COMMITTEE OF PUBLIC ACCOUNTS díospóireacht -
Thursday, 23 Sep 2004

North Western Health Board — 2001 Accounts - Southern Health Board — 2002 Accounts.

Mr. P. Harvey(Chief Executive Officer, North Western Health Board) and Mr. S. Hurley (Chief Executive Officer, Southern Health Board) called and examined.

Chairman

Today we are dealing with the 2001 accounts of the North Western Health Board, the 2002 accounts of the Southern Health Board and the 2000 accounts for the Tipperary Vocational Education Committee. There is no relevant correspondence apart from 321(a) of today.

Witnesses should be aware that they do not enjoy absolute privilege and should be apprised as follows. As and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 grants certain rights to persons identified in the course of the committee's proceedings. These include the right to give evidence; the right to produce or send documents to the committee; the right to appear before the committee, either in person or through a representative; the right to make a written and oral submission; the right to request the committee to direct the attendance of witnesses and the production of documents; and the right to cross-examine witnesses. For the most part, these rights may only be exercised with the consent of the committee. Persons invited to appear before the committee are made aware of these rights and any persons identified in the course of proceedings who are not present may have to be made aware of them and provided with the transcript of the relevant part of the proceedings that the committee considers appropriate in the interests of justice.

Notwithstanding this provision in legislation, I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable. Members are also reminded that under Standing Order 156, the committee should refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government, or the merits of the objectives of such policy or policies.

I call on Mr. Pat Harvey and Mr. Seán Hurley to introduce their officials.

Mr. Pat Harvey

I welcome the opportunity to make some opening remarks. With me are Mr. Anthony Travers, our director of finance, and Mr. Pat Dolan, deputy chief executive officer.

Mr. Seán Hurley

I am accompanied byRaymond O'Sullivan, director of finance.

Chairman

Will the officials from the Department of Health and Children introduce themselves?

Mr. Dermot Magan

I am a principal officer in the finance office.

Mr. Charlie Hardy

I am a principal officer in the planning and evaluation unit.

Mr. Richard O’Keeffe

I am chief architectural adviser in the hospital planning office.

Chairman

I ask Mr. Purcell to introduce the North Western Health Board accounts for 2001.

Mr. John Purcell

Two issues arose from my audit of the accounts of the board for 2001 which merited public accountability. The first was the circumstances in which the board had constructed a new headquarters building while the second was the failure to come up with an accurate figure on the balance sheet for creditors in respect of the amount owing to suppliers at year-end. My audit certificate is qualified in this regard.

I will take the headquarters project first. It had its origins in 1998 when it was decided to address accommodation problems by upgrading the existing offices together with an extension or by way of a complete new building. The decision ultimately was to go for a new building on an adjoining site and, following a tender competition, a contract was placed in March 2001 for the work. The contract covered the construction, fitting out and commissioning of the building. The board's staff moved in during April or May of last year and the final cost, including professional fees, was in the region of €9.5 million.

The board sought to fund the new building by way of a loan and, to this end, contacted the Department in July 2001 seeking its approval for this course of action. Members will note from the report that this is a requirement under the Health Act 1996. Approval was not forthcoming and, as I understand it, still has not been granted by the Department.

As I was concerned about the board undertaking a major capital project without the necessary financing in place, I sought the views of the chief executive officer whose response is set out in the report. I can see from his opening statement that he will elaborate on those views. In a nutshell, he makes the case that the funding by way of a loan would be significantly self-financing and cost effective on the basis that savings on rental, travel and subsistence expenses arising from the centralisation of the functions in the new building would largely cover the cost of loan repayments.

I do not know whether follow-up analysis has been undertaken by the board to establish if these projected savings have been realised but the Department's position on this, on which I am sure its officials will elaborate, is clear. It had no involvement in the decision to proceed with the project, no approval or funding had issued and the construction of the project had commenced before it became aware of the development.

I refer to the second issue raised in the report — the failure of accounting controls in the purchasing system. During the final stages of the audit, we came to a view that the figure recorded as the value of goods received but not invoiced included for creditors was not sound. The board was aware of the likelihood of overstatement having made a provision of €450,000 to allow for this. On further investigation, it became clear that the level of overstatement was more likely to be of the order of €2 million. In response to my inquiries, the CEO informed me that the bulk of the overstatement occurred because the system had been bypassed by paying some invoices without going through the computer matching process. In addition, in some cases goods received and recorded on the goods received notes may have been subsequently returned without the notes being adjusted.

The same problems beset the 2002 accounts with the result that the audit certificate for that year had to be similarly qualified. Members will note towards the end of the report that the CEO sets out the remedial action he has taken to ensure there is no recurrence of the problem.

Chairman

Mr. Harvey's statement is quite long. Is it possible for him to confine his statement to the key issues raised by Mr. Purcell? Can we publish the opening statement?

Mr. Harvey

Yes. I will refer to the headquarters and goods received not invoiced issues. Essentially, we had an accommodation crisis whereby we had buildings to house the corporate function of the board in Manorhamilton which were in many respects almost of a temporary nature and wholly inadequate. There were health and safety issues, union pressures and so on. As the Comptroller and Auditor General stated, we had options to refurbish and extend or construct a new building. We opted for the latter and are obliged under the 1996 legislation to get the approval of the Department of Health and Children if we want to take out a loan. It is not a draw-down of money from the Department but it gives approval for a loan to be made available to us. That loan, as yet, has not been approved.

Essentially, our contention throughout has been that there is a sound business case for this headquarters building. It would be self-financing. We would spend no more money on the anticipated repayments than we would on rented properties in Manorhamilton and Sligo. We also have the bonus that all our corporate team are based in the headquarters and that, in its own right, gives a significant benefit in terms of cohesion and synergy. We have that building for the same amount we would have paid and will have a capital asset of significant value in due course.

The other alternative available to us was to look for a local development association to build the offices and rent them to us but, because of our obligations under legislation to achieve best value for money, we were sure the option of the Government loan, at the most attractive of rates, should be sought rather than going for a more expensive lease or continuing rental arrangement. We, therefore, applied to the Department. There is not an argument about the business case or the intrinsic soundness of the development in its own right. There is a need to firm up the funding arrangements and matters that the Comptroller and Auditor General described from our respective reports to him.

On the goods received not invoiced issue, we have to put up our hands and say the system, as it was designed, was not operating as we had intended. There was a practice whereby goods received and recorded on the computer were not being matched with invoices. We, therefore, paid some invoices independent of taking the debt from the computer. We finished up with bills paid but the computer telling us we may still have had creditors. We made a provision of €900,000 against the figure used in the first instance when this was brought to our attention following the concerns of the Comptroller and Auditor General. A much more elaborate exercise was undertaken retrospectively when a further €1.5 million was taken from the recorded accruals or debt.

This does not accrue a benefit to the board in 2001 or 2002. It is a self-correcting accounting exercise. For instance, if we had overspent by €1.5 million in 2001, it simply would have been the first charge on the 2002 allocation and if it had been repeated at the end of 2002, the same thing would have happened. No benefit accrued to the board, nor did it seek to accrue benefit. I have given precise and deliberate instructions to the director of finance about this practice in the system to ensure it will not recur and we have a number of actions to ensure this happens, ranging from training of staff and certification by local line management to monitoring and checking through the Department of Finance and reassurances I receive from our internal audit function and our audit committee.

Chairman

Customer reconciliation does not appear to be a major issue from the point of view of ensuring reconciliation with suppliers, credit notes and payments.

Mr. Harvey

One would expect, if they say so much is owing by the board at the end of the year, that one should be able to get a list of creditors and discover how that arose. It should be possible to reconcile that with the suppliers who say, "Yes, we do agree with those figures." That reconciliation was done in a very comprehensive way in 2003 retrospectively. However, at the end of 2001, we had the practice of having an estimate in there and the precise reconciliation was not featuring in our back-up documentation.

Chairman

Would that incorporate both cash payments and credit notes?

Mr. Harvey

Yes.

Chairman

You have indicated that the headquarters building in Manorhamilton will be self-financing and will not compromise the capital development programme for patient services. Could you elaborate on the self-financing aspect of the building?

I also note from the report that the health board sold land worth €4.1 million, which would appear to be the deficit on the capital cost of the building. How do you propose to pay off the deficit without impacting on the level of services provided by the North Western Health Board?

Mr. Harvey

Part of what brought us to where we are is our absolute deliberate intent not to use the national development plan, NDP, funds for offices but that they should be self-financing projects. We reserved all of our capital funds for patient-related services. It has no impact on services. We were paying that money out on rentals, travel, hotel accommodation for board meetings and so on. All of that money would be used to pay off a mortgage on the offices. It is not unlike a domestic situation where a family who have rented accommodation scattered over several locations may decide to stop paying rents and buy their own house. The same amount of money could pay a mortgage, allow the family to live together in the same house and have a capital asset. That analogy might be helpful.

We sold lands, which were formally the farmland of St. Conal's Hospital in Letterkenny, to the IDA. This was to accommodate the development of a business park in Letterkenny. As a public service we felt we should row in with the IDA and create that infrastructure opportunity. The board earmarked the money we received, approximately €3 million, and some road widening money which we received since — a new road is going through the same patch — for the development of mental health and psychiatric services. We have it earmarked for the complete refurbishment of the acute psychiatric unit in Letterkenny. Meanwhile, that receipt is helping us to finance this interim period when we are without loan approval or where we have not taken the decision that, in the absence of a loan approval, we may have to sell the properties or finance them in some other way. The money is being used as an interim measure in a cashflow context but there is no intent to use that money in the medium to longer term for that purpose. The plans for the refurbishment of the acute psychiatric unit in Letterkenny are advancing rapidly. We hope we can advance that project sooner rather than later and we will want to tap into that money.

Chairman

What was the understanding of the North Western Health Board on the controls of the Department of Health and Children when indicative funding was launched in 2000? Was each project to be assessed properly or was there an envelope of cash coming from the indicative funding aspect? Has the health board got all the funding which was earmarked for it in that area?

Mr. Harvey

I know this is getting much public and media attention, even today. In fairness to the officials of the Department of Health and Children who met with us very early in the NDP programme, everyone had the expectation that there was a significant capital programme in the offing. There was every expectation that the type of capital spending we would have in our board and every health board would be significantly ahead of what we had been used to in the past. There were indications that we needed to ratchet up our capacity to manage projects and there were expectations that the Department, in view of its own limited capacity, probably would devolve more by way of project management to the boards, apart from significant hospital projects and the like. That was an expectation in all quarters. However, the rate of inflation within the building industry and many other factors came into play and expectations have been refined somewhat.

