National Treasury Management Agency Financial Statements 2018

Mr. Conor O'Kelly (Chief Executive Officer, National Treasury Management Agency) called and examined.

This morning we are meeting the National Treasury Management Agency, NTMA, regarding the NTMA financial statements 2018 and the Comptroller and Auditor General's Report on the Accounts of the Public Services 2017, chapter 21 - accounts of the National Treasury Management Agency. There will be two parts or sessions to our engagement with the NTMA today. We will deal with all matters in the accounts with the exception of those relating to the State Claims Agency for the first two hours approximately. In the second part of the meeting, we will deal only with matters related to the State Claims Agency and we will be joined with representatives from the HSE and the Department of Health for that part of the meeting. I wish to remind members that we will meet in private session this afternoon to conclude discussion on our periodic report, which we will launch next Tuesday afternoon.

We are joined this morning by, from the NTMA, Mr. Conor O’Kelly, chief executive officer, Mr. Ian Black, chief financial officer and Ms Sinead Brennan, director of human resources and organisational development; and from the State Claims Agency, Mr. Ciarán Breen, director, Ms Catherine Tarrant, executive head of claims, clinical indemnity scheme, and Mr. Pat Kirwin, deputy director and head of enterprise risk. We are also joined by Mr. Eoin Dorgan, principal officer of the Department of Finance. I remind members, witnesses and those in the public gallery that all mobile phones should be switched off and not just put on silent mode as that can interfere with the recording system.

I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009 they are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the committee to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the provisions of Standing Order 186 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. Although we expect witnesses to answer questions asked by the committee clearly and with candour, witnesses can and should expect to be treated fairly and with respect and consideration at all times, in accordance with the witness protocol. There will be a five-minute suspension before we move to dealing with the State Claims Agency.

For the benefit of those watching the proceedings, I wish to outline the role of the NTMA. Mr. O'Kelly will also do so and all members understand it. We are dealing today with the financial statements of the National Treasury Management Agency, including its administration account, the management of the national debt of Ireland, the Post Office Savings Bank Fund, the State Claims Agency, the Dormant Accounts Fund, the Ireland Strategic Investment Fund, ISIF and the NTMA's management of the Apple escrow account. These are the type of issues that will arise.

I call the Comptroller and Auditor General to make his opening statement.

Mr. Seamus McCarthy

As members are aware, the National Treasury Management Agency is a complex organisation with multiple functions that extend beyond its original and core role of managing Ireland’s national debt. The set of financial statements before the committee this morning reflects the various statutory obligations of the agency in respect of its financial reporting. The NTMA’s primary function is to manage borrowing on behalf of the State. The results of that borrowing activity are reported in the national debt account. At the end of 2018, the gross national debt stood at slightly more than €205 billion. This was an increase of more than €6.5 billion on the gross national debt at the end of 2017. Total debt servicing costs in 2018 amounted to €6 billion. This was 4% less than in the previous year, reflecting the impact of refinancing of debt at prevailing low interest rates.

Other key functions and services of the NTMA that are accounted for separately include management of compensation claims on behalf of certain State authorities in its capacity as the State Claims Agency, management of the Ireland Strategic Investment Fund and provision of procurement and financial advice in respect of certain public private partnerships and other large capital projects in its capacity as the National Development Finance Agency.

The financial statements of the State Claims Agency indicate claims settlements on behalf of State agencies in 2018 amounting to slightly more than €250 million, with associated expenses of €104 million. This expenditure, totalling €354 million, was recovered from the State agencies involved and represented an increase of almost 12% on the 2017 level. The agency’s estimate of the value of claims liabilities outstanding at end 2018 was €3.15 billion, up 18% from the estimate of €2.66 billion at the end of 2017. As members are aware, almost three quarters of the estimated claims value outstanding relates to clinical claims.

The financial statements of the ISIF show a reduction of €3.6 billion in the value of the fund assets between the end of 2017 and the end of 2018. The loss in value that occurred in 2018 is related to a significant fall in the value of the fund’s shareholdings in AIB and Bank of Ireland, which comprise a portfolio invested in by the fund at the direction of the Minister for Finance. The audit report on the ISIF financial statements draws attention to the NTMA statement on internal control, which discloses a weakness in controls relating to foreign currency hedging that resulted in a loss of €721,000 in the year. The agency has since introduced enhanced controls in that area.

The NTMA assigns staff and provides certain other support services, on a reimbursement basis, to certain independent bodies, including the National Asset Management Agency, NAMA, the Strategic Banking Corporation of Ireland and, since 2018, Home Building Finance Ireland. These are governed by separate boards and the NTMA is not accountable for their activities. The NTMA also provides staff on secondment for the Department of Finance’s banking unit, with the costs in that case being carried by the NTMA.

The NTMA’s administration account shows gross expenditure on administration costs totalled €127.2 million in 2018. Of this total, €46.7 million or 37% was recovered from NAMA and the SBCI. Overall, staff costs accounted for around 79% of the expenditure in the year. All staff are employees of the NTMA, including those assigned to work for the supported agencies. As explained in note 7.3 of the administration account, the agency operated a voluntary redundancy scheme during 2018 at a cost of €2.6 million. This is separate from the voluntary redundancy and retention scheme operated for NAMA staff, which cost a further €1.8 million.

The audit report on the NTMA administration account draws attention to expenditure of €5.9 million in 2018 relating to contracts that were not publicly advertised. The NTMA’s statement on internal control provides explanations for the procurement approach adopted in relation to those contracts.

Pursuant to section 28 of the National Treasury Management Agency (Amendment) Act 2000, the Minister for Finance delegated to the NTMA a range of functions in respect of the Ireland Apple escrow fund, including the production of annual financial statements, which are subject to audit by me. The first set of financial statements for the fund were prepared for the period 17 May 2018 to 31 December 2018. These are published separately from the other NTMA accounts. Between May and September 2018, Apple paid amounts totalling €14.285 billion into the escrow fund. The net assets of the fund at year end were €14.269 billion, representing a decline in value of €16 million. Operating expenses of €2 million were incurred during 2018 in respect of investment management and other fees and expenses. The remainder of the loss in value in the period of account is attributed to the current negative interest rate environment.

I thank Mr. McCarthy and call Mr. O'Kelly to make his opening statement.

Mr. Conor O'Kelly

I thank the Chair and committee for the opportunity to present before it.

The committee has received my opening statement, which I do not intend to read. We have also provided some slides which I will use only for the discussion of the national debt, if that is all right. It would probably be easier to go through that with the slides in front of us. I will give a quick overview of some of the businesses in Vote 2018, our outlook for the markets and what is informing our views of strategy and decision-making at the current time. I thank the board of the NTMA and, in particular, our former chairman, Willie Walsh, who stepped down at the end of 2018 having been there since the beginning of 2015 on the newly constructed board. I thank him for his contribution. We have seven excellent non-executives and a new chairman, Maeve Carton, former chief financial officer of CRH. We are very fortunate to have this quality of non-executives, who give us plenty of support and challenge. I also acknowledge the Committee of Public Accounts and the challenge it has given us, particularly in the areas of diversity, tobacco and fossil fuels. It is fair to say the committee has kept those issues high on our agenda over the last few years. We have made some progress there and we still have plenty to do. I wanted at the outset to acknowledge the contribution and challenge of the committee in that regard.

I will start with the Ireland Strategic Investment Fund, ISIF. The key fact is that for 2018, the ISIF lost 1% in value. Members will be aware that 2018 was one of the worst years for stock markets since the early 1920s. The S&P 500, the US index, was down 6% and the Irish stock market was down 22%. Virtually all asset classes lost money and were in negative territory in that year. The ISIF exposure to global equities meant that overall it lost 1% of its value. I am glad to say that markets have recovered very significantly in 2019 and all of that loss - and then some - has been recovered. In total, since the ISIF was first instituted, a total of €850 million in investment gains have been added to the value of the portfolio. That is a return of 2.3% annually on the money, which is invested across Ireland with some exposure to global markets, as that cash remains to be invested in the mandate. A 2.3% return when we are borrowing money at an average of less than 1% is pretty good business for the State to date.

One of the other key features of the ISIF is that we always co-invest in any of the investments we make. The €4.4 billion we have committed to the Irish market since inception has been matched by €8.1 billion in private investment. That means a total of €12.5 billion has been invested in the Irish economy right across all the different sectors and regions. I do not want to outline all the investments we made this year; they are listed in the annual report. Investments were made at a rate of about one every two weeks in total, with over €700 million deployed in the year. I will come back to the rate of deployment a little bit later on. Investments included MilkFlex, a fund which provides financing to dairy farmers, Shannon Airport, the Port of Cork, Green Isle Foods, Donegal Catch and Vectra, a company which uses artificial intelligence to provide cybersecurity and which has set up a Dublin office. Vectra has already employed more than 40 people following our investment. We invested across the alternative energy space in 2018, backing a fund called Temporis Capital, which is set to commit and develop alternative energy, as much as 1,000 MW, which is almost 25% of Ireland's total requirement in that space. We have also backed a solar energy company in the last 12 months. Another feature of the ISIF to which I referred springs from legislation enacted by the Oireachtas in respect of fossil fuels. The ISIF has divested of the 38 holdings it had in fossil fuel stocks and additionally has produced an exclusion list of 148 stocks in which it is precluded from investing under the Act.

The fund has had a review and tries to be adaptable to economic conditions. It was set up in 2015, when the economy was in a different position and there was more of a shortage of the kind of capital that we have. We have been adapting over those years and always look to be flexible in terms of moving with the times. We are not there to replace other capital that is available; we have to go where capital does not flow as easily as that is the purpose of the fund. That is what we call the dead weight test. If other capital is available, we will not invest. As the economy has recovered and there is a lot of capital available, we have found ourselves more in the space of tenure, meaning the term of the investment we are prepared to make. There is lots of private equity and investment capital for a term of five or seven years, but going out to ten, 12 or 15 years there is very little capital available. We find ourselves now engaged in projects that have a much longer-term horizon and focus. That is probably where the committee is going to see more of our activities over the coming year to 24 months. I also suspect we will deploy less capital than we did in the initial four years of the fund, when we deployed between €700 million and €800 million per annum. The size of the projects is beginning to decline. Many of the projects that were pent up from the crisis have come into our portfolio. As we normalise and as other capital is becoming available, I see the deployment rate declining somewhat. This is a good thing. If there is other capital available, that is good news and probably reflects where we are in the cycle. We do not have to spend the money. We are not anxious to spend it. We only want to invest the money if it is good value for the State and makes that economic impact. If the money is not invested, it is still an asset of the State and sits on the balance sheet as an asset.

