COMMITTEE of PUBLIC ACCOUNTS díospóireacht -
Thursday, 13 Jan 2000

Vol. 2 No. 1

1998 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 31 - Agriculture and Food

Financial Statements 1995 - The Irish Intervention Agency (FEOGA).

Mr. J. Purcell (An t-Árd Reachtaire Cuntas agus Ciste) called and examined.

Mr. J. Malone(Secretary General, Department of Agriculture, Food and Rural Development) and Mr. P. Mullarkey (Secretary General, Department of Finance) called and examined.

Chairman

We will deal with the 1999 report of the Comptroller and Auditor General and the Appropriation Accounts, Vote 31 - Department of Agriculture, Food and Rural Development. We will also consider the final report of the steering group on systems review of the Department of Agriculture, Food and Rural Development and the annual financial statements for 1995 of the Irish Intervention Agency. In addition to the above, in the past few days we received the annual financial statements for the Irish Intervention Agency for 1996 and we also propose to dispose of that today.

Witnesses should be aware that they do not enjoy absolute privilege and should be apprised as follows. Attention is drawn to the fact that as and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997, as amended, grants certain rights to persons who are identified in the course of the csommittee's proceedings.

I welcome the Secretary General of the Department of Agriculture, Food and Rural Development, Mr. John Malone, and the Secretary General of the Department of Finance, Mr. Mullarkey to the meeting. Will this be your last time before the Committee, Mr. Mullarkey?

Mr. Mullarkey

I do not know.

Chairman

We will miss you. Mr. Malone, perhaps you would introduce you officials.

Mr. Malone

I am accompanied by Richard Healy, Tom Arnold, Denis Byrne, John Fox and Donal Russell.

Chairman

Mr. Mullarkey, perhaps you would do likewise.

Mr. Mullarkey

I am accompanied by Mr. Gallagher and Mr. Fox, who is the secretary to the Cromien Group, and Mr. McSweeney.

Chairman

You are all welcome. I call on the Comptroller and Auditor General to introduce his final report of the Cromien committee. We will then deal with the various paragraphs.

Mr. Purcell

It will be recalled that the origins of the report stemmed from concerns expressed by the Committee relating to its examination of my report on the 1997 appropriation account of the Department. A high level steering group, chaired by Mr. Seán Cromien, a former Secretary General of the Department of Finance, was established pursuant to a Government decision. That decision of 12 January was to undertake an overall review of systems of control in the Department.

The group produced an interim report in April 1999 which was considered by the committee at its meeting on 6 July last, and now we have the final report which was presented to the Government just before Christmas. The Government decided that the Minister should report back to it within two months on details of plans or measures taken to implement the recommendations of the final report.

As the committee will see from even a cursory glance, the report is quite comprehensive. It contains 48 specific recommendations covering the areas of financial management, reporting and accountability, control and inspection systems, information management and the FEOGA guarantee system, and it also deals with organisation and resources issues.

The report acknowledges that considerable improvements have been made in the operations of the Department over recent years and that it is already well advanced in implementing some of the group's recommendations. In a press statement the Department, through the Minister, has given a clear indication that it is committed to taking all of the recommendations on board.

The Government decision of December 1999 also noted that the Minister proposes to establish a payments office to be known as the Agriculture Payments Office which will have responsibility for all FEOGA payment services. This is an issue which occupied the committee in the past.

As I said, the report is quite comprehensive and I welcome it. I would see it as part of my remit to establish at future dates the extent to which the Department implements the recommendations which it accepts and to report back to the committee on that in due course.

Chairman

Mr. Malone, would you like to make an opening statement?

Mr. Malone

As has been indicated, this is a comprehensive and in-depth analysis of the Department's operations and systems. Taken together, both the interim and final reports represent a substantial piece of work. There are a total of 48 recommendations in the final report and there are also a number of recommendations from the interim report on which the Department has acted as I promised at my last appearance at this committee in July.

At a general level, I want to assure this committee that the Department takes the exercise extremely seriously and, as has been indicated, the Minister has expressed his support for the report and its findings. The Department sees the implementation of the recommendations as the priority task for the year ahead and work has already begun in that regard. The report has been noted by the Government and the Minister will report back to the Government within a two month time frame on its implementation.

I would suggest that the report should be seen in the context of the changes which have taken place in the Department and the changes with which the Department has had to contend over the past decade. The primary change has been the shift in the nature and style of the support system under the Common Agricultural Policy, and this has manifested itself in the fact that direct payments now account for over 50% of farm income and the Department now has over 196,000 clients and makes over 1 million payments annually.

The Department has indicated at previous appearances at this committee how we have reacted to the new situation through change in section procedures, the use of IT, especially through mapping individual farms and building up client profiles, a strengthened internal audit unit assisted by an external audit committee, accreditation of the Department as an EU paying agency and the certification of the annual EU account by independent auditors.

In addition, we must take into consideration other major issues and changes such as the way that food safety has come to the top of the agenda and a very difficult BSE crisis which rocked the beef industry to its foundation. I believe the Department has adjusted its approach and procedures to take account of these factors and, as has been indicated, the report recognises the progress which has been made and suggests that more needs to be done, a point the Department fully accepts.

There are a number of central themes running through it: financial management, risk assessment, best practice in control and inspection systems, the Department's IT strategy and data management. Each of the individual recommendations has been examined and an action plan is being put in place for their implementation. Some of the recommendations will clearly be easier to implement than others. A proportion have already been implemented and others are in the process of being implemented.

I want to focus on three areas which will be of particular importance in implementing the recommendations - financial management; information technology and organisational restructuring. Considerable attention has been directed to financial management and almost one quarter of the recommendations fall under that heading. It is important to note that the Department has met its statutory reporting and accounting requirements for national and EU funds but, in common with the wider Civil Service, there is scope for improvement and reform.

This particular category of recommendations fits very much into the generic model for financial management in the public sector which was adopted by the Government in July and which will be implemented in the various Departments over the next few years. Critical to this for the Department will be the implementation of the new accounts system, which will be central to the Department's efforts under this heading. The Department hopes to have the first phase of the new accounts system in place later this year, in other words, in time for the next FEOGA financial year in October.

The early implementation of the IT strategy, on which the Department has been working for the past six months, is also fundamental. The Department has made real progress in the area of IT in that a number of important projects are now either complete or nearing completion, and the Department has built very significant data banks of both applicants and animals and has established a client register.

The Department now has a revised IT strategy and that has shown the potential for improvements in the Department's systems. In realising that potential, I believe the Department can improve its service to clients and enhance its control systems. An important priority over the next two to three years will be to develop a pool of shared data which will be used across a range of schemes. The advantage of that is it will enable the Department to better target its inspections, further improve its control regime and have a fully integrated approach to support schemes.

We are also proceeding with the organisational restructuring of the Department and we are working on a structure which is in line with our strategy goals in regard to policy development, food safety, animal health, delivery of support schemes and accountability. The implementation of the new schemes from Agenda 2000 which started at the beginning of this year will constitute a major challenge in that they will bring new and complex schemes. In that task the Department is using the principles put forward in the Cromien report.

I should also add that we progressed the implementation of the recommendations in the interim report, to which reference was made, to the point where they have all either been implemented or are in the process of being implemented. In particular, we have strengthened the Department's management services unit, we have expanded the internal audit unit, a revised IT strategy is virtually finalised, decentralisation to Wexford, which was a difficult exercise, has been successfully completed and we have used risk management principles in regard to Agenda 2000 schemes as well as formulating a general policy on risk management in the Department. The outcome of the accreditation process, to which I referred earlier, is also, in itself, risk management. The Department is in the final stages of setting up a dedicated legal unit.

However, we are conscious that the systems themselves should not be the ultimate objective; they have to deliver results and better controls in the protection of public finances on the ground and ensure the problems encountered in the past are not repeated. The important deliverable is that we now have a plan to deal with the changed environment and the changed requirements on the Department. The new accounts system and the revised IT strategy will bring enormous added value and position us to have systems which will enable us to use data effectively, to target inspections and to have a correct balance between full accountability and giving a good customer service. Based on these systems, we will use concepts like risk management, unannounced inspections, analysis of the outcome of the inspections and overall this will leave us in a much better position. The report back to the Government at the end of February will represent the first milestone on that road.

Chairman

Does Mr. Mullarkey wish to say anything?

