Committee Reports > List of Committees > Dáil > 1997 > Committee of Public Accounts > Report No. 02 - Value for Money Examinations

MIONTUAIRISC NA FIANAISE

MINUTES OF EVIDENCE

AN COISTE UM CHUNTAIS PHOIBLÍ

COMMITTEE OF PUBLIC ACCOUNTS

Déardaoin 15 Feabhra 1996

Thursday 15 February 1996

The Committee met at 11 a.m.

DEPUTY DENIS FOLEY IN THE CHAIR

Mr. John Purcell (Comptroller and Auditor General) called and examined.

Mr. John Loughrey (Secretary, Department of Transport, Energy and Communications) called and examined

Public session.

REPORT ON VALUE FOR MONEY EXAMINATION - GAS INTERCONNECTOR PROJECT

Deputy Finuance: Chairman, you may not have been aware that members of the press were not aware that we had switched our meeting last week from Thursday, 7 February to Friday, 8 February. Lorna Siggins from The Irish Times represented the only newspaper present at the meeting. They do not have a tradition of attending Committees that sit on Fridays.

Chairman: I understand that the press were notified.

Deputy E. Byrne: My apologies for being unable to attend the meeting last Friday. We are dealing with a report today that will not be too controversial and perhaps does not necessitate consideration during the entire length of the meeting. However, given the number of reports that are stockpiled, we should not have sacrificed the regular Thursday meeting of the Committee, whatever about sitting on a Friday in addition to a Thursday.

Chairman: This will not happen again. We had a problem in getting the relevant Accounting Officer for a meeting last Thursday. In addition, the Government has requested one meeting on a Friday per month. Where necessary meetings schedules for Thursdays and Fridays will take place together.

Deputy Broughan: The Select Committee on Finance and General Affairs discussed the forthcoming compellability of witnesses legislation, which it will be considering. The Chairman, Deputy Jim Mitchell, is doing his best to have the committee broadcast on television, but this may not have happened until the autumn. Perhaps representations could be made to him to speed this up, as this Committee is the only major Committee that suffers in this respect.

Deputy O’Malley: I am amazed to hear that the forthcoming compellability of witnesses legislation was discussed by the Select Committee on Finance and General Affairs today. Was it due for discussion?

Deputy Broughan: No. The committee discussed EMU and a couple of other matters, but the forthcoming legislation was discussed in the context of a brief report.

Deputy O’Malley: With regard to the changes that need to be made to the Standing Orders of this Committee, we were told that we would have to await the passage of the forthcoming compellability of witnesses legislation. On considering the proposed legislation, I do not see why this is so. The Dáil has power to change the restrictive arrangements pertaining to this Committee without waiting for that Bill and I think that should be done straight away. There are two glaring matters. The first is that this is the only Committee of the House of which television coverage is not allowed. They may not bother to cover some of the others because they are not of much interest.

Deputy Finucane: The Joint Committee on Commercial State-sponsored Bodies is not covered either.

Deputy O’Malley: Apart from that, this is the only one. The second point is that we cannot publish our debates, even though every other Committee can. Those two things can be changed without waiting for the Bill, as I understand it. I raised this before; could you, Chairman, not take this up with whoever is the appropriate person - the Government Whip, the Ceann Comhairle or both - to get this done? All they need to do is make a different Standing Order for this Committee.

Deputy Broughan: It may well be that it suits senior civil servants to restrict the coverage of this Committee. There is a fair amount of print coverage but most people agree that if it was on television, it would be one of the most interesting parts of Dáil coverage every week. It would get extensive coverage and some of the issues raised would possibly be highlighted even further. It would not surprise me if it was in the interest of senior civil servants to ensure we were not on television for as long as possible, until well into the next Dáil at least. Perhaps we do need to support Deputy O’Malley’s suggestions.

Chairman: We will take it up again with the Ceann Comhairle.

Deputy Finucane: I will take it up with the Whip on our side.

REPORT ON VALUE FOR MONEY EXAMINATION - GAS INTERCONNECTOR PROJECT

Mr John Loughrey (Secretary, Department of Transport, Energy and Communications) called and examined.

Chairman: You are very welcome, Mr. Loughrey. Please introduce your officials.

Mr. Loughrey: Immediately to my right is Dr. Tom McManus, who is the Chief Technical Adviser to the Minister and the Department. He had an intrinsic and pivotal role in this project. Immediately to my left is Mr. Tom Reeves, Assistant Secretary in the Department who is in charge of all energy policy and was the main driver of the project in a hands-on way within the Department. To his left is Mr. Paddy Fay who looks after the gas industry and BGÉ in general. So Chairman, you have the full team who effectively dealt with the pipeline and are still dealing with the issues.

Chairman: This morning we are dealing with the report on value for money and economy of the Department of Transport, Energy and Communications’ gas interconnector project. The rota this morning is Deputy O’Malley and Deputy Hogan. I ask the Comptroller and Auditor General to speak first.

Mr. Purcell: The construction of a pipeline interconnector to link the Irish and UK natural gas transmission grids was one of the largest engineering projects undertaken by a State agency in recent decades, As a result of the project the gas industry in Ireland can continue when the remaining known reserves of natural gas are exhausted, which is expected to happen around 2000. Bord Gáis Éireann had direct responsibility for the construction of the interconnector, which it funded with a combination of retained earnings, borrowings and assistance from the EU REGEN Initiative.

The Department of Transport, Energy and Communications played a number of important roles in the project. It was involved from the earliest stages in appraising options for the importation of gas and in briefing and advising the Government about the project. It consulted with the EU Commission on funding for the project and took the lead in negotiating a necessary inter-Governmental treaty with the UK authorities. The Department also had a role in monitoring progress throughout the construction period.

My examination focused on three aspects of the Department’s involvement in the project. First, it considered how the Department appraised the available options and advised the Government about them. Second, it looked at the systems the Department adopted to monitor the project. Third, it considered the factors the Department will need to take into account in evaluating the effectiveness of the project.

The report concludes that the assessment of the likely economic return from the project was not as comprehensive as it might have been, principally due to the omission of the substantial sums required for the development and upgrading of the natural gas grid. These could amount to anything up to £200 million and would significantly reduce the expected rate of return on the investment. That said, I think it is unlikely the Government decision would have been any different had this information been available to it, as there were persuasive strategic, security and environmental reasons for going ahead with the project anyway.

The report shows the project came in at £249 million or so, which is only 4.6 per cent over budget and represents a good overall performance on such a complex undertaking. It is only fair to say the systems and procedures adopted by the Department helped contribute to this achievement. There were, however, some hiccups and they are mentioned in the report; most notably, the delay in commissioning the gas compressor station in Britain and the budget overrun on the project administration and design costs. Both were due in part to the collapse of the Kentz group of companies.

The report makes the point that many relevant factors have changed since the interconnector project was approved in 1991. For instance, there has been a decision to build a new peat-fired electricity generation station which may affect the demand for natural gas for the power generation sector. As against that, the State has taken on extra obligations under international agreements governing sulphur dioxide emissions, which may lead to increased use of natural gas.

Major investment is still being made in gas and other energy infrastructure and decisions will soon have to be made about how to ensure long term security of natural gas supplies. In these circumstances, I think the Department should think — and perhaps do more than think — about evaluating the effectiveness of the interconnector project as an input to energy policy formation.

Chairman: Mr. Loughrey, would you like to comment on the findings of this report and inform the Committee of the up to date position of the project?

Mr. Loughrey: I will do so briefly because I realise the time limit on us all. I welcome the opportunity to assist the Committee in any way possible. This is our first value for money audit and we thought it was an excellent exercise. We worked with the staff and Office of the Comptroller and Auditor General in a co-operative way. I am here in my capacity as Accounting Officer but the team is here with me to see if we can do this business to the Committee’s satisfaction and help in whatever way possible.

For the information of Members, we will circulate a book by Dr. McManus. It is not for discussion today or to influence the Committee but it reflects very well the challenges facing BGÉ and the Department and captures some of the colour in common sense terms. There was also no little excitement, because this was a major project and we all shared in the excitement.

Deputy Broughan: Will it be a best seller?

Mr. Loughrey: I think the pipeline is in the best sellers list and I will come to that later.

Deputy McCormack: Is it going to the west?

