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

MIONTUAIRISC NA FINNEACHTA

(Minutes of Evidence)

AN COISTE UM CHUNTAIS PHOIBLÍ

COMMITTEE OF PUBLIC ACCOUNTS

Déardaoin, 11 Iuil 1996.

Thursday, 11 July 1996.

The Committee met at 11.10 a.m.

DEPUTY DENIS FOLEY IN THE CHAIR

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

Mr. Michael Dowling (Secretary, Department of Agriculture, Food & Forestry) called and examined.

Mr. Nioclás Ó Murchú (Department of Finance representative) called and examined.

Mr. Conor O’Mahony (Department of Finance representative) in attendance.

Mr. Michael Horgan (NTMA representative) in attendance.

Public Session

REPORT ON VALUE FOR MONEY EXAMINATION - FEOGA BORROWING

Chairman: There are four items of correspondence. One is from the Department of Taoiseach regarding the information requested on the employment of people with disabilities.

Deputy Finucane: One of the things that disappoints me in the statistics is the variation between different local authorities. There appear to be some progressive local authorities with over 3 and 4 per cent and then one finds very low percentages in others. I know one cannot dictate to local authorities that they must employ 4 or 5 per cent. Is there no uniform policy throughout local authorities to strive to achieve the employment of the maximum number of people with disabilities with the organisation? There is a wide variation.

Deputy E. Byrne: I support that. It shocked me to read this list. For example, Longford County Council jumps out from the pages. It does not employ a single solitary disabled person. That is quite disturbing, to say the least. One can compare it with the excellence of other local authorities. For example Louth is a relatively small county council but 4.14 per cent of the total workforce are people with disabilities.

Deputy Finucane: Kerry County Council is quite good.

Chairman: I compliment Kerry County Council.

Deputy B. O’Keeffe: As I understand it, the aspiration in the public sector is to employ 3.5 per cent of people with disabilities. We see statistics such as 0.42 per cent in Carlow while the top figure is 4.14 per cent. In the Health Boards the highest is 3.45 per cent in the Southern Health Board and I am delighted with that. We raised this matter as being a pertinent issue and we are very conscious of that. What is most disappointing is another report which states that neither the Department of the Taoiseach not the Tánaiste’s office employ people with disabilities.

In other words, neither Department is employing people with disabilities. Leadership and example should come from the top and it is astonishing there is no emphasis on employing people with disabilities given the 3.5 per cent target for the public sector. The Taoiseach and the Tánaiste should be aware of the responsibilities they have in this regard.

Chairman: We responded to the Tánaiste’s office after the last meeting.

Deputy E. Byrne: I have raised the issue of the value of school buildings which are no longer used as school buildings and the Department of Education’s lien on them. We eventually got some statistics from the Department. The correspondence from the Department indicates that seven secondary schools are no longer used for educational purposes.

I am aware that exclusive apartments are being built on the site of the former Coláiste Caoimhin on Parnell Road in Dublin. I was interested to know how much the State had made from the demolition of the previous building and the private development. According to this correspondence it seems the State got no money whatsoever, although the capital costs would have been met by the Department. The criterion it claims is that it did not receive any capital grants prior to closure.

It seems to be all very well that £1 million £1.5 million was put into the capital costs initially but we have no lien on the site to recoup any funding unless the school has been in receipt of a capital grant in the recent past. This seems outrageous. Would the Comptroller and Auditor General agree that the taxpayer is not getting value for money on the schools being used for other purposes?

Deputy Broughan: I wonder how accurate the information is or to what degree the Department bothered to pursue the fate of the schools. A lot of primary schools on the north side of Dublin, many of which had been Church schools, are now community centres. An example is a body of which I am a director, the Coolock Development Centre, which was a former boys’ secondary school in Bonnybrook. There would be a lot of primary schools on the north side which would have gone to the community. The schools used by the group with which I am involved came back to the community at no cost.

This list mentions a school in my constituency, Rosary College in Raheny, which was closed in 1995, and the Minister would have no lien. That school has been acquired by Dublin City VEC and is an educational campus of the VEC in Coláiste Dhúlaigh in Coolock. It continues in use in education. It is also an education campus of the Northside Partnership. Rosary College is still an important educational institution for the community. Given the information is wrong in that case, I wonder how accurate is the information on the other schools. We should ask the secretary of the Department of Education to give an explanation on all the schools. Many primary schools have played a valuable role on the north side of Dublin by reverting to the community to be used by it. The information on the secondary school I mentioned is wrong.

Deputy E. Byrne: Having re-read the list of secondary schools I see that four are in my constituency and three are in the south inner city of Dublin. Deputy Broughan is right. The Marist girls’ secondary school on the Sundrive Road is now occupied by Pearse College. The correspondence indicates that the schools are no longer used for educational purposes yet the Marist secondary school is used by the Dublin City VEC. This information has confused me more than ever.

Deputy Broughan: With regard to the secondary school in Raheny, the State would have paid some money for that building through the VEC. To that extent Deputy Eric Byrne is right that we should pursue how the moneys have been spent in this area.

Deputy B. O’Keffe: On the face of it, it seems this matter is much ado about nothing because the vast majority of secondary schools. While they have closed as one type of school, have opened as another, many of them former primary schools. What formula is there for recoupment to the State relative to the lien it has on schools? Do we get back the amount paid in grants over a period of years? If a schools is sold off by a religious order what recoupment is available? Is it totally based on grants made over a period of time? Is it possible to get that information?

Deputy Broughan: Under the Comptroller and Auditor General’s new powers is it possible for him to examine how moneys given to a voluntary secondary school or to a religious order were actually spent? You may not have been able to do an audit of any secondary school or any religious educational institution in the country in the past few years. However, our understanding is that you can now. How that money was spent comes within our remit just as much as the main report we do.

Mr. Purell: I will take the last point first and then go back to Deputy Eric Byrne’s point. We have audit rights in relation to community and comprehensive schools, although not in relation to secondary and primary schools. We look at the system the Department has in place for carrying out its role because it will have the primary responsibility in relation to the administration. Obviously, the primary administration will be at school level, but above that there will be a role for the Department of Education as the body which is providing the funds.

This matter has come before the Committee on a number of occasions in relation to frauds and so on that have arisen in primary and secondary schools and we have said there needs to be a regime in place to ensure the job is being properly done at a local level. It is not as easy as it sounds. If one gets into a situation where one wants each school to produce audited accounts and so on, there is a cost involved and that has to be met from local funds. The matter is being looked at in the Department of Education in the context of the proposed regional education/councils. There has been a gap over the years and this was freely admitted by the Accounting Officer when he was before the Committee. There has been a gap historically in the secondary and primary school areas.

In relation to liens and so on the Minister might have on property that is disposed of. I am not sure what the precise position is and I certainly could not comment on any individual school. However, I can say that at the moment we are finalising a value for money report on planning for second level school accommodation. As part of that study we have looked at this question, although not as a major part of the study. However, we have not ignored it because I was conscious of the Committee’s interest in the matter.

We are awaiting final clearance at present from the Department of Education about the factual accuracy of that report. I would certainly intend to publish it or at least send it to the Minister of Education within the next month or so. I would hope it would help to address the kind of concerns the members have at present. Rather than pre-empt what might be said in the report, with the Committee’s indulgence I would prefer to leave it at that for the moment.