Mr. Mullarkey

I have very little to add. Mr. Malone noted the Government has welcomed the final report and has expressed his thanks to all those concerned, particularly the chairman of the group, Mr. Seán Cromien. While the recommendations contained in the report cover a very wide range of headings and levels of detail, everything focuses very closely on the terms of reference. The group has formulated a wide range of recommendations, from the development of improved budgetary and financial control and resource management to the way things are done at factory and farm level. The group has looked at indicators of the success of the Department's systems of financial management and control, notably its record in relation to FEOGA costs. The group has also paid particular attention to the development of information technology, which is vital to the operations of all Departments, particularly one of this size. As a result, the recommendations provide a very good basis for the Department to have in place not only improved systems of control but also improved safeguards to ensure these systems are applied fully at all times by those given the responsibility to do so.

The report raises several issues for the Department of Finance, particularly in relation to the considerable financial and staff resources needed to implement the proposed IT strategy. The Department of Finance has noted the concerns raised by the steering group in this regard and has already responded positively to resource related recommendations in the groups' earlier interim report. Full consideration will be given in the Department of Finance to the Department of Agriculture, Food and Rural Development's draft implementation plan for its IT strategy when this is received. Finally, my Department will co-operate fully with the Department of Agriculture, Food and Rural Development when implementing the recommendations of the steering group's report.

Chairman

The Department of Agriculture, Food and Rural Development has been criticised for deficiencies, some of which arise from a lack of resources, particularly in IT. It is important that the resources issue is addressed and the Department is not wrongly blamed or criticised because of a lack of resources. This is obviously in the realm of the Department of Finance who I know are under pressure from the public service for more resources and have to make final judgments. We should not criticise the Department of Agriculture, Food and Rural Development if there is a problem in this area. We must also be conscious of the pressures placed on the Department of Finance in this regard.

Deputy Rabbitte

It would appear from Mr. Malone's statement that there have been many changes in the Department recently and that he looks forward with a great deal of confidence to them being effective. I received this report on Tuesday afternoon and I glanced through it last night. Given the amount of time it took to prepare and the work that went into it, it deserves more detailed scrutiny than that. I am not certain that I ever fully understood what a forensic audit involved - this is where we started out in 1997. Whatever a forensic audit is, it is not in this report, which is a review of systems. If it was found necessary to make 48 recommendations for improvement, that is to be welcomed. However, it is a systems review rather than dealing with some of the matters which arose at this committee - irregularities and allegations of other irregularities - and we must take it within those parameters.

I wish to refer Mr. Malone to the first matter dealt with in the introduction, on page 5. This raises the question of the lack of timely compliance, as it is referred to in the report, in terms of the presentation of accounts for the intervention agency and the remarks which follow on from that. What is the up-to-date position on that? We were way behind and Mr. Malone said it has now been brought up as far as 1998. is that correct?

Mr. Malone

Yes, we were behind. The account for 1995 and 1996 has been finalised, signed off and presented. The account for 1997 is virtually finalised with the Comptroller and Auditor General. The account for 1998 has been prepared and will obviously have to be finalised by the Comptroller and Auditor General. The next account we will have to work on will be the account for 1999. In the context of our involvement, we are up-to-date. I concede the point that we were behind.

Deputy Rabbitte

How far advanced is the Office of the Comptroller and Auditor General in terms of the filing of sequential reports like that?

Mr. Purcell

As the Accounting Officer said, 1995 and 1996 have been audited. The 1997 audit is well advanced and I expect it to be complete within a month or so. As soon as that is finished we will get straight into 1998. It would be wrong to be concerned that in the absence of the accounts there was a lack of accountability. Recognising the delays which existed in preparing these accounts and agreeing a format, for many years I have referred to such matters in my annual report on the appropriation accounts which would pertain to concerns I would have had about certain FEOGA transactions. These have been aired and examined at this committee. I had taken some compensatory action in order that the accountability demands would be met.

Deputy Rabbitte

I know the Comptroller and Auditor General said he will come back to us in due course. However, in terms of the paragraph to which I drew attention, where the group says it is not satisfied that the present accounting arrangements in this area are adequate and then recommends the setting up of a working group to address this, the aim of which would be the presentation of clear, accessible reports on the entire FEOGA operation, for national accountability, what is the Comptroller and Auditor General's initial reaction to that? That seems to be about the systems that have been in place as distinct from how up-to-date we are now.

Mr. Purcell

It is a very good idea to have a fresh look at all of this. To be quite frank, there was a difficulty in engaging the Department in the production of this account in the early stages - going right back to the 1980s when there was correspondence with a number of Mr. Malone's predecessors about this. I had been insisting for many years that an account of the intervention agency, other than the so-called account or claim to which I would rather refer, goes to the EU. There is a claim or account that goes to the EU every year around February in respect of FEOGA transactions for the previous year ending 15 October, and that substantiates the claim of Ireland on the EU for those moneys. In recent years, that particular account has been subject to certification by private auditors working on behalf of the Commission. Over and above that, there is a requirement since 1994 to have an account of the transactions of the Irish Intervention Agency. That is a public document but the one which goes to Brussels is not.

It is with that we had a problem in engaging the Department because it was working on many fronts; I could understand its problems initially. I was also conscious of the fact that we needed to have something realistic which would stand as an account rather than a memorandum account. It is not perfect, but even to get to that stage, I believe, is an achievement. However, I agree with the general thrust of the Cromien report that it is time to have a fresh look at how that information is presented in a public document. Up to now, it has been notable by its absence to a great degree, and the backlog of accounts did not help that process.

Deputy Rabbitte

I thank the Comptroller and Auditor General. In respect of the second chapter on control and inspection systems, what is the disposition of the Department in respect of the recommendation that priority be given to recovering the full cost of meat inspection services?

Mr. Malone

This is an issue which goes back for some time. We have a Government decision in that regard which obliges us to recover the full cost. It is an issue which has been the subject of litigation between the meat industry and the Department and there was a court case back in 1996. It must be stripped down to its component parts. What is full cost recovery? What we are legally obliged or permitted to recover is the full cost of the meat inspection service. We are not allowed to recover the cost of market support, in other words, the staff controlling intervention, export refunds or such issues. It is the cost of meat inspection.

In that regard we have two options. I should indicate that this is governed by EU legislation. There is an EU regulation covering this area. One has two choices. One can apply a standard provision or rate per annum which is set out in the particular EU regulation. That figure is £3.75 per annum in relation to beef. What we had been doing in endeavouring to recover the full cost is that we had been charging this standard rate and then charging for overtime, because much of the extra cost arises in relation to overtime. However, that was not bringing in the full amount. We had negotiations with the meat industry throughout 1997 and in 1998 we engaged consultants. We also obtained legal advice which was that the only way we could recover full cost would be on an individual plant basis, in other words, we could not do it on the basis of an across-the-board rate per annum. We had examined the idea of having the rate per annum plus a top-up provision.

We did some pilot studies in the middle of last year. We satisfied ourselves we could operate on an individual plant basis. The meat industry, for its part, argued that the system was over-costly and over-expensive and that there were inefficiencies which should be examined, especially the computerised animal movement system. One of the requirements from its point of view was that the animal movements requirement system should be fully in place because that would make the checking in of animals to meat plants more efficient.

We took a decision some time ago that we would apply the system with effect from 1 January this year. We have put that system in place and we have indicated that to the meat industry. That appears to have caused some difficulties between the meat industry and the farm organisations which has caused some problems at present, but they are only part of a larger problem.

Deputy Rabbitte

I do not want to be dragged into a discussion of the current situation.

Mr. Malone

I am anxious to convey that we agree with that recommendation and we want to implement it.

Deputy Rabbitte

On the question of disallowances, which was central to the compiling of this report, the net costs borne by the Exchequer are quantified for the first time. These are £300 million or 20% of the total. Has the Department given its allegiance to that figure?

Mr. Malone

Yes, except that it is teased out.

Deputy Rabbitte

I will come to that in a minute. I was speaking in terms of the global figure.

Mr. Malone

There is no dispute on the figure.

Deputy Rabbitte

I have an old document which shows Deputy O'Malley in the previous Dáil putting the question to Mr. Malone's predecessor if it could have been that the net cost was in excess of £100 million. Much cold water was poured on that possibility. I will find the exact text for Mr. Malone so as to be fair. In any event, the figure is £300 million.

Chapter 4 seeks to break that down. Perhaps Mr. Malone might explain that to the committee. It is stated that £160 million is incurred in respectof technical costs and £140 million in respect of financial costs. Would Mr. Malone explain what comprises technical costs?

