Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Tuesday, 3 Jul 2018

Role and Operation of National Development Finance Agency: Discussion

Chairman

We are discussing the role and operation of the National Development Finance Agency. I welcome Mr. Gerard Cahillane.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. If, however, they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official, either by name or in such a way as to make him or her identifiable.

I invite Mr. Cahillane to make his opening statement.

Mr. Gerard Cahillane

I am pleased to be here to assist the joint committee in its consideration of the role and operation of the National Development Finance Agency, NDFA, with particular reference to the impact on Irish infrastructural projects of the liquidation of the UK Carillion group and the role of the Dutch Infrastructure Fund in that regard. I am joined by my colleagues, Mr. Paul O'Neill and Ms Louise Mulcahy.

The NDFA's mandate is set out in the National Treasury Management Agency (Amendment) Act 2014. It has two main roles. The NDFA is the statutory financial adviser to certain State bodies as listed in the Act on all public investment projects of scale. At present, we are providing financial advice on projects with a value in excess of €5.5 billion, including public private partnership projects with a value in excess of €1.5 billion.

The NDFA's mandate includes responsibility for the procurement and delivery of public private partnership projects in sectors other than transport and the local authorities.

Within this mandate, the NDFA’s exposure to Carillion is confined to the schools PPP bundle 5 project, SB5. Carillion was new to the Irish market, in contrast to its presence in the British market where Carillion was engaged in up to 450 projects at the time of its collapse. We are not aware of Carillion having been involved in any other Irish Government infrastructure project.

The SB5 PPP project was announced as part of the Government’s 2012 PPP stimulus package. The NDFA managed and provided financial advice on the procurement of the SB5 project on behalf of the Department of Education and Skills. The project comprises six facilities: five replacement schools and one replacement institute of further education. Following a competitive tendering process and financial, technical and legal due diligence, a contract was awarded to the Inspired Spaces consortium PPP Company in July 2016. PPP Company comprises two shareholders: Carillion Private Finance and the Dutch Infrastructure Fund, DIF. Under the contract, the construction works were subcontracted by PPP Company to Carillion Construction and the post-construction services to Carillion AMBS. The contractual structure is set out in appendix 1 to our submitted paper.

Funding for the project was secured by PPP Company in the form of a 90:10 debt-equity ratio. The bank debt financing was provided by MUFG, at 50%, and Helaba Landesbank, at 50%.

The PPP Company, under the direction of its shareholders, is responsible for managing the overall process, including the making of payments to the main works contractor. Since the collapse of Carillion, DIF has taken responsibility for the management of Carillion’s stake in the project with the oversight of the funders. The NDFA, the Department of Finance, and the Department of Public Expenditure and Reform are in close contact with all parties.

Following intensive efforts by all parties in the intervening months, an announcement was made on 28 June 2018 that DIF and the project lenders were putting in place arrangements for the appointment of a replacement contractor, Woodvale, to facilitate the completion of the three most advanced schools: Loreto College, Wexford, Coláiste Raithín, Bray, and Ravenswell primary school, Bray, by the end of August, and undertake survey and preliminary work at the other three buildings in the bundle: Tyndall College, Carlow, Carlow Institute of Further Education, and Eureka school, Kells. This survey and preliminary work will be undertaken during the summer and will provide a detailed scope of works to enable the contract management arrangements to be finalised for the completion of these schools by the end of December. The arrangements, which follow a retendering process, provide for a contractor to be mobilised in the coming days and for work to commence on site in the coming weeks.

By way of an update since I submitted this statement, I can confirm that, as of yesterday morning, in Bray there was a team of construction workers and a landscape contractor on site. As of this morning, in respect of the Wexford school, I can confirm there are a team of contract workers there. Both sites are now active.

As of today, in accordance with the PPP contract, the State has not made payments in respect of the schools’ construction other than an amount in respect of preparatory site advance works. Payments from the State under the PPP contract are made monthly and will commence upon completion of the schools, which were at various stages of completion on the date of liquidation.

My colleagues and I will be happy to address questions relating to the Carillion liquidation to the extent that it has impacted NDFA-procured projects. I am, however, limited in two respects. I am not in a position to discuss third parties that are not counterparties of the NDFA nor am I free to discuss details of the procurement of the replacement contractor which has progressed but has yet to conclude fully. I ask for the members’ understanding in this regard.

Deputy Pearse Doherty

Go raibh maith agat agus fáilte chuig an gcoiste. There is a lot of welcome information in the opening statement, particularly on the additional works which have commenced on a number of sites. Are there two or three sites in Bray?

Mr. Gerard Cahillane

There are two sites but three schools.

Deputy Pearse Doherty

Are the schools in Bray?

Mr. Gerard Cahillane

There are two in Bray and one in Wexford.

Deputy Pearse Doherty

Is it intended that the schools will be opened and have pupils in them in September?

Mr. Gerard Cahillane

The work will, in fact, be finished by the end of August.

Deputy Pearse Doherty

That is welcome news for the parents, pupils and teachers, but can Mr. Cahillane inform the committee how we will ensure the works will be completed to the required standards as laid down by law in the Building Control Act 2007?

Mr. Gerard Cahillane

All of the terms of the contracts will have to be satisfied. We have an independent tester appointed for the project and that person will sign off that everything is in line with the regulatory requirements.

Deputy Pearse Doherty

Who does the independent tester need to satisfy?

Mr. Gerard Cahillane

Both us and the authority.

Deputy Pearse Doherty

What authority?

Mr. Gerard Cahillane

The State, that is, the Department of Education and Skills and us.

Deputy Pearse Doherty

Is the National Development Finance Agency acting on behalf of the Department of Education and Skills, or is it both?

Mr. Gerard Cahillane

We are acting on behalf of the Department of Education and Skills, but it is in close consultation with us on all aspects of the projects.

Deputy Pearse Doherty

The independent tester needs to satisfy the NDFA that the works have been satisfactorily carried out to the standards laid down under the Building Control Act. Will Mr. Cahillane inform the committee whether that includes not only the works being carried out by Woodvale - the company now tasked with finishing the works commenced by Sammon via Carillion - but also the works being carried out by the subcontractors which in some cases have been completed and in others are well advanced, be they mechanical, electrical or more construction related?

Mr. Gerard Cahillane

I can confirm that all of the works being carried out under the contract will have to be completed to the standards laid down in the building regulations and that they will be independently certified.

Deputy Pearse Doherty

Is the assigned certifier operating to normal standards, including having to hand all of the relevant documentation required in line with the Building Control (Amendment) Regulations 2014, BCAR, standards?

Mr. Gerard Cahillane

Yes.

Deputy Pearse Doherty

Is the State normally happy with a single certifier certifying all of the different works, given the range of complexities and works involved in these school construction projects?

Mr. Gerard Cahillane

Yes, it is the standard approach. There has been no dilution of that approach.

Deputy Pearse Doherty

Where has it been used before?

Mr. Gerard Cahillane

It was used in all previous 25 PPP contracts. A testifier is appointed and that entity has to sign off that the works have been carried out to the standards laid down.

Deputy Pearse Doherty

In all previous 25 PPP contracts did the independent assessor certify and validate that the works had been carried out by the subcontractors in accordance with the BCAR standards?

Mr. Gerard Cahillane

The certifier is independent and he or she will have to satisfy himself or herself that they were carried out to the standards laid down.

Deputy Pearse Doherty

The point is that was not the case in previous circumstances. Part D of the Building Control Regulations 2013, the section which deals with technical guidance on materials and workmanship, reads:

Materials, including products, components, fittings, items, equipment and back-filling for excavations.