There has been excess surplus in the fund, which stands at €9.4 billion now. There is €4.4 billion in Irish investments, which leaves us with €5.1 billion. As the committee is aware, €3.5 billion of that has been reallocated by the current Government, with €1.5 billion going into the rainy day fund, €750 million allocated to Home Building Finance Ireland, HBFI, and €1.25 billion to the Land Development Agency, LDA. That sum has been taken away, as it were, as excess reserve to be used elsewhere by the State, reducing the overall size of the ISIF. The €4.4 billion will already start to recycle because some of the investments are already yielding returns in the shape of dividends and even capital to the fund. The idea is that it becomes an evergreen fund and funds itself to be able to grow and invest long into the future. That is the ambition.

The National Development Finance Agency, NDFA, provides advice in respect of most big projects and particularly public-private partnerships, PPPs. We have had a lot of discussion of PPPs at this committee over the years. We had probably the most significant year of real challenge and stress in respect of the collapse of Carillion in the UK, one of the biggest liquidations of a project management construction firm in that country's history. It has had a devastating effect across many projects in the UK. Carillion was only involved in one project in Ireland, which we call "schools bundle 5". That was the building of six schools in Wicklow, Wexford and Meath. It was an interesting test of the PPP model. One of the discussions around PPPs is whether the risk transfers to the private sector; does the private sector really take the risk or, when something happens, does the State ends up picking up the tab. In this case, four of the schools are already open although they were a year delayed. The rest of the schools will open this September but there will be no additional cost to the taxpayer. That PPP contract has completely stood up and remained intact. From the taxpayer point of view, no additional cost has been incurred. The equity providers and financiers of that PPP contract have lost all their equity money and have had to take a lower return. That is the purpose of that contract when we transfer risk, and there is a cost associated with it. The idea is that in theory, when a stress event occurs, they do own the risk. It is an interesting real-life example where the PPP contract stood up. At a time when we have many projects to construct, it is worth reflecting on the robustness of that contract in that particular live situation.

I will touch on NewERA, which is in many ways the in-house corporate finance adviser to the State. It has advised on 132 different projects, acquisitions or disposals of commercial semi-State companies. NewERA tries to bring together all of the assets owned by the State under one umbrella in the context of the shareholder so that the State has consistent analysis of investment criteria, return on capital and dividend policy. NewERA brings them all to account in a similar and consistent fashion. The mandate that the team is being asked to deliver advice on continues to grow. There were 132 advisory projects done on behalf of the State for different Departments and clients this year. That figure is up from 81 in 2017.

Representatives from the State Claims Agency are with us and I know we have a separate session on that work but I will touch on it. There are 146 State bodies with more than 200,000 employees. Considerable footfall goes through there. Earlier, the Comptroller and Auditor General mentioned that the vast majority of the 1,500 claims are clinical in value terms. The provision is €3.15 billion. This is the current estimated liability and 74% of that is provided for the clinical sector.

We deal with and have dealt with many sad and difficult cases in the State Claims Agency. That is the nature of the mandate. However, we have never before had a situation like we have had in 2018. I know we are going to discuss extensive technicalities and legal positions today but it has to be seen in the light of the extraordinary devastation and grief caused to so many women by this situation. There are no good outcomes. We and the team try to walk that line as sensitively as we can but it is not an easy task. It all pales in comparison to the grief and devastation caused to the women involved in the overall issue.

Apple has been mentioned. The first financial results for the Apple fund were announced yesterday and released by the Department of Finance. As committee members are aware, the National Treasury Management Agency was directed by the Minister to establish the escrow fund to essentially look after those funds while the legal case is going on. Apple and the NTMA jointly have an investment policy. A sum of €14.2 billion sits now in an investment account of which the NTMA and Apple have oversight. The easiest way to describe it is as a conservative cash box of sorts. The purpose of the fund is a return of capital rather than a return on capital. That is the focus of the fund. It is about capital preservation. The fund has been established and it is currently operating satisfactorily.

I will turn to the slides to discuss the debt. It might be easier to talk through from slide 16. The slides cover the positives and negatives or challenges. I will touch on each of these in turn. On the left hand side of the slide we are looking at the positives of the national debt and the servicing of the debt. Committee members can see the so-called chimneys or refinancing stacks of 2018, 2019 and 2020. We have talked about these at the committee during previous years. It is fair to say at this point, when we are exactly half-way through the refinancing period, that we can safely put the refinancing risk that has existed behind us because of what has happened. I will come to that in more detail in a moment. The debt has been smoothed out in terms of the future profile of maturities. There are no such refinancing cliffs ahead in the foreseeable future. That is important from a debt management point of view; it is important to have a smooth profile.

The interest bill continues to fall. I will come back to that again. The interest bill has fallen from €7.5 billion in 2014 to a projected €4.5 billion next year. I will come back to the reasons that saving has been so dramatic. It is largely due to the interest rate environment we are in.

I want to touch on diversification. Ireland issued its first green bond in 2018, becoming only the fourth European sovereign country to do so. I will come back to the rationale behind that as well.

The debt is still elevated though. That is still a significant issue. It is four times what it was in the 2000s before the financial crisis. We have paid a very significant amount of interest. People may have heard me say that we have paid €33 billion in interest over the past five years. This interest bill is enormous. We paid €60 billion in interest over the last decade. That compares to €20 billion in the previous decade. That is all to do with the elevated amount of debt rather than the rate of interest, which many people concentrate on. Some may suggest that since rates are so low we should borrow more etc. We have to remember that it is the stock of debt that is really significant in this regard for Ireland.

We rely on foreign capital for the largest portion, 90%, of our borrowings. That is unusual versus other European and global sovereigns. It makes us slightly more vulnerable than others to financial markets. Of course there are significant external risks on the horizons of which committee members are well aware.

Before 2018 we talked about the refinancing chimneys to the tune of €60 billion. In the first instance we repaid the International Monetary Fund and that reduced the size of the chimneys. Since then, we have repaid the 2018 bond that matured. That was a €9 billion bond and it matured in October 2018. We have also repaid the €7 billion bond in June, some weeks ago. There is another maturity of €6 billion in October. There is a €10 billion maturity coming early next year. Then there is a final maturity of €6 billion in October 2020. That will remove the chimneys completely. However, given the cash we have already raised and the repayments we have already made of those maturities, we can say now for the first time that the refinancing risks of those chimneys is now behind us. This is because of what we have already repaid and the cash we have already raised at today's market rates. The key thing about the coupons that we have been repaying is that a total of five large bonds fell due over a short period. The range of coupons was from 4.4% to 5.9%. They are the really high coupons and they are all retiring. We are replacing them with debt that is 1% and under. That is where the big savings come from. That is why the savings really start to fall post 2020. It is why this refinancing period was so important for us. It was important for us to be able to try to lock in today's interest rate environment while we had that significant need. We can now put that risk safety behind us.

Let us consider the profile now. The debt manager normally looks three or four years ahead. We were looking at 2018, 2019 and 2020 in 2015, 2016 and 2017. Now we are looking ahead to 2022, 2023 and 2024. Committee members will see the smoother profile of maturities. That represents a far lower risk profile from the point of view of the State in terms of maturing debt over the long period and looking out to the future.

Earlier I said the interest bill was €7.5 billion and is down to €4.5 billion. There are three reasons this has occurred. First, and most important, is the interest rate environment created by the European Central Bank quantitative easing and the extraordinary low interest rate environment. Committee members do not necessarily watch financial markets in the same way that we do, but since Christine Lagarde's potential appointment as the ECB President, interest rates have fallen dramatically during the past 48 hours and there has been a dramatic move lower in bond market yields. She is considered to be a dovish ECB President potentially versus some of the alternatives. The market has reacted and moved rates even lower. The interest rate environment looks like it will remain low at least for the foreseeable future. This extraordinary low interest rate environment happened at a time when Ireland had its greatest refinancing needs and at a time when the credit rating of the country was improving. These three things came together and this environment has enabled Ireland to save so much interest.

Those high coupons all fall away and get replaced by lower ones. That is why the savings are so significant. I will revert to why that will not always be the case in a moment.

Some of the Deputies are interested in the topic of the green bond. While it is good news from the point of view of leadership and ensuring that sustainable projects get delivered and identified, the NTMA has a slightly narrow way of looking at it. This is the fastest growing pool of capital in the world. We are accessing new investors by issuing green bonds. From a funding perspective, that helps to diversify the risk. One of the few ways we can diversify and mitigate our risk is to widen the investor base that owns Irish bonds. When we issued our first green bond, more than 50% of the investors who bought it and loaned us money had never invested in Ireland before. Besides the ability to finance sustainable projects, that was the attraction for us.

The next slide shows the other side of the balance sheet with the negatives and challenges. This is our gross debt, which has effectively remained unchanged since the crisis. As the Comptroller and Auditor General stated, it stands at €205 billion currently. Let us just call it over €200 billion. It is four times what it was in the 2000s. I describe this as a mountain of debt, and there is only one way to get down a mountain, that being, very slowly and carefully and without taking alternative routes or going back up the mountain. We must try to find a way to reduce this debt over time. That will only happen slowly, but we must stick to the path and do that. The risks to the country of having very high debt levels are the risks that any of us would have as individuals, householders or businesses in the event of a downturn, in that we would obviously be more vulnerable. It is no different for a sovereign.

Regarding debt, by comparison with our European peers and other countries, we rate poorly in some of these statistics. The European average is shown at the bottom of the table. I draw members' attention to our debt-to-Government revenue figure, which is still at 251% and one of the highest in Europe. Although our interest bill has reduced as a percentage of Government revenue to 6%, it is still way higher than our European peers. Even at today's interests and with the savings we have made, that is where it still ranks among our European peers. Ireland is not in a good position from a debt point of view. We must continue to bear that in mind and be vigilant.

The next slide shows the interest bill dating back to the mid-2000s. I showed how it was falling from €7.5 billion to €4.5 billion, but that will still be three times what it was in the 2003-08 period. Even though interest rates then were 4% and are less than 1% today, our current interest bill is three times what it was in that period because of the size of our debt.

