State Claims Agency.

Dr. M. Somers (Chief Executive, National Treasury Management Agency) called and examined.

Witnesses should be aware that they do not enjoy absolute privilege and should be apprised as follows. Members' and witnesses' attention is drawn to the fact that as and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 grants certain rights to persons identified in the course of the committee's proceedings. These rights include the right to give evidence; the right to produce or send documents to the committee; the right to appear before the committee, either in person or through a representative; the right to make a written and oral submission; the right to request the committee to direct the attendance of witnesses and the production of documents; and the right to cross-examine witnesses. For the most part, these rights may only be exercised with the consent of the committee. Persons invited to appear 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 a 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 remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House, or an official, either by name or in such a way as to make him or her identifiable. They are also reminded of the provision in Standing Order 156 that the committee should 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 policy or policies.

I invite Dr. Somers, chief executive of the National Treasury Management Agency, to introduce his officials.

Dr. Michael Somers

Mr. John Corrigan is director of the National Treasury Management Agency. His main area of responsibility is the national pensions reserve fund. Mr. Oliver Whelan deals with the national debt, borrowing, bond issuance, deposits, short-term paper etc. Mr. Adrian Kearns deals with the State Claims Agency, which is responsible for all claims against Government Ministers, the Attorney General and, more recently, hospitals, doctors etc. Ms Anne Counihan is in charge of legal and corporate affairs and recently became chief executive of the National Development Finance Agency. Apart from me, Anne Counihan also falls under the category of Accounting Officer because she is also mentioned in legislation as one of two people involved with the National Development Finance Agency who have to appear and give evidence to this committee. Under statute law, I am non-executive chairman of the National Development Finance Agency and an ex officio member. Ms Counihan is the chief executive. Mr. Brendan McDonagh is director of finance, technology and risk.

Chapter 13.1 of the report of the Comptroller and Auditor General reads:

13.1 Audit Reporting

Annual Accounts

The National Treasury Management Agency has the statutory function of borrowing moneys on behalf of the Exchequer and managing the National Debt on behalf of and subject to the control and general superintendence of the Minister for Finance. During 2002 the Agency assumed certain administrative functions in relation to the National Pensions Reserve Fund and the State Claims Agency. Expenses incurred by the Agency in the performance of its functions are met from the Central Fund.

Under the provisions of section 12 of the National Treasury Management Agency Act, 1990 I am required to audit the accounts of the Agency and when making my statutory annual report on the Appropriation Accounts, to also make a report to Dáil Éireann regarding the correctness of the sums brought to account by the Agency in the year. The Agency's accounts for 2002 have been audited and the accounts, including an administration account and accounts relating to the National Debt, have been presented to the Minister who has laid copies thereof before both Houses of the Oireachtas.

I am satisfied that the accounts properly present the transactions of the Agency in 2002 and its balances at year end.

Administration Expenses

The Agency's administration expenses were €13,678,899 (€9,735,098 in 2001). The greater portion of this increase relates to salaries and superannuation costs which increased to €8,740,576 in 2002 from €5,773,026 in 2001.

The charge for salaries and superannuation may be analysed as follows:

Table 13.1

2002

2001

Senior Management*

Salary and other emoluments

2,576,991

1,683,364

Other Staff

Salary and other emoluments

4,162,099

2,899,431

All Staff

Pension and Employer PRSI

2,001,486

1,190,231

Total

8,740,576

5,773,026

*Senior Management comprised the Chief Executive Officer and five Directors. The Senior Management figures include salaries, non-pensionable allowances, bonuses, loan subsidies, payment of medical insurance premiums, but exclude the cost of pensions, employer PRSI and other non-cash benefits such as company cars.

The terms of the remuneration package of the CEO are sanctioned by the Minister for Finance on the advice of the Advisory Committee of the Agency. The remuneration of the senior management is set by the CEO who consults the Advisory Committee on the matter. In light of its assumption of additional functions in recent years, the NTMA commissioned a firm of consultants in 2001 to review the remuneration of senior management. The consultants evaluated the positions in the NTMA by reference to comparable positions in other Irish financial institutions. Their conclusions were accepted by the Advisory Committee of the Agency which agreed that substantial adjustments were needed to bring the remuneration of senior management of the Agency into line with that available elsewhere in the Irish financial services sector.

The Accounting Officer pointed out that the large increases in senior management's remuneration had to be seen in the context of the substantial change in the scale and diversity of the Agency's remit in recent years e.g. activities connected with the National Pensions Reserve Fund, the State Claims Agency and the National Development Finance Agency.

The increase in remuneration costs for Other Staff is largely attributable to the employment of extra staff to meet the workload arising from the assumption of the additional functions. The number of Other Staff employed increased from 54 at the end of 2001 to 68 at the end of 2002.

National Debt

Table 13.2 shows the outturn for the National Debt in the five-year period 1998-2002.

Table 13.2 National Debt 1998-2002

National Debt Outstanding

Debt Service Cost

€m

€m

1998

37,509

3,060

1999

39,849

2,800

2000

36,511

2,575

2001

36,183

2,379

2002

36,361

2,169

The composition of the National Debt at 31 December 2002 is shown in Table 13.3.

Table 13.3 Composition of National Debt as at 31 December 2002

€m

Medium/Long term Debt

25,288

Short term Debt

8,653

National Savings Schemes

4,200

Less: Domestic Liquid Assets

(1,780)

National Debt

36,361

The Agency's performance in regard to its activities is independently measured by an international investment bank specifically engaged for that purpose. The rationale and basis of the performance measurement was agreed with the Department of Finance. The bank determined that, measured on a net present value basis against an independent benchmark portfolio, savings attributable to the Agency's management in the year amounted to €28.2m.

Savings Bank Fund

The audit of the Post Office Savings Bank is carried out on my behalf by the auditors of An Post subject to my right to carry out further audit tests which I consider necessary.

In 2003 they reported to me on their audit of the 2002 accounts. I accept their opinion that the accounts of the Post Office Savings Bank give a true and fair view of its transactions for that year-end and of its year-end balance.

In addition to managing the National Debt, the National Treasury Management Agency is responsible for the investment and management of funds remitted to the Exchequer by the Post Office Savings Bank. The Exchequer is responsible for the repayment to the Bank of all such funds and for meeting interest charges thereon. The state of affairs of the fund at year-end is shown in Table 13.4.

Table 13.4 Post Office Savings Fund

2002

2001

€m

€m

Liability in respect of funds due to depositors and creditors

976

814

Value of related investments held by Post Office Savings Bank Fund (at cost prices)

983

823

Surplus at 31 December

7

9

Mr. John Purcell

The audit reporting arrangements for the NTMA are unusual in that, under governing legislation, I am required to make a report on my audit of the agency accounts in conjunction with my annual report on the audit of the appropriation accounts. There are good historical reasons for that, with which I will not bore the committee.

On Chapter 13, as well as formally reporting satisfactory audit opinion on the accounts, I also include some additional information on the remuneration costs of the agency in the interest of transparency. It will be seen from the report that salaries and superannuation costs showed a dramatic increase from 2001 to 2002, up from €5.77 million to €8.74 million. There were two main factors: first, the hiring of new staff to meet the demands of the additional work arising from the agency being given responsibility for the operation of the State Claims Agency and for activities connected with the national pensions reserve fund, as well as some other activities such as central treasury services; second, large increases in the remuneration packages of senior management as a result of a review commissioned by the agency of the top positions by reference to remuneration levels in other Irish financial institutions.

On the national debt, the level of debt has remained pretty static over the period 2000 to 2002, at around €36 billion. Once again, the cost of servicing that debt has fallen, coming in at €2.17 billion for 2002.

The last section deals with the Post Office savings fund, which is the vehicle used to channel funds deposited with the Post Office Savings Bank to the Exchequer. The deposits are guaranteed by the State.

Several other accounts come under the aegis of the NTMA, the most important of which are the capital services redemption accounts, which nowadays serve as a supplementary Central Fund account. Also included is the small savings reserve fund, whereby moneys are set aside to partially meet the accrued interest on the small savings schemes.

The committee will be aware that the NTMA acts as the State Claims Agency. The first full year account for 2002 reflects the modest level of claims settlements and the related expenses in its start-up phase. The NTMA also has responsibility for the NDFA, as the Accounting Officer has just said. That was only established by the Minister for Finance on 1 January 2003.

Does Dr. Somers wish to make an opening statement?

Dr. Somers

It might be helpful if I outlined some of the functions of the NTMA. Five major legislative provisions affect it. The agency was originally established at the end of 1990 to manage the national debt and deal with the borrowing activities of the State, at a time when the State's financial problems were very acute. There were major difficulties in the Department of Finance in trying to obtain staff experienced in this area and in holding on to them. They were leaving to join the private sector. The Government of the day decided that if one could not beat them one should join them and that the best thing to do was to set up a separate entity outside the Civil Service and hire people from the private sector to deal with this difficult matter and with the huge sums of money involved. I am sure part of the reasoning was that if we could reduce expenditure on the national debt, on the interest bill, it would be much more acceptable than trying to cut expenditure on health, social welfare or education. At this time, the paying of the interest on the debt required about 8% of our GNP. This has now reduced to between 1% and 2%.

We were the first country in the world to set up a separate entity to deal with the national debt. The Swedes have had an office to deal with their debt for about 200 years but we were the first to establish one in modern times. Before this, the debt was dealt with by the Central Bank and the Department of Finance. As I said, the problem was one of not being able to obtain staff.

Most countries have come to see us and have copied what we have done. They have realised it is a business and not an administrative activity. Most countries have not gone so far as us in terms of setting up an agency outside the Civil Service. Our organisation is the only one in the State in which, by law, a civil servant cannot work. It was designed to focus people's minds. For anybody who wanted to join the Civil Service, there was no going back; one resigned and that was it. In many other organisations in the State one can go on secondment from the Civil Service which allows for the possibility of return. This was not an option regarding the NTMA.

As time went on, other activities were given to the agency, mainly because we were the only entity available to central government that had commercial freedom to operate, hire people, pay them whatever was required and get the business done. One of the first tasks we received was the securitisation of the State's mortgage book under the rainbow coalition Government. The State had lent a lot of money to local authorities for on-lending to lower income groups to buy their houses and it needed its money back. Legislation was enacted to enable us to set up a company called Ulysses Securitisation plc which issued bonds and got the money for the State. In return the mortgage payments were then made to the company. This was the first major job.

We were then approached by the then Attorney General, Mr. Dermot Gleeson, about the problem of people suing the State. He said he had seen it from both sides, having acted for plaintiffs and having seen the difficulties the State was having in defending these claims as Attorney General. He approached me about the issue and I admitted frankly that it was an area about which we knew nothing. The only thing we brought was that we had taken a function out of the Civil Service, and the Central Bank and had set it up as a business.

