Committee Reports > List of Committees > Dáil > 1996 > Committee of Public Accounts > Final Report - Appropriation Accounts 1994

COMMITTEE OF PUBLIC ACCOUNTS

FINAL REPORT ON THE APPROPRIATION ACCOUNTS 1994

PARTICULAR ACCOUNTS

MARINE

1. Harbour Projects

The Report of the Comptroller and Auditor General (C&AG) drew attention to two projects involving harbour development works at Burtonport, County Donegal, and Kilmore Quay, County Wexford, both of which were of considerable concern to the Committee.

In October 1992, following its examination of the Dingle harbour project, a previous Committee recommended that, in all future harbour development works, the Department of the Marine should ensure that development proposals were properly researched and planned and that all expenditure would be fully sanctioned before the commencement of the work. In both these cases it appeared that these recommendations had not been followed.

a) Burtonport

From the outset, progress on the Burtonport project had been extremely unsatisfactory due, in the Department’s view, to inefficient work practices of the contractor. The contractor, in turn, blamed adverse weather conditions and the Department who, he claimed, failed to inform him of previous drilling and blasting carried out by the OPW on the site. The Department stated that this issue was insignificant as it had occurred in only a small part of the site and had been carried out 25 years previously.

Following the submission by the contractor of a claim for £705,000, on the basis of costs incurred, legal advice was obtained by the Department which was critical of the absence of a formal contract for the works, a matter which was also of concern to the C&AG. The Accounting Officer stated that the absence of a formal contract in the case had no bearing on how the situation had evolved. The contract procedure had been in existence in the Department for some time and, by and large, had been successful. The absence of a formal contract had not restricted the Department in any way, although counsel had observed that it would have been preferable to have had formal contracts. The advice recommended that the least cost option was to negotiate a new agreement with the contractor rather than terminate the contract and seek fresh tenders. The Department came to an agreement with the contractor that he would complete the work for the fixed sum of £560,000, (nearly £300,000 more than his original tender price) and a new target date of November 1995 was set for the completion of the project. The work in Burtonport was completed on 22 March 1996, some 18 weeks after the target date.

In evidence, the Accounting Officer pointed out that tenders had been sought for the project and site investigations had been carried out. The average tender received was £600,000, and the lowest tender submitted was approximately £260,000. In order to assist the Department in making a judgement as to which tender to accept, a full assessment had been carried out. The Department’s estimate was that it could cost £250,000 to £300,000 and as a result, it decided to accept the lowest tender. The problem which arose had not been in relation to the cost, but was as a result of an incorrect assessment of the management ability of the contractor to deliver, despite the fact that a thorough assessment, involving numerous tests and examination of the contractor’s track record and capabilities, had been carried out by the Department.

The Accounting Officer admitted that the situation had been most unsatisfactory but stated that had it been decided to go for a £700,000 contract, from an international contractor, the project could have been completed in less than six months but at a substantially higher cost. At the conclusion, the outturn of £518,095 was below the average tender price. (The negotiated contract price had been a lump sum payment of £560,250. When penalties of £38,000 - for the 18 week delay - and other deductions for charges incurred by the Department as a result of the delay, had been taken into account, the final payment of £518,095 was made to the contractor).

b) Kilmore Quay

In relation to the Kilmore Quay project, the initial problem in relation to the contract concerned the underpinning of the existing pier. The method of underpinning, selected by the contractor and recommended by the consulting engineer, was unsuccessful and there was no prospect of completing the work at anywhere near the contract price of £126,000. The contract was terminated and the contractor was paid £65,800 for work done. The consulting engineer was discharged and the work was undertaken by the Department by direct labour at a final cost of £271,000.

The lowest tender received for another phase of this particular development, the dredging contract, was £408,000. No contract was entered into because the Department decided on an alternative way of carrying out the work, again through the use of direct labour. It was pointed out that although the cost of dredging by direct labour was £350,000 greater than the tender amount, the method used enabled a much larger area than originally envisaged to be dredged and also facilitated the economic performance of other necessary works at the site.

The Accounting Officer told the Committee that, following the withdrawal of the original contractor, the original concept of the project had been changed by the Department’s engineers and rather than carrying out the project under water in the harbour without any drainage (as recommended by the consultants) had carried out the project “in the dry”.