I will show how challenging that will be in future. Consider the bonds that are now going to mature. I mentioned bonds maturing with high coupon rates. One of the bonds that will mature in 2022 was issued by us in 2017 and has a 0% coupon. The chances of the NTMA refinancing that bond in 2022 at a lower interest rate are slim. That is why we will be refinancing through low-coupon bonds and unlikely to make savings in future.

The next slide shows the investors from whom we borrowed this sizeable amount of debt. They are all overseas, which is unusual. There is not a large domestic savings market for our bonds. This makes us particularly vulnerable. These investors can change their minds quickly, move away and charge us more. Our reputation, creditworthiness and positioning in the marketplace are important. Obviously, we are quite exposed.

I will not necessarily go into the challenges ahead that are listed on the next slide in any detail, although we can take some questions. Our investors are telling us that they are worried about Brexit and corporation tax changes. The financial markets are concerned and are looking at Italy and some of the challenges it faces from a debt perspective. The spreads in Italy are volatile at the moment.

That concludes my presentation. I am happy to take members' questions.

I thank Mr. O'Kelly. Since we will have two sessions, there will be a lead speaker in the first session - Deputy Cullinane, who will have 20 minutes - and all other Deputies will have ten minutes each. In the second session, the lead speaker will also have 20 minutes and other members will have ten minutes each. Members have indicated for this session in the following sequence: Deputies Cullinane, Murphy, MacSharry and O'Connell.

I will ask a quick question. When Mr. O'Kelly discussed risks, he referred to corporate taxation. Are the investors worried that some corporates are not paying enough tax?

Mr. Conor O'Kelly

That is a general concern. When investors consider Ireland, they are worried by the proportion of the tax take from corporations and whether there will be a change in the Irish economic model's approach to corporation tax.

Are they worried about the sustainability of the tax base or that corporates could be taxed more?

Mr. Conor O'Kelly

They have two concerns, the first of which has to do with the increasing proportion of Government revenue that is related to corporation tax. They worry about what that would mean were anything to happen in the multinational sector.

The sustainability of the tax base.

Mr. Conor O'Kelly

Correct.

What is the precise figure for the mountain of debt? Mr. O'Kelly said it was €200 billion.

Mr. Conor O'Kelly

It is €205 billion.

How does that break down? I imagine that some of it is legacy debt from before the crash. Then there was the bank recapitalisation. We also had to borrow money for day-to-day revenue spending during the austerity years. Even in broad terms, does Mr. O'Kelly have a breakdown of what constitutes the €205 billion? How much of it is the legacy of the austerity years as opposed to the crash?

Mr. Conor O'Kelly

I will talk in very broad brush terms. The Comptroller and Auditor General has done a great deal of work on this matter, so the precise numbers are available. Going from €40 billion to €200 billion in terms of the debt size, the banking crisis probably accounted for €60 billion originally, although one would have to net off the value that we got from any bank sale, which would probably bring that figure down towards €30 billion. The rest of the €100 billion incorporates interest that we are paying on our borrowings from the very long time when we were funding deficits. When the crisis happened, the majority of the difficulty came from the gap between our revenue and our Government cost. We ran very large gaps for-----

Before the crash, was the debt approximately €40 billion? It is now €205 billion.

Mr. Conor O'Kelly

Correct.

The vast majority of it is crash or austerity era related either through bank recapitalisation or servicing State expenditure.

Mr. Conor O'Kelly

Yes. It was mostly due to Government expenditure.

When revenues collapsed. Is that correct?

Mr. Conor O'Kelly

Yes.

Mr. O'Kelly mentioned the banks. Two banks that received a great deal of taxpayers' money were Bank of Ireland and AIB. How much went into both? Is there a breakdown of how much went into each or does Mr. O'Kelly only have the figure for what went into the banks overall?

Mr. Conor O'Kelly

The figure I have in my head is €60 billion, with €30 billion returned. The money that went into Anglo Irish Bank and Irish Nationwide amounted to €30 billion, which we will never get back. The other €30 billion-----

In terms of Bank of Ireland and AIB, we got a return in shares.

Mr. Conor O'Kelly

Yes.

How much did we put in and what have we got back in share value?

Mr. Ian Black

It is shown on page 27 of the annual report. That table provides a breakdown of what was invested, what was received and what was the 2018 end-of-year value in respect of Bank of Ireland and AIB.

What is the figure? I am sorry, as it is not up on the screen yet.

Mr. Ian Black

Bank of Ireland's figure was €4.7 billion. The year end 2018 value is €700 million. AIB's figure is €16 billion. The year end valuation figure is €7.1 billion.

What is our total share value in both banks?

Mr. Ian Black

That is shown on the right. It is approximately 13.9% or 14% in Bank of Ireland and 71% in AIB.

What about in monetary terms?

Mr. Ian Black

The monetary amounts in Bank of Ireland and AIB at the end of 2018 were €700 million and €7.1 billion, respectively.

Was there a drop in the share values of AIB and Bank of Ireland in the last year?

Mr. Ian Black

Yes, a significant drop.

By how much did it reduce our-----

Mr. Ian Black

By €3.5 billion.

We put all of this money into the banks and got shares back, but in one year alone the value of the State's shareholding has dropped by over €3 billion.

Mr. Ian Black

Correct. It reflects the market, not just Irish banks but banks.

It might reflect the market, but it also reflects the fact that the taxpayer lost €3 billion because these companies' share prices dropped. In current value terms, is the State potentially down €3 billion because the share prices of both banks dropped?

Mr. Ian Black

When the State owns shares, it is exposed to the equity markets.

I understand that; I am just saying in plain and simple terms that we are down €3 billion because the share prices dropped.

Mr. Ian Black

Yes, the shares are worth less today than they were then.

There is now a concern about bank stabilisation in other countries. We are hearing stories about the possibility that banks in other countries will need to be recapitalised again. Has the Comptroller and Auditor General done any work on the issue of bank stabilisation to look at this area, in particular, and what the State put into the banks and then at whether the share value has gone up or down? In essence, what people want to know, having put in X amount to get Y amount back at the end, is whether we will get back more than we put in, the same amount or less? Is that something at which Mr. McCarthy has looked?

Mr. Seamus McCarthy

I reported on that issue in 2014 and 2016. I am working on a chapter for inclusion in this year's annual report which will outline the position at the end of 2018. I reported on the issue previously and have the report here. As it looked at the end of 2016, the picture was that, overall, banking stabilisation had cost us €40 billion. As Mr. O'Kelly said, Irish banks-----

Does that figure include the interest we are paying back?

Mr. Seamus McCarthy

It does.

It is the net figure.

Mr. Seamus McCarthy

There is a cost of capital with the investment we made and it is reflected in the interest rate for borrowings. As long as we have borrowing associated with banking stabilisation, we will have an ongoing cost. For the individual banks, our analysis at the end of 2016 which I realise is a bit out of date was that approximately €35.8 billion was the cost for the IBRC. The cost for AIB was approximately €8 billion and for Permanent TSB, approximately €1 billion. For Bank of Ireland, it is looking kind of positive, to the tune of approximately €1.8 billion. I will be updating the figures to the end of 2018.

It is a restatement of what we already know, that Anglo Irish Bank was the noose around the State's neck when it was nationalised. Obviously, it came at a big cost. If the overall figure of what it is going to cost us in terms of what we put into the banks is €40 billion-----

Mr. Seamus McCarthy

Give or take.

-----the interest we are paying over five years is €33 billion. I do not need a response, but when people hear these figures, it sounds like Monopoly money. However, €33 billion is a huge amount of money when one considers how many hospitals and schools we need and the investment needed in and the pressures on public services. It is extraordinary that we have gone through that mountain of debt, but that is the legacy of the crash.

I will move on because I think I only have ten minutes today. The time has been reduced.

The Deputy has 20 minutes as the lead speaker.

We received a briefing note from the Department of Finance on the Apple escrow account. The NTMA's presentation was excellent across all of the key areas. The Apple escrow account lost €16 million in value up to December 2018. While it might seem like a small figure in the context of the total sum of €14.269 billion in the fund, how did the loss occur?

Mr. Conor O'Kelly

The investment policy is to invest in conservative assets. That has been agreed to by Apple and Ireland. As such, 80% of the fund will be in Government bonds, all of which will be AA-rated or higher, while 20% will be in high grade corporate credits which are A-rated or higher. The maximum maturity period in the portfolio is five years, while the average maturity period is three years. Even if one looks at the Irish sovereign bond market today, there is a negative yield to five years, with negative interest rates. We are in a negative interest rate environment and the portfolio, as constructed, in theory, will probably return a figure of -0.5% per annum. That is the expectation.

There are only two potential outcomes. There is an appeal against the Commission's decision in the first instance. If the Commission sustains its original decision, the State will get the €14.269 billion and the question will be how it should spend it. If the Government wins and the taxpayer loses, I take it that Apple will get its money back. Will it only get what is in the fund? As such, does it share the risk?

Mr. Conor O'Kelly

Correct. We are both sharing; the pot is the pot. The decision to be made at the outset is whether more of a risk should be taken with the money. One can increase one's risk appetite and go further out with maturities or into equities to try to get a return on the fund. However, one would have to take a significant risk. We have just talked about taking a market risk and how it can turn against us. One can lose money very quickly.

Does the NTMA have any sense of how long the process will take before a decision is made? I imagine it will impact on the type of investments to be made, will it not?

Mr. Conor O'Kelly

Absolutely.

Has the NTMA been given any indication? Is it anything like "How long is a piece of rope"?

Mr. Conor O'Kelly

It is really, but we have made some assumptions which suggest a maximum period of five years and an average of three. That informs our guess as to how long it will take, but we do not know. I do not know whether the Department has a view on the matter. We are to manage the money and decided that was the basis on which we would start. An average life of three years is the way we have constructed it. If things change, we can adjust the policy.

Mr. Eoin Dorgan

It can take many years for the legal process to conclude in the European courts. Based on precedent, it can easily take up to a decade in some cases. We are very much at the mercy of the courts.

I refer to the voluntary redundancy scheme that operates within the NTMA. It is not something that is generally available in the public sector. My understanding - I might be wrong - is that one of the few other semi-State or Government agencies to run a similar scheme is NAMA, but there may be others. Why is there a voluntary redundancy scheme in place? It seems to be a very attractive scheme and obviously is very good for the staff. Why is it in place in the NTMA and not across the public sector generally?

Mr. Conor O'Kelly

I will ask Dr. Brennan to take that question.

What does it entail?