Mr. Malone

Technical costs would be issues such as the cost of storing product, a rate per week for storing product in cold stores, what would be called "handling in" and "handling out" charges, and taking in the product and taking it out when it is eventually sold or disposed of. They are the normal handling costs of taking product into intervention.

By way of background, I should explain that the European Union recouped member states at a standard rate and that, in certain instances and in certain years, the actual rates prevailing in Ireland were higher than the levels recouped by the European Union. That would have particularly been the case in the 1980s when it was recognised we had a high cost economy.

It is also important to note that, within that figure of technical costs - I refer the Deputy to table 4.1 on page 41 - there is an element of VAT of £117 million.

Deputy Rabbitte

I was going to ask Mr. Malone to refresh my memory on that. There is £117 million in that £160 million for VAT. Is that the point Mr. Malone is making?

Mr. Malone

Yes

Deputy Rabbitte

Am I wrong or is this the first time that I have ever seen reference to that figure?

Mr. Malone

The Deputy is not wrong. It is the first time this specific cost has been teased out in detail.

Deputy Rabbitte

Why did we spend so much time talking about this when we could have discovered from this report that there was £117 million in VAT? I only got around to reading the report last night but I do not recall seeing this figure before and Mr. Malone has kindly confirmed that.

Mr. Malone

No, Deputy Rabbitte is right. It was an education for us when we broke down these figures. There was an overall figure of £300 million, which Deputy Rabbitte mentioned, and that was the figure I accepted when I came before the Committee last year. That overall figure breaks down into two headings - technical costs and financial costs. The point we were trying to make is that it is virtually impossible to run intervention without incurring some cost to the Exchequer by virtue of the fact that the EU will recoup at a standard rate because in some instances it took unilateral and fairly abrupt decisions to reduce the level of recoupment. In one year it brought it down by 25 %. Also, as is well known, we had problems with interest rates and high costs generally.

Deputy Rabbitte

It is understandable that there would be some costs, but it is surprising that the net cost to the Exchequer is £300 million or 20%. Can we go to page 41 and deal with the VAT? At the bottom of that page it states that the VAT element of technical costs is not a true cost to the Exchequer as the money is recouped by the Exchequer when this VAT is paid over to the Revenue Commissioners by suppliers and that it is effectively a transfer payment between Government bodies. I am at a loss as to how to reconcile this with an earlier sentence which Mr. Malone might explain. The previous paragraph states that as the EU does not refund VAT on any payments to suppliers of goods and services to the intervention agency, any VAT incurred is borne by Ireland. How can it not matter if the EU does not refund it? How can it not matter to us and why does Mr. Cromien recommend registration for VAT purposes?

Mr. Malone

The first point is that, as Deputy Rabbitte rightly says, the EU does not recoup VAT costs, but the second point is that when it gets down to analysing the costs and the net cost to the Exchequer, the £117 million should be subtracted from the £161 million in the sense that the Department was paying the VAT. Effectively, it was a circular transaction of money. We were incurring a cost of £117 million at one end, but the Exchequer was getting the benefit somewhere else.

Deputy Rabbitte

I understand from Mr. Cromien that you can be registered for VAT purposes.

Mr. Malone

The first point is that we should separate the VAT. That would be good accounting practice. The second issue - this has been recommended - is that we should look at the concept of being registered for the purposes of VAT. That is not crystal clear. We must tease out the legalities of whether we can register for VAT and the practicalities and benefits of doing so, bearing in mind that intervention is a declining activity.

Chairman

This principle could have a more general application to arrive at the true cost. I recall Government decisions when the global cost was given, while the true cost wasmuch less, given buoyancy effects. Is there a general examination of this matter, Mr. Mullarkey?

Mr. Mullarkey

There is no general examination, but the Committee can take it we would respond positively, if possible, to this proposal or recommendation from the Cromien committee.

In the past non-commercial bodies have been treated as VAT-exempt, which is the way it is here, rather than as a taxable unit or entity for VAT purposes. The issue was possibly not addressed until now because the intervention transactions were part of an integrated Department of Agriculture and there might have been significant difficulties in separating the VAT transactions pertaining to this area. Given the new structure which has been proposed for FEOGA or intervention transactions, the issue must still be resolved, but either way there will be a clearer separation of these activities within the Department's overall account. It may be, therefore, much easier to contemplate treating this area as a VAT-taxable entity. Being taxable means it could reclaim the VAT and put an end to what is a circular transaction. Being a circular transaction, I suppose it was not a priority to resolve.

Deputy Rabbitte

The statement at the bottom of page 6 states, "we understand that no decision has yet been reached by the Government on the future administration of FEOGA payments". Can you explain that?

Mr. Malone

This is obviously what the Cromien report states. The issue is teased out further in a later chapter and I will get the reference for the Deputy. I referred at the outset to the overall organisational structure of the Department and if one looks at our position overall, from our strategic goals and objectives, the Department breaks down naturally into three headings: policy, animal health through public health and agricultural payments. There is a clear recommendation in the Cromien report that that exercise should start immediately and that the Department should be broken down into those three pillars. The issue on which the Government has yet to make a decision - the Cromien report was considered by the Government before Christmas - is the exact format of the third pillar.

Deputy Rabbitte

Did you not tell us at more than one meeting that the Government supported the decision of the previous Government in 1996, that you were circulating the heads of the Bill and that even though it had taken a long time it was about to be concluded?

Mr. Malone

What I indicated——

Deputy Rabbitte

Is there a battle going on, Mr. Malone, about which we should know?

Mr. Malone

The first point——

Deputy Rabbitte

And are you winning.

Mr. Malone

I never win. The point I indicated when I was here last year was that a memorandum was being prepared for Government, which the Minister proposed to bring to Government, on the appropriate structure for the FEOGA agency. That memorandum was prepared and circulated, but certain difficulties arose in relation to staffing implications, to state the obvious. If one creates a separate Department there will be additional staffing requirements both in terms of support staff and the loss of certain synergies that exist. In other words, we have people that carry out a number of different activities and if those activities are separated, it could mean that two people would be needed where previously there was one. The matter was considered by the Government on two occasions, as I understand it, once in the autumn and once in the context of the Cromien report. I see two options and we have set out our position in terms of both. There are advantages and disadvantages associated with both and it is a matter for the Government to make a final decision.

Deputy Rabbitte

I thought this would have been resolved in the last century. Clearly I was wrong and I look forward to progress reports.

Will you remind the committee of what the financial costs of £140 million as distinct from the technical costs comprise?

Mr. Malone

The position in relation to intervention is that it was necessary to borrow the money in advance. The European Union recouped the money at a standard interest rate. It is well known and accepted that we had a high interest rate environment which coincided with high intervention levels, particularly at certain stages during the 1980s. We were also obliged on foot of a Government decision to borrow in foreign currencies. A large proportion of these losses - I think £140 million - arose from costs emanating from devaluations, in other words, we were caught in a situation where we had borrowed in foreign currencies for understandable reasons at the time. It should also be noted that within the overall report, there is a figure which indicates that our policy of borrowing in foreign currency was in general a sound policy. This issue has been looked at before. The basic answer to the Deputy's question is that the European Union did not recoup us at interest rates——

Deputy Rabbitte

Page 45 shows a net loss of £57 million. Page 46 shows that the National Treasury Management Agency will do it henceforward. Unlike the Government decision on the administration of FEOGA funding, can I take it that the National Treasury Management Agency has been given this remit and that we will not discover there are staffing or other problems? In future will the NTMA handle the borrowing portfolio in so far as it now arises?

Mr. Malone

Yes, and are handling it.

Deputy Rabbitte

A £57 million loss is a lot of money. There was a value for money report on this previously. There is material on the record from Deputy O'Malley and Mr. Dowling where Mr. Dowling agrees that some of the figures suggested by the consultants were hypotheses. The fact is that a £57 million loss is a lot of money. No more than the VAT refundable issues, it seems to me that the NTMA could have been doing this ab initio.

Mr. Malone

You must look at the situation when intervention applied at a high level. Interest rates were high and nothing could be done about that. Second, the losses we suffered were also suffered by the NTMA at the time. That was borne out. There were a number of fairly painful devaluations. If borrowings were in foreign currencies, it was inevitable that these exchange rate losses would apply. There was a Government decision at the time, for reasons of the Exchequer balance and to keep down the overall level of Government debt, that required us to borrow in these currencies. The type of problems we suffered were not peculiar to us. Had the decision been taken earlier to move this area of activity - I believe this was the correct decision - I do not think it is axiomatic that these losses would not have arisen.