Deputy Broughan: If there is a capitation grant of £150 or £50 for a child, for instance, would the Comptroller and Auditor General be concerned that it would be spent on the child?

Mr. Purcell: We are obviously concerned that money ... is used for the purposes for which it is granted but there must be a limit to how far we go. In that case, we would insist that the Department fulfills its responsibility with regard to its functions. If it gives capitation grants to schools, the system must be there to make sure those moneys are used in the proper way.

I can recall seeing a note to the Committee from the Accounting Officer where he pointed out that, in effect, the very fact that local schools must engage in fund-raising and so on to keep themselves going and up to speed is a de facto recognition that the capitation grant is used for educational purposes.

Deputy B. O’Keeffe: On the issue of value for money in schools, is the Comptroller and Auditor General referring to the money which is being ploughed into schools? Is he referring to the building of new schools when there is spare capacity already? For instance, we are coming across a major problem in our cities whereby the numbers are falling dramatically in the inner city and there are major patterns of growth in the suburbs for particular reasons. One finds the demand is growing for schools to be provided in those areas. That is obviously necessary from a social point of view and parents feel strongly about it. In terms of value for money, we must reconsider the social aspect because parents would prefer their children to attend schools nearby rather than take buses or be driven into the city centre. We must consider whether it would be better to close the inner city schools and build schools on the outskirts of the city in areas of major growth. We must address this seriously because it is common in every large town and city at present.

Chairman: The Committee notes the rest of the correspondence. The Committee notes item 2, the Minute of the Minister for Finance on the Third Interim Report of the Committee of Public Accounts on the 1994 Appropriation Accounts.

REPORT ON VALUE FOR MONEY EXAMINATION - FEOGA BORROWING.

Mr. Michael Dowling (Secretary, Department of Agriculture, Food and Forestry) called and examined.

Chairman: Mr. Dowling, you are very welcome. Please introduce your officials.

Mr. Dowling: Thank you, Chairman. With me are Tom Arnold and Marion Byrne from my Department, Nicolás Ó Murchú and Conor O’Mahony from the Department of Finance and Michael Horgan from the National Treasury Management Agency.

Mr. Purcell: This report is the result of an examination of the borrowing activity undertaken by the Department of Agriculture;, Food and Forestry to finance the cost of purchasing commodities for intervention storage and to fund payments in schemes under the Common Agricultural Policy pending reimbursement by the EU at agreed rates. At the end of 1995, the level of borrowing was £270 million although on some occasions in the past it has reached more than £700 million. The examination focused on whether the Department borrowed in the most efficient and economic way, how well the associated risks of borrowing were managed and how things might be improved for the future.

The report states that in the period between 1993 and 1994 practically all the Department’s borrowings were in foreign currencies to avail of the generally lower interest rates prevailing in the major economies of the world. The report established that borrowing in this way was more cost effective than borrowing an equivalent amount on the domestic market during this period by an estimated £57 million, that is after taking account of currency exchange losses which chiefly arose during the currency crisis of 1992-93.

It should be said that the borrowing was generally well managed. However, there was one major glitch in December 1992, when, as a result of a shortage of other currencies, £85 million was borrowed in Japanese yen which resulted in a net additional cost of £5.8 million compared with borrowing an equivalent amount in Deutschmarks.

The report also suggests that some portion of the borrowing during the period of the review should have been denominated in Irish pounds as all of the Department’s transactions are exclusively in that currency. I should say that since May 1994, all borrowing has been in Irish pounds, and that reflects the reality of the narrower interest rate differentials and the wider bands within the ERM. It is our conclusion that the Department is correct in adopting this strategy at this time.

The report identifies a number of areas where there is scope for improvement and I might just mention some of them. First, we think savings could be achieved by ongoing analysis of interest rates and yields to determine the optimum period for borrowing rather than adhering to the Department’s traditional procedure of borrowing for periods of one month. We carried out what I would stress was an illustrative exercise which showed that an interest saving of £100,000 could have been achieved had the Department borrowed half its funds on a weekly basis rather than on a monthly basis over the first six months of 1995.

Second, we felt some improvement could be achieved by reducing exposure to adverse interest rate movements by getting into fixed interest rates for core borrowing, particularly now at a time when interest rates are low. Third, and what is effectively the bottom line of the report, the NTMA might take over the borrowings as an agent. On the basis of a comparison with borrowing rates achieved during the first six months of 1995, an interest rate saving of approximately £119,000 could have been made in that period. Then there would also be the savings on staff time of anything up to perhaps £100,000, which might add to the overall cost savings which could be achieved.

The transfer of responsibility to the NTMA would make much sense bearing in mind that it was set up to achieve economies in managing borrowings and its people have the required expertise. I am aware that at the time of the publication of the report the Government indicated that it would consider this option but I do not know whether there have been any developments on that score since.

Chairman: Regarding the option of the NTMA taking over the borrowings as an agent, has the Department of Agriculture, Food and Forestry or the Department of Finance considered whether it would be more cost efficient and effective for the NTMA to take over the management of the borrowings?

Mr. Dowling: First, I should say before answering the question that the Department welcomes the report. The conclusions of the C&AG regarding the Government decision on foreign borrowings are reasonably favourable. They also confirm that the management was good and that the results justify the Government decision over the protracted period.

The Government has asked the two Departments to consider the question of transferring the activity to the NTMA either on an agency basis or completely. We are doing this. The conclusions of the examination are not yet available but I hope they will be shortly. There are difficulties in the Agency acting on behalf of the Minister for Agriculture, Food and Forestry as well as the Minister for Finance in the sense that if borrowings for FEOGA activities, which, while relatively low at present, can be substantial at different times, have to be included as part of the overall Exchequer debt it will change the relationship in terms of the present percentages of borrowing by which the State is viewed by exchange markets. This could have some consequences in terms of our approach in the run up EMU. Any moves towards the NTMA would, therefore, have to overcome that difficulty.

This is an issue we are looking at closely. Neither the Department of Finance nor ourselves are opposed to it in principle. The difficulties are practical and there are benefits in giving a specialist agency responsibility for this work in the sense that there are economies of scale and skills available to that agency which are not available to us. However, it would have to be handled carefully.

Perhaps there are ways of doing it other than a complete transfer. If the agency could operate as an agent with the moneys coming through our books they could perhaps be kept out of being seen as part of the core Government debt. This is something we also need to look at, but as of now there are constraints which must be taken account of in deciding on this. The study between the two Departments is at a fairly advanced stage and we hope that it could be concluded during the summer.

Chairman: Why was a decision made in 1992 to borrow in the potentially more volatile Japanese yen instead of opting for a£ ERM currency? Did you have Department of Finance approval for this course of action?

Mr. Dowling: One of the criticisms made by the report is that some of the borrowings, with regard to both the dollar and the yen, were in non-ERM currencies and therefore held a greater potential risk of exchange losses than borrowings in Deutschmarks or other currencies within the European system. In practice, however, the borrowing in dollars, looked at when borrowing took place in the 1980s, resulted in a saving compared to borrowing in Deutschmarks over the same period. The borrowing in yen did not. The borrowing in yen took place because there was a surge of expenditure at the end of that year. We needed to get borrowings quickly to meet the expenditure that arose. The deutschmark or other EU currencies were not available to us at the time at such short notice while yen were available. We had a facility with a Japanese bank for yen and we had to use it, which resulted in exchange losses which would not have occurred had we been able to borrow in other currencies.