Dr. Sinead Brennan

The terms of the redundancy scheme are the same as the terms of the Department of Public Expenditure and Reform. We offer three weeks' pay per year of service, plus two weeks' statutory pay, capped at €600. We opened a redundancy scheme in 2018. The organisation was going through significant change and we wanted to ensure we would have the right skill sets for the future. There were 33 participants in the scheme, at an overall cost of €2.5 million. As for the return, one third of the people who have left will not be replaced, one third are being replaced at a reduced cost, while one third are being replaced at a similar cost. Overall, we will recover the cost of the scheme in a two and a half year period.

I ask the Comptroller and Auditor General whether this is something at which he would look. If it is unique to the NTMA and not available to others across the public service, would the Comptroller and Auditor General comment on it in his report?

Mr. Seamus McCarthy

I draw attention to it because it is not a standard feature. One does not see it in many-----

When Mr. McCarthy says "draw attention to it", what does he mean? Is it simply to draw attention to it?

Mr. Seamus McCarthy

I am drawing the attention of the committee to it as in "You may be interested in this." I am not commenting one way or the other on whether there should be a scheme.

Okay. Given that attention has been drawn to it, what is Mr. O'Kelly's view of the scheme, given that it is not in place across the public service? What is the logic in having it available in the NTMA? Was it sought by it?

Mr. Conor O'Kelly

The NTMA is a bit of a hybrid. It sits slightly outside of the public sector pay system. We do not have increments and are not subject to the usual public sector pay conditions. This was part of the legislation that established the NTMA. Contracts are drawn up individually. We have more flexibility than is available in the rest of the public sector. Our board agreed to put the scheme in place. It is about having mobility throughout the organisation and ensuring that we always have the right skill set. Obviously it must represent value for money. Under the Department of Public Expenditure and Reform's terms, three weeks per year of service is considered reasonable provided it can be demonstrated to a board - and our own board is very challenging in this regard - that it makes economic since and that it will result in a return. That is why, as Ms Brennan pointed out, it made sense for us in this case. We refresh the organisation, we add new skills, people move on and we save money.

I do not necessarily think it is a bad thing to have. It is something that could be looked at across the public service. It is included in the financial statement but perhaps we could get a more detailed note on how it works. That may be useful for us, given that our attention has been drawn to it. It seems to be unique although I believe NAMA and others operate similar schemes. Is that correct?

Mr. Seamus McCarthy

Yes. The committee has previously discussed the need for the scheme with NAMA. The need to retain people and to have incentives through a voluntary redundancy and retention scheme is recognised because of the time limit on NAMA's activities.

That note can be sent to the Deputy through the committee.

The note the committee got shows that in 2018, €13.4 million was spent on fit-out costs and professional fees relating to the new office accommodation at 1 Dublin Landings, North Wall Quay. We discussed this when the NTMA was before the committee previously. I estimate that, between 2018 and 2019, the fit-out costs are likely to exceed €25 million. Are those figures correct? It seems to be a lot of money to fit out a premises. Will Mr. O'Kelly talk me through the reasons for this expenditure? What is the background to this?

Mr. Conor O'Kelly

We are in the process of moving out of our current premises as we speak. As many members will know, we moved into Treasury Building in 1991. We signed a 25-year lease for the building at that time. We took up some more space over subsequent years. Those leases have been coming to an end. In light of that, a few years ago we began thinking about finding a new home. We could either renew the lease on Treasury Building or look at other options. The board decided to look at other options. We received 18 submissions under an open procurement process. We ended up looking at four particular buildings in some detail. We ended up moving to North Wall Quay at a cost of €49 per square foot. Rent in the area of Treasury Building is in excess of €60 per square foot. The north docks is one of the cheaper areas of Dublin from the point of view of economic value. We decided to move beside the Central Bank. The cost for fit-out was budgeted at €30 million and is coming in at approximately €25 million in total.

Is there a breakdown of the total between fit-out costs and professional fees?

Mr. Conor O'Kelly

Is the Deputy referring to professional fees included in the total fit-out costs?

Mr. Ian Black

They are coming in at approximately €3 million.

Mr. Conor O'Kelly

Every part of the fit-out has to be publicly procured. It is a high-specification building. The NTMA has some fairly sophisticated mandates. To put it in context, $1 trillion went through the NTMA's settlement system and treasury system in 2018 alone. There is significant cabling infrastructure to be put in place. It is reasonable value. The budget is set and a project board is in place which includes non-executives. We have remained on budget. The Comptroller and Auditor General has been looking at the numbers very carefully.

We can all rightly be angry at the mountain of debt we have and at the massive social cost for citizens associated with it but it is also important to point out that we do not often have Accounting Officers before the committee who give us the level and quality of detail we have got today. The quality of the work of the NTMA is recognised across the political divide and outside it. It is very professional. It has managed our assets very well and has managed our debt as well as is possible. I put on record my appreciation of that work. The mountain of debt is of concern.

I may elaborate on my final point. Towards the end of his presentation, Mr. O'Kelly talked about risks. One was corporate tax but the other was Brexit. Will he talk us through the risks presented by Brexit in respect of the debt and the other elements of the NTMA's remit? What solutions are being put in place by the organisation to mitigate these risks and protect the State from Brexit as best it can?

Mr. Conor O'Kelly

I do not mean to say this glibly but whether the issue is Brexit, Italy, corporate tax or some other challenge, Ireland is a small open economy which is heavily indebted and which relies on international investors for 90% of its borrowings, so Ireland has to be in the business of permanent contingency with regard to our debt. Something will end up hitting us. It may be Brexit, Italy or, more than likely, something which we cannot even think of today. People talk about whether the bond market or some other group is predicting a recession. I will give my prediction for a recession. The chance of a recession in Ireland is 100%. We cannot afford not to have a contingency in place. We have to remain vigilant to that and we do this by maintaining significant cash buffers at all times and by smoothing out the profile of the debt to minimise refinancing risks in the future.

Does the NTMA have any oversight over the so-called rainy day fund?

Mr. Conor O'Kelly

Yes.

It does. There is nothing in it at the moment but there will be €500 million going in this year.

Mr. Conor O'Kelly

Under the legislation currently going through, €1.5 billion will be allocated to the rainy day fund. After that, we have already positioned-----

Is this one of the buffers about which Mr. O'Kelly was talking?

Mr. Conor O'Kelly

Yes.

What other buffers are in place?

Mr. Conor O'Kelly

One is the cash that we hold. We currently hold €20 billion but, because of the maturities coming up, we have significantly more cash than we normally would. I estimate that we would normally have approximately €10 billion in cash. We do not like to talk in these terms any more but in the old days people used to talk during the crisis about how much funding we had in terms such as a year's funding, 18 months' funding, or nine months' funding. These days our access to markets is not an issue; it is just a question of the price of that access. We do not anticipate Ireland having difficulty accessing the market, we just worry about the cost involved because that will change. The interest investors will charge changes depending on their assessment of our profile.

I thank Mr. O'Kelly.

I will pick up on the €33 billion. Housing is included as an area for investment but over five years, if one considers an average house price to be €300,000, this would build something like 33,000 houses. It puts in context the extent of what we cannot do, that is, the opportunity cost. Billions get confused with millions these days. It really does show the magnitude of the debt.

Mr. O'Kelly told us earlier that the two highest rates on our bonds at 4.4% and 5.9%, yet we see an interest rate of 6%. Am I reading that right?

Mr. Conor O'Kelly

Where is that figure?

It is in the league table captioned "Despite progress, debt & interest remain elevated" in the NTMA's written submission to the committee.

Mr. Seamus McCarthy

This 6% relates to revenue. It is the cost of interest as a percentage of the revenue raised in the year. It is not the cost on capital.

I misread that. The NTMA also says that the amount of debt is largely unchanged since 2014.

On a previous occasion we were told that some bilateral debts had been paid off and we obviously have paid off some others. There has been borrowing in the meantime. Does Mr. O'Kelly have a figure for which is residual debt and which is new? We need to take on debt if we are to invest in capital and, with inflation, it makes sense for us to do some of those things. Is there a separation?

Mr. Conor O'Kelly

Not really. We are focused on what would be a primary surplus and an actual surplus. The primary surplus is the surplus of the Government's revenue over expenditure, not including interest cost. We have been running a primary surplus for quite some time, which is why debt is stable. When one goes into actual surplus, then one's debt starts to fall. The first time that Ireland went into actual surplus was 2018. That would be the first time when the debt started to fall in nominal terms. The Government could use sales of assets such as bank shares for a once-off payment. They would be the exception rather than the rule. Ultimately, for debt to fall, the Government has to run a budget surplus. There are significant capital expenditure and revenues to consider and that is a matter for the Government.

With regard to the former Irish Bank Resolution Corporation, the bonds are being worked through. I do not know what the terminology is but the NTMA is changing them from promissory notes into-----

Mr. Conor O'Kelly

Regular debt.

Exactly, if we just use layperson's language. What is the profile of that from 2018 onwards?

Mr. Conor O'Kelly

It is down from €25 billion originally to below €10 billion. We are retiring and exchanging those promissory notes, which are held by the Central Bank, to which we pay floating rate interest, and exchanging them for debt on the open market. A timetable was agreed with the Central Bank and European Central Bank to do that when the notes were originally issued. We would accelerate that because interest rates are so low. By doing that a bit faster, we lock in today's very low rates.

How far ahead of schedule is the NTMA?

Mr. Conor O'Kelly

We are well ahead. We may be proceeding four or five times faster than the original schedule.

Will Mr. O'Kelly provide a note on that?

Mr. Conor O'Kelly

I will.

The promissory notes were essentially an IOU. They have been turned into money. The NTMA is turning them into bonds and is trying to do it at the cheapest price possible.

Mr. Conor O'Kelly

That is correct.

In the examples of the 2018 investment highlights, there are a couple of areas where one would think that tariffs would pose a risk in the future, such as in the context of Irish whiskey and the China-Ireland technology growth fund. Why does that not show up as a risk with the possibility of trade wars and State security issues with some of the technology that is coming from China?

Mr. Conor O'Kelly

That is a live question for today. Whiskey was added to the list of tariffs that I saw overnight. We are included in tariffs which will potentially be imposed on Europe by the US. That is a risk and we will have to look at any other exposure that we might have. If there were to be issues with the China-Ireland fund, they are small venture capital companies and the amount of money involved is probably relatively low. Our exposure is €50 million in that fund along with China. It is a very early stage venture capital fund. It is not substantial exposure compared to the €9.1 billion of the ISIF. That is probably why it is not appearing at the top of our risk register. The Deputy is right that it is an escalating risk and we will have to look at it across the portfolio.