Deputy Rabbitte

Is it a considered statement that the NTMA suffered commensurate losses during the same years? I do not wish you to put that on the record if you are not happy with it.

Mr. Malone

For obvious reasons, I do not wish to comment on the NTMA. However, a study was carried out by the Comptroller and Auditor General some years ago when these points were——

Deputy Rabbitte

It is a relatively recent study. To my knowledge, it does not establish that the NTMA had similar experiences during the years in question.

Mr. Malone

I am talking about the devaluations.

Deputy Rabbitte

Devaluations were common but it is a question of how the portfolio was managed. Clearly if there were devaluations, they were quite common across the board.

Mr. Malone

A large proportion of the £57 million is explained by losses that arose in the context of those devaluations.

Deputy Foley

At the outset, it is appropriate to congratulate the high level steering group, chaired by Mr. Seán Cromien, on this excellent report which includes 48 recommendations. Before discussing the report, may I ask Mr. Malone what is the position regarding the present meat strike? I am interested in this issue because there is a factory in Tralee. Thankfully, the pickets there withdrew this morning.

Mr. Malone

This is essentially a dispute between the meat industry and the farm organisations. Deputy Rabbitte inquired about the meat inspection fee which is just part of the problem. There seems to be a broader difficulty, an unhappiness on the part of the producers that prices are not sufficiently high. I am anxious that the action which is taking place does not continue. It is not right that factories should be closed. We are prepared and willing to do anything we can do to resolve the situation.

Deputy Foley

I am pleased with that statement. Is it correct that there was an increase from £3.80 to £5.50?

Mr. Malone

Yes, but we did not impose that increase. Our figure was £3.80. We indicated to the industry and put in place a new system from the point of view of recovering the full cost. However, that did not oblige the meat industry to impose a figure of £5.50; it took that decision itself. As I stated earlier, I believe that is part of the problem. There is a bigger problem on the part of the producers that prices could be better.

Deputy Foley

Given that pickets have been withdrawn in Tralee because the factory has agreed not to impose the increase, could this happen throughout the country?

Mr. Malone

That is one of the obvious solutions. The decision in relation to imposing the full cost must stand. However, we would be prepared to consider how the mechanics of that particular system are operated and that, in the meantime, the factories would rescind their decision to impose the figure of £5.50. This might deal with some of the problems on the ground.

Deputy Foley

But you believe the Department would support that recommendation.

I referred to the 48 recommendations in the Cromien report. Has your Department got a programme in place to implement quickly these recommendations?

Mr. Malone

Yes. As has been indicated, the Minister has welcomed the report. A process has been put in place in the Department to look at each of the recommendations; some will depend on the progress of the overall SMI initiative on better financial systems and the implementation of the new accounts system will influence us. Some of the recommendations which fall into the first category, particularly division heads having clear responsibility for achieving goals, are already in place. There is already a system for the allocation of resources as mentioned in recommendation 9. We are proceeding well with the accounts system mentioned in recommendation 10; we are well on the way with the recommendations for the new accounts system. The recommendation on the composite account, No. 19, will be implemented quickly and we will proceed quickly with recommendation 16 on risk management. As regards recommendation 20 in relation to our financial skills and capabilities, we have taken on professional accountants and some of our own staff are now doing courses. There is also provision for accompanying measures for the early retirement and REP schemes and we have put much effort into those schemes. We have submitted a new scheme to Brussels under the new tranche of Structural Funds. We have established a system of unannounced inspections under a number of headings and we will extend it further. We have a new IT strategy and the recommendation on VAT will be taken on board quickly.

Of the recommendations, some have been implemented, some are on the way to implementation and we will introduce a system to deal with others that are not on the way to implementation.

Deputy Foley

Is Mr. Malone satisfied with the arrangements for internal auditing?

Mr. Malone

Yes. We have extended and strengthened our internal audit unit and will further strengthen it by taking on expertise in computer auditing. We have adjusted our approach to the use of internal audits. The head of the unit meets the management committee a number of times a year. He sets out his work programme and there is a system in place of following up on the reports of the internal auditor.

Deputy Foley

What is the audit committee referred to in the report?

Mr. Malone

This is an external audit committee to assist the internal audit. It is composed of private experts and chaired by a partner of a large professional accounting firm. There are also other outside experts, particularly from large organisations with experience of large systems. The committee is an outside body which advises the internal audit unit and has an independent look at the Department systems. It prepares a report each year.

Deputy Foley

Payments to farmers have been substantially improved. Will this report help to improve that further?

Mr. Malone

It is well known that this has been a difficult area. Over the past two years we have made progress in delivering a better service. We have met most, if not all, of the targets in the farmers' charter. This report will lead to improvements in IT, enabling us to carry out our inspections more efficiently and quickly. Our objective is to enter the area of electronic payments so farmers could make a claim on-line and we would be able to make electronic payments to them. We should be able to transform the way we pay farmers within three years with the use of e-government.

Deputy Foley

In the opening statement, reference was made to the fact that the Department makes over one million payments a year. Is that correct?

Mr. Malone

The figure is slightly higher than that. One year there were 1.3 million individual payments. We are the biggest customer of the Paymaster General. That has been touched on in the report, the difficulty for the Paymaster General caused by large surges in demand for payments. Once we are paying electronically those problems will be eased.

Deputy Foley

That is a tremendous achievement which should be publicised. Have direct payments replaced intervention?

Mr. Malone

Yes. In 1992 the system changed from supporting markets to supporting individual farmers. New schemes related both to land and animals were developed. The number of payments has increased dramatically since 1992. There are new schemes coming on stream - a new slaughter scheme and a more complex area aid scheme. In parallel, it is noticeable that the level of intervention intake has declined. There was a surge of intervention in 1996 explained by the BSE problem but there is currently no beef in intervention. There is a residual amount of 1,500 tonnes in store but that is committed so, for technical purposes, the amount of beef in intervention is zero. The level of butter is 15,000 tonnes, the level of skimmed milk powder is 50,000 tonnes and there are 82,000 tonnes of barley. Our level of stock is among the lowest we have had in recent years, particularly in relation to beef. It issome time since there was no intervention beef in store.

Deputy Foley

There has been a great deal of talk about Agenda 2000. Can the Department handle the new schemes?

Mr. Malone

We are anxious to learn the lessons of the past, such as the introduction of new schemes in 1993. We have factored the concept of risk management into the schemes. Part of the issue is that of resources; if we do not have the resources, the risk is increased. We are looking at our control systems and at better use of data between schemes. We are looking at our resources and will be talking to the Department of Finance. I hope we will be in a good position to run the schemes and to avoid problems further down the line. We are also holding a series of information seminars throughout the State on the new schemes. Part of what we must do is ensure that the applications are correctly filled in, thus avoiding many of the problems.

Deputy Foley

Those seminars are appreciated.

The first recommendation on page 8 states that management in the Department should harmonise standards of financial control and operation over all EU and national funds. Is this a priority recommendation?

Mr. Malone

Yes, it is an important recommendation. There are many well developed manuals for FEOGA funds. While we have systems and while there is an overall manual for the national funds, it is suggested that we set up a harmonised system that would work across all the schemes or funds, whether EU or national. That is a recommendation we will consider.

Deputy Foley

Item No. 6 recommends "Responsibility for managing budgets should be devolved to the maximum extent possible with divisions". Does that refer to divisions within the Department?

Mr. Malone

Yes. It refers to individual line divisions. This is a big task for our Department because we have roughly 50 people who would be regarded as being at head of division level. There are two aspects to this question. It is part of the overall SMI strategy to have work plans and systems for measuring output and performance at divisional level. The logical follow-on is that division heads should have responsibility for budgets. This is part of the new overall financial management initiative across all Departments, a great deal of work is involved and the project will take a number of years. The new accounts system which we hope to have in place will give us the functionality to do that through IT systems. It is an important recommendation. It follows the logic of the overall improved financial control system. It is a big exercise in a Department like ours, given its size and complexity but with the new IT system we should be well positioned to move ahead on it.

Deputy Foley

Item No. 10 states "Before the Department's new accounts system, NASA, is implemented, management should define a comprehensive set of standard financial reports to be produced by the new system as the cornerstone of financial communication within the Department". At what stage is that recommendation?

