COMMITTEE OF PUBLIC ACCOUNTS díospóireacht -
Thursday, 1 Dec 2005

University College Cork: Financial Statements 2000 to 2002.

Professor G. Wrixon (President, University College Cork) called and examined.

Vice Chairman (Deputy McGuinness)

The committee will consider the financial statements of University College Cork, 2002 to 2002. I welcome everyone to today's meeting.

The attention of members and witnesses is drawn to the fact that as and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 grants certain rights to persons who are identified in the course of the committee's proceedings. These rights 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 a 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 being invited before the committee are made aware of these rights and any person identified in the course of proceedings who are not present may have to be made aware of these rights and provided with a transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interests of justice.

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

I invite Professor Wrixon, president of University College Cork, to introduce his officials.

Professor Gerard Wrixon

I introduce Mr. Dermot O'Mahony, a member of the UCC governing body and chairman of the finance committee, and Mr. Diarmuid Collins, our bursar and chief financial officer.

Vice Chairman

I invite the officials from the Department of Education and Science to introduce themselves.

Ms Ruth Carmody

I am a principal officer in the higher education section of the Department. I am accompanied by Mr. John Rigney, a principal officer in the third level building unit, and Ms Chris Kelly, an assistant principal officer in the technology and training unit.

Vice Chairman

I invite the officials from the Higher Education Authority to introduce themselves.

Ms Mary Kerr

I am the deputy chief executive and accompanied by Mr. Stewart Roche, our management accountant.

Vice Chairman

I invite Mr. Purcell to introduce University College Cork's financial statements 2000 to 2002.

Mr. John Purcell

Accounts for a three year period to the end of September 2002 are before the committee for its consideration. I should explain that while I am the statutory auditor of the university, the governing body, in common with its counterparts in other universities, appoints private sector auditors to carry out an audit on its behalf and publishes the accounts, together with the audit report thereon. We place certain reliance on that work in accordance with auditing standards when planning our audit so as not to duplicate or re-perform any work already done.

I have always believed bodies in receipt of substantial funding from the State should provide for a higher level of transparency and disclosure in their accounts than that required by accounting standards which are primarily designed to cater for companies in the private sector. To this end, with the agreement of the former bursar, additional notes have been included in the accounts to cover details of the capital deficit, the Bank of Ireland exclusivity fee, and sections 23 and 843 financing arrangements. We also sought to have more information on debtors and creditors included.

The main area of concern from an audit point of view is the scale of the unfunded capital deficit which at the end of September 2002 amounted to €21.7 million and has since increased to in excess of €40 million as reported by the university's finance committee at its meeting last May. Capital expenditure in the university is funded by a combination of HEA capital funding, transfers from HEA recurring grants for current expenditure, own resources and private funding, mainly from philanthropic gifts raised by the Cork University Foundation. However, the money coming from these funding sources has not been sufficient to finance the ambitious capital programme undertaken by UCC.

One of the fundamentals of sound financial management is that funding should be in place to meet commitments legally entered into. While it is only to be expected, for example, for reasons of timing, there will not always be equivalence between funding and contractual commitments, what we have in this instance is a serious imbalance that has been building up in the past five years without any effective corrective action being taken. Apart from the implications for the future operation of the university, any tacit acceptance of the practice of knowingly incurring substantial unfunded capital expenditure might give rise to other universities adopting this approach with long-term consequences for the taxpayer.

Although the university has been in correspondence with the Higher Education Authority about tackling the issue, I deemed it important to draw attention to it by referring to it in my report on the accounts for the years in question.

Vice Chairman

Professor Wrixon has stated he does not wish to make an opening statement

Professor Wrixon

If I may, I would like to make a short opening statement.

The financial statements for consideration today, as Mr. Purcell has said, are for the three years from 30 September 2000 to 30 September 2002. Their format complies with the Higher Education Authority model for financial statements for the sector and the accounting principles are as agreed with the HEA and the Comptroller and Auditor General. During the three year period in question the university continued to develop with student numbers growing from 11,752 in October 1999 to 13,713 at the end of September 2002, an increase of 17%. Parenthetically, the number of students is now 15,000, which represents an increase of 40% on the October 1999 figure. According to our strategic plan which is being finalised, this number will reach 22,000 in five years time, which represents an increase of 100% on the 1999 figure.

On the accounts, I will outline some highlights. Overall income for the three years grew from €111 million to €148 million. External research income grew from €25 million to €33.8 million, an increase of 35%. Expenditure for the three years primarily related to academic faculties, departments, research centres and administration. The university incurred deficits of €358,000 and €370,000 in 2000 and 2001 but delivered a surplus in 2002 to bring cumulative income and expenditure for the three year period under review to a break-even position.

For the three year period the value of assets grew from €190 million at the end of 1999 to €292 million in September 2002. This infrastructural spend has been essential to maintain the quality of academic teaching and ensure the university remains at the leading edge of research. Although ours is the third largest university in the State, we are consistently the leading research university in Ireland. As a result of this asset growth, at the end of 2002 the university had incurred a net deficit in its capital account of €21.7 million, to which Mr. Purcell referred and details of which are included in note 20 of the financial statements. The deficit has not impacted on the ongoing operations and services of UCC and as Mr. Purcell said, we continue to have discussions with the HEA on the funding options.