Materials should be of a suitable nature and quality in relation to purpose and conditions of their use, and be adequately mixed or prepared and applied, used or fixed as to perform adequately the functions for which they are intended.

For example, in the case of a floor covering in a school, which is very important - it may seem mundane to anyone who is listening in - if there was to be a slippage or fall, it could result in a serious case of concussion, or a loss of life caused by a bang to the head. How does an independent assessor satisfy that requirement, that the product and solution used to affix the floor covering to the subfloor was adequately prepared and mixed and stored according to the criteria of the product manufacturers?

Deputy Pearse Doherty: Can the witness inform the committeemn

Mr. Gerard Cahillane

We have visibility throughout the construction process on what materials are used by the subcontractors. They are ultimately approved by the independent tester. The PPP company is responsible for the project, and does not get paid unless it is delivered to the required standard of the contract, which includes satisfying the independent testers.

Deputy Pearse Doherty

I have met with numerous subcontractors here. Some of the companies I have met with, which have operated for a number of generations, are about to go into liquidation themselves because of the collapse of Carillion and Sammon Contracting, and the fact they will not be paid. When one speaks to the principals of these family-owned companies, it sticks in their craw that the State will benefit from the work they did. They did hundreds of thousands, if not millions, of euro worth of work that they are unlikely to get paid for. The State will benefit from that through the use of these schools in September, and nobody wants to prevent that. They tell me there is no way whatsoever that an independent assessor can verify the work, the solution and the bonds. For example, the floor covering in one of these schools can be applied by only two companies in the entire State. They are unwilling to certify that the adhesive used was up to standard. There is no way an independent inspector can see what happens below the floor covering.

In terms of football pitches that were created, while one may be able to see the grass is a couple of inches long, or maybe not so long given the weather we have, there is no way that one can be satisfied the drainage, the pipes and the connections were done appropriately. We also have a knock-on effect in that the insurance provided for these products will not be guaranteed unless the subcontractor who installed them certifies the work.

I understand this is a mess of none of our making, and we all need to try to fix it. I have a concern that we may be fixing a problem in the short term, in getting the schools open and so on. There may be a longer-term problem which may involve court cases, breaches of European directives or non-insurance on products that are used in schools with thousands of our students on a daily basis. How does one satisfy those requirements? Is the easiest way not to ensure within a contract that the new contractor has to receive the certification from the subcontractors? If that means making sure they are paid, then so be it.

Mr. Gerard Cahillane

I will make two points to the Deputy. First, the independent tester is on site on a regular basis so has been monitoring what goes into the ground all along. Second, I can confirm that Woodvale has reached out to a number of the subcontractors, and a number of the subcontractors have reached out to Woodvale. It may well transpire that some of the subcontractors will be involved in a final solution here.

Deputy Pearse Doherty

I am aware Woodvale has reached out to a number of the subcontractors. I am also aware that there are a number of the subcontractors who have no relationship with Woodvale at this point in time. The system the State has put together has left it at the mercy of a contractor to decide whether it wants to reach out to the subcontractor. Those whom they have reached to will obviously get paid, while those who have not been reached out to may have to go into liquidation, close their business, let people go and they may have to deal with losses that are quite excessive.

Do we not have a building control amendment regulations, BCAR, system? Do we not have a Building Control Act? If it was the case that the independent assessor signed off on this, then there would be no requirement for the individual subcontractors to sign off and certify their work was done to the appropriate standard. Is it not the case that we have both, that we need an independent assessor and that there are subcontractors certifying their works? That is a requirement under the Act.

Is it not the case that we have both? We need an independent assessor and the subcontractors are certifying their works. That is a requirement under the Act.

Mr. Gerard Cahillane

I appreciate the matter being raised by the Deputy and I have much empathy for the subcontractors involved. Subcontractors, whether dealing with the private sector or the State, are treated the same. Whether the State is dealing with a public private partnership, PPP, or a traditional project, they are also treated the very same. The same regulations apply in all cases.

Deputy Pearse Doherty

I understand that. Under the law, the subcontractors must certify that their work is done in accordance with the Building Control Act. Is that correct?

Mr. Gerard Cahillane

Yes.

Deputy Pearse Doherty

Under the law there is also an independent assessor process as well. We have a dual guarantee. We understand that. I worked on construction sites for a number of years after leaving college. One can be on the site and make inspections but one might not know exactly how something has been stored, temperatures of storage and all the required details. Sometimes this can go wrong. We have seen mica problems and other issues arising from deficient blocks, etc. The wrong use of materials can lead to serious problems. There is a requirement under law for the subcontractor to certify its work and there is a requirement for an independent assessor to certify as best he or she can that the works were done to the appropriate standard. With these schools, the requirements for subcontractors are gone.

Mr. Gerard Cahillane

The PPP company is incentivised to ensure this is done to the correct standard, or else it would not get paid. If we subsequently find defects in the building, there are deductions and the company will not get paid. We have confidence in the contract and that the company will comply with all the regulatory requirements. Otherwise, the company knows it is building a problem for the future.

Deputy Pearse Doherty

It is not just an issue of being paid and finding out at a later stage that there are cracks in walls or flooring is starting to lift, etc. Perhaps the football field might not be put in at the proper standard or the drainage might not work. There is an issue of law. Under the Building Control Act there is a requirement on the subcontractor to certify its work. The argument we will hear on Thursday from subcontractors is that the process now under way contravenes the Act. The last thing I want to see is some type of legal case from a subcontractor or other party that would prevent these schools from opening indirectly; it would clearly not be the intention. Is there a danger that a requirement under the law is now not being followed because there is no way the independent inspector can certify what is being required to be certified?

Mr. Gerard Cahillane

I am happy to take that away and revert to the Deputy but I am not aware of any issue currently. I will certainly investigate and get back to the Deputy if that is okay.

Deputy Pearse Doherty

Okay. Has the NDFA sought legal opinion on the process agreed at this point?

Mr. Gerard Cahillane

We have our legal advisers on the project at all times.

Deputy Pearse Doherty

Have the witnesses examined the European Construction Products Regulation to see if it is compatible with the process under way?

Mr. Gerard Cahillane

Personally, I have not but I am happy to revert to the Deputy on that technical point.

Deputy Pearse Doherty

I believe the witnesses' comments that they have empathy for people who use their own skills for manual labour to build pitches and schools. Arising from a mess not of their creation, they have been left high and dry and hundreds of thousands of euro out of pocket. They are unlikely to get that benefit but the State will get the benefit of their labour when the schools open in September.

Is it not the case that the solution to this is to require the new contractor to enlist the subcontractors who carried out the work in these schools and get them to certify their work? This would do a number of things. First, the contractors would be paid. In addition, we would know the work is being done to the standard to which it is supposed to be done and we would know that there is insurance cover in respect of the products used for construction. When I was young, a boy in a neighbouring school unfortunately lost his life because some goalposts fell on him. Things like that happen in school environments.

There is an urgency in terms of having the schools we are discussing opened. They look complete to anyone standing outside but pupils are still in their old schools. I can understand all that but it is crucial that we get this right for the safety of the pupils and teachers in the long term. We also need to do the right thing by the subcontractors. Why was that not considered in this option? The easy solution is to require the contractors to engage with the subcontractors and the companies that did a lot of this work - this is already happening in some instances - pay them off and get them to certify their work. Otherwise, we will be selling our children short. We are definitely selling the subcontractors short. I appreciate that the NDFA does not have responsibility in this regard. However, the NDFA could indirectly stipulate a solution that would benefit everybody involved with the contract in question.

