubt that the implementation of the Progesa system has cost much more than originally budgeted and is a number of years behind schedule. The increased cost is due to many factors and these have been outlined in the report of the Comptroller and Auditor General. One of the major issues was the under-estimation of costs at the beginning of the project, particularly with regard to hardware. There was a lack of appropriate expertise within the organisation to implement such a major system in a pharmaceutical grade operation.

At the outset of the project, the Irish Medicines Board insisted that the project manager had to have been involved in the implementation of a major computer project within a pharmaceutical facility. This appointment ensured that we got somebody with the necessary expertise and it was due to his expertise that we uncovered the locking issue in March 2000, whereby one person could issue a product while another could quarantine that product simultaneously. This is a serious issue. The supplier refused to accept that there was a problem with the software and it was with our procedure rather than with their software. This involved serious retesting of the system.

In July 2000 the supplier acknowledged the existence of a problem with the design of the locking issue. However, it was unwilling to fix it in our version 4.4E, but it would in a future release. The locking issue resulted in a delay of nine months and a cost of €524,000.

I will move to the industrial relations issues. While the industrial relations issue are ongoing and being discussed with the Labour Relations Commission, we made a decision whereby one module of the system, which involves recording and giving results for patient samples, would go live. That happened in Cork in April and in Dublin in July 2002.

Industrial relations issues cost the IBTS an additional €333,000 in 2001 and €179,000 in 2002. The other additional costs were hardware, validation of the existing system, the provision of networks for new centres in Carlow and Ardee and consulting costs, which because of the overrun in the time of the project, ran for two or three years longer than budgeted.

At the beginning of this year we set a date of 18 March for going live in Cork and 6 May for Dublin. I am happy to report that the Progesa system core modules went live in Cork on Monday, 17 March at approximately 9 p.m. It has been operating efficiently since and there have been no major difficulties with the system. The project resources have now been assigned to ensuring that the project goes live in Dublin on 6 May.

The internal audit function was established in 1999 and has operated successfully. The function has added value to the operations of the IBTS by providing assurance to management on internal controls, procedures and policies, and accurate accounting records.

The board operates within the code of practice for governance of State bodies and recently, in line with the requirements of this code, the finance committee and board approved the internal audit charter. Since 2000 the following developments have taken place in the financial management of the IBTS: a director of finance and a management accountant were appointed in early 2001; the finance committee has received monthly financial accounts along with cashflow projections at its monthly meeting since June 2001; the finance department has been restructured and additional financial skills recruited; all suppliers are paid by electronic transfer and all staff expenses are paid directly into staff members' bank accounts; and consultants have been recently appointed to draw up a specification for an integrated computerised HR payroll system to be implemented before 31 December 2003.

In 2001, we had a surplus of €1.6 million for the year and a clear auditor's report from the Comptroller and Auditor General. We are in full compliance with the requirements of financial reporting standards and in 2002 we will again show a considerable surplus for that year with little cashflow difficulties and much reduced prompt payment interest paid. The organisation is now moving to the next stage in the development of management of its cash resources and budgeting. During 2003 and into 2004 we will develop a more sophisticated mechanism for the pricing of individual products thereby ensuring the economic price for each individual product can be ascertained.

We in the IBTS are conscious of the important role we play in the health care system of this country. I take this opportunity to thank the loyal donors who have supported us over the years and who in 2002 came out in increased numbers such that donations for that year were 8.2% higher than 2001. We have been able to supply hospitals throughout the country with 100% of their requirements for the past 15 months and this has been due to the loyalty of our donors and the professionalism of our staff. We ask that donors continue to supply the patients in our hospitals so that we can ensure that all activities planned by hospitals can happen without interruption.

We are also conscious of the need to provide value for money and we will be ensuring that we provide a cost-effective system designed to meet the current requirements of hospitals and deal with the emerging threats posed to all transfusion services throughout the world. We must ensure that the IBTS can respond to any emerging threat and has the resources and skills base necessary to do so. The appendices are attached to my submission.

Chairman

May we have permission to publish that report?

Mr. A. Kelly

Yes.

Chairman

Thank you. Does Mr. Barron wish to make an opening comment?

Mr. Barron

I have a brief statement, which I will circulate to the members.

Chairman

Do you want to make an opening comment apart from what is in the statement?

Mr. Barron

No, this is a short statement.

Chairman

I can circulate it.

Mr. Barron

Since the early 1990s the Department has given priority to the reorganisation and modernisation of the Irish Blood Transfusion Service, as it is now known. With the support of the Department, a major management consultancy exercise was undertaken in the mid 1990s to review all aspects of the board's operations. Arising from this, the board adopted a reorganisation plan in 1996, which was accepted by Government and endorsed in the report of the Finlay tribunal of inquiry which called for the early implementation of the plan. The plan envisaged significant investment in extra staff, new buildings, re-equipment and enhanced operational systems. In the present context, it is worthy of note that among a wide range of measures for which the plan called were a strengthening of the finance function and the development and upgrading of the board's IT system.

A multimillion pound investment programme was approved by the Department to support the reorganisation and redevelopment of the IBTS and to enable it to provide a transfusion service in line with best international standards. A new headquarters building has been provided at a cost of approximately €46 million. A new components processing laboratory was provided at the Cork centre. A project team has prepared a design brief for new facilities in Cork and it is expected to be submitted to the Minister shortly. Approval was also given by the Department for the appointment of additional medical consultants, quality assurance staff, senior administrative staff, including the director of finance and the management accountant, which have been referred to, and the establishment of new personnel and finance departments.

