Committee Reports > List of Committees > Joint > 1994 > Committee on Commercial State-Sponsored Bodies > Report - National Building Agency Limited

MEMBERS OF JOINT COMMITTEE

1. Introduction

1.1This is the second occasion on which the Joint Committee on Commercial State-Sponsored Bodies has examined the affairs of the National Building Agency (hereinafter referred to as the Agency).

1.2In this review, the Joint Committee decided that it would concentrate its enquiries on the following areas of strategy and policy concerning the Agency:

○the Agency’s evolving role as envisaged in its corporate plan, the funding implications of the plan, and the long term viability of the Agency;

○whether the Agency’s public service status affords it an unfair advantage over private enterprise and whether it operates its consultancies on a commercial basis;

○how the Agency came to be involved in the consultancy field;

○the Agency’s land bank policy and related matters;

○an assessment of the Agency’s role in helping to initiate urban renewal and development, and social housing.

1.3The Joint Committee met with the directors and senior management of the Agency on the 6th July 1993 and on a second occasion on the 4th November 1993. The Joint Committee would like to thank the Directors for the information they provided to the Joint Committee during those meetings.

1.4In addition they would like to record their appreciation of the assistance that the Agency, officers of the Department of the Environment, and some officers in local administration gave to this examination.

1.5The Joint Committee appointed Ernst and Young as its specialist advisors for the purposes of this review.

1.6The Joint Committee wishes to thank its consultant, Aidan Clarke of Ernst and Young, for his assistance and co-operation in the preparation of this report.

2. Summary of Findings and Recommendations

2.1The Agency’s original raison d’être was to provide housing for industrial workers and public officials, e.g. Gardaí, for whom housing was not readily available. It has had a market share of 15% to 20% of building houses for local authorities over the years. The core business of the Agency has extended since 1985 into providing a consultancy and management service to local authorities (paragraphs 3.1 to 3.6).

2.2In 1987 activity in the Agency’s core business declined as a result of public policy, for a period of four years (paragraph 3.8). The Agency underwent substantial transformation as a result. The Agency was encouraged to move into other areas of operation (shared ownership housing and urban renewal) to remain viable (paragraphs 3.9 to 3.11, 6.1).

2.3In the 1994 Budget, it was stated that tax incentives for urban renewal would be continued and extended so that there will be ongoing work in this area. Tax driven reconstruction has also encouraged other non tax-based projects. In addition, local authorities and agencies have extended their construction needs in recent years. The Agency is seeking to exploit these opportunities to reduce its dependency on local authority housing (paragraph 3.14)

2.4The Agency has a good reputation for the local Authorities for whom it works both in the areas of local authority house building (papagraph 3.7) and urban renewal (paragraph 6.8).

2.5The Agency has never sought to compete with the private sector outside of its own specialist areas (paragraphs 4.1, 4.4, 4.5). It only accepts consultancy contracts from the private sector from close contacts, and will give way to commercial developers on the most profitable opportunities it identifies while giving urban renewal advice. (paragraphs 4.2 and 6.5).

2.6The Joint Committee is concerned with the traditional dependence of the Agency on local authority house building (paragraph 3.17) which, in the 1980s, led to the Agency’s resources being underutilised (paragraph 4.2). The recent increase in the housing programme has meant that an adequate level of profitability can be achieved (paragraph 3.13). However, the Joint Committee believes that an Agency whose viability is solely dependent on public policy towards local authority house building is not guaranteed long term viability. The Joint Committee therefore recommends that the Agency develop new markets for its services and adopt clear commercial objectives in the new spheres of operation (paragraph 3.17).

2.7The Joint Committee considers that the expertise of the Agency in urban renewal may be under-utilised. The Joint Committee recommends that a more commercial approach to urban renewal should be adopted. (paragraph 6.10).

2.8The Committee recommends that the Annual Report and Accounts of the Agency should provide comprehensive information on the consultancy activities of the Agency in both the public and commercial sectors (paragraph 4.6).

2.9The Committee has reviewed in detail the circumstances concerning the disposal of land at Mulgannon, Wexford at a loss (paragraph 5.8 to 5.12). The Committee reminds the Agency of the necessity to comply with established procedure for the disposal of public sector land by competitive tendering (paragraph 5.18), and for control mechanisms to supervise any disposals where circumstances militate against standard procedures being used (paragraph 5.12).