Vice Chairman

Are copies of the statement available for distribution and can we publish it?

Professor Wrixon

Yes.

Deputy Boyle

I welcome my fellow Corkonians. I note the accounts are for the period 2000 to 2002. The Committee of Public Accounts has been endeavouring to get financial information from State institutions and agencies as early as possible. Why are we discussing accounts for 2000 to 2002 and not up to 2004, as would be the case for others? Perhaps the Comptroller and Auditor General might put this in context.

Mr. Purcell

For many reasons there has been an historical problem in keeping the university accounts up to date from the point of view of the statutory audit and UCC is not unique in this respect. I was very concerned about the growing capital deficit in this case and needed certain reassurances and details to satisfy myself that it did not affect the university as a going concern. I had to satisfy myself regarding some other issues in the public domain relating to governance of the university before I was prepared to put my name to a clear audit report.

There are general problems in the university sector with regard to the timeliness of accounting which I am trying to address with the help of the HEA and finance officers within the universities. There were specific issues relating to UCC. As part of the general problem, Professor Wrixon spoke about the accounts being in a form agreed with the HEA and me in terms of harmonising them. Five or six years ago they bore no resemblance whatsoever to any accounting standards. I regard the harmonisation stage of approximately five years ago as an interim measure. What is now holding up the accounts is the production of consolidated accounts in all the universities for 2003. There are some fundamental problems being addressed. I am very much engaged with each university and the HEA on how these will be resolved. I believe I am right in saying there has been no audited consolidated account for 2003 or later for any of the universities but we are close to resolution of the issue.

Deputy Boyle

I appreciate those comments which put the matter in context.

Professor Wrixon

We have completed the accounts for 2003 and 2004 which have been audited by our external auditor.

Deputy Boyle

They will then be checked by the Comptroller and Auditor General.

Mr. Purcell

On a point of information, in case it seems we are contradicting each other, we are probably talking about two different things.

Professor Wrixon

Yes.

Mr. Purcell

The 2003 and 2004 accounts to which Professor Wrixon is referring are the accounts for the HEA. They do not represent the agreed consolidation of all the universities' activities. They are the accounts which relate to the funding the universities received from the HEA. That is what I was referring to. It is desirable that we should have those consolidated accounts. This is something for which I have been pushing, as I have mentioned at previous meetings of the committee.

Deputy Boyle

I would like to raise the core issue jumping out from the accounts which has been mentioned by the Comptroller and Auditor General as his central reservation about the figures supplied. I refer to UCC's capital funding deficit, which was €15.5 million in 2000. By 2002 it had increased to €21.7 million, the figure about which the Comptroller and Auditor General has expressed concern. It was reported, on foot of a meeting held in UCC in November 2004, that the deficit had doubled again to its current total of €42 million. Is it true UCC's capital debt is equal to the combined capital debts of all the other Irish universities?

Professor Wrixon

I will speak about UCC's capital deficit which is within the HEA borrowing framework and consistent with the recommendations of the Kelly report on space in universities. The report highlighted that UCC had less student space than any other university. The Deputy will appreciate that UCC has particular difficulties, in the sense that it is a landlocked city centre campus. If one examines its student numbers, one will see that it is continually expanding. It is a successful university in terms of education and research and is attracting more and more students. There is a strategic plan for its expansion. When space becomes available to it, essentially, it has to buy it. The amount of physical space available to it, measured in acres, is the smallest of all the universities, even though it is the third largest in the State. When space in proximity to it comes on the market, it has to buy it. A 12 acre portion of land which was recognised as being of strategic value to it and the adjoining Mercy University Hospital came on the market last year. UCC contacted Irish Distilleries which was selling the land in question and agreed a price of €23 million which was below the market value. It informed the HEA of what it intended to do before it added to its capital deficit by paying €11.5 million for its six acre share of the site. I understand the Mercy University Hospital was reimbursed immediately by the Department of Health and Children after it had paid its share of €11.5 million. However, the €11.5 million paid by UCC remains part of its capital deficit. It could eliminate its capital deficit by selling other parcels of land. When one is running a university, one has to be conscious of its future plans for expansion, take into account its importance to economic development of the local region and plan accordingly.

Deputy Boyle

I appreciate Professor Wrixon's remarks. The quality of the buildings on the UCC campus is probably higher than that of buildings in other universities.

I am concerned about the scale of UCC's debt, the speed at which the debt is increasing and the effect that allowing the debt to persist will have on the prime purpose of the university, that is, to operate as an educational institution. The Comptroller and Auditor General was concerned about UCC's debt when it stood at €21.7 million, but that figure has doubled in the past two years. Will Professor Wrixon outline the factors which have led to the increase in UCC's debt? He has explained that the university purchased lands from a distillery. Is the ongoing debt being serviced effectively? Are there interest and principal payments? Is UCC experiencing difficulty in meeting the ongoing debt?

I would like to quote some of the things said about this matter during the years. The honorary treasurer of UCC's governing body commented on it in 1999, 2000 and 2001. First, he said "the difficult financial situation now obtaining arises from the continuing rapid expansion of the University and the fact that the necessary resources are not keeping pace with this expansion." The following year he pointed out that as the massive capital investment was not fully funded, there was a need to address the issue of the provision of increased capital funding for the university in the years ahead. He restated the latter point about capital investment in the most recent report to which I would like to refer. Is the possibility that this matter will be dealt with elsewhere a hope or an expectation? How does UCC propose to deal with its ever growing deficit?