Apart from the implementation of the reorganisation plan, the Department has also supported a range of other service developments at the IBTS. Ireland was one of the first countries in the world to change over to recombinant - synthetic - products for the treatment of haemophilia. Expenditure under this heading alone is running in excess of €50 million per annum. The Department has supported measures to minimise the risk of transmission of variant CJD. New technologies, such as PCR testing and leucodepletion have been introduced to improve the safety of the blood supply. Significant investment has been made in local donor recruitment initiatives. A new donation clinic is in operation in Dublin city centre. Decentralised mobile collection teams have been established in Ardee, Carlow and Tuam to augment the existing services in Dublin, Cork and Limerick. The Department has approved the creation of additional haematologist posts in hospitals and health boards across the country. At this stage 36 consultant haematologist posts have been approved compared to 22 posts two years ago.

Apart from the significant capital investment, the various service developments at the IBTS have had significant revenue consequences. As mentioned by the Comptroller and Auditor General, the IBTS is largely self-financing, that is to say, it derives most of its income from the charges it collects from hospitals in respect of the supply of blood and blood products. As a result, the IBTS has always enjoyed a large measure of operational freedom from the Department and it is not subject to the same financial control systems as apply in the case of the health boards. Ministerial approval is, however, required for price increases in the IBTS services. There have been substantial price increases in recent years and this has been a source of concern to the Department having regard to the cost pressures this has imposed on hospital budgets. I am pleased to say, however, that the board has agreed to a price freeze in 2003 and this will be of assistance to hospitals in the tighter financial environment that now prevails.

I would like to make some comments about the IT programme. As I mentioned, the need for an overhaul of IT systems was identified in the reorganisation plan of 1996. Given the very difficult situation that existed in the IBTS at the time, the rate of progress on that front was slower than might have been desirable. In 1998, the Department was approached by the board which was seriously concerned that its then existing IT systems were not Y2K compliant nor was there an assurance that they could be made Y2K compliant and that urgent action was required to ensure that the board would be able to secure continuity of its operations post 1 January 2000.

Chairman

A vote has been called in the Chamber. I will suspend the meeting and we will resume with Mr. Barron's presentation.

Sitting suspended at 11.59 a.m. and resumed at 12.25 p.m.

Mr. Barron

I will continue with my presentation from the first paragraph on the last page.

Faced with such a serious threat to the blood supply, with the potential impact on patient care, the Department agreed to the board's proposals for a major IT programme, including the Progesa project. Before committing investment to the project, the Department was advised that up-to-date project management arrangements, expertise, top management commitment and systems implementation methodologies were in place or being put in place to underpin the project.

The Department was aware that management consultants were advising the board in relation the project and participating closely with the board and project organisation management and specialised support arrangements. The Department was advised that senior management of the board would be providing project sponsorship. We were also advised that the specific hardware and software solution had been determined by the board and that the system selected was operating successfully across many sites internationally. The Department supported the development of a high level internal IT capability within the board when it approved the appointment of a senior manager for IT.

Taking all this into account, the Department was satisfied that the broad requirements to underpin an investment at the level involved were in place or being put in place, including in-built regular reporting by project managers. From the outset, it was understood by all concerned that responsibility for successful IT systems implementation, involving areas such as project management and supplier management, rested with the board.

Chairman

May we have permission to publish the report?

Mr. Barron

Yes.

Deputy McCormack

I acknowledge the case Mr. Kelly has made regarding the tightening of the accounts which appear to be haphazard in the recent years with which we are dealing in the auditor's report.

Mr. Kelly has stated internal auditing was established in 1999 and has been working satisfactorily since. However, it is stated on the first page of the Comptroller and Auditor General's report that "during the 2000 audit, it was noted that despite the fact that deficiencies in this area had been highlighted in 1997 in a report by the consultants, there was still no comprehensive budgeting or costing system in place". Has that to do with the product pricing and costing of activities and performance? Why was it the case, despite an expensive consultants' report in 1997, as identified in the 2000 audit, that nothing had been done? What was the cost of that consultants' report?

Mr. Kelly

To put the environment and organisation in context, the report was published in 1997-98, on foot of which major issues needed to be dealt with, one of which was the transfer from Pelican House, Mespil Road to the site on the St. James's Hospital campus. During that time there was a lack of resources in the Department to allow budgeting to take place in its proper format. It was not until the recruitment of the current director of finance and a management accountant in 2001 that we had the necessary resources and financial skill to provide for devolved budgeting to departments and cost centres. There was so much happening within the organisation in 1999 and 2000 that we had neither the time nor the resources necessary to implement a proper system of devolved budgeting until 2002.

Deputy McCormack

Who commissioned the consultants' report in 1997 if the board did not have the finances at the time to implement its recommendations? What was the purpose in commissioning the report?

Mr. Kelly

I do not know who commissioned the report but the purpose was to identify the measures needed to strengthen financial management in the organisation at the time. It was also to identify modernising measures which needed to be taken to strengthen the financial management of the organisation. It identified the need for a director of finance and a management accountant. A management accountant was appointed in 1998, subsequent to the report being published and the director of finance was appointed in 2001. It took longer than anticipated to act on some of the recommendations in the report to ensure that devolved budgeting to cost centres and budget holders of heads of departments was implemented in full.