Mr. Loughrey: I can assure Deputy McCormack that that is the long term objective and we may come to that later. I agree entirely with the Comptroller and Auditor General’s broad assessment. Rather than dwelling on any part of the report on which there is broad agreement that the approaches were largely right, I will concentrate on the important points he has raised. They come under a couple of headings in the summary of the report.

The first question is whether, in seeking Government approval, we somehow steered them incorrectly as to the cost of the project. The report says this is the prima facie impression but it was not the case. The Figure of £240 million represented the 1990 prices but when it went to Government for final approval in 1991, we had updated it to 1991 prices plus the contingency of £28 million. There were one or two other adjustments which we built in but broadly the 1990 and 1991 figures equate to the same sum, the difference being a prudent contingency allowance which was put in.

The next point is the economic rate of return to the State and the financial rate of return to BGÉ. I agree with the Comptroller and Auditor General that we undertook for the Government a simplified but internally consistent exercise. We excluded both the development costs up to the year 2000 and the associated revenues. We gave a simple, clear picture. However, this was a sophisticated project and I agree with the Comptroller that it would have been preferable, in retrospect, if we had included elements for the development of the gas grid associated with the interconnector. However - and I will put this as gently as possible - we disagree with his report to the extent that, while the £160 million has been added in, the report does not add in the associated benefits. That is not a consistent approach to calculating an economic rate of return.

The figure of £160 million is the main comment in the report. That figure is divided in the report into £79 million for upgrading and maintenance and £81 million for new developments. Broadly speaking, the £79 million is for safety. BGÉ has three major criteria in its operations which are safety, safety and safety. After what happened in Raglan House, the Department stands four square behind it on that. That £79 million would have had to be committed many event, even if there was a planned wind down of the national gas grid. That is something we can ring fence and put aside.

The remaining £81 million was associated with the pipeline and the Comptroller is right in saying it would have been better if we had rolled that up into the project assessment. However, in including this £81 million the report does not include the associated revenues of this investment. You are all familiar with 50:50 cashback and I will not describe all the marketing schemes. However, even allowing for the front end deep discounts which BGÉ has offered consumers to capture market share - because that was essential to bankroll the pipeline - the net revenues are approximately £80 million in the period up to 2000.

The Comptroller is right to raise the question and the report is quite correct. However, a combination of the safety elements and the addition of the marginal revenue effectively neutralises the £160 million. In hindsight, we would not have done the same simplified exercise. However, the Government was not misled in any way and the steer it got on the economic rate of return to the State and the financial rate of return to BGÉ would not have been significantly different.

The other major question raised in the Comptroller and Auditor General’s report is the timing. Did we get it wrong? “Just in time delivery” is a great buzzword. We are talking about a pipeline with a life of 50 years. With fresh aluminium anodes installed, in 50 years time it will have a lifetime of 100 years. Getting it within 18 months or two years of market requirements is, I suspect, as near as possible to a “just in time delivery” in terms of how we would amortise this pipeline over 100 years, certainly over 50 years.

Could we have postponed it in any way by two years? One can only judge a project by the sort of assessment which could be done at the time. What criteria did we use at the time? If we were to postpone this project by two years we would have saved between £30 million and £35 million, depending on the carrying costs of money. That was a real consideration but we had to look at the downside.

The financial downside was that it would have put the £90 million grant at risk. The Department or BGÉ were never grant driven and this project stands up to scrutiny even without any EU grant. Admittedly, from BGÉ’s point of view because of the heavy front end costs, its cash position would have been less than comfortable in the early years without the grant. However, the robust rate of return to the State and the financial rate of return to BGÉ stand up regardless of the grant. It would have put the grant at risk.

There were only three major projects in the REGEN envelope which was opened up, one of which was Ireland, which got 108 million ECUs - the largest single amount. That was a once and for all envelope which was open from 1989 to 1993. At the time, the advice was - and still is in hindsight - that we would have jeopardised that grant. INTERREG came into account after that but not at the time. The INTERREG regulations in 1993 were only for land based Border projects - not sea based - and energy was not included initially. It would have been highly speculative and grossly imprudent of the Department to advise the Government to postpone it in the light of the possible loss of the grant aid.

In terms of the economic and financial rates of return, the figure produced by the consultant of a 15 per cent economic rate of return to the State stands up to scrutiny. The timing was the right decision at the time. We got bargains because we moved quickly. We deliberated and caught the steel market in a measured way at the right time. We could have lost up to £20 million on the steel contract if we had postponed it. There are only two lay barges in the Western world which could have done this project. We had a window of opportunity in 1993 to do this project and we got it grosso modo for about £100 million. If we had left it to 1995, there was heavy competition for these two lay barges and Ove Arup, which was advising us, said that it could have been anything up to £250 million to get the lay barges in 1995. I am not piling on this misery to justify things in retrospect - they were the measured decisions we took at the time.

Why the hurry? In 1989 we had the Dake report which said that the end gain in managing the end of the reservoir of the Kinsale Head gas field was very suspect and that it could have run out in three to five years time. In the event, we know that Dake was wrong but he is one of the most eminent men in the world and was the head of Shell’s management team. He told the then Government that the Kinsale Head gas field could run out in three to five years time. It would be a brave civil servant who would tell a Government that it would be all right on the night, particularly when any interruption in gas supply has implications for safety factors and means purging the system which is very dangerous.

Dake revised his forecast in 1991 but we had to plan to get this pipeline in place by 1993, which was the original target. In the event, Dake was wrong but should he have been taken seriously, apart from his prestige? The answer is yes because two fields in the North Sea, one of which - the Frigg field - is well known to the Committee, were collapsing in exactly the same way. The reservoir failed and with water ingress one of the components collapsed with 12 month’s notice. We could not have afforded to take that risk with national energy policy. That is the reason we moved quickly. In the event we had a margin for error but not that much. Commercial quantities of gas flowed through this pipeline in 1995.

Another issue raised by the Comptroller is that we have a pipe but we do not have a long term gas agreement. Once again, we took a very specific decision in 1991. BGÉ kept very closely in touch with the market and engaged Wood McKenzie. The Department, through its own contacts in the banking and energy fields, kept very closely in touch with market analysts. In 1991, when the decision had to be taken to buy long term gas, if we had gone at that time we would be exactly like British Gas now. We would have been sitting on a bubble of dear gas. It is all right for the UK with its portfolio of North Sea gases. However, it would have been a disaster for Ireland with our open economy and trade:GDP ratio of nearly 140 per cent to be saddled indefinitely with a pool of dear gas in a long term contract. We stood back from it and took a decision to go ahead with the pipeline. The advice was that gas prices would soften in 1994-95 after the original dash for gas in the UK.

I am not saying this in any smug or complacent way but we have been vindicated by events. When we started negotiating for gas, North Sea gas was in the range of 17p to 23p a therm. It moved up to 27p. Now spot gas in the North Sea is down to 10p a therm and BGÉ quite correctly stood back and took that decision and the Department supported them. BGÉ is now in a position to take advantage of gas prices which are even less than half the price in 1991/92. It can now build up a portfolio of long-term different contracts which will ultimately be of benefit to the Irish gas consumer and Irish competitiveness.

The Comptroller and Auditor General quite correctly raised the question of the overrun on the project management team. The answer is it did overrun but, if you look at the original project, the vast majority of work was to be done in the period in 1992/93. In the event of the Kentz collapse, and one or two other things, that has stretched from two years to nearly four years. Instead of coming in at 9 per cent of cost, plus one or two add ons, it is over 10 per cent now. Given that this project management team had to ride shotgun, terminate two of the major contracts, turn them around rapidly and make sure that all the contracts were put to bed and any other legal outstanding matters looked out for, we believe that the project management team cost at £27.5 million approximately, is not an unacceptable figure.

We have covered a bit of ground there. You and Members of the Committee might like to take on many aspects. We would be delighted to help you in whatever way possible.

Chairman: Was the EU deadline of 31 December 1995 for the completion of all payments to Bord Gáis met? What funding has not been received to date from the EU allocation of £91.3 million? What steps have been taken to recover these amounts? Do you expect to recover the allocation in full, that is, the £91.3 million?

Mr. Loughrey: There is a full agreement that DGXVI, the Regional Affairs Directorate which pays out the money, has agreed to come in at £91.5 million approximately, which is obviously a satisfactory outcome, and there is a cheque in the post for £12 million. There is an outstanding amount of £12 million but we are working very closely with them to make sure that comes in as quickly as possible.

Chairman: Was the EU deadline of 31 December 1995 met?

