COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 29 Jan 2004

Vote 25 — Department of the Environment, Heritage and Local Government — Chapter 6.1.

Mr. Niall Callan (Secretary General, Department of the Environment, Heritage and Local Government) called and examined.

Chairman

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 granted certain rights to persons who are identified in the course of the committee's proceedings. These rights include the right to give evidence, produce or send documents to the committee, appear before the committee either in person or through a representative, make a written and oral submission, 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 can be exercised only with the consent of the committee. Persons invited before the committee are made aware of these rights and any person identified in the course of proceedings who is not present may have to be made aware of them and provided with the transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interests of justice.

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

I welcome Mr. Callan, the Secretary General, and ask him to introduce his officials.

Mr. Niall Callan

The officials accompanying me are: Ms Maria Graham, principal officer of the housing policy section; Mr. Ian Keating, principal finance officer of the Department; and Mr. John McCarthy, principal officer of the waste management section.

Chairman

By whom is the Department of Finance represented?

Mr. Fred Foster

My name is Fred Foster and my colleague is Mr. John White.

Chairman

Chapter 6.1. of the report of the Comptroller and Auditor reads:

6.1 Urban and Village Renewal

A continuing programme of urban and village renewal and regeneration is sponsored by the Department of the Environment, Heritage and Local Government and funded by a combination of European Structural Funds (ERDF and EAGGF), Exchequer, local authority and contributions from other participating bodies. EU involvement is through Sub-Programme 3 of the Operational Programme for Local Urban and Rural Development 1994 — 1999 (OPLURD) which was designed to support a wideranging programme of urban and village renewal and encourage social and economic development at local level. The programme was categorised under 5 measures.

·Flagship projects in the five main cities for the economic and social regeneration of their central areas.

·Landscaping, pedestrianisation and physical improvements to streets and the eradication of derelict sites in urban centres throughout the country.

·Village renewal measures, including general amenity improvements and the development of focal meeting points as well as a range of other improvements designed to underpin the economic future of the villages concerned and the agriculture-based community on which they are dependent.

·Assistance to civic trusts, local authorities and other local development bodies to rehabilitate the built environment in urban areas, through the conservation and restoration of urban architecture and heritage buildings.

·A programme of cultural initiatives in the Temple Bar area of Dublin.

The Urban and Village Renewal Measure of both the Border, Midland and Western and the Southern and Eastern Regional Operational Programme continues and expands the work undertaken with OPLURD assistance under 4 categories over a planned period 2000 to 2006. Works on physical, social and economic rejuvenation of the Dublin Docklands replaced Temple Bar in this programme.

Funding for the programme in the period 2000 to 2006 is provided from Exchequer and local sources and, to a lesser extent than the 1993-1999 programme, by the ERDF. The programme is managed by the Border, Midlands and Western and the Southern and Eastern Regional Assemblies. The individual projects are carried out under contract to the relevant local authorities and other promoting bodies. Exchequer and EU funding for the projects are channelled through the Vote for Environment, Heritage and Local Government.

EU regulations require that a minimum of 5% verification checks be made on expenditure incurred on projects under each Sub-Measure. These checks are undertaken by the Department's EU/Internal Audit Unit at Implementing Body level and are in addition to the annual audits carried out by the Local Government Audit Service, which is charged with the responsibility for auditing local authorities.

Table 6.1 gives an overview of Vote funding for years 1998 to 2002 — the period covered by my examination.

Table 6.1 Overview of funding and expenditure on the combined programmes 1999 — 2002

Year	Original Estimate	Expenditure	Saving on Original Estimate	Supplementary Estimate	Surplus surrendered by the Vote
	€m	€m	€m	€m	€m
1999	27.45	14.65	12.80	(10.16)	7.05
2000	28.64	13.19	15.45	(13.46)	1.72
2001	25.88	15.26	10.62		0.76
2002	56.44	29.36	27.08		47.57
	138.41	72.46	65.95	(23.62)	57.10

Shortcomings in the Estimating Process

Analysis of these figures indicates that the Estimates provision under this subhead has been consistently far in excess of the outturn over the period 1999-2002.

I asked why the slow rate of draw -down by beneficiaries has apparently not been factored into Annual Estimates calculations and what measures the Department is taking to align the Annual Estimates provisions with the expected outturn.

The Accounting Officer informed me that despite evidence of strong demand from local communities for funding under the urban and village renewal measures of the programme, take up under the schemes has been slow, leading to the savings under the relevant subhead for the period from 1999 to 2002. It appears that a combination of factors affected the start up of the new regional programmes, and to a lesser extent,

OPLURD

·There was a lack of continuity between OPLURD and the current Operational Programmes because of the delay in securing EU approval for the new programmes

·Urban renewal projects tend to be of a relatively small scale, and there were difficulties engaging contractors prepared to undertake such projects, at a time when the construction industry was operating to full capacity

·The public consultation process concerning these schemes has become increasingly protracted — in particular, the major initiatives in the five main cities entailed a lengthy period of preparation and consultation

·High tender prices gave rise to delays — with less competition, tenders received in some instance were above the range anticipated by the local authorities and a further call for tenders was considered necessary.

He stated that new programmes tend to start slowly and gather momentum. In this regard, he pointed out that overall outturn expenditure rose from 34% to 70% of the revised estimates provisions over the years 2001 and 2002.

He gave the following more detailed observations concerning the years in question.

·In 1999, there was no one specific reason for the under-spend under OPLURD. Due to a variety of circumstances — including the timescale necessarily involved in public consultation and securing planning approvals, and difficulties in engaging contractors or finding suitably experienced craftsmen — not all of the 1999 allocations under OPLURD were drawn down by local authorities or conservation bodies. In many cases work was ongoing on these urban and village renewal and conservation projects at year-end. In particular, two of the major initiatives were slow to draw down their expenditure and a number of the smaller village renewal projects proved difficult to get underway in time to draw down moneys by year-end.

·Local authorities were not in a position to enter into contracts unless funding for the urban and village renewal projects was allocated, yet under the EU's programme closure rules, contracts had to be entered into for urban and village renewal and conservation projects by 31 December 1999.

Consequently, it would not have been possible to allocate anything less than the balance of the outstanding moneys profiled in the programme, without jeopardising EU aid commitments. Under OPLURD, there were a few local authorities that were unable to complete their expenditure by the and of 2000, for reasons similar to 1999. Under the applicable EU programme closure rules, payments were allowed by Implementing Departments up to 30 June 2001 in circumstances where funding had been contractually committed to projects by 31December 1999.

·In 2000, the bulk of the under-spend related to the urban and village renewal measures under the Regional Operational Programmes, 2000-06. When the 2000 estimates were being drawn up (in 1999), it was anticipated that the negotiations between the Government and the European Commission would be completed in a timely manner and it was considered reasonable to include provision for spend in 2000. In the event, the programme was not approved by the Commission until the end of November 2000, and it was not possible to approve projects for funding until the final outcome of the negotiations (in particular the level of local funding required) was known.

·Accordingly, 2001 was effectively the start-up year for the urban and village renewal measure under the Regional Operational Programmes. When the estimates were provided, it was not anticipated that there would be such a loss of momentum between OPLURD and the new programmes. The operational guidelines published by his Department required all city and county councils to draw up strategy plans outlining proposals for the towns and villages and major city initiatives to be selected for funding over the life of the programmes. Allocations issue each year and details of specific elements of the projects are submitted for approval. Workshops were held to facilitate local authority staff involved in the planning and administration of the schemes. All of this took time and it was not possible for all the local authorities to draw down their full allocation in 2001.

·The initial 2002 estimate sought funding of €41.147m, which included the amount profiled for 2002 in the programmes and the balance of 2000 and 2001 moneys (€19.62m). However, even at that stage it was not envisaged that local authorities would be in a position to spend such an increased allocation in 2002. It was pegged at this high level to catch up with the agreed expenditure profile for the Regional Operational Programmes. A provision of €32.17m was further reduced early in 2002 to €24.286m. Of this allocation to local authorities, a spend of some 76% was achieved, a considerable increase on the previous year.

The Accounting Officer considered therefore, that the initial estimates were based on the best expectation of expenditure in any given year. These estimates are monitored on an on-going basis and are revised as required. Local authorities are requested to indicate if they are in a position to draw down their full allocation — if not, this can be re-allocated on the basis of capacity to spend. For example, the city initiatives all indicated that following protracted preparation, planning and consultation, they will require considerable spend this year. Expenditure in 2003 is expected to align closely with the Estimates provision.

Budgetary Control

My examination noted that for the years 1999 to 2001 cumulative under-expenditure from this subhead amounted to almost €39 million. The total sum surrendered by the Department to the Exchequer amounted to €9.5million. In 1999 and 2000, the savings were reallocated to other subheads in the Vote by Supplementary Estimates passed by Dáil Éireann late in both years. In 2001, the saving was reallocated to other subheads of the Vote by 'virement', approved by the Department of Finance. In 2002 the savings of €27m were surrendered as part of the overall surrender of €47m. It will be noted that Government had demanded significant savings from a number of major spending Departments as a result of the worsening budgetary position.

As I was concerned that the principles of budgetary control may have been circumvented by the persistent use of savings on the subhead as a reserve fund to offset excess expenditure in other areas of the Vote in the years 1999 to 2001, I asked the Accounting Officer for his observations.

The Accounting Officer stated that the provisions included in the Department's estimates for the EU cofinanced urban renewal programme were sought having regard to best expectations as to what would be expended in the years in question. It was never the Department's intention to use the programme, or any other programme, as a reserve fund.