Mr. Gleeson also felt we were managing risk, and there was much risk involved in these claims. People were suing individual Ministers and the claim would go to the relevant Department. Most Departments did not have specific groups that could deal with claims against the State so they would send them to the Office of the Chief State Solicitor, which was overburdened with many other activities. Eventually, junior counsel would be hired and then senior counsel. The cases would be settled in either the High Court or on the steps thereof when people's expectations had risen enormously, as had the legal bills. The idea was that if we could hire people who knew this business and could settle claims quickly, there would be considerable benefits for the State.

The matter dragged on and I spoke to successive Attorneys General about it to see if they were still in favour of the idea. They were and the legislation was eventually passed in 2000. The body in question, the State Claims Agency, came into existence at the beginning of 2001. We have hired claims managers, engineers and medical doctors. In more recent times, because of problems in the health area, the remit of the claims agency has been extended to deal with hospitals, doctors, health boards, etc. Anybody who wants to sue them will sue us. In fact they are doing so and there is an ongoing problem with the MDU, of which I presume the committee is aware.

The next thing that came our way was the national pensions reserve fund. Again, there was specific legislation to cover this. There had been no fund in existence to cover the accumulated liabilities in respect of those employed in the public service or those who are entitled, in due course, to the old age contributory pension. The Minister for Finance took the view that with the ageing of the population we needed to make some provision for this liability, which is containable at present.

There was much discussion on how the fund would be managed, including the suggestion that it be managed by a bank. The Minister for Finance was anxious not to get involved in taking decisions on how to invest the money as he wanted an expert group to deal with it. He set up a commission which was granted all the decision making powers. As some group had to look after the public interest, the question was whether the NTMA, the Department of Finance or a new agency would do it. The Department did not seem to have any wish to do it as it would have had similar problems with the recruitment of staff. There was no wish either to set up a new body and we only discovered later that the Central Bank had expressed an interest. The NTMA had to hire people from financial institutions and the private sector who were experts in the area to assist us in managing the fund, which is now worth €10.5 billion.

The NTMA was also granted control over the National Development Finance Agency. That came into existence at the beginning of 2003. We had to start these agencies from scratch as there was no model nor existing agency. Up until that stage, if a Department had a project, it would hire a pool of experts at high cost who would develop the expertise needed for a specific project. When the project was completed, the group dispersed and the expertise was lost. The idea with the National Development Finance Agency was that if there was a pool of expertise available to the State, then it could be used again and again for different projects.

The Act to establish the National Development Finance Agency provided for three things. The NTMA would run the agency, it would advise on the optimal way of financing major infrastructure projects and it could borrow or guarantee up to €5 billion for these projects if it was cheaper for the NTMA to fund them instead of the private sector. The NTMA could also set up special purpose companies. This was an attempt to find out if it could get projects off the State's balance sheet as there has been a view that many desirable infrastructure projects have been held up because of EUROSTAT rulings and so on. If these projects could be cleared off the balance sheet, they could go ahead. This is another new organisation and its first chief executive resigned last December. Anne Counihan then took over as chief executive.

The NTMA also undertakes a number of other activities. It acts as a central treasury service for local authorities, health boards, VECs and so on. This initiative seeks to prevent these bodies from paying too much to banks. If they had spare cash they placed it with banks but got a poor rate of return and if they wanted to borrow money they paid over the odds for it. The NTMA will give them a reasonable rate of return and will lend them cash if they are short. It can do that on a short-term or long-term basis. The level of expertise in many State entities is quite low. Some local authorities claimed that the NTMA was charging them too much, although it was over a 20-year period, and that they could get cheaper money from banks. We at the NTMA could not understand how the banks were prepared to do this so we asked to see the documentation. No one would do this but one local authority agreed that we could look at the legal agreement it had with the banks. When we looked at the agreement there were different kinds of break clauses. The bank had the right to demand its cash back in six months rather than 20 years. These documents are cleverly worded but officials at the NTMA have the expertise to spot those clauses.

We are also funding the housing finance agency. This agency had been borrowing on the market in its own name with the State's guarantee. We considered that there was no point in having two State entities borrowing, especially since this agency was paying more than the NTMA for money. We are now acting on its behalf to raise the money that it requires and it has made savings as a result. We also manage the social insurance fund on behalf of the Minister for Finance, which is worth over €1 billion. We manage the dormant accounts fund on behalf of the board that has been set up to do it. We manage liquidity on behalf of the European Central Bank. The ECB requires a five-day forecast of the amount of cash that the NTMA has in the Central Bank on behalf of the Government. It requires this information to manage liquidity within the eurozone. The amount of money that is in surplus or deficit has to be put in the market. We frequently find ourselves in the situation late in the day with a surplus or a deficit of between €500 million and €1 billion. We then have to either place it in the market or raise that money to maintain a deposit with the Central Bank. That is one of those awkward jobs where one has to search the market around the world and try to find out if there is any spare cash or if anyone wants to have our cash.

That is a quick synopsis of what the NTMA does. When I was before the Committee of Public Accounts a few months ago, we went through many of the issues from 2002. I circulated the end of year press release. We have been anxious to get whatever information we have into the public arena as quickly as possible. We have had a press release every year on 31 December, which is a pretty demanding target. The chairman of the national pensions reserve fund was anxious to release information on the pension funds. He therefore issued a review for 2003. The "Ireland information memorandum" is another document which we just released. It is a marketing document which essentially provides information on what we do.

Is it up to date?

Mr. Somers

It is very much up to date. The people that buy our bonds are all foreigners and we have to keep them up to date with what we are doing.

I would like to ask a few questions about salaries and pensions before I concentrate on the State Claims Agency and other more important items. I recognise the work that the NTMA is carrying out and its importance to the economy. There is a need to have executives who are on an equivalent par with the best financial institutions, not only in Ireland but in the financial districts of London and New York. I receive €80,000 per annum, while Deputies Connaughton and Rabbitte receive €86,000 for extra service. Deputy Rabbitte might get a small amount extra on his pension for his junior ministry. On average, the net allowances are worth between €10,000 and €15,000, although some make more and some make nothing. We receive a pension of 20 fortieths, one per year. What is the highest salary and pension benefits paid to the Chief Executive Officer or the director and what is the average for the remaining directors?

Dr. Somers

The Deputy has put me in a difficult position because I am the highest paid. The pay for these jobs is evaluated by-——

It is similar to the position regarding RTE. If we could address the issue we could proceed to other matters.

Dr. Somers

I will cause trouble for the Minister for Finance if I provide this information. The Comptroller and Auditor General knows exactly what we are paid. In fact, he has produced figures which give an average of what we are paid, which is roughly half what those in the main financial institutions are paid. I do not think anybody has to justify to a committee what he or she is paid.

Does the work done justify it? I am simply looking for the figure.

Dr. Somers

If I give the figure, I will cause trouble for everybody else. My colleagues do not know what other colleagues are paid. This places me in an awkward position because I would make trouble for my boss if I give the figure.

The salary of the CEOs of AIB, Bank of Ireland and other institutions are out in the open and it is possible to tell the average for senior pay.

Dr. Somers

The two chief executives of the major banks worked in the public service.

As did Dr. Somers himself.

Dr. Somers

That is correct. The chief executive of one of the two banks refused to become a director of it because he said he did not want his pay revealed to the general public. He said that six or eight people were paid more than him. Again, they did not want to serve on the board because they did not want their pay revealed. The only pay details revealed are those of executive members.

I will not push Dr. Somers on his salary. Can he provide details of the average pay of the CEO and directors taken together for 2003? What is the average remuneration of salary and pension benefits? I will leave out car allowances and medical insurance premiums.

Dr. Somers

Deputy Ardagh is putting me under pressure on this.

I am lifting the pressure from Dr. Somers.

Dr. Somers

To disclose this would add to public expenditure because others would want levelling up. I suggest to the Deputy that I will provide all the information to the Chairman of the committee. It would then be up to the committee how it uses this.

That is fine. I was impressed with the strong brush strokes of the artist, Michael Flaherty. I noticed Dr. Somers uses the same painting. Is the painting of the proud cock printed on three of the pages of the NTMA report representative of anything in particular?

Dr. Somers

I was annoyed when I saw that. We have tried to make the report interesting each year. While the subject matter is pretty dry, to encourage people to read it I have in recent years bought the copyright of paintings from Merrion Square or elsewhere and included copies of the paintings in the annual report.

Did Dr. Somers pay the artist, Michael Flaherty, six figures for his paintings?

Dr. Somers

I did not.

Did Dr. Somers pay him five figures?

Dr. Somers

We purchased some paintings and bought the copyright of some. They were about €600 each.

Dr. Somers can be tight enough.

Dr. Somers

The cock appeared by mistake. When I saw the report, I said it was ridiculous and knew I would be pilloried over it. However, there was no way of removing it and I was embarrassed by it.

Dr. Somers should not be. How much has the State invested in the national pensions reserve fund in 2003? Dr. Somers said the fund totals over €10.5 billion at present.

Dr. Somers

It was just over €1.1 billion.

Was the total also made up of the Telecom Éireann share flotation proceeds?

Dr. Somers

Yes, it was kick-started by the proceeds from the sale of Telecom Éireann. Since then, the Minister for Finance has invested 1% of gross national product each year, which is to be invested until 2025. No money can be drawn out until that time and the hope is that it will at that stage cover roughly 30% of the accumulated liabilities in respect of public service pensions and old age pensions. However, there is an obligation on us to carry out an actuarial survey to ascertain whether we are on track for that. There are huge imponderables involved in trying to figure out what the liabilities and size of the fund will be at that stage.

I heard on the radio today that Ireland, the UK and the Netherlands are well funded in regard to pensions relative to other countries, notwithstanding that Ireland is on average ten years younger in population. Does the funding mentioned on radio include the national pensions reserve fund?

Dr. Somers

I imagine it does. I know there is a move within the European Central Bank to look more closely at the true liabilities of governments. This is because debt is only part of the equation and non-funded pension liabilities are enormous. We carried out a survey in this area in the mid-1990s and published it in our annual report as we were taking much flak from Germany at that time as to whether we would be eligible to join the single currency. We pointed out to the Germans that they had much higher non-funded pension liabilities than we had. Ireland and the UK are in reasonably good condition on this whereas the Germans, French and others are not and will have trouble down the road. The bureaucracies in Brussels and elsewhere are looking increasingly at this as an indicator of budgetary and financial policy.

How far ahead of the norm in France, Germany, Belgium and other countries does Dr. Somers think we are? Can it be measured?