The Accounting Officer told the Committee that the contract, as organised by the Department, had been concluded at a cost substantially below what it would have been had consultants been engaged. Indeed, he estimated that approximately £2 million had been saved on that project vis a vis the original concept. However, he could not give a final cost figure in relation to the project as there was still a minor amount of work to be carried out, although he stated that, at the time of the examination, some £2.8 million had been spent and the final contract amount was £2.95 million, which he expected to be the final amount. The Committee requests that it be informed of the final cost in relation to this contract.

Since the problems referred to had arisen, consultants had been commissioned by the Department to review procedures for the administration of contracts. Standard guidelines for contracts had been issued by the Department and the Committee was told that all current contracts were being administered in accordance with these guidelines.

While the Committee welcomes the implementation of new guidelines in relation to contracts it must again express its serious concern about the way these projects were managed and costs were allowed to escalate. The fact that similar problems had arisen in the past should have been reason enough for the Department to take particular care in relation to these projects. The Committee stresses that formal contracts should always be entered into in relation to large and costly projects and that particular attention should be paid to the choice of contractors. It also urges that consultants on any public works contracts should be aware of, and held accountable for, their responsibilities in carrying out their contracts..

The Committee hopes the new guidelines will prevent a recurrence and wishes to be informed of the methods being adopted by the Department in relation to other similar projects in the future. It hopes it will not have to refer to matters of this nature in future, particularly in relation to projects undertaken by this Department.

HEALTH

2. VHI Payments to Health Agencies

The Report of the C&AG summarises the financial effects of the VHI cap on health boards and voluntary hospitals for the three year period ending in February 1995. The cap represented a measure whereby the Department set a cash limit on the amounts hospitals would be paid each year by the VHI in respect of private patient charges. Over the three years, almost £9 million of income had been forgone by the hospitals as a result of the arrangements.

In evidence, the Accounting Officer outlined the background to the situation.

A policy decision had been made in 1991 to evolve a transitional arrangement over three years, which would address some of the problems being experienced in relation to the changing public health situation. During that three years the Department, acting on behalf of and in conjunction with the health boards and the hospitals, sought to agree a cap on the VHI’s liability while supporting and seeking agreement from the hospitals and health boards that they would manage their expanding private output within that limit.

Between 1992/93 and 1994/95 there was an income increase of £28 million and at the same time the Department provided a service out of public funds, which cost almost £10 million. It emerged that prior to 1991, there had been a significant loss to public hospitals because private patients were not being identified. In one instance, one major hospital had only collected 18 per cent of all the charges it might have levied on the VHI in the years prior to 1992/93.

The Department decided to cap budgets and requested that a certain limited volume of service be produced. At the same time, it also made it clear to the health boards and hospitals that it was expected that every effort would be made to live within the budget. Nevertheless, it did acknowledge the right of consultants to private practice, and also the corresponding right of the patient to request private practice.

At the time of the examination, the matter was ongoing and discussions and negotiations with the medical profession on this matter were expected. The Accounting Officer pointed out that there appeared to be a broad acceptance among the health professions that some form of managed care was needed as it would, on the one hand, protect the clinical freedom of the consultant and as a result the patient, and on the other, it recognised that as there were limitations to resources, protection could only be achieved through better communication, co-operation, and costing systems.

The Committee heard that the Department of Health had, for a number of years, been facing major changes in relation to health insurance, particularly from the EU perspective. As a result, the Insurance Act, 1994 had been introduced which addressed the situation in relation to competition. It also set out to protect the important principles of community rating, open enrolment and life time membership (matters that had already been provided by the VHI) while, at the same time, creating an environment in which there could be competition. A detailed review of the VHI was also carried out, following which a number of recommendations were made and changes came about in the operation of the VHI. At the time of the examination, discussions were ongoing between the VHI and the providing agencies and a provisional working figure had been agreed for 1995-96. In addition, particular emphasis was being placed on developing a co-operative and focused relationship between the providers (i.e. the hospitals and the health boards) and the funder who would now have to operate together.