On the Department of Finance approval issue, the arrangement is that we get approval from the Department of Finance when we open the facility with any bank for up to a given amount of money. There was Department of Finance approval for that facility. The decision to use the facility at any given time must sometimes be taken at short notice. The decision is taken, so long as it is within the facility, on the Department’s initiative and does not require Department of Finance sanction.

Chairman: You have open approval for a given sum of money. What is the figure?

Mr. Dowling: We have open approval for individual facilities with individual banks up to certain levels. They vary with the facility. The Department of Finance approves of the facility for a certain period, where we have facilities to borrow in specific currencies up to a certain level. We work within that facility and when we have to change, by extending, increasing or decreasing it we must again get Department of Finance approval.

Chairman: Can you describe the role of the Department of Finance in the management of FEOGA and borrowing? Are you satisfied with its role or should it be more proactive?

Mr. Dowling: The Department of Finance approves the taking out of specific facilities. There are regular meetings between the two Departments about our operations within the facilities. Information is shared on trends on interest rates and other matters so there is close co-operation in the operation. It works well and the evidence from the experience of the years since 1983 has been relatively favourable.

Deputy B. O’Keeffe: What is the highest level of borrowings at any one time?

Mr. Dowling: Table 1.1 on page two of the report sets out the total end of year FEOGA borrowings, which varied form a high of £715 million in 1988 to a low of £270 million in 1995. The current position is that borrowings stand at approximately £150 million - £100 million on guarantee and approximately £50 million on intervention. We estimate that the end of year position this year will be approximately £520 million of which £433 million will be guarantee and approximately £90 million on intervention. The intervention figure is open to substantial adjustment because at this stage we are not clear how much intervention will take place in the autumn.

Deputy B. O’Keeffe: Is it likely to increase?

Mr. Dowling: It will certainly increase on where we are now, but I do not know if it will increase on the £90 million we have estimated. It is not likely to be less than £90 million.

Deputy B. O’Keeffe: Given that the Committee has had an overview of other Departments, is there such a thing as a reserve account? We borrow on a monthly basis. Would we have large sums of money in reserve accounts at any one time?

Mr. Dowling: No, we do not have that facility. We borrow against our expectation of what we will need to spend during the month.

Deputy B. O’Keeffe: The NTMA was established to manage overall Government borrowings and significant savings have been effected since it came into operation. The Committee has looked at the range of departmental borrowings. They are significant. It would make good rational sense, given the expertise in the NTMA, that the level of overall borrowings and the management of the borrowings, including the issue of cost effectiveness, should be taken into account. FEOGA should be considered from this aspect.

Mr. Dowling: According to this report, the operation of foreign borrowing by us in co-operation with the Department of Finance has shown that we have saved approximately £57 million over the period by the way in which we operated foreign borrowings compared to operating borrowings on the domestic market. This is a minimum because if the level of borrowing we had to undertake in the 1980s and in part of the 1990s had to fall on the domestic market, interest rates would have been higher and there would have been an even bigger loss by comparison with borrowing on the foreign market. The figures are set out in table 2.2 of the report.

Whether we or the National Treasury Management Agency do the borrowing, the actual amount will not change. That is a given. It is required to meet delays in payment from the EU on guaranteed payments. We spend the money and it is recouped six weeks later, therefore, it must be borrowed in the meantime. Secondly, it is needed to meet the cost of intervention purchasing where we purchase product with money raised by the national Administration and we get a recoupment through an initial depreciation on entry into store. We also get recoupment through subsequent depreciations or when the product is sold from store. The cost of the value of the product in store is carried by borrowing until such time as is it sold from intervention and it is recouped from the EU.

The amount of money which must be borrowed is a given. It does not matter who does the borrowing; it still must be raised. We would not argue in technical terms with the Deputy’s contention that there is a specialist agency which has available skills, which it either developed itself or bought in. It borrows on a bigger scale anyway and, therefore, it should have some degree of savings. There are estimates in the report of what the savings would have been. They are not enormous but, undoubtedly, there would have been savings. As I said earlier, the difficulty is that this is not normal borrowing but borrowing for EU purposes which up to now has been excluded from the total Exchequer borrowing amount.

This was on the basis that it is not borrowing for Exchequer purposes but borrowing to fund EU activities. It is repayable from the EU within six weeks in some cases and the balance when product is sold out of intervention. It was never considered reasonable that this amount should be added to the State debt and included in the debt percentage. For this reason it was decided from a relatively early stage that it should be done directly through the Department of Agriculture.

We are looking at two matters. One is whether we can get over that constraint and have it done by the National Treasury Management Agency without it being included as part of the national debt in the first instance. Secondly, there is a question of classifying what is to be regarded as Exchequer borrowing. The Union has not yet made a final decision on how borrowing for FEOGA expenditure will fall into that classification. If it decides that it must be classified as Exchequer debt anyway, then there would be no case for not looking at the National Treasury Management Agency and giving it the job because it will be automatically included in the State debt portfolio.

If the classification remains as it is now, that is, that it can be counted outside the State debt portfolio, and we use the National Treasury Management Agency, we would have to consider whether it can be done in a way that it is not counted in. That is the only constraint. There are no principled or policy objections to moving it to the National Treasury Management Agency. It is just a technical matter regarding the way in which the borrowing would be seen within the total State borrowing arrangements.

Deputy B. O’Keeffe: Perhaps the representative from the Department of Finance could answer my next question. We have some concerns about various Departments being involved in their own borrowing. It means many additional staff are required in the Departments involved in borrowing and certain overlapping. It also means we are not getting the best value for money. Has the Department of Finance examined the possibility of co-ordinating the total borrowing structure across departmental boundaries and giving over this function by means of liaison between the National Treasury Management Agency and the Department of Finance?

Mr. Ó Murchú: I have been out of the country for a number of years and I returned in the last six months. However, I was not aware that Departments did their own borrowing. The only one of which I am aware is the Department of Agriculture doing the intervention agency borrowing. It would surprise me if other Departments had facilities for borrowing. We have the semi-State bodies but they are not Departments. The semi-State bodies do their own borrowing.

Deputy B. O’Keeffe: It is still public sector money.

Mr. Ó Murchú: We have looked at that. Other factors are also involved with the State bodies. ¹Apart from its impact on General Government Debt, other factors are also involved with the State bodies. They have built up their own relationships with the financial institutions. There are special circumstances pertaining to each body and it is questionable whether it would be either appropriate or economical to centralise all of them. We have not come to any conclusions on it, but we are considering the matter.

Deputy Broughan: Regarding the significant losses at the time of the currency crisis, the basic point is that £66 million was lost through inappropriate borrowing in Japanese yen, as the Comptroller and Auditor General said. The shortfall was made up in other respects perhaps but, had the management of the currency been undertaken by the Department of Finance or NTMA, would it still have been the case that a very positive balance was not shown on the account? Is it possible that there would not be a net shortfall of £16 million had a more skilled team handled the foreign currency borrowing, given that there was some merit in going into foreign currencies at that time? However one looks at it, could it be said that the State should have done much better? The exchange losses of £66 million are still losses.

