COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 19 Jun 2008

National Pensions Reserve Fund Annual Report and Financial Statements 2006.

Dr. M. Somers (Chief Executive, National Treasury Management Agency), Mr. A. Kearns (Chief Executive, National Development Finance Agency) and Mr. P. Carty(Chairman, National Pensions Reserve Fund Commission) called and examined.

Chairman

We will now examine the 2006 Annual Report of the Comptroller and Auditor General and Appropriations Accounts: chapter 11.1 — National Debt; and chapter 11.2 — Savings Bank Fund; NTMA annual report and accounts 2006; National Development Finance Agency annual report 2006; and the National Pensions Reserve Fund Commission annual report and financial statements 2006.

I wish to make witnesses aware that they do not enjoy absolute privilege. I also draw the attention of members and witnesses to the fact that from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunity of Witnesses) Act 1997 grants certain rights to persons who are identified in the course of the committee's proceedings. These include the right to give evidence, to produce or send documents to the committee, to appear before the committee, either in person or through a representative, and to make a written and-or oral statement. They also have 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 before the committee are made aware of these rights and any persons identified in the course of the proceedings who are not present may have to be made aware of these rights 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 the legislation, I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official, either by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions within Standing Order 158 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

I welcome Dr. Michael Somers, chief executive of the National Treasury Management Agency, and ask him to introduce his delegation.

Dr. Michael Somers

Thank you, Chairman. I am joined by Mr. Paul Carty, chairman of the National Pensions Reserve Fund Commission. He is also an Accounting Officer for the purposes of the legislation, as am I. Also here is Mr. John Corrigan, who administers the pension fund on a day-to-day basis and Dr. Ivan Fitzpatrick, who deals with the investments of the pension funds in what are called alternative assets. Mr. Brendan McDonagh is our finance director and deals with finance, technology and risk. Mr. Adrian Kearns is also an Accounting Officer for the purpose of the legislation in connection with the National Development Finance Agency. Mr. Oliver Whelan is responsible for all of our borrowing activities, various small savings schemes and other financial activities in which we engage. Mr. Ciaran Breen heads up the State Claims Agency, the clinical indemnity scheme and deals with anybody who wishes to sue the State.

Chairman

I welcome everybody to the meeting. I ask Mr. John Buckley to introduce the 2006 Report of the Comptroller and Auditor General: National Treasury Management Agency, chapter 11.1 — National Debt; chapter 11.2 — Savings Bank Fund; the NTMA report and accounts 2006; National Development Finance Agency annual report 2006; and National Pensions Reserve Fund Commission annual report and financial statements 2006.

The full text of the chapters can be found in the annual report of the Comptroller and Auditor General or on the website of the Comptroller and Auditor General at www.audgen.gov.ie.

Mr. John Buckley

The primary function of the NTMA is to manage the national debt. However, it now has a range of additional functions, the principal ones being the management of compensation claims on behalf of State agencies, the management of the National Pensions Reserve Fund and the discharging of the functions of the National Development Finance Agency.

Overall, the Exchequer made cash payments of €29.8 million to the NTMA in 2006. When account is taken of the amounts which were owed to it by the Exchequer at the beginning and end of the year, its administrative income from the Exchequer was €30.9 million. It also earned a further €1 million from other sources, bringing its total administrative income to €31.9 million. The agency applied this €31.9 million as follows: expenses of debt management and managing claims against the State, €13.9 million; the National Development Finance Agency, €3.1 million; expenses of the National Pensions Reserve Fund Commission, €5.8 million; and contribution to pension funds, €9.1 million.

The contribution towards pension liabilities was designed to address an historic deficit in the pension fund operated by the agency as well as to meet normal, ongoing pension costs for the year. At the end of the year, the accounting deficit on the pension fund stood at €2.9 million, after taking account of the €9.1 million it received.

At 31 December 2006, Ireland's national debt stood at €36 billion. The drop of €2.6 billion on the previous year was as a result of an equivalent State budgetary surplus. When account is taken of the effect of derivatives, the entire national debt exposure was in euro at year end and was made up mostly of Irish bonds. The cost of servicing the national debt in 2006 was €2.4 billion. However, this includes a transfer of €470 million from current funds to a sinking fund to repay debt, which means that the true current servicing cost was €1.9 billion. That equates to 5% of the average debt over the year. This service cost was also inflated somewhat as a consequence of payments of interest which had accrued over many years from the encashment of small savings, including savings certificates, savings bonds and national instalment savings. A limit which had been placed on the extent to which these savings could be rolled over without triggering interest payments from the Exchequer has begun to kick in, with the result that many of the savings maturing in recent years give rise to the payment of large amounts of accrued interest. Overall, the interest cost of small savings met from the central funding increased by €200 million, while a further €243 million of the impact was absorbed from a small savings reserve fund which had been built up in recent years. The national debt is stated at nominal values for accounting purposes and that forms the basis for determining the dividends paid and the amounts to be ultimately repaid. In market value terms, the value of the debt at the end of 2006 was €37 billion.

Turning to the other management functions, the National Development Finance Agency provided advice during 2006 to State agencies in respect of major capital projects. Its remit was extended in legislation in 2007 and it can now also procure capital projects. Acting as the State Claims Agency, the NTMA manages claims against State agencies in respect of personal injury and property damage and advises on risk mitigation activities. It settled cases worth more than €12 million and incurred associated expenses on professional and legal advisers amounting to a further €10 million during the year. It recovers these direct costs from the agencies for which it acts and its own administrative costs are borne by the NTMA.

The value of the National Pensions Reserve Fund, which unlike the national debt is stated at market values, stood at €19 billion on 31 December 2006. Its value increased by €3.5 billion that year, of which approximately €1.5 billion was attributable to the State contribution of 1% of gross national product as estimated in the annual budget.

Chapter 11.2 of the annual report for 2006 presents information on the post office savings bank. This fund held €1.6 billion of depositors' money at year end. This money is in turn borrowed by the State and the capital and interest due to depositors are guaranteed by the State. The Accounting Officer will be in a position to elaborate in detail on each of the agencies' activities.

Chairman

I ask Dr. Michael Somers to make his opening statement.

Dr. Michael Somers

The NTMA was established at the end of 1990 to borrow for the Exchequer and manage the national debt. Its original objectives were to ensure adequate liquidity for the Exchequer at all times and to minimise the interest burden over the medium term, subject to an acceptable level of risk.

At that time, Ireland's debt ratio was one of the highest in Europe at more than 100% of GNP. It is now one of the lowest, at 23.8%. In 1990, £7 out of every £10, or 70% of the amount raised in income tax, was needed to service the annual cost of the national debt but, by 2007, it took just €12 out of every €100 raised to pay those interest charges. In 2006, the national debt fell to €35.9 billion, a decrease of €2.3 billion. In 2007, there was an increase of €1.6 billion to €37.6 billion. In both years, the movement in the debt reflected the budgetary position.

In accordance with legislation, the NTMA operates as a financial institution outside the Civil Service and has a commercial remit, which enables it to recruit professional personnel at market rates. As such, it has the capacity to deal with a wide range of financial issues on behalf of the State. To utilise the expertise it has built up over the years, the Government has assigned substantial additional functions to the NTMA, including the State Claims Agency, management of the National Pensions Reserve Fund and the National Development Finance Agency. We also provide a range of treasury services to the Housing Finance Agency, local authorities, the HSE and VECs, and provide investment management services to the dormant accounts fund, the education finance fund and the social insurance fund. The NTMA now manages a combined asset and liability portfolio of over €63 billion and the value of its transactions last year was €538 billion, which is approximately 3.25 times Ireland's GNP.

Relatively flat and flexible organisational arrangements have enabled the NTMA to operate with a tight staff complement, which currently comprises approximately 160 personnel spread across all businesses and support functions. We are a multi-faceted and diverse organisation, with staff from the professions of banking, corporate finance, pensions management, risk management, actuarial science, accounting, engineering, medicine and law. We aim to recruit and retain the best people and to utilise a unique mix of skills which combines professional and technical expertise with knowledge of both public and private sectors. The NTMA subscribes to the principle of adding value and we do not accept that the status quo prevails in any new functions. We constantly seek to refine and improve business processes with the aim of offering a better end product.

While the reports before the committee pertain to 2006, it may be helpful to outline what has happened since then in view of the dramatic changes that have taken place in the world financial markets recently. As regards the national debt, the NTMA had to fund the repayment of a €6 billion bond last October, as well as an Exchequer borrowing requirement of €1.6 billion. Although the liquidity problems which started in August 2007 resulted in volatile markets, they also created a flight to quality. Germany's Government bonds became the most sought after in the euro area and every other AAA borrower is ranked relative to them. In these difficult market conditions, the NTMA successfully launched a new €6 billion bond maturing in 2018 at a yield of 4.58%, or 15 basis points, over the ten year German bond and we received over €16 billion worth of bids. This was the largest deal by any government in Europe in 2007 and, at the time, it was the largest deal ever executed by the NTMA. Substantial amounts were also raised under the NTMA's short-term debt programmes in 2007 to finance the €1.6 billion deficit and ensure sufficient liquidity for the Exchequer going into the first quarter of 2008.

Although the money markets were still highly stressed and continue to be so, after lengthy discussions with financial institutions the NTMA launched another ten-year benchmark bond in April to take advantage of a unique funding opportunity in volatile markets. Demand for this bond, which matures in 2019, was strong with over €13 billion worth of bids and this time an unprecedented €7 billion was issued. This was the largest bond issue by any borrower in Europe since 2004. In the six months since the previous deal, pricing structures changed substantially for all issuers and while Ireland still has its AAA rating, the cost of funding relative to Germany was 44 basis points over that country's ten year bond. However we were still able to raise money at a yield of 4.51%. The yield on the 2019 bond has since risen to 5.05%. Based on current yields, this is equivalent to a saving of €378 million for the Exchequer on one transaction. For illustration purposes, at the same time that Ireland issued the 2019 bond, Italy offered a somewhat longer bond to the market which raised €4 billion with just over €6 billion of bids. Italy paid about 20 basis points more than Ireland and the yield curve continues with that differential.

Funding the budget deficit and refinancing maturing debt call for the maintenance of an active and liquid market in Irish Government bonds. We are a relatively small issuer, with less than 1% of the euro government bond market. Ongoing contacts with primary dealers, investment institutions and credit rating agencies assist this process. More than 90% of Irish Government bonds are now held by investors outside the State. One of the benefits of the National Pensions Reserve Fund, with its €20 billion in assets, is that it contributes to the positive assessment by credit rating agencies and international investors of Ireland's credit worthiness. In debt to GDP terms, Ireland stands at close to 25%, but when the NPRF is taken into account — the Maastricht criteria do not allow assets to be netted off — the ratio drops to 14% of GDP. This is remarkable for a small country that less than 20 years ago had a serious national debt problem and was severely economically constrained as a result.

The credit crisis has illustrated the importance of sound risk management. In its global financial stability report in April, the IMF noted that worldwide losses stemming from the US sub-prime mortgage crisis could run to almost $1 trillion. To date about $400 billion worth of losses have been announced. One major European bank, UBS, has announced losses of $38 billion, which is not far from the current size of Ireland's national debt. Banks are still hoarding cash as they no longer fully trust one another and are reluctant to lend to each other for any extended period. The banks' lack of transparency and reluctance to disclose their true levels of impaired assets and liquidity problems have exacerbated the situation with the effects now being felt in the real economy.

To safeguard the assets it manages on behalf of the State the NTMA has in place a comprehensive system for managing its credit risk with other financial institutions. We have credit lines in place with about 100 financial institutions worldwide. Counterparties are constantly monitored for any events that might affect their creditworthiness and all counterparty limits are subject to an ongoing detailed review process. The NTMA also continually reviews its own processes and procedures in the light of lessons learned from the credit crisis or any other market event such as the recent Société Générale-Kerviel alleged fraud.