Dr. Somers

I am sure it can but I would need to study the situation more to do so. We are probably ten to 20 years ahead or, to put it another way, they are ten to 20 years on the wrong road.

Are there funds available to provide, for example, the equivalent of €200 per week for the over-65 population in 2025 while Germany is in a position to provide only €100 per week? Is there a comparative measure relative to other countries in Europe?

Dr. Somers

We can try to obtain information for the Deputy although I do not have it at my fingertips. The general view is that they are in serious trouble. However, in some cases the pensions were a lot larger than they are in this country. In Luxembourg, for example, one could get five sixths of one's pay by way of pension. In the public service here, a pension has generally been half of pay.

In the private sector in the UK and Ireland, there has been a tendency to fund pensions outside of companies, which has not been the case in other countries. I was for some years on the board of the European Investment Bank and on its audit committee. It funded its pensions by a charge on the reserves of the bank and did not have a separate pension fund, which surprised me. However, this seems to be the practice in many continental entities, unlike the UK and Ireland. We are in a much better position than other countries.

With regard to the State Claims Agency, the committee met recently with medical consultants and the Medical Defence Union. I will use the example of a consultant in the Mater Hospital who also has a small private practice in the Mater Private Hospital. On the trip from the Mater Hospital to the Mater Private Hospital, he helped someone on the side of the road who was in need, from which a case has arisen. Is he covered under the enterprise liability scheme for any claim that might occur?

Dr. Somers

I understand he is. There is something called the "Good Samaritan" rule which is supposed to protect someone who comes across an accident. A doctor may not necessarily be covered by his or her insurance, but under the "Good Samaritan" rule, I understand he or she would be covered. There is an ongoing dispute to which we are peripheral.

Is that the position notwithstanding that the consultant has a private element to his or her practice and is employed as a consultant with the main public hospital? Would the State claims agency cover this aspect?

Dr. Somers

Yes.

That is good to know because in the past consultants have had concerns in this regard. I heard on the ether that there was some resolution of the matter but I am pleased to know that is the case.

On the State Claims Agency, has the number of claims decreased or has the legitimacy of claims improved as a result of integrating under one umbrella the various bodies to whom claims could have been addressed previously?

Dr. Somers

The figures indicate a decrease. Whether it is due to our agency is difficult to know. In 2002, there were just 1,001 non-clinical claims. In 2003, the figure had dropped to 544 claims. We are adopting a different approach.

What type of claims?

Dr. Somers

These were non-medical claims such as slip and trip, Garda accidents, accidents in prisons, a helicopter crash and so on.

The figure decreased from 1,000 to 544?

Dr. Somers

Yes.

That is almost a 50% reduction.

Dr. Somers

Yes. It is difficult to know what has driven this decrease. There were many claims under the heading "Asbestos" — the so-called "worried well" people. There was nothing medically wrong with them that could be detected but they were afraid they might have some disease as a result of exposure to asbestos. That case went to the Supreme Court which held that people were not entitled to claim on the basis that they were suffering from an irrational fear. We have been somewhat sceptical about many claims. We changed the previous approach of the State, which was that if the State lost a case, that was it. We are now pursuing people for our costs if they lose and we win the case.

A sum of approximately €2.5 million is involved.

Dr. Somers

Yes.

In regard to dormant accounts and the balances in question each year being transferred not later than 30 April, what is the total balance of dormant accounts for the financial institutions for 2003?

Dr. Somers

There are two types, the bank and insurance ones. The figure involved is €174,831,000.

In one year?

Dr. Somers

No, that is the total we had. There have been withdrawals. People have woken up to the fact that they had accounts and we had to pay back €24 million of the original €196 million transferred to us in 2003.

Nevertheless, a 15% reserve fund is maintained.

Dr. Somers

Yes, so that it is not all spent.

Has the NTMA a say in how the money is spent?

Dr. Somers

No, there is a separate board. The Deputy referred to administrative costs and so on. This will be administered by a board I never heard of. It is called Area Development Management Limited. It is being given responsibility to disperse €30 million a year. It will hire 18 people for this purpose while we are running the whole show with approximately 80 people.

They will not be as highly paid?

Dr. Somers

No, certainly not. One could end up either with vast numbers of people or with a small number of highly paid people.

Is that a criticism of the Civil Service?

Dr. Somers

No. We also have the money from the dormant insurance policies.

What has been secured from that?

Dr. Somers

We have received virtually nothing. There was an expectation of €500 million but the figure kept decreasing. The last figure was approximately €40 million and we have secured only €1 million so far.

What is the cut-off date?

Dr. Somers

Tomorrow.

Does Dr. Somers expect an avalanche of money tomorrow of up to €39 million? Will he let us know how much comes in?

Dr. Somers

Yes, we will.

Another issue relates to the National Development Finance Agency, the National Treasury Management Agency, Public Private Partnerships and using the money in the national pensions reserve fund to finance them. Dr. Somers agency is not an easy touch but does he find if there is private input into a project, it makes it easier to invest in it on the basis that there is more transparency in regard to financing, costs and so on?

Dr. Somers

At the moment we are wearing two hats. There is the €10.5 billion national pensions reserve fund money. We are most anxious to invest some of the money within the State but, so far, that has not been possible. We put €200 million on the table for PPP projects.

Are these projects for which the NTMA would be the sole investor?

Dr. Somers

No, we do not want to become involved on our own because we are a fairly small entity. To investigate these projects in great detail, one would need a squad of people. Other entities such as the National Roads Authority and those involved in the Luas light rail project are doing this. There is no point trying to duplicate what they are doing.

In terms of the NDFA, we have the authority to borrow or guarantee up to €5 billion. We have not invested any money so far. We are just the funding agent. Other people decide on the projects and we deal with the funding. We have found that the bodies involved in PPP projects surround themselves with rafts of advisers, consultants, accounts, lawyers and so on.

The financiers?

Dr. Somers

No, the local authorities. We are trying to reduce the numbers because they are very expensive. Ms Anne Counihan has been involved closely in some of these projects. The numbers are fairly small because most of them will be financed directly by the State in the next couple of years.

Do the local authorities, or whichever body promotes a project, accept the advice the NTMA gives in regard to financing.

Dr. Somers

No.

They can go their own way?

Dr. Somers

Yes.

Is it correct to say that they would be advised to accept the NTMA's advice because they might find it easier to get the money from the State on that basis?

Dr. Somers

I do not think we have come to that confrontational stage. We are fairly new and we have hired people with expertise in the area. I am told they have been of great assistance to many of these bodies because the level of expertise in many State bodies is low.

I would like to hear from Ms Counihan on the matter.

Ms Anne Counihan

They are obliged to seek our advice and we are obliged to advise. As is the case with most financial advisers, no one is obliged to take our advice. However, I guess they would need to do some explaining if they did not. We undertake elaborate risk analyses on proposed projects. These go into considerable detail, all with an eye to preparing the public sector benchmark. This is a rigorous exercise. It used to be carried out by the various large firms of accountants and so forth here in Dublin and not only in Dublin. We perform that exercise now. I guess a good explanation would be required if no advice was followed, especially where the clear advice was to go down a particular road regarding, say, a PPP, especially if, in the absence of taking such advice, there was no alternative. Furthermore, under the guidelines promulgated to all Departments and other bodies involved, they are no longer at liberty to appoint financial advisers elsewhere.

I return to a point on which Deputy Ardagh touched. The State liability for medical negligence was covered by a commercial insurance company, the Medical Defence Union. It has been reported that the Quantum report, which was commissioned by the Department of Health and Children, estimates the current cost of these liabilities at €400 million. From 1 February, the NTMA will take over responsibility for managing litigation. Furthermore, the Statute of Limitations for litigation dealing with obstetrics extends until an individual reaches the age of 21. Is there an estimate of the full value of such claims for the next 20 years, based on the estimated €400 million in the Quantum report?

Dr. Somers

To an extent we are on the periphery of this because we have not been part of the negotiations between the Medical Defence Union and the Department of Health and Children, which I believe are ongoing. It had been hoped that this would be settled. I am telling the committee what I know, although it may be somewhat out of date.

The figure the Chairman mentioned, is correct. It could be €400 million in respect of incidents which occurred up to now. There is the possibility of another €400 million because of the involvement of the other medical body, the Medical Protection Society. That would be a total of €800 million. It seems very strange that these bodies got premia over the years, in some cases very large premia, from consultants and others. In many instances, up to 80% or 90% of those premia were paid by the State. The Medical Defence Union is based in the United Kingdom and I understand it is Irish claims that it is resisting. We are not clear what money the MDU has at its disposal and how it operated. Did it operate on a pay-as-you-go basis or did it build up reserves? Again, we have not been party to the negotiations and we have not had direct dealings with the MDU.

Is the MDU insisting that the responsibility now rests with the State Claims Agency? Is it a contention that the figure could be as high as €800 million and that the Statute of Limitations for obstetrics claims extends until the individual reaches the age of 21 years? Will this not be a huge burden on the State in the next 20 years?

Dr. Somers

The whole business of claims has been nightmarish. The Army deafness claims were probably the start of it. I was Secretary of the Department of Defence in the 1980s and I do not recall any claims for deafness at that stage. There were people falling off jeeps and lorries and things like that but I do not recall deafness being a major issue. Suddenly it ballooned and a culture of suing has grown enormously. We have tried to do what we can to change that culture and the medical area would fall within that. There are genuine cases where people suffer. If one's leg is taken off by mistake, for example, one is entitled to compensation. There have been some appalling incidents in the Army following which people were entitled to compensation. However, there are many other cases. We have a management meeting every Monday morning and we discuss all these things. It would drive one demented to listen to some of them. The Phoenix Park seems to be one of the most dangerous places for anyone to go. People fall into potholes while cycling or jogging, trip over roots while chasing children in the undergrowth or get locked in the People's Gardens and become impaled on railings when trying to get out. People no longer seem to be responsible for their own actions.

This week a claim for €4.5 million was made against obstetricians. An agreement was reached which caps the premia paid by obstetricians and provides that the excess cost of their premia will be met by the State. Does Dr. Somers agree, that this area will be a specialised one within the State Claims Agency and will lead to a high liability in the future?

Dr. Somers

We have hired two medical doctors and we intend to avail of further medical expertise on these cases. Some of these cases are tragic and there is a view that they should simply be compensated on the basis of no fault. If a child is born with a serious disability, I am not an expert on who is to blame. It may be that these things simply happen.

We have set up a website to enable all hospitals throughout the country to report to us all incidents which occur. Since the NTMA took responsibility for the medical area, approximately 28,000 incidents have been reported to us. Many of these are trivial. For example, if a patient experiences bruising following an injection, that might be reported to us. We have 540 claims on the medical side at present and there are probably another 60 about to hit us. I do not know how much they are worth.