To what extent was an attempt made to cover the Department and State? Was it a policy decision? It was coming up to the time my party was involved in Government, but was it not a disastrous decision that an immediate switch to domestic borrowing was not allowed? The report states the Department was not allowed to do this because it was in contravention of Government policy. Who made the policy? Was it Deputy Bertie Ahern’s policy? Did this disastrous policy cost the State upwards of £60 million?

Mr. Dowling: We did not lose £66 million with regard to the Japanese yen. Those losses are a separate issue. The loss due to the decision forced upon us regarding Japanese yen at the end of 1992 amounted to something over £5 million. The £66 million was off set to some extent by exchange rate gains the following year when we were moving borrowings back into IR£ at a time when it was favourable to do so. We made £15 or £16 million in exchange rate gains and this must be off set against it.

The £66 million arose directly because of the devaluation on the amount which we borrowed in foreign currencies. It is well known that the Government was involved in a defence of the IR£ at the time. It would have been inconceivable that a major State agency would, in the course of the Government defending the IR£, move back a very large amount of money which it borrowed in foreign currencies into domestic currency. It would have undermined what the Government was trying to do. That was a policy decision taken in line with the general approach to defending the currency at the time. It was not unique to us. It applied equally to the National Treasury Management Agency whose losses on a percentage basis were exactly the same as ours. Whether it was with the National Treasury Management Agency or us, the same position would have applied. The only way we could have avoided some of them was to have had a greater degree of borrowings in Irish pounds rather than in foreign currencies. While that would have avoided the exchange rate loss, it would have resulted in greater interest rate losses. One must be balanced against the other. A decision was taken in the early 1980s that we would stick with foreign borrowings for FEOGA activities. That, over the whole period including the currency crisis in the early 1990s, resulted in a saving rather than a loss. If we had been allowed to move the borrowings back to Irish pounds before the devaluation, those exchange rate losses would not have arisen.

Deputy Broughan: Would you have shown a fairly significant profit?

¹See Appendix 4- letter from Mr. N. Ó Murchú, Department of Finance Representative.

Mr. Dowling: We would have shown a bigger profit, but it was a policy decision to stay where we were because it would have been completely out of line with Government policy which included raising interest rates to historically high levels in order to maintain the value of the currency within the mechanism.

Deputy Broughan: It is important to be fair to the team which has managed this for the State. Before the NTMA was set up, I presume officials from the Department of Finance ran the national debt. Is the Department of Finance continuing to organise FEOGA borrowings? The Comptroller and Auditor General criticises the structures by which the Department of Finance and the Department of Agriculture, Food and Forestry do this.

The Comptroller and Auditor General states there is no formal policy document on managing currency borrowings in your Department or in the Department of Finance. Do you intend to publish such a document? It is incredible that there are manual systems for managing currency in the Department when every bank has a computerised treasury management system. We have been told your work practices are still fairly primitive and that duties do not seem to be segregated in that one or two officials could be involved in different areas of money management. We do not use yield curve analyses, core borrowing requirement strategies or forward analyses in a wide range of areas. There seem to be significant stringent criticisms of this policy, which could have been made about the Department of Finance years ago before the NTMA was set up. Are you or the Department of Finance responsible for this primitive management structure?

Mr. Dowling: It is unfair to say the report is full of stringent criticisms.

Deputy Broughan: It seriously criticises the manner in which we carry out the policy. Do you have a policy document?

Mr. Dowling: The overall review of the report was that the foreign borrowing operation in the Department of Agriculture, Food and Forestry was reasonably well managed. It does not say it was badly managed. It says that certain things in management terms could be improved and nobody denies that. We are looking at computerising the system at present. Except for a period in the 1980s when some errors were found, there is no evidence that manually managing the system has caused any difficulties. It would be easier for the staff concerned if we were fully computerised, but it has not caused difficulties or led to losses, except during that one period.

Deputy Broughan: Are the staff based in the Department of Agriculture, Food and Forestry or in the Department of Finance?

Mr. Dowling: They are our staff. The system operates on the basis that we get approval from the Department of Finance to take facilities out up to certain levels of certain currencies for particular periods. Management within those facilities is done by our staff. They do business with the banks and they control the system. There is no evidence in the report that the system is unable to be controlled manually. We are looking at core borrowing, but it is not that easy.

Deputy Broughan: Would you accept that if you compared your treasury department with the treasury department of a small bank, your work structures would be out of date?

Mr. Dowling: I do not argue they are up to date, but it is a different question as to whether they have led to inefficiencies or, particularly, to inaccuracies or losses. There is no evidence in the report to suggest that is the case; in fact, it is the opposite.

As regards core borrowing, there are distinct difficulties with the way Brussels refunds money. We expect money to come in in a particular month, but then twice as much as we expected comes in a month later. We could have a core borrowing requirement which would mean we are heavily over-borrowed during some months. We get no interest on being over-borrowed but we are paying interest. It is not easy to have a core borrowing system when the amount of receipts are erratic. At present, we are working out a core borrowing system, which we will introduce. I hope it does not lead to us being over-borrowed because we are not dealing with a predictable flow of funds.

There is a segregation of duties, as the report states, and we do not have a formal policy document drawn up. Our policy aim is to ensure that borrowing takes place at the least possible cost to the Exchequer. As a result of the suggestion by the Comptroller and Auditor General, we have drawn up a draft policy document which we hope to clear between ourselves and the Department of Finance in a short time.

As regards computerisation, we have been looking at transferring the arrangements to a computerised system and at the possibility of recruiting specialist skills, if we do not have them, for certain treasury management operations. People have been reluctant to see what can be regarded as somewhat speculative activities, in terms of hedging etc, engaged in on behalf of the Exchequer. We would be happy to use treasury management skills, but it would probably mean recruiting them from outside. However, we will not make a final decision on computerisation or recruiting skills until the relationship between us and the National Treasury Management Agency is settled. There is no point in us going ahead with a computerisation programme or the recruitment of specialist skills if it is decided in September or October that the work will be done by the National Treasury Management Agency.

Deputy Broughan: Would you accept the judgment of the Comptroller and Auditor General that if the NTMA had acted as the agent for the first six months of 1995, we could have saved up to £0.25 million? Would you also accept that if we had been more flexible when borrowing money, we could have saved £100,000 over the same period? We could have saved almost £0.5 million if the NTMA had been the agent and you had a more flexible or professional approach to borrowing.

Mr. Dowling: The Deputy has put two things together which are not the same. The Comptroller and Auditor General said that on the basis of a six month study in 1995, there could have been savings of £100,000 if we had borrowed on a weekly rather than a monthly basis. I did not do the calculations, but I am sure they are right. However, he could have taken a different six months when we would have lost on weekly rather than monthly borrowings.

We would suggest that instead of moving completely from monthly borrowings, we will look at a mix where an element of borrowing is on a weekly basis and some is on a longer basis. We can have a core borrowing requirement which over time could save us money but equally could lose us money because it depends on whether interest rates are up or down. For that reason, and not for speculative activity, we need some specialist advice with regard to, for instance, yield curve analysis etc. so we can judge better whether it is a good or bad thing to operate on the basis of a core borrowing requirement at any particular time.

If interest rates are looked at the difference between borrowing through the National Treasury Management Agency and ourselves is that we are saving between £25,000 or £30,000 per £100 million borrowed. There is no reason why any saving should be foregone, but this saving is not of dramatic proportions. For policy reasons we cannot issue commercial paper which, if we could, would save us money. One of the advantages in the movement of borrowing to the National Treasury Management Agency is that they would be in a position to do that, but the reasons we are not doing that are not based on either technical or political grounds. They are ones which relate exclusively to the constraint involved in the size of the national borrowing requirement.