The Accounting Officer stated that in 1995, the total variance between the allocation and the unaudited expenditure of all the boards was £1.4 million, on a budget of £1.3 billion, in relation to public expenditure on health boards. When these figures were compared with the figures of some years ago, considerable progress had been made. He acknowledged that the skills to continue with the progress were present, but that the relationship between the boards and consultants and the consultants and the VHI was of considerable importance and would have to be addressed.

The Committee welcomes the advent of competition in the area of medical insurance but is concerned that so much of the taxpayers money had to be used in the process. It acknowledges that considerable progress has been made recently and wishes to be kept informed of any further progress which occurs in relation to this matter.

AGRICULTURE AND FOOD

3. Disallowances

In its final report on the Appropriation Accounts 1993, the Committee commented on the situation in relation to funds being disallowed by the EU. At the time of the Committee’s examination of the 1993 report, disallowances of almost £110 million had been proposed for 1990 and 1991, and when the 1994 accounts were considered by the Committee no final decision had been made in relation to the fines. As the matter had not been concluded, the Committee agreed to return to the matter again when the final decision had been made.

On 27 March 1996, following a lengthy process of discussion between the Irish Government and the EU Commission, the Commission decided on the following disallowances -

The final fines represented a reduction of £24m in the general disallowance which had been proposed for intervention operations during 1990 and 1991.

The Committee discussed the largest portion of the fine, in relation to intervention beef, and was told that the Department had always accepted that there were control weaknesses in the system as it operated in the period 1990-92. The control weaknesses largely arose from over 800,000 tonnes of the product which the Department was required to intervene for over three years. The system, as initially set up, was not capable of dealing with those quantities and from 1990 onwards the Department decided to change the system in a way which would improve the controls significantly and ensure that disallowances of this kind could not arise in future. It was pointed out that the fact that the disallowance had been reduced in the final Commission decision by £24 million was done specifically in recognition of the fact that controls had been adjusted when the deficiencies became clear. The Department was of the opinion that the fines had been too severe.

In the minute of the Minister for Finance, in response to the Committee’s final report on the Appropriation Accounts, 1993, the Committee was informed that a group of senior officials from the Department of Agriculture, Food and Forestry, the Department of Finance and the Office of the Attorney General, who had access to an independent legal adviser, had examined the possibility of recovery of all or part of the disallowances from resources other than the Irish Exchequer.

The Committee was also told that a number of measures aimed at combatting fraud in the beef industry and at protecting the financial interests of the EU and the National Exchequer have been adopted. In this connection a Bill (Protection of the Financial Interests of the European Communities) was expected to be brought before the Oireachtas and would include the following elements:

-improved procedures for inspection and seizure of documents and computer records in a pre-litigation phase;

-any irregularity which gave rise to identifiable loss to the EU would be the basis for statutory action regardless of whether breach of contract exists or not;

-changes would be made in the rules of evidence to ensure that all relevant evidence and documentation was not excluded;

-implementation of the Blacklist regulation which would prevent “non-reliable operators” from receiving EU and National supports. Existing legislation already provides for disqualification of certain persons from acting as directors or auditors or managers of companies.

In addition, attention was drawn to a number of substantial improvements in the control systems and organisation of the Department of Agriculture, Food and Forestry which had taken place since 1990, and which included the following changes:

-the establishment of a Beef Controls Division which has responsibility for all EU market support operations, intervention and export refunds in meat plants. In conjunction with the Customs Service, this Division carried out 250 unannounced checks on meat plants in 1995;

-more rigid controls on export refunds and intervention purchases;

-an enhancement of the Internal Audit Unit of the Department of Agriculture, Food and Forestry together with the establishment of an External Audit Committee which contains expertise from the private sector and other Government Departments.

The Accounting Officer informed the Committee that there was a responsibility on the Department to ensure that, in future, the control procedures are in accordance with the regulations. He went on to state however that in relation to multiple tendering, the Department’s view was that controls had been in accordance with the regulations in operation at the time. He drew attention to both legal opinion and the view of the conciliation body which seemed to support that view. He also stated that, in 1993, when the Commission wanted to ensure that multiple tendering did not take place, it had amended the regulations He believed that if the original regulation had excluded multiple tendering there would not have been any need to change it.