It may well show up as a risk in the future, particularly if trade wars happen.

Mr. Conor O'Kelly

Absolutely.

I want to focus on the investment strategy. The NTMA invests in specific areas and that sits as a State asset. Is the asset the item invested in or the return on the investment?

Mr. Conor O'Kelly

The asset is the valuation of that investment. It can change. It is marked to market every year. Everything that is returned is an asset.

I will focus on one thing that was purchased, the concessionary agreements for Enet. Did the ISIF purchased that in 2017?

Mr. Conor O'Kelly

No. The Irish Infrastructure Fund made an investment in Enet. That is a fund that ISIF is a passive investor in and it ultimately invested in Enet. That investment in the Irish Infrastructure Fund is a legacy investment from the national pensions reserve fund from 2012. It is an investment that we plan to examine to determine whether it is still appropriate.

Is that under the remit of the NTMA?

Mr. Conor O'Kelly

No.

When one looks at the challenges and the extent of the external risk, it would make one weep. Italy is noted as a risk. Is Italy's debt not almost exclusively internal?

Mr. Conor O'Kelly

It is. I am pointing to Italy as a risk that investors are talking about in the context of the debt markets and the cost of debt. My final slide compares Italy with Germany. The Deputy can see where the cost of debt spiked in early 2018 due to investors changing their perception of Italy as a creditor. Italy's growth is slowing and its debt-to-GDP ratio has started to rise towards 130%, which is higher than our ratio. Its banks own 20% of sovereign debt, its growth is slowing, its debt-to-GDP ratio is rising and the investors are suddenly charging it much more money for debt. That kind of environment can come about quite quickly.

We know that outside influences, such as what happened in the United States, had a significant bearing on us. This could have exactly the same kind of bearing.

Mr. Conor O'Kelly

That is exactly the point.

How would the NTMA see that playing out if it was to become more than a risk?

Mr. Conor O'Kelly

The cost of our borrowings would start to rise. We are currently rated as a semi-core country against Germany. If the Italian scenario turned into a full-blown crisis, people's attitude towards many European sovereign entities would start to change. Anything that could suddenly affect the interest rate that we pay in the marketplace is a risk for us as a debt manager. That is why we are watching the bond market so closely.

It is new borrowings as opposed to ones that the NTMA has already.

Mr. Conor O'Kelly

Correct. With our debt being so elevated, we will be borrowing for a long time. If the cost of that borrowing and our debt on the market starts to rise, it will have to come out of other spending. As the Deputy mentioned, there is also opportunity cost due to what it could be spent on.

I welcome our guests and thank them for the presentation. I have a few questions. Anybody looking in who, like me, has a basic understanding of these matters will require the Ladybird explanation in respect of some points. Deputy Catherine Murphy mentioned that the Italian borrowing is primarily internal. The yields on Italian debt are approximately 3.5% or 4%.

Mr. Conor O'Kelly

Correct.

We are at 0.5%. Is it Mr. O'Kelly's sense of the market that a major crash is anticipated in Italy?

Mr. Conor O'Kelly

I am just pointing out that investors can change their minds. Investor sentiment changes quickly.

Investor sentiment is saying to us that things are not good in Italy.

Mr. Conor O'Kelly

That is what investors are saying about their Italian exposure.

There is nothing we can do about that and, in the European context, there is very little the EU can do.

Mr. Conor O'Kelly

Correct.

People have to manage their own contingency as best they can. The NTMA carries on average €10 billion of forward funding, but it is €20 billion at the moment because maturities are coming up.

What happens if the wheels come off post Brexit? What if there is a major problem and something manifests itself in Italy or Portugal or elsewhere? How is the State fixed then? I recall the days when we were fully funded for the year ahead. Are we in danger of the markets drying up for us or is it just the case that yields will go up and it will be more expensive for us?

Mr. Conor O'Kelly

I think it is the latter. Ireland has strong growth, creditworthiness and resilience, and a strong position and economy across the board. Obviously we could get a significant shock from Brexit; we can see that certain sectors will be significantly affected. In the overall context, it probably will not be viewed as material from a bond market point of view when it comes to access to markets. However, they could easily change the price that they charge us, and that is where we need to have contingency built in.

Debt managers want to be in the position where they do not have to go to the market but can choose their timing and what part of the market and yield curve to go to. When there is big refinancing risk and they have to go to the market at a time that does not suit - perhaps it is very volatile or conditions are very poor - there will be a charge for borrowing in those circumstances. Debt managers want the freedom and flexibility not to have to go when the conditions are very poor. The cash buffer gives control over the timing and can allow them to wait it out and come up with a more efficient and economic strategy.

For people watching at home, the understanding generally is that our debt is at €205 billion but we are not borrowing any more or adding to that. Is that correct?

Mr. Conor O'Kelly

Correct.

When Mr. O'Kelly said the State will be borrowing for a very long time into the future, he was referring to refinancing, managing maturities and making sure that if the market improves, we can diversify our debt for better interest rates. We are not borrowing at the moment. There is speculation in the media and in some ministerial announcements that there is the potential for two budgets in the year ahead: the Boris Johnson budget and the other budget. If there was a crash-out and a very bad Brexit, we might be looking at a €5 billion deficit next year. How is that calculated? Does the Government lift the phone to the NTMA and ask it to prepare for a debt of €5 billion next year? What kind of preparation is done? What is the process or is that built in?

Mr. Conor O'Kelly

We feed in our assumptions to the Department in the form of economic statements and projections of the cost of the debt and of financing. We get forecast estimates of the Exchequer surplus or deficit for the years ahead. As those change, we have to adjust our strategy. That is the way it works. The Government is in charge of economic policy and if it wants our advice, we give it when asked.

We do not want to comment on policy anyway. Policy aside, the economic statement published a few week ago indicates that there is €2.8 billion of fiscal space with €2.2 billion committed. If things go bad for the HSE in the next period, that €2.8 billion will be gone and there will be no money. Is the NTMA preparing for the fact that we might need a few extra euros around next year?

Mr. Conor O'Kelly

As I said earlier, we are always prepared because we have to be, and whoever is managing the national debt will have to be for a very long time. Our debt is significant and we do not know what could happen; things could happen very quickly to blow us out of the water.

If we go back to borrowing-----

Mr. Conor O'Kelly

We manage independently of events. We cannot predict the future and we do not know what is going to happen, so we manage on a permanent contingency basis. We believe that is the most prudent thing to do. We have told the Minister and the Department that we are comfortable that, irrespective of the scenarios that will play out in respect of Brexit, from a debt management point of view everything is under control for the time being.

In the event that things do not play out particularly well and the Oireachtas decides to pass a budget involving a €5 billion deficit in current expenditure next year, what would be the likely impact on yields available to the NTMA to raise money?

Mr. Conor O'Kelly

Investors would make their own assessments, so I cannot speak to that.

Based on the NTMA's experience, what would the impact be? We are down to a bond yield of 0.5%; it was a very high a number of years back but, thankfully, bond yields have recovered since. Would it be a major statement to the markets if Ireland was not just debt managing but borrowing €5 billion as a Brexit contingency? I know we are talking about hypotheticals but what rate of increase could we expect on yields?

Mr. Conor O'Kelly

What are investors interested in? They are interested in getting paid back and in the State being able to pay their interest.

They are also opportunistic, in the sense that if they can sell something for €10 billion, they will, rather than taking €5 billion. Will preparations for a hard-Brexit budget - one of the two that is being prepared at the moment - have an impact on yields on an opportunistic basis? People know that they will be paid back because Ireland is not Venezuela. Might it be used as an opportunity for people to charge 1%, 2% or 5% instead of 0.5%?

Mr. Conor O'Kelly

Investors will look at the long-term economic impact, what the money is being spent on and why it is being spent. I imagine that if it were for a temporary blow such as Brexit, where the Government is trying to fix a problem and insulate itself, investors would look through that. As to whether debt managers would be charged a premium when they are in the market actively auctioning, it is very likely. If a little bit more needs to be borrowed, the markets would estimate that; it is supply and demand. However, I think it would be modest.

It would be reasonable to expect a modest spike for a short period.

Mr. Conor O'Kelly

Correct.

Why is the NTMA not buying its new offices?

Mr. Conor O'Kelly

Government policy is not to buy for agencies such as ours or allow them to purchase property. That is probably for the purposes of precedent. It would probably cost €150 million to buy the building; even if we thought it was a good thing to do, if we spend €150 million on a building, that is €150 million that cannot be spent somewhere else. That is why we will not buy the building. I presume that if we owned the building, we would probably never sell it, so is there real value in buying it? We negotiated lower rents because of the type of lease and the Government covenant. That is probably the best way to extract value.

Is it important to be on the North Dock?

Mr. Conor O'Kelly

It is.

If the office was in Kildare, say, would that matter?

Mr. Conor O'Kelly

There is an argument for both. Access to the airport makes it easier for international investors and we have a lot of traffic coming through. Staying close to the Central Bank and the financial district probably makes sense at the margin. That is my view and I know other people have different views.

Rent is just dead money though. It is just a personal view, but the NTMA is not going to close down any time soon and it would make better sense to purchase or build a building or to take over a State-owned building, rather than dishing out money. Is a lease on Treasury Building being broken to facilitate the move?

Mr. Conor O'Kelly

No. All our leases are expiring and some of them have expired already. We are managing that process and we can sublet.

NAMA is there as well.

Mr. Conor O'Kelly

NAMA is coming down to the dock.

Will it be there for whatever period it has left?

Mr. Conor O'Kelly

All our sister companies are coming with us.

What is the post office savings bank fund?

Mr. Ian Black

It is part of retail savings. It is a savings book.

The old-fashioned book, that we all had our 50p in. The NTMA is given that money and it manages that fund.

Mr. Ian Black

Correct. It is the agent of the NTMA for that fund.

The NTMA takes that money and manages and invests it.

Mr. Ian Black

The post office savings bank fund is separate to State savings but is all managed under the one brand. Legislatively speaking, the post office savings bank fund was set up separately. The State savings bonds or certificates go directly onto the NTMA's remit.

When Joe and Mary Bloggs lodge their money there, the NTMA manages it.

Mr. Conor O'Kelly

Yes.

Is it managed in liquid form or is it invested for them?

Mr. Conor O'Kelly

We allocate it as part of our cash.

Does it pay NTMA a dividend for doing that or does it do it for free as part of its role?