We are also trying to minimise risk because this also falls within our area of responsibility. We also deal with how claims arise and what can be done to prevent them. We are hoping this database will make it possible to identify areas where risks occur and to prevent problems such as the one which arose in Drogheda.

What provision has been made by the State Claims Agency regarding the possible liability for €800 million in the future? Given that the State now has total responsible for medical negligence claims, has a reserve fund been put in place?

Dr. Somers

As of now, the State has not accepted responsibility for the €800 million. However, there is no fund.

When the State Claims Agency was established we proposed and discussed with the Attorney General that, as part of our involvement, we would set up a captive insurance company to which Departments would pay an annual premium. That would have enabled us to build up a fund to meet such liabilities. The proposal raised all kinds of issues and, rather than argue the matter for years, we settled for just the claims end of things in the hope that we might go back at some stage in the future, gather money from people who were incurring these risks and put it into a fund to meet these liabilities. As of now, there is no fund.

From 1 February, the State Claims Agency has assumed responsibility for managing litigation relating to obstetrics claims.

Dr. Somers

Yes, and other medical liabilities.

In light of the massive claims going through the courts at present, will there not be a massive cost in the future? The Department says there is a €400 million liability, the MDU is in dispute and, I believe, will accept responsibility of only a fraction of that amount.

Dr. Somers

The State has not agreed to take on a €400 million or €800 million liability. It will fight it. There was a question of doing so in the courts in England. The body in question is English based and our ability to twist its arm is limited. I do not know what the end deal will be. The matter is between the Minister for Health and Children and the medics in the MDU. We do what we are told. As we are required to take on the executive functions of various Ministers, everything we do is delegated to us by the Government. If the Government wishes us to take on the claims, we will comply.

Is Dr. Somers saying the historical issue with the MDU, whatever it turns out to be, remains in dispute between the relevant Department and the insurance union? Going forward, will it be the NTMA's responsibility to manage this kind of issue?

Dr. Somers

Yes. As I understand it, no agreement has been reached between the Minister for Health and Children and the MDU. While, there have been a few false dawns, nothing has happened thus far. I am not sure what resources the MDU has in the United Kingdom. Its attitude appears to be that claims in this country are settled at a much higher level than in the UK and that it has been subsidising the Irish operation. It is no longer prepared to do so. I suspect, although I am not sure, that the scheme has been operated on a pay-as-you-go basis and that the MDU has not built up any kind of reserve which a normal insurance company would. There appears to have been a gathering of doctors who collected money from their pals to meet the liabilities of whomever got into trouble. This grew and now they find themselves with accumulated liabilities but no cash to meet them.

Is the resolution of the historical problem a matter for the Department of Health and Children and the MDU?

Dr. Somers

It is between the Government and the MDU. We have been very anxious not to involve ourselves in this particular row to build a level of confidence with the consultants. Initially, consultants were extremely wary on hearing that we were to take over this area of activity. They saw a threat to their professional integrity and thought we would be an easy touch in the settlement of claims with the result that they would end up being blamed. In the past, the MDU fought claims. While there is no point in fighting a strong case which one should settle, it is our intention to fight these other cases. We have fought cases in the past. We have been very serious and we employ highly technical people. If there is an accident, they take photographs, measure the site and conduct interviews. We have hired private detectives. They have observed people who claimed to have a serious back injury and to be unable to work but who were found at their local disco. Such a discovery can be used as evidence to reduce their claims. We have a very professional team which deals with these matters.

On the medical issue, we will do what we are told. As I understand it, the Minister for Health and Children and the Minister for Finance are completely opposed to taking on the €400 million liability. This has come at us out of the blue.

Does Dr. Somers think the reversal of fortune on the asbestos claims represents a turning of the tide in terms of the compensation culture to which he has made reference?

Dr. Somers

We hope it does. It has proved the State will not be an easy touch any more where there is not a genuine case. The fact that we have gone after people for their costs has sent a message, particular to certain firms of solicitors. A small number of firms have specialised in this area and one finds that all claims tend to be dealt with by them. This has come as a bit of a shock as these firms have encouraged people to take claims. When those individuals find that not only is their claim not successful but we are going after them for money——

Were many of them accumulated at the time the Fletcher case was decided?

Dr. Somers

There were about 500.

How many are extant?

Dr. Somers

Many of them have pulled back and very few are left. They have tended to disappear. Of course, if a person manifests some physical ailment down the road, he or she can come back at us again.

What did Dr. Somers say earlier was the percentage of GNP which meets debt servicing costs compared with a few years ago?

Dr. Somers

It used to be the case that approximately 8% of GNP was required simply to meet the bill for interest. We are down now to approximately 1.5%. That has freed up a great deal of cash for other purposes, including the reduction of the level of the deficit to move to a surplus.

That is a dramatic improvement by any standards.

Dr. Somers

It has freed up a significant amount of resources for other purposes. We are not taking credit for everything. Interest rates have fallen and governments have got their acts together. There has been a huge benefit to the State. Apart from Luxembourg, Ireland has the lowest debt-GDP ratio within the European Union.

When the national pensions reserve fund first went onto the market in difficult times, there were some performance issues. That has stabilised and the fund is performing well.

Dr. Somers

Yes. We are well in the black at this stage. We could not have entered the market at a worse time. The equity market has gone through a terrible time over the last few years. The one action we took which was highly beneficial was to average in the investment. We did not put all the money in on day one. It was a view strongly held by professionals, including those in Dublin, that all information was in the market and that we should invest all the money from the start through derivatives etc. There is a great deal of natural caution associated with us and we felt we would be better off dribbling in the money. We persuaded the commission that was the best approach. Even adopting this approach, what happened with the equity market was unbelievable. A great deal of wealth was simply wiped out. Even at present the market is jittery and is up one day and down the next.

The question at present relates to what will happen before the presidential election in the USA. Will it be ramped or will it be allowed to drop before being ramped just before the election takes place? We must also ask what will happen after the election and what will happen with interest rates. I have been at this game for a long time and I have never seen interest rates so low. There is pressure on the European Central Bank to drop them a little more. In the United Kingdom and the United States, interest rates are beginning to increase somewhat. If interest rates rise, the value of equities will drop which is one of the dilemmas we face. We have kept a chunk of the fund amounting to over €1 billion in cash. We agonise about what we should do.

Does the NTMA see wider economic implications of a 0.5% rise in interest rates, as is being talked about in the United States? Does it have wider concerns about the economic environment if interest rates were to begin to creep up?

Dr. Somers

In terms of our own business, which is the management of the national debt, we have converted a substantial chunk of the floating rate debt into fixed rates over the last year or two. We felt that low fixed rate levels of interest could not survive. We issued a long bond earlier this year which will not mature until 2020. We raised a substantial amount of money through that bond which is essentially fixed at a rate of approximately 4.5%. We have moved to safeguard the State against a rise in short-term interest rates. While events in the housing market are outside our remit, as difficulties there suck spending power from people's pockets they will have less to spend on other things. That would have a negative effect of some kind.

The sum of more than €10 billion is invested abroad. The last time Dr. Somers attended the committee, he told us about the setting aside of some €200 million for projects here. Has there been much progress in that area?

Dr. Somers

The €200 million is still there. We have advertised it far and wide but it is very difficult to find projects in which to invest it. While we are open to all suggestions, the number of public private partnership projects is, in fact, quite small. There are particularly few such projects which are self-financing. In fact, the only ones seem to be toll roads. The other projects do not wash their face in terms of the return one gets from them. We would much prefer to have this money invested in Ireland because it would at least show some additional economic activity here. Other economists would argue strongly against that line. In their view, to protect oneself, one should have the investments outside rather than inside one's area of responsibility.

With so much remaining to be done in this country, however, we would hope that opportunities would present themselves to invest some of this money. One can have as many arguments as one wants on these matters. Others would argue that money is not the issue at the moment and that the issue lies elsewhere. We have €10.5 billion and can borrow endless amounts of money wearing our NTMA hat and can borrow or guarantee up to €5 billion wearing the NDFA hat. Money is not the issue. There are other structural reasons for projects not proceeding.

Those of us on this side of the table find it difficult to understand how there could be an absence of projects given the infrastructure deficit in a number of areas. An analysis would be required to understand the reason projects are not materialising and bidding is not taking place. I wish to pursue the question of infrastructure but I must attend the Dáil for a vote. I apologise to the witnesses for the interruption.

I will continue the questioning while the vote is taking place. I thank Dr. Somers for the report and the documentation we received in advance of today's meeting. Page 11 of the annual report features a summary of the NTMA's activities. It states that the total debt service expenditure in 2002, which was €2.16 billion, was €315 million below the figure budgeted. A preliminary outturn for 2003 indicates that the equivalent figure this year will be €203 million below budget. The agency is to be commended for achieving a figure €315 million or 15% below budget but why was the budget so generous in the first instance? If, in making his annual Budget Statement, the Minister for Finance had an additional €315 million available to him, it would represent a significant sum for use as expenditure on a variety of other items. Why was the budget over-estimated in the first instance?

Dr. Somers

The Deputy had a go at me on this issue on my previous appearance before the committee.

I would not describe it as "having a go".

Dr. Somers

There are reasons for this, which I will outline, but in general terms the interest on the national debt must be paid no matter what happens. It is a charge on the Central Fund and the first charge on the revenues of the State. No matter what else happens, regardless of budgets for health, education or anything else, we must pay that cash. The estimate is done repeatedly on a fairly conservative basis. It is discussed between the NTMA and the Department of Finance which agree on projections etc., and a significant number of estimates are involved.

As regards the breakdown of the savings the Deputy cited, I can explain them in greater detail if he wishes. Favourable market rates on the bonds we issued saved us €70 million. In addition, interest rates have been historically low and we have never had it so good in that respect. We also had a bond exchange programme whereby we swapped bonds with one rate of interest for bonds with another rate of interest, which saved us €40 million.

The Exchequer account in recent times has been extraordinarily buoyant in that revenues seem to have come in very fast and expenditure has not gone ahead as fast as might be expected. If we have spare cash, and we have billions of euro in spare cash at the end of any day, we place it on the market and try to get the best rate of interest on it. If we have an extra billion euro, we can make money on it by putting it out on the market and getting the best possible rate of return. To the extent that the Exchequer runs a surplus during the year, we will have a lot of cash and will be able to make money on it.

We also made gains on foreign exchange, including €30 million due to movements in sterling at the time. Short-term interest rates have been extraordinarily low. At the time the budget was estimated, however, officials may have been conservative and reckoned rates might increase slightly, which was not the case as they have fallen to around 2%. We made €65 million as a result. The Exchequer surplus was higher than expected, which delivered a gain of €15 million. We saved €20 million on the interest on small savings such as the Post Office savings schemes and so forth that we must pay out. Many other bits and pieces delivered a further €30 million.