Deputy McCormack

The Comptroller and Auditor General referred to the fact that one of the 1997 recommendations was not implemented by 2000. Sales invoices for the first quarter of 2000 were not issued until later and as a result a prompt payment interest liability of €148,000 was incurred. The figure in 2001 was €173,000. Did this liability occur because the board's accounts were not paid on time? Was this money lost as a result of additional cost for late payments?

Mr. Kelly

On the invoices that were not issued for the period January to April 2000, the problem was that, to the end of 1999, we had a stand-alone system for generating invoices. It was hoped and expected that the Progesa system would be implemented before the end of that year. However, when it was realised in September-October 1999 that it was not, an interface with the existing blood control system had to be developed. That took longer than anticipated to do and that is why invoices could not be issued in the first four months.

Deputy McCormack

I am not asking why the invoices were not paid, I am asking whether that caused the penalty——

Mr. Kelly

In that period, the value of those invoices would have been €15.3 million. In the same period, we received invoice receipts of €12.8 million, therefore there was a shortfall of €2.5 million in terms of income for that period. The other thing happening at that time was that the construction of the building at St. James's was nearing completion and there was a cash-flow difficulty in terms of us having to incur costs and get reimbursed in time. The cash flow problem meant we could not pay suppliers on time so we incurred prompt payment penalties.

Deputy McCormack

I know all that. It is obvious from the report. I am asking if the board incurred the additional interest. It states here that there was a liability of €321,000. Was that liability discharged? Did that cost €321,000 as a result of the late payments?

Mr. Kelly

Yes.

Deputy McCormack

This brings me to the Lindsay tribunal and the costs not being met. It appears that €1.47 million of costs for one year of the tribunal were not met and the recouped cost at 31 December was of the order of €3.7 million. It was hard to pay out money when the board was not getting money in for legitimate expenditure. Could a system not be adopted whereby the costs of the tribunal would not be paid out until the Department of Health and Children had reimbursed the board for the costs? It seems unfair that the transfusion service had to bear the legal costs of the Lindsay tribunal.

Mr. Kelly

The way the tribunals operate is that they do not guarantee the costs at the outset and one has to go to the Taxing Master at the end of the tribunal to make sure they are reasonable and properly incurred.

Deputy McCormack

With those costs being so high and costs of senior counsel being so extravagant, would it not have been feasible to have an arrangement whereby the board would not have to pay out the money until it had been reimbursed for it?

Mr. Kelly

It is Government policy that they do not pay out moneys in advance.

Deputy McCormack

No. I am asking if an arrangement could not be made between the IBTS and the legal representatives that they would wait for the money until the IBTS had it.

Chairman

Perhaps Mr. Barron from the Department of Health and Children would like to answer that.

Mr. Barron

Mr. Kelly might like to answer that specific question first. I will have something to say.

Mr. Kelly

Presumably, if the Department were to give us our costs on an on-going basis, they would have to do similarly for every other party at the tribunal.

Deputy McCormack

I am not asking that. I am asking the IBTS, as the body employing this legal advice, if it could not have made an arrangement with its lawyers to pay them when the board was paid. The fees would have been so extensive, as illustrated in the report, that it would seem to be reasonable that they would not have to be paid out until the board was paid. Many people have to wait for money in the same way that the board is waiting for its money from the Department of Health and Children. Therefore, I cannot see why the legal people could not wait for their money too.

Mr. Kelly

I do not think one would get senior counsel or solicitors to take a case on if they knew they were not going to be paid for perhaps up to three years. The tribunal started in September 1999 and it is now March 2003 and we still have not got the money.

Deputy McCormack

Was the recoupment, which was due on 31 December 2000 of €3.7 million, composed entirely of legal costs for the tribunal?

Mr. Kelly

That was in relation to upgrade of the IT systems.

Deputy McCormack

The €1.47 million was in relation to the tribunal. In any case, it seems a high cost to have been paid out without being reimbursed.

Mr. Kelly

From an organisational point of view, we would prefer if we did not incur these costs and pay them because it impinges on our cash flow and ensures that we have to carry bigger overdrafts than we would want to.

Mr. Barron

The Lindsay tribunal caused difficulties for a number of health agencies including the IBTS. Some 30 parties were represented there including a number of hospitals and health boards. The view the Department took was that, given that it is a matter for the tribunal to determine at the end of the proceedings whether any party appearing before it can have its costs recouped, whether in whole or in part, we felt constrained from recouping the costs of any of the parties. The manner in which we treated the IBTS was no different from the manner in which we treated other bodies.

Deputy McCormack

I accept all that but if the IBTS is being penalised for not paying its accounts on time and the Department of Health and Children, which should be co-operating with it, owes it a large sum of money, it seems to me that in the long run it is bad practice to be owed a great deal of money. The IBTS is being penalised because the accounts cannot be paid on time - up to €300,000 in penalties. Someone is fooling someone. It does not make economic sense to me.

Chairman

Can I clarify the length of time the Taxing Master will examine this before a settlement is reached?

Mr. Barron

The IBTS bill is with the Taxing Master and I gather it is something of the order of €8 million. I expect it will be cleared by the Taxing Master fairly quickly.

Chairman

The bill is €8 million, is that correct?

Mr. Barron

I think it is of that order. My understanding is that the €8 million is the entire cost incurred by the IBTS in respect of the Lindsay tribunal.