The NTMA manages the national pensions reserve fund of more than €20 billion on behalf of the NPRF Commission. This is a reserve fund intended to meet some of the pension liabilities of the State from 2025 onwards. Based on projections the fund should accumulate to €140 billion at that time and should last until 2070. The NTMA directly manages the fund's passive bond portfolio of €1.7 billion, its cash position of €1 billion and its foreign currency hedging operations of €5 billion. Other investments are outsourced to specialised international fund managers.

Since December 2001 the NTMA has acted as the State Claims Agency, SCA, managing claims for personal injuries and damage to property against Ministers, the Attorney General, health enterprises and other State authorities. It is currently dealing with approximately 4,500 claims, with potential liabilities of €550 million. It also has a risk management role, advising the various State authorities on how to minimise their claims exposure. While there has been a drop of approximately 80% in the number of employers and public liability claims, EL-PL, since the SCA began, the most significant challenge arises in dealing with the number and value of medical claims.

The National Development Finance Agency, which came into existence at the start of 2003, advises State authorities on the optimal means of financing public investment projects, including projects procured via public private partnerships, PPPs. All public capital projects over €30 million must be referred to the NDFA for advice. So far, 119 projects have been referred, and the NDFA has completed its advice on 38 of these. The National Development Finance Agency (Amendment) Act 2007 expanded the role of the NDFA, giving it responsibility for the procurement of certain PPP projects. Some 39 Acts of the Oireachtas and statutory instruments cover the activities of the NTMA and these have been the subject of much discussion in the Oireachtas. Five major statutes have been passed, the most recent being the National Development Finance Agency (Amendment) Act 2007.

On the corporate governance side, the NTMA operates under the NTMA advisory committee, which in turn has an audit committee that oversees all its activities and a remuneration committee. It has a separate advisory committee dealing with the State Claims Agency and its subsidiary, the Clinical Indemnity Scheme. The National Pensions Reserve Fund Commission is responsible for decisions on the investment of the fund and it has two specialist committees, one dealing with property and one with private equity. Its members have also constituted a separate audit committee. The National Development Finance Agency has a separate independent board. There is an internal board for Ulysses Securitisation plc. which the NTMA was obliged to set up under the Securitisation (Proceeds of Certain Mortgages) Act 1995. The NTMA also operates under detailed guidelines and directions issued under statute by the Minister for Finance. The NTMA has an in-house internal audit and control function, as well as a compliance officer. PricewaterhouseCoopers provides internal audit services. All our activities are audited by the Comptroller and Auditor General.

For the information of the committee, which may or may not be helpful, I circulated an organisation chart in an attempt to set out exactly what the different organisations in place do and the type of skills we have. I also circulated the end of 2007 press release which we issued because at previous meetings of the committee members have frequently wanted to get more up-to-date information than that in the earlier documents. Mr. Carty and Mr. Kearns also have opening statements.

Chairman

I thank Dr. Somers. I draw members' attention to the vote in the Chamber. However, we will try to continue. Could we note and publish Dr. Somers's opening statement? I invite Mr. Adrian Kearns, chief executive of the National Development Finance Agency, to make his opening statement.

Mr. Adrian Kearns

The NDFA was established on 1 January 2003 in accordance with the National Development Finance Agency Act 2002. Its primary function under that Act is to provide a financial advisory service to State authorities in respect of capital projects over a certain size, €30 million, under guidelines issued by the Minister for Finance.

The NDFA (Amendment) Act 2007 significantly expanded the role of the agency to include the procurement of certain public capital projects by way of public private partnerships. This consolidated the agency's new procurement role, which began in 2005, in the education, justice and health areas. With the passing of the 2007 Act the NDFA's procurement remit was extended to include a wider range of State authorities. For example in early 2007 the NDFA commenced pre-procurement work on behalf of the Department of Arts, Sport and Tourism for the National Concert Hall and Abbey Theatre. We are also engaged in pre-procurement work for the decentralised headquarters of the Department of Social and Family Affairs in Drogheda. The areas excluded from our procurement remit are transport projects which are already provided for in the mandate of the National Roads Authority, NRA, and the Railway Procurement Agency, RPA, as well as certain local authority PPPs. However, all these projects continue to be subject to the NDFA financial advisory remit.

One rationale for the decision to assign these functions to the NDFA was the need to have a central and enduring professional expertise available to State authorities to analyse all financial aspects of infrastructure projects and, in a significant number, to act as procurement agent. Another reason was the recognition that a rapid growth in Government capital projects would have to be matched by a developed institutional expertise. A third rationale was the fact that the NTMA was already managing a number of significant financial businesses on behalf of the State. The procurement function complements the financial advisory functions already established within the NDFA and is governed by guidelines issued by the Minister for Finance.

In view of the new procurement responsibilities assigned to the NDFA, a technical project management group has been established in the agency. This group, comprising 15 project managers with a good deal of experience between them, recruited from the private sector is leading the delivery of projects once these are specified and handed over by the relevant State authority. The total head count in the NDFA is now 36. To date, 121 projects have been referred to the NDFA for financial advice. The NDFA has now completed its formal advice on 38 projects, of which 21 were PPPs and 17 were traditional. The NDFA is currently working on 57 active projects in conjunction with the sponsoring Departments or agencies.

I will say a few words about the public sector benchmark and value for money test. PPPs have been in the news recently and it may be worthwhile to emphasise that the approach to these projects is both rigorous and fair. The preparation of the public sector benchmark, PSB, is the key step in the appraisal of a PPP project. It fully estimates the cost of those elements of the project for which the PPP company is to bid. It is based on the lifetime cost of procuring those same elements by means of traditional procurement, including risks. The cost estimates are the responsibility of the State authority concerned. The PSB does not include any costs borne directly by the authority irrespective of the procurement method used and therefore not part of the PPP contract. In this way, the PSB serves as a direct, like with Iike comparator for the PPP bids and, at evaluation stage, forms the basis for the value for money assessment of the highest ranking bid, which is crucial.

In the case of projects to be procured by the NDFA on behalf of the State authority, the PSB remains the responsibility of that authority. It will be compiled by the NDFA, with input from the authority, and agreed by the authority before going to the market. The achievement of a value for money outcome in the use of public funds is the overarching consideration in the procurement of each public investment project. In the procurement of a PPP project there are key stages at which value for money is formally tested and the Minister for Finance has issued guidelines outlining how and when to carry out these formal tests.

The first and second tests are conducted by the State authority prior to going to market and help it to determine whether a PPP has the potential to give value for money against the alternative of procuring it by traditional means. These two tests are to varying degrees qualitative as there is no market test, such as would be reflected in bid prices, available at that point.

The third test is conducted after receipt and evaluation of the bids and is a quantitative measure relying on a highly formalised process. The purpose of the third test is to compare the highest ranking bid with the public sector benchmark to assess quantitatively whether that bid offers a potential value for money solution. If the bid equals or beats the public sector benchmark, it is deemed to offer value for money. A key principle is that the figures used in both the public sector benchmark and the PPP models must be comparable. In other words, we are comparing like with like.

If the highest ranking PPP bid equals or beats the PSB, the contract is awarded to the PPP company, provided always that the capital cost is consistent with the capital envelope allocation available to the authority. If the highest ranking bid fails to equal or to beat the public sector benchmark, the general principle laid down in guidelines by the Minister for Finance is that the matter should be referred by the authority to the appropriate Minister or to the Government.

I will move to developments on projects since the issuance of the 2006 report, dealing first with education. This amounted to a PPP programme of 27 schools costing €320 million. The first schools bundle involves the replacement of six existing schools, with four new schools located on three sites, two in Portlaoise and one in each of Ferbane and Banagher, County Offaly. These schools will provide 2,700 pupil places. The project will be carried out as a design, build, finance and maintain contract with a concession period of 25 years.

Macquarie Partnerships for Ireland was appointed as preferred tenderer and detailed planning permission was sought on 16 April 2008. Subject to no delays, this was expected to be granted in July 2008 and a financial close target date of August 2008 was set. However, a request for additional information has been made by Offaly County Council in respect of the Ferbane school, which will delay matters for an expected six weeks.

The second bundle consists of six schools on five sites in counties Cork, Limerick, Kildare, Wicklow and Meath. These six schools are to provide accommodation for approximately 4,700 students. The project was handed over to the NDFA for procurement in May 2008 by the Department of Education and Science. A contract notice was published in the Official Journal of the European Union on 20 May 2008. Expressions of interest are due on 27 June and following an evaluation of the expressions of interest, a shortlist of three tenderers will be invited to tender for the project in August 2008.

With regard to third level institutions, the Minister for Education and Science announced the bundling selection for this 17-institute programme on 15 January 2008. It is anticipated the first bundle will be advertised to the market during the third quarter of this year, with the second bundle to follow within six months. Pre-procurement work is under way and output specifications, risk assessment and enabling works and design are currently being progressed.

In the arts area, the first project is the National Concert Hall. The project has now been handed over to the NDFA for procurement. This will involve regeneration of the National Concert Hall, consisting of the building of extra facilities in the hall. The NDFA will be responsible for all aspects of the PPP procurement, including the construction period, up to the point of delivery of the new National Concert Hall. A contract notice was published in the Official Journal of the European Union on 29 May and two days ago we had a market launch day in the National Concert Hall, which was extremely well attended by people interested in bidding for this work.

With regard to the Abbey Theatre, the Office of Public Works is progressing arrangements for the international design competition. On successful completion of this competition, the standard pre-procurement work will advance, including the output specification and risk workshops. The public sector benchmark will be finalised and on completion, and assuming all policy matters are addressed, the project will be handed over to the NDFA for procurement.

The NDFA is financial adviser to the following transport projects.On metro north, the NDFA assisted the Railway Procurement Agency in reviewing the public sector benchmark which has been presented to and approved by the RPA board. The tender documents for the infrastructure contract, the rolling stock and the operation contract have issued to the four shortlisted consortia in May 2008.

Metro west will run initially as a light railway with the ability to be upgraded if required and it will run on the ground surface. In July 2007 the RPA selected the preferred route corridor for metro west, which will link Tallaght, Clondalkin and Blanchardstown and will provide a fast commuter service to the airport and the city centre via metro north.

The social and affordable housing regeneration projects are procured by Dublin City Council under the sanctioning authority of the Department of the Environment, Heritage and Local Government. The committee will be aware there has been controversy about some of these housing PPP projects which are stalled at present. These projects differ as follows from what can be described as "mainline" PPP programmes.

The housing PPP projects are essentially land swap deals. In general, in return for Dublin City Council providing a site, the successful bidder must deliver a specific number of social and affordable housing units and community facilities before it can build and sell the private housing and retail units. It is the profit from the private aspects of the development that pays for the social elements. The commercial viability of these transactions is based on the potential revenues from the sale of the private units.

In contrast, the non-housing PPPs are generally based on monthly payments made from the Exchequer to the PPP company, subject to the facilities being available to a set standard for 25 years. The commercial success of the transaction is a function of the PPP company ensuring that it meets the availability standards so as to receive all monthly payments. This is fundamentally different from the housing model, which is requiring the private sector to take the market risk for the sale of the private units.

The NDFA's role as financial adviser is to focus on the value for money test and does not engage in policy matters. The determination of whether to use a PPP or other type of procurement structure on a housing regeneration is not within the NDFA remit.

The phase of the decentralisation project covering areas in Carlow, Mullingar and Portlaoise is being procured by the OPW, with NDFA acting as financial adviser. Macquarie Partnerships for Ireland was appointed as preferred tenderer in January 2008. Planning for all three sites was submitted in April 2008 and is expected to be granted in July 2008, subject to no planning questions or delays. A planning notification was granted for the Portlaoise site on 3 June. The target date for financial close is August or September 2008, post the receipt of planning permission.