Mr. Paul O'Neill

We have certainly encouraged Woodvale Construction to engage with the existing supply chain because we agree with the Deputy. We are on the same page in this respect. We recognise the importance of engaging with the existing supply chain to commission the works and get the schools opened. We understand that Woodvale is actively engaging, as the Deputy pointed out. The issue is that we need to also consider the commercial side. Clearly, a number of those contractors potentially have claims against the previous contractors with which they engaged. Unfortunately, that also has to be considered. From Woodvale's perspective, it makes sense - commercially and otherwise - to engage with the existing suppliers in the interests of getting the schools open as quickly as possible. Our understanding is that it will do that but it is important to recognise that those suppliers will potentially have outstanding claims against the original contractor.

Deputy Pearse Doherty

I understand that. That is where the mess is in all of this. There is a liquidation process and then there is a construction process which is still under way in respect of these three schools currently and which will commence in respect of others later on. Surely we can develop some type of process which would allow the contractor to engage with the subcontractors and which would ensure that, through whatever legal agreement is entered into, they would be paid and that they could not claim on the double. Any claim they made of the liquidator would be counted towards them if it was in excess of the original contract price. I do not think any subbie is sitting out there wanting to benefit from this mess. That is not what they want to do; they want to keep their businesses in operation, to keep on the people they have employed, and to ensure that they can sign off on works of which they are genuinely proud. There is absolutely no suggestion that any of these works are defective but there is a suggestion that it may not be possible to insure certain products in the school. There is a suggestion that they will not be covered by the insurance because insurance is only provided to specialised manufacturers and specialised installers. Unless that installer or manufacturer is willing to sign off on it, no inspector sign-off will suffice for insurance on a floor product. That is a very serious issue. Mr. O'Neill says that it is happening but that it is not a condition that it happens. Why is it not a condition that it happens?

Mr. Paul O'Neill

We have to recognise that Woodvale is bringing its own supply chain into play. There is an element of working out who is most efficiently placed to deliver from that perspective. I understand the Deputy's point completely but it is difficult to stipulate that contractors have to use the existing supply chain and then to enforce that stipulation. However, we are certainly encouraging them to do so.

There is an aggressive timetable to have these three schools delivered by the end of August and we have made it clear that it is an absolute State requirement. From that point of view, we are trying to say this is key and that surely the best way to do it is to re-engage with the existing supply chain, given the stage the works were at. We get the point and that is what we were trying to do to ensure they did that, without formally stating it.

Deputy Pearse Doherty

The company is doing it with certain subcontractors, particularly subcontractors that would have had a role in design.

Mr. Paul O'Neill

Correct.

Deputy Pearse Doherty

If they are dealing with something mechanical, for example, and there is an element of design to it, no independent person can sign off on somebody else's intellectual property. It just cannot be done; therefore, it must engage with the subcontractor, even though the subcontractor has a claim against the Sammon Group. It is doing it because it has to in that case; however, it is not doing it with the other subcontractors that might not have that design element in their work but still pumped their money into the schools. It is not engaging and the people concerned are being left high and dry. That is the point. We are in a situation where the company can cherry-pick and it is doing it for some but not for others. It is doing it for some because it is expedient and it has to do so because there is no way the NDFA's independent inspector can sign off on that type of work. However, the others who slogged it out with their shovels and picks are being left high and dry and their companies are going to close down. That is the reality. Given the amount of money on the hook as we are emerging from a recession and with things picking up at a time when we need labour and so forth, it is a sin that potentially we will have companies closing down. The companies have been in family hands for generations and built or partly built other schools in the State. The pitches on which children will be playing, the floors on which they will walk and the classrooms in which they will be taught were constructed by them. It is not right.

The NDFA is the authority that must sanction the quality assurance in that regard. It is simply not the case that the NDFA has no role when it comes to the subcontractors. It has absolutely no role in the payment of the subcontractors, but it does have a role in ensuring the work the subcontractors did was up to the appropriate standards, as laid down by law. The way to do that is to ensure the contractor the NDFA has engaged receives the necessary certification from the subcontractors. How it does that is up to the contractor. We all know the way it will have to do it, which is through paying them, just as it will have to do with the subcontractors that were involved in the design. I cannot see why the NDFA will not do that. The only argument Mr. O'Neill has given is that they will have a claim against the Salmon Group which is in liquidation, but subcontractors that also have a claim against the Salmon Group in liquidation are involved with the new company. They have to be owing to the design element.

Why not do it for everybody? It would give the NDFA quality assurance. It knows that the schools would be safe and that they would be insured, as would all of the products that were used. It would also provide us with the right conclusion, which is that the companies that constructed the schools were all paid at the end of the day.

Mr. Gerard Cahillane

This is an industry-wide problem and if a solution is to be found, we will have to consult the industry as a whole and find a solution that would apply to all sectors.

Deputy Pearse Doherty

There is a serious risk that the NDFA is in breach of the law with regard to what is to happen. The Building Control Act stipulates clearly that the subcontractors must certify that their work is up to standard. We are creating environments in which children will be running around for up to eight hours a day where we will not have that certification. We have a secondary safeguard - the independent inspector. That will now be the only safeguard, but that is not what should happen. I recall when HomeBond inspectors visited building sites for insurance purposes when concrete was being poured. People were pulling steel out of it just as the HomeBond inspectors were walking off the site. These are the things that happened. I am not suggesting it is happening in this case or with the contractors I have met. However, the reason we require the subcontractors to certify their work is that they are liable for it. That is the protection.

Mr. Gerard Cahillane

The feedback we have been receiving all along is that the quality of the work on the schools is quite good. We do not see this as a big problem, but we will certainly look into it.

Deputy Pearse Doherty

Into what is Mr. Cahillane going to look? He has said he will come back to us on a legal opinion on the Building Control Act and whether it is legal to have a single certifier to certify all of the work in the absence of subcontractors doing the work. Is that the case? Will he, please, correct me if I am wrong?

Mr. Gerard Cahillane

That is correct.

Deputy Pearse Doherty

Mr. Cahillane will come back to us on that matter. Into what else will he look?

Mr. Gerard Cahillane

The position of subcontractors is an industry-wide issue. While former Senator Feargal Quinn's Construction Contracts Act 2013 has helped contractors, it is not bulletproof. It has added some protection and, as we have heard anecdotally, it has helped, but perhaps more might be done. Improving the legislation covering payments to a subcontractor would be a matter for the Oireachtas.

Deputy Pearse Doherty

I appreciate that, but this is not a shop being built in rural Ireland by a subcontractor for a company that has gone into liquidation. The State is paying for it. It will benefit from the work, while some of the subcontractors will go into liquidation or be left short by hundreds of thousands of euro. However, there is a solution. The company the State is asking to finish the works could employ the subcontractors to finish and certify their work. This is unique because it is a State project and the State is employing another contractor to complete and benefit from the work others have done.

Mr. Gerard Cahillane

For the purposes of clarification, it is the public private partnership, PPP, company that employs the contractor, not the State. The contractor is contracted to the PPP company.

Deputy Pearse Doherty

What is Mr. Cahillane's opinion on how the current process, in which the National Development Finance Agency is involved, complies with the European directive on construction products?

Mr. Gerard Cahillane

I can do that, yes.

Deputy Pearse Doherty

Is Mr. Cahillane saying to the committee that the National Development Finance Agency is unwilling to look at the issue again in the case of Woodvale Construction and require it to satisfy all of the subcontractors who had previously worked on the project?

Mr. Gerard Cahillane

The Deputy is correct that I am unwilling to open it up. As I said, the contractor is contracted to the PPP company.

Deputy Pearse Doherty

When will Mr. Cahillane have those two opinions?

Mr. Gerard Cahillane

We will raise the matter this evening with our legal advisers.

Deputy Pearse Doherty

It would be helpful if we could have them before our session on Thursday. Does the agency have any concern that the opening of the schools will be delayed as a result of the legal challenge on the basis that the National Development Finance Agency might be in breach of the Building Control Act?