As was intended in all quarters, we were then very quick out of the traps on our spending. I can show members of the committee a graph of the indicative funding line. It shows that we were ahead in the first couple of years. For the Department's own reasons, there was then an instruction not to proceed with projects without deliberate approval of stages from the Department. At this stage our spending is beginning to converge with the indicative spending. We were ahead of it in the first couple of years, we slowed up in the more recent year or two and we are now starting to converge. Our overall indicative allocation was approximately €103 million and capital liabilities to date are of the order of €88 million. We are not spending ahead of the indicative allocation, but then the indicative allocation was for a number of years.

Deputy Boyle

When the decision was made in 2001, was anything done by the health board prior to seeking initial approval for a loan from the Department of Health and Children?

Mr. Harvey

No. Our contact with the Department of Health and Children was in July 2001. That is when we made application to the Department for the loan, as we are expected to do under legislation.

Deputy Boyle

Had no construction work or even a tendering process begun at that stage?

Mr. Harvey

Contract documents were agreed at that stage.

Deputy Boyle

A tendering process had been undergone.

Mr. Harvey

The tendering process was complete and the contract nominated.

Deputy Boyle

Who was the contractor? Was it locally based or from outside the region?

Mr. Harvey

It was Brendan Loughran from Omagh. There was a full tendering and procurement process.

Deputy Boyle

However construction had not started prior to the board asking for loan approval from the Department of Health and Children.

Mr. Harvey

Construction had started.

Deputy Boyle

What reason was given by the Department in 2000 and subsequently as to why loan approval was not given?

Mr. Harvey

We never worked on the assumption that there would be a difficulty with the loan. There was a sound business case and the project was self-financing. My understanding is that the backdrop against which loans are approved changed somewhat in that year through Government policy on spending and loans. The Department may be able to clarify this further. At another time it may have been less of an issue but at that time there was some change in general Government borrowing policy and the loan was not approved. That created a difficulty for us and the loan has not yet been approved. I am not saying we have an indication that the loan will be approved or not. I merely say it has not been approved as yet.

Deputy Boyle

Was the board given specific reasons this project was not approved or was it the general thrust of Government policy that borrowing should not be added to?

Mr. Harvey

Yes.

Deputy Boyle

To continue with the project without loan approval was in breach of section 3 of the 1996 Act. Were there qualms or quandaries about proceeding on that basis?

Mr. Harvey

When Deputy Boyle says "in breach of section 3"——

Deputy Boyle

Section 2(1) of the Health Act of 1996.

Mr. Harvey

I am not sure what Deputy Boyle means when he says we were in breach of the Health Act. We had to get approval from the Department of Health and Children. Is Deputy Boyle saying that, in the absence of approval, we kept going.

Deputy Boyle

That is exactly what I am saying.

Mr. Harvey

We anticipated for some considerable time, and still anticipate, that the sound business case would attract loan approval. If that does not happen, we still have the capital asset and there is still the option to sell the building and to rent space and pay money as we did in the past, but we would not accrue the capital benefit.

Deputy Boyle

Did the North Western Health Board ever use this mechanism before in seeking loan approval from the Department for any capital development?

Mr. Harvey

No, but it would be fair to say that in all our service planning areas we always would be characterised as people who push the boat out as far as we can go and hopefully never cross the line, whether it is in trying to get into partnership arrangements with local community groups or provision of special residential units for mental health. A community nursing unit has been provided in more recent times in the Rosses in Donegal, which was part helped by Údarás na Gaeltachta and part helped by the local community. We have a contractual arrangement for beds in that unit and the contractual arrangement we have with them effectively allows them to pay back a loan. It means we have access to beds in the community nursing unit at something like 25% to 30% of the cost per bed that one would expect if one were simply building it on one's own right.

We have hospice services both in Sligo and Letterkenny, where we gave donations to the site hospice fund of maybe up to 50% over a few years from revenue to help with fund-raising. They eventually built and provided it and we have a hospice facility at the end of the day. In the primary care strategy, we would have, as I would see it, a very good rapport with our general practitioners and we have many very good primary care facilities in the region. In the past year or two we would have opened——

Deputy Boyle

I can understand that you are familiar with innovative funding practices and have no problem with that. However, the question I asked was whether the North Western Health Board had previously used this mechanism with the Department of Health and Children, and it had not.

Mr. Harvey

No, we had not.

Deputy Boyle

Having never previously gone down this funding avenue, why did the board have the expectation that it would be delivered in 2001 and since?

Mr. Harvey

I am not sure why. We felt it was a sound business case in its own right. We had an accommodation crisis. We were responding to a need and providing a solution to the problem without tapping into the national development plan funds. It seemed self-evidently attractive. In a worst case scenario there was always the option of inviting the local development association to put it in place for us, to fund it and we would then rent or lease it. It seemed to us that in the context of what offered the best value to the taxpayer, we should continue to try to attract approval for a loan from the Department of Health and Children.

Deputy Boyle

I wish to ask about the business case. Mr. Harvey spoke of current cash flow being met by the sale of land in the board's ownership. How much was received from that sale?

Mr. Harvey

It was about €3 million and there was perhaps a further €500,000 from road widening funds we had received from the local authority. The rest was through cash flow management.

Deputy Boyle

How long will that maintain an involvement in this project without getting loan approval from the Department of Health and Children?

Mr. Harvey

The mental health unit in Letterkenny is fast advancing to a point where we would like to get it to contract stage. Once it gets to contract stage, we would be depending on the money from the sale of lands to fund that. We would then have to reach a decision that if we could not get a loan approval from the Department of Health and Children, we would have to take some other option.

Deputy Boyle

What does Mr. Harvey believe will be realised from that sale?

Mr. Harvey

I would say we would get full recovery of €8 million to €9 million. We have not valued it recently but we would expect to get full recovery. We have indications from interests that it would be an option that people would be happy to exercise.

Deputy Boyle

My final question relates to what is described as the self-financing nature of the project. Mr. Harvey talked about savings in leases, rentals, travel expenses and hire of hotels. Can he quantify that on an annual basis?

Mr. Harvey

We have done exercises. I do not have a submission for the committee today, but we would have calculated that up to €400,000 in rental savings would accrue. If I compare accommodation costs in places like hotels and other areas which we had to use extensively, comparing 2001 with today's costs, there is a difference of €250,000. It could be argued that most of that accrues by way of saving by virtue of the provision of the headquarters offices, although not all, in fairness, because of more stringent value for money exercises in the past couple of years. Some of it would have accrued for other reasons. That brings the €400,000 up to €600,000 and it would be very easy to put another €100,000 at least on that from travel. This does not take us into the realm of value that comes from, for instance, Mr. Pat Dolan now being based at headquarters as the deputy chief executive officer when in the past I was in Manorhamilton, he was in Sligo and some other corporate functions were scattered in all directions.

We are confident that we can demonstrate the savings are there and would fund a mortgage — in effect, a loan.

Chairman

The subsequent evaluation is the nub of the case. If the board had justified the savings, that information would be pertinent to the——

Mr. Harvey

I am very conscious from local media interest that people were concerned that offices were being provided at the expense of services to patients and that, while wards were lying vacant, we had a tendency to look after ourselves. The intent was quite the opposite. It was never intended to compromise the funding for what are patient services. If we could not have done this through a self-financing initiative, we would have needed to reverse up and try some other initiative.

Chairman

That clarification is very important.

Deputy Curran

I do not fully agree with the Chairman that the evaluation is the nub of this case; it goes much further than that. Many procedures seem to have been bypassed which prompted the Comptroller and Auditor General to prepare the report. I want to go back over the dates, schedules and so forth. The earliest date this seems to arise is in the summer of 1998 when the North Western Health Board was considering possible refurbishment and architects were subsequently appointed etc. The board then carried out its evaluation of what it might save. Is that right?

Mr. Harvey

The chronology and history of it is that I was appointed CEO at this time of the year in 1998 and I was confronted with an accommodation issue, crisis — call it what one will — where we had no meeting room even for a small meeting. There was a difficulty in having privacy and it was possible to hear everything that went on. The unions made representations and we have letters on file from the Health and Safety Authority and so on. We decided we needed to do something about it without tapping into patient capital funds. The first impulse was to consider building an extension to the existing building. It is probably fair to say that the existing buildings by anybody's definition were just one step away from pre-fab, which was the specification for builders and architects in its day.

After carrying out an appraisal of options it was felt we were a major employer in the north west. We were by far the biggest employer in the north west, this was a public service and should be a civic facility and a civic building. It was in north Leitrim, which is a very deprived area by any reckoning. This represented an opportunity to do something substantial, bringing us into the long term and doing something opportunistically, if one likes, for north Leitrim. At that stage there was no mention of boards going by the wayside. When we carried out the appraisal, we decided on a new building.

Deputy Curran

I am not questioning the merits of or necessity for this building. I am more concerned with the procedures followed at the time. Mr. Harvey mentioned that an appraisal was carried out calculating how much could be saved on rent etc. The board then determined that it would easily cover a loan repayment. At what stage did the board look at the figures and reach that decision?

Mr. Harvey

I am sure it was in the early stages of the option appraisal, probably around 1999 or 2000.

Deputy Curran

It happened early on in the project.

Mr. Harvey

Yes.

Deputy Curran

What baffles me is that it started in July 1998, slightly before Mr. Harvey's time. A year later, the board had considered the savings it could make by moving into a new building. The North Western Health Board decided that the best way to do it was to borrow and repay from the savings, and to proceed with the project. Most people I know who run businesses try to put their loans in place before they embark on projects. In this case, the health board did not do it — it did it the other way around. It went to tender and engaged a contractor, which went on site in May 2001. It sought loan approval for the first time in July 2001, two months later. I fail to understand. The health board must have been totally unaware of the regulations which existed, or it must have chosen to ignore them. I do not know what happened.

When issues are presented to the committee it usually involves something going wrong, but I have not previously seen a case as blatant as this. The health board knew in the 1990s that it needed a loan, but no representation was made until it reached a point at which there was no backing away or altering its plans. That point needs to be clarified.

Mr. Harvey

As the project was self-financing, I expected at all times that the health board would have the option of becoming involved in a partnership arrangement. I thought it could get the local development association to adopt its plans and to develop the new building, which it could then rent. It was in the health board's gift to do so.

Deputy Curran

That was not the health board's first choice.