Mr. Ian Black

They are our agents so we pay them a fee for their services.

They gather the money for NTMA and NTMA pays them a fee.

I have a final question. It goes back to Deputy Cullinane's question about the escrow account. What does it mean if we are in negative interest in the context of the Apple money? Is it that we are putting in money and getting no return or losing some of the principle over the period?

Mr. Conor O'Kelly

A negative interest rate means getting back less than was put in at the beginning.

I know we agreed with Apple what we were going into, that there would be a three to five-year period and so on, but why would we not invest it where the principle was guaranteed and there was less risk?

Mr. Conor O'Kelly

If the Deputy can give us some examples of where to invest where the capital is guaranteed and the counter-party risk of that is ------

The NTMA could put it into the post office saving fund, could it not?

Mr. Conor O'Kelly

Apple would probably take Ireland as a risk, it is a single A credit, and €14.2 billion would be quite an exposure.

If it goes on for ten years and we lose €16 million a year, that would be €160 million.

Mr. Conor O'Kelly

The Deputy should probably talk to the former Governor of the Central Bank about all that. The purpose of that policy is to force people out of the risk curve and to take more risks and put money into the economy. This fund does not have that appetite.

And, of course, we may be in better shape in respect of it in five years. Who is managing the fund?

Mr. Conor O'Kelly

The money has been put out to three investment managers, namely, BlackRock, Goldman Sachs and Amundi.

Was the contract put out to tender?

Mr. Conor O'Kelly

There was a full open EU procurement process. The position was similar in the case of our escrow agent and custodian, Bank of New York Mellon. That is the custodian and there are three investment managers. We can monitor their performance, which we do daily, and can change the manager if necessary but all were done on open procurement basis.

Are they paid by the NTMA, Apple or the fund?

Mr. Conor O'Kelly

They are paid by the fund. The fees paid to the escrow agent and the investment managers all come out of the fund's expenses.

That is all done on pre-negotiated rates as per the contract and so on.

Mr. Conor O'Kelly

Yes.

That is great. I thank Mr. O'Kelly.

I welcome our guests from the NTMA and thank them for all the information provided. I cannot say that I understand all of it but I have tried to read it. They have provided the information and it is up to us to ask the questions.

I am seeking clarity on matters relating to rent, which I raised on the previous occasion. I refer to pages 111 and 113. The NTMA indicated that there were no breaks in the leases but according to what is stated on page. 113, the leases go on until 2026 and 2027. Is there parallel leasing? We are going into a new building. Will Mr. O'Kelly give me the details and cost of that? In parallel, the NTMA is retaining the old building because it has leases right up to 2027. What is the cost of that? Do some of those buildings remain empty? Does the NTMA plan to sublet some of them?

Mr. Conor O'Kelly

Mr. Black can talk more on the detail but we are moving out. There are leases on some of the floors because we took different floors at various times. We can sublet that and we are comfortable with the demand on that. We are also talking to the OPW on that. There are lots of possibilities in that regard.

I find Mr. Kelly very straight so I will keep questioning him. I refer to the NTMA's commitments which states that in 1991, 2007 and 2012, the agency entered into lease agreements of varying duration until 2017, 2026 and 2027. The NTMA is in the process of moving. Is it paying parallel rents?

Mr. Conor O'Kelly

No, we will be subletting.

I might be using the wrong word. At present, the NTMA is renting one building and another.

Mr. Conor O'Kelly

While we are moving, yes.

Then the NTMA will sublet.

Mr. Conor O'Kelly

Yes.

What is NTMA paying? The amount was approximately €1 million per floor when our guests were previously before us. How many floors was that?

Mr. Ian Black

Yes. We have two floors.

Does that include NAMA?

Mr. Conor O'Kelly

This does not include NAMA. It has its own lease.

So that is two floors and does not include NAMA. What else does it not include that comes under the NTMA's remit?

Mr. Conor O'Kelly

Nothing.

The rent is €2 million in the current building. What is the cost of the new building?

Mr. Conor O'Kelly

The rent is €49 per square foot.

Mr. Ian Black

It is €7 million per annum but we do not occupy the full space. We occupy approximately two thirds of the space, so we pay about €4.6 million of the €7 million.

That is going from €2 million plus NAMA.

Mr. Ian Black

No. While NAMA has two floors, the State Claims Agency occupies one of those. As NAMA has wound down, we have grown into its space. From the State's perspective, it made sense not to use its space.

I am stuck and it would be helpful if I could get a note on exactly what the NTMA has been paying, what it will pay and how long the premises will remain empty before it is sublet. I would like it spelled out in the same manner in which the NTMA have spelled out everything.

Mr. Conor O'Kelly

That is fair enough, absolutely.

I also want this for NTMA's sister companies. The NTMA's spending has gone from €2 million - €1 million per floor - to €7 million, but there are reasons for this and the NTMA is going to supply details in that regard.

Mr. Conor O'Kelly

The bottom line is that it is a like-for-like basis. The rent will be significantly cheaper than the rent we would have had to pay.

That may well be by square foot, but what about for the overall cost? A figure of €150 million was thrown out in the context of buying a new building. My view is that we should either build or acquire buildings. It is absolute madness and the State is part of the problem in the market. In this case, we need the details.

There was no breaking of leases. Was NTMA given the option to break the leases?

Mr. Ian Black

We have an option to either surrender the leases or to sublet them.

If they are surrendered, is there a penalty clause?

Mr. Ian Black

Yes. Both parties have to agree so there would be an option unless the party did not agree.

I think of Galway and the daftness that went on there in renting. There was one appalling building at a cost of €1 million per year and when the lease was broken, a payment of over €1 million had to be made. There are penalty clauses if a lease is broken.

Mr. Conor O'Kelly

We are not going to-----

The NTMA is not going to break the lease. It will keep it and sublet. That is okay. We would like details of that. I turn to the financial statements and the weakness of financial controls that is referred to on pages 70 and 147. I refer to page 147 and the figure of €721,000.

Mr. Seamus McCarthy

The audit report on page 147 relates to ISIF. There is one statement on internal control and this can be found between pages 68 and 70.

A weakness was identified in the context of internal controls. Was there an actual loss of €721,000 there?

Mr. Conor O'Kelly

It is regrettable.

The question was whether there was a loss. I am trying to get to simple language on it.

Mr. Conor O'Kelly

The gains on the fund are lower because of this mistake.

I see. The gains are lower to the value of €721,000.

Mr. Conor O'Kelly

That is correct. In ISIF terms, if the €850 million in total gains since inception are €750,000 lower because of this mistake of not hedging foreign exchange exposure that should have been hedged.

Had that been done, the fund returns would be €750,000 more.

How did that happen and what has been done to prevent it from happening again?

Mr. Conor O'Kelly

It is unfortunate that it happened. Our policy invariably is to hedge our exposure outside the euro. We bought a fund which was in dollars, but it was not designated or marked on one of the spreadsheets as such; rather, it looked like it was a euro fund. We discovered the mistake and brought it to the attention of the Comptroller and Auditor General. When we discovered it and went to put the hedge in place, the dollar exchange rate had moved against us, unfortunately, and it cost us €750,000. Had we done it at the time, the investment returns would be €750,000 more. We have since closed the gap in that process, which essentially resulted from human error and a process that had a weakness. We fixed the weakness and are confident that such a situation could not arise again.

Mr. O'Kelly set out the situation in regard to the divestment fund in his opening statement. The NTMA continues to consider it. While researching this issue, I realised the Government had initiated a Nuclear Weapons (Prohibition of Investments) Bill in 2012. I had not been familiar with it previously. It was introduced but not enacted. It was an excellent Bill which was somewhat similar to the Fossil Fuel Divestment Act. Has the NTMA given consideration to in what it is investing such as nuclear weapons? Has it considered its policy in that regard?

Mr. Conor O'Kelly

We cannot invest in armaments or munitions.

It is a separate matter and specific to cluster munitions.

Mr. Conor O'Kelly

That is right.

I am referring to nuclear weapons.

Mr. Conor O'Kelly

I will look into that matter further. I am hopeful we do not invest in nuclear weapons.

It is a matter for the Dáil to consider. I refer to the NTMA's ethical policy in the light of the military parade to take place in Washington today. The mind boggles.

Mr. Conor O'Kelly

I will look into it and revert to the committee.

On NTMA investment, I note and welcome that it has five strands this year, of which housing and regional development are two. On regional development, the map Mr. O'Kelly showed the committee detailing regional investment is not very positive for the west. I presume it will be a top pillar of the five.

Mr. Conor O'Kelly

We recently held a big conference in Sligo at which we presented to a great group of potential investors, entrepreneurs and local authorities. We are hopeful we will be able to attract more investment in all regions, including the west.

I cannot find the map, but it struck me that------

Mr. Conor O'Kelly

It is on page 23.

I thank Mr. O'Kelly. One can see that the figures for Connacht are 5%, 6% and 4%, while the figures for Ulster are also quite low. Munster, Leinster and Dublin receive the majority of investment.

Mr. Conor O'Kelly

I would love if there were more opportunities in Connacht. That would be fantastic.

I would love it too, but I would like to see more practicality in the plans.

Mr. Conor O'Kelly

We need proposals. We make an open call to anybody who is listening that we are open for business and would love to see------

The NTMA is open to proposals and investment.

Mr. Conor O'Kelly

Absolutely.

One of the big risks is that all of the investors are from outside the country. The NTMA made that point publicly and Mr. O'Kelly made it to the committee. What is its plan in that regard in terms of Irish savings and the potential here, given that there is that big risk.

Mr. Conor O'Kelly

We have the State savings market, to which reference was made. There is approximately €20 billion in State savings, which are retail State savings. To what we are referring in that regard is the institutional investment market. Ireland is not a big institutional investment centre. It does not have the pension fund and insurance industry that exists globally. The fact is that the financial centres are Frankfurt, Paris, London, Tokyo and New York. That is where the capital is. We travel a lot. Ours is a planes, trains and automobiles job selling Ireland and making sure people are informed and aware of the credit and risks.

Would it be possible to get investors in Ireland or is it too small an economy for that to happen?

Mr. Conor O'Kelly

I think the economy is too small. Various factors such as the IFSC and attracting that financial sector are part of it and will help a little, but even if companies have their headquarters here, it is still international capital and their original savings, investors and funders are probably in other jurisdictions. The savings must come from somewhere and the economy is too small to generate the savings we would need to fund that level of investment.