Deputy Broughan: What happens if Minister Quinn’s dream comes true on 1 January 1999 and we are rambling around with euros in our pockets? How does that affect the Department? There will be changes in the CAP etc.. What is the overall scenario?

Mr. Dowling: If financing from Brussels remains as it is, we will have to borrow because we will still have to spend money here before it is recovered from Brussels, but if we have a common currency wherever we borrow, as long as it is within the euro area, will not involve any exchange risks and if there is a common currency, interest rate differentials between the different member States will either be non existent or very low.

Mr. Purcell: The report is not a scathing or a trenchant criticism of the Department in its borrowing activities. The Department did very well bearing in mind that it was using people who did not have the expertise in what has become a difficult and complex set of undertakings in borrowing foreign currencies.

Deputy Broughan: The Comptroller made some stringent criticisms of the old fashioned work practices.

Mr. Purcell: No. That was stated in the context of the potential for improvement and that is the basis for the report. I would stand over that statement. My initial view was that it was a ridiculous situation, that this should be undertaken within a Department without having expertise. I was surprised that they did so well and that is a tribute to the Department, but it can be improved. If you set up an organisation like the NTMA where you are paying top dollar for people with the best expertise, that expertise should be availed of with regard to a particular segment of your borrowing. That is the bottom line. There are several other improvements that can be made if for policy reasons it stays within the Department - such as more focus on yield curves and interest rate movement to decide what is the optimum way of doing things and the idea of core borrowing.

Deputy O’Malley: This is a complicated issue which takes time. I wish to make comments to Mr. Dowling, as the Accounting Officer for the Department, and to the Comptroller on the report.

Chairman: I will allow the Deputy his time, but I will be coming back to everyone.

Deputy O’Malley: It is very hard to deal with this in a short period. This is not like a person in a school or a hospital doing away with 332 showers, it is more complicated than that. Mr. Dowling is of the view, based on estimated results, that it was better policy for the Department of Agriculture, Food and Forestry to borrow as it did in the relevant period, 1983 to 1994, almost exclusively in foreign currency even though all the Department’s liabilities were in Irish pounds. To borrow entirely in foreign currency and not cover it when your liabilities are entirely in Irish pounds is, putting it at its mildest, speculation and some would say crazy speculation. If this were the appropriate policy, why was it not followed by the NTMA or the Department of Finance? The NTMA holds 60 per cent of Irish public debt in Irish pounds. Even groups such as Bord na Móna, Telecom Éireann or the ESB hold 40 per cent of their debt in Irish pounds. The Department has a 100 per cent liability in Irish pounds and it never covered anything in a 12 year period. Is that not purely speculation?

Mr. Dowling: The policy of moving into foreign currency was a Government decision. The money which we pay out is paid in Irish pounds. In the main our borrowing was done in the period when the ERM was in existence. There was a maximum spread within the bands of 2.25 per cent. It could not have been said that borrowing in currencies which have the possibility of moving up or down by that amount was particularly speculative. There were two areas where we went outside the ERM band as we said earlier for particular reasons in the case of the yen and for reasons which gained us money in the case of the dollar. But if the result of the policy is looked at over the period, whether it was wise to do it or not, we gained by borrowing in foreign currency as distinct from borrowing in Irish pounds and, even if we had taken part of it in Irish pounds, we would have gained less because the higher interest rates payments remained on that part of it. There was a deliberate decision taken that for reasons of likely savings we should borrow in foreign currencies and it should be kept within the Department to keep that particular element of debt, which is exclusively related to the activities which are carried out here in the CAP on behalf of the EU, out of the total Irish debt. These were policy decisions which worked out favourably in practice. It could be argued that if exchange rates had gone differently, they would not have worked out favourably, but they did. When it became plain that interest rates in Ireland had fallen to levels which made it attractive to borrow in Ireland, we returned to borrowing here and all of our borrowings are presently held in Irish currency.

I can not answer as to whether the same policy was followed by the Department of Finance or the NTMA when it was established. That is not within my portfolio.

Deputy O’Malley: Surely it cannot be suggested that the NTMA was entirely wrong to hold 60 per cent of its liabilities in Irish pounds?

Mr. Dowling: I am not suggesting that the NTMA was wrong. I am merely indicating that the policy we operated, which was decided upon by the Government, returned a profit after a period. At present, FEOGA’s borrowings are all held in Irish pounds and there is no foreign exposure. It is not attractive, from the point of view of interest, to hold money in foreign borrowings. In the future interest rates may make it attractive to hold borrowings in foreign currency rather than Irish currency. One would not anticipate that with the current state of interest rates, but it could happen. A decision would then have to be made as to whether we placed our finance in foreign borrowings or withheld some part of it at home.

Deputy O’Malley: The summary attached to table on page 21 of the report states “depending on the portfolio composition, the risk and return factors varied from…”, and reference is made to high and low levels. Regarding the low level figure, there was an annual interest saving of 0.5 per cent. However, there was a currency risk of 5 per cent which on a once-off basis, is ten times greater than the annual saving. If one was operating a private business, would it not be crazy to opt for the 0.5 per saving and expose one’s business to a 5 per cent risk?

Mr. Dowling: During most of the period in question, the interest differentials were substantial and we were involved in a fixed rate currency exchange mechanism. Therefore, the risk was not enormous. I reiterate that it was a policy decision in any event. Interest savings are now insignificant compared to the currency risk, even for members of the ERM where there is a plus or minus 15 per cent band. We are not holding any foreign currency borrowings. For most of the period in question the interest rate saving was very substantial and the currency risk was not enormous because we were within the fixed exchange rate mechanism, where currencies moved, plus or minus, to the tune of 2.25 per cent.

Deputy O’Malley: Figure 2.1 on page 12 shows a graph for 1992 which indicates that Irish and German three month interest rate differentials almost met during that period. They had been very high, 12 per cent, in 1983 when the then Government made its decision, but they almost met in 1992. What was the advantage in borrowing Deutschmarks or ERM currencies, virtually all of which are related to the Deutschmark, when there was almost no differential in interest rates?

Mr. Dowling: One must consider 1992 in the context that we were coming out of a period where, for the majority of the time, there was a substantial differential in interest rates. We were working on the basis of an agreed policy which could not be easily changed overnight and we were beginning to move into the currency crisis. This is evident from the graph where the Himalayan Peaks occur-----

Deputy O’Malley: That occurred in 1993. The figures for 1991 and 1992 show that, in so far as there was any movement in the differential, it was downwards.

Mr. Dowling: Yes, but we were still in the exchange rate mechanism in 1991 and 1992 and currency exchange rate movements were small. This fell apart in the----

Deputy O’Malley: Yes, but the liability was in Irish pounds.

Mr. Dowling: It began to fall apart in autumn 1992 when currencies came under severe pressure. At that stage, we were not allowed to switch for policy reasons.

Deputy O’Malley: I am not sure about that, particularly if the position is considered from the point of view of a trading company.

Mr. Dowling: With respect, a trading company is not in the business of protecting an exchange rate. The Government was in the position of protecting its exchange rate and currency. For reasons of policy, we were not allowed to switch from foreign into domestic borrowing. The exchange rate losses which we suffered are not significantly different in percentage terms from those incurred by the NTMA for the same reasons.