2.10The Joint Committee is dissatisfied with the Agency’s management of the land bank

○insufficient action appears to have been taken to protect the value of land holdings (paragraph 5.11);

○lack of consistency in the capitalised book holding charges prevents the Joint Committee from forming a proper opinion on this issue (paragraph 5.15).

2.11The Joint Committee recommends that the management reports of the Agency should present a clear record of all accrued costs of holding land at current interest rates, and that the market value of land should be included in the notes to the accounts (paragraph 5.17).

2.12The Joint Committee recommends that a policy and objectives for Social Housing should be developed by the Department of the Environment with a clear role for the Agency in the promotion and development of such schemes (paragraph 6.17).

3. The Evolving Role of the Agency

3.1The original role of the NBA was to provide housing for public servants such as Gardaí and for industrial workers. In 1977 some aspects of this role were transferred to the Housing Finance Agency.

3.2The primary role of the NBA is now the provision of a consultancy and management service to local government agencies engaged in building houses and in building work associated with the provision of other services such as libraries and fire stations.

3.3The Agency may receive as much as 80% of its fee income from its work for local authorities. It is regarded by the local authorities (city boroughs and urban district councils) which use it as particularly efficient and cost effective on large scale housing projects. These authorities continue to use their own resources, or private architects and quantity surveyors, on small projects.

3.4The Agency over the years has maintained a market share of 15% to 20% of new local authority housing starts. In 1983 the Agency was responsible for 1,147 new starts out of 7,084. In the current year it is estimated that the Agency will be responsible for 500 new starts out of 3,500.

3.5A list of the Agency’s current local government clients is presented in Appendix A. The principal sources of the Agency’s work are urban district councils, boroughs, and city boroughs. The housing schemes of county councils, apart from Dublin County Council, with whom the Agency does have a program, tend to be too small and isolated to present economic opportunities for these councils to commission the Agency to work with them.

3.6To ensure that a local authority’s plan of housing starts is achieved, the Agency offers it architectural, engineering, quantity surveying and administrative services. It is important to note that, when a local authority uses the Agency, the contract to build is between the Agency and the builder. The local authority is not contractually involved. The Agency will conform to Departmental specifications in its operations, and the cost plan of the project will be cleared through the Department, as with any other local authority housing project.

3.7In the low cost housing initiative of the 1970s the Agency played a role in the provision of unsatisfactory housing. The Agency’s role in the initiative was examined by the Joint Committee’s review of the Agency’s affairs in 1980. The lessons of this period have been addressed. The Agency has a good reputation with the local authorities for whom it now works.

3.8The demand for such services depends very directly on state funding for local housing. In 1987 there was a very significant reduction in State funding which led to the very substantial programme of staff reduction presented in Appendix B.

3.9This downturn resulted in a significant decrease in Agency’s core business. It was encouraged by the Department of the Environment to use its expertise in the implementation of government policy in other areas. The 1986 Finance Act contained tax provisions which encouraged urban renewal. This afforded the Government and the Agency such an opportunity. The Agency was encouraged to take a active role in urban renewal. Recent Government initiatives in the area of affordable housing have presented further opportunities in the area of social housing and shared ownership.

3.10The Agency recruited a team of urban designers, some of whom had international experience. The Agency’s role in urban renewal is primarily as advisor rather than as developer. The Agency will step back if public funds are not required for a development.

3.11The effect of this policy has been that the typical involvement has been with the larger towns such as Waterford, Sligo, Athlone, Wexford, and Carlow, where progress without the participation of the Agency would have been more difficult. The Agency has not been involved with the larger, commercially attractive city centres, such as Dublin, Galway, and Limerick.

3.12The Agency has not been encouraged over the years to accept commissions from private clients. Some small commissions have, however, been accepted. In particular, the Agency used the opportunity to act as planning advisors to the Powerscourt Estate to avoid incurring serious losses when the local authority house building programme ceased in 1987.

3.13The Government re-introduced a programme of local authority house building in 1993, so that the Agency again has a viable core business for the short term. The corporate plan of the Agency for the next two years anticipates an adequate level of profitability based on 500 local authority houses a year, and a continued contribution from urban renewal and social housing operations.