While the Committee welcomes the reduction in the fine, it deplores the fact that a penalty of such magnitude is being borne by the Irish taxpayer and is disappointed that the reduction of the fine was not greater. The Committee notes that the issue has not yet been fully finalised, due to the numerous court cases that are pending, and wishes to be kept informed as to progress in these cases.

The Committee is also aware that a sum of £9 million has been set aside pending the outcome of legal proceedings between the Department and the insurers in the case of a fire that had occurred at a meat plant at Ballaghderreen. The amount represents the difference between the Department’s value (which has alrady been paid over to the Commission) and the Commission’s value of the stock destroyed in the fire. The Committee wishes to be informed of the outcome of this case.

The Committee welcomes the fact that greater controls have been introduced but is still concerned that the fines were so high. The Committee hopes that lessons have been learnt by the Department in relation to this matter and that every effort will be made to ensure that a similar situation will not arise again. The Committee urges the Department to examine ways in which the fine can be recouped from the perpetrators of the situations that caused the disallowances in the first place.

The Committee will continue to keep the matter under review.

CENTRAL FUND

4. Aer Lingus Group plc - Share Subscription

The report of the C&AG refers to the acquisition of share capital, amounting to some £175 million, by the Minister for Finance in the Aer Lingus Group. The relevant legislation provided that the money for shares should be channelled through a special account and also stated that the money would not be passed over to Aer Lingus until conditions imposed by the Government and the EU Commission had been met.

In this particular case, the money was paid over to the special account in three instalments. The first instalment of £75 million was made in December 1993 and the second and third instalments of £50 million each were made in December 1994. The first and second instalments were paid from the special account to Aer Lingus on the same day but the third instalment was not paid to Aer Lingus until December 1995. As a result, the £50 million stood as a charge to the Exchequer for 1994, although the money was not released from the control of the Minister for Finance until 1995.

Although the C&AG reiterated that the transactions were in accordance with the authority that governed them, he nevertheless had reservations about special accounts being used to influence the amount of expenditure to be charged to the National Accounts in any one year. He contended that the use of accounts such as special accounts in this way amounted to the introduction of reserve accounting by the back door. While he accepted that a case could be made for reserve accounting on budgetary grounds, he felt that, if it was to become a regular feature of budgetary policy in the future, it should be considered in the context of an overall reform of the government accounting framework rather than being addressed in an ad hoc way. He suggested that the impending introduction of some kind of accrual accounting for the State’s finances would be an opportune time to consider the wider implications of reserve accounting.

In evidence the Accounting Officer told the Committee that the money was paid in advance for budgetary reasons, in the circumstances outlined by the C&AG, in late 1994. At the time of the payment at the end of 1994, all the circumstances were not in place. The payment was made in accordance with the legislation which clearly envisaged sums being paid into that account in advance of payments out of the account to Aer Lingus. Indeed, he pointed out that the legislation, in fact, refers to interest being earned on funds while they are in the account, which implies that there was an expectation that funds could be held in the account for some time before they would be issued. He also explained that although interest was not payable on the £50 million that was paid into the account, it was available to the Exchequer while it was in the account, through the National Treasury Management Agency, for the general financing of the Exchequer requirements and, as a result, reduced the borrowings which otherwise would have been required for that purpose. He went on to explain that the matter was one that had been decided on the grounds of budgetary policy and in accordance with the specific provisions of the legislation and that he believed that the correct action had been taken in dealing with the issue.

He agreed that the reservations expressed about the use of special accounts should be addressed as part of the move to accrual accounting.

The Committee shares the concerns of the C&AG about interfering with the accounting system when what is needed is a re-evaluation and reform of the system. It looks forward to examining the Department of Finance proposals in this regard in due course.

ACCOUNTS NOTED

5. Accounts Noted

The following Accounts were examined and noted by the Committee and the Minutes of Evidence are published herewith:

Finance Group, including the Finance Accounts 1994

Houses of the Oireachtas

Office of the Director of Public Prosecutions

In addition, the Committee noted the following accounts without calling the Accounting Officers for examination:

DENIS FOLEY T.D.

Chairman

7 November 1996.