Thornton Hall prison involves the development of a new prison complex on the Thornton Hall site in north Dublin for the replacement of Mountjoy Prison. The Irish Prison Service is procuring this project, with NDFA as assigned project manager post-contract. The design development stage is being finalised by the preferred tenderer, Leargas Group. Funder due diligence is to commence afterwards. The planning resolution and environmental impact assessment are currently going through the Oireachtas. Financial close, which is anticipated to occur in the third quarter of 2008, will be dependent on the date on which planning permission is granted in accordance with the Prisons Act 2007.

Chairman

I ask Mr. Paul Carty, chairman of the National Pensions Reserve Fund Commission to make an opening statement. Is it agreed to publish Mr. Kearns's statement? Agreed.

Mr. Paul Carty

I am very pleased to have another opportunity to discuss the work of the National Pensions Reserve Fund Commission with the committee. It has been two years since our last meeting and the intervening period has been an eventful one in the relatively short history of the fund.

In discussing the fund, it is important to bear in mind the reasons it was established and its investment objective. The purpose of the fund is to meet as many as possible of the costs to the Exchequer of social welfare and public service pensions from 2025 onwards when these costs are projected to increase dramatically due to the aging of the population. Projections indicate that annual social welfare and public service pension costs will treble from current levels to some 14% of GNP by mid-century, putting significant pressures on the public finances.

Regarding performance, after several benign years, 2007 saw increased volatility return to the world's capital markets in the wake of the subprime crisis in the US and the resulting credit crunch. Despite this volatility the National Pensions Reserve Fund, NPRF, finished the year in positive territory, earning a return of 3.3%, mainly due to the performance of its equity portfolio. However, the fact that equities held up relatively well in difficult market conditions left them vulnerable to the effects of further credit losses by banks and the crisis spreading beyond the financial sector, as was evidenced earlier this year. While the fund earned a negative return of -10.5% during the first quarter of this year, an equity market rally in April recouped much of this decline and the fund was showing a return of -5.3% for the five months to end May 2008. These figures illustrate how volatile the fund's return can be over short time periods and I will return to this point later in my remarks. Overall, from its inception in April 2001 to end of May 2008, the fund has earned an annualised return of 4.9%, excluding the Exchequer contribution. It has grown from €6.5 billion to €20.5 billion and earned €4.9 billion in excess of the contributions received from the Exchequer.

Regarding our investment strategy, the fund's statutory investment mandate is to secure the optimal financial return provided the level of risk to the moneys held or invested is acceptable to the commission. In seeking to meet this objective the commission has adopted an investment strategy primarily focused on building up a diversified portfolio of equities and other real assets. This strategy is founded on the expectation that equities and other real assets, with a performance linked to economic growth, will outperform financial assets, such as bonds, over the long term. Equities are inherently more volatile than bonds, with sharp performance swings over short time periods and such an asset allocation can expose the fund to high levels of short-term volatility, such as we have experienced over the past year. However, with no drawdowns before 2025, the fund can afford to accept periods of volatility as a trade-off for achieving a long-term return that will make a meaningful contribution to Ireland's future pension costs and the sustainability of the pension system.

It is also important to pay due attention to current investment conditions. This is a particular concern for the NPRF where the annual Exchequer contribution of 1% of GNP, which amounted to €1.6 billion in 2007, forms a significant percentage of overall fund assets. By phasing the fund's entry into the markets and smoothing out the prices at which it purchases assets, the Exchequer contribution is, in itself, a significant volatility dampener. In the uncertain market environment that has persisted since last summer the commission has taken a cautious approach to investing the Exchequer contribution.

Regarding responsible investment, the fund's lengthy investment horizon also means that it is a long-term owner of companies and the commission recognises that the way in which companies manage environmental, social and governance, ESG, factors can affect their long-term performance. Since our last meeting with the committee the commission has made important advances in this regard.

In 2006 the fund was one of the founding signatories to the United Nations principles for responsible investment. The commission has also developed a responsible investment policy with a commitment to active ownership at its core. What this means in practice is that we try to effect change through a detailed programme of engagement with companies on environmental, social and governance issues and through the exercise of shareholders' voting rights. To that end the commission last year appointed Hermes, the executive arm of the BT pension scheme and the UK's largest pension fund, to execute proxy votes on the fund's behalf and to engage with companies on environmental social and governance matters based on the Hermes principles. These are a set of guidelines developed by Hermes that codify a number of expectations between owners and managers and that represent the commission's view of the essential elements of good governance. The appointment of Hermes will help the fund put its commitment to active ownership into practice.

The issue of exclusion of stocks from the fund is often raised when the whole area of responsible investment is discussed. The UN principles reflect the fiduciary duty of investors to their stakeholders as their first responsibility and deliberately do not call for screening or avoiding stocks. In the case of the NPRF, the commission operating under a commercial investment mandate and taking a view as to whether stocks should be excluded for ethical reasons does not form part of its brief. That said, as Deputies are probably aware, the commission agreed to exclude companies involved in the manufacture of cluster munitions from the fund earlier this year. This decision was made in very particular circumstances on foot of a specific request from the Government and in light of the Government's efforts to conclude a legally binding instrument to prohibit cluster munitions. The effect of this exclusion on the fund's risk and return will be marginal. The fund's investments in such companies totalled some €24 million out of a total portfolio of €20 billion.

On investment in Ireland, while the commission is required to make investments with a view to generating a commercial rate of return and the majority of funds are invested internationally, it seeks to invest in Ireland where such investment is consistent with its commercial investment mandate. Currently some €590 million or 3% of the fund is invested in Irish equity and debt securities. In addition to this figure the fund has also committed some €60 million to a small number of Irish venture capital firms, subject to their meeting a number of conditions, principally to do with fund size. A particular issue that arises from time to time is investment by the fund in Irish infrastructure. We would like to invest in Irish infrastructure and infrastructure forms part of our target asset allocation. One of the factors that would seem to have prevented us accessing this market is that until now there does not seem to have been any shortage of capital. However, the tighter lending environment brought about by the credit crunch may lead to more investment opportunities for us. This is an area we are actively looking at.

The pensions issue is of critical importance and has moved towards the top of the public policy agenda in recent years, as was underlined in 2007 with the publication of the Government's Green Paper on pensions. The commission is committed to playing its part in addressing the substantial challenges that lie ahead as the population ages through effective management of the National Pensions Reserve Fund. This will include navigating through difficult investment conditions from time to time as has been amply demonstrated over the past year or so. In such circumstances it is imperative that we maintain our focus on our fundamental investment objectives and on pursuing and implementing the investment strategy most suited to the attainment of those objectives.

Chairman

We will open proceedings by asking Deputy Clune to contribute.

Deputy Deirdre Clune

I will first concentrate on the National Pensions Reserve Fund. There is much concern in this area and the Secretary General of the Department of Finance recently told this committee that the commitment to serving and retired public servants had exploded. He quoted a figure of €75 billion and we know that half of all workers do not have a private occupational pension. Are the projections still in line or have they changed? Have the accounting procedures changed? I read somewhere that the expected commitment to the State and public service pensions has expanded beyond what was originally envisaged when the fund was established.

Mr. Paul Carty

As Dr. Somers mentioned, in 2025 the fund could be worth €140 billion. In terms of the exercise at the moment, it was always felt that this would only meet between 25% and 30% of the total liabilities that will arise by that date. Exercises will be done to try to quantify in numerical terms what the liabilities are. In general terms, only part of the problem, between 25% and 30% of liabilities, will be dealt with.

Deputy Deirdre Clune

Does the National Pensions Reserve Fund Commission intend to review this?

Mr. Paul Carty

Yes. Within our mandate we have occasion to look at that area and will do so in the next 12 months.

Deputy Deirdre Clune

It is provided for in the Act that reviews be carried out.

Mr. Paul Carty

Yes; we will do so. That is being considered.

Deputy Deirdre Clune

Was there any input into the Green Paper on pensions?

Mr. Paul Carty

No. Our main concern is that the funding that comes from the Exchequer is invested by the commission within the terms of the Act to get the optimum return with a risk that is acceptable to the commission.

Deputy Deirdre Clune

One point struck me with regard to the review. Will it focus on the commitments anticipated to be required?

Mr. Paul Carty

Yes, it will look at all of those matters, including life expectancy, age profile, birth rate and so on. It will be a detailed exercise.

Deputy Deirdre Clune

Therefore, this will be done in the next 12 months.

Mr. Paul Carty

Yes.

Deputy Deirdre Clune

When was such a review carried out prior to the establishment of the pensions fund?

Mr. Paul Carty

In 2001, when this pensions fund was set up, the indications were that it would only meet 25% to 30% of the ultimate liability. It is only a small part, as the Deputy can see.

Deputy Deirdre Clune

Yes; I anticipate major problems in this regard. We have had a rocky year economically on a global scale. I have been looking at the 2006 annual report of the National Pensions Reserve Fund Commission, which mentioned the breakdown in terms of property, equities and cash, with targets up to 2009. Is there flexibility within the system, whereby this can be changed, depending on economic circumstances?

Mr. Paul Carty

Most certainly. The commission is very cautious. In the current economic climate caution is important. We take tactical decisions in terms of our targets. We set out our targets for 2009 in the 2006 annual report; they are mentioned on page 7. This is a gradual process. For example, we are underweight in terms of equities and overweight in terms of cash. In today's terms, our proportion of cash would be about 7%, or about €1.4 billion. We are holding back.

Deputy Deirdre Clune

Yes. Therefore, there is flexibility.

Mr. Paul Carty

We would certainly apply caution. Our targets for private equity investment and property are both 8%.

Deputy Deirdre Clune

Would the property element change now?

Mr. Paul Carty

I should emphasise that when we say property, we are not referring to direct investment in property. It is done through managers. There are managers worldwide who invest in private equity and properties. We would have a very small percentage. It is not a direct investment. We would slow our investment in that area if we thought — as we do — that the opportunities might not be right for us. We are behind our targets in terms of private equity and property. We have a property exposure of about 3.8%, compared with the 8% target. We slow matters down and apply caution.

Deputy Deirdre Clune

That is good. I would also like to ask about public private partnerships and the NDFA.

Chairman

I have a question on investments. Does the National Pensions Reserve Fund have a separate audit committee?

Mr. Paul Carty

Yes. There is an audit committee represented by commissioners other than myself — as chairperson I cannot be on the audit committee — and Dr. Somers, who is also excluded. The committee actively meets and reports at our quarterly meetings. The reports are very detailed. The whole control environment is critical, not only to the pensions fund and the commission. In the whole NTMA audit, control is essential in the light of what we see happening around the world. We have an internal auditor in the NTMA; we have PricewaterhouseCoopers, as the Chairman mentioned; and we have the Comptroller and Auditor General. Control is focused not only within the NTMA generally but also in the pensions fund and the individual segments within the organisation.

Chairman

Was a reassessment of investments carried out? I note that the list of investments includes Northern Rock, Babcock and so on.

Mr. Paul Carty

Yes.

Chairman

Has the NPRF carried out a reassessment of its portfolio since the episodes concerning these two companies?

Mr. Paul Carty

Yes. It is important to stress that we are taking a long-term view. The fund is focused on 2025. There is high liquidity. We have passive and active investments. Passive investments are those for which we appoint managers who invest in line with indices such as the FT index, as distinct from specific shares. In this regard, we are taking a long-term view over the next 20 years. We recognise that we will have volatility and situations where individual companies turn out not to be as good as one would have hoped. We will have situations where there will be outperformance. We have invested in about 2,500 companies through active and passive management and 20 managers worldwide. Matters are very diversified to take into consideration the risk that applies, even in these volatile situations. That is why, since our last meeting, we have moved to alternative assets. We are looking at private equity and property for which the returns are likely to be better, as well as commodities. Diversification is essential in assessing risk.