Mr. Loughrey: From their point of view, the EU deadline in terms of commitments was met. In terms of payment there is £12 million outstanding and perhaps my colleague Mr. Fay would say that is only a matter of time.

Chairman: It is in the pipeline.

Deputy O’Malley: The Comptroller and Auditor General wrote or completed this report last August. At that stage he gave us an estimate, presumably given to him, that the construction would be completed in December 1995 and that the interconnector would be fully operational and bringing in gas 24 hours a day at that stage. Did that prove to be the case?

Mr. Loughrey: That proved to be the case. As the Committee might know, there has been security gas or standby gas in the pipeline for the last two years. There were significant commercial flows of up to about £7 million worth in the period October, November, December 1995. In practical terms that proved to be the case.

Deputy O’Malley: Do not go on at great length because I have only a limited amount of time to ask you questions.

Mr. Loughrey: The answer is yes.

Deputy O’Malley: Is it in daily use all the time?

Mr. Loughrey: Yes.

Deputy O’Malley: How much is flowing through it each day? What is the value of the gas?

Mr. Loughrey: In the two month period up to the end of December, £7 million worth flowed in during that period. Over this year alone, in terms of power generations, approximately £20 million worth of gas will flow through it. That is at bulk supply prices.

Deputy O’Malley: Will flow through it?

Mr. Loughrey: It is contracted to flow through it.

Deputy O’Malley: Is it not in daily use?

Mr. Loughrey: Of course it is in daily use.

Deputy O’Malley: The amounts must be very small if you are only going to import £20 million worth in a whole year.

Mr. Loughrey: The nature of a project like this - and I know you appreciate this - is that it is a gradual switch over from the falling off indigenous gas in Kinsale and Ballycotton to the imported gas. Right now I am told that £150,000 worth of gas a day is imported. That works out technically at 100 million cubic feet of gas a day.

Deputy O’Malley: It strikes me as rather questionable that the State should have spent £300 million roughly building a pipeline and all the associated works if they are going to bring in £20 million worth of gas a year.

Mr. Loughrey: That is only the start. By the year 2000 the pipeline will cater for all of the country’s needs. We use the indigenous gas first. As we claim the last economic rent from the Kinsale gas field, the reservoir is being managed to work to the end of the decade and we pick up the slack through the pipeline. By the year 2000 it will be the sole national source of gas supply.

Deputy O’Malley: I want to come to the project management which particularly gives rise for concern in this report. Paragraph 3.48 says that despite their strict legal right to hold the management team to the original agreement, BGÉ having consulted the Department, took a number of commercial considerations into account before agreeing to alter the basis of payment. It mentions the delays, dependence on the project team and, then amazingly, the refusal or inability of the project management team to provide an all in cost.

When one takes the polite gloss off that language, what I read it to mean is that the project management team said that they wanted to move from a fixed fee to an unlimited fee with no cap and that was agreed to, more or less, because they wanted it that way. The result was that we had an increase of 45 per cent in the already very high cost of the project management fee. We had an unprecedented situation whereby consultants were paid more or less on a time and material basis. They could name their own price and the longer the project went on, the more money they made. The amount of additional work that was necessary was quite limited.

When the project came to an end, there was only £3.5 million worth of work outstanding but it cost £9 million to complete it. That £9 million also entailed an additional £8.5 million to oversee it. Is it not pretty outrageous that all that should have happened and that the Department should have given in to it? It says that the Department was consulted. It does not say that it agreed. Did it agree and what comments have you on this appalling overrun?

Mr. Loughrey: I will try and be as brief as possible on the questions raised by Deputy O’Malley. The Deputy would be fully entitled to take that interpretation. Indeed the very words that struck you - “refusal or inability” - are pretty pejorative I think they require a bit of interpretation. The Deputy expressed in a very cogent way the fact that the end game proved very expensive. It was not because of any prolonged contentiousness or refusal of co-operation by the project management team.

The original contract was a matter of some dispute between BGÉ and the project management team. When they came to the end of their input, including rolled up things - let me put it in colloquial terms - like the amount of overtime they could afford to give, the project management team was faced with two things after the Kentz examinership. They could either carry on and go into liquidation, which they certainly would have, or there could be a new relationship between the project management team to recognise the realities of two terminated contracts, all the work that went into it, and managing the legal claims that come inevitably in an international project of this size.

The BGÉ board was faced with that choice and consulted the Department whose advice was clear and unambiguous. Ideally we would like to have kept to a fixed rate contract, but to change horses mid stream in an international contract that was open in certain cases - and litigation was already threatened - would have been penny wise and pound foolish. Admittedly, there were a lot of pounds, as you point out, and the board of BGÉ took that view as well, It was not an open-ended bonanza time. Limits were put on the revised arrangement.

I want to come back to these words “inability” and “refusal” that stick out. It was not an inability because they did not want to provide such an estimate or fixed rate contract. It was a sheer inability to be able to judge the business risk for the project managers at the time given the uncertainties over the Kentz situation. It was based on a genuine inability of the project management team to have a full assessment of that business risk for them. That was understandable but regrettably it resulted in a cost overrun which arose mainly from the Kentz examinership.

Deputy O’ Malley: In the appendix to this report all the various contractors are named. For some reason the project management consultants are not named at all, although they would be one of the major beneficiaries from all this.

Mr. Loughrey: There is no secret whatsoever. It was McMahon’s and McCarthy’s - a consortium of two very prestigious Irish consulting engineering firms - linking up with Sofregaz, an offshoot of Gaz de France which has tremendous worldwide experience of laying pipelines.

That was the consortium which comprised the project management team.

Deputy O’Malley: You say there are limits on the revised arrangement, but the Comptroller and Auditor General does not seem to say that. What are the limits?

Mr. Loughrey: As I understand it, limits were fixed not as in a classic fixed contract but in terms of inputs by way of revisions to the sort of man-hour inputs and overtimes. This is a time consuming and complex area but if you wish I am quite prepared to follow it up. We can provide a note for the Committee if it so wishes.

Deputy O’Malley: That is one way of dealing with it. The more satisfactory way is to deal with it here.

Mr. Loughrey: We can pursue it now if you wish, Deputy.

Deputy O’Malley: Under this contract as originally envisaged, there was £219 million worth of construction and £19 million in project management and design fees There was additional construction work of £9 million but there were additional project management and design fees of £8.5 million. In other words, the additional work at Brighouse Bay, allegedly caused by Kentz’ liquidation, cost almost the same to manage as it did to build it. Is that not outrageous, and why did the Department agree to it?

Mr. Loughrey: I cannot agree with your contention that it is outrageous, Deputy. On the surface it seems a pretty steep figure when you put it against the marginal cost, but it was not just Kentz collapse which required the renegotiation of two contracts starting from scratch. There were also significant changes in the pipeline as it went along in the sense that parts of the pipeline were changed and there was a change in the compressor design in Scotland. We are not talking about materials but about professional man hours. Even though the absolute size of the additional contract work was small - a total of about £20 million, and I will give you a breakdown on those figures if you so wish - the amount of professional man hours to do that terms of design, contract and legal work was such that it warranted the additional amounts.

Deputy O’Malley: That is a matter of opinion, Mr. Loughrey. There are many who would hold the contrary view. Reading this stuff, it looks to me as if there is an aura of a cosy cartel - to use a current phrase - about a lot of what was going on here.

Mr. Loughrey: With respect, Chairman, I would have to reject that in the sense that this project was run impeccably. There were 83 separate contracts in this project, all of which were put out to tender. All but three of them had more than three tenders, and every one was accepted on the basis of lowest cost tender. This was an impeccably run contract and, with respect Deputy, I would have to reject the inference.

Deputy O’Malley: Right. You suggest that this is a major and unique project. It may be for Ireland because it is the only offshore pipeline that we have built so far, but in normal world engineering terms these things are ten a penny. Hundreds of these pipelines have been built which are much longer and deeper than this one. There is nothing new or unique about it that justifies all the additional time, delays of 26 months and huge additional payments to the consultants.

Mr. Loughrey: I would agree, in conventional terms, we were dealing with fairly tried and trusted pipeline technology. Indeed, I reckon that pipeline technology will not change over the next 50 years, although I hope that statement does not come back to haunt me. However, we were dealing with a very complex project in terms of jurisdiction which involved Ireland - UK treaties, the Isle of Man complication and the agreement to take a spur to Northern Ireland. We were dealing with all the local authorities in Scotland as well as Fingal or Dublin County Council as it was at the time. A multiplicity of agencies and consultation was Involved which made it very different.