He argued that the Department's ability to exercise budgetary control is best evaluated in the context of the overall Vote, as there will always be some individual programmes on which savings are realised or excesses are incurred. The extent to which funds have been vired between different programmes has not been large in the context of the overall funding provided to the Department, and outturns have been brought in close to overall spending limits without any excess over gross or net voted spending.

Receipt of EU Funding

In response to my inquiry as to whether any EU moneys had been lost to the Exchequer under OPLURD as a result of failure to meet EU deadline, the Accounting Officer informed me that in all, the Urban and Village Renewal sub-Programme of OPLURD came in at 0.67% (€0.533m) under-spend of EU funds.

Measures 1 and 5 came in slightly over the forecast while, in the other measures, the eligible spend in a number of the final projects came in under the amounts allocated. A number of approved conservation projects could not meet the 31 December 1999 deadline for contracts, largely due to lack of availability of skilled craftsmen and contractors experienced in conservation works.

Mr. John Purcell

Chapter 6.1 sets down the results of an examination of the funding of urban and village renewal measures in the period 1999 to 2002. The programme of renewal and regeneration is sponsored by the Department of the Environment, Heritage and Local Government through which Exchequer and EU financial support is channelled. This funding may be supplemented by contributions from local authorities and other participating bodies towards the cost of EU co-financed and other renewal projects.

Chapter 6.1 shows a wide divergence between the amounts originally provided in the annual Estimates for funding the programmes encompassed by the subhead and the amounts ultimately expended in each of the four years. In aggregate, only €72 million out of original provisions totalling €138 million was expended. This outturn raised questions in my mind about the adequacy of the Department's procedures for preparing its annual Estimate and I put this to the Accounting Officer. The committee will see on pages 65 and 66 where he outlines the factors that gave rise to the underspends in each of the years, such as delays in securing EU approvals, difficulties in sourcing contractors due to a lack of capacity in the building industry and consequentially high tender prices, and the protracted nature of public consultation. He specifically refers to a loss of momentum between the end of the 1994-1999 operational programme and the start up of the current seven-year programme.

The persistent underspends also had the effect of making funds available within the Vote to meet excess expenditure incurred in other areas of the Vote. While it is a regular feature of Government accounting that virement is used to cover such situations, it was the fact that it was happening in four consecutive years involving the same subhead that concerned me from a budgetary control point of view. The Accounting Officer assured me that the provisions included in the Department's estimates for the EU co-financed urban renewal programme were sought having regard to the best expectations as to what would be expended in the years in question. He also assured me that it was never the Department's intention to use the programme or any other programme as a type of reserve fund.

The fact that much of the programme expenditure took place much later than intended could have caused problems in meeting EU deadlines for incurring eligible expenditure but thankfully the committee will see in the final paragraph that the Accounting Officer informed me that the amount involved was negligible in the context of the overall expenditure on the earlier programme.

Mr. Callan

I fully accept the central concern of the Comptroller and Auditor General as expressed in paragraph 6.1, that Estimates presented to the Dáil should be as accurate and realistic as possible. I accept also that my Department's estimates of the amounts required for the urban renewal programme were less than satisfactory for the years in question. There are, however, some mitigating factors in this regard, which I will now summarise briefly.

The urban renewal programme is a medium-sized one, in the context of the Department's Vote, and the subhead in question, subhead F9, covers expenditure on a range of sub-programmes of which EU co-financed grants are only one, albeit important, component. The subhead has also been used to provide finance for a number of civic/community centres and parks, and, typically, this element of funding has been added to our Vote as a budget day adjustment. Since 2001, grants in respect of the EU URBAN II community initiative and for urban renewal works undertaken by the Dublin Docklands Development Authority have also been defrayed from subhead F9.

I make these points so the committee will understand that the underspend on the subhead did not arise on the EU co-financed capital grants scheme alone, although this is the major item contained within the provision and the one which has given rise to the greater part of the underspend. The reality is that there has been a pattern of slow drawdown of grants for the civic and community centres also — in part because of the voluntary nature of the projects.

The EU co-financed scheme of urban renewal grants was introduced as part of the operational programme for local, urban and rural development, 1994-1999. In the 2000-2006 period, the urban renewal programme has been administered as part of the local infrastructure priority of each of the two NDP regional operational programmes.

The main reasons for the slow spend on the programmes are as set out by the Comptroller and Auditor General. From 1999 to 2002, the period comprehended by the Comptroller and Auditor General's report, the economy was in a buoyant phase, and local authorities encountered difficulties in sourcing contractors to undertake works, some of which were relatively small in scale and specialised in nature.

A further, and significant, factor was the transition to different EU funding instruments between 1999 and 2000. Negotiation of the new funding arrangements with the European Commission was not completed until November 2000 — considerably later than expected. This, and the introduction of more extensive requirements in regard to public consultation for the new funding round, led to a hiatus between the old and new funding arrangements.

Nonetheless, I accept that these delays and difficulties offer only a partial explanation of the problems with the subhead. My Department has long experience in administering EU assisted programmes, most of which are considerably larger in scale than the urban renewal one. We take seriously our responsibility to administer our co-financed programmes so that the relevant aid complement is earned in full, and our record in this regard is good.

Against this background, the Department sought funding for the urban renewal programme in the expectation that the spending environment would improve and that the total aid complement would be earned. In effect, this meant that where spending had been under-achieved in a given year, the following year's estimate was determined, not simply from earlier programmed amounts for that year, but also by the need to accelerate the programme if possible in order to make good the underspend from a previous year or years. In that sense, and combined with the factors which depressed the potential level of spend, the Department's estimations in this instance can now be seen as overly ambitious. We will look critically at the spending history of our infrastructure programmes in formulating estimates for the future.

Virtually all of the €78 million aid available to the urban renewal programme over the 1994-99 period was earned. While the under-spend over the early years of the 2000-06 funding period is now a matter of record, I am pleased to report that the 2003 spend on the corresponding sub-head represented over 99% of the intended provision of some €24.6 million. Of this amount, the budgeted amount for the EU component was, in fact, exceeded.

The committee may wish to know that the negotiating mandate approved by the Government for the mid-term review of the NDP and community support framework is relevant to the urban renewal programme. The mandate envisages a reduction of the funding available to the urban renewal programme and the transfer of this money to the non-national roads measure which is in a position to earn the aid available. Earlier discretionary transfers of aid to the non-national roads programme have already ensured that no loss of EU aid has arisen on the local infrastructure priority to date. This, taken together with the negotiating mandate decided by the Government, should ensure that there will be no loss of aid incurred on the priority over the entire period to 2006.

I conclude by reiterating the point made in my response to the Comptroller and Auditor General that there was no intention on the part of the Department to use unspent money under these programmes as a reserve fund. This is borne out by the fact that in only one of the years was any transfer made from the under-spent urban renewal programme into other spending areas of the Department. Otherwise, the money was surrendered to the Exchequer.

Chairman

With regard to the many villages and urban areas that need investment, does the fact that this money was not spent not indicate poor financial management by the State? I am astonished that the uptake and management of this scheme was not promoted from the start.

Mr. Callan

That is an understandable concern. The money was voted into our administration. It would have been our intention to ramp up the programme to ensure fuller if not complete spend. Unfortunately, the logistical factors I have mentioned, combined with the timescales involved — we were up against deadlines for mid-term reviews when the Department of Finance and the EU Commission would, understandably, ask questions about the pattern of spend — meant that, in the interests of ensuring full draw-down from the EU, we had to compromise and use the non-national roads measure, which had spare capacity, to earn the money for Ireland.

Chairman

Around the country, villages are on their knees because of their need for regeneration and the infrastructure deficit. The concept of this renewal scheme was to give a sense of lift and it is disappointing that an operational programme was not properly developed to deal with the type of deficit which exists in every county.

Mr. Callan

We are now spending on this programme at a healthier rate and hope that will continue. To consider the total urban renewal effort, it is important to understand that direct grant assisted measures, such as those under discussion, are only one smaller component of the total urban renewal effort. The bigger picture is better seen when we realise that there is a range of successful tax incentive driven schemes driving development in cities and towns around the country. The amount of development being leveraged by such measures is greater and, while these are complimentary and almost subsidiary measures, I accept your concern, Chairman, as they are important in their own right. However, they are part of a bigger picture.

Deputy Connaughton

I welcome Mr. Callan and his officials. Much of the voluntary sector, including many chambers of commerce and tidy towns associations, will be aghast to find out that of an estimated €133 million available to be spent from 1999-2002, only €72 million was spent, for a variety of reasons. That brings us back to a point made in this committee on many occasions: the basis for the Estimates must have been wrong and somebody got this very wrong.

I will go through the figures with Mr. Callan. In 1999, the original estimate was €27.45 million and €14.65 million was spent, though I accept that 1999 was the last year of a particular plan. Given that a new national development plan — the 2000-06 plan — was beginning in 2000, I can appreciate that those handling this were getting expert advice in this regard. However, if they were picking up on anything, they should have known what happened in 1999.

In 2000, the original estimate was approximately €28 million. It is hard to believe, but less than half of that amount — only €13 million — was spent. In 2001, the estimate was €25 million with just €15 million being spent. However, in 2002, despite all the expertise involved, somebody said that we would spend €56 million. Despite that projection, with all the plans in place and bedded down, all that could be spent was just short of €30 million.