Professor Wrixon

The Deputy has asked many questions and I will try to answer some of them. If UCC's ability to repay its debt ever becomes an issue, it can simply get rid of its land to pay it off. Obviously, that is not a real option as the university continues to expand. Some €17 million of the debt of €42 million to which the Comptroller and Auditor General referred can be attributed to land purchases. UCC's investment in the university technologies centre will be realisable in the next six months or so, thereby giving the university €6million that can be directly applied to its debt. It realised €12 million six years ago by tendering its banking exclusivity fee. It intends to engage in a similar process in four years time. I imagine it will realise between €15 million and €20 million on that occasion, when one considers the increase in its size since 1999. It will be possible to apply the moneys which will be realised directly to its capital deficit. Its capital expenditure in the past six years has been approximately €200 million, of which €100 million was raised through its ongoing fundraising. I expect some of the moneys received on foot of its fundraising will be applied to its deficit.

Deputy Boyle

From where is Professor Wrixon's confidence coming? Not only has UCC's debt doubled since 2002, but it has trebled since 2000. Surely the mechanisms mentioned by the professor such as the university foundation were in place five years ago. Why are they failing to meet UCC's growing capital debt?

Professor Wrixon

The university's student numbers are increasing. It has to deal with many compliance issues, involving health and safety, for example. It has constructed many new buildings and also has to maintain many older buildings. It has not received any capital grants from the HEA in the past two years, other then the capital payments made to it under the PRTLI system of funding research. In such circumstances people in my position have to consider that UCC is the premier university in the south which gets all the best students. In today's knowledge-based society there is a direct connection between the economy and what goes on in universities. I refer to research activities and the production of graduates of a high quality. At the same time, for whatever reason, the system is not investing enough money in capital to tackle the various compliance issues. Investment is needed to allow the university to purchase strategic parcels of land which are needed to facilitate its growth. The number of students in the university is increasing and it is a question of juggling all the interests involved. Should the university authorities refuse to buy land, allow existing capital plant to deteriorate and ignore health and safety issues? Certain problems would arise if they were to take such a course of action. Not only would they not be performing their duties, but they would also be jeopardising the university's ability to continue to attract good students.

Nowadays students have the ability, on their personal computers, to compare one university versus another while doing their leaving certificate. It is a fact that Queen's University, Belfast is exactly the same size as University College Cork. The former's recurrent budget is 50% greater than ours on a per student basis. Top-up fees introduced by the British Government in recent years will be introduced in Northern Ireland next year. If these fees were available to us, it would mean an additional 30% in our income. We have students who are considering whether they should go to UCC or Queen's University, Belfast or, more likely, some of the universities on mainland Britain which have huge amounts of state money going into their capital plant, while we are left in the situation I have described.

To answer the Deputy's question, it is really a juggling exercise between trying to move the university forward while, at the same time, trying to deal with an inadequate level of funding for the university sector.

Deputy Boyle

While other universities operate in a similar context under the same series of constraints, it appears UCC's capital deficit is equal to the combined capital debt of all other Irish universities. I wish to return to two questions.

Professor Wrixon

The Deputy comes from Cork. The other Irish universities are not operating under the same series of constraints. None of them is constrained in the way UCC is constrained in terms of the purchase of——

Deputy Boyle

In terms of financial constraints, I am talking about general policy, for example, Government funding, the existence of top-up fees and so forth. On the questions I have already asked, is the debt being serviced on the basis of paying off interest and the principal or is the university contributing to a future problem by only paying off interest?

With regard to the purchase of the distillery site, Professor Wrixon mentioned that Mercy University Hospital received immediate reimbursement payments. Did the hospital go through exactly the same process as the university? Did it obtain prior approval from the Health Service Executive or Department of Health and Children to make the purchase? Did the university obtain prior approval from the Higher Education Authority to proceed with its purchase?

Professor Wrixon

Yes, Mercy University Hospital received prior approval. We communicated with the HEA informing it that the site was coming up for sale and that by purchasing it the university would add to its capital deficit. When we asked whether we could buy it, we were not told we could not do so.

Deputy Boyle

My colleagues wish to ask questions about capital expenditure. On current expenditure, the deficits, balances and bank overdrafts vary significantly over the three years in question. The bank balance in 1999 was €7 million, whereas it was zero in 2000. The accounts also show there was no bank overdraft in 1998-99 but in 1999-2000 the university had a bank overdraft of close to €2.5 million. The next set of accounts shows that the bank balance of zero in 1999-2000 became a balance of €14 million in the following year when the bank overdraft, which had amounted to €3 million, disappeared. The final set of accounts shows that the €14 million balance in 2000-01 fell to €2 million during the period in question. The category of bank overdraft disappears from the balance sheet but I understand it declined to zero again. A general category for creditors and accrued expenditure contains a high sum of €43 million. Subsequent to these sets of accounts media reports on the college's current financial position have suggested the current deficit is €6 million. The figures indicate that the deficit of €300,000 in two of the three years in question became a surplus of €600,000 in the third year. How did this come about?