Mr. Malone

That is virtually done. It is an integral part of the accounts project. Once we have the new IT system to handle our accounts there should be a standard financial reporting system. I agree that this is a cornerstone of communication within the Department and I regard that recommendation as coming under the "implemented" category.

Deputy Foley

Item No. 18 recommends, "There should be more formal analysis of inspection and risk management activities in the Department as a whole. In particular, cost/benefit techniques should be developed to measure the effectiveness of inspection programmes". At what stage is that recommendation?

Mr. Malone

We have worked the concept of risk management more clearly into our thinking. We must do this at a number of levels. We do it when looking at the Department overall and the strategic risks that apply. We also look at it in the context of individual schemes. For example, it is one of the issues the European Commission examines very carefully - when we are targeting our inspections, risk assessment and analysis must be built into those inspections. We are defining a more formalised policy for the Department with regard to risk management and work on that is well advanced.

The accreditation process which I have referred to on a number of occasions is the basis for independent accountants to audit our FEOGA transactions. In their work, they look at different categories of risk and we have a committee to look at the issues they have raised. We then have an action plan for dealing with those risks and that has been in place for the past number of years.

Deputy Foley

In the executive summary, on the last paragraph of page 4 I read, "We also recommend that the Department should review the professional accounting/financial expertise available to it, including the management level at which such expertise is employed". How many accountants are employed in the Department?

Mr. Malone

We have a professional accountant who heads our internal audit unit. We have recruited, on contract, another professional accountant who works in our financial control area. We are in the process of recruiting another who will work in our accounts department and a number of our staff have, on their own initiative, done courses and have trained as accountants. Approximately 11 of our staff have done that. We try to use those staff members strategically as well. We have made good progress in that area and we have learned a great deal. The problems of the composite account which were referred to earlier were resolved once we were able to use professional accounting expertise.

Deputy Foley

Does the Department intend taking on extra staff?

Mr. Malone

We are in the process of recruiting one extra staff member. The interviews are taking place at the moment. We would encourage more of our people to qualify. We will bring in some and we will train some of our own.

Chairman

This room is required at 1 p.m. Could both questions and answers be more brief?

Deputy Ardagh

The meat inspection services features in the news media, in the report and in the Comptroller and Auditor General's report. It is interesting to note that the Cromien report recommends that all inspection tasks which are carried on at the moment be done by the industry itself with regulation and inspection by the Department. Does the Department agree with that recommendation in the long-term?

Mr. Malone

We must look at this under a number of headings. It is accepted that our system has a relatively high cost. The overall cost is more than £20 million. The importance of the inspection service, particularly the veterinary element of it, must be considered in the context of a £2 billion industry and of maintaining presence in important markets. It is well known that we went through a difficult period in trying to restore our position in various export markets. There is a case for reviewing the way the inspection system operates. There is a very heavy reliance on permanent presence. We have vets permanently in various plants for the obvious reason that veterinary certification is required. That will always be the case but two dimensions need to be looked at.

There should be greater reliance on laboratory tests, for example. The industry itself should have laboratory checks carried out and present the results to the Department. There may also be a case for the industry to take on the responsibility for providing some of the back-up inspection. There is a system of temporary veterinary inspectors. These are private practitioners who work on contract to the Department for periods of roughly four hours on shift. The industry could take responsibility for this.

A balance must be struck. I would not support the idea of a self-regulating industry but what one could do is place more responsibility on the industry through greater use of laboratory systems and it meeting the cost of hiring some of the back-up staff. We would maintain a presence and still have to be satisfied. The difficulty with this concept is that it would require a change to European legislation. This is not a problem for us alone, it is a problem across the European Union.

Deputy Ardagh

It is stated on page 51 of the report that there have been discussions within the European Union on the system of inspection as enshrined in current EU and national law and in international trading standards aimed at introducing changes. How advanced are those discussions?

Mr. Malone

They have not advanced too far. A number of member states, including Ireland, have been pressing the European Commission to take a fresh look at this area, at concepts and practices applied internationally. The Commission is coming around to this view but there are not any specific proposals. It will be a few years before we see the outcome of this initiative, which we strongly support.

Deputy Ardagh

There appears to be implied criticism in the report of the costs involved in meat inspection. This is borne out in the report of the Comptroller and Auditor General which shows that the amount paid in overtime is high. A total of 2,932 staff were paid £7.85 million. The maximum individual payment was £33,229, and the individual concerned was not unique. What is the Department doing to reduce these costs? If one looks at today's advertisement one will see that the IMA states that the cost of meat inspection is very high. What is the Department's response, bearing in mind the evidence in the report of the Comptroller and Auditor General and the implied criticism by the IMA?

Mr. Malone

While the cost is high, it has to be looked at in terms of the overall value of the industry and in light of the fact that, unlike many other European countries, we are heavily dependent on exports. We have to satisfy many third countries which want to see a strong veterinary presence. While overtime accounts for much of the cost, this is due to the way the industry operates. If it loads product at 10 p.m. we have to have somebody there to supervise. This generates costs. Some of the points highlighted in the report of the Comptroller and Auditor General arise from the fact that plants operate on a 24 hour basis. This presents a problem for us in the sense that our system is based on normal working hours.

Deputy Ardagh

From 8 a.m. to 6 p.m.

Mr. Malone

To get somebody to work all night one would have to enter into some arrangement. One of the advantages in placing the full cost on the industry is that it would be able to control much of this itself——

Deputy Ardagh

How?

Mr. Malone

By organising its business differently. Do all the trucks have to be loaded at 10 p.m? What we have been trying to do is pass on the cost. What this means is that it has to make a choice - if there is overtime it will have to meet the cost. The business should be managed in such a way that costs are reduced. While overtime costs are high, many schemes, the direct payments schemes in particular, are seasonal in nature. There are huge surges in workload, particularly in the autumn when many payments have to be issued. One logical way of dealing of with this is to ask staff to work overtime. There is nothing wrong with this if you get value for it. The alternative is to recruit more permanent staff. Dealing with the situation through the strategic use of overtime in issuing payments efficiently and quickly is justified. There are issues at which the industry can look in terms of the way in which the business is organised. If our staff were not required at unusual hours the overtime bill would not arise.

Chairman

Are there ways of dealing with seasonal peaks other than through overtime?

Mr. Malone

There are, including the recruitment of more permanent staff. Many schemes apply from a particular date. We do not have discretion therefore to issue payments at any given time. They are not once-off payments.

Chairman

Was this subject not addressed to some extent in a previous value for money report by the Comptroller and Auditor General?

Mr. Malone

It is an ongoing problem which has been looked at before. Management in the Department is conscious of the level of overtime payments. I am anxious to ensure overtime does not become ingrained in the system, that staff do not see it as routine. Overtime is justified if you get value for it. It can arise in meat factories and is inevitable at certain times of the year in the case of particular schemes.

Deputy Ardagh

It is mentioned in the reports that there is a problem with regard to the shift system vis-à-vis overtime. Everybody has to play their part in solving the current meat inspection problem. Is the Department adopting a pro-active approach to some form of parallel industrial relations discussions with the trade unions involved to find a solution?

Mr. Malone

There is a deep-rooted problem between producers and the meat factories on the price paid to producers. There is also the issue of meat inspection. We are prepared to engage in discussions with the industry on the mechanics of the system into which more flexibility should be built. I accept that it is too rigid. This would entail discussions with a number of trade unions, not just one. I would have no problem in having parallel discussions. An industry as important as the meat industry should not be shut down.

Deputy Ardagh

To return to the body of the report, while page 19 contains the heading "Financial Risk Management", pages 19 and 20 refer to the overall concept of risk managment. How do you see the Department operating to ensure the risk management programme operates, your staff related risks are minimised, change is introduced and the risk involved is managed? How do you respond to the Cromien report on that matter?

Mr. Malone

You have to look at it at a number of different levels. The concept of risk management must be ingrained in the consciousness and I think we have achieved that.

Deputy Ardagh

What do you see as risk management?

Mr. Malone

There are a number of different levels. For example, in the case of particular schemes, what we should do is look at them in advance. We have been able to do this in relation to the Agenda 2000 schemes and identify as best we can the potential pitfalls, the financial exposure and the potential for fraud or misappropriation. You have to use your inspection services and resources for the purpose of minimising the level of risk and target inspections to the best effect. We have to take into account the outcome of inspections, that they are reviewed from one year to the next, the problem areas, the most serious difficulties and whether inspections are correctly targeted.