I accept the criticism that we always run a surplus on the national debt, for which the estimate is prepared cautiously. If a Department runs a large surplus or over-estimates what it will need, it can spend it. We do not spend surpluses, which are saved and made available for future years. I remember an occasion when we had a surplus at the end of a year in the Department of Defence and looked around to find out what we could spend it on, which was very difficult. I believe we bought a little tank at the time as well as some inflatable dinghies for the Naval Service. That was all we could do with it.

Page 11 states: "Savings of €28 million were achieved against an externally audited benchmark". How is that statement reconciled with the figure of €315 million saved on the budget estimates? I may have misunderstood but it appears that some externally audited benchmark indicates that the agency achieved savings of €28 million.

Dr. Somers

This refers to an attempt to measure the valued added by the agency over the years. At the beginning of each year, my people in the Department of Finance agree what is the best way of funding the Exchequer during the following 12 months in terms of types of borrowing and the timing of borrowing. We set out a benchmark for the year as regards the optimal way of doing our business. During the course of the year we will depart somewhat from the optimal approach because we will see other opportunities for making money. That is a measure of the amount we made over and above what the benchmark would have done.

Many people would regard achieving the benchmark as a very good performance. We have outperformed the benchmark. The figures are audited by PricewaterhouseCoopers and until now the hard sums, etc. have been done by UBS in London which has produced this figure. We are having some difficulty because UBS wants to get out of this business. It is a time consuming business which involves going through every transaction we make and obtaining the net present value of all the sums we pay out and would have paid if we had stuck rigidly to the benchmark. These two figures are then subtracted from one another to ascertain if we made or lost money against the benchmark.

Dr. Somers is stating, therefore, that the figure of €28 million is the savings the NTMA has achieved against——

Dr. Somers

——this particular benchmark, which is supposed to be the best way of doing things, as determined at the beginning of the year.

Page 83 indicates that the fees and expenses of the NTMA amounted to €13.5 million for the year. Dr. Somers has already indicated that salaries and pensions accounted for the largest element of this figure. Did it cost €13.5 million to run the organisation and achieve the savings against an external benchmark of €28 million?

Dr. Somers

We did a lot more than just achieve the savings to which the Deputy refers. We ran all the other businesses as well. Albert Reynolds was Minister for Finance when the NTMA was set up. At the time, the reason for establishing the body, its costs and the savings it could achieve were debated in the Dáil for three days. We were heading into the unknown and therefore it was argued at the time that the NTMA could save £20 million per year, bearing in mind what was happening with the Department of Finance and the Central Bank, and that it would cost £10 million to run it. However, we ran it for much less than £10 million. The figures of €13 million or €15 million are not very much higher than £10 million. That was 1990 and it is now 2004.

One might think the salaries are high but we run a very tight ship. One hires the best people, pays them accordingly and obtains from them as much work as one can get out of them. Rents, rates, lighting and heating bills have also to be considered.

I appreciate that and want to move on to a different aspect, especially in light of the more up-to-date information Dr. Somers has provided the committee. He states in the document that 76% of the debt is now fixed. Does this not imply, in layman's terms, that the majority of this would not be short-term debt but medium- to long-term debt?

Dr. Somers

That is right.

Does this mean that, in terms of managing the national debt for 2004, almost 76% of the work is done before we start?

Dr. Somers

I know what the Deputy is saying.

One can understand how one would regard 76% of the work to be done before walking into the office on 1 January.

Dr. Somers

Yes, one could say that. There is a complicated answer to this.

That is fine.

Dr. Somers

No matter what happens we will probably have to raise €4 billion or €5 billion every year. To do so we must get overseas investors — the locals do not invest any more — to buy all our bonds. We want to pay as close as possible to what Germany is paying because that is the benchmark. To do that, one has to have marketable bonds that can trade on what is called EuroMTS. To get on EuroMTS one has to have at least €5 billion outstanding in a bond. When fund managers are buying bonds, they look for bonds that have five years to run, ten years to run and maybe 15 or 20 years to run. These are the benchmark bonds. Given that time moves on, a bond that has ten years to run this year will only have eight years to run in two years' time. If we want to issue a new bond, we will have to have a ten-year bond. To have this, we will have to have a swap programme from that eight-year bond into a new ten-year bond. We are doing this all the time. We are retiring old bonds and bringing on new ones.

Rolling over.

Dr. Somers

Yes. We can take advantage of the fact that we have locked the money in at fixed rates of interest when we swap an old bond for a new bond. The economic cost is locked in. In other words, if we have got that money at4%——

One might get the new bond at the lower rate.

Dr. Somers

We might get a lower rate but, in any event, we will not lose money on it. We have that benefit. For example, if we were to issue the bonds we issued over the past 18 months today, it would cost us about €35 million more because interest rates have moved up, not by very much but they have done so nevertheless.

The sum of €35 million pertains to the period between now and 2020, not just to the day of issue. The bonds Dr. Somers mentioned run up to 2020.

Dr. Somers

They do.

Therefore, the €35 million is spread over the next 15 years.

Dr. Somers

That is the net present value. There has been an amount of discussion about the expense of the agency. We do all this work——

I have not harped on it.

Dr. Somers

No, I know that. We do this work ourselves. Finland, for example, issued €5 billion in bonds earlier this week. We do this ourselves; we do the marketing, Oliver Whelan meets all the buyers and we try sell the bonds ourselves. We sell directly ourselves by auctions and we pay no fees. Finland, which is a very sophisticated and wealthy country, does not do this. It goes to a syndicate of banks and, for its €5 billion, it pays the banks 15 basis points, which is €7.5 million. Life is much simpler for them but we save that €7.5 million and do not pay the banks — we do it ourselves.

Given that the national debt is, to some extent, under much more control than it was when the agency was set up, is much of the agency's work behind it, bearing in mind that there is always ongoing work? Is that why the extra work is being taken on? The agency has the expertise.

Dr. Somers

We have the expertise and the only reason we have it is because the Government regards us to be doing a good job; otherwise it would not give it to us. Our turnover in cash last year was €400 billion, which is about three times the GNP of this country — a huge amount of money. This is because there is money coming in and out every day. As was mentioned, we are borrowing up to 2020, but we are also borrowing overnight and putting money out overnight. There is a huge swathe of cash moving in and out of our books every day of the week and we are trying to make a little money on every deal we do. Sometimes we are successful and sometimes we are not.

What was the average interest rate on the national debt over 2002 and 2003? The report has many charts and maybe I have missed one, some of which list percentages of the national debt in respect of GNP, benchmark bonds, Government bonds, etc. I am sure the relevant figure is in the report but I have not picked it out.

Dr. Somers

It is.

What is the average? Is it 3%?

Dr. Somers

No, it is between 4% and 5%.

Would it be?

Dr. Somers

There is a great deal of legacy stuff——

Older stuff.

Dr. Somers

Even items such as savings certificates——

They are much higher. Is the average rate pertaining to the national debt of €38 billion 3% or 3.5%?

Dr. Somers

The average for 2003 was 4.1%.

That is fine. I did not see the figure in the charts. Is Dr. Somers saying the figures for 2003 are all in euro?

Dr. Somers

Yes.

The agency has eliminated the last bit of sterling. What about dollars? Dr. Somers stated that, in 2002, the agency made €30 million on foreign exchange transactions. However, the possibility of making this sum has been eliminated by not having any foreign exchange transactions.

Dr. Somers

One of the dilemmas concerns how much risk one takes. We agonised over this when we adopted the euro. We borrowed in every country under the sky at one stage and we had considerable foreign exchange exposure. Over the years, our exposure regarding foreign currencies had not been good because the punt constantly devalued. It was an expensive exercise but we probably saved on interest rates. However, when we joined the Economic and Monetary System, a question arose as to whether unnecessary risk should be taken in terms of foreign exchange bearing in mind the other huge risks being taken. This was widely discussed at the time and we first concluded that interest rates in the eurozone would be much lower than anything we had experienced in Ireland. We had no particular experience in foreign exchange. I have discussed the question of how to make money on foreign exchange with banks around the world. If one is in the dealing room of a major international bank and one sees the flows, one can put a bet on behalf of the bank, but if one is in Dublin, by the time one obtains that information, it is too late.

In terms of foreign exchange, we had a benchmark, which was supposed to be an optimal benchmark of the spread of currencies. It was a question of not putting all one's eggs in the one basket. This was all done very scientifically, but when we adopted the euro, we reckoned that the risk was unacceptable given the low interest rates and that we were acting on behalf of the people. We did keep sterling for a while and my only regret is that we did not get rid of it as well. There were all kinds of arguments at the time as to why we should have sterling exposure.

One of the reasons I ask about foreign currency exposure — I accept Dr. Somers's position — is because the National Pensions Reserve Fund Commission seems to take a different approach. It has a fund of €10 billion, a large proportion of which is in equities. Very little of it is invested in the Irish stock market. We will not address that issue now, but suffice it to say that the commission has essentially hedged 50% of its foreign investment. It has taken a very different approach to the NTMA in investing some of its funds in foreign currency. Where is the consistency on behalf of the State? I am very concerned that there are such divergent views between the national pensions reserve fund and the NTMA. The fund is not a subsidiary of the NTMA but it is closely connected. How could the two groups who are responsible for managing funds and the national debt into the future have such divergent views?

Dr. Somers

The nature of the business is entirely different. Regarding the national debt, we still have liabilities in foreign exchange, but we have closed them off by hedging the risk.

Is the risk 100% hedged?

Dr. Somers

Yes.

Why has the national pensions reserve fund paid some genius to tell it that 50% will be hedged? Anybody could have said that. The NTMA decided to hedge at 100% while pensions reserve fund decided to hedge at 50%. That is a major difference of approach. How can that be?

Dr. Somers

I do not know whether the Deputy accepts my argument why we closed off the risk on the debt.

I understand that.

Dr. Somers

I have to answer for that. There is a commission which deals with the policy. It got advice what to do to invest this money which was to put 80% in equities and 20% in bonds. Of the equities, half was to be put in the eurozone and half outside the eurozone. Of the half outside the eurozone, the currency risk was to be closed but remained open in the other half. There are many arguments whether that should be done or not. I have been told that if bonds are bought in dollars, the exchange rate risk should not be hedged because losses on the currency will be recouped on the dividends of the equities. Most of these companies are multinationals and if the dollar falls, their earnings in dollars will rise because they are making money in Europe and the Far East. Therefore the risk should not be hedged. Other people will say that the risk should be hedged. This is a different type of activity to managing the national debt. The commission decided to hedge half the foreign exchange risk but there was a strong body of opinion that held that it should not be hedged. We made some money by hedging it as the dollar fell but it is virtually impossible to predict how the currency is going to go.