From the EU’s point of view it was the largest single pipeline included in their region. So, even though the Deputy is right in saying that more testing technology has been applied in deeper water, and pipeline technology is tried and trusted, this had jurisdictional and legal complications which were pretty unique certainly from our discussions with Europe on other European pipelines.

Deputy Hogan: Before the decision was made to lay this interconnector, what assessment was carried out on the need for an interconnector at all, and what other options were considered to meet our energy requirements?

Mr. Loughrey: The short answer to that is that it would have been a tombstone for the gas industry - BGÉ RIP. I often think that God forsook Ireland when it came to geology. Everybody around us has had hydrocarbon finds left, right and centre but when a line is drawn in the seabed, unfortunately, Ireland seems to be on the wrong side of it. Other than the hydrocarbon discoveries at Kinsale Head in 1971 - and a small bubble of gas, providing a six or seven months supply, which was found at Ballycotton - we have not been blessed with hydrocarbon finds offshore or onshore. If this interconnector had not been commissioned - and we needed the gas as early as last year - it would have been the end of the gas industry here.

Gas is not like electricity. If there is a power cut the ESB can send out a team to connect up the wires and your supply is back on again in an hour or two. If it is an act of God, like lightning, your supply will be back the following day. If gas is interrupted for more than 48 hours and if pressure drops in pipelines, particularly on the distribution side, we are into major safety connotations and we do not take risks. I have been told by one of my colleagues that more people have died in Sarajevo from lighting unpurged gas systems than from snipers bullets. BGÉ has an impeccable record in safety. It works to the highest international standards so if there was an interruption, the system would need to be purged. Industrial and commercial users would lose confidence in such a system and premium gas users would be held back for months in some cases. There is world-wide documentation on this.

More importantly, if we did not have the gas interconnector, we would rely on peat as the only indigenous fuel, although we still have Kinsale in our fuel mix. In terms of fuel diversity, we would have missed out on perhaps the most important energy source in western Europe for environmental and competitive reasons. To return to what Deputy McCormack said about the west of Ireland, anywhere a pipeline has been laid, 90 per cent of industry over a certain size has taken up gas in preference to any other energy source. It is vital for Ireland’s competitiveness that we have this diversity of energy supply. The short answer to Deputy Hogan’s question is that it was necessary for the continuation of the Irish gas industry and for the competitiveness of the economy.

Deputy Hogan: If there was a break in the offshore pipeline between the Kinsale field and the Cork coast, how could we deal with that problem in terms of our energy needs?

Mr. Loughrey: Because of the interconnector, we can sleep in our beds at night, although it is not that we were living dangerously - I do not say that in a pejorative sense. A nightmare scenario for the board, management in BGÉ and the Department would be if the pipe was snagged sub sea and total dependence on the gas industry was based on one source of supply. The interconnector now means that until we plan further augmentation of security of supply, we have that reassurance - a second source of supply. Although this is not quantified and the Comptroller and Auditor General’s report clearly adverts to this, there is no quantification of benefits put both in terms of security of supply and the environmental impact. The Comptroller and Auditor General is right in that it would be very difficult to construct a model where one could put any quantitative figure on these. I agree with the approach, but nonetheless security of supply and the benefit to the environment are significant.

Deputy Hogan: Obviously, before a decision was made to build this interconnector, energy options and security of supply were looked at. In view of the fact that natural gas accounts for about 17 per cent of our total energy requirement, was a more competitive option available rather than spending this money on an interconnector?

Mr. Loughrey: Unless we found more gas onshore or offshore, there were two methods of importing gas - a pipeline or liquefied natural gas which could be brought in by special tanker. The feasibility study carried out by the Department analysed that and this LNG position was revisited. The cost of LNG was dramatically higher than the cost of any pipeline configuration.

Deputy Hogan: Do you have the figure?

Mr. Loughrey: It would have cost approximately £250 million in today’s prices to build a terminal in Ireland - Foynes or Tarbert on the Shannon Estuary would have been the obvious sites. Depending on whether we got the LNG from Algeria or Nigeria, which are the only two major states in the business of exporting, embryonically in the case of Nigeria and business as usual in the case of Algeria, special ships would cost approximately £300 million each in today’s prices. There are none available at present and they would need to be commissioned separately with a long lead time.

Even if the price of LNG was not double or three times greater than that of a pipeline - I will choose my words carefully because this is an open public forum - bankers, when assessing geopolitical risk, would not put Algeria or Nigeria in a triple A category rating. In other words, there were distinct geographical risks as opposed to taking North Sea gas from Norway or the United Kingdom. Those risks should not be minimised because if we sat down to negotiate with the Nigerians and the Algerians in 1990, the word from Lagos was that we had to sign up straightway, yet it has only recently taken the decision to go ahead and there will be no LNG from Port Harcourt or the Bonny Estuary until the year 2000. Had we gone down that route, even with the higher cost, we would have been left high and dry. Given the recent problems with the execution of nine Ogoni people, it would still be imprudent to assume that this would be the way to do business even if all the costs were equal.

The situation in Algeria is different. It is, no longer putting the emphasis on LNG and it is moving towards sub Mediterranean pipelines through the south of Spain for the most part. The LNG option, besides having a heavy penalty in terms of capital expenditure, also carried other connotations and notably different kinds of geopolitical risk.

Is there another option? If clean coal technology became available - that is not yet in sight because we are only at an experimental stage - that might in the first quarter of the next century affect some demand for power in terms of the take up of the pipeline. The ESB has said that the economy will need the equivalent of between 2,000 and 3,000 megawatts of new installed capacity between now and 2010. The ESB’s indicative programmes show that to be based mainly on combined gas turbine technology. There will be a robust demand for gas which will be essential for the ESB’s mix to remain competitive.

Deputy Hogan: How much activity is taking place at present as regards exploration? How likely is it that further fields will be discovered?

Mr. Loughrey: While I would like to say that the Irish offshore province is God’s gift to explorers, the strike rate has been very low. Over the past few years, we have produced the most user friendly terms for oil and gas explorers. That is beginning to pay dividends and we have had two rounds in the past year, notably in medium and deep water off the Irish coast. I am glad to say that the response has been exciting and positive in the past year. We hope that this enhanced drive on exploration, notably off the west and north west coast will yield dividends. Indeed, the coast close to north Scotland is increasingly being looked at as an area of potential in the UK. There has been a very favourable take up in relation to new rounds we put in place in the past year or so. I suppose we need a lot of prayers to translate that take up into effective commercial finds. It has been recognised in the trade that the Department has produced the most consumer friendly regulation and fiscal terms in Europe - I am not being smug when I say that. Even if it does not deliver, that is as far as we can go at present.

Deputy Hogan: What is the impact of this project on the finances of Bord Gais Éireann in terms of its debt? What is the likely profit to the company? I notice under project management expenses or miscellaneous contracts, there is £5 million for a number of items which were not included in the budget for the project.

Mr. Loughrey: Perhaps a good point of reference in the excellent table produced by the Comptroller and Auditor General is table Al, the two sets of rates of return. When it came to the financial rate of return to the company, the Comptroller and Auditor General, quite correctly, took the sensitivity analysis done by BGÉ very prudently indeed. BGÉ, with the Department’s full support, did sensitivity analyses in which it looked at the downside in prices and said: “What would happen if prices were discounted by 20 per cent and by 30 per cent?”. This is where the project comes out at the financial rate of return to BGÉ of 2.7 per cent and up to 5.7 per cent. The good news is that while it is always wise to do sensitivity analyses and it is quite correct for the Comptroller and Auditor General to pick it up, in practice prices have not gone that far. Current prices discounts are far less than 20 per cent. BGÉ asked outside consultants to recalculate the financial rate of return to them and it is at over 8 per cent now.

For a utility that was doomed, if I may say so, unless it got fresh supplies of gas, this is a robust financial rate of return. I am glad to say that even with high front end capital costs and with revenue spread over a longer period - of course, there is always cash management; we will also have to be careful in the next few years about BGÉ and the State will recognise that in its dividend policy - BGÉ seems set fair, given the management of this project and of the market to date.

Deputy Hogan: The £5 million?