3.14It was announced in the 1994 Budget speech that tax incentives for urban renewal would be continued and extended so that there will be further work in this area. Tax-driven reconstruction has also encouraged other non tax based projects. In addition local authorities and agencies have extended their construction needs in recent years. The Agency is seeking to exploit these opportunities to reduce its dependency on local authority housing.

3.15An analysis of fees and net profitability, of the Agency is presented in Appendix C for the years 1987-92 and of projected profitability for 1993 and 1994.

3.16As a result of this increase in profitability, the Agency anticipates a positive cash flow in its corporate plan. The plan provides for repayments of funds due to the Exchequer of £500,000, and an increase in cash balances after absorbing increases in working capital due to its social housing programme. The Agency has adequate cash reserves and is well-positioned to fund its corporate plan.

3.17The Joint Committee believes that an Agency whose viability is solely dependant on policy towards Local Authority housing is not guaranteed long term viability. The Agency must develop other markets for its services. The Joint Committee believes that this response is not desirable unless clear commercial objectives are established in the new spheres of operation.

4. The Agency’s Consultancy Activities

4.1The Board of the Agency has not been encouraged to seek substantial work in the private sector and only four private consultancies have been undertaken in recent years. These are:

○planning advisors to the Powerscourt demesne.

○design service to the Clashganna Mills Trust.

○refurbishment contract for the Grapevine Centre.

○financial, engineering, and quantity surveying services to the Bar Council for the Church St. project.

4.2The Joint Committee was advised that the Powerscourt commission arose through a personal contact at a time when, through the lack of an active public housing programme, the resources of the Agency were under-utilised. The Board saw this opportunity as a means of preventing the Agency from falling into a loss-making position, and willingly accepted the commission. They considered that their view of the potential uses of the Demense would be in the public interest.

4.3The Agency advised the Joint Committee that its contract for the provision of a long term development plan and the achievement of planning permission for the Powerscourt Estate was completed satisfactorarily. A revised planning application has been submitted. The Joint Committee notes that the Agency is not continuing as advisors to this application.

4.4The Agency’s consultancy activities in the private sector are therefore not material to an assessment of the Agency as a business in its present form. Indeed these consultancies are only budgeted to achieve 2% of the Agency’s fee income over the next two years.

4.5The Joint Committee is advised by the management of the Agency that they do not have the resources to seek and undertake commissions outside their normal sphere of operations on a regular basis.

4.6The Joint Committee recommends that consultancy activities in both the public and commercial sectors should be comprehensively itemised by the Board in the Annual Report and Accounts.

5. The Land Bank Policy of the Agency

5.1Appendix D shows how the land bank of the Agency at 31 December 1979 has been used in the intervening period. The holdings ranged from a holding of forty five acres, to individual sites of little potential. These holdings arose as a result of Government industrial policy in the 1970s, as discussed in paragraphs 5.3 to 5.9 below. Some of these holdings have since been used by local authorities and others without potential have been disposed of, so that only sites with potential are now left.

5.2Appendix E shows the Land Bank of the Agency at 31 December 1993. The percentage value of holdings by potential use is:

5.3The large land bank held in the late 1970s and early 1980s was caused by the process by which housing for industrial executives and workers for new IDA sponsored projects was provided.

5.4When the IDA first built factories on the Waterford and Galway Industrial Estates in 196, 7 it became obvious that the IDA would have to arrange houses very quickly for key workers who would be brought into the areas in question. The purpose of the IDA’s involvement at all times since then has been to ensure that the recruitment of key workers who were not locally available would not be jeopardised because of lack of housing. The IDA was empowered to deal with these issues in association with the Agency by the Industrial Development Act, 1969.

5.5The Agency worked very closely with the IDA, both at the strategic and tactical levels. The IDA set policy and indicated needs, both at a strategic and specific level. The Agency implemented policy by undertaking the purchase of suitable land as it became available. These purchases were funded by the Exchequer.

5.6Holdings of unwanted land came about because:

○land was purchased for strategic reasons which did not materialise;

○land was purchased for specific incoming investments which were cancelled or scaled down;

○in the later years of the programme, the labour pool for new industrial investments did not require housing.