Mr. Harvey

It was a very——

Deputy Curran

Mr. Harvey has told the committee that his preference was——

Mr. Harvey

I will discuss that point. That option was available to the health board. It seemed to me that when the board examined the loan rates it could get in a Government context, as distinct from through local development associations, better value was to be obtained by getting a loan. In that context, the health board decided to look for a loan from the Department of Health and Children. That was, and still is, its preferred option because it is cheaper. In the early days——

Deputy Curran

The health board had two years, between mid-1999 and mid-2001, in which it could have informed the Department of its preferred option. I cannot understand why no approach was made in that time. The board approached the Department only when the project reached a totally irreversible stage. The contractor was engaged. The board had a fall-back position, but it did not do itself any favours by trying to advance its first priority.

Mr. Harvey

That is probably a fair comment. I would probably make a defence by arguing that we were dealing with all capital projects at that time in the context of a move to a new era. A great deal needed to be done at that time. We had to ratchet up the whole system. More had to be done by way of devolution of authority for project management.

Deputy Curran

Mr. Harvey mentioned that more had to be done by way of devolution, but I wish to ask him a specific question. Were Mr. Harvey and his fellow health board officers aware that loan approval would be needed from the Department?

Mr. Harvey

If we went for a loan, yes.

Deputy Curran

The board intended to seek a loan. That was its stated objective because it represented the best value.

Mr. Harvey

When I tried to come up with a solution for the offices in the earlier stages, I probably expected that it would be done as part of a partnership arrangement with a local development association. It became apparent that loan arrangements through Government would be much more——

Deputy Curran

They would be more cost-effective.

Mr. Harvey

It was not clear that they would be much more cost-effective, but that they would be somewhat more cost-effective and attractive. We took that route.

Deputy Curran

I find it bizarre that the health board engaged the contractor before it confirmed its source of funding. I find that unbelievable. I would put that view forward to anybody who is engaging in any project, not just Mr. Harvey. I would regard it as reckless. I do not deny the necessity of the building which was provided. I am not looking at that issue but at how the health board went about it. I consider that one of the first things which should be done by anybody engaging in a project is to determine accurately and to put in place one's source of finance. One should not say, "We have a fall-back position if X, Y or Z does not come through." I do not buy it. It was atrocious management from that point of view.

I want to go back to the early stages. The Comptroller and Auditor General's report states that the board prepared an outline planning brief for refurbishment in July 1998. It mentions the initial cost estimate and refers to the fact that architects were invited to make presentations. When were the architects invited to make presentations? How many of them made presentations? Was it a public advertisement?

Mr. Harvey

It was a public advertisement. I am not sure how many people made presentations at the time. There was a full procurement process.

Deputy Curran

The board prepared an outline planning brief in July 1998. Was a presentation made to it at a monthly board meeting? How did the process start? How was it initiated?

Mr. Harvey

The health board advanced the project through a sub-committee of the management team. It advised the board of its plans, programmes and intentions on a couple of occasions during the life of the project. The executive of the board, in project team mode, would have done those exercises.

Deputy Curran

I wish to summarise what Mr. Harvey has said. The board was told about the intended project in July 1998. A decision was then taken to advertise for architects to make presentations. That was subsequently done. The health board considered the presentations and gave instructions to a specific architect by August. It seems to me that a very short period elapsed between the board meeting in July — this all happened during a holiday period — the publication of advertisements, the bringing on board of architects and the issuing of an instruction in August.

Mr. Harvey

I do not have the detail. I do not think we decided to adopt firm proposals to proceed with a new building in the couple of months to which the Deputy has referred.

Deputy Curran

No, I am not suggesting that. I wish to be specific. I referred specifically to the section of the Comptroller and Auditor General's report which states that in July 1998 the board prepared an outline planning brief with an estimate. The report mentions that architects were then invited to make presentations.

Mr. Harvey

Yes.

Deputy Curran

The architects were invited after the preparation of the brief. A recommendation was made to make an appointment after the architects' presentations had been considered. In August, however, the architect who had been appointed was given a brief to do something. The specific point I am making is that the timeframe was very tight. One would not process a medical card application in such a period of time. If Mr. Harvey does not have the dates to hand, perhaps he can furnish them to the committee at a later stage by way of correspondence.

Mr. Harvey

I have been advised that the health board's actions during the months in question related to proposals for refurbishment, rather than a new building.

Deputy Curran

I accept that point fully.

Mr. Harvey

Deputy Curran is concerned about what we said we did in two months.

Deputy Curran

I am concerned about the timeframe, especially as July and August are holiday months. I appreciate that the board was looking primarily at a refurbishment project in July 1998. The board decided in July 1998 that it was to proceed with a refurbishment project. It then asked architects to make presentations, which it then evaluated. It had instructed a particular architect by August. I consider that the process of advertising, receiving presentations, evaluating presentations and instructing architects took place in a very tight timeframe, particularly as it all happened in a holiday period. Things would move much more quickly if every public body could operate in such a tight timeframe.

Mr. Harvey

I will clarify that.

Deputy Curran

I would appreciate such a clarification. I will not delay the committee much further, but I wish to discuss one aspect of this matter a little more. In 1998, a particular architect was doing a design for the refurbishment. For a variety of reasons the project was changed over time from one of refurbishment to one of constructing a new building. The funding was again to be secured by the health board by means of savings. That led to another problem, however. As I understand it, in layman's terms, the architect is paid a percentage of the contract value. As that value exceeded the EU procurement guidelines, is it correct to say that the appointment of an architect for the new project should have been advertised in the EU journal?

Mr. Harvey

Yes.

Deputy Curran

Did the board deliberately decide not to do that?

Mr. Harvey

Yes, I have to put my hands up and say that we took such a decision. We did so for a good reason, as we then perceived it, which related to time lags and value for money. We wanted to avoid the duplication of costs by not repeating the work which had already been done.

In the cold light of day and in hindsight, we overrode public and EU procurement rules.

Deputy Curran

If the board were to do it again, would it adhere to the guidelines and the regulations?

Mr. Harvey

Certainly, yes we would have to even if it meant delays in the programme and extra costs. The imperative seems to be that we would subscribe to the rules.

Chairman

In terms of cross-Border services from the health board, how beneficial is this facility to Northern Ireland?

Mr. Harvey

We often think of our peripherality from Dublin. When one removes the Northern Ireland entity from the map, we appear to be a peninsula that springs up into the north west. If one couples the North Western Health Board area with the equivalent of the western health and social services board area, which includes Derry and Enniskillen, the population of the north west corner increases from 250,000 to approximately 500,000. There are significant opportunities to be pursued in the north west in the context of that larger population base that could involve having a critical mass of patients for different services. We have made many inroads in that context. In recent weeks the appointment of a third maxillofacial surgeon in Derry to look after the north west catchment has been secured. We considered the headquarters in Manorhamilton to be well placed to work closely with our counterparts in the neighbouring jurisdiction. Any number of opportunities can be exploited in that context.

Chairman

Would the principal officer from the planning and evaluation unit of the Department of Health and Children like to record his assessment of the development at Manorhamilton?

Mr. Hardy

The matter does not come under my responsibility in the Department. As capital development does not come under the aegis of my unit, perhaps those people covering the capital budget are better placed to answer.

Chairman

Does any other official from the Department have a comment?

Mr. Magan

Is the question about cross-Border co-operation or capital expenditure?

Chairman

What is your evaluation of the headquarters and how essential is it in the context of health care provision in the region?

Mr. Magan

Like any other Department, the Department of Health and Children must work within the rules. In general, the health board has been always proactive, particularly in the general practitioner and community services area and in the context of issues of improvement and availability of cross-Border services. We are in a position in which the only way to fund capital programmes is through the national development plan. While we support in a general way improvements in accommodation in any board, our difficulty is that there is no avenue to seek loans once we have an NDP programme as that is the system's vehicle for funding capital projects.

From the point of view of our finance unit, it was never going to be a runner irrespective of the merits of the case itself. Rules are in place from the perspective of funding. We have a substantial capital programme though we would no doubt like more. There is a series of reviews and agreements on how we develop such programmes in each board's area. While people can ask if there was an opportunity in the capital programme to prioritise, it was for the board to make a decision and come to us. We did not have an opportunity in terms of other funding methods. Loans, lease arrangements and other methods are not contemplated where one has a significant capital programme.

Cross-Border services are fundamental for the North Western Health Board and the North Eastern Health Board. I attended a meeting in Brussels yesterday about cross-Border care and potential improvements throughout member states, at which I was able to indicate that we are very far advanced in terms of our activities and agreements with our Northern Ireland colleagues. While we have only one border, we are well placed by comparison with countries like Germany that have many border countries and that have developed services significantly for communities. The North Eastern and North Western Health Boards are not behind such countries.

On the capital programme, there is no other avenue of operations for us.

Deputy B. O’Keeffe

Deputy Curran said that what the North Western Health Board did was reckless. While I would not go that far, I was struck by Mr. Harvey's comment to the effect that the board pushes the boat out as far as it can, leaving enough rope out there to get back in. While that is not reckless given that the building in question should have been in place, Mr. Harvey and his board stand accused of having absolute disregard for and flouting the mechanisms and regulations that were in place.

In terms of good management, I cannot understand putting in place a building to which trade unions were absolutely opposed on the grounds of the safety and welfare of their members. The health and safety officer described the building as being unsafe. The board had an opportunity to put good management into the national development plan. Of all the buildings that could have been suggested, this corporate building was a particularly good candidate as it was unsafe and condemned. Yet, the board chose not to do it. I wonder why. It was not a positive management decision to decide not to put in place a building like that given that the board would have to use money that could have been invested in fixed assets to further develop community care. The project in question was the very first that should have been included in the national development plan given the extent of the backing the board had. Despite this, the board disregarded that route and decided to flout the regulations and use up resources it may not have had to employ. I question whether this was good management on the part of the board.

Mr. Harvey

: In the context of a local board, it is very difficult to convince the public and service providers that the provision of a headquarters from an overall indicative capital allocation is a priority. Even if it is, it does not sit comfortably. In many respects this was the reason we had facilities such as those in Manorhamilton for 30 years. The patient service area was always given priority. This is the reason we deliberately decided that the project needed to be self-financing. For instance, if I had opted in the final analysis for the easiest route — to ask the local development association to provide us with accommodation and pay for it using money we use for rent in all sorts of areas — this matter would not have come before the Committee of Public Accounts in any shape or form. That option was within our gift and if we had taken it, the project would not be an issue and we would have new accommodation similar to that which we currently have but at a slightly greater cost. In the spirit of wanting to ensure we got the best deal for the taxpayer and incurred the lowest cost, we decided not to take this option but to seek a Government loan or funding through the Department of Health and Children. That is the reason we approached the Department. I do not believe I could have sold to board members or the public a decision to take €8 million from the NDP fund. That may have been an incorrect judgment but it is my view.