Mr. Kelly

I thought it was €7 million.

Deputy McCormack

That seems to be an extraordinarily excessive amount of costs to pay for the IBTS. It beggars belief that this kind of liability could be incurred during a tribunal.

Chairman

Is it possible to clarify the figure. In the Comptroller and Auditor General's report it is €1.4 million as of that time but that cost has now gone up to €7 million. Could Mr. Kelly give us a breakdown?

Mr. Kelly

Yes. I will.

Chairman

That is a significant difference in two years.

Mr. Kelly

At the moment we are carrying €2,3686,667 as a liability.

Chairman

Do you have any breakdown today?

Mr. Kelly

I do not, unfortunately. I can submit——

Deputy McCormack

Will it be circulated with that?

Mr. Kelly

Yes.

Mr. Barron

For the information of members, the taxing master is currently considering a bill from the solicitors of the Irish Haemophilia Society of €17 million which puts the IBTS bill in context.

Deputy McCormack

This is a scandal.

Chairman

Regarding the invoice with the taxing master, is it an invoice for €1.4 million or for the €7.4 million agreed at present?

Mr. Kelly

It would be the total amount of €7 million. I can calculate it and give a breakdown.

Chairman

Would it not make sense to agree invoices on an interim basis as that would affect cashflow?

Mr. Kelly

At the moment we do not have a cashflow problem. The taxing master will look at the totality of bills for each party represented at the tribunal and then make a decision rather than on a piecemeal basis.

Deputy McCormack

I note that considerable staff changes affected the implementation phase, particularly in the IT area including IT management, which necessitated the employment of consultancy staff to fill vacancies, which I presume means hiring people for jobs before vacancies were filled. Where were those consultancy staff recruited that would have knowledge of the internal workings of the IBTS?

Mr. Kelly

During the duration of the project there were three IT managers. The IT people recruited as consultants were people with IT rather than blood bank skills. We required IT resources and people with those skills, and from 1998-2000 those people came at a premium price because of the Y2K situation. They had IT skills rather than blood bank skills.

Deputy McCormack

Were any of the people on the consultancy staff people who had left the IBTS and formed consultancies?

Mr. Kelly

No, certainly not to my knowledge.

Deputy McGuinness

I understand most of the questions have to do with history at this stage and should not reflect on the current officeholders in the organisation. That said, it is necessary for us to get to the bottom of this and, by asking questions, give some confidence to the general public that the appropriate changes in personnel or structure took place. In terms of management, what happened was major bungling from one end of the operation to the other and should not happen again. The Deloitte and Touche report of 1997 was highlighted. Have its recommendations been implemented? Have any aspects of the report not been implemented? How much did it cost? Did it refer to the management structure in the organisation?

We have been told of invoices not being sent, and there must have been an impact on the organisation - it must have been overdrawn at the bank. Has anyone costed that? We know the cost regarding the IBTSs other liabilities but not lodging in the bank overdraft was askew and must have caused problems elsewhere. The organisation must have been on penalty interest on bank overcharges.

On project management, the estimated cost of the project was €4.26 million. The current estimated final cost of the project is €9.04 million. It seems to be an incredible gap in management skills which would lead a project to a doubling of cost, though that is just an estimation. I cannot understand how management would set out on a project of that nature, knowing the supervisory bodies at the project's outset were low.

Chairman

We will take those questions. There are about five.

Deputy McGuinness

I have more specific questions.

Chairman

We will take these first.

Mr. Kelly

Regarding the 1997 Deloitte and Touche report, I do not know what the cost was but I can find out. We have implemented the recommendations. One related to the director of finance and another to the management accountant; one was on the internal audit function and one was for more financial skills in the financial department. In 2002 we have more devolved budgeting in the organisation and it will be more refined for 2003 and again for next year.

Regarding the interest paid, what happened was we had an overdraft facility of €1.5 million. During 2000 we had cashflow difficulties and had to meet payroll not to mind suppliers, though obviously suppliers want to be paid by a certain time, so the overdraft was increased to £3.75 million. The Deputy asked about the interest paid and I will try to get that information.

Deputy McGuinness

How much was the board owed at that time? It had an overdraft of how much?

Mr. Kelly

It was €3.75 million.

Deputy McGuinness

The board was overdrawn fully on that facility.

Mr. Kelly

Absolutely.

Deputy McGuinness

How much was the board owed?

Mr. Kelly

During the year it was variable. The Lindsay report cost €1.47 million and there was a timing difference on money for the building project. I could not say with certainty how much we were owed at any one point during the year but at the end of the year there was money owing on the IT upgrade, €3.7 million, and the Lindsay tribunal, which was €1.47 million. We would have been owed more money than the limit of our overdraft in that period.

In terms of the interest on the overdraft, it was €195,000 in 2001. In 2000 it was €84,0000. Deputy McCormack asked about the prompt payment figure and it was €173,000 in 2001 and €148,000 in 2000. Regarding the bigger issue of project management and the cost differential between €4.26 million at the outset and then €9.04 million, a range of issues impacted on the increase in cost of €5 million. I can go through those in greater detail. For example, the BBCS, the blood bank control system had to be Y2K compliant in 1999 which cost €400,000 to implement a new system. We also had to validate that system as our regulator was not happy that the system was not validated to the standard it required, so that cost €283,000.