5.7This role terminated in 1982 when the IDA’s activity in housing ceased, although the legislative position was not changed until the 1986 Industrial Development Act.

5.8When the land was purchased in the 1970s, this overall policy was considered both beneficial and vital to the industrial growth of Ireland, by both the IDA and the Department of Industry and Commerce. This opinion has not changed with hindsight. The policy was not assessed until the early 1980s. With its low profile, the Agency appears to have been overlooked in any assessment of this policy until now. This is not surprising as the financial consequences of the policy for the NBA were not very significant and were capable of being absorbed by the general profitability of the Agency. Only the site at Mulgannon, Wexford, appears to have incurred substantial loss, and to have caused substantial controversy regarding its future use.

5.9Certainly the policy did have the unforeseen result of leaving the Agency with a series of holdings of mixed quality in country towns which it has had to dispose of. The Joint Committee in its last review of the Agency in 1980 examined this issue. The Joint Committee was then not dissatisfied with the policy of the Agency in offering land first to Local Authorities at values based on either the valuation set by the Commissioner of Valuation, or at the original cost plus holding charges “provided that the selling price of any portion of the land bank does not fall below the original price plus holding charges”¹

5.10In general, these procedures resulted in the larger sites being sold to local authorities for housing and amenity use, and the smaller sites being sold off for a variety of private uses at values reasonably consistent with this policy. The particular controversy surrounding the land at Mulgannon, Wexford, made its disposal according to this policy, and at the target value, difficult. In addition, the normal procedures for the disposal of public sector land were not followed. The Joint Committee does not approve of the procedures used in this instance.

5.11The Joint Committee is dissatisfied with the effectiveness of the Agency in managing its land bank. The Joint Committee considers that the Agency could have been more pro-active in seeking planning permission or other appropriate use to maintain the value of the land in its possession. Had such policies been operated, the need to depart from standard procedures for the disposal of land in the case of the Wexford property may not have been necessary.

5.12In this review, the Joint Committee confirms that a policy of disposal at valuation or original cost plus holding charges is appropriate to land disposals by the Agency. In addition, the Joint Committee is concerned that proper competitive procedures should also be used. The disposal of land at a loss without the use of competitive tendering processes should be the subject of control mechanisms.

5.13In two cases, the land holdings had good potential, and the value placed on the land by the Valuation Office resulted in a profit of £126,000 over cost plus holding cost (see Appendix D).

5.14In two cases, land acquired for executive housing in 1968 in Wicklow, and in 1974 in Clarinbridge, Galway, has become of sufficient potential to be developed profitably with houses for sale for private ownership. These two developments are part of the Agency’s corporate plan. The increase in the value of the land over holding cost is less than £25,000, and the total opportunity is not significant in the overall context of the Agency’s operations.

5.15The book value of the land bank has not been consistently managed over the years. Originally the interest costs of holding all land was capitalised. When interest costs became very high in the early 1980s, this policy was stopped because the policy was resulting in book values which would not be realised. The effect of this is that it is difficult to validate gains or losses estimated on land bank transactions. The Joint Committee is dissatisfied that it cannot assess accurately the success or otherwise of the agency in managing its assets.

5.16The sites on Greenhills Road, Wicklow, are carried at valuation. This policy was adopted in this instance because the sites were partially developed in 1991, and development work was carried out to allow the construction of a further six houses. The revaluation takes into account interest capitalised and the development work undertaken.

5.17While the Joint Committee accepts that prudence prevents the capitalisation of interest costs in Annual Reports and Accounts, when these costs will not be ultimately recovered, the Joint Committee recommends that the management reports of the Agency should present a clear record of accrued holding costs of all land at current interest rates, and that these should be consistently incorporated into project accounts, including urban renewal projects conducted through joint venture. The Joint Committee would also like to see the estimated market value of the land bank incorporated in the notes to the Annual Reports and Accounts.

5.18The Committee reminds the Agency of the necessity to comply with established procedure for the disposal of all land owned by the public sector by competitive tendering, including land held for urban renewal.

6. Urban Renewal and Social Housing

Urban renewal

6.1With the encouragement of the Department of the Environment, the Agency formed a team of qualified urban designers, some with international experience, to enable it to provide worthwhile assistance to local authorities seeking assistance in this area.