Mr. Callan might explain to the committee how, after the experience of four years and the audits carried out in this regard, a Department could decide to try to spend €56 million on projects, though I accept that these are projects we would all applaud and there is no doubting the excellent facelift that the improved quality of street architecture has given to so many cities and towns around the country. Nonetheless, as practising politicians who get representations from so many places for funding for projects such as high street centres, we must ask how, in any circumstances, the Department could have got it so wrong in 2002. Mr. Callan might give the committee some idea about that. I read what he said about it being hard to get contractors etc. That had little to do with the forecasting for the fourth year, when there was a substantial increase in the amount of money Mr. Callan's Department thought would be spent. How did that happen?

Mr. Callan

I would start with the paradox that it is sometimes easier to ensure full spend of very large programmes, those comprising large projects, than to do so with programmes which comprise a variety and multiplicity of smaller projects involving many different local authorities. That said, even up to 2002 my Department was hopeful of ramping up the programme so that it would pick up past under-spends and discharge the spend expected for 2002 also. We knew there was difficulty in this and that it was an ambitious undertaking, but we felt it was right to continue to seek to drive the programme and to go out on the highways and byways with the local authorities to draw in eligible proposals, so that fuller spend-out of the programme could be achieved. In mid-2002 the Government wished upon our Department, as on many other Departments, a reduction in spending. We were asked to hand back money in June or July

Deputy Connaughton

Was that in 2002?

Mr. Callan

Yes. That was not the same context in which the estimate of €56 million was decided. We had to look more critically at programmes which might not reach full spend and decide how to make up the portfolio of cuts to be handed back to the Department of Finance. That accounts for the major gap arising in 2002 rather than the other years.

Deputy Connaughton

I assume there are accompanying plans for the €56 million which was estimated to be spent and that that figure was not plucked from the air. I also assume there was negotiation and consultation with the bodies throughout the country via the local authorities. It was decided before the Estimates that year that €56 million was required to be spent. Is that true?

Mr. Callan

Not entirely.

Deputy Connaughton

What was the estimate for?

Mr. Callan

Let me explain. This programme was launched only in 2000. We were now in mid to late 2001 looking at the estimate for 2002. While we had a certain shelf of work which was either already in progress or we could confidently bank upon, given the relatively short timescale of this programme, we had to make a more speculative estimate of how much new eligible work we could drum up from the point at which we would have handed in our estimate to the Department of Finance. We had to look at the possibility of ramping up the programme and drumming up more eligible projects from local authorities. We could not have all the projects banked. That would be the case in some of the bigger programmes with a longer cycle and history. We might have a shelf of projects big enough to guarantee spend. However, because of the relative novelty of this scheme, that would not have been the case.

Deputy Connaughton

Would Mr. Callan call it a novelty after four or five years?

Mr. Callan

There were some different parameters. There was the hiatus about which I spoke, which is regrettable. There was a public consultation issue which hampered us and which I mentioned. We will make the case if local authorities and the others mentioned come to us with solid proposals. We are always open to a case being made to us that more can be done. If that case is convincing to the Department, we will try to vindicate it with our spending masters for future years, without prejudice to how well ——

Deputy Connaughton

I thought the shelves were filled with potential projects from all the local authorities. We may suffer from many things in this country, but we do not suffer from a lack of plan preparations. Was the Department stuck in terms of where it could spend the money?

Mr. Callan

Unfortunately, that proved to be partly the case. I cannot conceal that. I began with that distinction when I started my response. We have a good shelf of projects in planning for some of our longer and better established programmes. To some extent, we are trying to manage a scarcity rather than a surplus of funds. In this case we were trying to develop relatively quickly and within a compressed timescale a new set of projects which were generally smaller in scale than in some of our bigger programmes. That posed problems for us in terms of mobilising and ramping up the programme to the required degree.

Deputy Connaughton

I understand how those systems work and I appreciate that there could be an over-estimation in the first year or two. However, I cannot understand how in the fourth year the amount of money available was almost doubled when, in the previous three years, only half of what was available was spent. As regards handing money back to the Department when the begging bowl was sent out by the Minister for Finance, as has happened in successive Governments over the years, the Department of the Environment, Heritage and Local Government would have found it difficult to convince the Minister for Finance that this was not a good bird's nest to raid, given that it only spent half of what was estimated in the previous three or four years. The Minister for Finance was knocking on an open door when he looked for money from this subhead.

There is something dramatically wrong with the systems in the Department and the connections with the groups and local authorities throughout the country. I hope that better progress is made with whatever plans are financed in the future. It is not always possible to know what will happen when allocating funding, which means that money will either be overspent or underspent. However, it is difficult to understand how that could happen for four years in a row. It is extraordinarily difficult to understand the basis for the evaluation. We all agree that the money was well spent. The urban and village renewal scheme is one of the best from a community development point of view. However, more could and should have been done. The Department discovered in the fourth year that 2002 would be the big year, but the only person who did well out of it was the Minister for Finance. He gutted it when he took €27 million. That is difficult to understand and it would be difficult to explain to a local community.

Mr. Callan

The history of this matter has been a learning experience for the Department, as I said in my initial response. We learned that smaller programmes are more difficult to mobilise and that, against the pressure of trying to fulfil expectations at European and national level, there can be a temptation to be ambitious and not to surrender the ambition to ramp up a programme and spend money.

Deputy McGuinness

It is unusual for the committee to review this because it is not an overspend and we are not blaming computer systems. It will break new ground for us. Mr. Callan said it was a learning process over those four years. It was not a crash course if it took four years. Little seems to have been learned from it. The scheme meant that one could stand in the main street in Killarney or Kilkenny and almost believe one was in Galway or Birr. The scheme produced the same features in every area. It showed a woeful lack of imagination by the Department because something better should have been achieved.

I wonder about the value for money obtained in the schemes that were delivered. They were delivered in a hurried fashion based on a one size fits all theory. It is as if someone did a night course on the scheme, spread the word about it and delivered the same project everywhere.

The planning of the programme underlines that local government is not seamless. There is something wrong with the Department's planning and how its programmes are explained to local authorities or how they are encouraged to take them up. Numerous local authorities, including my own, could examine the scheme now and list the number of projects that could have benefited from it in their area. The Department made no effort to encourage local authorities to address black spots in their areas in the context of the scheme and no value for money was achieved.

With regard to the financial planning, a funding error of 50% in the first year can almost be explained against a backdrop of what public representatives and local groups considered to be significant demand for such a scheme but to continue to make the same mistake over the next three years, given that the Department that is used to handling large sums emanating from the Exchequer or Europe is unacceptable. Mr. Callan put it down to the lack of contractors on the one hand, and the lack of schemes going forward on the other hand. It is one or the other. The Department had a shelf full of schemes or applications or it had not. If it did not, the lack of contractors to fulfil the schemes would not have had an effect. There is something wrong with the Department's thinking regarding the formulation of schemes. The explanations that have been given are not good enough. There will be an outcry in various communities when this is made known. Mr. Callan will have to come up with better explanations than those he has given.

Money was not returned to the Department of Finance in only one year. How much was involved and where did it go? Will Mr. Callan reflect on the structures that connected the Department's senior civil servants to those who implemented the scheme locally?

Mr. Callan

I understand and share the Deputy's disappointment that this scheme did not achieve greater momentum earlier. I would like to temper some of the criticism made of the Department in terms of planning and project management. During the period concerned, the Department was driving a number of major programmes under the NVC, including the national roads, water service, housing and bus lane programmes and these all moved ahead strongly and satisfactorily during the relevant time. To some extent, I have been suggesting there was competition at construction industry level between the major programmes. We suffered from competition with other capital programmes, which also needed to be driven strongly. In other words, we were trying to develop early and strong uplift for a relatively small programme at a time the bigger programmes were also running at full tilt and occupying consultants and small as well as large contractors and subcontractors. That is part of the context of the situation which we are trying to analyse.

With regard to the specific inquiry on funding, virement moneys were transferred to the benefit of other services in the Department in 2001. The amount "vired" from the urban renewal programme was €10 million and it went mainly on social housing, water services and the national vehicle and driver file but it was part of a bigger readjustment of the finances, I suspect, late in the year. A sum of €10 million was taken from this programme.

Deputy McGuinness

I will not labour this point but the committee will not get anywhere. I accept there is a bigger picture in terms of the Department's involvement in the delivery of various services and projects but that does not explain why this happened. Every business engages in small and large projects and one cannot afford to take one's eye off the ball in regard to any project because they all knit into the bigger picture at some point. Tax-driven projects such as integrated area plans have not even been delivered. They were formulated but a number are still going through the planning process and while others were delivered during the period in question. What were Mr. Callan, his officials and the officials of every local authority doing? They were telling the county councillors they did not have funds to implement other schemes. This scheme was open but few applications were made because half the money allocated to it during its first four years was not used. It was not encouraged or driven by the Department at a senior level. Such small schemes make a significant difference in local communities. They are the most tangible in the context of the effect of local government on them and they are the most successful, yet few applications were made.

I have not received a reasonable explanation. There is no significant connection in this regard between senior management within the Department and engineers and so on who drive local authorities. As a result, the Department failed to encourage local authorities to deliver on the estimate it provided and, in turn, failed local communities. I could not give Mr. Callan's explanation to a constituent. When people read that 50% of the funding for the scheme was not used and that local authorities did not buy into it, they will be aghast and will not understand.

The other issue in terms of the local authorities is the scheme could have been introduced using direct labour or contractors they normally use for other schemes. I have been a local authority member for 25 years and the books of contractors were not so full that they could not during the four years turn their hands to one of these schemes or employ the extra people required to deliver a scheme such as this at community level. I fail to understand how there is no management structure that would ring alarm bells after the first year when half the money was not spent. While we are discussing under-expenditure in this instance, the alarm bells also fail to ring in instances of over-expenditure. There is a for someone to say they got it wrong and to outline what is being done to address the problem. I have not seen sufficient proof that enough is being done about the issue. It is clear that nothing was done about it for four years.