Professor Wrixon

That has to do with the fact that, in common with all of the universities, benchmarking increases were not paid to the university when introduced a couple of years ago. To return to the Deputy's previous question, the university has in place a system for taking money from the recurrent budget to pay towards the alleviation of the capital deficit. We intend paying back €10 million over the next ten years. Again, there was a mechanism which I forgot to mention. The figure of €6 million to which the Deputy referred has to do with the fact that we have to pay benchmarking increases for our 2,500 employees. We were not given any increase in our budget to do so.

The fixed-term workers legislation has been introduced and we have made provision for it. I know the matter is being discussed in the Department of Finance and that we may not be liable for the purposes of the Act but we are making provision via our research grants in that we employ many fixed-term workers and have been doing so on research grants for the past 20 years. We have made provision for many of these workers' pensions but now we will have to reimburse them retroactively up to the scale envisaged by the fixed-term workers legislation. We have made a provision in our accounts for this, although the question of whether the university or the research funding bodies will have to pay the costs is, I understand, still under discussion.

There are two items, namely, the lack of payment of benchmarking increases and the retrospective aspects of the fixed-term workers legislation.

Deputy Boyle

While the context is important, the overall level of indebtedness of the college between capital and current expenditure is €50 million.

Professor Wrixon

That is a fair statement.

Chairman

Deputy Curran wishes to contribute.

Deputy Boyle

I want to ask two specific questions. I am disappointed that officials from the Department of Finance are not present because some of the issues arising in this discussion concern the Department. This is the second meeting of the committee at which officials from the Department have not attended. I do not want their absence to become a habit.

The response of Government officials to one of my questions which relates to Professor Wrixon's position needs to be placed on record because it has implications for public service pensions. Perhaps officials from the Department of Education and Science rather than Professor Wrixon will answer it. The extension of Professor Wrixon's tenure as president of University College Cork has been a source of controversy. Even if decisions such as this tend to be once-off and isolated, to what extent are their potential effects on public service pensions taken into account?

Ms Carmody

Full consideration was given to the pensions implications of the decision. It should be pointed out that there was a technical reason the pension scheme in UCC had to be amended in Professor Wrixon's case. I do not believe it affects his actual pension in any way. As the Deputy will be aware, the retirement age limit of 65 years no longer applies for new entrants in the public sector. While this was not directly relevant in this case, it is common for age limits other than 65 years to be specified, particularly for top management posts. While the implications were fully considered, approval nevertheless issued.

Deputy Boyle

Although the matter is not referred to directly in the accounts, Professor Wrixon was involved in NMRC, a successful operation, prior to becoming president of UCC. Concerns have been expressed to me about private companies being involved in the same area of business as UCC research. Apparently, this is a common feature in most universities. Are specific regulations in place to deal with businesses in the private sector which mirror businesses being established in the university on a research basis?

Professor Wrixon

That is a good question. The university would discourage a publicly funded institution from competing with a private company in any way. In the past this may have involved civil engineering companies. What we in the university are trying to do via research is to develop intellectual property which I hope can be used to sustain economic growth, either by helping multinational companies which have come to Ireland to do low level work such as test and assembly to stay to perform added value functions such as product development — we have been successful with a number of such companies — or else to make the intellectual property available to indigenous Irish companies which want to start off.

This is the whole idea behind the investment in science and technology. Because we have a lot of expensive equipment we also provide services for industry. The question probably relates to that area. Speaking personally, I absolutely discourage that kind of thing. We are not there to put private companies out of business, we are there to develop economically.

Deputy Boyle

Thank you.

Vice Chairman

Before calling Deputy Curran, perhaps it would be helpful if the HEA and the Department commented on the overall indebtedness which stands at €50 million. Perhaps they will indicate if they are satisfied with the structure of that debt in regard to the banking arrangements and so on.

Ms Kerr

The HEA is concerned about the capital deficit which is in the order of €40 million. The HEA has been in correspondence with UCC in regard to this deficit in recent years. The university has provided us with a plan in regard to the elimination of the deficit, which we will keep under ongoing review. While the scale of the deficit is significant it should be viewed in the context of overall capital expenditure in UCC, which has been over €200 million since 1998, of which only €61 million was HEA funded expenditure. The university has been extremely successful in private fundraising for capital development.

As the president mentioned, during this period student numbers have doubled. The size of the deficit does not compromise the financial viability of the university as it has assets to back it up. The president referred to particular sites that were purchased and can be sold. Plans are in place to eliminate this deficit over a period of time. Equally, on the recurring side, the university has presented a plan to eliminate that debt over a period of three years. Again, we will keep that under ongoing review.

Ms Carmody

Obviously we have not formally received the proposals. We are aware of the situation and will monitor it closely with the HEA.

Vice Chairman

Is the HEA satisfied that the management structure is in place to deal with this? Warnings were issued in regard to the accounts since 1999 and it appears that the auditors continued to flag the issue of capital funding, yet the debt was allowed to grow. If every other university were to do likewise, substantial debt would result. I am surprised to hear that a plan is only being requested as to how the university intends to deal with the issue of capital. The capital funding issue appears to have grown to €42 million and a further €6 million is referred to in recent accounts which is an indication that there is also an impact on the current spend. I am surprised the HEA did not intervene earlier. Is money due to the university or is there some reason, as was pointed out by Professor Wrixon, that the university is not being supported in the context of the purchase of land?