Mr. Gerard Cahillane

The Deputy will appreciate that news of a breach of the Building Control Act is very new to me, but if there is a legal challenge, it will certainly delay the process.

Senator Rose Conway-Walsh

I thank Mr. Cahillane for his opening remarks. In the context of his role as the statutory financial adviser, how the project was set up in the first place and how the assessment was made, will he explain who was responsible for conducting the stress-testing of the parent company? How was it decided that the project was a safe bet?

Mr. Gerard Cahillane

Is the Senator's question about the financial robustness of the entity?

Senator Rose Conway-Walsh

Yes.

Mr. Gerard Cahillane

The most independent, reliable source in assessing a company's robustness is its audited financial accounts. For Carillion, we relied on the audited financial accounts for the past three years that had been prepared by KPMG in the United Kingdom. They showed that the company had a turnover of between €5 billion and €6 billion and a market capitalisation value of €1.5 billion. It was making a profit.

It was a going concern. There was no emphasis of matter. It ticked all the boxes on best practice. We now know that those audited accounts were flawed and there is an investigation by the UK's regulatory authority of how KPMG concluded those audits. There are several investigations into the matter. We did that and it is pretty standard and is considered best practice. We now know that we could not rely on them. We did an additional check because this was a publicly listed company and Mr. O'Neill will talk about that.

Mr. Paul O'Neill

We awarded the contract in July 2016 when it was a solvent, profitable company but we do not rely only on the audited financial statements. We had the benefit of Carillion being a listed company. It was listed on the London stock exchange as a FTSE 250 company so we were able to assess the stock announcements it had been making, the share price and any material or press releases it had put out. We tried to go beyond the scope of audited financial statements but equally recognised that they remained the best independent verification of a company's health at a given time. We are continually looking at ways to improve and optimise our procedures so we are very cognisant of what is happening in the UK investigations and we are reviewing our own procedures to see what more we can do in addition to what we do. If it was a rated company we could rely on Moody's and Standard & Poor's and more independent verification reports to help us. We feel that at that time we did all we could to ensure that the entity was robust. We also considered the size of the project. This project represented 1% of the company's turnover so it was not simply a case of checking the audited financial statements. We looked at a broader scope.

Senator Rose Conway-Walsh

What would the Department do differently now in making that assessment?

Mr. Paul O'Neill

We would consider the same measures; the audited financial statements remain the best independent verification.

Senator Rose Conway-Walsh

Would the NDFA use KPMG again for a similar assessment?

Mr. Paul O'Neill

We do not use it. Whatever auditors the company has engaged is its own business.

Senator Rose Conway-Walsh

For the NDFA's assessment would it-----

Mr. Paul O'Neill

I do not see how we could discount an audited opinion that came out on that basis but we will certainly be mindful of what will come out of the UK in that respect. One factor we may consider is, for example, on the date of signing, to look for more detailed directors' statements and reports on the solvency of the company, the banking covenants and the cash position to try to get a clearer view from the company. The caveat is that it comes from the company. It is not independent verification. We are mindful of broadening the scope and finding different ways we can improve the analysis.

Senator Rose Conway-Walsh

Is there any way of getting independent verification?

Mr. Paul O'Neill

Outside the audited financial statements, if a company is credit rated that is one option but most contractors are not credit rated. There are other private firms that have a financial statement analysis that we have engaged in the past but they, in turn, rely on the audited financial statements to do their own assessments. In short, there are not many viable options outside the audited financial statements.

Senator Rose Conway-Walsh

Surely that speaks to the problem that we have had all along of the overdependence on auditors, as well as paying them enormous sums to supply a service, and we continue to place full trust in what is given to us. If there is not the analytical capacity within government to see beyond what is presented to us by an auditor we are at the mercy of auditors, in the same way that we were during the banking crisis, when many issues should have been flagged that were not about the status of the banks.

Mr. Paul O'Neill

I do not agree with that because we do not simply take the audited opinion; we do our own analysis of those accounts so we perform our own sensitivity analysis on those-----

Senator Rose Conway-Walsh

Is Mr. O'Neill satisfied that the NDFA did absolute due diligence in selecting this option and the companies involved?

Mr. Paul O'Neill

Absolutely, at that time it was a company with a turnover of €6 billion and more with a cash balance of €620 million. It was a solvent, profitable company. It was a viable entity.

Senator Rose Conway-Walsh

The NDFA made the decision so that is where the buck stopped.

Mr. Paul O'Neill

It is important to acknowledge that we are considering our procedures and ways to improve because I agree it is not acceptable just to say that we see the audited statements and nothing else.

We will continue to explore ways to try to improve the processes.

Senator Rose Conway-Walsh

That is part of the problem with respect to the situation in which the subcontractors have found themselves. Even if there is not a specific legal obligation, there is a moral obligation on the agency at least to meet them. Has Mr. O'Neill met any of the subcontractors who have had their businesses ruined as a result of the collapse of Carillion?

Mr. Paul O'Neill

No, we have not. We do not engage with the subcontractors. The private partner has that arrangement.

Senator Rose Conway-Walsh

That hands-off approach does not sit well with me. The agency made a decision, having been informed by the auditors, and arising from that decision, businesses have gone to the wall. There is a moral responsibility on the agency. Has the agency done an audit of the number of jobs that have been lost as a result of the collapse?

Mr. Gerard Cahillane

Of Carillion?

Senator Rose Conway-Walsh

Yes.

Mr. Gerard Cahillane

In the UK or worldwide, Carillion has about 40,000 employees, of whom approximately 25,000 would be in the UK. Approximately two thirds of the Carillion workers have found employment with alternative contractors.

Senator Rose Conway-Walsh

How many jobs have been lost in Ireland, North and South?

Mr. Gerard Cahillane

In Ireland there were only a couple of people in the Carillion operation, which was quite small here.

Senator Rose Conway-Walsh

No, I mean as a result of it collapsing in terms of subcontractors. Has the agency done an assessment of exactly how many jobs were lost or how many businesses were forced to close?

Mr. Gerard Cahillane

No.

Senator Rose Conway-Walsh

That is something that needs to be done. That has been an impact of the agency's original decision to do this. The agency or some Department has an obligation to carry out a proper assessment of the number of jobs that have been lost. This has impacted on livelihoods and businesses that until the collapse of Carillion were operating effectively and efficiently.

Mr. Paul O'Neill

It is important to point out that Carillion paid in full per the terms of the contract as of last December 2017. That is contained in the briefing pack we submitted. That was the last payment date. It paid in full, per the terms of the contract to its subcontractor, which was Sammon. I do not want the committee to be misled in thinking that payments were not made in that respect. The payments were made in full. As to how those moneys progressed down the supply chain, that is not something we could comment on. It is important to bear that in mind.

Senator Rose Conway-Walsh

I understand that in the way it filters down and in terms of Sammon and its obligation to do what it needs to do. The agency cannot dissociate one from the other in terms of the obligations to workers and to businesses. Has all of this made the agency rethink the drive to go down the PPP route for these projects?

Mr. Gerard Cahillane

The short answer is "No" in that 40 to 50 construction companies went into liquidation in Ireland in the first six months and very few of those, apart from Sammon, were related to the Carillion projects. The construction industry is a high-risk, low margin industry, particularly in Ireland and the UK. Our industry is operating on a margin of 1% to 1.5% while the standard in Europe is 4% to 5%, so that is an issue.

Senator Rose Conway-Walsh

Are the industries in Britain and other European countries still going down the PPP route or are they favouring the traditional procurement method?

