I fully appreciate that, Chairman. I am pleased to have this opportunity to address the committee. Thank you for being so accommodating. The last time we were due to appear before the committee was in December, which was in the middle of the pork crisis. I much appreciate the committee's flexibility in rescheduling that meeting.
The committee has asked me to comment on the operation of the internal audit function in the Department, and to include details of the number of reports undertaken in 2006 and 2007, and the areas covered. I would like to do this before I turn to the account itself.
The Department has always placed an extremely high value on good governance and strong internal systems of financial control. I have outlined these structures in the statement on internal financial controls that accompanied the appropriation account. They include: formalised procedures at all levels of the organisation; strong finance and accounts structures; an enterprise risk management system involving regular meetings of a high level risk management committee, which I chair; and an accreditation review group to review compliance with financial control requirements for EU co-funded and funded schemes. I also chair the latter group, which includes officials from all the paying and control divisions within the Department, as well as from the vote control section of the Department of Finance.
The Department is subject to an extremely high level of external audit not only by the Comptroller and Auditor General but also by the agriculture directorate of the EU Commission, OLAF — the Commission's anti-fraud directorate, the European Court of Auditors, and a private accountancy firm which acts as a certifying body for its EU accounts. In all, when the audits conducted by the internal audit unit are included, the Department of Agriculture, Fisheries and Food was subject to more than 3,000 person days of audit in 2007, a slight increase on the 2006 level.
The internal audit unit is a critical part of the Department's governance framework. The unit is headed by a professionally qualified accountant and includes 20 appropriately trained staff. It operates to a formal charter and derives its authority directly from me as Accounting Officer. It is required to produce an annual work plan for all areas under its remit.
The internal audit unit reports to an independent audit committee, also with a formal charter. This committee, which was established in 1994, is chaired by an expert from the private sector and includes several external members, including representation from the Department of Finance.
The internal audit unit produced 14 internal audit reports in 2006 and 16 in 2007, concerning a variety of areas, including all the EU-funded and co-funded schemes, the research stimulus fund, the world food programme funding and a number of other areas, including IT-related areas such as the animal health computer system, the SAP accounts system, and the IT business continuity and disaster recovery systems. In addition, the unit carries out a substantial amount of audit work under the structural fund control and scrutiny regulations.
My Department was also requested to provide information separately on expenditure on consultancies to the committee, which we have done. To avoid any confusion or misunderstanding on this point, I want to explain the basis on which we have responded. The list of consultancies provided sets down those items which represent expenditure on independent advice which is not available within the Department. For this purpose, I have distinguished between consultancy and outsourcing or contractors. For example, the Department avails of contractors in the IT area to provide an essential service which is not available internally.
I now turn to the appropriation account for my Department in 2007, which is under review. My comments are on the outturn for 2007 and may seem out of context with developments in the meantime and with the economic and budgetary situation in which we now find ourselves. I should also explain at the outset that responsibility for fisheries functions was transferred to the newly constituted Department of Agriculture, Fisheries and Food on 20 October 2007. The Estimate and expenditure figures in the account include fisheries funding from that point until year end. Expenditure on fisheries matters prior to that date is included in the appropriation account for the Department of Communications, Energy and National Resources.
Because of the passage of time, I will give members of the Committee a quick reminder of the major developments in the environment within which the Department operated in 2007. It was the year in which the National Development Plan 2007-13 was launched, incorporating the €6 billion rural development plan. This provided for substantial support for the agri-food sector and the wider rural economy. In the markets for agriculture, 2007 was a good year overall with strong international milk prices. In our two main commodities — dairy and beef — the dairy sector performed well on EU and international markets due to increased demand and tight supplies. Beef markets were more challenging with recent annual trends in increasing prices easing somewhat. In overall terms, agri-food exports continued to expand.
Emerging concerns at international level on food security featured very much in 2007 and have since assumed an increasing importance for future policy on agriculture. In trade terms, the WTO negotiations were ongoing and, in June 2007, a serious but ultimately failed attempt was made to negotiate a new trade agreement under the Doha Round.
That year, 2007, was one in which the Department very much advanced its agenda in preparing the agrifood sector for the challenges of the decade ahead. We drove the simplification debate at EU level with considerable success, we remodelled the dairy quota system and provided for large-scale state investment in on-farm and industrial facilities and infrastructure.
Against that general background, the gross Vote for my Department for 2007 was €1.761 billion, including approximately €63 million for transferred fisheries functions. When appropriations-in-aid are taken into account, the net Estimate was €1.325 billion. Net expenditure was €1.155 billion, and €31 million of the consequential saving was rolled forward into the 2008 Estimate under the Department of Finance's multi-annual capital envelope arrangement. The net surplus for 2007, therefore, was €138 million.