Ms Kerr

We have been raising the issue of capital debts with the university for some years, since before 2000. It is an item we discuss with each university in the context of the annual budget meetings. We review the accounts in the context of the budget meetings. We wrote to UCC and we formally brought it to the attention of the authority in 2003, at which point a plan was put in place by the university to eliminate it. At that time the debt was in the order of €20 million but it subsequently increased. The president has outlined the background to the purchase of the distillers land. As he stated, it was brought to the atttention of the HEA that land was available and that the hospital would purchase half of it. We did not have funds available at the time. We did not tell UCC not to purchase it. We are very much aware of the strategic importance of that purchase for UCC but we were very clear in regard to the fact that we could not guarantee funding for it. However, it is the type of funding purchase of which we would be supportive.

Vice Chairman

It is good to see that student numbers have grown, but alongside that there must be an appropriate plan to deal with those numbers and that appears to have been lacking over the years. Will Ms Kerr comment on the 2004 report which states that a short-term overdraft facility with Bank of Ireland for €30 million is being continued on a short-term basis? I would consider an overdraft facility of €30 million to be unusual.

Ms Kerr

I ask my colleagues in UCC to comment on that because I am not familiar with the matter.

Professor Wrixon

It is a facility which allows us to have an overdraft up to a maximum of €25 million, but we have never reached that sum.

Vice Chairman

UCC's report of 29 November 2004 clearly refers to a short-term overdraft facility with the Bank of Ireland of €30 million. Does it currently stand at €30 million? Is it still a short-term facility in 2005 or has the overdraft of €30 million been restructured? It is unusual to have that amount of money on an overdraft.

Mr. Diarmuid Collins

I shall comment on that. The short-term overdraft borrowing requirement facility is set with our treasurer at a maximum of €25 million. At any one time we can go up to that level without going back for another mandate or approval to go beyond it. We have never reached the maximum facility of €25 million. Our cash flows are well within that €25 million.

Vice Chairman

How much would be used in the context of the overdraft?

Mr. Collins

The maximum I have seen is up to €18 million at any one time. A great deal is down to the timing of the receipt of grants from the HEA. Payments can go up one week but dip back down when the income comes in.

Deputy Curran

Part of the reason we are here is that the accounts are so historical. The accounts for the years 2000, 2001 and 2002 were only eventually signed in July of this year by the Comptroller and Auditor General. He gave a background to that. I assume in the process of preparing those accounts there was ongoing discussions between the Comptroller and Auditor General's office and the university to eventually come to a set of accounts that could be signed and presented. Was that how it worked?

Professor Wrixon

Yes, in general, that is how it worked.

Deputy Curran

The Comptroller and Auditor General mentioned that a capital funding deficit was one of the major issues. I may refer back to that in a moment. He also mentioned that there were issues of governance. I would like Professor Wrixon to explain to me what was going on and what were the issues.

Professor Wrixon

I am not aware of the specific issues. At the time, I guess around the year 2000 or 2001, we instituted our audit committee and, in accordance with best practice, we instituted a system of internal audit. Unless this may be something to do with the mechanics of putting together the audit committee I do not know the answer to the question.

Deputy Curran

Was there anything specific? As Mr. Purcell mentioned it, perhaps he can provide more information on it.

Mr. Purcell

I said in my opening remarks that an audit was carried out on behalf of the governing body by a firm of private auditors which was available to me when carrying out the audit. It is the extra dimension which I feel, as statutory auditor, I would be required to go into. Correspondence within the university and its structures, from members of the governing body and senior members of management, had to be addressed. In this correspondence issues were raised that certainly placed question marks against corporate governance. There was also external correspondence which I believe was addressed to me. The committee also received correspondence in the past. Matters arose that had to be resolved. In my case, they had to be resolved to my satisfaction such that I could give an appropriate audit report.

Deputy Curran

Did Mr. Purcell make management or the governing body of the university aware of the issues that had arisen in the correspondence?

Mr. Purcell

They would have been very much aware of them because, as I said, the content took on two characteristics. There was internal documentation in the university, to which, of course, I had unfettered access. This was very much of the same colour as the correspondence sent to me from particular sources within the university.

Deputy Curran

Does Professor Wrixon understand the issues to which Mr. Purcell referred?

Professor Wrixon

There were a number of issues but it was not clear to me that they had anything to do with governance.

Deputy Curran

Mr. Purcell said they did and outlined two specific reasons the accounts had not been signed off. One concerned issues of governance and the other the growing capital deficit. Deputy Boyle addressed the capital deficit in considerable detail. I stated I might return to the second issue but Mr. Purcell was clearly saying issues of governance had arisen. These issues, the details of which I do not have to hand, were obviously of sufficient merit to cause a delay, for the Comptroller and Auditor General to mention them today and not to allow the accounts. I am trying to find out the changes Professor Wrixon has made to address these issues. Do they still arise today?