The locking issue was a serious problem for us because one could have one person issuing a unit of blood and another quarantining it at the same time. Clearly that was not acceptable and we instituted procedures to stop that happening. We looked at the 116 programmes we had and tested them to make sure the locking issue was not a factor. If there were problems we had to close out the problem by devising procedures to work around them. That took nine months and €500,000.

Clearly this was a matter for the supplier, with a fault in the system's software. We discovered that problem, which was not discovered by other blood banks. We went to a meeting in Paris of other system users from Europe and the US and we replicated that problem for the company in its Paris offices. It still refused to accept there was a software problem and said it must have been our procedures and how we parameterised the system within the IBTS that caused the difficulty. It was a major cross for us and delayed us. It took nine months to check the systems and make sure there were no problems.

Deputy McGuinness

From reading the report it seems the IBTS set out on this major project with staff unqualified to follow it through and without a project management team with the skills necessary. That is stated in the report, which goes on to say that the other system had to be Y2K compliant, so the company spent €400,000 on that.

Mr. Kelly

That is right.

Deputy McGuinness

Then there was a validation process costing €283,000. It seems these major issues in implementing the system were overlooked. That would not happen in the private sector and it is astonishing to see it here. It begs the question: was it just poor planning running through the system? There does not seem to have been an overall plan. The price is paid through consultancy fees and through not having a handle or control on the supplier. Did the supplier come up with the €500,000 for the error which was noticed as this was being implemented? Where is the follow-up?

Mr. Kelly

On the supplier, when it was clear to us that the locking issue was a software issue - in other words a supplier problem - the steering committee discussed the possibility of legal action. The supplier has offices in Paris and Skopje and we looked at the option of recouping the money we spent correcting the locking issue, which we deemed a supplier issue. Being pragmatic, we could have lodged a claim for €500,000 against the supplier but it could take years to come to court in the French system and we might get no redress in terms of compensation. In the meantime the supplier would withdraw all support for the system and we would be left with nothing. While this was something we would like to do, the pragmatic view was that it would not be of benefit to the organisation in implementing the system but that in fact it could hinder implementation of the system, so we decided not to pursue it on a legal basis at that stage.

Deputy McGuinness

Surely the steering committee, in going into a contract like that, would have covered all aspects of the contract, including the possibilities that the contract might not work out, that relationships might deteriorate or that there might be a fault. There surely should have been some contingency in place to deal with this and get the money back. I do not know of any company which could afford to say we will leave €500,000 behind and not pursue it. A company would have planned in the beginning how to deal with something happening if it arose and would have had some hold over the supplier. That was not the case here, nor did any planning go into Y2K, yet €400,000 was spent. Validation became necessary and cost €283,000. All the time this is adding up, €400,000, €283,000 and so on being added up and soon one has another €1 million spent. I am trying to fathom the thinking as there is no comfort from the answers we are getting.

Chairman

Were there similar problems anywhere in Europe, in other jurisdictions?

Mr. Kelly

No, chairman. At the meeting in Paris there were representatives of blood banks from all over the world using the system and they did not discover this problem. We showed them our problem on a screen and said it was a real problem. The suppliers refused to acknowledge it was their problem and said it must have been our systems. They asked why no other blood bank had had similar problems.

To go back to Deputy McGuinness's comments, there are serious questions to be asked - which he has raised - about how there came to be a €5 million differential on implementing this project. There were some mitigating factors outside our control. On the Y2K issue, in 1996 the project was conceptualised as required to replace our current system and Y2K was not an issue then for most companies, nor was it in 1997. Perhaps it was by 1998. In October 1997 the contract was placed with Mak Systems but it was not until 1998 that the project commenced and problems arose with the supplier. In 1998, when the project began to be implemented and in September 1999 it became clear we had to be Y2K compliant to function, as IT is the driver in how we process, test and issue blood products to hospitals. For safety reasons we had to have a system that would operate on 1 January 2000. It was then decided to look at making the current system work by then and when we saw we would not make the deadline to implement the projected system, we had to work on the other one. However that would not have been thought of at the start of the project, which commenced in 1997.

Deputy McGuinness

The steering committee must have been naïve and inexperienced in the extreme to have allowed some of these things to happen. Page 10 of the report states that while there was an expectation that assistance could be obtained from countries with similar systems, this did not materialise due to differences in production methods. If I knew there was an expectation that someone would assist me and my project would cost €5 million, I would make sure it was more than an expectation if the €5 million was coming out of my pocket. However, as it was someone else's money, there seems to have been a certain looseness with how the project contract was put together. To say "there was an expectation" beggars belief.

Has the management structure that brought this disaster and overspend about been changed? Are the same key people in place or has there been an overhaul? I do not want to be unkind to any employee but with bungling of this nature there should have been a fresh start practically the next day.

Regarding the internal audit, I know of no-one who can get away with a sort of in-house audit, particularly given what happened here. Everyone brings in an external auditor; that should be done across the board. In business one brings in an auditor at the end of the year and he or she tells one the story, good or bad. Who would be on an internal audit or finance committee? The listing does not tell us who is on that finance committee. If they were aware of and sympathetic to the problems being spelt out for us, what do they really think of their verdict? We are giving our verdict on what happened, that it was pretty miserable management.

Mr. Kelly

First, on the expectation of assistance, the Scottish National Blood Transfusion Service had implemented this system in Scotland and our IT manager was in contact with it, requesting assistance with documentation to speed up our process of implementation. When we went into the project in detail we discovered that we operated differently in some small respects when it came to processing blood. The system had to be parameterised differently for each service. While Scotland parameterised its system ours was parameterised differently. The documentation it provided was therefore not of great use and we had to come up with our own documentation from scratch.