Mr. Gerard Cahillane

They are using both, as are we. To take the example of the construction industry in Ireland, the value of which is approximately €20 billion, the State sector accounts for 25% of it and the PPP sector accounts for approximately 3% to 4% of it. Therefore, the PPP sector is a very small part of the construction industry. By and large the default rates in PPP projects are lower than in traditional projects.

Senator Rose Conway-Walsh

Therefore, the agency is wedded to PPP projects, as such.

Mr. Gerard Cahillane

No. The decision to go the PPP route in respect of this was made in 2012. It was part of the Government's stimulus package. These schools - nine other projects were involved in this as well - were either being delivered as PPP projects or they were not being delivered at all.

These were additional projects that were allowed by the troika because they were off-balance-sheet.

Mr. Paul O'Neill

Under the Project Ireland 2040 plan there is a clear direction towards more traditional Exchequer-funded projects as opposed to public private partnerships. That is clear. As financial advisers to the State, we are neutral in that respect. We are not here to promote public private partnerships. We are advising on both PPP and non-PPP projects.

Senator Rose Conway-Walsh

I wanted to get the witnesses' opinions on this because the PPP options were being shut down in the UK in 2012. It makes me wonder why our Government would pursue that model. How much extra has the re-tendering process cost?

Mr. Gerard Cahillane

It has cost the State zero. The State has paid nothing. That is a commercial matter between the PPP company and Woodvale Construction Company.

Senator Rose Conway-Walsh

Very well. I will leave the questions at that.

Deputy Paul Murphy

My apologies for being delayed. I was at another meeting, but I did read the opening statement. I take the point that the witnesses are not here to politically defend strategic, economic or political decisions to go down the route of using public private partnerships to provide public infrastructure. The Carillion collapse blows a massive hole in some of the arguments that have been used to justify PPPs, in particular the argument that they transfer risk off-balance-sheet. The reality, when a PPP collapses, is that the risk will come back on-balance-sheet and the State would be better off building directly.

What the National Development Finance Agency, NDFA, does have responsibility for is defending the decision to go ahead with Carillion, given the political choice to proceed with PPPs. The witnesses indicated that the NDFA did not rely only on Carillion's audited accounts and did its own due diligence as well. What was the latest date at which a contract was awarded to Carillion?

Mr. Gerard Cahillane

Does the Deputy mean in Ireland?

Deputy Paul Murphy

Exactly, by the NDFA.

Mr. Gerard Cahillane

Carillion participated in a few competitions in Ireland, but the competition it won was in respect of schools bundle 5. That contract was awarded in July 2016.

Deputy Paul Murphy

Was Carillion awarded any contracts after that?

Mr. Gerard Cahillane

It participated in the competition for a social housing PPP and because we had a profit warning against the firm, we marked it down and it was not shortlisted in that regard. We felt our exposure was enough with just one project.

Deputy Paul Murphy

There were three profit warnings in the course of five months. In the summer of 2017 it became clear that Carillion was in trouble. It would have been significantly more difficult for the company to win any further contracts because the profit warnings would have counted against it.

Mr. Paul O'Neill

It is also important to note that at that point Carillion's 2016 audited financial statements had been released. This was around July 2017. Those accounts showed a very profitable company. To reiterate the point, we were not solely relying on those statements. We looked at factors outside of that, and profit warnings were a pretty obvious factor in that respect.

Deputy Paul Murphy

Is the NDFA's view that even if it had done further digging, it could not have discovered that this would be a serious problem in the future? The information could not have been found. Several articles on this topic were published in the Financial Times, The Guardian, and other newspapers. The Financial Times, for example, reported that with "hindsight, the board fell into a series of textbook traps". The same article goes on to list these traps, including failing "to halt acquisitions", "aggressive accounting policies" and "continuing to pay out dividends even as cash haemorrhaged out of Carillion". None of those things could have been spotted by, say, mid-2016.

Mr. Paul O'Neill

Correct.

Deputy Paul Murphy

I am not sure if the witnesses are in a position to answer this question. As I understand it, there were two parts to the PPP, namely, the building of the schools and the managing of the schools. I understand these have now been separated for the purposes of resolving the matter. What is the current status of the contract to manage the schools?

Without getting into anything that is commercially sensitive, has a provider been found or is the NDFA still looking for one?

Mr. Gerard Cahillane

I think a provider has been identified but that matter is commercially sensitive. Negotiations are ongoing between the public private partnership, PPP, company and that entity as we speak.

Deputy Paul Murphy

Can Mr. Cahillane explain how that works? The State will pay a private operator to maintain these buildings over a period of 25 years. Is that correct?

Mr. Gerard Cahillane

I should remind the Deputy that the contract is still intact. There is one contract which includes the construction and the facilities management, FM, services for the next 25 years. We will pay for it in monthly instalments over the next 25 years once each of the schools is commissioned to the standard required under the contract.

Deputy Paul Murphy

Will the same monthly instalment be paid over a period of 25 years?

Mr. Gerard Cahillane

It will be the same monthly instalment but payment is subject to deductions to the extent that the facilities are not available or the services are not provided. If there are faults in the system, that will be picked up and the providers will not get paid. That puts pressure on the PPP company to quickly rectify any defects in the building.

Deputy Paul Murphy

Can our guests provide figures regarding what a 25-year contract for a school costs as a basis for comparison? Can they give me a hypothetical generalisation and outline the proportion that is made up of building costs and the proportion that constitutes maintenance costs? I understand that they are all rolled in together.

Mr. Paul O'Neill

The general rule of thumb is that the unitary payment for a capital project is roughly €10 million for every €100 million. In this case, the project is worth almost €100 million but the unitary payment is not €10 million, it is actually lower. It depends on what funding rates were secured at the time. For this project, the annual unitary charge is approximately €8 million. Of that, roughly one third relates to the ongoing facilities management and life-cycle expenditure.

Deputy Paul Murphy

How would that compare to the costs of the State simply directly building and maintaining the facilities itself?

Mr. Gerard Cahillane

We carry out a test called the value for money test before we sign the contracts. We compare the tendered price against a benchmark. That benchmark is what the cost would be if the State built the facility and maintained it for 25 years on a traditional basis. We compare the two figures. We had to carry out that test before we signed the contract, and it was favourable.

Deputy Paul Murphy

How does that make sense? Fundamentally, building materials, labour and maintenance each cost a certain amount. There are prices for these things, there are markets, competition, etc. What explains the difference? Obviously, in the private sector, layers of profit are built in. That is an extra cost the State is paying. All things being equal, this should result in the private sector being more expensive than doing it directly. If it is not, does that not raise a question about how other costs are somehow lower, because there is profit that does not exist in the public sector? How is that achieved? Is it achieved at the cost of cutting standards or wages? Where does it come from?

Mr. Gerard Cahillane

My colleague and I will share the answer to this. Profit arises whether the facility is funded traditionally or through a PPP. The contractor and FM companies assigned the job on a traditional basis also make a profit.

Deputy Paul Murphy

However, there is one less level of profit. The main contractor, the equivalent of Carillion in this case, does not exist if the State does it directly. The witness makes a fair point, however, in that a firm such as Sammon is still subcontracted.

Mr. Gerard Cahillane

One of the other factors we find is that there are economies of scale involved in these projects, which is a big factor in making things competitive.

Mr. Paul O'Neill

The way we look at it is that over the years, from a construction point of view, there is not much difference in building by the Exchequer and by PPP. As the Deputy said, the same input costs and so on are incurred. It is a fair point to say that if there are also funding costs, then surely PPP is more expensive. It is actually because of the 25-year facilities management and life-cycle costs. It is through the economies of scale and the associated savings that this partner can make by taking a 25-year outlook on those costs. The savings they can make in that respect outweigh funding costs.