Mr. Loughrey: That is for miscellaneous contracts. There was a new control and monitoring system at an additional cost of £1.3 million. There was also commissioning of gas. Perhaps we should have included it in the beginning but one cannot test a pipeline without putting gas into it. It was not included in the original budget and it cost £2 million. A substantial volume of gas is required to test the pipeline system from Moffat in Scotland to the existing BGÉ gas grid. There were additional road works in Scotland. Dumfries and Galloway County Council drove a hard bargain because the pipeline was of no benefit to the south of Scotland. Additional road works in Scotland cost £1.3 million. Strengthening and widening of key construction roads were required by planning conditions in Scotland. Finally, there was perimeter security. It is a fact of life that perimeters, particularly of compression stations, have to be reinforced and an extra £400,000 had to be spent both in Scotland and in Ireland for perimeter security. That comprises the £5 million.

Deputy E. Byrne: I welcome Mr. Loughrey and wish to assure him that just because he is Secretary of the Department and is appearing before the Committee of Public Accounts it does not mean that we deem him to be a “baddie” and believe that nothing good is coming from the Department. I congratulate the Department on its achievement in the establishment of this pipeline and interconnector.

I wish to ask some simple questions. You have outlined the importance of a reliable supply of gas to this country and said that we are changing from Kinsale to a British source of gas. You also referred to the security of the pipeline. Given its nature and the fact that accidents occur, what would be the net effect of a break in the pipeline between England and Ireland? How easy would it be to remedy it and how vulnerable is the industrial economy of the country to an interruption, should it occur? What guarantees are built into the contract design work that the chances of a break are practically nil?

Mr. Loughrey: The answer to Deputy Byrne’s question is very serious indeed. That is why in the design and execution of the project this possibility was taken very seriously. What would happen if it were snagged by a trawler or by an anchor? It was not just laid on the bed of the Irish sea; it was trenched and buried in a comprehensive way. In other words, fishermen can trawl with equanimity because the pipeline is trenched and buried. It is expensive but it is done that way to avoid the situation the Deputy outlined. It would be a very serious problem for the gas industry, for general industry and for all consumers if there were such a break.

What other type of risk might arise in the popular imagination? It might have to do with the Beaufort Dyke where munitions were buried by the British after the war. This pipeline is located a long way from the Beaufort Dyke. In the design of the pipeline we were absolutely confident that this would not be a factor but there is no such a thing as being absolutely sure without testing it. BGÉ specified that a lane in the seabed should be trawled up to two kilometres wide to ensure that there was no such problem. They did discover wrecks but no hint of any drift southwards of munitions or of any danger. That was not a once and for all operation; that has been done again, since the pipeline was buried, in 1994 and 1995 and no such risks have been detected.

I am informed by Dr. McManus that there is a site scan sonar for the two kilometres it trawls; in other words, sonar cuts this two kilometre path. The Deputy can be certain that the security risks of a rupture were looked at and planned for, for precisely the reasons he raised.

Deputy E. Byrne: Natural phenomena do occur. If there was a break and taking the worst scenario, have you looked at the alternative to depleting the reserves in Kinsale? Have you considered putting the existing reserves on a maintenance basis; in other words, rather than exploit them totally have you considered using the mainline importation network to feed the system? In the event of something unforseen occurring you would have a fallback. Do you think the strategy of totally exploiting the Kinsale field is appropriate? Is there any benefit in retaining the existing reserves in a hold, as it were?

Mr. Loughrey: Thank you for your kind remarks about Secretaries being “baddies”; perhaps we are both “baddies” because we think alike. I remember asking precisely that question in about 1990. Gas can be stored and what could be better than keeping something up one’s sleeve? Unfortunately, reservoirs are very tricky and have a mind of their own. They are not amenable to that type of absolute precision planning.

We have taken over 75 per cent of the gas out of this huge underground cavern system called Kinsale Head gas field. The trouble is that once the gas is taken out, the remaining gas sloshes around in funny ways, if I can use a colloquial term. It is not amenable to precise measurement or to keeping it up one’s sleeve. As I mentioned earlier, the problem of water ingress is a danger. The question of managing the end of a reservoir is very tricky. All the advice is that when one reaches the last 25 per cent of a filed, which is the case in Kinsale, the only safe way of taking it out is to take it out sooner rather than later. That was the answer I received when I asked the same question as the Deputy. I understand that argument has subsequently been reinforced and validated by professional study.

Deputy E. Byrne: Given that we will be solely dependent in the near future on our pipeline for gas, does the Department have any plans to develop alternative sources of supply? Is there long-term planning to network into the supplies of other countries?

Mr. Loughrey: We have; it would be wrong of us not to do such planning. If we did not make such plans we would find ourselves, in the early decade of the next century, in the same scenario as we had up to recently which was being dependent on one pipeline.

Deputy E. Byrne: Can you indicate what country you have in mind?

Mr. Loughrey: There are two factors - provenancing the gas and the question of another pipeline. We facilitated Northern Ireland in allowing a spur to be taken off our pipeline to provide gas to Northern Ireland. That is being built at present. We are planning on the best way - I suppose we are doing it on a linear programming basis - to make a link-up North/South pipeline so that, again, we would not be dependent on one stretch of pipeline under the sea.

As for provenancing the gas, at present we can take it from the UK or from an element of the Norwegian gas field in the North Sea. The so-called Zee pipe between Britain and the Continent has yet to be completed. British Gas is particularly anxious to push this because, having found itself sitting on a pile of very expensive gas, it is anxious that the pipeline is completed as quickly as possible so that it can break into the more lucrative European gas market where prices are a little higher. Unfortunately, the Zee pipe has not made the sort of progress British Gas would have liked; ultimately, Ireland would have liked to see such progress because it would be another connection for us. It was due to be finished by 1998 but that might be a heroic assumption. However, let us assume that it is finished in 1999; that would mean that in theory we could go as far as the far side of the Urals to Siberia for gas once the Zee pipeline has been completed across the English Channel.

Deputy E. Byrne: With regard to the contractual nature of purchasing this gas, you mentioned the spur in Northern Ireland and I understand a link to the Isle of Man is envisaged. Who sells on the gas from Northern Ireland and the Isle of man?

Mr. Loughrey: This is a classic third party access pipeline. As long as there is surplus capacity in the pipeline, they do their own buying. This applies in Ireland as well. As long as there is capacity in the pipeline, the very largest consumers in Ireland are free to ask BGÉ for a common tariff to do their own deals and bring gas into the pipeline. This means that BGÉ, if it positions itself correctly as it has always done in the past, will be able to make a substantial rate of return on the pipeline as a transmission system as opposed to selling the gas itself. This is how the Northern Ireland pipeline will work and that is how the system will work from now on in the EU.

Deputy E. Byrne: What is the contractual arrangement between BGÉ and the supplier? Are there contracts on a five or a ten year basis which guarantee the cost of supply to consumers and industry?

Mr. Loughrey: Most of the gas is being bought in the North Sea at a spot rate. There is now a buyer’s market as opposed to the seller’s market which existed a few years ago. There will continue to be a buyer’s market because there is excess gas capacity of about 20 per cent in the North Sea feeding into Britain and Ireland. This will continue for some time. Some of the main players, such as Shell and Conoco, are holding back capacity because gas is so cheap. The good news is that the cheap spot rate gas will continue for some time.

It is also a good time to lock into the longer term by building up a portfolio of different types of gas which will protect the position of consumers, not just now but into the future; this is a matter of commercial judgment for BGÉ. Its strategic business approach is the correct one to look after competitiveness and Irish consumers. Will this overhang of gas last indefinitely? When the Zee pipe is up and running in the first few years of the next century, there will be an equalisation of price between other Western European markets and the British markets. This is now the conventional wisdom.

Deputy E. Byrne: Deputy O’Malley talked about the incredible costs of design and management team work. If it was as professional as you say it was, why did you have to build an additional ten kilometres of pipe in order to avoid, presumably, the jurisdiction of the Isle of Man? This cost an additional £5.4 million. Why was this not envisaged? Could we not have saved £5.4 million by correctly planning the route of the pipe?

Mr. Loughrey: Your are right, Deputy. The optimal engineering solution would have been as near a straight line as possible. However, Articles 2 and 3 of the Constitution would have raised jurisdictional problems. I do not mean to infer that these problems could not have been eventually negotiated but time was of the essence under these contracts and the opportunity cost of the time it would have taken to make new treaties and review these jurisditional issues would have been far greater than £5.4 million.