On management structure, to be fair to those who were there at the initiation of the project, it is easy for me - I was not there - to look back in hindsight and say they should have done things differently and taken x, y or z into account. There was a high staff turnover during the project. We have our fifth chief executive officer since 1996 and we have had three IT managers since 1998, while we have our second quality assurance manager in the past four years. Clearly there has been a turnover of very senior positions within the organisation which does not lead to good continuity and stability in terms of project management and delivery of service.

Clearly there are serious issues. We certainly do not want to squander or waste public moneys. We realise that we must get value for money. The credence of that is we have, with the new director of finance and the new staff on board, developed new procedures and new systems to ensure that we will give value for the public moneys invested in us.

On the internal audit, we are audited externally on an annual basis by the Comptroller and Auditor General. In 2001, Deloitte and Touche did the initial audit and that was vetted by the Comptroller and Auditor General and overseen by his office. The Deloitte and Touche auditors are currently in the organisation doing the audit for 2002. They will be submitting their audit report to the Comptroller and Auditor General who will vet it and come back with questions and queries on it.

The finance committee is made up of two members of the board appointed by the board itself. The others who attend are the chief executive officer, the director of finance, the management accountant and one other member of the executive. They double as an audit committee in that two meetings per year are audit meetings. They would meet the internal auditor twice per annum to review her programme of work, the reports she has done and what actions have been taken on those reports. If necessary, if they find that there have been actions recommended which have not been worked on or acted upon, they would ask why those have not happened and ask the chief executive officer to justify those issues. The audit committee/finance committee does function in terms of looking to reports conducted by the internal audit, vetting those reports and making sure the recommendations in those reports are implemented.

Chairman

On the costing of products and services, we are told in Mr. Purcell's report that there will be more accurate pricing of the IBTS's products in future because of work on the budgetary and costing system. It has been IBTS practice to have a percentage increase in product and service charges before this, rather than have them costed individually. Can you give us an example of how this system worked and how the IBTS arrive at these figures?

Mr. Kelly

The current year is the one about which I can talk best because obviously it is the one I know best. In 2002, in preparing the budget for 2003, we would have taken all the expected increases in costs coming down the line, in terms of pay increases and the known factors. Then we would have developments within the organisation to improve the service we provide to the hospitals or in terms of testing or whatever. We then would have a look at income foregone, in terms of variant CJD, for instance, where we do not use our own plasma - we import plasma now, whereas before we would have had our own plasma. We would factor all those items into our budget and we would then see what is appropriate, cost wise, for the organisation, in terms of both the revenue and the capital items which the organisation could implement in the coming year.

For 2003, we did not see it necessary to seek any price increase on any of our products for the current financial year from any of the hospitals. We felt we had operated last year and had made a surplus, and therefore we could fund the costs that we wanted to implement, which included improvements in delivery of service to the hospitals, from within the surplus and resources gained from increased volume sales. We recommended to the Department that we would not increase any prices this year. Obviously that has been welcomed by the hospitals. That is how we would have worked through the budget process.

We would have detailed budgets for every Department and under every cost heading - blood bags, test assays, clinics held in country halls or whatever. All the costs are itemised so we know exactly were the costs are incurred.

Chairman

It is clear that IBTS has had a rather haphazard approach to costing previously. It seriously under-priced products, considering there was a 46% increase in January 2002.

Mr. Kelly

That is right, Chairman.

Chairman

That was a significant increase, 46%.

Mr. Kelly

It was, but there were some mitigating factors which were predominantly to do with variant CJD. As I mentioned earlier, we get three products from the blood of a donor - the red cells, the platelets and plasma. We were selling plasma to our hospitals and also abroad for vaccination into other products. As a result of variant CJD, we decided we could no longer do that. It was one of the measures we took in terms of the precautionary principle of avoiding the possible transmission of variant CJD through blood. Therefore we lost approximately €3.1 million from the sales of plasma and we had to import plasma from voluntary donors from the US to replace the Irish plasma. There were two costs involved: one was the foregone cost of selling our own plasma; and the other was the increased cost of importing other plasma.

We also had to set up the centre in Tuam in 2002. That is proving very successful because we are now more linked with the community and we are getting in more donations, as the committee saw from the figures I mentioned earlier in 2002.

Therefore, many of the factors would not have been from the inherent cost base of the organisation. They would have been driven by other issues, but every cost centre is looked at strenuously because we are conscious of the fact that we do have to seek, through the Department, approval for a price increase. In 2000, the price increase was 2%. Clearly that year inflation was predicted at 2% and therefore in real terms there was no increase in the product price for 2000. Clearly there was immediately a difficulty perhaps in cashflow and in income for that period during the year 2000.

Chairman

Did that not indicate bad management when you had to raise prices by 46% in 2002? Was the deficit in cashflow due to the fact that there were poor costings done on our products?

Mr. Kelly

There were two factors. Yes, that clearly was a factor. The other factors are those which were just mentioned. In 2001, we obviously then had to increase product price by approximately 25% and then, in 2002, it was 46%. Clearly we have got large funding from the Department in recent years in terms of cost increases and clearly we have to be very conscious of the fact that we cannot keep going back to the Department and the Government looking for extra moneys. We must ensure we give value for money and obviously that is what we are trying to do at the moment. That is why we have put systems in place to try to make sure we do that.