6.2The Agency has been involved in urban renewal projects in the following cities and towns:

As developers:

○Dublin

○Wexford

○Waterford

○Carlow

○Athlone

○Cork

As planning advisors:

○Clonmel

○Drogheda

○Tullamore

○Dundalk

○Letterkenny

○Enniscorthy

○Ballina

○New Ross

○Sligo

○Gorey

○Castlebar

○Dungarvan

○Longford

○Galway

6.3The opportunity for urban renewal projects was created by the tax incentives provided by the Government for urban renewal, initially in the Dublin inner city, and then extended to a total of 23 major towns throughout the country. It was announced in the Budget Speech on 26th January that the tax incentives are in would be extended again in the 1994 Finance Act, so that urban renewal activity will increase in the short term.

6.4The primary role of the Agency is as advisors. The local authority must have a view of what is good planning in each individual case and the mix of buildings and facilities which are advisable. The Agency will undertake a reconnaissance survey, determine why the site has not been developed, draft indicative plans, identify land ownership of sites involved and assist in progressing compulsory purchase orders, as necessary.

6.5The Agency’s draft indicative plan may show that good planning in a particular case may be commercial. If viable, commercial interests will then undertake the development and the Agency will step back.

6.6The Agency has participated in developments where private interests have been unwilling to make the initial investment in the area concerned and, in some of there cases, the Agency was able to identify a partner willing to enter into a joint venture to undertake the project. The Agency’s involvement in Wexford is the best example of this process. It is the Agency’s experience that the residential aspect of urban renewal has been disappointing, and that it has a role in explaining this and promoting the residential component of urban renewal.

6.7Once the Agency becomes involved in the development, normal commercial criteria will be applied. The viability of the project will be researched in depth, and the development will be undertaken on a phased basis to reduce risk.

6.8It appears that the Agency has acted beneficially in assisting with Government policy. The towns where it has been involved appear to be less obviously commercial than others. Local government officials consulted were appreciative of the Agency’s role in enabling urban renewal.

6.9It is the Agency’s experience that the tax incentives have promoted inner city renewal in other non-designated areas. If tax incentives now ceased, there would be ongoing demand for planning and reconstruction work.

6.10The Joint Committee considers that the expertise of the Agency in urban renewal may be under-utilised. The Joint Committee recommends that a more commercial approach to urban renewal should be adopted.

Social Housing

6.11Shared ownership is a new scheme to provide housing in the £30,000 to £40,000 price bracket in an affordable way to people who would normally be local authority tenants, whether actual or eligible. The objective of the scheme is to reduce housing costs to local authorities.

6.12The occupier is part owner from the very beginning. He or she receives a 50% mortgage from the Housing Finance Agency (HFA). The occupier then rents the half that he or she does not own from the local authority. When the first half is paid for, the occupier then proceeds to buy the second half, effecting full ownership over forty years instead of twenty.

6.13The Agency’s role is to use its expertise in large scale housing projects, and its resources, to facilitate local authorities wishing to provide this type of owner occupier housing. The process is relatively risk free, except that the selling price of the houses must recover all the costs involved. Emphasis is placed on good design to give value for money, and to differentiate these houses from other local authority housing.

6.14The service the agency offers to local authorities in the provision of social housing includes:

○preparing plans;

○seeking planning permission;

○inviting tenders;

○determining the selling price based on the accepted tender;

○providing bridging finance to allow the scheme to be built.

6.15The local authority has the responsibility to provide the site. It must confirm to the Agency that it has prospective occupiers, complete the mortgage arrangements, and refund the Agency with money obtained from the HFA.

6.16T The Agency’s corporate plan is to finance the building of 100 of these houses a year, from which it will derive a contribution to overheads of up to £100,000 in 1994.

6.17TThe Joint Committee regards this involvement in social housing as peripheral to both the Agency’s business and the development of shared ownership schemes in Ireland. The Joint Committee would like to see a policy and objectives for social housing developed by the Department of the Environment, with a role for the Agency in the promotion and development of such schemes.

(Signed) LIAM KAVANAGH, T.D.

Chairman of the Joint Committee.

March 1994

¹Tithe An Oireachtais Joint Committee on State-Sponsored Bodies Twelfth Report National Building Agency