I understand that it is different but I still do not see why those managing the pensions reserve fund did not come to the same conclusion. I know equities are different to debt but the principle is there.

Dr. Somers

It is because of this argument that is made.

Two groups came to different conclusions.

Dr. Somers

We have gone 50:50.

During the course of the year, the national pensions reserve fund released its funds into the market on a phased basis. Its report states that its average return on its cash of more than €1 billion was 2.4%. Dr. Somers stated that the NTMA was paying 4.1% on average. Why was it paying out 4.1% on the debt when the pensions reserve fund was earning 2.4%? Why did it not borrow that €1 billion from the pensions reserve fund as opposed to going to the Central Bank?

Dr. Somers

It is just the interest rate curve, as short-term money can be obtained at cheap rates. If it needs to be fixed for a longer term, more must be paid for the money. We paid almost 20% for fixed rate money years ago. I could borrow any amount of money at 2% but it would expose the State to an incredible risk as interest rates went up. There is no certainty and I have never seen interest rates this low before. My experience has been of interest rates of between 7% and 8% and sometimes double that. If we exposed the State to that kind of risk, we would be slaughtered.

Is it the intention of the pensions reserve fund to have little cash in the long term?

Dr. Somers

Its intention is to have the fund fully invested. At present, consideration is being given to see if it could be invested in property, in small and medium-sized companies and in some venture capital projects. These are small amounts but they are trying to enhance the return for the fund. There is additional risk associated with these products. There is a trade-off between the return and the risk.

I want to pursue the apparent mismatch between the availability of funds on the one hand and the absence of projects in a country with an infrastructure deficit on the other. I am trying to understand why that is the case. The automatic criticism made when Dr. Somers told the committee that €200 million was available for this kind of project was that such a sum of money would not do a great deal. It is extraordinary to find that we are here six months later and the funds available for projects have not been exhausted. Why is that the case? People complain about the rail route to Sligo or the route through Loughrea, or the absence of broadband in some towns and so on, yet the head of the NTMA informs the committee that there are many funds available and the projects are not coming forward. What can be done to ease that?

Dr. Somers

The Government has committed itself to spend 5% of GNP on capital projects, which is about twice the average in Europe. That is about €5 billion to 6 billion per annum. The policy for the Minister for Finance is that other projects which are self-financing can also go ahead. I agree with the Deputy that it seems to take a long time to get things done. There are endless agencies involved in getting anything moving. We do not seem to have the culture of moving projects on quickly. Anne Counihan has a number of projects in connection with the National Development Finance Agency. We are only the funding agency and not the decision makers for these projects. I have seen the infrastructure in other countries, and I drove about 800 miles in 12 hours when I went from one end of France to the other. Even when we spend money on infrastructure, we seem to do extraordinary things. There is a motorway in the Glen of the Downs which has a stretch of road with a 40 mph speed limit. It used to have a 60 mph speed limit. In France the speed limit is 130 kph or 82mph. We do not seem to be capable of dealing with these issues. We build something and then do not use it and it seems to take us forever to build these roads. We are not building over big ravines or cutting through mountains. Most of the land here is flat.

Will the emergence of the National Development Finance Agency change the situation? Is it a significant difference that the autonomy enjoyed by the NTMA is not enjoyed by the development finance agency?

Dr. Somers

We have considerable autonomy for what we do in the NTMA although we do not have the same autonomy as the development finance agency because we cannot initiate projects. We can only advise on the funding end and let it be known that we can put up the funding. However, we cannot authorise others to go ahead unless we are authorised to do so. We can try to speed up the process in regard to tenders or the consideration of financial packages. Going forward, I hope we will be able to do more but we are not the authorising authority on this. There seems to be a significant number of people with their fingers in the pie before these projects take off.

Officials from the Department of Finance came before the committee recently to discuss PPPs. A number of colleagues raised the point that private sector sources are telling us that PPPs have never been made to work in Ireland and we are not hopeful they will be made to work. My colleague, Deputy Noonan, who is not present today, had a number of questions he wished to pursue. We are trying to get to grips with the issue and we eventually received a document from the Department of Finance on it. We were under the impression, following the recent EUROSTAT ruling, that there was clarity as to where the risk was being transferred to the private sector. The expectation was that a number of projects could be got up and running under the new dispensation, if one can call it that. However, we are told by IBEC and other sources that it is not happening and they are not holding their breath that it will.

Dr. Somers

My understanding is that the Department of Finance wrote to various Departments to instruct them not to think that because the statistical rules had changed they could begin all kinds of projects, which is not the case as constraints remain. The main constraint, as I understand it, is the 5% of GNP limit. It is Government policy that it spends no more than 5% of GNP on capital projects, unless the project can wash its face and pay for itself. EUROSTAT rulings have ceased to hold up. I presume the argument the Government would use to justify the 5% limit is that this is all the productive capacity the State can cope with, although I am not certain of this and the Department of Finance may have explained the situation in more detail to the committee.

On that point, the departmental document states:

Challenging targets will see the PPP-NDFA contribution increase from 3% of total investment in 2004 to 15% in 2008. In monetary terms, this amounts to €3.6 billion. This is in addition to a target of €1.35 billion for PPPs funded by user charges over the same period giving a total target of PPP-NDFA funded investment of almost €5 billion by 2008.

Is that figure a low expectation of PPPs compared with what might be possible? Does Dr. Somers think it likely to be realised?

Dr. Somers

I have met a number of developers involved in PPP business. There is an element of disillusionment among those in the private sector about this, and Ms Anne Counihan may wish to add to what I have to say. To win a contract in the State, one must tender for it. There is a view that our tendering process is much more rigorous than is the case in other countries; there are more stages to the process and it is quite expensive to submit a tender.

On moving through the tender approval stage, the best and final offer, BAFO, stage is reached. A company would be in a two-horse race at this stage but it would still cost a substantial amount of money to prepare a BAFO. If the company does not win the contract, all that money is lost as the State does not cover any of the costs of submitting a tender. The view has been expressed that this is fine if there is a stream of projects coming along. If a company did not get one project, it would have a reasonable chance of getting the next. However, there is not a stream of projects as these are generally one-off in nature. Companies would have spent a lot of money submitting tenders but have got nothing from them. When another project is advertised, they may not be bothered tendering again because it would cost more money with no guarantee of success.

The other side of the argument on PPP projects is associated with the fear that the private sector will take advantage of the public sector, which will then be pilloried for paying too much. The famous five schools project is a case in point. There is extreme caution about paying over the odds, as it might be seen, to the private sector to carry out a PPP project. The cheapest way to fund a project would be to get the money from the NTMA because no-one can borrow cheaper than the State. By definition, the cost of obtaining funding from the private sector will be higher.

The offset is to what extent risk is transferred to the private sector and how much that sector will be paid for taking on additional risk such as construction or operational risk, for example, the risk that expected traffic on a toll road does not materialise. There are huge uncertainties in this regard and everything must be paid for. Ms Counihan and I considered some of the issues which arose in regard to specific projects. For example, a charge for protests and demonstrations had to be built into tenders if the private sector was to be persuaded to bid for projects. The alternative is that the public sector would undertake the projects and carry the risk of protests. There would be a cost if protests occur and none if they do not.

The point is that the private sector will factor in every cost, including the finding of human bones on a road route, and these must be paid for. There is a genuine fear on the part of the public sector that it will end up paying a packet of money and finding, with hindsight, that the project could have been completed far more cheaply if it had carried it out. I understand the Comptroller and Auditor General is preparing a report on the case of the five schools project. If somebody gets grilled over that type of project, they will not make a similar decision a second time.

From my long experience in the public service, I know there is a view that one should not take unnecessary risks. If one does nothing, one cannot be blamed. However, if one does something and it goes wrong — it is hard to get everything right — one could end up in a lot of trouble. The culture of blame is embedded here at this stage, which causes the problem that things do not get done.

However, every other country seems able to build vast infrastructure projects. For example, France is laced with motorways. When I first went camping around France, there were no motorways. They are now everywhere and the situation is similar for the rest of Europe and the United States. I was told that the motorways in the US were completed quickly by building temporary roads for traffic while working on the main motorway. While in France recently, I saw a huge stretch of road being built along the side of a motorway, with the intention of upgrading the motorway without disruption. We do not seem able to act in this way and I am not sure, given our current pace of development, we will ever catch up with the rest of Europe.

Other countries are moving much faster. One of the projects Ms Counihan considered was a railway from northern to southern Italy costing €29 billion. Somehow, the project is off the Italian state's balance sheet and appears set for completion by 2009. The examples are there for us to copy but we are not doing so.

With regard to the structure of repayment on any given project, the understanding of the committee is that it is like a mortgage which could be paid back over a given period, for example, 25 years. I understand from the PPP committee of IBEC that this is the type of structure it would like. Can Ms Counihan outline the structure as we had some difficulty coming to grips with it?

Ms Counihan

Where a project involves the private sector and the finance is coming from the private sector, a mixture of debt would be involved. There would be senior debt coming from a mix of foreign and Irish financial institutions and banks. The senior debts rank ahead of other debts, which are also raised from banks and financial institutions. Because the banks consider some projects risky, and because risk varies between different projects, the banks prefer the promoters of projects to take some risk, for example, by putting up equity so that they take on potential liabilities. In between these types of debts, there is the so-called mezzanine financing, which can be a strange mixture of share capital coming from the private sector.

Where a company would approach the Department of Finance PPP unit to offer to build, for example, five schools by PPP rather than in the conventional way, how is the repayment of debt scheduled?

Ms Counihan

It refers to unitary payments which are made by the Government on an annual basis.

In terms of front-loading or otherwise, what freedom does the State have?

Ms Counihan

The EUROSTAT treatment of a project involving payment by the State — to which the latest changes refer — would mean that the construction costs would not appear in the general Government balance. They would, however, appear in the Irish accounting on the Government balance sheet. Therefore, EUROSTAT would then look to the amount of the payments of capital and interest made over time.

This is where the major change has occurred. EUROSTAT recognised that there was a trade-off between the risk that could be transferred to the private sector and the advantage accruing to the State. It provided that if the construction risk associated with the project and one of two other risks, namely, availability risk or demand risk, were transferred to the private sector, it would be treated as being off the Government's balance sheet. For this purpose, construction risk means late delivery or delivery not in accordance with the specifications. An example of availability risk would be a six-lane motorway delivered with just four lanes in operation. Demand risk is the major risk and the one which is frequently transferred to the private sector, especially in connection with roads such as tolled roads. An example of this risk would be that the public would not use a road, thus affecting toll revenue. That risk is taken from the State and transferred to the private sector.