Deputy E. Byrne: The report highlights that expenditure on the UK on - shore pipeline was £5.2 million less than the amounted budgeted for and congratulations are in order for this. An additional £2 million was spent on repairing pipe-coating faults. The report suggested that this should be recovered from the contractor. Did we reclaim this?

Mr. Loughrey: This is being pursued vigorously. I have to consult my colleagues about the extent to which we have settled those claims. The coating put on those pipes is extremely robust and will stand up to sub-sea conditions indefinitely. We advised the contractor to handle them carefully but they did not follow that advice. We are talking about little penetrations the size of a pin; in many cases they are not visible to the naked eye. The insistence by Dr. McManus on quality was such that it was written into the contract. The repairs carried out in default of the contractor have been fully detailed and back charged against the contractor in the final accounts. The contractor has been provided with these details and notified of the final account. We are deducting this amount from the final moneys.

Deputy Broughan: I echo the comments of Deputy Byrne in congratulating the Department for being so close to the general guidelines on such a difficult and costly project. This was clearly a prudent move by the State. Could we have waited for the Northern Ireland, British or Scottish connection and linked up from Dundalk? Did we need to spend the £249 million?

Mr. Loughrey: With our full encouragement Northern Ireland piggy-backed on our pipeline. It allowed its gas industry to lapse and it now greatly regrets this. Everything we did was done on a minimum or no regret basis. We kept in close contact with our counterparts in Northern Ireland and they, on reflection, decided to piggyback on our initiative. We could not have waited because their project is not completed. We needed the gas as early as last October. Had they taken the initiative before us, that would have been a distinct option for us and would probably have made sense but we could not afford to wait. By the time Northern Ireland’s project was up and running our gas industry would not have been able to cope.

Deputy Broughan: Can it be said that the total cost of this project was a cost of the war in Northern Ireland?

Mr. Loughrey: We do not know what historians will tell us when they examine the file.

Deputy Broughan: It seems incredible that we launched such a major project. We now have Dr. McManus’s book; we are looking forward to the film and the mini-series.

Mr. Loughrey: He has already signed up the rights.

Deputy Broughan: The project is a wonderful achievement but could we have hooked up from Dundalk and gone across to Newry or Banbridge?

Mr. Loughrey: This would have been common sense but we could not afford to wait. We were the persuaders in this case of the benefits for the whole island of a gas interconnector. There will be a happy merging of those interests because we can act as security of supply to each other. Northern Ireland would have been in the same situation in that it would have been dependent on one pipeline. This is the ultimate example of practical cooperation between North and South for the benefit of the people of the whole island. The two pipelines will combine to provide a security of supply which we have not had until now. The initiative was taken by the Department of Transport, Energy and Communications and BGÉ, although BGÉ does not even have a counterpart in Northern Ireland. We kept closely in touch with civil servants in the Department of Economic Development in Netherleigh. They were happy, when they saw the seriousness of our intent, to come on board later.

Deputy Broughan: A large component of our energy needs will be met by this external sources but does this in any way tie us to the energy economies of Scotland, mainland Britain or Europe? Deputy O’Malley was a supporter of nuclear power in the past. To what extent will the prices be influenced by the cost of nuclear generated energy? I know this also relates to the ESB because we could be using nuclear generated power in the future.

Mr. Loughrey: That is a demanding question. There is no such thing as stand alone world energy price; one cannot compartmentalise. Gas was the nearest source of power we had to this but we had few gas fields in operation and only local pipelines. However, now that the trans-European gas network has been developed, there will be an equalisation of gas prices throughout western Europe when the final link up takes place.

The Irish gas industry will not have a comparative advantage. However, BGÉ is an effective, efficient and streamlined organisation. The way in which it has embraced change in the last number of years gives us every confidence that with an equal source of gas, it can compete pound for pound with any of its western European counterparts.

We will no longer have the economic rent of the Marathon find in Kinsale Head. That was a lovely cash cow for this State since 1978. It is no longer bonanza time from Kinsale Head gas. We will now have to use world energy prices efficiently but, with the interconnector, we will not be at a disadvantage. With the turnaround in BGÉ and the dramatic increase in productivity levels it achieved in recent years, we can compete effectively.

Deputy Broughan: Could the decisions being made by Mr. Loughrey’s UK counterpart have deep implications for our energy price policy?

Mr. Loughrey: It could, but so far the British Government has stood firm. It stood back from the blandishments of British Gas to rescue its privatised version which is now hoisted on its own petard. This means that the price of North Sea gas is competitive for everybody, including Ireland, at the moment.

Deputy Broughan: In analysing the various components of the cost, the one matter which sticks in my mind is the McMahon/McCarthy project management team. Did it not have us in a vice grip, especially after the collapse of the Kentz Group, and force BGÉ and the State to pay that extra money? The Comptroller and Auditor General’s report on the gas interconnector project said-

“The project management team indicated that an insistence on maintaining a fixed fee basis would, in the light of the additional input required of it following the disruption of the project, have forced it into liquidation.”.

Is the significant cost overrun of £6 million not astonishing blackmail?

Mr. Loughrey: The short answer to that is no. The Department of Energy was not blackmailed or forced by anybody; the ultimate legal decision was taken by the board of BGÉ. I do not see any shrinking violets on that board. It took a conscious and measured commercial decision. If we switch horses now, with two main contracts to renegotiate, two sites to turn around and impending legal challenges, the downside would be far greater.

Deputy Broughan: BGÉ had a good agreement at the start which gave the Department some control over these people. We have gone through a tendering process but these people have gone out of control, which gets us into situations we see week after week in this Committee. It may have been in relation to a larger component of a project but letting these people do this imposed a significant extra cost.

Mr. Loughrey: Nothing in this project was out of control. Kentz was an accident of history. Tom Reeves, Tom McManus and their BGÉ counterparts had a hands on policy on this project task force. It met over 100 times and an average of once every fortnight. Nothing went out of control.

Having said that, the force majeure of the Kentz Group did mean we were in a new ball game in terms of project management. The board of BGÉ made a conscious commercial decision. Of course it could have stood on its dignity, say this was its viewpoint, that it had a fixed rate contract and the time was up. However, this appalling vista, to borrow Lord Denning’s phrase, would have left the project half finished because the essential compressor stations on both sides of the Irish Sea would not have been completed. It is no use having a pipeline if one cannot push gas through it.

Deputy Broughan: Will the Secretary consider this when McMahon/McCarthy tender for other big projects in the semi-State or other sectors in which he has an interest?

Mr. Loughrey: Absolutely. I am sure it is true of BGÉ - it is certainly true of the Department - that we are learning organisations and by God, we have taken that lesson on board. The Department and BGÉ will continue to evaluate - the Comptroller pointed that out - and run with it. No doubt the Committee may come back to it and that would be welcome.

As far as the project management team is concerned, we will be looking at future contracts with eagle eyes. The programme management team did not agree with the legal interpretation as seen by BGÉ. It would have been in dispute and a matter for litigation in any event. We are now wiser and project management contracts will be drawn up in future, as Deputy Broughan suggests, in the light of that experience.

Deputy Broughan: Various Deputies are intrigued with one issue. Because of EU directives etc., we have one delivery mechanism for gas and another for electricity. This seems to be the basic idea, although we would introduce-competition for the service. Why on earth is the Department allowing some companies to inflict a number of mobile telephone Networks on us? This matter is of great interest to Members. Its equipment is blighting the landscape of our urban and rural areas. Why does the Department not lay down the law and insist, in conjunction with the Minister, that there should only be one mobile telephone network and that competition can take place within it?

Mr. Loughrey: Of course we agree with everything the Deputy said. The Minister for Transport. Energy and Communication has worked closely with the Minister for the Environment on this issue because these are clearly planning matters. The Minister for the Environment has sent clear guidelines to Local Authorities.

Deputy Broughan: The Minster is a member of my party but there seems to be an element of passing the buck here. Surely at national level, the Department of the Environment should lay down the law and stop the growth of these networks. The appearance of these devices on the streets of my constituency makes it look like a spaceship has landed in front of people’s hall doors.

Mr. Loughrey: We can only work within the existing law at present and both the Minister for the Environment and the Minister for Transport, Energy and Communications have done that to the maximum extent. Both the Minister for Transport, Energy and Communications and the Department have been leaning on Eircell and the emerging Esat Digiphone to ensure this will be the case. However, there is little we can do, short of looking at additional powers. We have worked by exhortation up to now. However, I totally agree with what Deputy Broughan said.