Deputy Paul Murphy

I thank the witnesses.

Chairman

According to Mr. Cahillane, the role of the NDFA is to provide financial and general advice on proposed projects.

Mr. Gerard Cahillane

We provide advice on whether a project offers value for money to the State, for example, if it is procured as a PPP as against it being-----

Chairman

Mr. Cahillane says that its responsibility is for the procurement and delivery of PPP projects.

Mr. Gerard Cahillane

Correct.

Chairman

The NDFA failed to deliver these PPP school projects. When giving advice, what does it rely on for information? Is the information in its staff's heads or stored somewhere in its sections? What qualified people does it have to give this advice?

Mr. Gerard Cahillane

In most cases, we are delivering the projects, be they primary care centres or other bundles of schools. Ultimately, the schools in this case will be delivered. As to our qualifications, we have accountants, engineers and quantity surveyors on the team.

Chairman

What are Mr. Cahillane's qualifications?

Mr. Gerard Cahillane

I am an economist. My colleagues are accountants with banking experience. I have a great deal of risk experience.

Chairman

Mr. Cahillane stated that the audited accounts provided by KPMG to the company were flawed. Does that mean the NDFA will now sue KPMG? Is Mr. Cahillane contemplating that?

Mr. Gerard Cahillane

I have not contemplated that.

Chairman

Should he not?

Mr. Gerard Cahillane

What I-----

Chairman

I will put this in perspective for Mr. Cahillane. I read his opening statement and have listened carefully to his exchanges with other committee members. The Department and anyone associated with this situation are washing their hands of the issue that lies at its kernel, that being, the poor treatment of the SMEs concerned. What roared out of Mr. Cahillane's statement was an uncaring State. That is how I read it. There is no comfort in anything he has said for the contractors who are now out of pocket. The procurement process did not learn from the past mistakes of, for example, the National Roads Authority and other projects on which there was overspending or which were not delivered. Here we are again.

Mr. Gerard Cahillane

As I stated in my submission to the committee on 20 June, a clause in our contract requires the PPP company to confirm that the subcontractor has been paid on a monthly basis. As far as we are concerned, and as my colleague stated, the subcontractor in this case - Sammon - has been paid 98% of the moneys owed to it. The 2% that it has not been paid relates to the remaining works and some retention. The State has overseen the payment from the funders and the equity people to the subcontractor.

Chairman

In some of these new schools, the pupils are going to turn up and sit on new furniture that has not been paid for but that was provided at a cost of €250,000 and that the school, the Department, the NDFA, the company or whatever does not own. Under the supplier's contract, the goods are not the property of the schools until they are paid for. Will Mr. Cahillane allow that contractor to go into the schools and take back its furniture?

Mr. Gerard Cahillane

Our relationship is with the PPP company. It is a matter for the main contractor to deal with the subcontractors. That applies across all of the industry.

Chairman

But that is the problem. We are referring to the State. Mr. Cahillane stated that it would cost the State zero, but it will cost the State. Small companies will go bust and their employees, who will be out of jobs, will sign on for jobseeker's payments or whatever they can get.

There will be a cost to society and communities because those small businesses will be gone.

I was in business. It is not easy to get back to profitability having lost the kind of money we are discussing. If any of the SMEs is listening, it will draw no comfort from what Mr. Cahillane has said. SMEs will wonder where they fit into the figure of 2%, but they do not. They will be further down the chain. They will hear an uncaring state telling them that all of the other companies are responsible for this, that or the other and that the NDFA, because it has been hands off, cannot play a role. I suggest it can.

As far as subcontractors are concerned, the procurement process is flawed. The State has ignored the mistakes of the past. That is down to the advice the NDFA has given. I saw contracts work where there were a number of contractors involved and the person at the bottom of the line was still protected. If the State was caring and the NDFA advised accordingly, they would use the existing methods to protect the person at the end of the line - in this case, SMEs. What will the NDFA now advise the Government or whomever it advises to do to protect SMEs, including the company that is owed €250,000? What advice will it give in the context of the new contract on which it is engaging?

Mr. Gerard Cahillane

I am afraid that our hands are tied. Our contract is with the main PPP company. It is a matter for the works company to manage the relationship with the subcontractors.

Chairman

I am asking what advice the NDFA will give. Has it learned a lesson from this? In the light of Carillion's failure within the process, what will the NDFA tell the new contractor? What advice will it give to whoever is writing the contract to protect the payment of the last person in the line?

Mr. Gerard Cahillane

We have encouraged the new contractor to reach out to the existing supply chain. That is as far as we can go at this juncture.

Chairman

Obviously, the contractor will have won in a competitive tender process, but is there no line the NDFA can insert into the contract to require the contractor to employ people at the same rate they had been charging for goods and services?

Mr. Gerard Cahillane

These are private commercial matters between the main contractor and the subcontractors and we do not get involved in them.

Chairman

No, I am asking the NDFA to insert it into the main contract.

Mr. Gerard Cahillane

It is not our contract.

Chairman

What I do not like about the committee's conversation today is that the NDFA is dealing with many companies, but at the centre of this issue is taxpayers' money and the State. He who pays the piper calls the tune. Therefore, the NDFA has to do something to stop this. As part of a learning process on this issue, I am asking what it will insert into the new contract to protect everyone down the line from the main contractor.

Mr. Paul O'Neill

I will make two points. We do care. We have a duty of care which we clearly recognised by ensuring, when we entered into the contract in 2016, Sammon as an SME would be fully paid. We sought confirmation on a monthly basis that that payment was being made. I hope the Chairman will acknowledge this point. Our contract provisions did not allow for same in the case of the moneys flowing beyond that point, but equally that company had a duty of care.

Chairman

Could the contract provisions have allowed for that?

Mr. Paul O'Neill

Will the Chairman say that again?

Chairman

Mr. O'Neill said that beyond that payment, the contract did not stipulate anything. I am asking if it could have.

Mr. Paul O'Neill

Yes, it could have.

Chairman

Given the experience we have gained through the Office of the Comptroller and Auditor General investigating misspending and poor spending by the State, or just the downright laziness that caused the whole thing to fold up, would the NDFA not have learned from the experience and, in the context of this big contract, stipulated that down to the end of the line it was going to show how much it cared by putting it in the contract? Can it now put it in the new contract?

Mr. Paul O'Neill

The formal agreement has not yet been signed. As we are very keen to get workers on the ground as soon as possible, we have entered into what we call a letter of intent, an early works agreement. What we can endeavour to do is take the Chairman's point away and communicate it to the project company. We cannot mandate that it happen, but we can certainly do all we can to ensure it will engage with-----

Chairman

A minute ago Mr. O'Neill told me that the NDFA could not stipulate it to the nth degree. I am asking it to do so. I am also asking the question about the contractor as an example. Can we get back the school furniture that has not been paid for because it has not honoured the contract? It is stated in the contract that it is not its furniture until it pays for it. Are we going to play the role like everyone else plays it, saying it is not our fault, although we overlooked the particular contract and the moral duty we have to make sure everyone does his or her work correctly? Are we just going to turn a blind eye to it and allow it to continue? When does someone like the NDFA cry "stop"? That is the question. It is central to this because it gives the advice and its job is to deliver PPP projects. Its responsibility is procurement and that is where it all has gone wrong. If all of this had been included in the contract at the beginning and it had been bidding on the basis of that contract, the NDFA would not be dealing with this. Mr. Cahillane says it is an industry wide problem. That is not excuse. The State should be leading by example.

Mr. Gerard Cahillane

We have to operate within the existing legislation and regulations. As of now, the legal position is that when the State enters into contracts, it does not manage the relationship between the main contractor and subcontractors.