Chairman

The revenue generated for 2000 was €45 million. There were expenses of €27 million in processing costs, which would represent 50%. Your wage costs that year were 31% of the revenue. What would that figure be for 2001-02?

Mr. Kelly

Of overall sales of approximately €105 million in 2002, the costs are about 50% in terms of salaries and wages. If we take out the recombinant products——

Chairman

What percentage would that be?

Mr. Kelly

Roughly 50%.

Chairman

That would be a considerable increase on 2000, when it was 31%.

Mr. Kelly

I think that is true, Chairman. I will check that figure for you before we leave.

Chairman

Wages would have gone up 19%.

Mr. Kelly

Much of the wage costs have been driven by certain groups of staff who got significant increases which were made throughout the country. The technical staff, for instance, got 10%. We did not have any say in that. These increases filter into the system to us and we try at the beginning of any year to factor in any pay increases we know are coming down the track. Then we submit those into a budget and then request a price increase, or in this case no price increase in 2003, to make sure we balance the books at the end of the year. That is how we operate within the system.

Chairman

Processing costs were 60% in 2000. What percentage of revenue was it in 2001-02?

Mr. Kelly

Roughly 50% in 2002.

Chairman

What was the revenue total?

Mr. Kelly

The revenue total was about €106 million. These are not the finalised accounts but they are almost finalised. The revenue was €106 million and there were processing costs of €53 million.

Chairman

Is there any business expertise on the board of the IBTS?

Mr. Kelly

There is a person on the board who is a senior executive in a private sector company. I think that is the only person on the board with business expertise.

Deputy Connaughton

I do not want to go back over what everybody else has said. Would Mr. Kelly give some indication of the unit cost of a pint of blood and the increase which the IBTS had to charge the hospitals over the past five years? If we look at 1998, the unit of blood was €80.18. In 1999, it was €199.36, €121.74 in 2000, €152.79 in 2001, €223.07 in 2002 and there has been no price increase in 2003.

That is a colossal increase by any standard. While I do not want Mr. Kelly to take this personally as I appreciate he is new to the position, an increase from €80 to €223 within five years must be a record that warrants inclusion in the Guinness Book of Records. I have never heard of an increase as astronomical as this. I have never heard of the locking system, it is not my business.

If I buy a new car I expect to get a guarantee with it. I further expect that when one does a deal with a company to provide the necessary IT, particularly with all that has been said about the quality of blood over the past eight or nine years, one would get a guarantee. Could only one company provide this? Was there only one fish in the pond or could tenders have been given from other companies? I find it extraordinarily difficult to understand that one company could cost the service nine months of valuable time and €500,000 without the service having any redress. While I fully appreciate the idea of international courts and going to France etc., surely the damage was done long before the contract was given. We have often heard of the small print in contracts, there must not have been any writing at all in this contract.

Mr. Kelly

This was done by public tender as we are governed by public procurement regulations. A number of companies tendered for the system. The system, called Progesa, is a market leader in the field of blood banking. It is used in New Zealand, Canada, Singapore, New York, Australia, Finland, the Netherlands, Scotland and Belgium. It is the market leading product and this is one of the reasons it was chosen.

Clearly there are significant price increases. In 1997 the report of the Finlay tribunal was published and we all know of the documented tragedies that occurred prior to 1994. Because of the history of the organisation, we must be seen to be to the forefront of all testing regimes and safety measures world-wide. We have been among the first organisations in Europe to introduce nucleic acid testing for HIV and hepatitis C. This is not done in Britain, for instance. The State has invested heavily in building infrastructure to a standard termed good manufacturing practice. This is what operates in pharmaceutical companies and it is a huge step forward from previous blood banking facilities. This entails huge running costs. In one area alone, the particle counts have to change four and five times per second. It is an incredibly tight environment and there are huge costs in run air-handling devices etc. This is the environment we now operate in and we must be seen to operate in it. This is most of the reason for the substantial increase in price from 1998 to 2003.

Deputy Connaughton

I will not pursue the argument other than to say it is the most unusual contract that I have heard about for a long time.

Mr. Kelly

We could have sought redress in the courts. Given that it was a court in France and we might still be waiting on a hearing and the costs of legal fees etc., it would not have been the route to go. I accept that it is a difficult position.

Deputy Connaughton

It is a difficult position and it sent out all the wrong signals. Both my head and my heart are with the transfusion board and I wish it well. I was a member of the Joint Committee on Health and Children during the last Dáil and we met the transfusion board on a number of occasions. Have all the tornadoes that have blown through the transfusion board in recent years abated? I saw the most unedifying suggestions made by members of staff over the years and while I will not mention anyone by name, it is generally known that there appeared to be no more troubled organisation on the face of the earth than the transfusion board. Is all this past? Is it a nice place to work now?

Mr. Kelly

I thank the Deputy for his support and know he has expressed that view in the past. I do not have any difficulty in going to work each morning to the Irish Blood Transfusion Service. It is an organisation that has gone through its fair share of difficulties in the past. The Cork-Dublin issue was exacerbated by the decision on the centralisation of testing. That has been reversed and testing will continue on both sites. The board has approved the design brief for a new centre in Cork and it will soon go before the Minister for Health and Children for consideration.