Mr. Callan

In 2003, we achieved almost a perfect match between the allocated amount in the Vote and the outturn. In other words, we have reviewed the programme. We are confident it has gained momentum. We fine-tuned the estimation process.

I accept the frustration public representatives must feel about the handing back of moneys for such worthy purposes as were available under the urban renewal scheme. More generally, I do not accept there is a serious disconnect in terms of programme management and projects management between the Department and local authorities. The appropriation account before us today, and more recent programmes running from the Department and through local authorities, give the lie to this criticism. We have a range of programmes, big and small. While I pleaded some difficulties in regard to the small size of the programme, I am not saying the Department cannot drive smaller programmes. We drive many useful initiatives in the housing area, which are relatively small. It is through a combination of many small programmes that we are helping with special housing needs.

We have a reasonably successful relationship with local authorities on all of these issues. Spending generally goes reasonably well and outturn matches estimates pretty faithfully. In the totality of a Vote as large as ours we must concede that, unfortunately in this instance, the programme under-performed in the years in question. I have made that admission to the committee today and said that we are readjusting ourselves to the realities involved.

Deputy Curran

Unlike Deputy McGuinness, I am much younger, therefore, I do not have 25 years experience on a local authority. However, I have been on a local authority and I share the same surprise as the Deputy. In regard to schemes, local representatives are frequently told the funding is not in place, therefore, these figures cause some surprise. In any year in which the estimate was made, was the figure use a global one or did you try to determine a breakdown on what was thought might be allocated to individual local authority areas?

Mr. Callan

There would be two parameters to the Estimate, one of which would be bottom-up. Through our contacts with local authorities, we would have various spread sheets indicating their bids, proposals and aspirations. We would make as realistic an estimate as we could to see if we could build up the programme in that way. The other parameter was a top-down one, where the initiative involved had given us a target for which to aim. We had a complement of aid to earn from Europe, which was predetermined, and we were making strong efforts to build up the programme to that level.

Deputy Curran

In any given year, was there a list of local authorities in one column and beside it the estimate expected each of them to get?

Mr. Callan

I believe so. In any nation-wide programme, we would be dealing with the total number of local authorities and we would build the thing up from a local set of proposals or a local picture inputted by the local authorities.

Deputy Curran

Mr. Callan has an advantage over me because he has the estimate and the outturn. Obviously you are not totally responsible for spending this money. As it is spent by way of grant, is it correct that the money cannot be spent directly because you need the local authorities to apply for it? In some sense you are a little bit out of the loop.

Mr. Callan

Absolutely.

Deputy Curran

Did the Department look on a year by year basis at the outturn in local authority area by local authority area? Were there discrepancies between the performances of the different local authorities?

Mr. Callan

The bid we make for the following year to the Department of Finance would normally have to be finalised by July of that year. We would not have all outturns available. It is a fairly fluid situation.

Deputy Curran

I am trying to get a little more detail.

Mr. Callan

We were trying to build up the programme to its complement size. We did not think that was an unachievable ambition. Given time, it would have been achievable. There were deadlines involved. A view is taken at a certain stage in the programme by the EU Commission and Department of Finance paymasters that they would like to transfer aid to a safer bet, so to speak. The non-national roads programme had spare capacity to take up the slack. These judgments were eventually made.

Deputy Curran

They were made because it was obvious the money in this programme would not be spent.

Mr. Callan

Yes, the ramp-up was not going to happen quickly enough to meet the deadlines imposed by those monitoring and managing the overall EU programme.

Deputy Curran

Mr. Callan said there was an attempt to ramp-up activity. While there could be delays in the first year of any programme, was an analysis being done local authority area by local authority area on how they were performing? The estimate was a global one, which was broken down region by region and by local authority area. Were local authority areas that were not achieving under the programme, or not participating at the level you might have expected being identified?

Mr. Callan

That would be normal practice in administering this aggregate among local authorities. We had a certain missionary concern in regard to the new programme to build on and encourage support among local authorities. We were active in that. Unfortunately, the finished projects did not come back to us with a bill ready to be paid as quickly as we would have wished.

Deputy Curran

Did any local authority area in the country achieve the targets you might have expected?

Mr. Callan

I do not have that breakdown with me.

Deputy Curran

That breakdown would have been available internally in the Department, otherwise you would not know how to allocate your time and effort. Would that be correct?

Mr. Callan

Yes.

Deputy Curran

Can you outline in simple terms the process by which local authorities would apply for this grant, including the time-scale that might be involved?

Mr. Callan

At an early stage we sent circulars to the local authority explaining the parameters of the new scheme, the method of application, the sort of works that would qualify and giving advice on planning and aesthetic criteria, to which Deputy McGuinness has adverted. We sent people into the field and co-ordinated meetings of key officers in local authorities to develop interest in the programme and to realign them with the new parameters of the scheme.

Deputy Curran

Did they apply annually or two years down the road? For what timescale would a local authority have been engaged?

Mr. Callan

They had to have claims in by early November in any year.

Deputy Curran

That is the end of the scheme. I am trying to get to the start of it. Before submitting a claim, a scheme had to have been approved. Is that correct?

Mr. Callan

Yes.

Deputy Curran

I want to look at the entry to the scheme. When did a local authority have to submit the application for the scheme?

Mr. Callan

There was never a closure date. The local authorities submitted applications as soon as they could. We had an open door to new proposals during the period of the scheme. We would not have brought closure, at least until a later stage. We would not have said, "You are late." We were encouraging proposals from local authorities.

Deputy Curran

In the year 2001, for example, a local authority could have proposed a scheme in June, been told to proceed with it, completed it, presented the bill in November and been paid. Is that, more or less, what Mr. Callan is saying?

Mr. Callan

Yes, and if there was a carry-over we would build the need to finance the balance of the scheme into the estimation for the programme.

Deputy Curran

What percentage of a scheme did the programme finance?

Mr. Callan

It financed 50% in the south-east region and 75% in the BMW region.

Deputy Curran

So the finance was 50% for many local authorities. Would that be a reason the scheme was not taken up? Did local authorities not have the matching funding?

Mr. Callan

There could be an element of that. It has constrained similarly structured schemes.

Deputy Curran

Obviously things have improved, because in 2003 the outturn was equal to the Estimate. Is that correct?

Mr. Callan

Yes, almost.

Deputy Curran

I do not wish to appear big-headed but it is easy for the outturn to be equal to the estimate if the demand is greater. In 2003 were there projects in the system which were not funded?

Mr. Callan

Is the Deputy asking if applications were turned down?

Deputy Curran

In 2003 there was an allocation and a funding estimate and the outturn equalled the estimate. Were there other projects for which funding was not available and which have either been held over to 2004 or rejected completely?

Mr. Callan

There are still projects requiring more funding for 2004. There is a carry-over of liabilities into 2004.

I should correct something I said earlier. While not, definitively, excluding further proposals from local authorities, we asked them to set out their proposals in programme form at an earlier stage of the exercise. We had a broad picture but there could have been additions. It was open to local authorities to suggest additions to that programme.

Deputy Curran

The broad rolling programme for local authorities might have been agreed but I presume the individual costings, on a year by year basis, would not be known by a local authority at the initial stages.

Mr. Callan

It was subject to revision in light of actual tenders received. There were estimates of costs in what local authorities gave us but they were subject to the test of actual tendering.

Deputy Curran

Before they went to tender, had a maximum price the Department would pay been agreed? Did the Department pay 50% of an estimate of the project price or 50% of the tender price?

Mr. Callan

The main emphasis was on eligibility of works for the EU co-financed programme. We were not keen on following overruns for the sake of it, unless the local authority could demonstrate that there was greater value——

Deputy Curran

That is not the point I am trying to get to. I accept Mr. Callan's point about the eligibility of a project. If a project was identified the local authorities would prepare a plan and identify different areas to be completed over different years. At that stage the plan would not include figures for the individual projects to be done. In any given year when a local authority intended to take on a project, before it went to tender it had an estimate of what the project might cost but the estimate and the tender price might be two different figures. Did the Department tell the local authority it would be given 50% of the tender price or 50% of the estimated cost?

Mr. Callan

It would be 50%, or 75%, of the finally agreed amount, which would normally reflect the tender price.

Deputy Curran

It would be the tender price. I thank Mr. Callan. That is all I have to ask.

Deputy Connaughton

Deputy Curran raised the matter of the local own resources. Can Mr. Callan give the committee some indication as to how many applications failed because the local community could not come up with its 50% or 25%?

Mr. Callan

The obligation was on the local authority rather than on the local community.

Deputy Connaughton

I am putting them in the same category.

Mr. Callan

That might not have registered with us. In general, these were the terms of the scheme and proposals made to us under that scheme would have been accepting of the need to put up the local contribution.

Deputy Connaughton

I am concerned about the Department's evaluation of the schemes from the beginning. I learned today — I had not been aware of it — that the Department did not have the actual applications. That comes as a surprise to me. I know of areas which found it quite difficult to get funding and of smaller towns where there was an overspend and which did not get additional funding, even after two or three years. I find that aspect of the programme very hard to understand.

Mr. Callan will remember when the national development plan was being formed and we had all sorts of consultative meetings of the regional organisations and local authorities. That was a huge consultative process. All over the country we were talking to each other. I sometimes wonder if anyone took notice of what was said, but that is neither here nor there now. The plan for urban and village renewal schemes, which was part of the national development plan, was to the extent of the estimates brought forward by the Department. It was from that process that the renewal schemes sprang. In the national development plan it was believed that the time was right for Ireland to invest in street architecture and such matters. I assume that those plans, which came from regional organisations, local authorities and other interested groups, proposed that X millions of euro should be spent between 2000 and 2006. Was it on the basis of those plans, which came to the Department through the NDP at that stage, that this amount of money was earmarked in the first place? Was that the basis for the estimates?