Professor Wrixon

Quite frankly, I do not know the issues to which Mr. Purcell is referring. We have a finance committee, composed mainly of external members of our governing body, and an audit committee, composed totally of external members of the governing body. We have internal audit procedures in place and I feel we are running the university according to good practice. Perhaps there are issues——

Mr. Purcell

I can help in that regard. Ultimately, I was satisfied to give a clear audit report, except that I wanted to draw attention to the scale of the unfunded capital deficit. There were corporate governance issues concerning the timeframe and the person on whose watch the capital deficit had been incurred. It is fairly clear that there were also other issues. There was a level of dissension in that individuals within the university structure, at both governing body and management levels, had issues. I would have had to satisfy myself before signing an audit report that, on balance, I could stand over. It would have been remiss of me not to delve further into those matters before signing off on the report.

I mentioned in my opening remarks that I required a greater level of disclosure in the accounts over and above the accounts that had been published by the university on foot of the audit report received from the private sector auditors. The university complied with my requests in that regard and, as a result, the accounts are now much more informative.

Professor Wrixon

On the issue of timing, to a certain extent the university is a public institution. When I became president, I inherited a capital deficit. I also inherited land which could be used for building — we have used it subsequently for this purpose. There may have been some issues regarding the timing but the timing is irrelevant — it is a matter for the institution.

The question of dissent is an interesting one. As I stated in reply to Deputy Boyle, universities in the knowledge-based society of the 21st century are places where knowledge is created. They are becoming central not only to economic development but also to social and cultural development. To a certain extent, in the distant past they were places where things were done in a certain traditional way — one thinks of quiet ivy groves in this regard. When one is trying to change a very traditional institution into one that makes the kind of contribution to development made by institutions in other countries, many changes must be made, some of which are more palatable than others. The result of this is a certain amount of dissent. We are dealing with very clever, imaginative and innovative people and they can write letters to where they feel they will matter the most.

Deputy Curran

We heard the more current figures regarding capital grants, including those for 2004. The accounts for 2001 and 2002 show that capital commitments had increased from €48 million to €160 million. I know these did not involve signed contracts. Would Professor Wrixon like to comment on them?

Professor Wrixon

We knew we had funding to meet most of these commitments. I refer to capital commitments mainly under the programme for research in third level institutions.

Deputy Curran

The accounts show an increase from €48 million to €160 million.

Professor Wrixon

The programme of research in third level institutions was subjected to a competitive process in which all the universities made a bid. UCC was particularly successful in its bid. It enabled us to build a biosciences building, double the size of our library, build an environmental research institute and carry out a number of other developments. It was these kinds of commitments for which we had funding in place.

Deputy Curran

Although contracts were entered into for only a proportion of the commitments, will the commitments affect the capital funding deficit of the university?

Professor Wrixon

No, I do not believe they will. Obviously, an important part of my job involves questioning whether one should wait until one has all the money before one starts a project.

Deputy Curran

Obviously, the university did not — that is what I am getting at. Historically, it did not. Therefore, it has a capital deficit of some €40 million. Possible future commitments could result in a figure in the order of €160 million. Will the university continue to build such that €50 million will increase to €100 million?

Professor Wrixon

No, that is not true. A framework for the risk assessment of capital projects is being worked on by all the universities and the Higher Education Authority. We are confident we have the money to meet any commitment we have given.

Deputy Curran

Therefore, the capital funding deficit is not growing.

Professor Wrixon

No. We have specific milestones in mind where in a number of years the banking exclusivity fee, the return on the investment, will specifically take large chunks out of it.

Deputy Curran

If future capital commitments are not being funded in this way, is funding in place for them?

Professor Wrixon

Yes. In the past two years the only commitments we have made in terms of additions to the capital deficit concern land purchases.

Deputy Curran

Deputy Boyle asked specifically about the current deficit. What is being done with this? Is just interest or is principal and interest being paid? How is it structured?

Professor Wrixon

It is part of our overdraft.

Deputy Curran

It is short-term.

Professor Wrixon

Yes. We are discussing with the HEA ways to put it on a long-term basis.

Deputy Curran

To finance it in a more structured way.

Professor Wrixon

Yes.

Mr. Collins

The medical development is being funded by way of a long-term loan but the bulk of the deficit is on a short-term funding basis.

Deputy Curran

Is it at a higher rate of interest?

Mr. Collins

No, we receive a premium on the rate of interest.

Deputy Curran

From time to time the university is party to legal proceedings. Its officers have been informed by their legal advisers that it is not possible to make a reliable estimate at this time of the financial effects of these cases. That is unusual. It recurs in the accounts in different places. Are these ongoing or different cases?

Professor Wrixon

I looked at our legal costs for the last four years. Some are reimbursed under public liability insurance policies. For those four years the average legal costs have been €250,000 per year, half of which has to do with capital projects and purchasing land.

Deputy Curran

Is €250,000 the amount after reimbursement?

Professor Wrixon

Yes. Ongoing legal costs averaged €125,000 over the last four years. For an organisation of 2,500 people, that is reasonable.

Deputy Curran

The potential liability for VAT has not been assessed by the Revenue Commissioners. That was fine for one year but it carries through to the accounts for the next year. What is the potential liability?

Professor Wrixon

That is in respect of the banking exclusivity fee. We put our banking services out to tender some years ago and raised €12 million via that process, the use of which is restricted to capital purchases. Part of it has been used to reduce the deficit. The position on VAT remains to be fully elucidated.

Deputy Curran

How many years ago was the deal done with Bank of Ireland?