Deputy O’Malley: The logic of Mr. Dowling’s argument is that the NTMA should have divested itself of its 60 per cent Irish debt.

Mr. Dowling: I am not saying that at all.

Deputy O’Malley: This problem arose quite suddenly in September 1992. Through 1991 and in the earlier part of 1992, the pressure did not exist. However, there was a situation where there was almost no differential between Irish and German three month interest rates and FEOGA would not borrow in Irish currency, even though its liabilities were measured in Irish pounds.

Mr. Dowling: An interest differential still existed and the pound was steady, within the exchange rate mechanism. No one expected a currency crisis. Neither ourselves, the Department of Finance nor the Government anticipated that this would arise and it was not seen as realistic to move a substantial amount of foreign borrowings into the domestic market. That decision turned out to be wrong, for reasons, as Deputy O’Malley stated, which no one expected.

Deputy O’Malley: It could have been moved at the figure at which it was ultimately moved, approximately £25 million per month.

Mr. Dowling: We did move it later in different circumstances, when the exchange rate mechanism had collapsed and there was a high possibility of very large exchange losses. That possibility did not appear high in the summer of 1992.

Deputy O’Malley: Table 2.3 on page 11 indicates that 2 per cent of FEOGA’s borrowing was in Japanese yen. However, 20 per cent of its exchange loss was in yen. Does it not seem extraordinary to have borrowed in yen in such circumstances?

Mr. Dowling: We have explained that the reason for taking out the borrowing in yen is obvious from the table and that we had not done so from 1988 onwards. But there was an unexpected surge of expenditure at the end of 1992 and we could not obtain money in Deutschmarks or guilders. The facility available to us was in yen and we had to take it up as a short-term measure. We would not have done so had the money been available in other currencies.

Deputy O’Malley: Mr. Dowling’s statement that it could not be obtained in guilders is not borne out by the fact that 31 per cent of FEOGA’s borrowing in 1992 was in guilders and this rose to 49 per cent in 1993. That would suggest you were dripping in guilders.

Mr. Dowling: It is true we had large borrowings in-----

Deputy O’Malley: Huge increasing borrowings in guilders.

Mr. Dowling: I was going to finish the sentences. We had big borrowings in guilders and Deutschmarks. The particular week or ten days when we took out yen, we could not get guilders or Deutschmarks. We had used up most of our facility and could not get the currencies. The only one easily available to us at the time was the yen.

Deputy O’Malley: You went out with Swiss francs at exactly the same time. You went from nine per cent to zero. If you had stayed in Swiss francs….

Mr. Dowling: You are looking at annual figures. We are talking about what happened in a particular week. We did not run out of them in that week.

Deputy N. O’Keeffe: How secure are you now from a further currency crisis with your existing borrowings? The finance market can be volatile and can move backwards and forwards in the currency area. How secure are you should a new situation arise? I hope it does not but it might.

Mr. Dowling: As of now, we are completely secure because we have no foreign exchange borrowings at all. They are all in Irish pounds and we would not anticipate that changing in the short to medium term because interest rate differentials are very low and the currencies now move within a much wider band than before. In the short to medium term we would not envisage any change in the situation whereby we hold virtually all borrowings in Irish currency.

Deputy N. O’Keeffe: Do you see any change in the Brussels system of payment where you have to borrow money and then recoup it from Brussels? Do you see that policy changing in any way? It would be a disadvantage for national Governments and especially for the Department of Agriculture, Food and Forestry.

Mr. Dowling: There are disadvantages. There are two situations. One is intervention where member States have always had to put up the money for puchasing into intervention which is recouped gradually or at the end of the intervention period when the product is sold out All or part of the cost of carrying stock falls upon member States, who deal with that in different ways. We do it through borrowing. In the United Kingdom, for instance, it is done through the Vote. The money is advanced annually and spent in the same way as any other Vote expenditure. Borrowing takes place in our case because the volume of money is very high relative to the size of the Vote. It has always been done on the basis of borrowings.

The other situation only changed some years ago. Previously, money for normal guarantee activities like export refunds and farmer premia was advanced by the Commission on the basis of member States’ demands. Member States were getting a benefit because there would be half a month when you had more in than you were paying out. For budgetary reasons, the Council and the Commission changed that in 1988 to have a once-off saving for the Community budget. They changed the arrangements so that member States were paid in arrears and it is six weeks in arrears at best. They must therefore borrow the money to meet payments which they have to make in the meantime. The Council did agree at the time that for the four poorest member States they would pay an interest subsidy towards the cost. That interest subsidy is gradually being phased out. Last year it was reduced to six per cent and this year there is at least an agreement that it should be paid at a lower rate which possibly might be three per cent and, as and from next year, it will no longer be paid.

I do not see the system changing because the spending within the Common Agricultural Policy is currently quite close to the agricultural guideline which is the amount laid down by the Summit and the Ecofin Council for the limit on agricultural spending. Were you to change back to a situation whereby the money would again be coming in advance, rather than six weeks in arrears, the first year would see a substantial additional expenditure and could push a agricultural expenditure above the guideline. Technically it would be very difficult to change the system unless, in the context of the enlargement of the Community and new arrangements following the Intergovernmental Conference, the new financial framework involved an increase in the agricultural expenditure guideline. That is not the most likely outcome of the agreement on the new financial framework.

Deputy N. O’Keeffe: Mention was made of specialist advice. Is that kind of advice available? What role does the Department of Finance play in that type of borrowing and what advice can they offer? As the word “specialist” was mentioned, do you avail of the expertise in the banks and National Treasury Managment Agency to ascertain the opportune and advisable time to borrow and whether it should be foreign or domestic currency? Could you elaborate on the advice sought?

Mr. Dowling: The way we operate is that facilities are approved one by one by the Department of Finance. The facility, i.e., a right to borrow in Deutschmarks, guilders or whatever for the period in question, is approved in advance by the Department of Finance and we then operate within that facility to draw down as required when we borrow foreign currency. We have regular meetings with the Department of Finance to review how interest rates and currencies are going. To that extent we take the advice of people within the Department of Finance who have great experience in this area. We have built up some experience ourselves but it has been gained on the job rather than people coming in with specialist experience.

There are issues which the Comptroller and Auditor General has identified where, if we were to use National Treasury Management Agency techniques of the kind he has suggested - one or two of those might be difficult to justify for a Government Department but some would not - we would want specialist advice that is not presently available. If this operation, for reasons of policy, is left with the Department of Agriculture, Food and Forestry and not with the National Treasury Management Agency, then we would expect to recruit some specialist advice in that area and complete the computerisation system. If it goes to the National Treasury Management Agency, there would be no point in us having the specialist advice since they have it anyway. A decision will be taken within the next couple of months when it is clear how the constraints can be overcome that, up to now, have obliged the Government to keep FEOGA borrowing outside of the general Government borrowing requirement. That will happen, either through some technical arrangements or through a change at European Union level in the classification of FEOGA borrowing. If they can be overcome, responsibility for the technical work on this and raising the money should transfer to the National Treasury Management Agency to make use of the expertise they have and their scale of operation which is much different to ours. If it is decided that it stays with us without National Treasury Management Agency involvement, we will complete the computerisation programme. We are looking at identifying a level of core borrowing. Hand in hand with that will have to go some specialist advice or adviser capable of assisting us in deciding how the core borrowing should be handled with regard to the likely long term trend in interest rates and other things. How we deal with the recommendations of the Comptroller and Auditor General, with which we agree, depends on what policy decision is taken on who handles it.