Chairman

I must apologise for the absence of committee members, but with volatility in the financial markets, there is volatility in the Dáil.

Mr. Paul Carty

I understand.

Deputy Deirdre Clune

There has been some questioning of public private partnerships recently. Mr. Kearns spelt out clearly in his opening statement the benchmark used. In the 2006 report I notice that the value of non-public private partnerships was €52 million, while that of public private partnerships was €945 million. In the report updating the position in 2007 the balance in terms of numbers had changed, but what about values? Is there still such a contrast?

Mr. Adrian Kearns

The value of non-PPP projects is still a lot higher. The traditional mode of procurement is still very popular compared to the PPP mode. In Britain, among public investment projects, PPPs, or PFIs as they call them, are about 15%, but in Ireland, as in Germany, they are only about 4% to 5% of the total. We still have a long way to go to increase the proportion of PPPs among public projects. They are becoming increasingly popular and may become more popular still. One of the advantages is that we can pass a certain amount of risk to the private sector. As members know, there are three types of risk: there is construction risk, where something goes wrong at construction stage; availability risk — for example, the roof might blow off after the project has been finished and the builder has gone; and demand risk — for example, the risk that there will be no pupils for a school. The State always has to carry the latter risk. It must always assure the developer that there is a throughput. However, the other risks — availability and construction — should be carried by the private sector builder. The big advantage is that if something happens in one of these areas — for example, if a builder forgets to provide for damp coursing in a school or, as happened notoriously a few years ago, the roof blows off a project — the builder's unitary monthly payments can be stopped if he or she does not come back to fix the problem. That does not happen in the case of traditional projects. PPPs are advantageous in that regard.

Deputy Deirdre Clune

I notice in the report for 2006 that the criminal courts complex has been awarded to Babcock & Brown. Is that the same company being discussed in the media at present?

Mr. Adrian Kearns

That is correct.

Deputy Deirdre Clune

Is it not the case that the company is experiencing a serious lack of confidence from investors as reflected in the halving of its share prices?

Mr. Adrian Kearns

Those contracts would be sealed in, meaning that the builder, the developer and the bank, as part of an integrated package, would already have put money up front to do this. I am sure the Deputy has seen the development at the corner of the Phoenix Park which has proceeded very well and is taking a distinctive shape on the Dublin skyline. We are not aware of any problems regarding that project. It has gone ahead even more quickly than might have been anticipated. It is a very good project. I am not aware of any——

Deputy Deirdre Clune

There is no lack of confidence?

Mr. Adrian Kearns

I am not aware of any.

Deputy Deirdre Clune

What if a contractor were to default on a project? I am thinking of the McNamara situation as recently reported in the media, although I recognise that housing is different.

Mr. Adrian Kearns

There have been cases where a contractor finds difficulties. Down in Cork——

Deputy Deirdre Clune

There was the Cork School of Music.

Mr. Adrian Kearns

——there was the Jarvis contract for the National Maritime College and the Cork School of Music. In that case a new contractor, Hochtief, stepped in quite seamlessly and took on the reins. Those projects were both completed very smoothly.

Deputy Deirdre Clune

What was the original company?

Mr. Adrian Kearns

I am not aware which was the company in question but in that case there was no loss to the contract, to the State or to the sponsor because of what happened. If a new developer could not take over and the original one had left the scene unitary payments would be cut off straightaway. Unlike the traditional situation where a contractor gets into trouble after getting money from the site and the building of the contract and subsequently making off with it before going out of business, in these circumstances at least the unitary payments can be stopped. The State has, therefore, a strong power of suasion over the contract.

Deputy Deirdre Clune

There is another area I wish to cover, that of claims. Dr. Somers mentioned in his opening statement that there was a real challenge in respect of medical claims. This was raised at a previous committee meeting and a risk management scheme was to be put in place. Has that happened? Most cases we hear about concern obstetrics and pediatrics.

Dr. Michael Somers

The State claims agency started out dealing with claims against Ministers, the Attorney General and such like, and employers' liability. That was extended to cover hospitals and doctors. In addition to dealing with claims there was the further function of trying to reduce the number of claims, identifying where they might arise and doing something about that.

We had to set up two units, the clinical indemnity scheme, which has two medical doctors and four nurses, and another which is headed by an engineer and deals with other types of claim. Their role is to try to see where cases occur. All incidents that occur in hospitals are reported to us and we attempt to identify if a cluster of claims is arising in a particular area and, if so, whether we are in a position to do something about those claims.

We have been reasonably successful in the non-medical area, where the number of claims has dropped quite dramatically. On the medical side it is still a major problem and a great number of claims still come in to us. We are trying to do what we can. Mr. Ciarán Breen, who heads the State claims agency has sent some of our staff into hospitals to see what is happening in certain areas. We receive detailed reports when some particularly awful accident occurs and we try to see what lessons may be learned from it.

We are small players in this. The new organisation, Health Information and Quality Authority, HIQA, is supposed to introduce better standards in hospitals. Awful things can occur and we have people who spend their time trying to settle these claims. Some cost a great deal of money, in particular claims relating to cases of cerebral palsy. There are lesser cases also. Mr. Breen outlines the more difficult cases to us every Monday at a meeting of management. Many of them do not make pleasant reading and the question is whether anything can be done.

If there is anything we can usefully do to reduce the number of such incidents occurring in hospitals obviously we shall do it. They will not go away, however. The situation of MRSA infections will turn up in time and we do not know how that will pan out. We know of at least one legal firm building up towards a class action against us in respect of MRSA. We can win or lose these cases and the outcome will be decided on a particular major test case.

The issues are there and people have different solutions. Should there be a large number of single-bedded rooms for people or is it a question of better standards of cleanliness? That is one of the less gruesome types of case we encounter.

Deputy Deirdre Clune

Does Dr. Somers have any idea of the potential liability of the State? I do not mean only financial exposure.

Dr. Michael Somers

We reckon our total exposure at the moment in respect of all claims to be about €0.5 billion. Mr. Breen might be in a position to give us a figure in respect of MRSA.

Mr. Ciarán Breen

At the moment we have a relatively small number, about 100 cases. If that grows exponentially, which could happen if there were an adverse court finding and we were to have in the order of, for instance, 1,500 such claims, we could certainly be heading up to €0.5 billion, inclusive of costs, if these cases had to be settled.

Chairman

I am mystified by that estimate because the Department of Education and Science was before the committee on 17 April and, reporting on the computed potential liabilities of the residential institutions redress scheme, the Secretary General told us that the potential exposure of the State was €1.1 billion. Therefore, Mr. Breen's estimate of a total possible exposure of €0.5 billion in all areas does not seem to fit. How does that equate to the reserve fund? Mr. Breen stated that fund stood at €314 million in 2006. How does he tally his evidence now that there is a total of €0.5 billion?

Mr. Ciarán Breen

The difference might be explained in the following way. I understand that in the residential institutions redress board the average award is in the region of €65,000 per applicant. There are some legal costs on top of that. We are looking at a situation where — I am not saying that this will necessarily happen but base it on the eventuality of an adverse court finding — the courts would award a much higher figure, a multiple of the €65,000 figure applying in the case of the residential institutions redress board. There would be considerable legal costs of top of that. We are looking at the situation in terms of what likely court awards might be in individual cases, with legal costs of both plaintiffs and defendants added.

Chairman

The reserve fund in 2006 was €364 million.

Mr. Ciarán Breen

That was against all clinical indemnity scheme premises——

Chairman

How does the fund stand now?

Mr. Ciarán Breen

It currently stands at €565 million, of which €449 million is designated against clinical claims. At the moment, however, a very limited number of MRSA claims is reserved within that figure.

Chairman

Regarding the computed estimate by the Secretary General of the Department of Education and Science of €1.1 billion for the residential institutions redress scheme, how will the agency plan for that?

Dr. Michael Somers

We are not responsible for the redress board. Those figures are separate from those with which we actually deal. The residential cases are being dealt with by a redress board which will award compensation. We deal with abuse cases that arise in non-residential institutions of which, hopefully, there will not be too many. We operate in the usual legal confrontational way when dealing with cases but we do not deal with the redress board. The Department of Education and Science may have another €1.5 billion to pay out, which is, by and large, separate from that with which we are dealing.

Chairman

I understood the agency was dealing with all claims on behalf of the State.

Dr. Michael Somers

No, only where there is a claim, but we are not dealing with the redress boards, which are separate. The redress boards settle cases, whereas we are confrontational — we have to be — rather than settlement oriented.

Deputy Deirdre Clune

There was an article recently in the newspaper about a sex abuse case in a school. The victim claimed the State was liable in that instance. Will the agency be dealing with those types of cases? That is another area where there would be many——

Dr. Michael Somers

This is the Ms Louise O'Keeffe case which has been heard by the Supreme Court. It has reserved judgment in that case. There are approximately 100 other cases which will either proceed or fall depending on the Supreme Court decision in that case. The High Court decided on four or five occasions that the Minister for Education and Science is not responsible for what teachers may do to pupils, because the Minister does not appoint them. They are appointed by the school manager, the local parish priest or bishop. The question is where does one sue? So far, the High Court has held that the Minister is not responsible and much will depend on what the Supreme Court decides.

Deputy Deirdre Clune

There have been some terrible medical cases in the areas of obstetrics and paediatrics which are very sad for the families and individuals that suffer. Is there any consideration given to a "no fault" compensation arrangement, which was discussed several years ago?

Dr. Michael Somers

This seems to arise every so often and is considered but I am not sure of the current position of the Minister for Education and Science. One of the issues raised was, if this was the arrangement for one type of illness, whether one would have to extend it to many other mishaps and accidents that may occur. I am not aware that anything is likely to happen in the near future on that front.

Deputy Deirdre Clune

Does the agency deal with claims on a case-by-case basis?

Dr. Michael Somers

Yes, we would receive a solicitor's letter and that would frequently be the start of a case. I note there is now the concept of enterprise liability whereby there are not separate legal teams for the nurses, doctors and the hospital. One legal team covers all parties on behalf of the State. We have, at least, been able to cut down on legal costs with this development.

Chairman

I will ask Deputy Collins to speak shortly. Dr. Somers referred in his opening remarks to the banks' lack of transparency affecting the real economy. This is an implied criticism of the banks and their lack of transparency in dealing with the credit crisis. Could Dr. Somers elaborate on this point?

Dr. Michael Somers

The situation came out of the blue last August or September when the subprime mortgage crisis suddenly arose in the United States. The question was who would lose money as a result. This arose where so-called teaser mortgages were extended. These are loans at a very low initial rate of interest and then, after one or two years, the interest rates rise. People frequently could not afford the initial low rate of interest, never mind the high rate. The banks in many instances extended these loans to people. They put all these loans into a special fund, securitised the fund and sold off the liability to many other investment institutions. They did not succeed in selling off all of them. As people began defaulting on their mortgages, the question was what the level of the default would be. That created significant uncertainly within the whole banking system because as losses began to emerge, nobody knew what the extent of these would be. If a bank revealed a loss, people, obviously, worried about whether they should leave money with it.

The inter-bank market then began to dry up. Typically, banks lend to each other for periods of three to six months and sometimes longer. As they began to lose confidence in each other, that period began to fall quite dramatically. The banks initially revealed fairly small amounts of loses and write offs. As time went on, people began to probe and the loses began to get bigger. UBS has written off $38 billion. That is extent of the losses it incurred. Nobody was quite sure where this would end. The figures are staggering. The International Monetary Fund said the total could reach as high as €1 trillion.