Mr. O'Kelly highlighted that as a risk. What steps can the NTMA take to alleviate the risk if it is outside its control and it cannot do anything within Ireland?

Mr. Conor O'Kelly

There are several things that can be done. First, one ensures there is plenty of cash available. Second, one ensures the investor base is diversified. One must be aware of the risk of an event happening in the United States or the United Kingdom which would lead to that investor base shutting down. We ensure we are diversified geographically and by type, which is why we have the green bond, the inflation bond and other types of bond. Having different pools of investor in terms of type and geographical location means that one is unlikely to be shut out of any market at one time or, if one market starts to decline, one can look elsewhere for capital. Diversification is probably the key mitigation measure as an issuer, with holding some cash on the balance sheet.

I thank Mr. O'Kelly.

We are dealing with the National Treasury Management Agency's accounts separate from those of the State Claims Agency, with which we will soon deal in a separate session. We will take a five-minute break between sessions.

I have some questions for the witnesses based on the information provided. I thank them for the very professional and helpful presentation. On the Apple escrow account, the three fund managers involved - Amundi, BlackRock and Goldman Sachs - are based in Paris and London. If one of them underperforms, are there criteria to reduce its involvement? How long are the contracts?

Mr. Conor O'Kelly

We have given them equal amounts for the time being. They are active managers and we watch them closely. We can switch the money at any time based on their performance.

The NTMA can switch the money from one to another.

Mr. Conor O'Kelly

Absolutely.

Has it done so?

Mr. Conor O'Kelly

No.

On the escrow account, the agent and custodian is the Bank of New York Mellon which is based in London. Some €14.285 billion was put into the fund by Apple Sales International. The Comptroller and Auditor General carried out an audit on behalf of the Minister for Finance and the State. Presumably, Apple Sales International carried out an independent audit of the fund at the end of last year. Does Apple accept the NTMA audit or does it carry out its own?

Mr. Conor O'Kelly

It does whatever it needs. What it does is its own business. It is a publicly quoted company which reports quarterly results and its process is its own.

The fund of €14 billion was deposited in an escrow account by Apple Sales International to be held for it and the State. The NTMA looks after the fund for the Minister for Finance and the Comptroller and Auditor General audits it to provide reassurance for the Minister and the committee that everything is okay. I presume Apple has done the same. Was there a joint audit? There must be some detail on an audit of the fund at the end of each calendar year in the tomes of contracts that were signed. I am looking for a copy of the audited accounts produced for Apple Sales International to make sure it tallies with what I have in front of me.

Mr. Ian Black

The custodian provides the information for us and Apple to allow it to produce its accounts. We produce our accounts based on the same information Apple receives directly from the custodian. In a sense, it is for Apple to deliver. It allows it to monitor the fund and produce whatever financial report it has to provide for the Securities and Exchange Commission.

What is the line of communication between Apple Sales International and the NTMA? Is there a line of communication?

Mr. Ian Black

No, the money was put into the fund. It is managed jointly-----

So the NTMA communicates with the Bank of New York Mellon?

Mr. Ian Black

No, there is an Ireland-Apple committee with three members for Apple and three members for Ireland that oversees the management of that fund.

I am hearing something that I have not heard before. Who are those six people?

Mr. Conor O'Kelly

There are three members of the Apple team and three members from the NTMA.

Who are they?

Mr. Conor O'Kelly

They are Frank O'Connor, Kieran Bristow and Dave McEvoy.

Are they staff of the NTMA?

Mr. Conor O'Kelly

Yes.

How often do they meet?

Mr. Conor O'Kelly

They meet quarterly.

Are there minutes of those meetings?

Mr. Conor O'Kelly

There are minutes of those investment meetings.

Who is the chairperson of that group?

Mr. Conor O'Kelly

Frank O'Connor from the NTMA is the chairman.

The amount of money is so large that the Committee of Public Accounts could do with reassurance from the Apple-Ireland committee that it has seen the audit report from both sides. We presume they are identical but we would like to verify that.

Mr. Conor O'Kelly

Would the Chairman like to see how it is reported in Apple's accounts?

No, Apple must have done an audit on this escrow account.

Mr. Conor O'Kelly

It has not.

Apple has not done an audit.

Mr. Conor O'Kelly

No, not as of yet.

How does Mr. O'Kelly know that? Is it from the work of the joint committee?

Mr. Conor O'Kelly

Yes.

Does Apple plan to do an audit?

Mr. Seamus McCarthy

I imagine that when Apple is doing its financial statements it may or may not have a reference in them as required for the companies that contribute to the fund. It may be recognised as a contingent asset but presumably the value information would be standard and it would be accepting of it.

Is it possible for the NTMA to use its good offices to get us a note on-----

Mr. Conor O'Kelly

We can get a note on how Apple is recording the fund for value.

We do not want to hear in two years' time that Apple is not satisfied with something after the NTMA has said everything was in order. Apple may have a different view, although I presume it takes a view that is identical to that of the NTMA.

Mr. Conor O'Kelly

It does.

We want to have that verified in a transparent manner. That is all I am asking.

Mr. Conor O'Kelly

That is understood.

I am laughing at the symbolism of the apple and Eve comes to mind but there is not a sign of a woman on the committee. It might be appropriate to tell Apple about what women suffered as a result of the apple symbolism.

Mr. Conor O'Kelly

Eileen Fitzpatrick was the chairperson of the committee but she stepped down.

I have a question about the Strategic Banking Corporation of Ireland. Page 17 of the NTMA's financial statements notes that its investment has supported 32,000 jobs in Ireland. Does the NTMA make funds available to the Strategic Banking Corporation of Ireland?

Mr. Conor O'Kelly

Yes, it does.

The SBCI is a separate organisation.

Mr. Conor O'Kelly

Yes, that is done on the direction of the Minister.

The SBCI, in its financial statements, states that it is supporting 40,000 jobs or whatever the case may be.

Mr. Conor O'Kelly

They are not the same jobs. They are different jobs. These are the jobs supported by the ISIF direct investments in companies in Ireland.

That includes the NTMA's investment in the Irish Strategic Banking Corporation.

Mr. Conor O'Kelly

No, we do not attach any jobs to that. It employs 20 people but we do not include that.

Can the NTMA give us a breakdown on the 32,000 jobs it supports? Are they organisations? To give an example, IDA Ireland often states how many jobs it supports. It may give a small grant to an organisation that employs 500 people and then say it is supporting 500 jobs. Can the NTMA give us a breakdown of these 32,000 jobs? Would we not have those jobs without the NTMA?

Mr. Conor O'Kelly

It is not just about jobs for us.

I know but I am only asking about that bit.

Mr. Conor O'Kelly

As an impact and as a measure, yes.

Employment is a big aspect of the Irish economy.

Mr. Conor O'Kelly

It is a measure of economic impact.

It is highlighted here so I ask the NTMA to provide a breakdown of these 32,000 jobs, whether by category, region or companies employing under 500 people, over 50 people, or whatever the NTMA thinks is reasonable.

Mr. Conor O'Kelly

We will do all of that.

Did the National Development Finance Agency have a separate account before? Where is it in the NTMA's financial statements? Is there a separate account in there?

Mr. Seamus McCarthy

There was a separate account up to 2014. The NTMA was then reorganised and it became a reporting function that was not done separately.

Where are the NDFA's figures?

Mr. Ian Black

They are included in the administration accounts because in a sense its costs are included as part of the NTMA's administration costs.

Does the NTMA have a separate cost centre for what we would call NDFA's function?

Mr. Ian Black

Yes.

Can the NTMA send us a note on that or is it shown separately?

Mr. Ian Black

It is shown in the administration accounts. It is broken down by cost centre.

I was wondering where the NDFA went and if its role has been diminished.

Mr. Ian Black

On page 104, the expenses of the agency are broken down by function.

A sum of €11 million is attributed to the NDFA. I ask the NTMA to send us a note on the NDFA's main activities. We have a note stating that the NDFA delivered public private partnership, PPP, projects in education, health and justice with an estimated total capital cost of €1.7 billion and it mentions the schools bundle. Will the NTMA send us an information note on the activity or is it provided here?

Mr. Ian Black

It is on page 29. There is a chapter on it.

That is good. I have not read every single one of the more than 200 pages in the report in detail.

Mr. Conor O'Kelly

There is a full section on the NDFA and all of its activity.

Is that its activity in 2018?

Mr. Conor O'Kelly

Yes.

That is fine. We have touched on the banks already, as detailed on page 27. The NTMA says it lost €3.5 billion on the investment in the banks last year due to the market.

Mr. Conor O'Kelly

We did not lose it.

The taxpayer did.

Mr. Conor O'Kelly

The value in the banks is not-----

The NTMA is our agent. It lost that money on our behalf. I should have specified that I meant the taxpayer lost the money.

Did the NTMA have a choice on that investment?

Mr. Conor O'Kelly

We did not have a choice.

It is a directed fund from the Minister. We understand that.

Mr. Conor O'Kelly

It is a directed investment. There is no discretion.

We will not get into the politics of blaming the Minister for that one.

The terms of a direction are authoritative.

Yes, it is a long-standing direction so it might go back a number of years or cover various Ministers. That is fine.

Mr. Seamus McCarthy

There was no new direction in relation to it in 2018.

When was the sale of the AIB shares? Was that the previous year?

Mr. Seamus McCarthy

That was in 2017.

The fall in value had nothing to do with the disposal of those shares.

Mr. Conor O'Kelly

No, that was done at a higher price.

On page 27, there is what looks like a simple chart with small figures but there is a lot behind it. Is it correct that €4.7 billion was invested in Bank of Ireland, the State has already received €4.2 billion in return and the value of the investment at the end of the year was €700 million? That would indicate that in respect of the €4.7 billion the State invested in Bank of Ireland, between cash received and the balance of the 13.9% of shares at the end of December, the State and the taxpayer are slightly up.

Mr. Conor O'Kelly

That is correct.

When it comes to Bank of Ireland, of the €4.7 billion invested in it, the taxpayer has received €4.2 billion back to date in cash terms and the shares are worth €700 million, even at the reduced value. That means there is a €200 million surplus on the State's cash injection into Bank of Ireland to date.

Mr. Conor O'Kelly

That is correct.

The State is in surplus as a result of the Bank of Ireland bailout.

Mr. Conor O'Kelly

That is correct.

I will move on to Allied Irish Banks in which the State invested €16 billion. Is that correct?

Mr. Conor O'Kelly

Yes.