Deputy Ardagh

Is there a risk management task force to do that? How is it implemented?

Mr. Malone

We are heavily audited and have the results of the various audits which we carry out ourselves. We try to get feedback from our inspectors and have regular consultations with them. We also try to have groups working on various schemes involving those administering the schemes and those who carry out the inspections. There is a team approach in that area. We have to look at it in the context of the organisation itself and the broad areas of risk. For example, the focus has shifted from intervention to on-farm schemes to animals. Obviously the systems have to be adjusted to where expenditure is shifting. If the bulk of expenditure is shifting, the control systems have to be adjusted.

The accreditation exercise was enormously beneficial in that it looked at the overall work of the Department and identified major intermediate and minor risks. On a strategic basis a committee which I chair meets monthly, goes through the different categories and checks progress in implementing the recommendations. For the future we have to build on the accreditation process and integrate our IT with it. We have quite an amount of information technology but it is not properly integrated. We can share information and obviously there has to be consistency. A farmer making application under a number of different schemes can be dealt with as a client. If the information he has supplied under one scheme can be applied across the board it puts one in a much stronger position. Those are the two main areas.

Deputy Ardagh

There has been a big shift from price and market type supports to either land-based or animal-based data and supports. It is gone from price and market to the cheque in the post. Two matters arise from the report: the data and integrating the systems to ensure information on the one client, his animals and land, and the so-called dual structure of administrative and professional and technical staff and the operation of inflexibilities to which it gives rise. I understand from the report that you could do with more resources in IT and with senior professional accountants and that there are too many staff in the local administrative, professional and technical areas. One person goes in to examine the amount of land a client may have, the next day somebody goes to see how many cattle he has and the next day somebody goes to inquire about the number of sheep. How will the Department deal with that dual administrative structure given that the report says it needs to be targeted, examined and dealt with?

Mr. Malone

There is no argument or question that it needs to be streamlined. The dual structure which has existed for a long time is a professional and administrative structure. We have to look at a number of issues and make the Department more flexible. It is clear more has happened in the past ten years given the number of schemes than in the previous 20 or 30 years. The idea that schemes would be based on land was a new concept. We must also make greater use of teams of people with a mix of skills and ensure they are part of the team and not of the structure. That is one area in which we can make progress and have done so under some headings but not enough overall in the Department.

The question of the client being subjected to a number of different inspections comes down to the question of data. We can use our data for a number of different purposes. For instance, the animal traceability or animal movement system is up and running. Every animal born in the country is registered and we have information on animals as they move around the country and as they are slaughtered. Allied to that are the various applications farmers make at different times of the year for different premiums for animals of various ages. It would be logical to use the database for this purpose. In some instances it may not be necessary to go out and check as much of it could be done by a desktop check on whether the number tallies with the number of animals for which the farmer has applied. If the data is available a number of inspections can be carried out for a number of different purposes. The two main areas are the animal inspection system, the various applications under the livestock premia, the number of animals etc.

Another area is the rural environment protection scheme in which 43,000 farmers participate. It would be advantageous if both could be integrated. We now have information on the amount of land because we have a map. The key is to integrate the data and use it for different purposes. This would enable us to target our inspections better and probably have fewer inspections, which would get over the phenomenon to which the Deputy referred.

Deputy Ardagh

As a record of every animal will now be on computer, is it intended or proposed to integrate the ownership of those animals with the client base that is on the computer so that there is integration of the databases of both animals and owners?

Mr. Malone

Yes. In many ways that is the——

Deputy Ardagh

And land.

Mr. Malone

——key part of the IT strategy. We started an IT strategy in 1991 but essentially what we have are a number of fairly well developed systems, but they have all developed separately. The key job now is to integrate those systems. Obviously the first task is to try to get common platforms and then draw in the information on the animals, the land, the client and the various applications he or she is making. That is the reason I highlighted the IT strategy. If we get that aspect right, we will have made a huge leap forward. We have worked out a programme for ourselves over a two to three year period. We will then take that a step further in that if we can pay farmers electronically, in essence it becomes a totally different system.

Deputy Ardagh

I want to ask two further questions, one of which relates to the whole concept of e-Government and using the Internet to process all the data and the input from farmers. Some people may believe that farmers are in the last century, but they are not. It will not be long, perhaps in the next two year, until the farming community has Internet access and it will require the Department to be up to speed in that regard. The headage payment application forms can be processed using the Internet and posted electronically. Will the Department be ready to do this speedily, within two or three years?

Mr. Malone

That is essentially what I have been talking about. It is part of our strategy which fits into a two or three year timeframe. One finding from some of the work that has been done on the concept of e-Government is that there is quite a high uptake of IT among the farming community. There are some obvious benefits from our point of view in that if they can apply either on the Internet or in some other way, or through kiosks in post offices and other such places, we can get the applications in electronically. The other side of that equation is that we can get the payments out electronically. We would see that as an initiative that would happen certainly within a two to three year timeframe.

Deputy Ardagh

Other companies aspire to this type of facility but the big problem is staff. How will Mr. Malone put forward the case that the Department of Agriculture, Food and Rural Development is the place for IT staff to work. How will he sell the Department as a place in which people will achieve work satisfaction?

Mr. Malone

There are a number of exciting IT projects going on in the Department. Some of the biggest IT projects are taking place in the Department. I mentioned the animal movement system. There are eight million animals, twice as many animals as people. There are 12 million individual animal movements. The Department can offer IT people a level of experience and exposure to modern systems and a range of experiences under the different headings. The accounts project, for example, that we are currently putting in place uses some of the most modern accounts technology in existence. I would not say we are at the frontier in that regard but we have as modern a system as one would find anywhere. There is a great opportunity to get involved in major challenging projects using modern technology.

As members know, there is a general problem in the Civil Service in terms of keeping IT staff. That is a problem experienced by other Departments also. There is a certain level of leakage to private enterprise because people are offered salaries significantly higher than those the public service or the Civil Service can pay them. Obviously we have to use a certain amount of outside expertise and there is an opportunity to work in conjunction with very highly qualified professional people. We are talking about the experience and the challenge, not the money.

Deputy Ardagh

Does Mr. Malone know of any person who left the Civil Service on a salary of £20,000 to £25,000 and returned soon after as a consultant with a charge from the consultancy firm of double or treble that?

Mr. Malone

Yes, but they might not come back too quickly. Some people earning relatively high salaries as consultants in the IT area would have worked in the Department——

Deputy Ardagh

Not too far back.

Mr. Malone

——not too far back, but some further back than others. That is a phenomenon we have to deal with.

Deputy Durkan

In relation to the Vote, on page 54 reference is made to the overpayments position. The top paragraph outlines a list of the combined headage and premia overpayments outstanding in June 1999. Almost half of those, 45% or so, are BSE 1995-96 cases. Will Mr. Malone explain the reason the overpayments were made in BSE cases? Were they slaughter cases?

Mr. Malone

It is clear that a fairly significant portion of the overpayment relates to the BSE payments, as they are referred to, but one must look into the context of how these BSE payments came to be made. These payments were effectively special compensation paid to the producers in the context of the BSE crisis that developed in 1996 when the market collapsed. The Commission made available a level of funding. It required us to pay on 1995 eligible animals, and those payments were made in October 1996. You may ask why did we pay on 1995 animals. Essentially, that was the only way it could be done. This was not our system but was imposed by the European Commission. The only applications on hand were those from 1995 and there was a top-up on those applications. It was understood that that money would be recouped when the more accurate applications came in for 1996. In essence, we were asked to pay in 1995, compare 1996 with 1995 and recoup the money in 1996. Initially, that led to an overpayment of £7.5 million. We have been systematically clawing back that money and it has now fallen to £0.5 million.

Deputy Durkan

BSE payments apply only to BSE affected herds. Is that true?

Mr. Malone

No, that is the fundamental point.

Deputy Durkan

That is the point on which I want clarification.

Mr. Malone

This money is not for BSE herds but for the industry. This is not BSE compensation per se; this is compensation to beef farmers for a collapse in the price of beef or cattle because of the——

Deputy Durkan

Resulting from the BSE crisis.

Mr. Malone

Resulting from the BSE crisis.

Deputy Durkan

The report does not make that clear. To a casual observer it would appear that the money referred to BSE cases because the report refers to BSE cases.

Mr. Malone

That might be the basis of the confusion but the intention of the scheme was clear. There was a serious collapse in the market in 1996.