These savings arose because of lower than anticipated expenditure on large demand-led schemes and additional EU receipts. Apart from the administrative budget, a substantial proportion of expenditure under the Department's Vote comprises schemes subject to external factors such as demand from beneficiaries, market and economic factors, animal disease incidence, and the pace at which capital investment and research projects are completed.
There is always some degree of uncertainty about the level of expenditure on such schemes and a difficulty in accurately forecasting expenditure. In 2007 this was exacerbated by the fact that implementation of enhanced rural development and other measures was contingent on our obtaining approval from the European Commission under the state aids regime and under the new rural development programme for the period 2007 to 2013. We had anticipated obtaining early Commission approval for the programme which was submitted in December 2006. As the programme was only formally approved in September 2007, there was some knock-on effect on expenditure during the year.
In 2007, savings arose in areas such as the welfare scheme for suckler cows — €18 million — for which state aid approval was only obtained late in the year, in the animal disease control area — €10 million — owing to reducing BSE and brucellosis levels, in the technical and operational costs of market supports primarily because of dramatically improved world prices in the dairy and cereals, in the marketing and processing scheme primarily because of the later than anticipated launch of the dairy investment scheme, in various demand-led rural development schemes such as the early retirement scheme — 18.7 million, the installation aid scheme — €2.3 million, and REPS — €49 million. Savings also arose as a result of the late receipt of state aid approval for the new fisheries decommissioning scheme — €15.1 million — and because of the pace of completion of approved fish processing, harbours development and other projects in the fisheries sector which amounted to €11.8 million. We always endeavour to provide in our Estimates for anticipated demand for the various schemes we operate, but ultimately expenditure depends on the variables I have mentioned already.
I want to address briefly the issue raised by the Comptroller and Auditor General on the consolidation of single payment scheme entitlements. There has been discussion at official level and the Comptroller and Auditor General's report records the Department's official response. The report refers in its conclusion to a contingent liability of an undetermined amount arising from the findings of the 2006 annual report of the European Court of Auditors on the consolidation of the single farm payment. I have no difficulty with this summary statement.
The members of the committee may be aware that the first payments were made under the decoupled single payment scheme on 1 December 2005. Approximately €1.3 billion of EU funding is spent annually on the scheme in Ireland. Given the scale of the EU funding involved in Ireland and elsewhere, it is inevitable that the single payment scheme will be the subject of considerable audit attention across all member states for the foreseeable future.
In its annual report for 2006, the European Court of Auditors included a chapter on the establishment of entitlements under the single payment scheme. Among its observations was that a number of member states, including Ireland, had not applied the provisions relating to consolidation of entitlements correctly. The background is that to participate in the single payment scheme, farmers were required to establish a payment entitlement per hectare. In Ireland, these entitlements were established on the basis of averaging coupled direct payments to an individual over the area farmed in the years 2000, 2001 and 2002.
Article 7 of Council Regulation 795/2004, permitted farmers, in certain circumstances, to consolidate payment entitlements, initially established on a certain number of hectares, to a reduced number of hectares. The need to do this might arise, for example, if part of a farmer's holding was subject to a compulsory purchase order. The rules limited such consolidation to 50% of the original holding. The view of the Court of Auditors was that in Ireland and a number of other member states, the circumstances in which consolidation was permitted went beyond those envisaged in the regulation.
I have indicated in my reply the Comptroller and Auditor General that I do not agree with the view expressed by the court in its annual report. Ireland provided for the consolidation of entitlements in the case of loss of leased land and afforested lands in addition to land lost through compulsory purchase orders. Specific mention is made of these measures in the relevant recital clause of Commission Regulation 795/2004. In addition, in preparing a programme for the consolidation of entitlements in Ireland, the Department consulted closely with the Commission, including its legal experts, at all times and is satisfied that its procedures were fully in compliance with the relevant regulations.
The Department is still engaged with the Commission on this audit finding. The question of any liability arises in the context of the Commission's conformity clearance of accounts, and we have not reached the point where the Commission has made a final determination in the matter. If the Commission and Ireland fail to agree on an outcome, the mechanisms established by the financial regulations governing the Common Agricultural Policy provide recourse to a conciliation procedure and, ultimately, to the European Court of Justice if that proves necessary. This would be a last resort. I indicated in my reply to the Comptroller and Auditor General that I believe further discussion and speculation on the outcome is premature and could undermine the Department's position in further negotiations with the Commission and any appellate body in the event that the Department failed to reach agreement with the Commission.
I am happy to take any questions the members of the committee might have.