This has not affected the Irish banks as such. They had enough business from extending normal mortgages and so did not have to work very much in this market. The problem is mainly with the US and European banks. Our local banks have not been involved. On the other hand, they have got some of the backwash, because the interbank market as we knew it in the past has really ceased to function. Credit is very hard to get and we have seen, even here, that the terms which people have to accept to get a mortgage have deteriorated. The 100% mortgage has, by and large, disappeared and rates have been increasing. We hear that the European Central Bank rate is 4%. In fact, that rate is largely for very short money. If one borrows money for three months, the interbank rate is closer to 5% and the banks must then add their spread and so on.

To give an example, there was a report yesterday that Bank of Ireland issued a new three year floating rate note. This is a note that will be redeemed in two years time, but carries a rate of interest which changes every three months. It is paying just more than 1% per annum on top of the inter-bank rate, which is pushing towards 5%. Its cost of funds will be approximately 6%. By the time it adds on margins and so on, obviously it does not bode well for those trying to borrow money for mortgages.

There is generally a tightening of credit. We met one of the vice chairmen of a major investment bank in the United States last October or November. It had just written off $3 billion in losses. The bank said that was the extent of it, that it was upfront and that the chairman and chief executive is a great guy who is upfront and open. He further said, by the way, that the shares were a great buy at $65. Almost one month later those losses had completely ballooned, the chief executive was gone and the shares had fallen to $40. That is the kind of lack of transparency that——

Chairman

Did the agency buy some shares?

Dr. Michael Somers

We did not. The concern is that nobody knows the extent of the losses these banks will have to produce and what they must do in terms of recapitalising. These losses will hit the balance sheets and they will not be able to extend credit. They seem to be relying now, to a large extent, on wealth funds in the Far East to provide capital so they can resume business. The big problem is the loss of confidence and the fear is this situation could last for another 12 to 18 months before the system starts going again. The fact that the banks are not in a position to lend money feeds into the real economy, because it is very hard for businesses to raise the money they need, especially for any kind of business that is risky. As interest rates have effectively ticked up, credit costs more anyway so the fear is that this will lead to some sort of global reduction in growth rates. The whole system then suffers as a result.

Chairman

I understood when Dr. Somers mentioned the lack of transparency affecting the economy he was referring to the Irish context.

Dr. Michael Somers

No, the Irish banks are reasonably open and there is no suggestion they have significant embedded losses. They did not really get into this business to any great extent.

Deputy Niall Collins

On public private partnerships, the Limerick tunnel was mentioned as one of the projects for which the National Development Finance Agency has responsibility. The people in the mid west were told the public private partnership would bring on the project faster and that because it was not a priority for the State it could be done through that model. It will be a tolled road infrastructure and a tunnel under the River Shannon. People hate having to pay tolls. Has consideration been given to a model of public private partnership where the developer will develop the infrastructure and get his rate of return over several years and where it will revert in time to State ownership without having to be bought out as is the case with a project in Dublin?

Mr. Adrian Kearns

The National Roads Authority was responsible for the Limerick tunnel PPP. Tolls on bridges, tunnels or roads are always controversial. The reality is that where one can toll a bridge or tunnel it is done because the developer will get a quick return. That is not to say that every infrastructure can be tolled. On some roads one can still have a PPP project, as the Deputy suggests, without a toll so long as the developer takes a certain amount of risk. He does not necessarily have to be paid from the toll, he can be paid by unitary payments like any other PPP project.

In this case the NRA decided this should be a PPP. It could point to areas such as the Drogheda by-pass and other roads infrastructure, including, Kinnegad, where the company concerned was able to complete the project within budget well before schedule. In these cases, the NRA would be very pleased with the result. I would not necessarily rule out variations as suggested by the Deputy. There is only a limited number of cases where tolls are involved because tolls are not suitable in many cases. In that case a toll was decided upon, on the basis that if people are prepared to pay the toll to save a great deal of time in getting from A to B, they will use it. The developer will see that it is a profitable option. Whether at some stage that should run out and should revert to the State is a possibility that should be considered.

Deputy Niall Collins

Does the National Development Finance Agency actively look at it as a model to move forward and to learn the lesson? I appreciate what Mr. Kearns has said about Limerick. It will be a toll road indefinitely and people are concerned. I gave the example in Dublin where the State has to buy out a project. Is that issue at the back of the mind when assessing PPP projects at present, including those awaiting assessment?

Mr. Adrian Kearns

The basic rule is that all PPP projects revert to the State after 25 years. As financial adviser, when we look at a project we consider whether that project should revert or run on. After a certain period, the State should get complete use of that project or facility. In other words, a toll company should not go on saecula saeculorum taking money from users.

Deputy Niall Collins

My other question is in regard to PPPs and the provision of school buildings which are mainly secondary schools. There are plenty examples of primary schools way below standard in a modern age such as in Kilfinnane in my constituency, in north Cork and around Blenerville and in Tralee and places like that. I have asked the Department of Education and Science to upgrade them but it cannot do so under its schools building programme. I asked why it could not be done under a PPP model and they said that generally primary schools are on the same campus as large secondary schools and where there has been an amalgamation of large secondary schools. Is the National Development Finance Agency looking at a model where it can offer a bundle of primary schools to the market?

Mr. Adrian Kearns

We have to take what we are given by the Department. The policy maker in this is the Department of Education and Science. It decides on what schools are to be given to us for PPP procurement. For example, in one of the bundles, either the second or third bundle on which we are going forward to do a PPP, there is a national school.

Deputy Niall Collins

That is in Limerick.

Mr. Adrian Kearns

Yes. In principle, I do not see any reason national schools should not be bundled in the same say. Of all Departments, the Department of Education and Science is more accustomed to bundling towards a PPP result than most others and is more geared up for it. So far as we are concerned, if we are told to go out and get a bundle of national or other schools we would be happy to do that. As the Deputy rightly hinted, the only inhibition on PPP companies in providing schools is that a school may not be of a high enough value for a PPP to get involved. That is where bundling comes in as the Deputy suggests. If there was a sufficiently big bundle of national or other schools to make it worthwhile for the market to compete — there is much documentation with PPP projects — there is no reason those schools should not be involved.

Deputy Niall Collins

In regard to the valuation process — I forget the terminology — Mr. Kearns compares like with like.

Mr. Adrian Kearns

Public sector benchmarking.

Deputy Niall Collins

In terms of evaluation of PPPs for schools, does the National Development Management Agency factor in a social factor given that children are being taught in slum-like conditions in many schools? Is allowance made for the social element? I appreciate it is a finance management agency.

Mr. Adrian Kearns

We do not, unfortunately. It is the policy makers in the Department concerned that decide that particular schools should be replaced or replenished. It then gives it to us to procure and we can also do the financial analysis. The Department has to give it to us. We take it as a given then.

Deputy Niall Collins

It is a crude number crunching exercise that is done by the National Development Finance Agency rather than bringing in the social factor and the fact that the school is——

Mr. Adrian Kearns

Basically, we try to see what would be the cost of producing this in comparison with the traditional way of doing it. I would argue that once the policy is made to do it, the PPP approach for a school or bundle is better than the traditional way. It will be quicker. In the public sector benchmark, it is assumed the State does not have to pay anything where in the PPP approach the full charges by the bank are brought to bear on the PPP elements. The PPP approach has a handicap when it starts, yet it still able to beat, in many cases, the public sector benchmark.

Deputy Niall Collins

I thank Mr. Kearns. To return to the Limerick tunnel, did Mr. Kearns say it would revert to full State ownership?

Mr. Adrian Kearns

As I understand it after 25 years.

Deputy Niall Collins

I have a couple of other questions on the State's claims agency. The figure we had for 2006 was 3,900 claims which has risen to 4,500? Is that correct?

Mr. Ciarán Breen

Yes.

Deputy Niall Collins

What is the breakdown? The analysis we have shows employer and public liability claims. What is the breakdown for employee and public claims?

Mr. Ciarán Breen

The breakdown is as follows.

Deputy Niall Collins

The third element obviously is the clinical one which I think we have covered already.

Mr. Ciarán Breen

Some €116 million is allocated against the total number of empoyers' liability and public liability claims. Of 72% of all employers' liability, public liability and property damage claims, the Garda Síochána accounts for 30.5%, the Defence forces account for 29% and the Irish Prison Service accounts for 12.5%. The biggest category of claimant is members of the public, who account for 44%.

Deputy Niall Collins

Is Mr. Breen saying that of 4,500, 44% are members of the public and the balance are employees of the State?

Mr. Ciarán Breen

That is correct, yes.

Deputy Niall Collins

Regarding the processing of the claims, does the State Claims Agency use the Personal Injuries Assessment Board? Are many of the claims referred through the PIAB or is the agency out of the loop in that regard?

Mr. Ciarán Breen

No. We are like any other indemnifier or insurer. In the first instance the claim will go into the Personal Injuries Assessment Board even if it is against——

Deputy Niall Collins

All claims go through it?

Mr. Ciarán Breen

Yes. The Personal Injuries Assessment Board will then come to us and ask us if we are happy for them to assess the claim.

Deputy Niall Collins

What level of claims are dealt with to finality at the PIAB?

Mr. Ciarán Breen

Of our claims?

Deputy Niall Collins

Yes.

Mr. Ciarán Breen

Approximately 10% to 12% of our claims will go through the PIAB process, the reason being that in many instances, as the Deputy can imagine, including, for example, in national schools, the Minister is frequently added as a defendant and it is clear he should not be a defendant because boards of management are the liable party. We would not consent to those type of cases being assessed by the PIAB. Many of our cases, because of their very nature, are out of the PIAB process but we do have approximately 12%.

Deputy Niall Collins

Is it a tactical move by the claimant or their legal advisers to add the Minister or the State to avoid the PIAB?

Mr. Ciarán Breen

No. Many of those cases are settled afterwards, directly with the insurer in any event or where the insurer agrees that it will indemnify the State and deal directly through the PIAB process with the claimant. It is more a case of looking for surety on the claimant's part.

Deputy Niall Collins

I have two brief questions for Dr. Somers. Has the National Treasury Management Agency taken over the banking and treasury of the Health Service Executive? I understand that was on one of its to do lists.

Dr. Michael Somers

No. We were asked by the Department of Finance some years ago to do a review of the financial operations of the HSE to see if certain improvements could be made and if money could be saved. We asked a former colleague of ours, an ex-banker who headed up a bank in Dublin, and he did a report on that which made certain recommendations. We sent the report to the Department of Finance. That was the totality of our involvement with that exercise.

Deputy Niall Collins

The NTMA has not taken over any of the treasury management function of the HSE.

Dr. Michael Somers

Of the HSE?

Deputy Niall Collins

Yes.

Dr. Michael Somers

No. We do not have that ambition either.

Chairman

Dr. Somers mentioned that the review was completed in 2006. Is he saying he submitted it to the Department of Health and Children?

Dr. Michael Somers

No, to the Department of Finance. I believe it examined it.

Deputy Niall Collins

Could we get a copy of that?

Dr. Michael Somers

I have no problem about giving a copy. Perhaps the correct procedure would be to get it from the Department of Finance. Some of the recommendations in the report would not be that easy to implement. There would be questions of reduced staffing levels and such like, which are never very acceptable to organisations.

Chairman

Did Dr. Somers believe the HSE was overstaffed?

Dr. Michael Somers

Our colleague came to the view that there was scope to make reductions in the number of people on the finance function, which is all we were asked to look for. There was also a question of a very large number of bank accounts and we reckoned that there could be efficiencies regarding shrinking the number of such accounts in terms of administration, etc.

Deputy Niall Collins

Professor Niamh Brennan did a financial review of the health boards at the time of the creation of the HSE. Was the report undertaken by the NTMA separate to that of Professor Niamh Brennan?

Dr. Michael Somers

Yes. Ours was a specific report that we were asked to do by the Department of Finance. At the time there was a concern that in having many bank accounts there could be small amounts in different accounts that might not be earning money because they were left there overnight and that if they were all amalgamated interest would be earned, or at least interest would not be paid on overdrafts or whatever, and also to examine what the consequences would be in terms of trying to save money. If there are fewer accounts matters could be simplified and there should be savings emerging out of that.