Deputy Durkan

It was price supports——

Mr. Malone

It was price supports.

Deputy Durkan

——to compensate for the impact of the BSE crisis.

Mr. Malone

Prices fell by 20% to 30%.

Deputy Durkan

That is badly identified in the report. That is not the impression one would get from reading it.

Mr. Malone

We had to get the money out quickly. The only way to do that was to pay it on the 1995 applications which had come in and then balance it out on the 1996 applications. That was not an ideal way of paying out the money, but it was the system in place. It led to an overpayment of £7.5 million initially and we have reduced that to approximately £0.5 million.

Deputy Durkan

The report states that according to the Department, £832,000 or 47% of these overpayments related to dormant herd or flock numbers and these dormant herd numbers represent debtors who are no longer in receipt of premia or headage payments. To a casual observer reading that it would appear the database on which the Department was working was out of date. Is that the case?

Mr. Malone

Not entirely. We make payments in advance. In the case of sheep, the ewe premium is paid in three phases and some of it is paid in advance. It could happen that between making the advance payment and the final payment, a farmer could go out of business. Overpayments can also arise where two farmers make an application on the same piece of land. That happens particularly in relation to area aid. There could be confusion as to the ownership of land, particularly commonages. When the matter is teased out, it could happen that a farmer has got a payment but has since gone out of business.

These overpayments must be put in context. The report states that they represent 0.2% of scheme expenditure. The most up-to-date figure is probably nearly half that amount. Where overpayments arise, our approach is clear. If an overpayment has been made, we claw it back automatically on the next payment.

It is important to note that the BSE market compensation payments are not overpayments in the sense of taking money back from one farmer and giving it to another. It is a balancing act of taking the money from the payments under the 1995 applications payments and putting it onto payments under the 1996 applications.

Deputy Durkan

I note the Comptroller and Auditor General zoomed in on this area. He must have been concerned about it.

Mr. Malone

We are not complacent about this issue. We have a system in place for registering and dealing with overpayments. They are registered and automatically put against the next payment and, in most cases, that resolves the problem. Difficulties can arise where people leave farming. Approximately 2% of farmers per annum go out of business. A major part of our IT programme is to ensure we have a properly integrated IT system dealing with these overpayments. We take this issue seriously and are not complacent about it.

Deputy Durkan

On page 56, Vote 31, the paragraph dealing with disallowances by the EU Commission, will Mr. Malone give me further information about the scale of disallowances? I note the amounts are not large. A total of £5.28 million was charged to the account in 1998. I presume that relates to cases disallowed by the EU Commission which were allowed by the Department.

Mr. Malone

On a broad level, yes. Some of the disallowances related to the ewe premia scheme. A total of £2.9 million relates to the clearance of account for 1994. Within that, there are disallowances in regard to the ewe premium scheme where the Commission disallowed a level of expenditure. Its main concern relates to our inspection system. It could happen that not all animals would be present for an inspection. There was a rigid system in place prior to 1994 where if a few animals were missing a farmer's application was refused and if one animal was missing, a producer was disallowed for three animals. A criticism of our inspectors was that they may have accepted the explanation for one animal missing but did not disallow for three animals.

There were also difficulties in regard to the special beef premium. Farmers are required to have animals in retention. They must keep them for a period of two months and the Commission was concerned that we did not achieve the requisite level of inspection in all counties. We are required to achieve a 5% minimum level of inspection. That was uneven and that caused some disallowances in that respect.

Difficulties also arose in respect of the extensification premium. We are required to have 96% of payments made by a particular date. In other words, we are given a 4% tolerance. We can be caught between a rock and a hard place in that if we make all the payments and are not entirely satisfied about them, that poses a problem, or if a problem arises and we do not make the payments, that poses another. Disallowances in the order of £900,000 arise under that heading.

There were also some disallowances in relation to late payments for intervention beef. We are required to pay between 45 and 65 days of take over. There was also a loss in a cold store in the Netherlands where, when all the product was disposed of, there was a balancing exercise in respect of 21 tonnes of beef. There were a number of minor disallowances in relation to what are called "SLOM" cases, which involve milk quotas and compensation. For 1997, again there were disallowances in respect of late payments. Overall, the main problem we had under that heading was late payments.

There was also a difficulty with product in a cold store, the product being damaged under what is called "glass freezing". When the product was being taken into intervention it was damaged in the freezing process which also resulted in a loss. It is a mixture of different years and different systems.

Deputy Durkan

I return to inspections in factories and the costs attaching to organising and administering them. Which countries are Ireland's main competitors in the world beef industry?

Mr. Malone

There are two markets in my view. There is the European market which is large and which mainly caters for the multiple trade, while our industry supplies supermarkets. Our main competitors in those markets would be the suppliers on the home market. If we are competing in the French market, the French are our competitors. A noticeable phenomenon is that European markets have become more nationalised which is part of the fallout from BSE. In that context, many countries have tried to push the safety and integrity of their product.

If one takes the third country markets, our main competitors there would be Australia and, to a certain extent, New Zealand. We may also encounter competition from other European countries, such as France and Germany, from China and from Argentina and other South American countries.

Deputy Durkan

What systems of inspection are employed in the various countries referred to? How are they funded? How does Ireland compare with those countries in terms of efficiency, administration, cost-effectiveness, etc.?

Mr. Malone

If we take the European system first, broadly the same inspection system applies. If one looks at any country that is exporting beef, the basis of the system lies on veterinary supervision because veterinary certification is required. By and large, the European system is broadly similar to ours. In some European countries there might be greater use of what are called "auxiliaries" or "lay technicians". These people are not qualified vets, they are back-up staff who are either partly qualified or hold special qualifications in the meat inspection area.

We feel that our system is among the more elaborate in Europe. It follows, when one compares costs, that it is probably on the high end. However, what one then must do is——

Deputy Durkan

Are the costs attaching to our system higher?

Mr. Malone

Yes, but our exposure is also higher in the sense that we are exporting huge amounts to certain third country markets. These countries set out strict requirements for veterinary supervision and veterinary certification. Two examples I would highlight in this regard are Russia and Egypt. In fairness, we have managed to protect our position in important strategic markets certainly as well as, if not better than, most other European countries. In certain markets Ireland was the only European supplier despite the fact that a certain level of BSE existed here.

If one considers the third counties, they also, obviously, have a dependence on veterinary supervision. However, it can vary. This is the point I made to Deputy Ardagh, namely, there are lessons to be learned and issues to be considered, particularly if one looks at how the Australians make greater use of laboratory systems, hazard analysis control systems, etc. There are some ideas we can use.

Deputy Durkan

Have inspection costs in Ireland increased since the transfer? It has been recommended that the Department should give priority to recovering the costs incurred by the meat inspection service. Have inspection costs increased in line with that development?

Mr. Malone

Yes.

Deputy Durkan

What is the reason for that?

Mr. Malone

BSE mainly.

Deputy Durkan

Obviously last year's costs should compare with this year's costs. Regardless of who is responsible for paying for the service, the total cost should not be affected. If the work being done is the same - I accept that there may be normal wage increases due to the people who provide the service - it should not be the case that a procedure used in a particular year costs more because a different paymaster has been appointed.

Mr. Malone

The costs have increased, not dramatically but they have risen. The point I was trying to develop in relation to BSE was that prior to its emergence certain concepts were being considered such as the use of what were called commercial documents. In other words, for trade within Europe a person would not be required to have a veterinary certificate and would only need a commercial document. That would have reduced costs because it would have meant that, in many cases, veterinary certification would not have been required. In many instances, the costs arise because the Department's staff are obliged to provide supervision in order to provide the veterinary certification. They are not adding anything to the safety or integrity of the product.

Deputy Durkan

Is Mr. Malone satisfied——

Chairman

I must interrupt at this point. We are operating under a time constraint because another committee is due to meet here at 1 p.m. It is clear we will not conclude our deliberations on this issue today and I wish to allow Deputy O'Malley an opportunity to contribute.

Deputy Durkan

I have one final question. Is Mr. Malone satisfied that there has been no extraordinary or appreciable increase in costs since the transfer of responsibility for payment from the Department to the producer or the factory?

Mr. Malone

No. I believe there is a misunderstanding here. There was always a charge on the factory, £3.80, which was passed on to the producer. We have charged factories for our overtime costs in the past number of years. What we proposed to do was bill each individual factory for its costs. In other words, the cost of carrying out an inspection in one factory may be less than in another - it depends on the level of activity. What happened was that the industry took a decision to apply a figure of £5.50 - that was not our figure, it was theirs. The industry made that calculation and passed it——

Deputy Durkan

I might return to that issue at a later date, Chairman.