If one were minded to build a school, one would do so out of public funding in the normal way. One might look at it differently if one had to build ten schools. Is there clarity in public policy in terms of whether PPP is a useful instrument and whether we are seriously trying to get PPP projects up and running?

Ms Counihan

There are two questions here. As Dr. Somers described, there is perhaps a difference in the expectations of the private and public sectors. Both sides need to give the other a good hearing. It is fair to say that Ireland is quite a recent entrant to the PPP market. The two key pieces of legislation, the National Development Finance Agency Act and the State Authorities (Public Private Partnership Arrangements) Act, were only introduced in 2002. If the example of other countries is to be considered, they also had teething troubles when they first entered PPP markets.

There is much scope for improvement in the relationships between the public and private sectors in Ireland. It would be sensible not to be quite so fearful of what the private sector can provide. Although we do not have the relevant statistics for Ireland as this is a recent phenomenon, the statistics on speed of delivery are favourable to PPP. For example, in one of the most mature PPP-PFI markets, that of the UK, the private sector has a very low failure rate of approximately 20-25% for delivering on time and on budget. The UK public sector, which is probably a weather vane for other countries also, has a comparable failure rate of approximately 70-75%. It can be seen that there are huge advantages to PPP if speed of delivery is factored in.

The Department of Finance is responsible for the introduction of the five-year rolling budgetary arrangements, the envelopes, what is inside and outside them, and so forth. There was some, perhaps understandable, confusion on the issuing of the rule changes by EUROSTAT in February last. Therefore, a notice seeking to clarify the position was issued by the Department of Finance providing worked examples of the EUROSTAT treatment for purposes of general Government balance, and giving the domestic Irish treatment for the purposes of the Exchequer's own finances. I do not want to go into this two much as it raises policy questions which are not for me to raise. My point is that the two treatments, by EUROSTAT and the State, with respect to the same project, do not coincide.

Therefore, Ms Counihan has no initiating role. The projects must come to her agency before it can advise on them.

Ms Counihan

Exactly.

If she had a good idea, say as a result of seeing a railway in Italy, that does not mean her agency could replicate this in Ireland. Is it the case that Ms Counihan has no initiating role in that sense?

Ms Counihan

First, I made a number of inquiries as to the kind of projects being carried out overseas, especially within the part of Europe subject to the same EUROSTAT constraints as those applied to Ireland. Some extremely interesting projects are proceeding and many have been given off-balance sheet treatment by EUROSTAT. Dr. Somers mentioned one in particular, the rapid rail project which is the largest infrastructure project in Italy. The trains on this system will run from Turin, Milan and Bologna all the way to Naples. They will ultimately cross a bridge on the Strait of Messina and over into Sicily. The entity involved, Infrastrutture SpA, is the equivalent of the National Development Finance Agency in Ireland and, as its name suggests, it is an Italian state-owned body formed for the purposes of speeding up the development of infrastructure.

The part about which I could make recommendations is the structure that was used in that instance. It involved a great deal of state backing in one way or another. It did not amount to the giving of guarantees but there was recourse to the state to such an extent that the entity was able to obtain the same credit rating as the sovereign, namely, Italy, which was quite an achievement. The importance of that is that the higher credit rating achieved, the lower the cost of raising funds. The cost, therefore, to Infrastrutture SpA of funding this project, which will rise to as much as €25 billion, is between ten and 15 basis points more than the cost of Italy, the sovereign, raising the same funds. I cite this example because that is a financial structure we could copy.

EUROSTAT has to be consistent across the area of its remit in terms of its application of the rules. There are risks involved because EUROSTAT looks to the economics of the financing arrangements. For example, a European country can provide a state guarantee so long as it is considered unlikely in EUROSTAT's view that said guarantee will be called. The importance of this is that even if one achieves off-balance sheet treatment, one may return to the state's books if one's financial circumstances change. There are many financing structures used in other countries. My attitude is that there is no point in our trying to reinvent the wheel. Many other countries have been through considerable pain, have learned a great deal from their mistakes and devised clever structures. In my view Ireland would be well placed to follow suit. We could not copy such systems in their entirety because no two countries are the same, no two legal systems are identical, etc.

As regards the initiatives we can put in place from what we learn elsewhere, I have brought these projects and the financing structures attaching to them to the attention of the Central Statistics Office and, where relevant, to that of the National Roads Authority, the Railway Procurement Agency and, to some extent, certain Departments. I have not received much in the way of replies but I am building up an information bank which can be beneficial to everybody. It is important that those involved, such as, for example, the Central Statistics Office, are comfortable with whatever structure is being put in place. One can become involved in debates about what is treated in a particular way. If the State provides a parcel of land in return for which it receives a cut of the tolls, one school of thought says that is tantamount to a tax, while another says that it is the equivalent to a rent. The implication of the latter is that one can secure a rent but one cannot secure a tax.

In recent times we have tried to speed matters up. This was much to the dismay of a bidder on a project I am not at liberty to identify. However, the individual in question was surrounded by many legions of advisers and, as a result, was running up enormous costs for himself, his colleagues and his companies. We served a notice on him to the effect that time was of the essence and that the State would delay matters no further. That had the effect of greatly speeding up a project that might have continued on for many more months.

The number of projects coming to us is beginning to rise. Unless there are special reasons for doing otherwise, our remit is to look at projects only in excess of €20 million. Many of these projects are about to come to their financial conclusions. It appears that May will be a busy month because there is a considerable lead time involved.

I thank Ms Counihan.

I apologise for the fact that we were obliged to attend in the House for votes on a number of occasions earlier. As Deputy Rabbitte stated, the committee has heard from officials from the Department of Finance on the issue of public private partnerships. I am informed by people in the private sector that, in general terms, their businesses are geared towards a different set of targets. As is natural with the private sector, there is a profit motive involved. The business acumen of those to whom I refer, which is necessary for a successful partnership, does not appeared to be matched by their counterparts in the public sector. Does Ms Counihan agree with that assessment?

Ms Counihan

They may perhaps be bragging somewhat about their abilities.

They have proved on other occasions that——

Ms Counihan

The difficulty has been mutual criticism. Everybody has been pointing to the problems involved. IBEC referred to the entrenched resistance of public servants to PPPs. Similarly, there have been uncomplimentary comments made about the private sector. This is not a constructive approach and there is nothing to be achieved by IBEC or the private sector stating that people in the public sector know nothing about what is required for PPPs. We are all on a learning curve and that sort of approach is not constructive. Both sides should identify where they see difficulties arising. Neither side is happy at present.

This is a matter of fundamental importance.

Ms Counihan

It is.

On the first occasion Dr. Somers appeared before the committee he referred to there being €200 million on the table. In relative terms, that is a small amount of money but it is still €200 million that nobody wants. That is remarkable. When one considers the discussion Ms Counihan and Deputy Rabbitte had earlier and the information we received from officials of the Department of Finance, one can see that major problems exist.

Let us consider the fact-finding Ms Counihan carried out which she forwarded to the National Roads Authority. Surely the latter would have been aware of that information without her having to contact it.

Ms Counihan

Rather surprisingly, it was not aware of it.

I find that incredible.

Ms Counihan

I also found it incredible. People seem to be very knowledgeable about the projects that have gone wrong in other countries. I refer, for example, to a project that went wrong in Austria. The authorities there thought that it was going to be treated off-balance sheet but EUROSTAT insisted that it be treated on-balance sheet because the project was some way towards completion. Similarly, in Portugal, they did not get one of the bridges right. That is on, not off, balance sheet. There is significant knowledge about those projects. I agree with the Deputy it is surprising there is no knowledge regarding the myriad projects that have gone through and are being done.

Are we comparing like with like? Our population is only 4 million whereas the Italian population is much greater. I refer to the scale of rail projects and, for example, Deputy Rabbitte referred to the western rail corridor. Like with like is not compared in this project in terms of the overall benefit of the investment. Is that true?

Ms Counihan

I do not agree.

Will Ms Counihan explain how a project with a low consumer base because of the small population is of benefit?

Ms Counihan

The Italian rail line is approximately 900 kilometres. We need a 200 kilometre line, not a 900 kilometre line. The game is the same. An interesting aspect of the Italian deal is that, aside from domestic financial institutional investors, the next greatest investment in the project was by the IFSC in Dublin. That is a little ironic. Many of the IFSC participants are not indigenous companies but the money can be raised here. There are differences in scale. Italy is bigger than Ireland whereas Luxembourg is smaller. However, everybody is getting on with it and we can do it too. Why do we have to say, given that it works in other countries, we must invent this whole thing ourselves? We do not have to; we can learn.

Did Ms Counihan get the impression the Department of Finance had the information she supplied?

Ms Counihan

I do not believe the Department had the information relating to projects in other countries. When I mentioned a number of these projects, the officials did not tell me they knew about them.

That is incredible. The committee meets representatives of State agencies every Thursday and that is a fundamental issue.

Ms Counihan

Many projects relating to water and roads are being done through PPPs.

The agency has a fund and a marketing programme should be undertaken so that a partnership approach could be taken. Vested interests that could avail of the fund should be more aware about it. Deputy Connaughton is correct.

Ms Counihan

I met a Minister, whom I will not name. I described a number of rail and metro projects and he asked why nobody had told him about them.

I refer to hospitals and risk management and a reply Dr. Somers gave to the Chairman and other colleagues. Consultants almost went on strike a few months ago on this issue. The issue was side-stepped but, according to Dr. Somers, that chicken could come home to roost within his domain if, for instance, in the next number of years the claims amount to €400 million or the €800 million mentioned earlier. The only body that can carry the can is the NTMA, which, in turn, means an additional burden on every taxpayer.

Dr. Somers

That is true and that is why the Government opposes taking on these historic liabilities. Its reasonable argument is that it has contributed most of the subscriptions to these institutions on behalf of consultants. Normally, if one pays an insurance premium, one thinks one is covered for anything that occurs during the period of insurance. However, even though the premiums were paid to cover particular periods, the MDU is saying, "We will not cover you, notwithstanding the fact that we have taken your premiums." We are not in the loop in this discussion and, therefore, I am outlining what I understand the position to be rather than——

It looks like that is where the vehicle is rolling into and that is the station for which it is headed.

Dr. Somers

As the Deputy said, where else does it go? At one stage, the Department of Health and Children wanted to set up its own claims agency but the Government decided one was enough and that we would deal with it. If the Government is stuck with this at the end of the day, we are probably the natural home for it, not that we particularly want to take it on, but we will do what we are told. It is an additional burden. At one stage, the Department wanted to fight a test case in the courts in the UK to see what claim the State had against the MDU and whether the historic liabilities had to be taken on. I do not know where that stands currently.