Deputy B. O’Keeffe

I do not agree. The Health and Safety Authority and the trade unions informed you that the building was not up to standard and staff morale was low. Other health boards have done exactly what you failed to do in terms of putting stuff into the——

Mr. Harvey

My understanding is that other health boards may have gone down the rental route and incurred costs. We made a judgment call on the matter.

Deputy B. O’Keeffe

Will you clarify the savings you are making? What are the repayments on the overall cost of the building? The first indication of cost received by the Department of Health and Children was for less than €1 million for refurbishment work. You then employed architects and obtained another view. Nowhere in the response from the Department to the CEO does it state it received notification of the revised cost of the building.

You sought a loan from the Department in 2001-02. Did you consult it at any stage about the increase in the cost from the initial estimate of under €1 million for refurbishment? The cost has since risen to €9.5 million. Did you have any regard to the Department of Health and Children or the Department of Finance at any stage? Did you inform them that you were going overboard and ask them to come along with you?

Mr. Harvey

To be honest, I am not even aware of the consultations which took place with the Department of Health and Children as regards the figure of less than €1 million. We took a local option and carried out an appraisal with the intention of choosing something new and complete.

Did you ask me whether we estimated the repayments?

Deputy B. O’Keeffe

I was wondering——

Mr. Harvey

Our estimate was that the loan, if repaid at 4% interest, would yield repayments of €680,000 per annum.

Deputy B. O’Keeffe

You told the committee you made savings. What were they?

Mr. Harvey

I arrived at a figure of close to €700,000.

Deputy B. O’Keeffe

There was, therefore, an additional cost of €200,000. Is that correct?

Mr. Harvey

No, we were saving up to €700,000 to fund the €680,000 loan repayment. I am saying there is a break-even between what we would save and what we would be spending on a mortgage. In the final analysis, by taking this route we would have, at no extra cost to the board, a capital building worth €8 million or €9 million at the end of the period.

Deputy B. O’Keeffe

As CEO, does it ever strike you that you faced a dilemma with regard to the Departments of Health and Children and Finance and that you were in breach of regulations? How did you feel about that? Did you address the issue with the board then or in the interim? Did the matter weigh heavily with you?

Mr. Harvey

I do not believe I was in breach of regulations. Under the regulations, we must seek loan approval from the Department of Health and Children, which we did. While I am aware that this is a technical argument, the advice I have received indicates that we are not in breach of regulations. However, it could be said, certainly in hindsight, that a wise man would have been better advised to have liaised more with the Department in the early stages of the project.

We proceeded in the context of the new NDP and with a view to pushing out and finding solutions to problems. We had a problem and it is a judgment call as to whether it would have been preferable to take a top slice out of the NDP or try to proceed in a self-financing manner. If we had taken the former option, the easier but slightly more costly one, I would not be before the committee today but in a new building in Manorhamilton which we would be renting from a local development association.

Deputy B. O’Keeffe

We are aware of that. Does Mr. O'Keeffe believe the North Western Health Board was in breach of the regulations? Mr. Magan appeared to imply that, as far as the Department of Finance was concerned, the board was in breach of them.

Mr. O’Keeffe

Health boards must comply with mandatory national and EU procurement procedures. The Department of Health and Children has its own procedures and guidance documentation which all health boards have in their possession. The procedures were breached in this particular project. The procedure pursued with regard to the initial project at a value of less than €1 million was correct in that, as I understand it, the health board interviewed a number of architects, one of whom was selected. Following receipt of a develop and control plan, it decided to provide a new building at a vastly increased cost. It was at that stage that the project went off the rails. The health board should have gone through EU procurement procedures, realised the position it was in and readvertised the project.

Deputy B. O’Keeffe

Were many tenders submitted for the work?

Mr. Harvey

Mr. O'Keeffe is referring to the engagement of the design team. I put up my hand and admitted we breached EU procedures in the engagement of the design team. It was with regard to the other aspects of the project, the contract and so on, that I stated otherwise.

Deputy B. O’Keeffe

Is that what Mr. O'Keeffe was saying?

Mr. O’Keeffe

As regards the appointment of the design team initially, a prerequisite to proceeding with any project is to have a clear and detailed brief. It was obvious that this was not the case, given that the estimated cost was less than €1 million, whereas the detailed brief, when first produced, had an estimated cost——

Deputy B. O’Keeffe

Is a mechanism available which would have allowed the Department of Health and Children to step in and inform the North Western Health Board it was in breach of EU procurement rules and, therefore, out of order? Did the Department indicate to the board that it had gone off the rails and needed to pull back and that the project was not acceptable?

Mr. O’Keeffe

When we became aware of the project, a contract had been entered into with the main contractor. Such contracts are virtually irrevocable.

Deputy B. O’Keeffe

What does one do in such circumstances? Does one sit back and wait for the matter to come before the Committee of Public Accounts for a good airing, after which the matter is closed? That is effectively what happened.

Mr. O’Keeffe

There was a contractual commitment between the North Western Health Board and the contractor. The project was near completion at that stage.

Deputy B. O’Keeffe

Obviously it is not satisfactory. The Department of Health and Children states clearly that the North Western Health Board did not comply with the regulations, irrespective of the statement that there was a serious breach. Ultimately, while there might be good value for money, there are procedures in place and it could have been a mess. There may not have been value for money. If that had been the case, there might have been a different briefing at this committee and we might have been calling for further restrictions. It is a serious breach and the Committee of Public Accounts will have to examine what happens and what it should do if a serious breach is not addressed by the relevant health board, the Department of Finance or the Department of Health and Children. How many tendered for the project?

Mr. Harvey

The design team.

Deputy B. O’Keeffe

Both.

Mr. Harvey

We had invitations and engaged the design team at the stage of the earlier and smaller project. The normal procurement process of advertising and inviting through——

Deputy B. O’Keeffe

Was the same design team retained?

Mr. Harvey

Yes, and that is where we breached the regulations. We did not breach them in terms of engaging contract, which was done according to normal protocol and procurement procedures.

Deputy B. O’Keeffe

How many firms tendered for the construction?

Mr. Harvey

Sorry, I am lost.

Deputy B. O’Keeffe

How many firms tendered for the construction contract?

Mr. Harvey

We went through public procurement for the contractors. Off hand, I do not know how many tenders we received, but we received several. We will return to the Deputy with the figure.

Deputy B. O’Keeffe

What was the duration between the date of tendering and the awarding of the contract?

Chairman

While Mr. Harvey is sourcing that information, Deputy Fleming may ask some questions.

Deputy Fleming

Who signed the contract on behalf of the health board?

Mr. Harvey

The board chairman and I signed it.

Deputy Fleming

The board chairman signed it.

Mr. Harvey

On my advice to the board.

Deputy Fleming

Therefore the board was fully aware that the project was proceeding at that stage. I formed the impression that Mr. Harvey felt there would be difficulty obtaining general support for a project for headquarters given that there were other priorities.

Mr. Harvey

We had the board's support for the provision of headquarters on the basis of the project being self-financing and subject to the approval of a loan. I would have had difficulty going to the board and asking that the first call or an early call be made on allocating to the headquarters project what would have been an overall national development plan, NDP, capital fund for five years.

Deputy Fleming

If Mr. Harvey had obtained substantial funding through the NDP for the headquarters, he would not have had to engage in the same level of self-financing.

Mr. Harvey

Correct.

Deputy Fleming

Since Mr. Harvey did not take that route, he decided to finance the project from his own health board's resources to a greater extent. His decision meant in effect that there are fewer resources in his health board for patient care.

Mr. Harvey

We would have had an indicative allocation from the NDP for a five-year period. There is no question that it was to be supplemented by virtue of our case for headquarters. We would have been taking money——

Deputy Fleming

On the point that there was no indication that the allocation was to be supplemented, was a proposal made with this in mind? From where did this assumption come?

Mr. Harvey

In all the discussions we had about capital programmes, we had a sense — I am sure it was not wrong — that there would be no expectation of an allocation being supplemented for the headquarters in Manorhamilton. Had there been an opportunity to supplement the allocation, we would have piled many other capital projects into the pot. It is a judgment call as to whether it would have been acceptable and palatable, both at board and public levels, to take some of the capital and use it for the headquarters. I accept the Deputy's point that if we had paid for the headquarters with capital funding, the money we are currently paying for rental, etc. would have been available for patient services. However, it is one or the other. If I use it for the buildings, I cannot use it for some of the patient services, an extension to Sligo hospital or renal dialysis.

Deputy Fleming

Mr Harvey stated it was a judgment call as to whether the proposal for the new headquarters would have received support at board level. Whose judgment call was it?

Mr. Harvey

It was mine.

Deputy Fleming

Had Mr. Harvey consulted board members informally to arrive at it or did he just assume they——

Mr. Harvey

I——

Deputy Fleming

How many board members are there?

Mr. Harvey

There are 27 members.

Deputy Fleming

How many of them are staff and professional representatives?

Mr. Harvey

Fourteen of them are public representatives.

Deputy Fleming

Approximately half of them are staff and professional representatives.

Mr. Harvey

Or general practitioners.

Deputy Fleming

Given the health and safety requirements, how would Mr. Harvey have concluded that they would have opposed the provision of improved facilities for staff? Many of them were members of staff.

Mr. Harvey

I would have made the conclusion in the same fashion that I would make any judgment call on any business going to the board. One would have a good sense of the forces at play, what a board would be comfortable with and what would cause it to react in one way or another. From my experience of dealing with public representatives over the years and from my knowledge of the backdrop against which they have to work, I believe there is little doubt that the course we took was more——

Deputy Fleming

Mr. Harvey is really undermining and expressing no confidence in his own members if he feels there was a justifiable case. He is almost saying they would not have had the courage to go with it because of other priorities. Many other public bodies have faced similar decisions and have built new headquarters when there were competing requirements.

Mr. Harvey

I am not sure that is a fair call. We go to the board and present to it what we believe is a reasonable case that stands up in its own right and with which it will be comfortable. While we would not necessarily have presented the board members with three options, through our interactions with them at standing committee level and in other quarters we would have developed a very clear view that they would have found it much more palatable to have scarce capital funds received from the Department of Health and Children allocated to patient services rather than to what is perceived as office accommodation for administration. On that basis, we presented the board with the proposal to have a self-financing project, which it found palatable and very acceptable.

If we had gone further and simply avoided the risk of applying for a loan, as we have done in some other quarters, bearing in mind that boards rent accommodation all over the place, it would have been more costly. However, we would not have been having the debate we are having today. That was our judgment call on the matter.

Deputy Fleming

At what stage in the process did the board approve the approximate full cost of this project?