The value of the shares at the end of 2018 was €7.1 billion and we have received €6.1 billion in the meantime. That amounts to €13.2 billion, which indicates we are down about €2.2 billion on that investment.

Mr. Conor O'Kelly

The Comptroller and Auditor General will probably have something to say about that because there are other charges and there is interest.

When we come to that I will let the Comptroller and Auditor General in. We all know the big black hole was caused primarily by the IBRC, that is, Anglo Irish Bank and Irish Nationwide. I ask the Comptroller and Auditor General to flesh out the figures for the other banks.

The black hole is concentrated within those two banks: IBRC which includes Irish Nationwide Building Society and Anglo Irish Bank. The other two, to a significant extent, have been repaying the original investment to the State. I want to indicate that pen picture.

Mr. Seamus McCarthy

The cash figure at which the Chairman is looking is the position for the fund. The position for the State is different because we had to borrow and pay the interest.

It had to finance it.

Mr. Seamus McCarthy

The opportunities for investing it in something else were forgone when a return could have been generated.

I understand that.

Mr. Seamus McCarthy

I will provide a chapter on the updated position as at the end of 2018. When I reported on the matter in 2016 - the figures are broadly in the same space - the big loss concerned IBRC. There is a loss on AIB which is relatively significant. In the case of PTSB and Bank of Ireland, one is slightly under and one is slightly over, but that does not take account of any surplus that will be eventually generated from NAMA. When one takes it into account, all in all-----

As we all know, the ultimate value of the shares when they are sold could be up or down. On the payments that had to be made under the bank guarantee, what does "cash received" consist of?

Mr. Seamus McCarthy

Is the Chairman referring to the "cash received" in the fund?

Yes, Bank of Ireland-----

Mr. Seamus McCarthy

It represents dividends and share sales.

The banks were paying a significant fee to the State during the period of the bank guarantee. Has it been factored in in the figures?

Mr. Seamus McCarthy

No, but it will be factored in in the chapter I will produce.

It was significant in its own right.

Mr. Seamus McCarthy

There are many elements to it. On the retiring of the IBRC debt that the Central Bank is carrying, while it is a cost to the NTMA, it is generating a surplus for the Central Bank which will come back to the Exchequer. It will all be laid out in the chapter.

It will come back by way of a dividend.

I am handing over to Deputy O'Connell, although I have a few more questions to ask, but it is not fair of me to take up too much time.

On page 7 of the NTMA's financial statement it is indicated that we owe €205 billion, while the interest paid on the national debt last year was €5.8 billion. On average, a figure of 2.8% was paid on debts last year. Much of it is now coming in at 0%. Can the NTMA give the committee a breakdown of the €205 billion in terms of how much is at a negative interest rate, or below zero; between zero and 1%; between 1% and 2%; between 2% and 3% and all of the way up? What is the most expensive debt still in the NTMA's portfolio?

Mr. Conor O'Kelly

It is a 5.9% coupon to be paid in October next year.

We have no debt which carries an interest rate of over 6%. I know that there are 200 pages, but they are the figures I want to see.

Mr. Conor O'Kelly

We will come back to the Chairman with the breakdown.

I am sure Mr. O'Kelly knows it off the top of his head.

It also relates to the amounts of money involved because an interest rate of 5.9% might be charged for a very small or a very large amount of money.

I want the NTMA to break down the figure of €205 billion by money amounts.

We want the amounts of money and the matching interest rates.

Mr. Conor O'Kelly

We and absolutely and totally understand.

On the charts we were given it was indicated that a figure of 29% of the national debt was sourced in the United Kingdom. Was much of it moved in 2018?

Mr. Conor O'Kelly

London is still a big financial centre. It is the average for our last eight or nine auctions. That is where the investors are-----

It is necessarily in sterling.

Mr. Conor O'Kelly

No.

Is it included and I am sure Mr. Black will show me the exact note. Can we have a breakdown of the sum of €205 billion by currency?

Mr. Conor O'Kelly

It is all in euro. There is no other currency.

When the accounts refer to the United Kngdom, from the NTMA's point of view, the public might assume it is in sterling.

Mr. Conor O'Kelly

I understand that. All of our borrowings are in euro, bar a sum of €1 billion to €1.5 billion.

That amounts to about 99%. It is important to clarify the matter as people might have misunderstood.

I have two other minor questions. On page 81 of the accounts there is a reference to the EU-IMF funding programme, under which we still owe €45 billion. There is a figure of €18 billion for the European Stability Fund; €25 billion for the European Financial Stability Mechanism; and €4 billion for the UK Treasury. At what interest rate is the money owed? Why can we not get out of it?

Mr. Conor O'Kelly

The rates are more attractive and lower than at what we can invest. The entities borrow in the market and the debt sits in our accounts. The credit terms are better and they can borrow at better rates than we can on a regular basis.

They are at a lower rate. That is fine.

My last question which always interests some relates to the dormant accounts mentioned on page 136. There are charts, but and I am a little confused. I have the impression from what is included on page 140 that the NTMA holds a sum of €477 million from dormant bank accounts and €100 million from dormant unclaimed insurance policies. There is a figure for the escheated State fund of €4.4 billion. Can it be explained?

Mr. Conor O'Kelly

That last figure is in millions.

Yes, it is €103 million.

Mr. Ian Black

The overall figure received from banks and life assurance companies to the end of December 2018 was €585 million. That is money that was received and not reclaimed.

A sum of €500 million was not claimed.

Mr. Ian Black

What is left and has not been disbursed is represented on page 138. The fund is €289.8 million. They are funds that have been received and not disbursed.

In broad terms, €300 million has been disbursed-----

Mr. Ian Black

Yes.

-----out of a total of €600 million approximately. We are left with half of that sum. That leads me to page 142 on which it is indicated that €27 million went last year to different Departments. Who decides where the money is to be disbursed? Is it by ministerial direction? Who made the decision that the Department of Rural and Community Development was to receive €9.7 million and the Department of Transport, Tourism and Sport, €5 million?

Mr. Ian Black

We act under instructions and disburse to the relevant Department. There is a disbursement plan which is co-ordinated by Pobal but approved by the Minister for Rural and Community Development.

Mr. Seamus McCarthy

It is all included in the Votes for the various Departments.

When representatives from Pobal attended and we looked at the dormant account funds in the Department, we found that it was one of the most mismanaged funds. It had been moved from one Department to another. I am not talking about NTMA's administration of the fund, but there were things that had been approved and never happened. Some of the projects were a mirage. Will the NTMA send us a note on the method by which the funds are-----

Mr. Conor O'Kelly

All we do is operate on instructions and send money back and forth. We are not part of the decision-making process.

Is it by ministerial or departmental-----

Mr. Seamus McCarthy

The Department of Rural and Community Affairs has overall responsibility.

The Department sends a letter requesting the sum of €9.7 billion and the NTMA sends the money to it. We can take up this issue with the line Department.

Mr. Seamus McCarthy

It can be seen that this is cash that has been recouped from the NTMA; therefore, it has to have been spent. One can see the figure going from €15 million to €28 million. It is a significant step up from on what we reported previously.

We were not happy with the amount of money claimed, money Pobal-----

Mr. Seamus McCarthy

It is money that was provided but not drawn down.

That is the only reason I have raised the issue because it has crossed our desks before.

On what page is the chart to which the Chairman referred which indicates the investment in Bank of Ireland?

Mr. Seamus McCarthy

Is it on page 27?

If we look at this example, there is almost an inference that the return received represented good value or was a good idea. When did we give it the money during the bail-out? Was it eight or ten years ago? There is a surplus of €200 million after an eight or ten-year investment period.

It does not seem like good value for money or a good return for the country. The Comptroller and Auditor General referred to the opportunity cost. That money could have been invested in other things, like people's lives. I do not think it is true to say that ending up with over €200 million on that investment was a good idea. It was essential but in terms of a return for the taxpayer, it does not seem like a very good one. AIB's is much less.

Is the reference to the 100% chance of a recession in respect of the present time or 31 October stuff? Can I assume that if we have a hard Brexit looking at a contraction of 8% to 10%, we really will be in an extremely precarious position as a country? Would it be fair to say that?

Mr. Conor O'Kelly

No, I was just making a general point in respect of the long term, that at some point-----

It always happens, the cycle.

Mr. Conor O'Kelly

Correct.

Okay. If we are in this precarious position, which we clearly are as we are carrying that mountain of debt, and if there is a hard Brexit, we really could be in the depths of a recession worse than we were in ten years ago. Would that be true to say? If there is a 100% chance today and then we have a likely contraction of 10%, that does not seem ideal. Would it be true to say we need to brace ourselves?

Mr. Conor O'Kelly

We have to be vigilant and ready. Our debt makes us more vulnerable than we would have been.

If the interest rates had not been so favourable, we would be in a far more precarious position, would we not?

Mr. Conor O'Kelly

We would be. In 2014, the forecast for our interest bill today was actually €10 billion. They were official forecasts. We are going to be coming in at €5 billion. That is because of the interest rate environment.

It is purely interest rates.

Mr. Conor O'Kelly

Yes. It would have been extremely difficult for us to manage without the interest rate environment that has existed.

We have been lucky.

Mr. Conor O'Kelly

We have been.

We might not necessarily be as lucky into the future and we have to be very conscious of that.

Mr. Conor O'Kelly

Correct.

Perhaps this is outside the remit of the meeting but we have significant pay pressure coming on because there is an affordability issue. I am assuming people like Mr. O'Kelly are very concerned about this in terms of an inflationary set-up taking off. It is quite concerning, especially when we have been lucky with interest rates and given the threat of Brexit. Has Mr. O'Kelly any view on that himself or is it outside his area?

Mr. Conor O'Kelly

I think I will pass on that, if it is okay with the Deputy.

The appointment of Ms Lagarde is positive, as Mr. O'Kelly mentioned.

Mr. Conor O'Kelly

I think so, yes.

I know I discussed the NTMA building with Mr. O'Kelly - is it a year since he was here? Time goes very quickly.

Mr. Conor O'Kelly

I remember it well.

I am still waiting for my invite although I know the NTMA is not in the building yet. Mr. O'Kelly mentioned ethical investments. I see whiskey on the list and Deputy Catherine Murphy referred to Mercosur and the effects that deal might have. Who determines what is ethical in terms of NTMA investment? We have had a lot of conversation here about minimum unit pricing of alcohol and all of that. Is there an ethics committee or how is it decided?