The threatened strike by the consultants was deferred on the basis that a solution would be reached. The issue was not resolved. The State will take on the liability in respect of what consultants do in public hospitals and it will also take on their private work in public hospitals. The State will take on obstetrics for Mount Carmel Hospital and the Bon Secours Hospital in Cork. Apart from that, the consultants are on their own. I am not sure what they intend to do about the rest of their private practices because the MDU probably will not be around. St. Paul's was covering many of these cases but it may also withdraw.

A total of 25,000 incidents were advised. Does every hospital have a department dealing with risk management or is this a new initiative, which has been adopted by a few hospitals?

Dr. Somers

Most of them have something like that with, perhaps, one manager doing it. Risk management is not that developed. A number of these entities operate as separate units and communications might not have been marvellous between them. The website we set up, on which all these incidents are reported, is the first attempt to come to grips with the issues that arise. At least there will be a database and clusters of incidents can be identified so that something can be done about them.

This is a double-edged sword. To address a cluster of problems in an area usually involves spending money. We have not got the money to spend so it would be up to the Department of Health and Children or the health boards. The accusation is made against us that we are meddling and trying to influence the amount they spend or where they are spending it. This is early days in this game and we are anxious, as we are in all areas, to reduce the burden on the State. If we are forced to take on medical claims amounting to €800 million, we will apply a rigorous approach. We could get lambasted because many tear-jerking cases will inevitably come up, some of which we cannot win.

And they are extremely costly.

Dr. Somers

Exactly.

Going back to the first question, I compliment Dr. Somers on this report which is extremely well done. As chief executive he has six directors, although five are here today. Are there six?

Dr. Somers

No, because one resigned at the end of December.

I was about to say I was reminded of the "Magnificent Seven". I do not want to hold the meeting up on this but according to the documentation I have, regardless of whether six or seven people are involved, a sum of €2.5 million is involved. I found it hard to understand why each director would not know what the others are getting, particularly as everyone is in the same building.

Dr. Somers

I control the payroll.

Dr. Somers must keep it in his inside pocket.

Dr. Somers

I keep it in a locked safe.

I have no problem with paying for people's skills but I have a problem in that my salary and expenses are in the newspaper every so often and I do not treat Dr. Somers organisation any differently. They may not call themselves public servants but they work on behalf of the Government. Would it be true to say that, on average, the directors are paid €400,000 a year or more?

Dr. Somers

I will go back a couple of stages. When the NTMA was set up the idea was that people would be hired in from the private sector and would be paid whatever it took to get them in. They would not be civil servants and would not have security. I am on a six-month rolling contract with a definite cut-off date at the beginning of 2007.

It has been said to me that Dr. Somers is on €800,000. Would he work for that?

Dr. Somers

I am not going to comment on that. I will give the figures to the Chairman. If I were in the private sector, this could all be revealed without embarrassing anyone, but the problem is that I am in the public sector. I am not a civil servant. Whatever people get is inevitably used as a lever in other public service sectors by people seeking what they want. I pay what I have to pay. I am a long time in the public service of the State and have had endless options to get out. I am still offered positions outside the public service.

I can see why.

Dr. Somers

My colleague, Adrian Kearns, was about to leave the Department of Finance when the NTMA was set up. My other colleague, John Corrigan, had left and was working as investment director for AIB investment managers. Ms Counihan was head of legal affairs in Manufacturers Hanover in London. I had to gather these people in and I had to hire doctors, engineers, accountants, actuaries and so on. At the same time, I am competing with the private sector. I have lost three people this year whom I could ill-afford to lose and who were very well paid, and I am now in the market again trying to recruit people. I am in competition with AIB, Bank of Ireland, Anglo-Irish Bank and so on and if I do not pay, people will walk out on me. I do not want to labour the point, but we are managing vast amounts of money — €50 billion of the people's money.

We will not proceed any further with this. I fully appreciate the reasons the NTMA staff are outside the public service. If someone is to stand in on the share market against all the odds in the world, then one must have someone who can operate at that level. I understand that. However, a Government Minister's salary is known. I do not accept the rationale here. If the NTMA officials are paid why not tell the public, as most people in your business know what they are paid?

Dr. Somers

I do not want to take the responsibility of putting this out, because if I do so there will be——

I understand. I wish Dr. Somers well for all our sakes. I hope the next annual report is even better than this one.

Does Dr. Somers accept that his reticence will eventually have to be responded to and that eventually some provision on reporting remuneration will have to be made in future reports?

Dr. Somers

I hand that over to the committee for it to decide. If and when this comes out, it will lead to upward pressure on costs, both in my organisation and elsewhere in the public service. I do not want to be accused of adding to public service costs.

I want to move to the pensions reserve fund, as I have some more questions arising from the last time Mr. Geaney was here and dealt with the fund. There was some concern about the lack of an ethical dimension to the investment strategy. Mr. Geaney said that the fund managers working on behalf of the fund would have been ethically blind to how the investments were made and that it was about getting the maximum possible return. Has there been any reassessment of that position? Have any requests been made of those managers regarding the investments?

Dr. Somers

Mr. Geaney and I appeared before Deputy Fleming's committee and we had lengthy discussions with them.

Yes, it was the Committee on Finance and the Public Service.

Dr. Somers

The ethical investment issue came up and Mr. Geaney made some colourful remarks about businesses he would not invest in. I am in a slightly difficult position in that I am not supposed to comment on the policy of the pensions reserve fund. Much of this money is invested through passive fund managers who track an index and it is virtually impossible to get them to exclude specific companies. I know there were issues about having shares in tobacco or missile companies. The view of the commission is to stay away from that.

I have just been given a note to say that we have discussed this issue with managers and, to the extent that there is a financial impact, the managers take those things into account. Some of these companies make substantial amounts of money and we have done well with our investments in tobacco companies. The State is pulling in over €1 billion a year in tobacco taxes. Personally I would prefer if our investments were ethical but everyone has an opinion on what is ethical and what is not.

I recall the debate at the time. Mr. Geaney said that one person's ethics might be another person's common practice. He was asked to outline what area he thought might be ethically incorrect and he referred to the area of sexual exploitation. The Bank of Ireland has subsequently got into hot water for doing exactly that, which indicates why we must have standards and a general policy in this area. However, I will leave that to one side.

People might be prepared to argue that acquiring shareholdings in companies should be done on a neutral basis. I would argue against this because I believe there is a need for a different set of standards. I would like to know what the pensions reserve fund is doing in regard to acquiring shareholdings. The largest shareholding fund has 47 million shares in Exxon. Exxon will have an extraordinary general meeting in May on the governance of the company. It could also be concerned with the policy direction of the company in the future. As a major shareholder in the company, what is the position of the fund representing the Irish people? Does it decide to take part in these votes, and if so, who makes the decision?

Dr. Somers

As of now, the commission has decided that the fund managers should exercise the proxies on our behalf at annual general meetings, etc. There is a physical problem. We have shares in approximately 1,200 companies. As I have never even heard of most of these companies, there is no way we could keep track of all of them. There is a growing concern about how one should vote at AGMs. This has been exercising the minds of members of the commission. So far it is unfinished business. I am not sure that I see my way very clearly through it. Given the resources available to us, there is no way we could monitor such a vast number of companies. Half the income of the Phillip Morris group comes from food products, which we favour. Companies also take over companies. Boeing, which produces fine passenger aircraft, also produces military aircraft. I do not know where one could stop with this. It is a major problem.

There is a difference between having 5,000 shares in a company and 47 million shares. To hold 47 million is very influential in terms of what that company does and what kind of influence can be exerted on it. One cannot stand aside and watch how the company is governed and what policies it puts into practice without asking these questions. The fact that the agency is doing it on behalf of the country is an added responsibility. People would be very concerned if they were aware of this type of leverage being exercised on their behalf.

Dr. Somers

There is a fund in Britain called Hermes, the old British Telecom pension fund. It has 30 people working on the proxy voting policy. If that is how the commission wishes to move, I would have to hire 30 people. We are very much in the hands of the commission. It is the one area of the NTMA's activities where our hands are tied. We do not have any decision-making power. We are the manager for ten years and after that the commission can hire someone else. We do what we are told by the commission. I have an ex officio seat on the commission and I try to move the members in certain directions on issues, but I do not always win. It is easy to overrule me. If they want us to look at proxy votes, we can do so, but it will add to the expense.

What is the real increase in the value of the fund? By real increase I mean the fund since its inception or the actual value of the fund currently, less all the input into it.

Dr. Somers

At the moment the fund is worth €10.4 billion. In regard to the capital, that is, money from Telecom, plus the GMP contributions, we are up approximately €800 million.

Is that over three or four years?

Dr. Somers

Three years, plus the period of the temporary holding fund which was an earlier period.

That is an average increase of €275 million, even though the amount was increased.

Dr. Somers

It is not huge because we had a dreadful first year.

What is the cost of administering the fund since its inception?

Dr. Somers

The fees to the commission, including the investment manager fees, amounted to €14 million in 2003.

Is that approximately €50 million over three years?

Dr. Somers

It is €28 million since its inception. Much of this money is paid to fund managers.

What is the real increase in the value of the fund? Surely a pension fund that increases in real terms is being established. There have been some inflationary aspects in respect of the original money invested in the fund.

Dr. Somers

Not much.

Has there been an inflation rate of 2% for each year since?

Dr. Somers

Yes. We are talking about €800 million.

Is an average of €275 million per year an increase of 4%?

Dr. Somers

The internationally recognised basis for calculating returns is just 1% per year.

Does it take inflation into account?

Dr. Somers

No.

There is no real increase in value?

Dr. Somers

No. It has been a disastrous few years for all pension funds.

I do not think that is generally understood. Given that the 2003 figure was such a good one, there has been an impression that the fund is €1 billion larger in total when, in fact, it is just recovering past gains.

Dr. Somers

That is all. I feel lambasted. I have not taken the investment decisions in regard to the fund. The agency has received dreadful press in the matter, as have other pension funds. If the shares go down because of international problems, there is not much we can do about it. We do our job well, which is to find the so-called best in the world fund managers. They are assessed by the commission, appointed and given the cash. Sometimes the economies of the world go down.

That is more or less the information I was seeking. I thank Dr. Somers.

Can we dispose of Chapter 13.1 and note the financial statements for 2002? Is that agreed? Agreed. I thank Dr. Somers and his team for attending the committee.

The witnesses withdrew.

The committee adjourned at 2.40 p.m. until 11 a.m. on Thursday, 13 May 2003.