Mr. Harvey

The board would have been aware of our proposal to build new headquarters. Its members would have been engaged in some of the design arrangements associated with the boardroom, etc. and they would have been engaged in the decision when we were entering into contract. To be fair to the board, it was largely working and responding to my advice to it. If I put the case to it that a certain option was the preferred one, it would probably back me on it.

Deputy Fleming

Given that the board members probably felt Mr. Harvey had done such a good job in that he was able to obtain new headquarters for them on an almost self-financing basis, did they ask him to use his skills in other areas, for example, to provide other facilities for patients on a similar self-financing basis?

Mr. Harvey

That is probably exactly why the members backed my proposal. It takes great drive, innovation and energy to get maximum benefit from whatever limited resources we have. If, for instance, we review the 2001 service plan for the board, very significant developments and enhancements took place not because the necessary additional funds came from the Department but because we used existing funds and redeployed them. For instance, in that year alone we increased the level of home help hours to the community by 49% in a very focused way. We did not get 49% more funds for home help from the Department. Increasing home help hours by 49% was a huge development. We cut the ophthalmic waiting list by 90%. We did many things.

While what we did mainly in headquarters stands out now like a huge sore it is not untypical of the type of innovative approach and energy we would apply to almost every problem that arose. We had an accommodation crisis. It seemed that in many respects we were handing the solution on a plate. We did not anticipate a difficulty in getting a loan. It seemed self-evident that this was a project that was self-financing. We were not looking for funds from the Department but approval for a loan. We assumed we would get it. That was the time when technically and legally we were obliged to go to the Department to get its approval for the loan. The climate changed somewhat, but we would not have assumed that there would be a difficulty in getting approval. It seemed to us like a very straightforward process, though it is somewhat different in retrospect today.

Deputy Fleming

There was the option, whereby the development association would have provided the accommadation and it could have been rented which would not have involved this type of issue in the first place. Obviously the cost of finance for the association would have been greater than what it would cost the health board to borrow, and that is why the board took that route. I understand that. Had the board taken that route with the development association I would call that, in effect, a public private partnership project, involving the board as a public body working with a private development association to rent or lease accommodation over a period. I would call that a classic PPP style project. Given that the board looked at the possibility of a PPP with one development association, with clear merit involved, why did it not seek submissions or proposals in general and advertise for people to come forward from the private sector with proposals to build and lease accommodation to the board, rather than merely looking at the one proposal before the board? Had it advertised the PPP route publicly, the board might have secured the accommodation through the private rental-leasing route by way of PPP at a much better rate than that offered by the local development association.

Mr. Harvey

That may be fair comment. I am not sure that a better rate can be had than the loan rate the Government can get.

Deputy Fleming

A PPP involves more than merely the loan rate. The speed of delivery and many other issues must be factored in. The board looked only at the development association offer, which was a fair approach, but why did it not broaden it out and invite proposals from the private sector?

Mr. Harvey

I would not have studied that with the same vigour as I approached the rest of the business. The Deputy has described the rental from the development association as effectively a PPP, but in technical terms it is not. It is a much more complex route. The rental method is operating in very many settings countrywide. In reality, I can spend without question twice as much on a rental, and not appear before the Committee of Public Accounts. I went for what I thought was the best value for the taxpayer, which the board is obliged to do under the 1996 legislation. I went for the cheapest option but in fact it has involved a complicated lifestyle for me as a consequence. The easier option for me personally, and a more costly one, which would resolve the problem, was to simply take the rental option, which happens in very many settings throughout the public service.

Deputy Fleming

The route Mr. Harvey chose was clearly chosen because all the work was being done and the board's management and project team was in place. Had the board taken the other route, there would have been many savings apart from the actual cost, in terms of staff time and resources that could be used for the board's health services. Such a big project being handled by the board's own project team ate up much of what I would call senior executive time at headquarters which could have been used for other services.

Mr. Harvey

Knowing the project team, the members probably did the work after hours, but it would not have consumed a great deal of time. There was a project manager who was involved in several other projects, and once one gets through one's brief and one's schedule of accommodation, the work then falls in large measure to a design team. I do not imagine the time spent on the project would have been an undue intrusion.

Deputy Fleming

In fairness to Mr. Harvey, we are the Committee of Public Accounts and we have to learn lessons just as the board does. Mr. Harvey makes the fair comment that the board could have carried out this work through a rental-leasing route without engaging the contractor at more expense and less value for the taxpayer, and he then would not have to appear before this committee today. The board chose to take what we might call the capital construction route because of the different rules with regard to that, and thus Mr. Harvey is here today. This is an issue of which this committee should be conscious because ultimately, this committee looks at value for money. While the board might have breached some procedures, Mr. Harvey is satisfied it got greater value for money by so doing. Perhaps, therefore, we as a committee should look more widely at how buildings and facilities are acquired and the overall cost ultimately to the taxpayer over the life span of the use of these properties.

We should compare the rental-leasing route with the capital acquisition costs. It may be that the different rules are causing the anomalies that lead to some of the problems before us here today. We should look at the overall picture. The board could have taken the more expensive route, Mr. Harvey would not be here today and the Irish taxpayer would be none the wiser. We would all be spending more money on the health services and wondering where it is all going. I have learnt an important lesson from what Mr. Harvey has told us today.

Mr. Harvey

It reminds me in some respects of defensive medicine. Someone gets called in to a sort of court setting and the practice is a little safer but it is not necessarily in the best interests of services afterwards. What has occurred would cause people like me to be more careful, defensive and safer, and not as ambitious. I do not know if that would serve the public better. There is an issue involved here, and I appreciate that the Deputy acknowledges it.

Deputy B. O’Keeffe

I would not agree with the Deputy's summation of what went on.

Deputy Fleming

It was an observation.

Deputy B. O’Keeffe

I would not like this committee to glorify in any way what was done. Good management would have offered a different route which would be within the regulations and would have given good value for money to the taxpayer and perhaps left much more money for the development of other services within the North Western Health Board had it pursued that route.

Chairman

How many staff are currently accommodated in that building facility?

Mr. Harvey

: There are 150. Incidentally, there were ten tenders for the contract.

Deputy Curran

Regarding the breach of the EU procurement guidelines, now that it is historically shown, is the health board exposed to any possible sanction, or is that business water under the bridge — finished, so to speak?

Mr. Harvey

It is probably water under the bridge. If someone were to take a case against the board it would be because he or she felt that equal opportunity to tender was denied. That probably would be the only circumstance. We have not been challenged in that way and I imagine it is water under the bridge. The design team was all EU.

Chairman

I have a question for the Department of Finance. In light of the situation whereby the North Western Health Board has its hands up with regard to the non-compliance, how will things change? The board has sought approval for the loan and Mr. Harvey has stated that the €4 million is being temporarily used to facilitate the borrowing. The facility is now there. I am not condoning what has happened, but we need to know the Department's position for the future with regard to the approval of the loan to facilitate the borrowing. I have no doubt the current arrangement is temporary and will have an impact on services if it is not resolved. How soon will this be resolved?

Mr. Magan

I thank the Chairman. The honest answer is that we have a difficulty because the rules have not changed since we were first here. To be helpful, the only thing we can do after today is to explore the options with the health board and the Department of Finance. However, listening to the discussion, it is fair to say the rules laid down by the Department of Finance obviously relate to more than just one health board. A process exists as regards the national development plan. Health boards and other public bodies could justify, from their perspective, additional loans, with a significant effect on the Exchequer. From the Department's perspective, rules are laid down and obviously we have to follow them. The rule is there. I cannot see the Department changing its mind because projects may be self-funding. Many people may decide this or that project is self-funding. What do we expect them to do as regards value for money?

As regards any year in which a determination is given, we have always asked for significant value for money initiatives and savings and these have been forthcoming from health boards. These are part of the funding of the health service. People are always being asked for those types of initiative and value for money schemes to augment the efficiency and funding of the system. To address the Chairman's question, we will have to reflect on this matter with the health board and decide what the next approach should be. There is not much more we can do. We have an NDP, but we do not have the ability to approve loans. That is the position.

Chairman

With regard to the non-approval of the loan, no doubt the temporary accommodation will have an impact on services if this matter is not resolved. The building is in place and this problem will not go away. It is important that the matter be addressed at the highest level to see what arrangements may be put in place.

Mr. Magan

We will do that. The day-to-day situation is that the health board has to meet those costs from whatever funds it has. One of the solutions could be a loan, but that would have to be serviced as well. However, costs are being incurred and these must be met. That is the way the system works. People do not wait around to be paid.

Deputy Rabbitte

I will address my remarks to Mr. Purcell rather than Mr. Harvey. The point has been fairly made that this committee cannot condone breaches of financial procedures and so on. However, our overriding responsibility is value for money. I had the opportunity to visit this particular headquarters recently. It is a splendid facility that was badly needed, in my judgment. This committee often has the problem of criticising bureaucracy over delays in the implementation of decisions that are required to be made and for killing off initiative taken by chief executives. The entire problem in the NDP's wider infrastructural remit is that of projects coming in late, over budget and so on. On the one hand we require innovation in public sector projects, and often we find ourselves on this committee criticising at the same time the management of such projects.

The issue is value for money. I would like to know either from Mr. Harvey or Mr. Purcell whether it is being suggested that public money has gone missing. It is clearly not suggested that this is the case. Was it a bad use of public money? I do not believe that is the case. Will patient care or services suffer as the result of the creative use to which health board resources were put? That is something that should be capable of being reconciled with the Department of Health and Children. If the health board had taken the lease and rent route, it must be possible to assess on the back of an envelope, so to speak, the cost of that over 20 years as distinct from the route that was taken.

I am sorry I was called out from the meeting. I was listening to the exchange. I do not know what conclusions will be arrived at on this question, and while we cannot be seen to condone procedures not being observed, we need to look at how badly this facility was needed, what contribution it is making and what the alternative routes would have cost the taxpayer. These are reasonable questions. The committee has come up against this type of problem in a number of areas, such as the National Roads Authority, VECs etc., where our proper concern with vigilance in terms of the spending of taxpayers' money ought not be confused with a willingness to stifle creativity or innovation demonstrated by managers.

Mr. Purcell

The committee, as well as having to consider value for money, has a regulatory mandate. In this case we were not nit-picking over regulations. However, it would be seen as imprudent to embark on a major capital project without having the funding in place. There is a cost to the board. The proceeds of €4 million realised in the disposal of assets, which could have been reinvested for capital facilities and so on in particular areas, cannot currently be used and there is a strain on the cash flow as well. Some €9.5 million has not been serviced in any way or funded. Therefore this must put a strain on resources.