Mr. Callan

I am not entirely sure. The 2000-06 programme was to some extent seen as continuous with its predecessor under the operational programme. I suspect it was a macro-estimate by the Department in consultation with other interests. There was a great deal of bidding in terms of what would be included in the national development plan. We would have been informed by the pace of spending under the previous plan.

There were policy objectives to increase the tempo and scope of this type of spending but they would not have been informed by a bottom-up process. We only sought local programmes from local authorities when we commenced developing the plan. We would not have had the benefit of them when negotiating with the Department of Finance and the European Commission on the scale of financing to be provided under the NDP.

Deputy Connaughton

I am sure the parameters were known.

Mr. Callan

Yes, we were educated by experience of the previous operational programme. Our oversight on the urban renewal issues——

Deputy Connaughton

That is obvious in that not enough applicants came forward. Some of the regional authorities would not agree with what has been suggested but, as Mr. Callan has the information at his fingertips, we will accept it. Given that operational programme had been in place for nearly six years, should it not have dawned on somebody that the 50% or 25% contribution from the local authority in the Border, midlands and western region was a huge factor in many of the budget problems experienced by local authorities? Should that not have been renegotiated given that so much money was available?

Mr. Callan

That is a point of view. The 75% contribution came from the Department in favour of the BMW region. The local authorities in the area were required to put up the 25% balance. In many other areas it was 50%. It was felt that, as the scheme was of local benefit and did not represent strategic national infrastructure, local authorities should be encouraged to prioritise and identify worthwhile schemes by having to invest some of their resources in the overall mix. Local authorities would then place a greater value on the project and would be more exacting——

Deputy Connaughton

That could only happen if they were financially able to do it.

Chairman

How much of the fund is diverted to non-national roads?

Mr. Callan

I will provide the committee with figures in that regard later. There has been no loss of aid to date within this initiative. Our confident estimate is that there will not be any loss.

Chairman

As more than 99% of the 2003 allocation has already been spent, will towns and villages be at a loss because they cannot access the fund?

Mr. Callan

Following the estimation difficulties this morning, we feel we have reached a realistic target for the scheme going forward. We hope to manage the programme for the future on that basis.

Chairman

On spending, this would have been a big loss if you had anticipated spending €57 million. The allocated €24 million for 2003 has been spent. Following our investigation of these accounts you may have a lower allocation. Local authorities may not be in a position to match funding and will be the real losers in the future.

Mr. Callan

It is a foregone conclusion that, under the new negotiating mandate, this programme will benefit to a lesser extent than was originally intended from EU aid. It does not follow that, if demand for the programme is sufficiently strong, the Minister might not be moved to seek greater resourcing from national budgetary resources.

Chairman

That concludes our discussion on that item.

Mr. Purcell

As this committee may recall, this section of my report has its origins in concerns expressed by it at its meeting on 29 January 2003 about the financial position of Kilkenny County Council. At the committee's request, the Accounting Officer furnished background information in a note dated 6 May on how the problem arose. Following receipt of that note, the committee requested me to examine the matter and to report back to it in due course.

In summary, things started to go wrong for Kilkenny County Council in the late 1980s when a combination of factors, falls in interest rates, the introduction of variable interest rates and the ready availability of mortgage finance, led to the redemption of many mortgages by holders of fixed rate housing loans from the council. Traditionally, redemptions would be used by local authorities to fund new housing loans but, with the changed scenario in 1989, the redemption moneys should have been used by the council to redeem the corresponding amount of fixed rate debt to the local loans fund or the Housing Finance Agency which had taken over responsibility for that function and which had provided funds for the housing loans in the first instance.

As the Accounting Officer points out in his note, Kilkenny County Council used some of the redemptions to finance current services or to bridge what would have constituted a revenue deficit in the council's accounts. The adverse financial implications inherent in this practice were compounded by advancing housing loans to borrowers at lower rates than applied to the borrowings which the council had first entered into. Later, the loans also tended to be for shorter periods than pertained to the borrowings.

The Department, in 1994, had made known to the council its concerns about the practice. At that time, the serious problem arising from the mismatch of tenure of loans was not evident. The local government auditor, in the course of his reports on the council accounts for 1998 and 1999, drew attention to the scale of the problem and its causes. Following correspondence and several meetings between the Department and the council over a period, it was agreed to tackle the deficit by taking advantage of lower interest rates to refinance the council's general borrowings and to address the loans mismatch by making an annual provision in the council's budget for repaying a new loan over 15 years.

One of the committee's main concerns at the time was that this was not an isolated problem. I attempted to find out if this was the case. My review of the local government auditors' reports was inconclusive so I sought the information directly from the Accounting Officer. As Members will be aware, the governing legislation expressly excludes local authorities from my audit remit. The position is not entirely clear. Apparently there were indications of similar problems but nothing on the scale of that experienced by Kilkenny County Council. Again, the Accounting Officer may have some up-to-date information in that regard.

One of the difficulties in establishing the true position was that the accounting system used by local authorities up to 2001 did not facilitate the identification of material mismatches between the repayments due to local authorities and those, in turn, due to the lending institutions. The Accounting Officer's note shows how the new financial management system in local authorities should overcome this shortcoming.

Chairman

We should publish both statements.

Mr. Callan

The background to this matter has been set out accurately by the Comptroller and Auditor General and in paragraph 6.2. Local authorities have a long-standing role in housing loan financing to make mortgages available to persons who wish to enter the housing market but who might have difficulty in securing finance from a commercial lending agency.

Since 1986, local authorities have sourced their capital requirements for housing loans from the Housing Finance Agency, HFA, before lending on to individual borrowers. Unlike other borrowing undertaken by local authorities, the Department does not exercise prudential control of individual loan draws by local authorities from the HFA. We administer this detailed level of control for virtually all other local authority borrowing to verify the ability of the local authority to undertake the borrowing and to ensure overall compliance by local government with PCP or other national budgetary limits.

Housing loans differ however from other local authority borrowing in that there is an income stream available to the local authority provided by the mortgagee enabling it to service its debt. Consequently, the Department's more limited role in borrowing for housing is to ensure that individual draws do not exceed annual capital allocations for that purpose and that the overall provision for borrowing as set out within the PCP is respected. We liaise with the HFA on these programmes level issues but do not monitor individual borrowing transactions against ability to repay.

Separately, however, the Department exercises a more general oversight of the finances of local authorities, mainly to ensure that individual local authorities do not overstretch themselves in terms of the financial commitments they enter into. It would be common for the Department, based on financial data provided to it, to question individual local authorities about their general financial position and to caution, and seek remedial action if necessary, regarding adverse balances in their finances.

It was in the context of this general oversight operated by the Department on local authorities that we took issue with Kilkenny County Council in 1994 about the state of its finances. This was when the first indications became available to us of problems with these finances. As the Comptroller and Auditor General has explained, the problem was due to a historical mismatch of interest rates on loans, compounded by more recent problems on the tenure of loans. The effect of this last factor in particular was that the local authority had secured a short-term gain in the early years of the loan mismatches, but that this was now starting to reverse itself. It should be stated that the data available from the new financial management system now introduced in local authorities would have shown up the cause of the council's revenue difficulties earlier and more clearly than was the case over a decade ago.

Paragraph 6.2 summarises the extensive individual meetings and exchanges of correspondence, which took place between the Department and the Kilkenny County Council. At intervals, starting from 1994, elements of the councils' loan exposure were restructured until the Department approved a final restructuring of the housing loans in 2000 with a 15 year loan to the amount of almost €4.5 million. Non-housing borrowing was beneficially restructured in 2002. At all times, loan repayments have been properly made by the council to the HFA.

In May 2003, following the concern indicated by this committee this time last year, the Department wrote to all local authorities requesting them to ensure, as far as possible, that their loan books are balanced in terms of interest rates and tenure of housing loans. Arising from this, I can say with some confidence that the practice of resort to imbalanced loan books for short-term revenue gain does not appear to be widespread among local authorities. In the course of following up on the Kilkenny case, it has, however, come to light recently that one other county council has a significant imbalance in its housing loan book, although this is less both in absolute and relative terms than that experienced in Kilkenny. In co-operation with the Department, the council concerned is taking steps to eliminate this imbalance.

Arguably, the factor which contributed most to the Kilkenny situation was that the financial management system then in use did not readily provide information on the imbalance in the loan book which arose through oversight or expediency or both. This information would have been useful from the perspectives of financial management by the executive, the exercise of accountability by the elected members, and general oversight by my Department.

Arising from the introduction of the new financial management system in local authorities and guidelines issued by the Department, the annual financial statements of local authorities will, starting from the financial year 2003, show a comparison between the principal outstanding on loans receivable and loans payable at the end of the year. This new policy will clearly highlight instances where there is a potential mismatch between repayments due by a local authority to financial institutions on foot of borrowings for housing loan purposes and the amounts collectable by the authority from its own borrowings.

Chairman

With regard to the study carried out by the local government audit service, a value for money audit for 1998-99 noted details of the principal amounts outstanding on loans due by borrowers to local authorities and local authorities to the local loan fund and the Housing Finance Agency. Has that report been fully completed or published?

Mr. Callan

I am not absolutely certain. However, VFM reports in principle are published and are in the public domain. If it is a completed VFM report I would assume it is——

Chairman

Did it incorporate all the local authority loan books at that time?