Chairman

That takes me back to the role as adviser. The NDFA has learned from the past and seen all of the reports of the Comptroller and Auditor General and we are here now. Will it now advise that this should happen? We create the legislation, but the Minister and the Department are advised by somebody at the coalface. The NDFA is at the coalface. Will it advise them where it has gone wrong? Will it tell them that they need to change the references or the detail of contracts?

Mr. Gerard Cahillane

That is a policy matter as to how it is treated. Unfortunately, we do not do policy.

Chairman

No, but the NDFA advises.

Mr. Gerard Cahillane

Yes, we advise within the existing rules and regulations.

Chairman

Where it sees that the rules and regulations are wrong and causing such problems in the SME sector, would it not just tell them to change the rules or the legislation? Is that not part of what it should be doing?

Mr. Gerard Cahillane

We will be happy to have those discussions.

Chairman

That is all I asked for.

Mr. Paul O'Neill

I agree that it is not just a PPP problem. The Chairman mentioned that he has seen it in our contracts. We advise on a lot of traditional contracts, Government contracts committee for construction, GCCC, contracts and, to the best of our knowledge, it is not a common feature of them. We would certainly recommend that it could be looked at.

Chairman

There is no harm in breaking a mould that does not work and introducing something that might put manners on the industry. Carillion may have been the cheapest bidder, but we have a great country; history tells us that we built America and England, including London. Some of the biggest companies of one kind or another are Irish made. Our attraction to going beyond our shores in procurement baffles me.

Mr. Gerard Cahillane

Under EU regulations and procurement rules, we have to open up the competition to Europe. This was opened up to all in the European Community.

Chairman

Going back to the issue of where goods are provided and are not paid for, is there any way of addressing that?

Mr. Gerard Cahillane

Again, the management of the supply chain and the subcontractors is a matter for the main contractors.

Chairman

People out there who are owed money will look at this meeting as a farce. It is the State that is offering the contract. It is taxpayers' money we are paying out. Surely to God we should have some respect for the SME sector, that at one stage employed 1 million people, and ensure that the State does things right and sets the example.

The witnesses should go away and reconsider the whole process of what they do. They have certainly contributed in no small way to all of this going the way it did. Yes, Carillion went bust but Mr. Cahillane stated the accounts were flawed, which is a very serious statement to make. Arising from that, there is an obligation on the National Development Finance Agency to sue the auditors, just as there was an obligation on the State to sue the auditors which audited the banks. Given that we are not yet in the territory where such a course of action is statute-barred, perhaps the NDFA should consider it while it is a live issue. I firmly believe that if the agency does not change and put manners on the industry and does not take on the auditors with respect to the flawed figures or whatever they provided, we will be at nothing because it will amount to an invitation to these companies to do the same thing over and over again. Will the NDFA sue the auditors?

Mr. Gerard Cahillane

I will take that away. We are not the regulator of the accountancy body and I think elsewhere-----

Chairman

No, the money comes from the NDFA and the auditors provided the agency with figures that were flawed. If these flawed figures formed the basis of an understanding about a contract, then the company in question misled the NDFA as much as the banks misled us in 2008. For this reason, the agency should ask its legal advisers if it has a case. If so, it should sue the auditors and put manners on them.

Mr. Gerard Cahillane

Absolutely, we will take that away.

Mr. Paul O'Neill

In respect of the figures in the preparation of the accounts, the numbers were not flawed but the opinion clearly did not highlight any issues with the trends the auditors were seeing.

Chairman

In that case, they were flawed.

Mr. Paul O'Neill

No, it was the trend-----

Chairman

The trend was flawed, so they were flawed. Mr. Cahillane said it. Sue them.

Deputy Pearse Doherty

On that point, a damning report came out from the House of Commons this week which castigated the big four accountancy firms - KPMG and also the other three - because all of them were involved in work with Carillion. While the impact here has been severe in terms of the disruption to these school projects and, as we have discussed, the issue of subcontractors providing services and not being paid for them, it has been harder felt with the loss of jobs in Britain. The House of Commons committee has called for the breakup of the big four. Given the witnesses' comments before our committee today, we could at least expect that the NDFA to report the companies to their regulatory body. In my view, there should be a case taken against them. I ask the witnesses to consider both options - the one the Chair mentioned and, as an initial step, reporting them to the Chartered Accountants Regulatory Board, CARB.

As to the reliance on auditors, how many PPP projects does the NDFA oversee?

Mr. Gerard Cahillane

There are about 25 PPP projects completed by the State. A number of those are well into operations, in particular all of the roads. One or two might be at advanced construction stage. In the accommodation space, there are seven or eight PPPs in the education sector, two in the justice sector, one in the health sector, one in the tourism sector and one in the waste sector, which is the waste energy project at Poolbeg.

Deputy Pearse Doherty

What is the combined value of those projects?

Mr. Gerard Cahillane

The combined value of all of those projects is between €5 billion and €6 billion. The roads would be the main part of that.

Deputy Pearse Doherty

While some projects are completed, Mr. Cahillane said there are others where the physical infrastructure is built but the PPP projects continue as there is a maintenance or management role.

Mr. Gerard Cahillane

That is correct.

Deputy Pearse Doherty

How many staff are assigned from the NDFA to oversee that €5 billion to €6 billion programme?

Mr. Gerard Cahillane

Total staff in the NDFA is approximately 60 people, of whom 20 are financial and approximately 35 of whom are on the project management side. We act as a financial adviser in respect of all PPPs, including the transport ones, but we are not directly responsible for procuring the transport projects.

Deputy Pearse Doherty

Regarding current or future PPPs, have any been announced in the last year? There is housing.

Mr. Gerard Cahillane

In social housing, three projects have been announced.

Deputy Pearse Doherty

They are selected. There are a number of bidders in that regard.

Mr. Gerard Cahillane

Correct.

Deputy Pearse Doherty

In the education sector, €200 million of investment has been announced.

Mr. Gerard Cahillane

That is correct. There is an intention to do further PPP projects in the education sector at third level.

Deputy Pearse Doherty

Has the process begun in terms of expressions of interest?

Mr. Gerard Cahillane

No. We are at the early planning stages of that project.

Deputy Pearse Doherty

How can the NDFA ensure another Carillion does not happen?

Mr. Gerard Cahillane

We will certainly take on board-----

Deputy Pearse Doherty

These are colleges. These are 11 projects across the country from Letterkenny right down.

Mr. Gerard Cahillane

Correct. Certainly, we will learn the lessons of this. We await with interest the outcome of the various investigations in the UK on accountancy practices. There is also an investigation into the profit warnings issued by the Financial Conduct Authority in the UK and there is a further investigation by the Pensions Regulator in the UK. We will certainly read those with interest.

Deputy Pearse Doherty

Some of those will take time to conclude.

Mr. Gerard Cahillane

Some of those are ongoing for some time. They will be concluded before we go to market on these new projects.

Deputy Pearse Doherty

Is it the case that the NDFA cannot identify any lessons at this point and is waiting for the British reports? Does it have any lessons it can share with the committee at this point in time?

Mr. Gerard Cahillane

At this point in time, we do not have any. We applied best practice and there is nothing to add.

Mr. Paul O'Neill

The important thing is not to rely solely on an audited opinion when making an assessment. Currently, we do not do that anyway. I refer to a comment I made earlier. We try to broaden what we look at. If one looks at Irish contractors, most, if not all, are not listed on any stock exchange and they are not rated. We are mindful we have the audited accounts and it is a question of what else we can do on top of that to ensure the assessment is robust.

Deputy Pearse Doherty

Let us dig into that a little. Carillion collapsed at the start of January this year.

Mr. Paul O'Neill

Correct.