I am all for innovation and the chief executive officer made much of the business case. However, a business case has to be validated. Perhaps there is evidence, because we are currently completing the audit of the 2003 financial statement and concentrating on that, but I have not seen it. Were the estimated savings realised and are they verifiable and attributable directly to the construction of the new headquarters? I have no problem with the new headquarters. There was clearly a need for it. However, this was not the way to go about it. If that latitude is extended to the rest of the health service, we will be in the same mire that has necessitated its overhaul.

NDP funding was mentioned. Indicative allocations were mentioned and why this capital project could not be encompassed through that programme. As we say in the vernacular, "sin scéal eile". I have recently signed a report which includes a major section on the confusion that arose between the Department of Health and Children and the various health boards over what was and what was not being delegated. Under the Act, that report has to be laid in the Houses of the Oireachtas by the Minister for Health and Children before 12 November 2004. I do no want to pre-empt anything, but there is a broader issue if the indicative funding and the use of the NDP capital programme on health is being brought into play. I do not know whether that fully addresses——

Deputy Rabbitte

I do not wish to interrupt, but I stated that we needed to have some type of figure that compares one route with the other to see if there was a business case. I have not seen that yet. What would an alternative route have cost the taxpayer? That is not to condone the breach of procedures, but I have not seen those figures yet.

Deputy Curran

I will be brief as I spoke earlier on the issue. I have no criticism of the building or the facility that is being provided. Unlike Deputy Rabbitte, I view this as more than just a breach of procedures. This was bad management. They decided to construct a building and it was not until afterwards, when the contractor was on-site, that they approached the Department to put in place funding. There was a two year period from the time they decided to build this headquarters to the appointment of a contractor. During that period they should either have made a loan application or they should have put in place one of the other funding mechanisms. It was precisely because they did not do it in time that this situation has arisen. It is the timeframe which concerns me more than anything. They proceeded with the project without firm ideas and that was bad management. I am not critical of the building but rather the manner in which it was processed, or not processed, over the two year period.

Deputy Boyle

My concern is about the establishment of a precedent. If this is seen to happen in one health board area, what will stop it happening in another health board area or agency? While we can all point to valuable projects that need to be implemented and which could save on costs in the long run, if we do not have a system in place to ensure how that is done, administrative anarchy could result. This seems to be a Canon Horan "build it and they will come" approach to capital development. This committee has to be firm on such issues, otherwise we will see this development throughout the country.

Mr. Harvey

I am imagining being called Canon Horan around Manorhamilton after this. I could probably live with that.

Chairman

We will have to reflect on what we heard today. I thank Mr. Harvey and his team for attending today. It has been a good discussion on this issue. I now call on Mr. Purcell to introduce the Southern Health Board accounts for 2002.

Mr. Purcell

After that intervention, I think this will be a rules based observation. There are well established rules that govern public procurement. These operate at a number of levels — EU, national, sectoral and right down to those at organisational level. The underlying principle in all cases is that competitive tendering should be used in procuring goods or services above certain thresholds unless there are compelling reasons for not doing so. In the case under consideration this afternoon, the policy covering health service procurement applies. That policy identifies a number of exceptional circumstances in which tendering is not required, but even then the CEO or its nominee must certify that particular circumstances apply. Importantly, the policy makes it clear that the use of exceptional circumstances does not permit departure from EU procurement rules.

Members will note from the report that during the years 2001 and 2002, the Southern Health Board paid out more than €1 million to a consultancy firm for a variety of assignments, including one for more than €500,000 for work on behalf of a forum set up to formulate a strategy for the development of acute services in Cork city. My concern was that none of these consultancy assignments was put out to tender and there seemed to be no appreciation of the requirements of national and EU procurement rules. Furthermore, the nature of some of the assignments suggested that consideration should have been given to whether the required expertise might reasonably have been expected to have been within the board. I put these points to the CEO for his views, and his response was that the firm in question had first been retained by the board in 1997. The board was clearly impressed by the quality of the work produced. After that the firm seemed to have been the first port of call for any help in management strategy work in the board's region. Good as the firm's work may have been, the bottom line is that it does not obviate the need to comply with the rules when dealing with taxpayers' money.

Chairman

I believe Mr. Hurley does not wish to make a statement.

Mr. S. Hurley

I do not have a formal statement, other than what was submitted to the Comptroller and Auditor General some time ago. However, if the Chairman wishes me to make a number of points in response to Mr. Purcell, I will do so.

Chairman

Yes I do.

Mr. Hurley

There are two separate elements involved in the issues before the section 64 report covering 2001 and 2002. Based on the analysis set out under the report heading of audit concern, the first five payments covered issues about work undertaken by the firm of management consultants on behalf of the Southern Health Board. The last payment, which was for the preparation of the acute hospital strategy and which was by far the greater element of it, was undertaken on behalf of a number of agencies of which the Southern Health Board was only one. It was undertaken on behalf of the two voluntary hospitals in Cork, UCC and the Southern Health Board. We were just providing the administrative back-up to that particular project.

We did engage the firm of management consultants without going through the proper tender procedure and there is no doubt about that. I should have availed of the derogation that would have been available by seeking approval of the Government contracts committee. There is a provision for single tendering and I did not avail of that. However, having not adhered to the regulations and given the context of this morning's discussions, I have to say we obtained very significant value for money. The firm of consultants delivered a very good product to us. When I started off as CEO of the Southern Health Board, one of my key objectives was that we should improve the management processes and systems within the Southern Health Board with the sole objective of delivering value for money. I felt it was a huge challenge we are still facing. The work we carried out which was supported by the firm of consultants could be described in two ways. First, it was an investment as it was a series of learning projects. It was about us and how we would modernise our organisation. Currently, we are spending €1.1 billion which is a huge enterprise. I wanted to make sure we had in place the most up to date management processes and systems. We needed the outside expertise to learn all of this. I did not adhere to the regulations and I also could be faulted for putting far too much significance on the whole question of value for money. What has been driving me is value for taxpayer's money.

I would also like to outline the context for the preparation for the acute hospital strategy in Cork. Members will probably recall that the ERHA was set up in March 2000. At that stage the Department of Health and Children and the Minister in particular were anxious to look at the Cork situation whereby there were two large voluntary hospitals still being directly funded by the Department. In May 2000 the Minister met the chairman and CEO of the Southern Health Board and representatives of the Mercy Hospital and the South Infirmary, Victoria Hospital. He outlined the intention, with effect from 1 January 2002, that the Southern Health Board would become the single funding agency for all agencies and that, therefore, the two voluntary hospitals would be funded directly by the Southern Health Board.

The Minister wished to ensure, as did I and the then chairman of the health board, that the two voluntary hospitals would be seen to be playing on a level pitch. He set up a top level steering group which reported to him. One of the health board's key recommendations was that we should set up a forum for Cork city, the acute hospitals planning forum, representing all of the stakeholders so that they could come together to prepare a strategy for the development of services in the city for the following ten years.

It is obvious the Southern Health Board would not have had the resources to prepare the strategy or support the forum. Also, due to the sensitive nature of that work, it was vitally important that any support would be independent of the Southern Health Board because the big issue for all, particularly for the two voluntary hospitals, was to have confidence in the new venture. We engaged with a firm of management consultants, which, as part of its work, would interact with the two voluntary hospitals and the medical faculty at UCC. All of the parties on the top level steering group agreed that this firm of management consultants would be the ideal firm to prepare the strategy and this is why we engaged the firm.

I reiterate that, by learning over the years, the health board achieved significant improvements in its management processes which help it to deliver better value for money. A second point is that when the Minister set up the top level steering group, the equivalent of an ERHA was not established in Cork as, in my view, it would have created unnecessary bureaucracy and required legislation. However, there was a difficulty in that no further mechanism was put in place to create one contracting entity with legal responsibility. In that vacuum, it fell to the Southern Health Board to ensure delivery of the strategy the Minister wanted it to prepare.

Deputy B. O’Keeffe

I declare an interest in that I am a previous chairman of the Southern Health Board.

Deputy Boyle

I was not going to expose Deputy Batt O'Keeffe in any way. I acknowledge the admission by Mr. Hurley about the failure to meet the criteria. I have a worry in the context of both presentations this morning that we might in future have delegations coming before the Committee of Public Accounts stating that they did not meet the rules but that they did this because they did not want to hit the taxpayer's pocket. Getting the balance right is one of the lessons we must take from today's session.

I will focus my questions on the relationship between the health board and the company. The health board first engaged the company in 1997. I presume this was as a result of a tendering process.

Mr. Hurley

There was no tendering process at any stage.

Deputy Boyle

Was the health board familiar with the company? Was it based in the health board region? Were health board personnel involved with the firm in a way that would have encouraged the board to take this route?

Mr. Hurley

We first engaged with the firm on a very small work project. I became aware of the firm and its track record through work it had carried out primarily in the private sector. The health board engaged the firm to carry out work based on its track record and its methodology and approach. I have worked in the health services for many years and have come across many firms of management consultants. I found the approach of this firm significantly different from other firms. I regarded the expertise of other firms as lying primarily in implementing IT systems and solutions whereas what the board wanted at this stage was to improve its management processes and systems. I wanted a firm of consultants to look at the business side, not to provide IT solutions, and this firm's strengths lay in this area and met our specific requirements.

Deputy Boyle

The work for which the health board engaged the firm covered a diversity of projects. Was the board confident the firm had the skills to help it in each of these areas?

Mr. Hurley

It was primarily about improving our business processes and making the health board more efficient. The first project involved developing a new senior management structure. A significant proportion of this work was based on my decision that the board would set up — it is the only health board to do so — a specific unit for strategy and planning. I saw that one of the key weaknesses in the health boards at that stage was that their planning processes were not up to scratch. The Southern Health Board set up a dedicated unit to undertake all corporate and care group strategies but which would also monitor performance. I felt there was no point in asking a programme manager managing the delivery of a service to draw up a strategy for his or her area because it would not have the necessary integration. In addition, there was no point asking a programme manager to report to me on a monthly basis on his or her own performance. Therefore, we created this independent unit to pull all of the information together.

With regard to questions on the selection process, this was not an assignment. It was good human resources practice to have people with expertise from the outside world on interview boards with us. This was the second element.

The board developed its first corporate development plan for 1997 to 2000 because I felt it was essential for any health board to have such a plan. National policies were coming from the Department of Health and Children in addition to our own strategies. I wanted to have one vehicle which would drive the development of the health board over the following years rather than having staff saying one day that they were working on the Southern Health Board's development plan and the next day that they were working on the Department's cardiovascular strategy. We would have a single, unified document and would monitor this monthly.

No health board had ever prepared anything like this, including the Southern Health Board. We recruited the firm of consultants to help us devise the plan because the process of preparing the plan was more important than the end product in that it was a learning project.