Mr. Callan

It sought information, but it was not complete.

Chairman

Was it not sufficiently comprehensive?

Mr. Callan

No. It did not have complete data and did not have as complete an understanding as we are now dealing with.

Chairman

In hindsight, if that had been done accurately at that time, would it have identified many of the problems that have emerged since?

Mr. Callan

The tables contained in that report did not highlight any issue in any other local authority on the scale of Kilkenny as I understand it.

Chairman

What do you mean by "on the scale"?

Mr. Callan

I mean at the level of mismatch. We are talking about the level of mismatch in the loan book.

Chairman

Did many counties have a similar situation?

Mr. Callan

No, the conclusion we drew at that time was that further action was not warranted by us. We were taking action with Kilkenny and we concluded that there was not a widespread problem and that further action was not warranted. Our more recent inquiries have highlighted a problem in one local authority and we are dealing with that local authority.

Deputy Connaughton

I will leave questions about Kilkenny to my colleague, Deputy McGuinness. It would be difficult for the layman to understand how all this could happen. To confirm I have understood all this, I will put a scenario to Mr. Callan. I have been a member of a local authority for some time. In the 1980s local authorities represented a significant source for young people to build or buy their own houses. Those loans were made available by county councils and corporations to persons who could not obtain a loan from the building societies or the banks. If memory serves me right, at that time it was possible to get a loan from a local authority at a fixed interest rate of 12.5%, which now seems to be a huge rate. In the environment of the time that was good value because the banks and building societies were charging 14%, 15% or even 16%.

A few years later the interest rates began to decrease and naturally families that were tied into the local authority fixed rate of 12.5% were able to go back to the bank or building society and take out a loan at 6%, 7% or 8%. They then redeemed the loan and asked their local authority how much it would cost to pay their way out. To put it bluntly, they brought with them a sum of money, sometimes as much as £30,000 depending on the size of the loan, and paid off the loan. The question which arises is what the local authorities did with this money?

The local authorities had borrowed from the local loans fund, which was, I understand, managed by the Office of Public Works and the Housing Finance Agency. I understand they borrowed money from those sources for periods of 30 to 35 years whereas they lent it to their clients for periods of 15, 20 or perhaps 25 years. Obviously there was a considerable financial problem in the making if the local authorities did not make peace with those from whom they had borrowed. While I do not know the ins and outs of the Kilkenny case, I assume this is the basic outline of the problem. Is that correct?

Mr. Callan

Yes, the background as described by the Deputy is broadly correct in terms of the shape of the system. Our investigations would not, however, bear out the claim that many local authorities resorted to this practice of borrowing long and lending short. It has been instanced here in the case of Kilkenny and one other instance. We do not believe it was common practice at the time but it did happen.

Deputy Connaughton

That is the basis of the problem.

Mr. Callan

Yes, in this case.

Deputy Connaughton

Is Mr. Callan reasonably sure that no other local authorities engaged in this practice and buried it in such a way that the Department may not have been aware of it?

Mr. Callan

Yes. I do not want to be too paradoxical but if the issue can be successfully buried, it is not really a problem. In other words, we only have a problem in so far as it puts pressure on local authorities' finances. The local loans fund and the Housing Finance Agency are being repaid by all local authorities. A specific local authority, Kilkenny County Council, found itself under financial pressure during the 1990s because it owed more to the Housing Finance Agency that it would have liked to pay due to the practice described by the Deputy.

Deputy Connaughton

As I am sure Deputy McGuinness will inform the committee, this has caused major problems for Kilkenny and services in the county because a repayment must be made every year. Is Mr. Callan at liberty to disclose which other local authority was involved?

Mr. Callan

Yes, it is Donegal County Council with which we have been in discussion for several months. The maximum amount of the imbalance in that case, although it has not been estimated with complete accuracy, is €6 million, which is somewhat less than Kilkenny where, at its high point nearly ten years ago, the imbalance was around €10 million. In both absolute and relative terms, given the respective sizes of the two counties, it is not a major issue for Donegal, although it is not a minor one either.

Deputy Connaughton

It is not a small figure. Are these the only two counties which have come to the Department's notice?

Mr. Callan

Yes.

Deputy McGuinness

I would much prefer to be talking up Kilkenny rather than dealing with this matter. I was a member of Kilkenny county and borough councils. Mr. Callan accurately described the current position but simplified it a little in the context of its impact on the day-to-day running of the local authority's affairs, especially given the size of Kilkenny. County Donegal is also in the loop.

What is the average length of time required by a local government auditor to visit a county council, go through its books as presented and issue a certificate? How many years behind is the Department with regard to auditing the affairs of local authorities? One does not have to present one's accounts for audit at the end of a certain year and then have them audited quickly. I understand that there is a backlog and that the method employed addresses what happened in the past, rather than the present.

Is the Department not concerned, having discovered this practice in Kilkenny and Donegal, about its impact on the delivery of services in those counties? In Kilkenny, for example, the restructuring of the loan to service what is now a hard core debt is creating serious difficulties in the delivery of services. The scheme worked in such a way that the council was nothing more than a conduit for the money provided by the Housing Finance Agency. This money, which was repaid by the client, was meant to be returned to the HFA but was used for the day-to-day affairs of the council. In turn, the council kept the rate artificially low and must now pay the penalty through having to service this hard core debt. Is that correct and, if so, is it not a concern?

Mr. Callan

Yes, it is obviously a concern. As I stated, it is a general concern of the Department that local authority estimates and finances be balanced as far as possible, or that deficits should not be such as to strain the current and future resources of the council in question. The issue, as mentioned by the Deputy, of transferring burdens to future generations of administrators and politicians in a local authority is also highly relevant. Various departmental circulars were issued on housing loan operations of local authorities over the years which implicitly and fairly explicitly encouraged the notion that local authority loan repayments must be treated as such. In other words, this operation should have been managed on a self-financing basis and receipts should have been generally managed in such a way as to be able to pay back the ultimate lender, be it the local loans fund or the Housing Finance Agency.

Transparency, to which we are moving with the new financial management system for local authorities, is the key. The difficulty in the past, to use Deputy Connaughton's expression, was that these matters could be buried successively from an accounting point of view and were difficult to pick up, even by auditors. The way in which our accounts were expressed did not make it easy to pick up such matters. As I have admitted, the Department detected this issue not by probing the HFA or the housing loan book as such, but because it became obvious that the local authority in question was suffering from more general financial strain. When we analysed and drilled into this, we found that this was one of the main reasons.

That said, and neither Deputy implied otherwise, the Department can do only so much to control the finances of each local authority. We exercise macro-controls in all kinds of ways but it could involve excessive micro-management to set up systems that would absolutely prohibit any mismatch in the loan book. I do not believe we would have the resources in the Department to monitor and police the management of loan books of all housing authorities. We feel the solution lies in the more transparent system of accounting we are now putting in place which will allow these matters to surface. They will surface very clearly in the annual financial statements to be made by local authorities and therefore both elected members and the Department can question them.

Deputy McGuinness

I know this is historical and that sometimes one learns from the past and moves on, but I am not too sure if we have learned anything in this case. The local government auditor failed to uncover this problem in the 1980s. It was not uncovered until 1998 or 1999. Therefore, the problem was buried in the interim and would never have arisen were it not for the amount of money involved. The black hole involved €9 million, which is a great deal for any local authority.

Deputy Connaughton said he was a member of a local authority. For members of any authority, raising money to complete a job is an enormous task. Many different schemes and provisions must be shelved to obtain the money required to fill a pothole, yet the €9 million lay buried in the accounts for a considerable period. Now that this has been discovered — in Donegal as well — we realise that the local authority members and ratepayers today are paying for what happened in the 1980s.

I do not believe Mr. Callan is macro-managing local authorities by inquiring into a €9 million black hole. He is identifying a serious problem with his local government audit. It is fine that the members have dealt with it by doing what they had to do by way of a lower rate, but it says something about local authorities that they borrowed on a long-term basis and at fixed rates and must now renegotiate those because rates are now so low. Had the local authority in question been a business, it would have gone broke. However, to pay back the money owed, it fell back on taxpayers and ratepayers, who are increasingly hard pressed to pay rates to local authorities.

Is it not a fact that the system failed over a long period and that the local government audit system failed in the same period? We are now faced with the huge bill of €9 million. I do not know if Mr. Callan cares to say what the relevant figure is in Donegal, but it would allow us ascertain whether the Department considers the sum of €9 million large or small. It is an enormous amount of money in one county. It may be small by comparison with the sums involved in national Government, but it is certainly large when striking a rate in a local authority.

It is not good enough that a local government audit continued for so long. Given that the climate was pretty turbulent in the commercial world by virtue of bank rates, etc., one must question why this problem was not addressed sooner. This major problem is now being paid for by today's ratepayers. No comfort is given to the local authority by the Department. It is a huge burden and is now shared by the local authority in Donegal.

I would like to hear a little more about the local government audit and why the problem was not uncovered. In business one makes one's returns at the end of the year, but one can be subject to random audit by the Revenue Commissioners. Is it not the case that local authorities now need random auditing? This is now much easier to do because the Agresso system is in place. I intend to raise this issue in respect of another matter in the context of the Department's overall report and the accounts under discussion. It is not a question of managing the affairs of local authorities but of having a better system of management at national level.

Mr. Callan

The Department intervened and was trying actively to manage the problem from as early as 1994. The restructuring of the finances began at that time and we had a series of engagements with the county council between then and 2002 to try sort out the problem. While it did take some years to detect, we intervened earlier than the Deputy suggested and we have been actively on the case thereafter.