Deputy Upton: The report says that Nitrigin Éireann Teoranta is getting 23 per cent of the total supply of BGÉ but is only generating 8 per cent of its total turnover. Is my interpretation correct?

Mr. Loughrey: The Deputy is right.

Deputy Upton: Am I further right in suggesting it received a remarkable deal by any standards, world class perhaps? Maybe we should be getting some advice from its negotiators in how to do business?

Mr. Loughrey: From Bord Gáis’ point of view, it is the loss leader of the century. You are absolutely right.

Deputy Upton: How has this arisen? The core market, which contains industrial and household consumers, contributes 61 per cent of turnover, they are getting 35 per cent of the gas, it is 11 per cent for domestic, it does not say here how much they are contributing of the total turnover, but it seems as if NÉT are doing exceptionally well. Am I wrong in suggesting there is an element of cross subsidy here?

Mr. Loughrey: You are absolutely right. In the best traditions, we are all gifted with hindsight and some of us are here long enough to remember what happened initially in an emerging EU energy policy. When gas was first discovered it was deemed to be far too valuable to be used for anything as mundane as power consumption. It was to be used as a chemical feedstock, for instance, so NÉT was first into the field. This was not decided by the Government of the day. It had the full blessing of the conventional wisdom at the time in the European Commission and in other world institutions. At the time the State cut an excellent deal with Marathon. I do not say that in retrospect. Even at the time it was a first class deal.

The benefit of that deal initially went to NÉT, to Marino Point. They signed up long term contracts. Those contracts are still in place but they will expire by the end of the decade. At that stage, we are faced with a new situation that NÉT as a major consumer, and it is a very major consumer, has the rights of third party access. They can use the natural gas grid to buy at competitive world energy prices; that is the fate of NÉT when the existing contracts are up. They will pay a transmission fee to Bord Gáis Éireann, but the old relationship of this bargain basement deal will end at that time.

Deputy Upton: Where will that leave NÉT?

Mr. Loughrey: NÉT will not be any different from any other fertiliser producer in the sense that they will be buying gas in at comparable prices. It will be a major challenge to NÉT, but there is no question now of indirect State aid or some deep discount allowed. They can only use the pipeline or buy gas on the same basis as anybody else.

Deputy Upton: Are NÉT at risk? Would they be at risk if this type of deal had not been struck?

Mr. Loughrey: NÉT are fully aware of this. NÉT is in the sphere of influence of the Department of Enterprise and Employment, but I know they are fully apprised. They have been planning this for a long time and because they struck a good deal, they have a long lead time to reposition themselves strategically, in other words get their house in order to cater for this new situation.

Deputy Upton: Can you tell us about the ESB? They are 31 per cent of turnover, they are getting 42 per cent delivery. Admittedly the ratios are not as distorted as in the case of NÉT. Is that due to a long term deal or is it because of their size?

Mr. Loughrey: Yes, that is due to their long term deals but they are also getting a bulk supply rate. Breaking large parcels of anything and putting them in small parcels is expensive and that is why it is more expensive for Seán Citizen to buy gas than it would be for the ESB. The ESB would be a major bulk customer and the discount is reflected in that arrangement.

Deputy Upton: Are consumers losing out to some extent because they are not organised, because you do not have an agency purchasing on behalf of consumers?

Mr. Loughrey: This is a very competitive field. I do not want to start talking about brand names, everything from ESB’s Gold Shield Homes to your friendly local Kosangas dealer. I probably should not have mentioned individuals. Bord Gáis Éireann knows what it is like to be in competition and they have catered very well, but this is a very competitive field and once you had that kind of cutthroat competition consumers are well looked after. If consumers wanted to band together and make themselves into a vocal force, the Department would be very comfortable with that, but there is no evidence that the consumers are getting anything but a first class deal.

Deputy Upton: Can you tell us something about efficiency of energy utilisation and the various transformations which are going on? What will NÉT do with this energy? Will they transform it into electricity or do they use it directly?

Mr. Loughrey: NÉT use it as a feedstock for making fertiliser. It is converted - once again I am out of my depth - into ammonia and urea at the Marino Point complex. It is a factory input rather than an energy consumption.

Deputy Upton: Is it methane converted into ammonium and urea?

Mr. Loughrey: Yes.

Deputy Upton: In terms of the ESB and so on, how does gas compare? What is the cost of the various energy sources?

Mr. Loughrey: Nothing will compete with Moneypoint. Moneypoint can produce electricity from coal at a unit cost of about 1.1 pence but unfortunately it is using dirty coal, and because of the Helsinki Agreements, the nitrous oxides emissions and sulphur dioxide emissions, until clean coal technology is found, the ESB have to content themselves with Moneypoint. In any event, Moneypoint is producing about 42 per cent of the national base load and to go any further than that would be a risk in terms of diversification. Next in terms of sheer competitiveness are combined cycle gas plants where you link gas turbines with a steam turbine, you turn around the energy and keep it in the system. On the margin in incremental capacity for Ireland’s electricity, gas will be the order of the day and it will be very competitive.

Deputy Upton: How does this new peat station compare with it in terms of efficiency of energy production?

Mr. Loughrey: The new peat station will be a new generation peat station and its effectiveness will be nearly 50 per cent greater than any of the better performing peat stations that we have already. It will raise peat efficiency, they sound low but in fact they are quite high, from about 25 per cent to about 38 per cent, so the new Finnish technology which will go into this peat station will make it comparable, will bring it down to world energy prices. In other words Bord na Móna will only be paid the equivalent of world energy prices, that is £13 per tonne for peat in this new station. Up to now they have been receiving £19 per tonne from the ESB on a take or pay basis. In other words, the new peat station will be competitive, not as competitive as a combined cycle gas plant or Moneypoint, but it will be competitive and will not be any penalty on either ESB or electricity consumers.

Deputy Upton: I notice that just 2 per cent of total energy comes from hydro-renewable sources. Is that very small? What is the potential for further increase there?

Mr. Loughrey: It is very small indeed, but you may have noticed that the Minister of State, Deputy Stagg, has launched two initiatives. The first was a trawl by the ESB which got projects up to 111 megawatts. Some of them will fall by the wayside. We have accepted about 38 of them, but the target was 75 megawatts which is a dramatic increase in terms of alternative energy. The Minister also announced recently a major effort on bio-mass, so if we revisit this in a few years time, you will find that we will have a much more respectable performance in terms of alternative energy.

Deputy Upton: How much effort is going on in the Department in relation to anticipating technological developments? How much research and development is going on? I ask you in the context of the idea of a carbon tax, which is very close to the hearts of some of our political colleagues who are unfortunately not represented here today.

Mr. Loughrey: What was the question before the carbon tax?

Deputy Upton: How would a carbon tax fit into all this

Mr. Loughrey: The carbon tax is a serious challenge for the European Union. The Council of Ministers, both Environment Ministers and Energy Ministers bought into this concept of stabilising carbon dioxide emissions by the year 2000, naturally, because we were less developed, Spain, Greece, Portugal and Ireland got a slight derogation of 20 per cent. We will meet our targets in terms of carbon emissions. The European Union in general almost certainly will not, in aggregate.

The European Commission feels that there should be a carbon tax to make sure that the Rio de Janeiro commitments in terms of carbon dioxide emissions were met. The awful thing about carbon tax is that no Member State is starting from the same place. It is like running a race where some people are starting at the one furlong pole or the two furlong pole. It is very difficult. The second thing is that Europe could shoot itself in the foot in terms of employment because we volunteered ourselves for a carbon tax and the South East Asian rim, where a lot of competition is coming from, the United States, and North America in general, have not done the same thing. Yes, we could perhaps make a greater impact on environment but it would certainly be - I cannot quantify it and nobody is attempting to do so - at the cost of jobs in the European Union in general and Ireland in particular. We have to be persuaders in moving the other competing OECD countries; notably in the south east Asian rim where they are - I will not name any country - rather free and easy with their emissions, and persuade them to come on board as well. That will be a major task.

Chairman: Regarding the compression station and the delay in elements of the interconnector project, is that functioning at present?

Mr. Loughrey: They are working now.

Chairman: Is it functioning?

Mr. Loughrey: Yes, absolutely.

Chairman: You made a point at the outset that you had a disagreement with the Comptroller and Auditor General. I want the Comptroller and Auditor General to comment on that point.