Deputy Boyle

The money spent in the context of the corporate development plan was greater in 2002 than in 2001 yet it was a plan for 2002 to 2005.

Mr. Hurley

That was our second corporate development plan. The national health strategy, Quality and Fairness — A Health System for You, was published in November 2001. Action 71 of this strategy required every health board to prepare a corporate development plan for submission to the Department.

Deputy Boyle

That is not my question. It seems that the preponderance of the money-——

Mr. Hurley

The major work on our second corporate development plan was undertaken in the earlier part of 2002 whereas Quality and Fairness — A Health System for You was published in November 2001.

Regarding support for the executive management board in Tralee, we established the first health board hospital and executive management committee or board at Cork University Hospital and it has been extremely successful. We wanted to establish a similar committee at Tralee General Hospital. The medical consultants from Tralee met the consultants from Cork University Hospital. They then approached me seeking access to this firm of management consultants. They wanted to familiarise themselves with the terms of reference and to understand their management role. I was faced with a situation in which the consultants were asking whether they could have access to the same firm of management consultants. I thought there was only one practical solution and my overriding aim at that time was to get the consultants in Tralee involved in the clinicians management process.

The public private partnership was very much a pilot project. When the NDP and the quality and fairness health strategy were published, they clearly signalled that the Government looked on the health area as one where public private partnerships, PPPs, could be progressed. We knew absolutely nothing about PPPs. This firm had one particular expert. He had acquired this expertise abroad. I did not want to go out to tender on this one because I knew that many of the other firms of consultants would be extremely interested in getting involved as business advisers subsequently and would have felt that their position would have been compromised.

Deputy Boyle

Is Mr. Hurley not aware there is a specific public private partnership unit within the Department of Finance?

Mr. Hurley

There is, but this was how we, in a health board, would actually construct and prepare the business case for a PPP project. We did not know it and, indeed, the Department of Health and Children at that stage did not have that unit. We prepared an outline business case, submitted it to the Department of Health and Children and, subsequently, the Department created a PPP unit within it. That was why it was for the people on the finance and service side. The PPP approach is not a simple one. It is a very detailed and complex one. Again, going back to my earlier point, that was a specific learning project for us as well. We were the first health board to prepare the outline business case and to submit a submission to the Department of Health and Children and, indeed, to the Department of Finance looking for funding, or approval, to proceed on a PPP project. The last payment set out in that schedule was the one I referred to earlier which involved all of the stakeholders in Cork city.

Deputy Boyle

The acute hospitals strategy was allocated the largest sum of money in 2002. How many were involved from the consultants' point of view in implementing that or in bringing that situation about?

Mr. Hurley

Taking the main clinic divisions within the hospitals, we had people from all of Cork city involved in them. We had to set up groups for surgery, pathology, anaesthesia and such items. Each one of those had to have a facility and be supported. The firm of consultants would have had a team of approximately eight people working on that project.

Deputy Boyle

Does Mr. Hurley know the man hours involved?

Mr. Hurley

I do not know that. At all times I was able to check the market rates being quoted to us and I was more than satisfied with the competitiveness of the rates quoted and on which we engaged.

Deputy Boyle

Mr. Hurley said he was satisfied that such resources were not within the health board. Was he satisfied that those resources did not exist in the wider State sector, either within other Departments such as the Department of Health and Children, State agencies such as the Institute of Public Administration in terms of administration or the Economic and Social Research Institute in terms of economic analysis?

Mr. Hurley

They certainly would not have been within the Department of Health and Children and I did not look beyond to other areas such as the IPA or the ESRI, especially not the ESRI because it was totally different work which we were trying to do in building up the systems, the processes and the capacity of our management.

Deputy Boyle

In regard to the continued use of this firm, are there ongoing projects?

Mr. Hurley

There are not. The last one would have been the acute hospitals strategy. It has not done any work for us since.

Deputy Boyle

Going back to Mr. Hurley's original point, I imagine everyone accepts that in the context of the board's overall budget, the amounts of money are minuscule and, over a two-year period, they are even less. I got a sense from what he said that he felt a justification in examining the criteria that perhaps matters would have been progressed more quickly had they gone the road he went down. I also get the sense that in future, he may think this way again. Would that be unfair?

Mr. Hurley

It would not. With due deference to everyone present, I am satisfied that the Southern Health Board has the best management processing systems in this health system. I have absolutely no doubt about that. To illustrate one point, I mentioned earlier that we had set up our own department of strategy and planning.

A number of years ago, the Health Boards Executive, HeBE, wanted work done by a firm of consultants on having a standard template for service planning and what was most unusual about it was that we, with the expertise we had built up, bid for it in an internal competition and we actually got it. We did it for a rock bottom price. I think we had to recruit one person. HeBE paid us for the cost of that. By undertaking that, we saved the Exchequer a considerable sum. Much of the money incurred was wiped out by that because we then had the resources and the expertise to do that work.

Going forward, that is how I see it. There is still a lot we can do to improve processes — that will always be the case — and in delivering greater value for money. We are now in a unique position where we have significant and sophisticated management processes.

Deputy Boyle

In the context of the restructuring of the health board system, does Mr. Hurley believe all the work undertaken has a value or has some of it been superseded by changes in policy direction?

Mr. Hurley

It has not because the whole focus of it was an improvement in management processes. I would still argue, and it has been my view for a long time, that one of the biggest challenges facing us in the health system is to ensure that we continuously upgrade our management processes. I mentioned earlier that the Southern Health Board is now a €1.1 billion enterprise, which is an enormous one. There is a huge onus on chief executive officers to make sure that what is in place in managing that is on a par with anything available anywhere, including in the private sector. Given the focus and regardless of the structures, the work we were doing was totally independent of the structures. We will always have to manage our resources and to deliver value for money. It does not matter whether there is one board or 11. In going forward, some good, solid work has been done and perhaps that could be replicated or built on. It was not a waste. The changes — the Government reform policy — do not make any of that redundant. There is good material there for moving forward so that people, such as committee members, would be satisfied that the entire system is delivering value for money.

Deputy Curran

Mr. Hurley's opening statement clarified many of the points in that he admits there should have been a tendering process. I suppose that is easy to say with hindsight. In the context of the annual budgets in 2001 and 2002, €1 million was a small figure. When this company was being awarded these contracts, all of which were individual projects, I presume some of the amounts were quite small and Mr. Hurley was probably unaware that they were being awarded. When they were, was the health board aware that there should have been a tendering procedure or were they just awarded?

Mr. Hurley

Of course, there was. In fact, I would have been personally involved in most of those. This goes back to my opening comments. I said we did not adhere to them and that the second fault that could be laid at my feet was that I was driven by the overriding issue of achieving value for money.

Deputy Curran

I suppose we could argue from this side that without the competition and the tendering process, we will never know if that was the best value for money or if there was another player in the market which might have provided an equal or a better service or a more competitive figure. We will never know that.

Mr. Hurley

That is fair. Again, I repeat that I was able to check the rates quoted with the market rates and I was satisfied that they were extremely competitive. I have no doubt that if we had gone down that route and if they had not been selected, we would have paid as much or, perhaps, even more.

Deputy Curran

During 2001 and 2002 when this particular firm was engaged, did the Southern Health Board engage any other consultancy firms?

Mr. Hurley

We would have for building projects.

Deputy Curran

Not for building projects, but in terms of general management.

Mr. Hurley

No.

Deputy Curran

Since the acute hospitals strategy, this firm has not been engaged further.

Mr. Hurley

No.

Deputy Curran

Has any other firm been engaged?

Mr. Hurley

With all the health boards, we are participating in two major projects. One is on the PPARS whereby a new payroll system is going in right across all the boards. The second, on which Raymond O'Sullivan is the lead person, relates to a new financial system which involves a new general ledger right across all the boards. However, there has been no specific one relating to the Southern Health Board.

Deputy Curran

I do not want to know the name of the consultancy firm. However, I wish to pick up on a point made by Deputy Boyle. When one considers the various projects, it is clear that a range of diverse skills were required, some of which related to internal management and the management of the health service, while others related more to financial matters in connection with, for example, the preparation of PPPs. Is the company involved substantial in size?

Mr. Hurley

Yes. Its name is in the public domain, particularly in respect of this project. It has also carried out projects for other Departments.

Deputy Curran

The final project with which it was involved was the acute hospital strategy for Cork. What is the basis of that strategy?

Mr. Hurley

I can supply the committee with a copy of the strategy which sets out a plan for how services will be developed in Cork during the next ten years. As stated, Cork University Hospital is the largest hospital in the Southern Health Board area and there were also two private hospitals involved. As a result of the new arrangement relating to single funding, there was a need to introduce an integrated plan because, when he established the top level steering group, the Minister was adamant that all of the players would put in place streamlined processes for the planning and delivery of those services. Up to then, the three hospitals to which I refer had their own priorities and plans. It made a great deal of sense for the public, patients and the Department to have a single integrated plan for the development of services in Cork. This was the first time it was ever attempted. In many matters of this nature, the process is as important as the output. The process was particularly important because it brought people from three hospitals together for the first time. There were major issues involved such as sensitivity, confidence-building, etc.

Deputy Fleming

I wish to focus primarily on the preparation of the acute hospital strategy in Cork. The documents indicate that the group was chaired by a professor from UCC and comprised of representatives from the Southern Health Board, the Mercy Hospital, the South Infirmary-Victoria Hospital and the Department of Health and Children. Did any of the other bodies contribute to paying the costs relating to the consultancy arrangement?

Mr. Hurley

No. As I have explained, there was a vacuum in terms of funding and everything was paid for by the Southern Health Board.

Deputy Fleming

Why was that the case? I accept that the Southern Health Board is the biggest player in the area of health in the region. However, two private hospitals and the Department of Health and Children were involved.

Mr. Hurley

They are voluntary hospitals.

Deputy Fleming

Yes. Two voluntary hospitals and the Department of Health and Children had an interest in the matter. Why did they not make some contribution to costs?

Mr. Hurley

In comparison to the Southern Health Board and the budget at its disposal, they would be extremely small players. The Southern Health Board was the statutory agency with overall responsibility and it was believed it should fall to the board to pay the costs involved.

Deputy Fleming

I take Mr. Hurley's point. He mentioned that there was an involvement of the other group. Was there a recoupment in that regard?

Mr. Hurley

No.

Deputy Fleming

I was wondering whether any of the money paid in 2002 was recouped but that was obviously not the case. In the light of the fact that the consultants had previously worked for the board and that there was such sensitivity involved in the project, were the other bodies not concerned that they might not be fully independent?