Deputy N. O’Keeffe: With the huge volumes of money involved, what effect would that have on overall domestic requirement if it is all borrowed domestically? You get a concessionary interest rate plus a margin. What is that margin?

Mr. Dowling: The effect on the domestic market varies over time.

Our highest level of borrowing at the end of any year since 1988 was just over £700 million in the first year. At present all the borrowing is on the domestic market, we are currently borrowing £150 million but we expect that to have risen to about £520 million by the end of the year. Figures of £520 million and £700 million are heavy levels of borrowing and in certain circumstances they could have an effect on the domestic market. It was strongly believed throughout the 1980s and early 1990s that putting that level of borrowing on the Irish market would have an effect, perhaps a significant effect, on interest rates. However, the management consultants have advised that at present we are correct in funding the total borrowing requirement in domestic currency, as the domestic market is sufficiently liquid to supply the funds. They have also advised that the risk/return tradeoff for foreign borrowings is unfavourable and a return to foreign borrowing would have to be accompanied by active treasury management facilities which are not available at present, and we agree with that. If we return to foreign borrowing, some of the Comptroller and Auditor General’s recommendations about management techniques would have to be introduced, if it is we who do the borrowing. If not, the National Treasury Management Agency uses those techniques anyway.

Deputy N. O’Keeffe: What about its effect on interest rates?

Mr. Dowling: The present advice is that it has little or no effect on interest rates because the market is quite liquid. If the market becomes less liquid at some stage in the future, between £500 million and £700 million of FEOGA borrowings would affect interest rates. It is believed it has little if any effect in the current circumstances because the market is high in liquidity.

Deputy N. O’Keeffe: Do the FEOGA borrowings get a preferential rate?

Mr. Dowling: Yes, we do.

Deputy N. O’Keeffe: Is it DIBOR plus a margin or is it an all-in rate?

Mr. Dowling: It is DIBOR minus a margin.

Deputy N. O’Keeffe: When this reached Brussels, did FEOGA ask how this had arisen? Did it raise any objections or did it accept it in total? Was the Department’s judgment questioned in the management of the borrowing to pay the moneys owing to this country from the funds put in here? Was FEOGA satisfied?

Mr. Dowling: I do not see any reason why FEOGA would have a difficulty with it because it knows why the borrowing is required. FEOGA pays interest to us at a fixed rate, it is not affected by the rates we can achieve and exchange rate losses are not recoupable. We have given FEOGA a copy of the report as a matter of courtesy and the informal feedback is that it regards the report as satisfactory. FEOGA would not have a strong view one way or the other, it is not something in which it has a major interest.

Deputy N. O’Keeffe: The Department borrows to pay the FEOGA grants in this country, so even if it does not borrow wisely or prudently, will FEOGA still pay the total amount presented to it by the Department? I am not saying the Department did or did not borrow wisely.

Mr. Dowling: We argue that we did. The arrangement is that FEOGA moneys under the guarantee fund must be spent. Farmers, traders and companies are entitled to the money once they have done whatever they must do to gain it and they must be paid on the basis of their claims. FEOGA will only agree to recoup after payment has been made and even then at a minimum of six weeks after payment. FEOGA knows that means we have to borrow the money and it has no problem with that. Otherwise the Exchequer would have to find the money directly and given that we usually run a current account deficit the money would have to be borrowed one way or another.

Deputy N. O’Keeffe: There is no objection to the carried exchange risk and a potential loss on the borrowing?

Mr. Dowling: No, because FEOGA does not carry the exchange risk, we do.

Deputy Broughan: The bottom line is that Europe is not prepared to carry the exchange risk, so we have to carry it.

Mr. Dowling: Europe is not carrying the exchange risk for any country. It is not required that we meet it through foreign borrowings and different countries do it in different ways — some borrow, some do not.

Deputy Broughan: Why could Mr. Dowling not present Brussels with a bill for the cost of administering these guarantee schemes? To an urban TD this is an unbelievable list — financial compensation for producer organisations, arable area aid, aid for skim milk, butter, supply of milk, milk super levy, etc. Could the Department not present a bill for the total cost of running CAP on a yearly or six monthly basis?

Mr. Dowling: I wish we could. All the schemes listed are compulsory schemes which must be provided in every member State under EU law. The cost of the money spent on them — in the sense of grant levels, premium payments, etc. — comes out of the EU budget but, as I said earlier, at a delay, thereby involving the borrowing. The cost of administering them falls - I think in all cases — on member States, which means Departments of Agriculture, intervention agencies and the customs services in the main. It is a matter of EU law that this must be carried by the member State itself. We think that is unfair because it places a disproportionate burden on countries where agriculture makes up a much bigger proportion of the total economy, which are usually the less well-off countries. The system has worked that way from the beginning. In one or two areas there is a recognition that it is an unfair burden; for example, the Commission pays an interest subsidy to the four poorest members States in regard to the borrowings to fund the six week delay in guarantee payments but that is now being phased out, unfortunately.

Deputy Broughan: The Comptroller and Auditor General’s briefing notes mentioned - as did Mr. Dowling — that the UK set up its own specific intervention board to administer the schemes. The structures in the UK and the way the money moved would have been totally different to what happened here. However, considering that the Department was making monthly reports to the Department of Finance, did Mr. Dowling not feel it would have been better to ask the Secretary of that Department to carry this out and be responsible for it, in order to allow Mr. Dowling to manage his other business? Mr. Dowling is a regular visitor to this Committee — he has been here to discuss many controversies involving intervention stock in recent years. Would it not have been better to allow the Department of Finance to take its responsibilities and allow the Department of Agriculture, Food and Forestry to get on with the business of running the agriculture industry?

Mr. Dowling: Whether it would have been better depends on other things but it certainly would have been a lot easier and we would have had no difficulty if it had been done that way. However, the reason for allowing us to do it was to ensure there was a separation between borrowing for this purpose and the rest of Exchequer borrowing. It would be much harder to have such a separation if it was being done by the Department of Finance — in fact, it would have been impossible until recently. One reason it now may be possible to work more closely with the National Treasury Management Agency is the prospect that, by early autumn, borrowing for FEOGA expenditure may be classified differently and would therefore automatically be part of overall Exchequer borrowing. Until now, the reason was clear — there was a Government policy decision that this borrowing, which is separate from borrowing for the purposes of the State, should also be kept separate in the accounts.

Deputy O’Malley: Mr. Dowling, you said in your evidence earlier that you estimated the FEOGA borrowing towards the end of this year at £520 million, all of which will be Irish. Why will it be so high, given that we thought intervention was finished except for the limited arrangement made arising from the BSE problem?