Professor Wrixon

It was done in 2001.

Deputy Curran

Surely the liability, if any, should have been determined by now. Is this not unsatisfactory?

Professor Wrixon

I do not think it is satisfactory. We are in discussions with our accountants and the VAT people.

Deputy Curran

Is the position any clearer now?

Professor Wrixon

Not yet.

Mr. Collins

We are close to finalisation. VAT is payable but we are allowed to recover some for research generated expenditure. The debate centres on the net position.

Deputy Curran

Therefore, the debate is not just about VAT arising from the deal with the bank.

Mr. Collins

The VAT payable is on the deal with the bank. The VAT recoverable is an amount due to the institution. The debate is about what is due to us and what is payable.

Deputy Curran

The accounts for the period do not reflect the VAT payable; they reflect the potential liability. I did not realise VAT was recoverable.

Ammonite Limited built student accommodation on leased land but the university acted as guarantor for the loan.

Professor Wrixon

We will have to come back on that issue as I do not have the details.

Deputy Burton

Note 27 on page 22 on contingent liabilities relates to various legal proceedings. How many cases have crystalised and been settled? How much did the settlements cost? This would relate to the situation in September 2002.

Professor Wrixon

We have one major ongoing legal case which has been covered by our insurance policy. Therefore, there is no related contingency. It is being appealed to the Supreme Court.

Deputy Burton

Is there any indication of how much will be claimed from the insurers from the current state of determination of the case?

Professor Wrixon

All of the costs we have incurred will be covered by the insurance company in that case. The case was brought against the university.

Deputy Burton

What amount is involved? If there were significantly high numbers of such cases, would they affect subsequent attempts to take out insurance for legal cases?

Professor Wrixon

Insurance cover is no longer available to us.

Deputy Burton

Why has such cover been refused? Was it because the level of claims against the university was deemed to be high?

Professor Wrixon

Yes.

Deputy Burton

Three years later, could we have an indication in respect of the balance sheet in such cases?

Professor Wrixon

As it is all covered by insurance, it has no effect on the balance. Legal costs of €125,000 per year over the last four years have not been covered.

Deputy Burton

I presume the university's insurance policy covered legal fees and potential settlement costs in litigation.

Professor Wrixon

I understand this case will not involve a settlement. It concerns the determination of a point of law.

Deputy Burton

Has the court so far upheld the university's point? I presume the parties are members of staff.

Professor Wrixon

In the original High Court action the university's case was upheld but that decision was reversed on appeal to the Supreme Court. The case was sent back for retrial. In the second High Court hearing the plaintiff's case was upheld and the university is appealing the decision to the Supreme Court.

Deputy Burton

This balance sheet is three years old, at which stage most businesses would have some idea of the financial picture in regard to likely outcomes. Does the university have an estimate of what the Supreme Court challenge is likely to cost the college authority?

Professor Wrixon

The insurance company advised us to appeal to the Supreme Court. The cost of the appeal is a fraction of the costs already met in the High Court action.

Deputy Burton

The university does not have insurance cover, dating from 2002 or in the current period. Does Professor Wrixon have any estimate of what the cost is likely to be?

Professor Wrixon

As we are talking about future litigation, I have no way of predicting what the cases will be. Ideally, none of these matters should ever reach the courts. We have put in place many procedures and mechanisms for settling disputes without recourse to legal means. That, however, remains the right of any citizen. The university did not bring any of these cases but we are aware of the Deputy's point and I hope our procedures will minimise or eliminate the numbers going to court.

Deputy Burton

The university has an enviable reputation and track record on research. Does it have an accounting policy to value intellectual property rights for researchers, and are such rights included in the university's accounts? Multinational companies aggressively value their intellectual property rights in order that, for example, when the State buys a computer system, it pays a high price for the right to acquire systems. Does the university have a policy on this issue?

Some universities have personnel working on or off campus in research centres. If somebody creates a valuable right or patent, is this held by the individual, the research institution or the company which may have commissioned the research or, as happens in some universities, is it divided up between the groups mentioned? Does the university have a policy on this issue?

Professor Wrixon

We have a policy because we have been dealing with this issue for the past 20 years, first through the micro-electronics centre to which Deputy Boyle referred. There is a division between the university, the person who makes the discovery and any funding agency involved, whether industrial or the State.

We also have a policy to encourage technology transfer when a staff member makes a discovery with commercial potential and wants to take the intellectual property to start a company. The university takes an equity stake by right in that company. We always try to facilitate the creation of intellectual property and its migration to industry, either through new companies or intellectual property income if the discovery is commercialised.

Although the activity has not generated significant sums of money for the university to date, we hope it will become a major source of income, as happened in other universities which began small such as Stanford.

Deputy Burton

Does the university have an account of patents and assets that it either holds or in which it has an interest?

Professor Wrixon

Yes, it does.

Deputy Burton

Is that included in the accounts? In American universities this is a major source of funding and capital.

Professor Wrixon

Yes. I would be happy to supply the accounts to the committee. I agree with the Deputy. We hope the intellectual property we develop in the university can be commercialised which would help the national and university economy. As a country, we are trying to do this. The deficit about which we have talked is an investment in the future and arises from exactly the type of activity the Deputy describes.

Deputy Burton

This might sound like a stupid question but is this reflected in the accounts?