Deputy Niall Collins

Has the NTMA taken over the private property accounts of patients of the HSE?

Dr. Michael Somers

No. We are providing assistance in terms of the way some of that money should be managed and how it could be invested.

Chairman

In fairness to Deputy Collins he has raised a valid issue about the recommendations the NTMA made in its review of the HSE.

Dr. Michael Somers

Yes.

Chairman

At a time when frontline staff are being let go it might be interesting for us to assess the report. Could Dr. Somers arrange for the NTMA or the Department of Finance to supply the committee with a copy?

Dr. Michael Somers

Yes.

Chairman

We might ask the Department of Finance for a copy of the report.

Dr. Michael Somers

I should mention, Chairman, that the man who did that report is now the chairman of the Irish Financial Services Regulatory Authority — the Financial Regulator. I presume it does not cause him any problems in that regard.

Deputy Darragh O’Brien

I thank the witnesses for the presentations and apologise for missing two of them because of what was happening in the Chamber.

On the National Pensions Reserve Fund, Deputy Clune asked earlier if the commission made any submission to the pensions Green Paper and Mr. Carty said it did not. Was there any reason for that or is the commission precluded from making a submission?

Mr. Paul Carty

Our mandate clearly sets out——

Deputy Darragh O’Brien

The commission is precluded from doing so.

Mr. Paul Carty

Yes.

Deputy Darragh O’Brien

With regard to the expected pensions liability at mid-century, all of us agree that the pensions reserve fund is a step in the right direction. When we consider the annualised returns since inception in April 2001 they would stack up very well, particularly this year, and the commission and all agencies must be commended for that.

Regarding the shortfall that will happen in terms of the State meeting its pensions liabilities, the fund will probably reach approximately 25% by mid-century according to the report. Does the commission have any interaction with the Pensions Board or with other agencies? As mentioned earlier by Dr. Somers, the commission has a broad range of experience within its organisations. Has it any interaction with the Pensions Board or the Department with regard to other measures that could be taken to bridge that gap by mid-century?

Mr. Paul Carty

I should mention, and Deputy Clune mentioned it also, that in section 6 of the National Pensions Reserve Fund Act there is a requirement to commission from time to time independent valuation of the assets of the fund. It goes on to refer to communicating with the Minister for Social and Family Affairs and "... to commission, from time to time, independent assessments of the investment performance [of the Fund]". It refers also to the profile of what the liabilities will be. As I mentioned, that exercise will be done shortly. There will be a relationship with the Departments and with other——

Deputy Darragh O’Brien

When Mr. Carty says "shortly"——

Mr. Paul Carty

Within the next year.

Deputy Darragh O’Brien

How often are the asset managers we are using reviewed in terms of their performance?

Mr. Paul Carty

They are regularly reviewed by the operational side on a regular basis. Every time the commissioners meet an assessment is made of all the performances of the managers. We get an attribution report every month setting out the performance of each manager. They are regularly reviewed and decisions are made. Whether one might change them or leave them, they are regularly reviewed and the performance is regularly——

Deputy Darragh O’Brien

We have only two Irish asset managers according to the report.

Mr. Paul Carty

Yes.

Deputy Darragh O’Brien

Irish Life and Bank of Ireland Asset Management, BIAM. In that regard, when is the last time an asset manager was sacked?

Mr. Paul Carty

I would not use the word "sacked". Not reappointed.

Deputy Darragh O’Brien

Not reappointed.

Mr. Paul Carty

We would look at that regularly. There can be three or four a year.

Deputy Darragh O’Brien

That is good to know.

On the full management costs across the market, I realise this might be a difficult question because the commission has different segments including equities, cash, property and so on but what type of percentage fund management costs are we paying in terms of the overall fund? The fund was valued at €21 billion in December 2007.

Mr. Paul Carty

The total costs come to approximately 0.27% of 1%.

Deputy Darragh O’Brien

I have a few further questions on the commission's investment strategy in terms of ethical funds. I raised this matter with Mr. Carty previously. I appreciate it can be difficult when investing such large sums of money to check this aspect with each of the companies involved. What is the commission's investment strategy regarding ethical investments?

Mr. Paul Carty

The commissioner's mandate is very strict within the terms of the Act. Our mandate is to get the optimum return. The question of our screening of considering ethical issues does not come under the ambit of the Act. Our mandate does not require us to screen in this respect. As I mentioned, there was a case regarding investment in the manufacture of cluster munitions. A big event on that issue was held in Croke Park at which 100 countries were represented. We were asked to examine this issue. We had to examine it carefully from the point of view of securing the optimum return on investment. In light of it accounting for €24 million of a €20 billion portfolio, it would not have materially affected the returns we would get.

Deputy Darragh O’Brien

To what did that €24 million relate?

Mr. Paul Carty

It related to the manufacturers of cluster munitions in which we had invested. I understand there were six or seven of them. Very small percentages were involved.

Deputy Darragh O’Brien

Therefore, the commission's remit does not in any way require such consideration and it seeks optimum returns on investments regardless.

Mr. Paul Carty

Yes, but we engaged in terms of agreeing to the United Nations Principles for Responsible Investment. We were one of the founding signatories to it and now 130 countries have done so. We set out our involvement in that regard. As I mentioned in my statement, we have also employed Hermes, a subsidiary company of BT, to meet the various companies in which we invest if environmental, social and governance issues arise. I know of one such case in India where cheap labour was employed. Hermes met the people concerned. We believe it is better to engage by communicating with these people than screening them. At the same time, there is strength in 130 members of pensions funds having signed up to those principles in that we all take the same advice from the one source. We make representations in this regard.

Deputy Darragh O’Brien

I understand the commission's remit is to secure the optimum returns on investments. The annualised returns since 2001 would stack up very well, particularly given the market volatility in the past year. In the Irish market in particular and in other European markets, more people look towards ethical investments such as stewardship funds. As companies are screened regularly, better returns tend to be derived. However, given that such screening is not part of the commission's remit, can I take it that when the commission is selecting a stock or a fund manager——

Mr. Paul Carty

I will explain that. To take the example of our total investment portfolio in equities, there can be divided into passive and active equities. A greater percentage of our equities are in passive equities. The word "passive" in this sense means that the manager is given the funds and he or she invests in the index.

Deputy Darragh O’Brien

I understand that; he or she tracks a index.

Mr. Paul Carty

Yes, he or she tracks an index and within that index, one could have——

Deputy Darragh O’Brien

I understand that completely because one cannot change what is in the index.

Mr. Paul Carty

Yes.

Deputy Darragh O’Brien

What I am talking about is specific active asset management.

Mr. Paul Carty

We do not give any instruction not to screen such companies. No instruction is given in respect of them.

Deputy Darragh O’Brien

I will brief in raising a few other points. I do not want to labour the point but I wish to return to the example of the companies involved in the manufacture of cluster munitions. I accept that such investment represented a tiny percentage of the commission's investment. It was discussed at a meeting of the Joint Committee on Foreign Affairs that we were considering not investing in certain companies. It could come to light that another company is involved in the manufacturing of an aspect of cluster munitions. Therefore, the commission must closely monitor legislation——

Mr. Paul Carty

Absolutely.

Deputy Darragh O’Brien

——to ensure that when a change in introduced by way of legislation or by the Government signing up to some measure that it will accordingly immediately change its investment strategy.

Mr. Paul Carty

I will give the example of the Norwegian fund. The commission there has an ethical committee separate from the commission which does that screening, but it has not relationship to the commission. That is the way the Norwegians approach this aspect.

Deputy Darragh O’Brien

I have one final question on the reserve fund. What is Mr. Carty's view on geared assets? Does the commission invest in any geared equity funds or geared property funds?

Mr. Paul Carty

There are equities and in the case of private equities and property investments; we had a target of 8% in respect of each in 2009. In respect of these, we would invest in companies such as Blackstone, Apollo or KKR. We are a limited partner and, therefore, we have no activity in or management of such equity investment. We have a small percentage in that respect. Such investment is long term and can vary from five to seven to ten years. We have no control over what is taking place within the fund. There would be leverage in the fund. However, we would be conscious that there would not be leverage of a factor of 50 or 60. Therefore, we only pick the best. However, we have no control over the general partner in making his or her commercial decisions, whether it be a large buy-out of Boots chemists. There is a huge leverage in respect of Allied Boots shares over the level of which we would have no control.

Deputy Darragh O’Brien

I have two brief questions for the National Development Finance Agency.

Chairman

I wish to ask Mr. Carty about another matter. On the last occasion he appeared before the committee, some of the members — most of whom have left to attend meetings of other committees or have been promoted — expressed concern about investment in tobacco companies and asked that he review such investment. The commission's portfolio for the United Kingdom includes the Imperial Tobacco Group shares. The Gallagher Group is also listed and I wonder if that is the tobacco company.

Mr. Paul Carty

I will clarify that for the Chairman. I have a schedule of how much we invest——

Chairman

It is stated on page 68 of the portfolio of investments.

Mr. Paul Carty

I have a schedule here.

Chairman

Mr. Carty might come back to us on this point.

Mr. Paul Carty

No I have the schedule here. There are investments in the British American Tobacco, Reynolds American etc. the value of which holding comes to €75 million. Returning to Deputy O'Brien's point, if one consider the return one gets on investment in tobacco companies, the relative return in 2007 was 18.1%, in 2006 it was 3.8% and in 2005 it was 11.7%. If one compares the return on investment in 2007 in that respect with the MSCI All Country World index, it is nearly 16 percentage points greater. The return on tobacco companies is very attractive.

The point was made on the last occasion I appeared before the committee that by making such investment we are killing people. Deputy Broughan said that in doing this we are killing people. I appreciate the comment, but against that, our mandate is to get the optimum return. Equally, we do not go out with the intention of investing in tobacco companies, we give our funds to 20 managers and they invest them for us. We do not tell them what to invest in.

Chairman

The commission signed up to the UN Principles for Responsible Investment.

Mr. Paul Carty

Yes.

Chairman

Do Mr. Carty believe he is complying with those——

Mr. Paul Carty

Yes, absolutely.

Chairman

——by investing in tobacco companies which are killing people?

Mr. Paul Carty

Yes. absolutely.

Deputy Thomas P. Broughan

Would any other sovereign nations investing such funds have a policy of excluding tobacco?

Mr. Paul Carty

Not that I am aware of. The Norwegian pension fund would be top of class in that respect. As far as I am aware it does not exclude tobacco funds, but it excludes munitions and nuclear industries. When it comes to the issue of ammunition, we all fly on Boeing jets and Boeing might be involved in manufacturing ammunitions. Therefore, do we all stop flying with Aer Lingus on its Boeing jets?

Chairman

We have outlawed smoking in public places in this country; we have not outlawed travelling on Boeing jets.

Mr. Paul Carty

Our fiduciary responsibility is covered by what is provided in the Act. It sets that out and we have no control over that aspect.

Deputy Thomas P. Broughan

Unfortunately, I invest in Gallaghers Tobacco Group every day — I deal with that separately. With regard to the ten projects on which the agency gave advice in 2007, does it have any role in them now? The advice has been given but in the case of, for example, the M50 extension or the Lansdowne Road project, does it have a role while they are being constructed?

Mr. Adrian Kearns

Not really. Once financial close is completed, we are finished with the project. In the case of the Lansdowne Road project, the Government put up €191 million. Therefore, we were heavily involved in giving advice on how worthwhile that was. However, once the close is completed, it is up to the project managers and those in charge of the project to go ahead and do it. Our job is to say whether it makes sense in terms of value for money. It is different, of course, when we are in charge of the PPP where we are the procuring agent.

Deputy Darragh O’Brien

When the Lansdowne Road project is finished, will the agency have any remit to look back at the actual costs, how its advice was or was not taken on board and whether its advice was accurate?