Chairman

I welcome Deputy O'Malley. I hope he had a nice Christmas and has recovered from the flu.

Deputy O’Malley

Not quite, unfortunately, Chairman. I may start coughing, for which I apologise in advance.

Chairman

When the Deputy was before us last year we informed him that we would afford him another opportunity to raise his concerns about the Department of Agriculture, Food and Rural Development. He will have seen a copy of the Cromien report in recent days. Are there any points the Deputy wishes to raise?

Deputy O’Malley

I received this report yesterday, but I believe it may have arrived in my office on Tuesday evening. I am sure it is a very valuable report for the future and it makes a large number of recommendations. The very fact that it has to make so many recommendations is worthy of comment in itself. However, it does not deal in any sense with past matters, except in the vaguest and most general way. It then makes recommendations as to how some of these things can be avoided in future. It is very well written but, as is often the case with reports that are written by civil servants, it manages not to mention a single name of either a person or a company. One would think that all these major catastrophes which hit the administration of agriculture over the last ten years happened by accident. It was always my submission to this committee and other bodies that this was not the case. They did not happen by accident; they happened, unfortunately, as a result of deliberate policy. One of the things that is not dealt with in any detail in the report is the question of disallowances or the recovery of them. As far as we know, no recovery has been made in the past year. Although I am subject to correction on that, I am not aware of any and certainly none has been publicly reported.

On 5 January 1999 we were told that the recovery of the Rathkeale larcenies of meat by the company involved - which amounted in total to about £2.5 million - would be completed in the year 1999, but that does not appear to have happened. We were told that proceedings had been instituted in regard to yields whereby the Department was seeking, about six years after the event, to recover the excessive yields, but as far as we know nothing has happened in that regard. Those proceedings were taken against seven companies which, we were told, were all Goodman companies.

I am referring here mainly to Mr. Malone's statement in reply to mine of 5 January 1999, which I re-read yesterday for the purpose of replying to it or rebutting it if necessary. It really does not rebut anything I said, so I do not need to rebut it in that sense. It is worth drawing attention to the fact that recently, and again this morning, Mr. Malone referred to the Government decision of March 1996 in relation to the reimbursement of meat inspection charges. He said the basis for that policy, which has led to the current problem, was the Government's decision of March 1996. That is true but, of course, the Government decision of March 1996 decided many other things also. It seems to me that the Department is cherry-picking the decision which is a new form of democracy.

That Government decision of March 1996, as the committee knows, was reiterated by the present Government but it still has not been implemented and we are now two months short of four years later. There may be reasons the Department thinks it should not implement the decision, but these are matters to be considered by the Government. The Department made its case to the Government that two successive Administrations, comprised of different parties, overruled the Department and made a decision. The decision has not been implemented. That is a matter of some seriousness when one comes to look at the concept of democracy in this country. At the same time, where it suits the Department, it is prepared to implement the other parts of the Government decision that it agrees with. I think that is a rather serious matter.

Chairman

Will you clarify the point about the decision not being implemented?

Deputy O’Malley

The decision related to the control and payment of FEOGA moneys, where a separate body was to be set up, as is the case in most other countries - in fact, I think now in nearly all other countries.

One of the most important things that happened since this committee last examined these matters was an RTE programme on Emerald Meats, presented by Mr. Milotte. I watched that programme twice and there was very little in it that was not already known either to this committee or the Dáil. However, the impact of the programme was considerable because of the way it was presented. If anything, it shows the power of television which can get across to the public some very serious matters, including malpractices on the part of the Department of Agriculture, Food and Rural Development, the full impact of which did not come out from the deliberations of this committee, even though the facts were certainly adverted to here. That programme has caused considerable concern among many members of the public who were astounded to find that such things could go on and that the Department could act in the way it did.

In going through Mr. Malone's statement of 5 January 1999, I tried to find elements I disagreed with or that contradicted me. I found very few, but one of them is where he said there was no finding by any court of collusion by the Department. That, of course, is not correct. If one reads Mr. Justice Costello's judgment, which was subsequently upheld by the Supreme Court, there is clear evidence of collusion. The thing would not have happened unless there was collusion between the Department and the meat processors. That is borne out by the fact that the meat processors apparently gave an indemnity to the Department if they acted as they did on behalf of the processors. I am not aware that any recovery has been made in respect of those indemnities.

The matters that have not been dealt with, which the committee was simply going to note - although when I was a member of it I tried to ask the committee to do more than just note - include the Bureau Veritas saga. A huge amount of public money, Irish and, mainly, European, was paid out on foot of a huge range of forged public official documents. All the documents were forged but the whole episode has been consigned to the past and forgotten about. The losses that were sustained are losses that the Irish taxpayer will have to bear.

Chairman

Obviously, we will not finish this matter today. In relation to those past matters, are there any points you wish to make concerning things that could or should be done and which have not been done?

Deputy O’Malley

Yes, there are, and recovery is one of the main ones. An appalling catalogue of disasters and financial catastrophes occurred as a result of the negligence of the Department - some people would put is more strongly than just negligence - and recovery has not been made in respect of those. Most importantly, not alone has the taxpayer suffered a loss as a result of the malpractices and inefficiencies of the Department, but those who benefited illegally by the Department's negligence, and who improperly enriched themselves, have not been asked to give up any of it.

Chairman

We will pause there for a moment because, in fairness, I should allow the Secretary General a few moments to reply, as we will not be able to finish this today. Mr. Malone, do you wish to comment on anything that Deputy O'Malley has said?

Mr. Malone

Maybe just to up-date a few points. I referred to a Government decision of March 1996 on meat inspection fees, but that issue was referred back to the Government at the end of 1996 so there was another Government decision on that particular issue. I understood that I earlier explained the situation on the organisational structure of the Department. This issue has been considered twice by the Government. I am not aware a decision has been made. As I explained at the outset I believe there are two choices with regard to establishing an agricultural payments agency. It is a matter for the Government to decide.

With regard to the cases referred to and what would be regarded as the area of recoveries, the issue is getting a number of them to court. While that is not absolutely within our control, the various proceedings that have gone back and forth in relation to the Shannon case and the Rathkeale case have now been completed.

Chairman

Completed in what sense? Have the legal preparations been completed?

Mr. Malone

All the legal submissions have been finalised.

Chairman

The cases have not been heard in the courts?

Mr. Malone

No. Bearing in mind that this is handled through the Attorney General's office, we are seeking a date for hearing and the issue now is how quickly a date for hearing can be set. I do not believe there is anything I or the Department can do to determine that; it is a matter for court hearings.

Deputy O’Malley

If the proceedings had been started five or six years earlier they would have been heard long since.

Chairman

Unfortunately time is against us and I considered it only fair that I should give the Secretary General an opportunity to make some preliminary comments in reply. Is there anything you wish to add, Mr. Malone?

Mr. Malone

With regard to the yields case, we lodged our statement of claim last May. No defence has been submitted, but that is a factor of the legal process.

Chairman

Unfortunately time is against us. We have been critical of the Department of Agriculture, Food and Rural Development in the past. Our purpose is to improve public administration. We have before us the Cromien report, which contains many recommendations and I hope it will form the basis of significant improvements. We know there are many people in the Department who are fine public servants and we do not mean to dispirit them. I hope this will be a turning point and will perhaps be a model for other Departments on how to improve.

We will resume our deliberations on this issue on 6 April when I hope we will complete our consideration of the Cromien report and the paragraphs before us. I am very concerned about paragraph 29 in the Comptroller and Auditor General's report and I hope that, by the time we return in April, we will have more definite progress on this new accounts system than is now evident.

The committee will adjourn until next Thursday, 20 January, when we will consider a motion to the House on the DIRT inquiry. Under public session we will deal with the 1998 annual report of the Comptroller and Auditor General; Appropriation Accounts - Department of Justice, Equality and Law Reform, the Garda Síochána, the Prisons, the Courts, Land Registry and Registry of Deeds (resumed); and the Office of Public Works - Vote 10 - and Flood Relief - Vote 44.

Deputy Rabbitte

I take it, Chairman, that when we resume on this matter on 6 April we will take up where we left off.

Chairman

Yes.

The Committee adjourned at 1.05 p.m.