Mr. Dowling: It is not exceptionally high. Going back to last year, borrowing for intervention purposes at the end of the year was £40 million but the total borrowing was £470 million. This year, borrowing for intervention purposes will be about £90 million. That could be higher depending on the degree of intervention in the autumn, which is unknown at this stage, and the total will be £520 million. The difference is that the shorter term borrowing for guarantee purposes, to pay export refunds and farmer premia etc., is recouped a minimum six weeks after expenditure. That amounted to £429 million at the end of last year and we expect it to be £433 million at the end of this year. The reason is that a big proportion of that at that time of year is premia payments to farmers for suckler cows, male beef, sheep etc., the majority of which cannot be made until November I, under law. The payment is normally made in the period between November I and January. There is a big draw down on expenditure in the months of November and December, which is not recouped until the new year. Therefore, a borrowing is carried at that time of year, which is disproportionate to the rest of the year. Intervention, while it will be bigger this year, will not be the main part of it as far as we would estimate as of now. Intervention may be higher than we anticipated.

Deputy O’Malley: The figures in table 1.1 are average annual borrowing levels. They are not end of year levels.

Mr. Dowling: That does not invalidate what I said. The figures I have given you are end of year figures.

Deputy O’Malley: What will the estimated average annual borrowing level for 1996 be, in accordance with the total column in table 1.1?

Mr. Dowling: I do not have the actual figure. We started the year at £470 million and we are likely to end the year at £520 million. The current level is about £150 million and we are halfway through the year. Adding those figures up and dividing them by three should give a rough estimate of the average, which is about £330 million.

Deputy O’Malley: What is interesting is that it can all be done in the Irish currency, whereas only a couple of years ago, none of it could be done in Irish currency.

Mr. Dowling: With respect, we have repeatedly said that the interest rate differential is different now, it is almost non-existent. The exchange rate mechanism is different.

Deputy O’Malley: It was almost non-existent with German interest rates in 1991 and 1992.

Mr. Dowling: There was a fixed exchange rate position at that time which does not exist now. The liquidity position on the Irish market is very different also. The Department of Finance representative would like to make a comment.

Mr. Ó Murchú: Going back to the 1992 situation, we had agreed the Maastricht Treaty. Everybody thought the Community would move smoothly to economic and monetary union. That was reflected in the interest differentials between the various currencies. That is why they were so low in 1992. In effect, the currencies of the narrow-band of the Exchange Rate Mechanism were regarded at that time as virtually interchangeable and there was no perceived exchange risk. These issues have to be seen in the context of the time. No-one could have predicted what emerged in September 1992. It is necessary to have regard to the psychology of the time, when everybody thought there was going to be a nice smooth run-in to EMU and the currencies were interchangeable. The fact that the interest rate differentials were so narrow at that time was a reflection of market perceptions of the future development of the Community.

Deputy O’Malley: All the liabilities were in Irish and none of the borrowing was in Irish. Nobody in their sane senses would do that.

Mr. Ó Murchú: I am just pointing out that, at the time, the narrow-band ERM had gone without any realignments since early 1987. There might have been adjustments to the marginal currencies such as the peseta, escudo or lira. The hard core currencies, of which Ireland was a member, had no changes since January 1987. We were going for five years with what appeared to be an ever-solidifying hard core of currencies. Nobody expected change so the fact that there were liabilities in Irish pounds or Deutschmarks did not seem to- matter. The interest differentials on the market reflected the fact that the financial markets saw the currencies as virtually interchangeable.

Deputy O’Malley: Could the Comptroller and Auditor explain how much of this report was written by FTI Finance, because they seem to have written a proportion of it? Where there are references to “our view”, is that FTI Finance’s view or is it the Comptroller and Auditor General’s staff’s view? There are frequent references to “our view is…” but it seems to come under where FTI Finance are referred to.

Mr. Purcell: We engaged FTI Finance to assist us with certain aspects of the examination. They did not write any of the report. We wrote the report and we came to our own conclusions. We would have certain expertise within the office, such as economists, accountants etc. We were also auditors of the NTMA which would have given us a certain expertise in these matters. We felt the issues were so technical in some respects that we brought in FTI to assist us. When the report states “our view”, it is the office’s view, or my view if the Deputy wants to get technical about it. We did not take the consultants’ view willy nilly but we agreed with their conclusions. We got them to do certain financial modelling for us, using sophisticated software they would have.

To go back to the point of getting into Irish currency and the liabilities involved — our criticism is not of having it in ERM currencies, because that was almost a surrogate for having the borrowings in Irish pounds, because of the stability of the exchange rates at the time. Our criticism was of having it in US dollars and yen, to which we had no relationship, even though, as the Accounting Officer said, having it in US dollars proved to be beneficial. We felt that was an unacceptable risk to take, even though it worked out for the Department. We had a problem in that area. That is what we felt about the policy document, that while it was geared to reducing the outgoings and costs of the Department, there should have been some emphasis on managing the risk, which is the hallmark of good treasury management.

Deputy O’Malley: In page 78 of the 1993 Comptroller and Auditor General’s report, he said that exchange losses of £ million were due to the devaluation of the Irish pound early in 1993. In this report, table 2.4 states the losses caused by the devaluation were £40.5 million. The remainder of the £66 million was due to other factors. How do you reconcile those two?

Mr. Purcell: The total effect of the currency crisis was the exchange loss of £66 million. If the effect was calculated on the date of the devaluation, it was £40.5 million but the other factors would have to be taken into account in the period. Immediately prior to devaluation there would have been an impact because people were aware there was a crisis and a lot had to be done in that period. Obviously further adverse movement occurred on the borrowing transactions after devaluation. I wish to distinguish between the precise cost of the debt on the date of devaluation, which cost us £40.5 million more and the total effect of the currency crisis, both the shivers beforehand and the aftermath, which cost us £66 million altogether. We would attribute this to the crisis.

Deputy O’Malley: An item like post-devaluation loss at £18.1 million could be anything. It is not necessarily related to currency shivers. This does not say what it is, it happens to be a loss that accrued or was realised after devaluation. It could be for some other reason.

Mr. Purcell: That was not our judgement and I can give the Deputy a detailed note on it if he wishes.

Deputy O’Malley: In the report that I mentioned, the Comptroller states that the total expenditure met by the Department exceeded the amount received from FEOGA on December 31 1993 by £246.9 million. That is the total unrecouped loss on the management of FEOGA. What is the current figure?

Mr. Dowling: We do not have the figure with us but it can be calculated and given to the Committee. It is the loss that occurs over the whole range of activities relating to intervention, interest rates, etc. Over a long period the cost of storage, transport and interest was higher here than the standard rate at which there is recoupment from Brussels. There has traditionally been some loss every year on that although there were one or two years where it has worked in the other direction. The net figures, which are presumably what Deputy O’Malley is referring to, will have changed since that but not enormously. There will be an up-to-date figure. We do not have it with us because we came here to deal with borrowing activity but we can pass it on.

Deputy O’Malley: In conclusion, I put table 2.2 to the Comptroller again. The bottom line is net saving but that figure is arrived at as a result of calculations which include estimated interest and gain. Should the table not be headed “Estimated Net Savings” and the bottom line be “Estimated Net Saving”?

Mr. Purcell: You have a point. We do say in the footnote that it is the estimated cost of servicing an equivalent amount of domestic borrowing. One could say that it is estimated net saving. If one looks at the table it is meant to be illustrative and, seen in the context of the text, it is clear one has to speak of estimates because hypothetical situations are being discussed. You are quite right, it could read estimated net saving and would perhaps be more correct. I appreciate the Deputy’s attention to detail.

Chairman: Mr. Dowling, thank you for your cooperation.

Mr. Dowling: Thank you.

The witness withdrew.

THE COMMITTEE ADJOURNED.