Mr. Adrian Kearns

There is nothing laid down for us but, as a matter of policy, it is always useful for our own sake to pick out a number of projects, look back at them and examine how they worked out in practice, whether our advice was taken and if it worked out. It is no harm for an agency to have a look back at how valid its advice was.

Deputy Darragh O’Brien

Does the agency do this?

Mr. Adrian Kearns

There is no project at that stage yet but we intend to do it.

Deputy Darragh O’Brien

My final question relates to projects on which the agency is currently giving advice. As the Thornton Hall development has been debated to death, I will not discuss it. However, with regard to projects in general, when does the agency conclude its advising? Does it continue right up to construction, after which the agency steps out? Mr. Kearns could use metro north as an example of how the agency operated.

Mr. Adrian Kearns

We give advice right up to the point where the bidders are invited to tender for the deal. We look at the tenders in conjunction with the RPA and compare them with the public sector benchmark. We would still be used as a litmus test to see whether tenders made sense. Once the winning bid is picked by the agency, in this case the RPA, we are out of it. However, we are there right up to the last point where the winning bid is compared with the public sector benchmark.

Deputy Darragh O’Brien

Taking the metro projects as an example, the agency examines and stress tests the bids. Does it then make a recommendation?

Mr. Adrian Kearns

What happens in practice is that normally the governance procedures for these projects are detailed. First, there is a project team, in which we would be involved. Then there is a steering committee made up of more senior people, in which we would also be involved. The steering committee is chaired by the Accounting Officer for the State authority, in this case the RPA. The agency is called upon to give its advice as part of the steering committee.

Deputy Darragh O’Brien

I thank Mr. Kearns.

Deputy Róisín Shortall

I thank our visitors for their presentation. I wish to return to the issue of PPPs, an issue with which I have great difficulty. I have an underlying suspicion that at some point in the future we will discover that the taxpayer has got bad value for money. I say this purely on the basis that there is such an appetite among developers for PPPs. As a public representative and a member of the Committee of Public Accounts, I feel helpless in terms of my ability to oversee what is happening. For that reason would the agencies provide more detail on the exact role they play in overseeing PPPs? We have had dealings with a number of Departments which have engaged in PPPs. We know that the PPP section of the Department of Finance sets down guidelines but it is the sponsoring Department which appears to be responsible for overseeing its own performance in this area. That seems unsatisfactory.

I am particularly concerned about the widespread use of PPPs for building motorways. We do not have clear information on, for example, the cost involved per kilometre in building a motorway by traditional procurement or PPP procurement. We do not have the figures to actually compare the different methods of procurement. Often the estimate for the cost of a motorway on the basis of a PPP can appear competitive but the 30 years of tolls paid by the taxpayer are not factored in. How do we compare the two forms of procurement? I am anxious to hear our guests' views because the Committee of Public Accounts does not have access to that information. How can we have confidence in the PPP option as a method to achieve value for money for taxpayers?

Dr. Michael Somers

Perhaps I can give the Deputy a general response. Mr. Kearns can give a more detailed response, particularly with regard to roads, because our involvement in that area is actually quite small.

The PPP concept started in Britain under the private financing initiative to try to get the private sector more involved in building projects. We were brought into it within the last couple of years, since the National Development Finance Agency was established, to provide some expertise in having a look at projects to try to ensure the State was not being ripped off. The whole thing got off to a less than favourable start with the famous first five schools, when there certainly was the impression that the State had paid too much. They were finished to a standard that was probably higher than the normal standard to which schools would be built. I am open to correction on this but I believe the original plan was to involve six schools, five to be built through a PPP and one using the traditional method. The PPP schools were completed but I am not sure how the sixth one was built in the end.

Personally, I was a little curious as to how good an idea it was. It took me a while to come round to the conclusion that perhaps it was better than the traditional way of doing things. I came to that conclusion because it appeared to deliver — fast — whereas many other projects seemed to go on forever.

The longer one leaves a thing to be done, the more it appears to cost. I suspect PPPs will become a bigger issue in the future. We are approaching a difficult budgetary position. Up until recently, we were in the extraordinarily favourable position where current revenue was sufficient to cover all our current and capital expenditure and the payment into the pensions fund, with a little left over. We are now heading into a situation where there probably will be very little growth this year and in the next few years, and the budgetary position will be much tighter. I suspect there will be a temptation to try to undertake more projects on a PPP basis in the hope it will be possible to get them off the State's balance sheet for the purposes of this famous 3% Maastricht treaty limit, under which we are not supposed to run an overall deficit of more than 3%. That limit might bite us much sooner than any of us thought and might restrict the amount of money we can spend on infrastructural projects, including schools and the like.

One of the hopes would be that we would find a way of using PPPs to get a project off the balance sheet in order that it would not count as public expenditure.

With regard to costs, the points raised by the Deputy are valid. None of us likes to pay tolls or sums to which one is committed for 25 years. The question of whether the State is getting value for money arises. That is the reason the public sector benchmark came into play. It is an attempt to quantify all the costs that would arise if the State did a project and, likewise, the costs that would arise if it was done on a PPP basis. If the PPP tender comes in at less than the benchmark, it appears to be good value. If it does not, it is up to the Minister concerned or the Government to decide if they want to proceed with it.

Deputy Róisín Shortall

Does that figure include the payment of tolls for 25 or 30 years?

Dr. Michael Somers

I understand it includes the net present value of all the payments we have made over the 25 years, discounted back at a correct discount rate. Part of the problem with the first bundle of schools was that the discount rate was queried by the then Comptroller and Auditor General as being incorrect or giving a questionable end result. The Comptroller and Auditor General may recall it and can correct me if I am wrong. The discount rate that is being used now is the market rate. In so far as one can believe mathematics, that is supposed to give a valid comparison if one discounts back all the future costs at an acceptable discount rate.

One of the advantages being put to me with regard to schools is that if a wash basin falls off the wall or a light is damaged, the principal does not have to find a plumber or an electrician. The private sector entity, which has the obligation to design, build, maintain and finance the unit for 25 years, will come in with a plumber or electrician to fix it. That will avoid what has happened frequently with State projects whereby they are built to a high standard but over the years they deteriorate and end up in an awful condition. As I understand it, these schools are designed to last 65 years. The PPP period would be 25 years, at the end of which they are to be handed back to the State in good condition. The payments would stop at that stage.

Our involvement with roads is rather minimal because the National Roads Authority is quite separate from us, as is the Luas operation.

Deputy Róisín Shortall

Does the NTMA have an oversight role?

Dr. Michael Somers

I will ask Mr. Kearns to comment on that.

Mr. Adrian Kearns

We do get involved in the value-for-money test. In other words, we have to oversee that the value-for-money test is valid, and we do so.

Deputy Róisín Shortall

Can Mr. Kearns tell me if the 30 years of tolls are included in the price?

Mr. Adrian Kearns

They are. Basically, all cashflows, including the assumptions about tolls, are built in. It is supposed to be the whole-life cost until the time at which the asset reverts to the State. All money flows are subsumed into the final costs that are presented as part of the value-for-money test. In addition, all value-for-money papers — the comparison with the public sector benchmark — are available to be audited by the Comptroller and Auditor General to justify their validity, or not as the case may be. That is an important safeguard.

The report on schools by the Comptroller and Auditor General is a useful one. One of its highlights was that there was a lack of what they called an affordability cap, which was really the lack of a public sector benchmark. There was no comparison of like with like. Earlier today, I said that while the PPPs are still a minority of public sector projects here, one aspect is that the unitary payments mechanism — which involves monthly payments paid to the developer as soon as the construction is finished — is quite a useful way of bringing the developer to heel. If for, example, the developer absconds when a capital sum has been paid over, very little action can be taken against it unless one brings it to court and ultimately one might be able to get money off it. Where all future unitary payments have been withheld, one has much greater power of persuasion. That is a strong argument in favour of the PPP approach. The bottom line, however, is the value for money aspect, which is overseen by the Comptroller and Auditor General. The public sector benchmark, which started with the first pilot group of schools, is the litmus test for all these projects.

Deputy Róisín Shortall

That may be the case for schools, but I am still not convinced by any means that there is the same kind of rigour concerning motorways. When one considers that the Government has spent €3 billion on PPPs in the last five years, and intends spending a further €13 billion over the life of the NDP, it is highly unsatisfactory from our viewpoint to be in a situation where we cannot say whether or not we are getting value for money.

Mr. Adrian Kearns

May I answer that? As Mr. Somers said, the NRA is a body in its own right. I am sure it is also subject to audit by the Comptroller and Auditor General to see if the projected cashflows are correct. As a member of the public I would say that the PPP roads projects it did, such as the Kinnegad by-pass and others, were all completed quickly, ahead of budget. The road system here has been transformed with the help of some of those projects. I am speaking as an ordinary driver.

Deputy Róisín Shortall

It is fine to say that and everybody wants projects finished quickly and on budget, but the backdrop to it is a fairly incompetent public sector, and fairly incompetent agencies in terms of delivering public projects. The more incompetent they became, the greater the case that was being made for the PPP approach. We do not know, however, whether we are getting value for money because there does not seem to be a robust system for scrutinising the costs involved. All we can do is take the word of people that it is okay, but we are not being presented with the figures, which is the difficulty.

At a political level, one can see why Governments want projects delivered quickly and on time, but it is only years afterwards that one discovers that something had cost an awful lot more than we thought. Nobody likes to complain and everybody likes to cut the ribbon on a motorway, but who goes back five or ten years later to ask how much the project cost the taxpayer when one factors in all the tolls? The only real example we have is what happened with the West Link and how that turned out to be a blank cheque for National Toll Roads. My fear is that we will have a similar experience with the motorway projects.

Mr. Adrian Kearns

I understand exactly what the Deputy is saying. It is fair to say, however, that in addition to the normal auditing of these projects, the Comptroller and Auditor General also carries out value-for-money reports on any such projects. The Comptroller and Auditor General is already engaged in doing a value-for-money audit on the criminal courts complex and O'Deveney Gardens.

Chairman

I will ask Mr. Buckley to say a few words.

Mr. John Buckley

That is correct. We are carrying out a study on the criminal courts complex, which will review the public service benchmark. In a few months time we will have a report before the committee. Within that report there will be an analysis of how the public sector benchmark was put together. The kind of things we will be examining on the development of the public sector benchmark are as follows: whether the scenario is consistent with the project specification; whether full-life costs are included; the risks to be transferred under the proposed PPP; whether they are identified, quantified, valued and incorporated into it; whether proposed changes in operational practice are reliably costed — for instance, whether security services are contracted in, leading to lower Garda or prison service costs; and whether residual value is treated appropriately. I could go on listing these items, which are the kinds of things we must make up our minds about in the next few months. The committee will have a report which will hopefully provide some assurance. I cannot prejudge which way it will go, but it should be fairly transparent from the report for one particular project, the criminal courts complex, how the Public Service Benchmark works.

Deputy Róisín Shortall

It is only one and it is worth reminding ourselves of the comments of Mr. Buckley's predecessor who said we should not regard PPPs as a panacea for procuring all public projects. He issued a note of caution concerning them.

I would like to move on if that is all right.

Chairman

It depends on how long we go but I ask the Deputy to be a bit flexible.

Deputy Róisín Shortall

May I ask two questions?

Chairman

Our time is short.

Deputy Róisín Shortall

Does the NTMA have a fund at its disposal for investment in major public projects? Why is it that the NTMA does not get involved in financing more public projects? If all of these projects are good value for private sector investors, why are they not good value for the public sector?