Mr. Hurley

No. As stated, when they were doing work for us, they would have had interaction with all of the hospitals. The hospital authorities had met the consultants and, from their experience — limited as it was — were quite happy that we should engage them. We did not have the resources ourselves but had to ensure the facilitation of the various groups would be provided for by the external consultants. I was of the view that if the Southern Health Board had played any kind of meaningful role in the process, the two voluntary hospitals would have raised serious objections and not been satisfied.

Deputy Fleming

Were the figures relating to the project approved by the board at local level, at its annual budget meeting? Were they listed as relating to specific projects or were they approved on foot of executive decisions?

Mr. Hurley

They were approved by means of executive decision. They would not have been listed as relating to specific projects. When the initial work from the top level steering group was submitted to the Minister, he approved all of it. The chairman, a professor of medicine at UCC, was obliged to send the report to the Minister who then asked us to circulate it to our own boards which discussed it. The Minister requested that we go about implementing the various recommendations in the initial report.

Deputy Fleming

The consultants were charged with providing advice on management structures, corporate development plans, public private partnerships and the preparation of the acute hospital strategy for Cork. Mr. Hurley has glowingly praised their abilities and knowledge in this area. I accept that it is somewhat similar to turkeys voting for Christmas but surely the consultants should have been aware that they should only have been appointed following a process of competitive tendering. What kind of consultants are they if they were not aware of that process or if they took up a contract while knowing that they were in breach of normal procedures?

Mr. Hurley

I am not sure that at all times people would have been aware of what the process on our side was.

Deputy Fleming

I am talking about the consultants.

Mr. Hurley

I know that. I accept the point the Deputy is making.

Deputy Fleming

When one appoints a consultant, one expects him or her to have a certain level of competence. I would be stunned if the consultants in this case were to admit that they knew nothing about the competitive tendering procedures that must be undergone before a firm can be appointed. I am sure they underwent this process in respect of other appointments. If they are as good as Mr. Hurley indicated, they should have stated they would be much happier to be appointed after a tendering procedure. Did they not make such a statement?

Mr. Hurley

I have never discussed those procedures or arrangements with the consultants.

Deputy Fleming

I consider that a black mark against the consultants because they should have been aware of the rules applying to the process under which they should have been appointed. They should have been up-front and brought to the attention of the board the fact that it would be better for everyone involved if they were appointed in line with standard procedures. Apparently, that did not happen. While I accept Mr. Hurley might not have been fully aware of it, I do not accept that the consultants were not aware of it.

Chairman

The Comptroller and Auditor General's audit certificate relating to the accounts states that there is a capital deficit of €25 million? Is Mr. Hurley alarmed by that high figure?

Mr. Hurley

That goes back to some of the points the Comptroller and Auditor General raised. He has stated he is going to publish a report. I return to the question of indicative budgeting and suspect it is covered in the report. In the years 2000 to 2002, inclusive, the indicative budget for capital projects under the NDP was €119 million. However, as far as we are concerned, we only spent €105 million. This is all tied up with the interpretation and classification. Just under €16 million of the €24 million relates to NDP projects, all of which were approved by the board. When we received our communication regarding the period 2001 to 2006, we submitted a schedule of projects to our board amounting to the £240 million on offer at that stage. All of the projects were approved by the board. Another element of the €24 million was a €4 million loan which was approved by the Departments of Finance and Health and Children for the purchase of our headquarters in Cork.

Chairman

That is another issue. Mr. Purcell, will the €25 million deficit be covered?

Mr. Purcell

Yes. It is part of the overall problem common to health boards.

Mr. Magan

In case there is any misinterpretation, it is not really a problem that is common; it is the system and the way the payments are made. We are looking at a set of accounts based on accrual accounting. In other words they represent the total capital being spent in the particular year. The Department's process of payment is one of paying by way of approved projects and then on specific requests for payment. The health board must have made those payments which we reimburse. At the end of a year — this is typical of the €24 million — a health board will have paid the money and we will pay it on receipt of its demand on us in the next year. We pay the health boards approximately €74 million in capital payments. Out of that €74 million we would have paid €24 million. It is a timing issue. One is accrual accounting and the other is system of cash reimbursements based on a particular system.

Chairman

Is it creative accounting?

Mr. Magan

No, absolutely not. The voted system, which we are examining today, is a cash system. Health board accounting is accrual accounting, based on the proper standards of accrual accounting. We have a set of accounting standards, as do the health boards. If one looks at the front of the accounts, one sees that they must be certified by the board. The Comptroller and Auditor General audits on the basis of that. What we have in the capital Vote in the Department is cash. They are two separate systems. At the end of any year, there will be a timing issue between what is spent in terms of accrual accounting and what is paid for in cash. The Department will have paid that in the following year. There is only a small timing issue. When one does accrual accounts, one has paid money and it is owed to one by someone. In the case of a health board, the Department pays the money the following year and probably in the next two months depending on how quickly claims are received from the health boards. There is no mystique or creative accounting. This is the Government system. One has cash against accrual. It is very simple.

Mr. Purcell

I am a little confused by the last contribution. I suspect the chief executive officers, CEOs, of the health boards are also confused, although I will let them speak for themselves. Timing differences can come into play but it is not entirely that. Expenditure is accrued once the board has approval in writing from the Department. If one did not have that system, health boards could do all kinds of things off their own bat and merely charge expenditure up to be recouped later in the year. The deficit is something more substantial than that. Perhaps this can be teased out when the health report is considered by the committee.

I am not questioning the value or necessity of the work carried out by the set of consultants nor the motives of the Southern Health Board in commissioning the work. I have no doubt it has given value and has improved the quality of management within the board. However, I must disabuse the notion that public procurement rules and value for money are mutually exclusive or contradictory. The purpose of the public procurement rules is to achieve value for money and to stimulate competition in the marketplace. In that way we will get value for money. This is recognised at EU level and it is what is behind the EU procurement requirements.

There must be some kind of governance over the procurement function. The document promulgated by the health care materials management board sets out the health service procurement policy in plain English. It states, "All purchasing of supplies, works and services is governed by the following core values". It lists six core values but I emphasise one: "Operating in a fair, open, transparent and non-discriminatory manner in the work place". The list also includes compliance with all relevant EU and national legislation and Government regulations.

A firm of consultants can have the inside track in any public organisation. In the context of the acute hospital strategy, the CEO mentioned that the process is as important as the output. I suggest that the process can also be as important as the outcome in the case of procurement. I do not question the motivation and objectives of the board in this matter. They acted in good faith. Nevertheless, the rules are there for a very good purpose. That is why it is important that I review the rules and report when I see a material contravention of them. I suggest that the committee should also take a serious view of any such material contravention.

Deputy B. O’Keeffe

As two of the foremost health board CEOs are present, I would like to ask them a general question. The main focus of the national health strategy has been on organisation and readjustments. What are the CEOs' views of delivery of services after January 2005? Will we have a different, more effective and more cost-efficient delivery of service to patients? I am not trying to lead the CEOs into anything. I am merely seeking an overview.

Mr. Hurley

Is Deputy O'Keeffe happy to address that question to another Cork man? The interim Health Service Executive is working on the blueprint of the new system and we understand it will be communicated to the health boards in the next number of weeks. I take Deputy O'Keeffe's point that much of the work has concentrated on the new structure which will exist on 1 January. That is right and I do not question that.

I accept that we need to get the structures right. Eight or nine new management positions, plus the top one which was announced yesterday, have been designated. My concern is with value for money. I put that on a par with the quality of service to patients. While we have vertical structures, if the health service was being financed by Seán Hurley, I would put a horizontal vehicle in place to ensure value for money and processes. This is a hobby horse of mine. This must be seriously addressed. I hope it will be addressed by the HSE in the future. We need structures to organise and run the hospitals and for primary, community and continuing care. However, sophisticated management processes, systems and uniformity throughout the services so that we know what is happening is equally important. I hope this will he given a high priority in the future. We need a vehicle to cut across all of that. There is no doubt the Deputy may have heard me say this at our own service plan meeting before that I said I would never come to a Southern Health Board service plan meeting and say we are delivering best value for money. That day will never come. Much can still be achieved within the system, but there will be a great opportunity now within the context of the HSE because there will be one system. Up to now we had 11 boards, which made it more complicated. Certainly from a management perspective I would want to make sure that the question of value for money in processes remains on a par with quality of service and access to service. If we get the value for money right we will free up more money. There is no doubt that we can do things more efficiently within the health system at this stage.

That is the only comment I would make at this stage. It is a personal comment. It is not meant to be a criticism of anyone. It is just that we all need to make sure that that whole concept and issue is kept to the forefront.

Chairman

Has Mr. Harvey any comments?

Mr. Harvey

When Mr. Hurley spoke earlier about the management processes I thought it was nice to see them catching up. That banter will go on between us. There is no doubt that the health system is so hugely complex that management literature claims that a hospital in its own right is the most complex of organisations to manage because of the very many disciplines, power, clinical autonomy and all of that. This can be multiplied many times when talking about a total health system. To reconfigure a total health system is hugely complex.

Most of the reform programme would have been prompted and supported by people like ourselves, for instance the need for a national hospital plan. Local politicians cannot be expected to make decisions about closing a local hospital. There is no doubt that the shared services theme where things like the recruitment process and payroll — PPARS was mentioned earlier on — lend themselves to central shared services, all of which we support. At the end of the day if it does not deliver something better for patients and staff, and if it does not deliver better value for money and cannot be measured, I am sure it will be argued in many future debates that it was not worthwhile.

One of the fears that would have been expressed at local level when the proposal relating to the boards was put into the public domain in the first place was how would local areas ensure that this big system, which is now located in Naas, would look after all the interests in all sorts of corners from Kerry to Donegal and so on. Is there a risk that local requirements could get lost in the size and complexity? I know that local board members and politicians would have mentioned that.

In future whenever difficulties arise, people may be tempted to say: "My God, we inherited something here, which is far worse than we ever imagined." Somehow they will try to attribute blame backwards. This comes hand in hand with the size of the change programme in hand. Most people would say that much of what is happening is very good, that we should not throw out the baby with the bath water, that we should keep a very clear focus on the point that if what is proposed cannot be proven to deliver patient services, better places for people to work in terms of systems etc. and better value for money, then stop it, reverse back up and try it some other way. So I believe there is a huge challenge out there.

Deputy B. O’Keeffe

Are we still hanging out?

Chairman

I thank Mr. Hurley and the Department officials. We should note the North Western Health Board accounts for 2001 and the Southern Health Board accounts for 2002. Is that agreed? Agreed.

The witnesses withdrew.

Sitting suspended at 2.15 p.m. and resumed at 2.20 p.m.