In defence of the local government audit system, the best response to the problem that has been presented here is to make the accounting so transparent that this problem will surface for us all in the future. We are doing this and I hope it will eliminate this kind of issue from our discussions as annual financial statements are submitted for 2003 based on the new accounting system.

Deputy McGuinness

On the local government audit system and the Agresso package now in place, Mr. Callan did not answer my original questions on how long it took to audit, the number of audits completed and how far behind the Department is in auditing local authorities. Will the Agresso system modernise the process and use layman's language so that members of the local authorities and the public can understand the auditing system?

Mr. Callan has not addressed the impact on the services where a local authority must first commit itself to honouring its commitment to repay a €9 million hard core debt. We already spoke about local authorities raising half the money, for example. They cannot do this because their first commitment is to service their huge loans which are an enormous burden. Is there any relief or are local authorities allowed flounder on their own and perhaps get into further difficulty?

Mr. Callan

I shall deal with the questions in the order in which the Deputy put them. The local government audit has completed audits of 80 local authorities for the financial year 2001. I believe audits of eight urban authorities are still outstanding for that year. The audit is dealing with 82 of the 88 major local authorities for 2002. The audits of 62 of these have already been completed or are well under way. Twenty-six audits for 2002 have not yet commenced.

The Agresso system, which is now operating in most local authorities, and comparable systems operating in the remaining local authorities will facilitate quicker and more accurate audits. The audit process will be significantly speeded up and its quality will be enhanced. This has been our objective and we must now realise it.

The final concern related to further borrowing and the deficit of €8 million that Kilkenny County Council must cope with. In the allocation of general purpose local government fund grants, regard is given to needs and resources. Some of Kilkenny County Council's difficulties may be picked up through this mechanism. However, if a local authority has done things that can be regarded as being injudicious regarding financial management, it is appropriate that, as far as possible, the authority sorts out its problems and carries out its responsibilities. A beneficial restructuring of loans and taking advantage of lower interest rates will help the authority. This must be the basis of the solution. The Department cannot keep a reserve of money from the local government fund to deal with difficult cases. In fairness to Kilkenny County Council and other local authorities that have suffered difficulties, they accept their responsibility to deal with them as best they can.

Deputy Boyle

I was a beneficiary of a housing finance agency loan in 1987 when the interest rate was 13.5%. I recall the Department's initiative in the 1990s that sought to encourage people to transfer their housing finance agency loans to commercial lending institutions. These commercial institutions were offering lower interest rates that were rapidly decreasing. The existence of this initiative and the large-scale movement from the housing finance agency to commercial institutions could have been the trigger that helped reveal this imbalance. If this was the case, it is not a satisfactory endorsement of the local audit carried out in each local authority. Is it fair to say this was one of the factors that revealed the imbalance in this authority?

Mr. Callan

I think it was part of the problem. However, I do not think it was the trigger that disclosed the problem to us. The problem came to the notice of the Department because of the general financial stress Kilkenny County Council was suffering. When we looked at the overall estimates in 1994, it was clear there was an inordinate deficit in Kilkenny. When this was examined, the issue the Deputy referred to was discovered.

Deputy Boyle

I accept this. We are still talking about the 2000 audit of local authorities. Only 80% of these are progressed or near completion. This committee does not have a direct role to play in local government audits. While I do not want to put Mr. Callan in an invidious position, as no local authority has established its own public accounts committee does he feel this is a reason delays in producing and auditing accounts persist? This means that problems of this nature are not identified as quickly as they should be. In my experience of local government, a statement of annual expenditure always accompanied the estimates process. I do not see what difficulties could prevent the production of audited accounts in a shorter time period than is currently the case.

Mr. Callan

The financial era I referred to was 2002, not 2000. We are confident the new financial management systems now being implemented in local authorities will allow the much quicker production of annual financial statements. Paradoxically, the teething problems with the introduction of the new system have slowed up the production of these statements beyond what we would have liked and has created a backlog.

We have brought greater automation within the system now operating in the local authorities by adding a component to it that will bring much greater facility to the production of annual financial statements. We are hopeful that the range of statements to be provided by major local authorities for the financial year 2003 will come forward more quickly than was the case in 2001 and 2002.

Deputy Boyle

Is the Department encouraging local authorities to establish public accounts committees that might help in the process?

Mr. Callan

This was a permissible provision of the Local Government Act 2001. The Department is waiting for developments to see how local authorities embrace this initiative. As far as I know, the Deputy is correct in saying that no audit authority has been formally established.

Deputy Boyle

No city or county manager has recommended it.

Mr. Callan

It is relatively early days. The provisions were commenced within the last 12 or 15 months and we will follow up on them. However, as this was discretionary rather than mandated, we have not sought to force the issue as yet.

Chairman

That concludes our deliberations on this section. We now move to consider the Vote.

Deputy Connaughton

Can Mr. Callan give the committee an indication of the standard of drinking water in the State? Conflicting reports have been carried in the press stating that the standard of our drinking water is deteriorating while others state that the quality is improving.

Mr. Callan

I will be pleased to do this. We have a rigorous system of monitoring drinking water standards. Our monitoring system is world class and Ireland is one of only three EU member states that produce periodic compilations of water quality reporting. The Environmental Protection Agency carries this out. The last report was in 2001 and the agency is on the verge of producing the next national report on water quality.

The main feature of the 2001 report was that compliance rate for all supplies remained unchanged from 2000. It was 94% based on 14 parameters. The compliance rate for public schemes was 96%, the same as in 2000. The compliance rate for group schemes was 89.5%, down from 91.2% in the previous year. The main problems relate to chloriforms. The compliance rate for faecal chloriforms was 97.2% for public supplies, something of an improvement, and 74.1% for group schemes, also an improvement. The compliance rate for total chloriforms was 92.6% in public supplies, again an improvement, and 56.8% in group water schemes, a drop of 1.8%. I can furnish the Deputy with a lengthier statement about drinking water quality but, without getting bogged down in the figures, we must target group schemes, especially those that do not have a connection to public supplies.

Deputy Connaughton

That is the topic I am about to raise.

Mr. Callan

They are the target and have been for some years.

Deputy Connaughton

: I will not delay the meeting on this point but it is extremely important. Would the Secretary General say that the attitude in the Department to the management of group water schemes needs to be radically changed? The concept now is to place a number of local group water schemes under the management of a contractor who gives an undertaking to be responsible for water quality. There are thousands of group water schemes and, in the past, there would have been no water provision were it not for the concept behind them. Does the Department want to get rid of group water schemes now?

Mr. Callan

Certainly not. This is not an entirely new initiative. Since 1997 we have dedicated more resources to group water schemes with the aim of professionalising them. We feel that, to achieve these sophisticated environmental and public health standards, more technology is needed. We cannot rely on natural purification processes any more; technology and management are both necessary. We are taking these requirements on board and trying to gain acceptance for them in the communities that use group water schemes.

We are enjoying success in this. We set up new structures through a national rural water monitoring committee and other initiatives and model plans have been developed. We are using a design and operate procurement approach, and the bundling of schemes will bring greater manageability and economies of scale to the provision of group water schemes. We are not trying to take over these schemes. There is still valuable self-help being provided in many rural areas and it is more valuable to work with that on a partnership basis than to seek to replace it.

Deputy Connaughton

I do not disagree with improving the level of performance but there are operational matters. I can see how a contractor could manage small group schemes of between 20 and 100 participants that could be looped together. The Department is also, however, trying to bring into the loop much larger schemes of 6,000 households that work extremely well. They must join if they are to obtain 100% funding for filtration. Surely those well known and efficient group water schemes should be funded directly without having to be attached to other schemes.

Mr. Callan

We will bear in mind the Deputy's comments. We are not trying to impose one template on every situation. That would be impractical because different solutions apply in different areas.

Deputy Connaughton

The Department should visit Caherlistrane near Tuam in County Galway and use that as a template.

Chairman

All politics is local.

Deputy McGuinness

Is there an indication of the costs of the tribunals to date and in the future?

Mr. Callan

No. We made provision in last year's Estimate for this contingency but the money was not spent because the tribunal did not get around to awarding costs. In this year's Estimate, there is a contingency fund of between €4 and €5 million. It is an arbitrary figure because we do not know the quantum of costs likely to be awarded by the tribunal.

Deputy McGuinness

How many people have applied for costs at the tribunal? That would give an idea of future costs. I accept that we cannot put a figure on it but the costs are enormous and the potential exists that the State will have to pay a huge bill.

Mr. Callan

The Department of Finance was invited to make a submission to the tribunal about how it should approach the awarding of costs. The State made a submission on that point.

Deputy McGuinness

Was that on behalf of the State?

Mr. Callan

Yes. I am not, however, at liberty to disclose the submission but, as the committee would expect, the Department is arguing on behalf of the State that the tribunal should have an economical approach and should not place an undue burden on the taxpayer.

Deputy McGuinness

I presume that is as far as the Secretary General can go.

Mr. Callan

Yes.

Deputy McGuinness

I was interested in the remarks about the heritage section of the Department. The Secretary General referred to the administrative changes that were required when heritage became part of the Department's remit. What provision was made for that? Has the Department carried out an analysis of the costs of the old Dúchas area? Until recently Dúchas had no cost centres and consequently it could never answer a parliamentary question about its costs. It had a loose way of accounting and performing procurement procedures but one could not get specific information. Has the Department's new management structure taken up the Dúchas technology and will it give us more information on the cost-effectiveness of that body within the Department? Has the Department managed to change the culture of Dúchas and its accountability to the Department?