Mr. Purcell: I would not like any disagreement on costings and what to include in costings and so on to obscure the value of the project, which is obvious and to which Members attested this morning. However, regarding the anticipated return on investment, my point was that most of these costs in relation to the development work on the grid were undertaken on the basis that the gas industry had a future which it patently would not have had if the interconnector was not built. It was logical to include those costs in it. I do not know the extent to which any Government would have put £160 million or possibly £200 million into a capital development which would only have a value for four or five years.

The Accounting Officer - he will smile when I say this - wore a different hat when he was trying to get EU assistance to fund this particular development. The amount of money drawn down for the building of the interconnector itself did not reach the maximum that could have been obtained. The Department made a very cogent and strong case to the EU that development work on the grid was part of the interconnector project. I am glad to say it succeeded. I do not want to go too far about it, but

I wish to make that point. As I said, it is clear the decision would have been to go ahead for reasons other than economic, although there were good economic reasons for going ahead with the project.

Mr. Loughrey: I find myself in total agreement with the Comptroller and Auditor General. I also found the VFM exercise to be absolutely excellent. It put challenges up to us and we have learned from it. However, I wish to come back on one point. I agree the Comptroller and Auditor General’s approach to project assessment was the better way. Our only disagreement is that the revenues associated with the extra costs should have been included also. I will run with the hares and hunt with the hounds if it means that Ireland Inc. gets a better deal from Europe. I freely confess to selling my soul to inconsistency to get a better deal in Brussels. I admit guilt.

I thank the Chairman for giving us this opportunity. A number of Deputies said it is obvious the Department did a reasonable job on some aspects of this matter. To the extent that this is true. I wish to acknowledge the work of my immediate colleagues. However, BGÉ played a vital part. The one thing which heartened me about this particular project was that BGÉ and the Department, not only was it professional, but the teamwork was exemplary throughout all the difficulties. I would like any kudos or credit to the extent that they are warranted - we are not feeling any way complacent or self-congratulatory - to be extended also to BGÉ.

Deputy O’Malley: May I refer Mr. Loughrey to table 3.1 on page 23 of the Comptroller and Auditor General’s report? The total budget of construction costs was £219 million.

Mr. Loughrey: That is right.

Deputy O’Malley: That is the first column. The project management fees and administration were £19 million.

Mr. Loughrey: That is right.

Deputy O’Malley: The estimated final cost - I do not know whether this is ultimately correct—-

Mr. Loughrey: The final outturn figure is £265 million.

Deputy O’Malley: £265 million?

Mr. Loughrey: We are not comparing like with like but that includes interest during construction which would not be allowable and was not used as a basis in this. The figure of £265 million has been given to the Dáil because it includes rolled up interest during construction. I do not want to confuse the meeting because they are not strictly comparable

Deputy O’Malley: If one leaves the interest out, is it closer to £222 million?

Mr. Loughrey: No. £249 million is the final outturn figure without interest during, construction.

Deputy O’Malley: The project management fee for that, assuming the figure is £249 million, is £27 million. For a relatively small increase in the total construction costs, there is an increase in the management cost of 45 per cent.

Mr. Loughrey: The Deputy is absolutely right; prima facie that does not look like a good deal. Perhaps I did not get around to explaining it properly, but it is not just on the aggregate amounts. The project management team were faced with an extra two years work, not just the two contracts and the turn around of them. The professional input required is out of all kilter with the incremental capital cost.

Deputy O’Malley: Mr. Loughrey said earlier he was faced with this ultimatum, or, as another Deputy put it, blackmail, that they would go into liquidation if they were not given a totally free hand to charge whatever they liked, when the contract was half finished. However, that is incorrect. The contract was 95 per cent finished. All that was unfinished was the Kentz element in Brighouse Bay, where it was 45 per cent complete. It left 55 per cent which would have cost £3.5 million. However, you still gave into the blackmail and paid an additional £8.5 million to complete a contract, the outstanding part of which was £3.5 million.

Mr. Loughrey: I fully accept the validity of the Deputy’s point. However, I must reject any connotations of blackmail or ultimatum. The McMahon/McCarthy consortium worked professionally and honourably. They have national and international reputations. There was no question of blackmail. For the two Irish legs of that particular consortium - the Deputy will realise this - professionals, whether they are engineers or consultants of any kind, have a low equity base. They are driven on their assets or personnel. It was clearly demonstrable that, had they been asked to stick to the interpretation of the contract as BGÉ saw it, they would have been driven into liquidation. I repeat again that their lawyers’ view of the contract was different from that of BGÉ’s. We would have been embroiled in a stand off anyway.

Deputy O’Malley: Is there any precedent for a situation where a consultant acting for the State can throw aside his contract with the agreement of the Department concerned and move from a fixed fee, which he agreed freely, to an open ended arrangement where the longer the thing goes on, the more money he gets? He is paid every day of the week for as long as it goes on.

Mr. Loughrey: I cannot cite the Deputy a precedent, but I am quite certain that many projects encountered a force majeure of the extent to which the Kentz’s examinership caused this particular project. I am not defending this as an ideal outturn.

Deputy O’Malley: Kentz was a very minor contractor for a minor part of it.

Mr. Loughrey: The Deputy is absolutely right that 90 per cent of the capital expenditure was in place. However, the compressor stations at both ends would have been static, sterile pipes unless the capacity to drive gas through was there. This was the pivotal role the Kentz contracts played. Unless new contracts were put into place and the existing ones terminated, we would not have gas flowing today. This was the judgment for the board of BGÉ and the Department.

Deputy O’Malley: One would think that a subcontractor never went wallop before.

Mr. Loughrey: I am not saying that.

Deputy O’Malley: It is a normal risk of the trade that one, two or three of them will collapse.

Mr. Loughrey: While I do not wish to rehearse arguments you have heard already, this is the most complex and sophisticated project we have had for a long time. To change consultants and advisers at that stage was deemed to be impracticable. It was as simple as that.

Deputy O’Malley: Do you realise the headline it now affords to other consultants dealing with your Department or other Government Departments?

Mr. Loughrey: The alternative headline would be that BGÉ stood on its contract and its dignity, got rid of its consultants and brought in new consultants at a higher outturn price. This would be the other lesson to be learned.

Deputy O’Malley: That depends; we do not know whether this would have happened.

Mr. Loughrey: The view taken by the experts ---

Deputy O’Malley: Did you see an article in the Sunday Independent dated 3 December 1995 by Martin Fitzpatrick where he deals with the return to the State, which was originally estimated by the Department and presumably BGÉ, at 23 to 39 per cent depending on the assumptions used? It was estimated by the EU at 15 per cent and is now calculated by the C&AG at 11 per cent, which is approximately one third of the Department’s estimate. Have you any comment on this?

Mr. Loughrey: To judge from the tenor of the meeting here, there is perhaps a friendly meeting of minds between the C&AG and myself on the terms of what may be appropriate - whether it be 11 or 15 per cent. I will return to the higher estimate later.

By any reckoning, a real rate of return of 15 per cent is a monumentally robust figure for any infrastructure project of this nature. If this was the return we obtained from the PCP since the foundation of the State our worries would be over. I can, and would be happy to stand over 11 per cent if this were the figure we were to live with.

With regard to the higher estimate, the original feasibility study was undertaken in 1989 before the crystal ball was clear. In some cases we did not even have estimates. By its nature, some of the estimates were perhaps optimistic, and some of the assumptions were clearer by 1991. Nonetheless, the thrust of all the estimates - it does not matter whatever technique one uses such as net present value or an economic rate of return - were all positive, robust and have stood up to scrutiny in the meantime.

Chairman: I welcome this useful and informed examination of what was a large and complex project undertaken to ensure the supply of natural gas to Irish consumers will continue after our known reserves become exhausted around the turn of the century. I find it encouraging that the expenditure on such a large project came in so close to budget, especially in view of the unforeseen problems encountered along the way. For that, BGÉ and the Department of Transport, Energy and Communications can take credit.

On the downside, the estimated economic returns from the project should have taken account of the costs of developing and upgrading the national gas grid, estimated to be in the order of £160 million up to 1998. I would appreciate if you would inform the Committee of the findings of any reviews undertaken of this project. Thank you, Mr. Loughrey.

Mr. Loughrey: Thank you, Chairman.

The witness withdrew.

THE COMMITTEE ADJOURNED.