Deputy Pearse Doherty

I cannot remember the exact date. When did the alarm bells start to ring in the NDFA regarding problems within Carillion?

Mr. Paul O'Neill

It was really with the profit warning in July 2017. That was the key indicator from our perspective. At that point, the contract had been awarded for 12 months and the schools were 60% complete.

Mr. Gerard Cahillane

They were 60% to 70% complete.

Deputy Pearse Doherty

What did the NDFA do after the profit warning in July?

Mr. Paul O'Neill

As per the terms of the contract, we met regularly with the project company. Because we have a project management team in house, it was on site regularly to monitor construction progress.

Clearly, when that came out, we recognised its seriousness. As such, we escalated our engagement with Carillion significantly up to managing director level of the Carillion private finance entity responsible for putting the money into the project. We continued to meet the company regularly over the next seven or eight months until the liquidation date. From our point of view, we looked at our contract and the provisions within it. It is important to recognise that even after the profit warning, there was no termination event or event of default under the terms of our contract. It was a profit warning. We recognised that Carillion was providing equity, the construction, albeit through a subcontractor, and the ongoing facilities management services. We tracked the equity to ensure it went into the project and it was committed fully by the end of December last. We relied on the fact that Sammon was the incumbent subcontractor providing boots on the ground to do the works. As such, we thought it was reasonably well safeguarded and that we would only have to worry about the long-term facilities management contract. We knew at that point that it could be retendered as is currently happening.

Deputy Pearse Doherty

Did the NDFA have any concern about the liquidation of Carillion at any point during that process?

Mr. Paul O'Neill

We did, of course.

Deputy Pearse Doherty

What safeguards were put in place? Did Carillion assure the NDFA that liquidation would not happen after the July profit warning?

Mr. Paul O'Neill

It did. We met with them. We sought assurances in writing and met its representatives multiple times. Each time, they gave us those assurances.

Deputy Pearse Doherty

There was a subsequent profit warning in September and another profit warning in November. When did the light go on that this place was going down the tubes and this company was no longer there? It was not just profit warnings; 25% of shares in Carillion were being shorted at the time by companies like Blackrock, which the State has many engagements with. There were other warnings about Carillion's pension pot. It seems as if the NDFA was caught in the headlights.

Mr. Paul O'Neill

That is not true. There was no default under our contract. The project company was performing and the project was performing. Even after the profit warning, construction works continued as normal. It escalated with the July 2017 profit warning and the Deputy is correct that things only got worse from that point. On 31 December last, Carillion committed its equity into the project fully. Even at that date, it was fulfilling its obligations under the contract. The way these projects are structured is that they are ring-fenced and do not rely on corporate facilities within the group. The funding debt and equity is ring-fenced. It was previously agreed at financial close that this money would go in. From that point of view, we were safeguarded. We were mindful of tracking the construction programme. At the end of December last, all schools were 90% complete and we were monitoring that throughout.

Deputy Pearse Doherty

Mr. O'Neill says the debt was ring-fenced but the company increased its debt by 50% between September and January, within that three months before it went into liquidation.

Mr. Paul O'Neill

The debt is being provided by two banks. As such, the money was locked in at financial close in July 2016. What Carillion was providing was equity financing.

Deputy Pearse Doherty

Given all of those assurances, how could the NDFA learn any lessons? Mr. O'Neill has just told me that everything was in place. Every assurance was made, the debt was there, the company was paying and all the rest of it. Regardless of what the auditors said, the NDFA was getting the assurance and was satisfied that everything was going to be okay. As such, how can it learn any lessons?

Mr. Paul O'Neill

One can always learn. I do not want to sit here and say we would not. I go back to the point that we felt we did as much as we could from a robustness point of view at that time. However, we are open to looking to do more in that respect. As my colleague mentioned, when the profit warning came out, it was a clear indicator to us that the problems were happening and the company was not shortlisted on a social housing bundle at the time.

Deputy Pearse Doherty

It was not shortlisted. Did it apply to be?

Mr. Paul O'Neill

It did.

Deputy Pearse Doherty

Was it on the pre-qualification list?

Mr. Paul O'Neill

No. It sent in an expression of interest at pre-qualification stage and we did not shortlist it for the social housing bundles.

Deputy Pearse Doherty

Was that due to concerns on foot of the profit warning?

Mr. Paul O'Neill

Correct, yes.

Deputy Pearse Doherty

I go back to the core issue. In correspondence to the committee, the NDFA indicated that it expected the contracted works company under the PPP co-entity to honour all of its obligations to the subcontractor.

How did the agency expect they could do that?

Mr. Gerard Cahillane

We have a monthly monitoring regime and every month we get a statement from the PPP company to that effect. In my statement of 20 June I included a copy of the last verification, showing they had fully paid all that was due to the subcontractor.

Deputy Pearse Doherty

Which company is that?

Mr. Gerard Cahillane

The works company is Carillion

Deputy Pearse Doherty

That is a red herring. Mr. Cahillane is only talking about the subcontractor, which is Sammon.

Mr. Gerard Cahillane

That is very important.

Deputy Pearse Doherty

Sammon is in liquidation. We are talking about the numerous subcontractors in every part of the island of Ireland. Mr. Cahillane is saying he will ensure the liquidated company will honour its obligations to the other liquidated company. The problem is that all the other companies, which might end up going into liquidation, will be on their own.

Mr. Gerard Cahillane

No. For clarification, the funding came from private banks and from equity and we are happy that the bank debt was fully drawn by the end of December and was paid out to the subcontractor here.

Deputy Pearse Doherty

Yes, but it was not paid on to the other subcontractors

Mr. Gerard Cahillane

Perhaps. We have now learned that some was not paid on to small subbies.

Deputy Pearse Doherty

Does Mr. Cahillane know how many subcontractors Sammon had?

Mr. Gerard Cahillane

I believe it had 160.

Deputy Pearse Doherty

Does he have any indication of how many are still owed money by Sammon?

Mr. Gerard Cahillane

I do not.

Deputy Pearse Doherty

I appeal to the agency to do something. Surely the witnesses can go and look at its contract with Woodvale. The best way to show empathy, which the witnesses said they would do, would be to ensure Woodvale engages with the subcontractors. It would be wrong to take advantage of subcontractors by benefitting from their work without paying them. The State and its legislators have an issue here which we need to address. We need to build on the work done by former Senator, Feargal Quinn, and to do it urgently. There is an opportunity for the State to lead by example and Mr. Cahillane is the person who needs to do that. He needs to revisit the contract with Woodvale to make sure there are no glitches down the road in the form of legal or insurance issues. He needs to tell Woodvale that, while it has engaged with some subcontractors and is going to pay them, it needs to engage with all of them. The NDFA needs to make this a condition of its contract with Woodvale. At the end of the day, the NDFA has to sign off on quality assurance matters. It can refuse to sign off without certification from the suppliers and the installers. That is what is in the law that was passed in these Houses.

Mr. Gerard Cahillane

Yes.

Senator Rose Conway-Walsh

When the first profit warnings were coming in, at what point did the NDFA contact KPMG? Did it formally contact KPMG to tell them that their financial opinion in the audited accounts appeared to be incorrect?

Mr. Gerard Cahillane

No, we did not contact KPMG at all. We contacted the various other entities who were in the contract to which we were a party.

Senator Rose Conway-Walsh

Has the NDFA had any formal engagement with KPMG?

Mr. Gerard Cahillane

No.

Senator Rose Conway-Walsh

None whatsoever. I suggest it does so.

Chairman

I thank members and witnesses for their attendance.

The joint committee adjourned at 3.10 p.m. until 9.30 a.m. on Thursday, 5 July 2018.