Mr. Collins

In the balance sheet, under the heading of fixed assets, there is a note on investments. It is to be found on page 11 of the 2002 balance sheet. The total for investments is €293,000, which is the university's share of the investment in the campus companies spun out of research.

Deputy Burton

That figure seems to have fallen sharply.

Mr. Collins

As the companies grow, we can choose to maintain our stake in them which would allow us to increase our investment. While some might be a great idea, they may not be commercially viable and close down, while others come on stream. At any one time the figure tends to change but at the end of 2002 the accounts reflected our interest in several small spin-out campus companies. It has since grown, if one looks at the accounts for 2003 and 2004.

Deputy Burton

In addition to its academic policy on research, investment and intellectual property rights, does the university have an ethical policy, particularly where research might have military applications? This has been a controversial issue on several occasions, particularly in areas such as micro-electronics and computer applications which have mixed use capability.

Professor Wrixon

We have an ethics committee for research which mainly concentrates on biological research. The Deputy is correct in so far as the ongoing research in software and information and communications technology is concerned, it has mixed use capability. Obviously, no work is done in any of the university's departments which would be sensitive or directly applicable to any military application. We work on mainstream software and micro-electronics hardware developments for industry in Ireland or State research agencies.

Deputy Burton

On the tax-based property deals noted in the accounts, sections 23 and 843 financial arrangements have been used to develop facilities on a sale and lease back basis. Will Professor Wrixon comment on these?

Professor Wrixon

Both facilities, sections 843 and 23, now section 50, are mechanisms used by all universities to help fund capital development. In some of the State universities it was a requirement of the programme of research in third level institutions to use section 843 which allows corporations to offset capital liabilities to universities. We share the tax savings involved. Since the corporation tax rate has gone down to 12.5%, the benefit of this mechanism has reduced considerably as we receive a benefit of 6%. However, the legal and accounting costs involved tend to eat into this. The university sector is trying to persuade the Government that section 843 type funding should be available to individuals, as it is in the United States, to promote individual research as opposed to corporate philanthropy to universities.

Section 50 is a mechanism used by all universities to help fund student accommodation. UCC has a policy to make available student accommodation to all first year students living away from home and all international students. International students, particularly non-EU students, represent a large source of income. However, they will only come to study if there are good places in which to stay and under university control. When I became president, UCC had 230 beds in one development, Castlewhite. There are now 1,300.

Section 50 is a mechanism by which a developer deals with the whole project. UCC pays the developer an annual fee which is reimbursed from the income from the development. The accommodation charges go to the developer. At the end of the ten year period there is a put-and-call option, whereby UCC can buy the asset. There is a sinking fund in place to purchase it, following which it becomes a source of revenue for the university. It is a mechanism under which the university can be made more attractive for domestic and international students. In time, after the ten years have expired, it will represent a capital asset which will give us income from the rents paid by students. There is also the option to sell and lease back the asset, which would represent an additional source of capital for the university.

Deputy Burton

Will Mr. Purcell tell me if there is any information on the cost benefit analysis of this mechanism compared to the traditional method of direct funding by the State, particularly concerning the interest rates involved in such deals?

Mr. Purcell

Not as such. The introduction of these sections in legislation was a policy option taken at a time when money was not so flush. There was no real alternative except borrowing on the university's behalf. Members know the Minister for Finance spoke about reviewing some of these tax expenditure schemes. I am not sure to what extent this review covered some of the schemes directly related to the provision of student accommodation. A year ago a particular scheme at a third level institution was brought to an abrupt end because it was felt too much benefit would be given to investors and developers as against the original intention. The Department of Finance moved quickly because it felt there was excessive zeal on the part of the developers and investors in a particularly creative scheme under one of these sections.

Vice Chairman

Has Mr. Purcell any concluding remarks?

Mr. Purcell

The issue of intellectual property rights was raised. When these rights transfer to campus companies or offshoots, they are included, as Mr. Collins said, in the balance sheet. The information on the particular companies concerned is published by the university as part of the additional financial information to be provided. No value is put on intellectual property rights as they are developed. This is common across the university sector.

I had a bee in my bonnet about the unfunded capital deficit and will make just two points on the issue. I understand where the university is coming from; it is doing what is best for the institution. However, there can be some ambivalence about the extent of the funding available. The gross deficit was of the order of €100 million. There would be income streams and anticipated funding levels to cover this element. We should not confuse the issue. Included in the figures for the medical building was an anticipated sum of approximately €6 million from tuition fees available from non-EU students. However, there could be policy changes if it was decided that a greater percentage of those availing of our third level medical studies on offer should be Irish in order to meet domestic demand. There are several other risk factors involved such as an increase in what are historically low interest rates. Over and above the figure of €40 million, some capital funding is not nailed down.

As Professor Wrixon said, there is land available. Of course there is. I think he also said that the college does not intend selling it to meet debts because it was bought for strategic purposes due to the location of the university and the lack of scope for the kind of developments necessary to meet the upsurge in student intake.

Vice Chairman

We have now concluded the examination of the statements 2000 to 2002. Is it agreed that these be disposed of? Agreed. As that ends this part of the meeting, we will suspend briefly.

The witnesses withdrew.

Sitting suspended at 1.40 p.m. and resumed 1.45 p.m.