Dr. Michael Somers

It is a very good question. Our pension fund is managed by Mr. Paul Carty and I have one ex-officio seat on the commission. We are conscious of the fact that very little of this fund has been invested in Ireland. We have been constantly trying to find projects. Years ago, we announced that the commission would allocate €200 million as an initial amount to be used towards infrastructural projects in Ireland. It was widely reported but it was not taken up. The reason was that up to now there has been no shortage of funds to build projects. Money has been freely available but that is going to change. We joined a consortium which tendered for the upgrade of the M50 because we thought this would be a way of getting some of the pension fund invested in Ireland. However, that contract was pulled and it was decided to retender it on a different basis. The consortium we joined decided not to tender again.

We got a certain amount of flak at the time that we could be conflicted because wearing one hat, as the National Development Finance Agency, we were looking for value for money, and wearing another hat, as the manager of the pension fund, we were trying to get the best rate of return. The question was to where do we go from here. To try to deal with that, we asked that if there was a PPP in the future, could we, wearing our hat as manager of the pension fund, arrange the full funding of that project or put together a consortium comprising ourselves plus private sector bidders, which would do all the financing of it, and just put out to tender the design, build and maintenance end of it. We floated that idea but so far it has not been taken up.

The money is there. We would much prefer to invest some of this in worthwhile projects in Ireland than elsewhere. It has also been put to me that all we are at is using the State's money in a different route to fund projects which the Government may or may not want to go ahead. We are not the decision makers in terms of what projects should go ahead. However, if there is a project and we can usefully engage in funding it, we are all in favour of that.

The other problem is the famous Maastricht 3% limit. If, for example, we use the pension fund to build an office block, apparently that is regarded as spending for Maastricht purposes and goes towards the 3%. If we buy shares in some sort of company which builds an office block, I gather that does not count towards the Maastricht 3%. We have had discussions with various State agencies which would like us to help them to build some projects. We said we were all in favour of it but we asked them to confront this Maastricht issue because we could not do so. It is all to do with the overall Government limit on how much money should be spent.

However, that is a long way of saying that there is €20 billion in the fund that we have tried to invest in Ireland where we can and that while there has not been an issue about finding money until now, there will be one in the future.

Deputy Róisín Shortall

Could any Minister apply for funding for a particular project?

Dr. Michael Somers

Yes but provided he or she could get the agreement of the Government and the Department of Finance. It is just the State's money out of another pocket.

Deputy Róisín Shortall

There have been no applications for that.

Dr. Michael Somers

I do not think so.

Deputy Róisín Shortall

How much is there?

Dr. Michael Somers

There is €20 billion in the fund.

Mr. Paul Carty

Dr. Somers spoke about the pension fund. If the opportunity was there, we would be delighted to take it but the criteria is whether we could get a commercial return and whether it stands on its own independently. We would be delighted to look at those opportunities once they meet the commercial return.

Dr. Michael Somers

I should have added for completeness that the National Development Finance Agency can borrow up to €5 billion and can set up special purpose companies, again to deal with particular projects. That power, which we can only exercise on the direction of the Minister for Finance, has not been used to date but it is there as another way to do things. The Maastricht aspect still hits us.

Deputy Róisín Shortall

I wish to clarify the fund available for investment in public projects.

Dr. Michael Somers

Is the Deputy referring to the pension fund?

Deputy Róisín Shortall

Is an actual amount earmarked?

Dr. Michael Somers

The pensions commission earmarked €200 million initially but that was not the end of it. That was just to kick start it.

Deputy Róisín Shortall

That €200 million is available.

Dr. Michael Somers

That is 2%.

Deputy Thomas P. Broughan

I welcome Dr. Somers and his colleagues. I commend them on the outstanding work they have done for the country in these reports and since the foundation of the NTMA.

I wish to follow up on my colleague's point. I have a constituent who was very interested in the near collapse of Babcock & Brown's share price and who wondered whether there would be a strong case, again using the PSB and so on, for the State to buy back the national telecoms network. Obviously, that would be a major project but given the grief we have had in this key infrastructural area, could a case be made for using a portion of the fund to re-acquire the network we should never have sold?

I am transport spokesperson for my party and there is a growing concern that the funding for Transport 21 major projects, such as metro north, the Luas extension, the interconnector and so on, is in danger given the darkening economic clouds over us. Dr. Somers rightly spoke about the interurban routes and the NRA proceeding so well but could he see a situation in which it would be good to utilise the fund for some major infrastructural developments so as to invest in Ireland and strengthen a key infrastructure such as broadband, which is a disaster at present?

Dr. Michael Somers

I thank the Deputy for his kind comments at the beginning, which we very much appreciate. The Deputy spoke about the telephone network. I have been approached by some other politicians on this and they have asked if we could get involved in it. I wish to make a general point first.

Under the terms of the pension fund legislation, we are not allowed to have a controlling interest in any project. A controlling interest can vary depending on legal interpretations. That does not cause us any problem as such. It is a political decision as to whether the Government wants to buy it back, or the extent to which it might want to buy it back.

In terms of putting pension fund money into it, I would be quite happy to approach the commission provided we got an acceptable rate of return, which we are legally obliged to get. If there was a political decision to do so, there is no technical reason the pension fund itself could not get involved, although we could not put up the full amount of the cost. However, there are ways of putting together consortia, etc., which can do these things.

In regard to funding these other major projects, such as metro north, the interconnector, the Luas extension, etc,, obviously we are not doing those. We get involved through the NDFA in terms of providing financial advice. In the sort of straitened financial circumstances we will face, I find it difficult to see how the State will fund them unless somehow or other we can get them off balance sheet for the purpose of this famous Maastricht 3%, because the costs are enormous. We are talking about approximately €5 billion or €6 billion for metro north. I do not know what the interconnector will cost but it will probably be €2 billion or so. That is for starters because there are all the other extensions of the transport network around Dublin. If they are to be paid for out of current revenue, I find it very difficult to see from where the moneys will arise. It will really be a question of trying to get them off balance sheet, if that can be done.

That is getting increasingly difficult because there are statisticians in Luxembourg who apparently look through all the mechanisms one puts in place to get things off balance sheet and then they gong one to say one has failed. It is a combination of construction risk, availability risk or demand risk. One must get two of the three off to the private sector, otherwise it comes back on one's balance sheet.

Deputy Thomas P. Broughan

I notice the chief executive of the NRA——

Dr. Michael Somers

He is on the board of the NDFA.

Deputy Thomas P. Broughan

I notice the NRA has, to an extent, its own sort of PPP evaluation. I know there is one in the Department of Finance and in the NDFA. Is the NRA like an independent empire in regard to PPPs?

Dr. Michael Somers

It is. As the Deputy stated, the CEO of the NRA is a member the board of the NDFA, appointed by the Minister for Finance, but they go their own way.

Mr. Adrian Kearns

They do, but their independence stops at the point where they are statutorily obliged to come to us for a value for money opinion on what they are doing. Within their own rights, as a PPP service provider or company, they have independence. They can decide whether something is to be a PPP project, provided it has washed its face as a transaction.

Deputy Thomas P. Broughan

In his introductory address which, unfortunately, I missed due to having to attend another meeting, Dr. Somers referred to the major financial product that the agency has recently launched. We are beginning to get used to the idea that there are a significant number of sovereign funds. He mentioned that of Norway which was originally founded on oil and gas money and has passed the €200 billion mark. There are, obviously, the funds of all the traditional oil producing Arab countries. Is there any sense that there are the beginnings of competition between sovereign funds? The agency has an outstanding record. Is the fund competitive on financial markets, particularly in recent times, because there are other national funds which are also trying to increase their value?

Dr. Michael Somers

Does the Deputy refer to the pensions fund?

Deputy Thomas P. Broughan

Yes.

Dr. Michael Somers

We would not necessarily see ourselves as being in competition with any of the sovereign wealth funds. We look to invest, largely in public markets, property and private equities. They have their own objectives, some of which may be opaque. We also have made the argument that ours is not a wealth fund as such. It is a pensions reserve fund. Wealth funds have different objectives and aims and would be regarded in a different fashion. We have seen wealth funds from the Far East bail out many American banks in recent times. That would not be something in which we would become involved. They may have other objectives in doing so.

Deputy Thomas P. Broughan

On a related point——

Chairman

There is a practical problem in that there is to be a vote at 1.30 p.m. I want to wrap up before that time.

Deputy Thomas P. Broughan

The recent downturn was obviously incredibly difficult for investment managers. How did the NTMA manage the banking sector in that regard? I read about the problems with German banks, state and other banks. There seems to be a cascade effect and it is beginning to become a little scary.

Chairman

We have dealt with that issue in detail.

Deputy Thomas P. Broughan

I will leave it at that.

Deputy Róisín Shortall

On the public sector benchmark, Mr. Kearns stated that if at a late stage in the process of procuring a project, the highest ranking bid failed to equal or beat the PSB, the general principle was that the matter should be referred by the authority to the appropriate Minister or the Government. How many projects have been referred?

Mr. Adrian Kearns

As far as I know, there has not been one case that has had to be referred to the Minister.

Deputy Róisín Shortall

Is that not extraordinary?

Mr. Adrian Kearns

Before a PPP project is started, an assessment is made of whether it is likely to be worthwhile. Perhaps it should not be so surprising that it turns out to be so. There is rigour — perhaps more than the Deputy might acknowledge, which I can understand — in the comparison made between a PPP and the public sector benchmark. For one thing, the financing costs of the PPP are fully loaded in the comparison, unlike the financing costs of the traditional PSB. As I mentioned, the PPP approach starts with a handicap. As PPPs become more prevalent which I think they will for the reasons mentioned, I am sure one will have cases in which a comparison may fail compared to the public sector benchmark and which will have to be referred to the Minister.

Deputy Róisín Shortall

I probably would have more confidence if there had been cases that failed. It is hard to believe none of them has.

Mr. Adrian Kearns

There was a recent competition in which the winning bid beat the benchmark but the two following bids failed.

Deputy Róisín Shortall

I look forward to the forthcoming report of the Comptroller and Auditor General.

On the National Pensions Reserve Fund, the cost of fund managers seems excessive. What is Mr. Kearns's view?

Mr. Adrian Kearns

I mentioned to Deputy O'Brien that it came to approximately 0.27% of 1%, which is very efficient. As I mentioned——

Deputy Róisín Shortall

Is that €40 million?

Mr. Adrian Kearns

It is in the accounts.

Deputy Róisín Shortall

It seems substantial.

Mr. Adrian Kearns

We are involved in passive management in terms of equities. That is the most efficient way to invest.

Deputy Thomas P. Broughan

Does Mr. Kearns still find it difficult to keep staff? I recall a time when I was also a member of this committee when good managers seemed to be like masters of the universe who could name their price. Mr. Kearns mentioned to my colleague that staff came and went, but is it difficult to keep them?

Mr. Paul Carty

Equity managers are independent bodies. It is a contractual arrangement, as distinct from employment.

Chairman

We have had a detailed and in-depth exchange of views, as well as questions and answers. I thank everybody involved on both sides. Does Mr. Buckley wish to comment on what we have heard?

Mr. John Buckley

I have very little to say. We will take account of anything that arises from the discussion in future audits. On the criminal courts complex, I can outline the issues in more depth in private session next week, as is allowed under the terms of reference. I hope we will publish the report in the autumn. I have nothing further to add.

Chairman

Is it agreed that chapter 11.1 — national debt and chapter 11.2 — savings bank fund be disposed of and that we note the 2006 annual report of the National Development Finance Agency, the report and 2006 accounts of the National Treasury Management Agency, as well as the annual report and 2006 financial statements of the National Pensions Reserve Fund Commission? Agreed.

The agenda for our meeting next Thursday includes the special report on Bord na gCon, as well as the 2006 accounts of Bord na gCon. Is that agreed? Agreed.

I thank all the witnesses and support staff who attended, as well as members who prepared diligently for the question and answer session.

The witnesses withdrew.

The committee adjourned at 1.30 p.m. until 10 a.m. on Thursday, 26 June 2008.