Mr. Callan

Following a major research exercise and a report entitled Reorganisation of the Heritage Function within the Department of Environment, Heritage and Local Government, we proposed certain changes to Government which were approved in April 2003. The gist of these was that responsibility for the operational management of built heritage in State ownership — the built heritage portfolio of the former Dúchas — would transfer to the OPW and that has taken place. Meanwhile, my Department retains responsibility for all heritage policy and all operations of the national parks and wildlife service. Following the Government's approval of our proposals I instituted some changes in the divisional structure of the Department such that the planning division took over the remaining functions of Dúchas regarding built heritage. We now have a planning and heritage division, dealing with physical planning, urban renewal and built heritage and we have another new division comprising responsibility for environmental infrastructure and nature conservation, the national parks and wildlife side of Dúchas. The former Dúchas no longer operates within the Department as a stand-alone division. It has been split and apportioned to other divisions, mainstreamed with the physical planning side of the Department on the one hand, and the environmental protection side on the other.

The Deputy's points about cost management and accountability are very important. We are rolling out our new Oracle-based financial management system to Dúchas this year. We rolled it out earlier to the older part of the Department but it will encompass all former Dúchas functions remaining with the Department at a certain stage this year. That will underpin the more rigorous approach to management and cost reporting to which the Deputy aspires and I hope to have a good report of progress the next time I meet the committee.

Deputy McGuinness

I welcome that. In his replies Mr. Canny, from the Department, said Dúchas had purchased 20 properties since 1997. Could I get a list of those properties and their costs after this meeting? I await Mr. Callan's comments in his report but in my experience the cost centres to which Dúchas refers on the various sites do not exist. No one can give specific information about work being carried out. Scaffolding is hired and becomes part of the building it surrounds. How is that managed? I am sure it will be part of the report because it will be seen when the systems are revised. With respect to Dúchas it had difficulty managing its ordinary sites. It devoted time to the flagships everywhere but on the other sites the method seems to have been to erect scaffolding to give the impression that work is being done. That is the case throughout the country. Can Mr. Callan outline within the Department's plans what Dúchas will do with its flagship and other important sites, such that there is a specific work programme rolling out over a five year period or beyond? We can then begin to understand the Department's objectives for, and spend on, the sites so that we can assess whether it is achieving value for money. I fail to see how Dúchas can even contemplate buying a further 20 properties when it cannot manage the stock that it has.

I am intrigued as to how paragraph 11.82 of Mr. Canny's report will be implemented. I derive some comfort, however, from the last line, to the effect that the Department is prepared to examine any incidents where difficulties arise in respect of individual claims. Can Mr. Callan explain how the Department does that? Who answers the phone to a caller seeking clarification on this paragraph? In taking on Dúchas the Department took on a great deal of baggage, but how effectively can it deal with that? There is a cost involved in taking over Dúchas. In this regard, the matter of respraying vehicles and so on was covered in our last discussion. Mr. Canny's information is less than fair to my question. I know where the vehicles were sprayed. I was asking about the procurement procedure for what was purchased. It is less than clear that he is answering that question. The answers to my questions on specific sites do not give the information I sought. My questions at that meeting were particular to certain sites, for example, Kells Priory in Kilkenny, which is of international significance. According to the report the continuing conservation works are being undertaken by a direct workforce. That is not accurate. If one removed the scaffolding from Kells Priory, people would think there was something missing from the building because it has been there so long. I question the wisdom of spending the money that was spent there. Now there is no one on the site, so the reply is inaccurate. Other members mentioned sites in their counties. Rather than delay the meeting, now that Mr. Callan is responsible for Dúchas, can he revisit the questions I put to Mr. Canny, with a view to resolving the outstanding issues? Perhaps they can be taken up again at a later date. In the meantime I will not pursue the matter further. If they are not dealt with I will pursue it, based on the information I have, not only about Kilkenny, but elsewhere.

Mr. Callan

We will try to facilitate that. A further change is taking place whereby operational responsibility for management and maintenance of built heritage sites has transferred to the Office of Public Works. I do not want to complicate the issue institutionally. We will do our best to co-ordinate and facilitate Deputy McGuinness, having regard to the new division of functions, in the way he has requested.

Deputy Boyle

I want an update. I am conscious of the time and the need to bring the meeting to a close. I will ask my questions together. I hope that will get the information I am seeking. Judgment is pending on the court case involving the clean-up of the contaminated Irish ISPAT site at Haulbowline. If the case is lost what, from the Department's view, will be the potential cost to the State in terms of the clean-up? I presume the State's case revolves around the fact that the contract agreement with Irish ISPAT in 1995 included a specific commitment that the clean-up would have been done by the company. It had a responsibility to do it and that now rests with the liquidator. If failure to do the clean-up represents a breach of contract in the view of the State it brings into question other activities of the company, particularly at the time of its closure announcement.

Mr. Callan

I want to be reasonably circumspect, given that judgment is awaited, as the Deputy mentioned, on one important High Court case. We have already put an estimate — and it is very much a "guesstimate" — into the public domain of about €30 million in respect of the overall cost for clean-up of the site. That estimate may vary upon full investigation of the site, which we are seeking to secure. It is based on a desk estimate. In view of the current litigation I would prefer not to comment about the breach of contract issue. The legal issues are being fought out and we will have to see what the High Court decides.

Deputy Boyle

Is the Secretary General aware that other activities were engaged in by the company prior to its closure that affect other areas of environmental policy in the region? I refer to the sale of other parts of the site and alternative uses for them.

Mr. Callan

The responsibility now falls to the liquidator to see what assets may be realised.

Deputy Boyle

If the liquidator is making a case that the contaminated site is not part of the property or his responsibility, does that not call into question the sale of other areas? He is picking and choosing what is the property of the company.

Mr. Callan

We are vigorously defending the State's interest in this at the High Court. If I colour the issue with any comments it might not be helpful.

Deputy Boyle

I am conscious of that and I hope the State is successful. We await judgment. There seems to be a dual approach to similar problems, but I am not sure if it is consistent. Perhaps it is something that can be returned to once the judgment is delivered.

Chairman

The committee also sought information from the Department of Enterprise, Trade and Employment which should be of use in this regard. A question much in the public domain is the main drainage scheme at Limerick. In the light of the conciliation recommendations, alarm bells must be ringing within the Department of the Environment, Heritage and Local Government. How does the Department satisfy itself about the quality of a scheme's design prior to committing funds to a project?

Mr. Callan

Is that a general question in terms of major services projects?

Chairman

Yes.

Mr. Callan

In large-scale projects of this kind we engage the services of highly expert professional consultants, many of them with international experience, to draw up plans of the type of infrastructure being provided. Sometimes designs are based on successful precedents operating successfully elsewhere in the country or in other highly advanced economies where environmental standards are high. In many cases schemes are based on environmental impact assessments, in terms not just of design but the overall impact on the environment. A wide background range of factors pertaining to a scheme are justified in the environmental impact statement and subjected to public debate. In other instances — not, I think, in the Limerick case — we embrace the "design and build" or even the "design, build and operate" route. That is an increasingly common form of procurement for water services projects. The experience here has been fairly successful but it brings greater innovation to the planning of some of these schemes. It brings greater economies of scale to the way a scheme is designed when bundled in with operation and management so as to ensure easier maintenance throughout its working life.

Chairman

With regard to Limerick, how does the Department satisfy itself as to the expertise and experience of the staff provided by the local authority? This scheme cost €8 million. The conciliator has assessed €25 million as a settlement figure and it is costing millions per month without an agreement.

Mr. Callan

Consultants would have been procured by Limerick City Council to assist with the scheme. The contract in dispute is just one element and not the major one. It is part of a much larger process. I respect the fact the Chairman has made no comments on the merits of the dispute between the parties. I do not want to reflect on the case of either party to the dispute. The form of dispute resolution set out in the contract for this scheme is arbitration, and that has now been enjoined.

However, by agreement between the two parties, the city council and the contractor, conciliation was entered into on a voluntary basis from late 2001. Part of that conciliation recommendation became available in January 2003. It was against the local authority's case and in favour of the contractors.

The local authority decided that it would repudiate the recommendation and proceed to the full hearing of the issues at arbitration, where it would be possible to cross-examine the evidence provided by each side. It would offer a much fuller investigation of the issues. The contractor, legitimately from his point of view, wanted the conciliation to continue towards the point of making a recommendation on award. The recommendation would have foregone that part of the process but the contractor wished the conciliation to continue.

That resulted in a further ten months or so of an examination by the conciliator which was only published in November 2003. It was only from that point that it was possible to join the arbitration proper, and that is now being done. A result from this arbitration process would be expected later in 2004. The hearing is set for around July or August and the result would be a little later than that.

Chairman

I accept the merits of the case, but what resources has the State in the event that the project has been inadequate? Has the State any redress? Are architects or other professional advisers held accountable or pursued for redress in cases where contractors' claims for damages have been upheld?

Mr. Callan

We could have some redress against our professional advisers in that eventuality.

Chairman

In terms of the merits of this case, the projected cost of the scheme was €8 million, but the conciliator's recommendation is that it will cost €25 million, and the figure is rising. Does Mr. Callan feel that it will be settled this year?

Mr. Callan

We are not party to the process. I am only speaking in terms of reports which have been made to the Department. The full hearings at arbitration are expected in August 2004, after an exchange of pleadings, discovery of documents and so forth, and a ruling might be expected around October.

Chairman

We have concluded our examination. Vote 25 is to be noted.

The witnesses withdrew.

The committee adjourned at 2.15 p.m. until 11.00 a.m. on Thursday, 5 February 2004.