Many of the issues that were around at that time have been dealt with. We still have work to do and we are working through all the issues. We are developing a partnership model in terms of doing our business within the organisation. We have held four of five workshops to date that involved all our staff around the country. We are in the throes of employing a new director of human resources to further implement policies and procedures with regard to personnel within the organisation.

Deputy Connaughton

In other words, the board is now singing from the same hymn sheet.

Mr. Kelly

Yes, I think so.

Deputy Connaughton

Is there any major residual matter that might blow up in the board's face?

Mr. Kelly

I am not aware of any major issue that might blow up. While there are some issues to be dealt with, they are not of such significance that they might disrupt the operation of the organisation and the delivery of service to the hospitals.

Deputy Connaughton

I understand from the report that there was an 8% increase in public donations in 2002 over 2001. This is to be welcomed. Is this continuing to grow in 2003?

Mr. Kelly

Yes. We have never had such healthy blood supplies in the country. As of this morning, we are holding 2,800 units at our national blood centre. Two years ago we would have had one third of this. The blood supply has been strong and robust; we have been able to meet the requirements of hospitals and this is testimony to the decentralisation programme. As the Deputy is probably aware, we have a centre in Tuam that attends clinics throughout Galway, Roscommon, Mayo and parts of Leitrim.

Deputy Connaughton

It makes a big difference.

Mr. Kelly

It does. We are closer to the community and have an affinity with it. We bring our awards ceremonies to the regions. These ceremonies award donors who have donated 50 times or more and we held one in Galway last year and will go to Carlow, Ardee and Limerick in the near future. We depend on community support and being in the community in Tuam means we have a greater affinity with it and it has supported us in recent years.

Deputy Connaughton

On a lighter note, I compliment the PR firm that created the advertisement that is running on the radio. One would almost be inclined to run out and give every drop of blood one had.

Chairman

We heard last week that the Department of Health and Children proposed to introduce a unique patient identifier and this would make duplication of medical cards a thing of the past as members of the public would have a health service equivalent of a PPS number from the cradle to the grave. Will the introduction of the unique patient identifier have any resource implications for the IBTS?

Mr. Kelly

I do not think so. I am not very au fait with it, to be honest. Obviously, we issue units to hospitals which track who gets those units of blood, platelets or whatever within the hospital system. However, if because of a certain donor history we had to look back on a product that we issued, it would make it easier if there was a patient tracking system to help us do this. I do not believe there are resource implications but I am not too au fait with it.

Chairman

Patients with unusual blood groups often require extensive searches by local hospitals and the IBTS. Is it not the case that this work is often duplicated when a person relocates to another area?

Mr. Kelly

No, we have one donor base which has all our donors on it, their blood groups and types and the antigens or antibodies specific to them. If asked to track a specific blood type, it would be on our donor base, irrespective of where in the country a person donates.

Chairman

Some very good questions were raised, especially the issue concerning legal charges and the installation of the Progesa system. The fact that it has begun in Cork and that the project manager has been involved in its implementation there and in Dublin is very welcome.

The Comptroller and Auditor General's report contains some serious criticisms which were justified and explored by members. We need the agency's assurance that these matters are being closely monitored. As Deputy Connaughton said, everyone wishes the agency well. The public needs to be reassured. I think confidence in the agency is certainly emerging. That said, all the inquiries and associated legal charges have caused concern, as has the fact that we are talking about £7.4 million for the installation of the system. That information became apparent today.

The Committee of Public Accounts has the right to examine the agency's accounts. I certainly hope to do this in future to ensure the appropriate systems are and will continue to be in place. That is critically important, given the duplication in installing IT systems and the fact that there was no drive or ambition and it took so long to put the system in place, this at a time of considerable consternation about the blood service in many areas. It was disappointing that the installation of IT systems took so long, from 1998 to 2003, that initially it was to cost £4.6 million and that, as of 31 December, it cost £7.4 million. What is the final cost of the system in euros?

Mr. Kelly

It is €9.3 million.

Chairman

Does Mr. Purcell wish to say anything more?

Mr. Purcell

No, there is very little. Clearly, mistakes were made, as has been acknowledged. They were costly but the important thing about mistakes is that we learn from them and try to put systems in place to avoid a recurrence. It is fairly clear this has been done by the Irish Blood Transfusion Service. Therefore, we should be positive.

I am certainly heartened by the feedback from the current audits of the accounts of the service which suggest that matters have improved greatly. I certainly hope my audit report on the agency for 2002 will be clear. I have no reason to believe at this stage that it will not be.

Chairman

That is very good. I am delighted to hear that from Mr. Purcell. Perhaps Deputy Connaughton will note the report and agree the agenda for the next meeting.

Deputy Connaughton

I so do.

Chairman

I am delighted to get Mr. Purcell's endorsement. It is good going forward and certainly very encouraging. The fact that the Progesa concept was switched on in Cork in March and that the agency is looking at going live in Dublin is reassuring.

I wish the witnesses well and thank them for attending. It has been a worthwhile meeting. I have no doubt, Mr. Kelly, that you had a challenging time integrating all the systems. From what we have heard at the meeting, especially Mr. Purcell's comments, the Committee of Public Accounts is more reassured than it was. Thank you.

Mr. Kelly

Thank you very much, Chairman.

Chairman

The report has been agreed.

The witness withdrew.

The committee adjourned at 1.25 p.m. until11 a.m. on Thursday, 10 April 2003.