COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 22 Apr 2010

The issues that have arisen in the financial services sector in Ireland are certainly not of the NTMA's making, but the NTMA and Mr. Corrigan are now central to the clean up that is taking place. It would be remiss of me if I did not mention that at the start of today's meeting. I appreciate that they do all their work on time and I am sure their work-life balance has gone out the window in the past year and a half.

I welcome the witnesses here this morning and I ask Mr. Corrigan to introduce his officials.

Thank you for those kind words, which are certainly appreciated. I am accompanied by Mr. Ciarán Breen, director of the State Claims Agency, Mr. Adrian O'Donovan, senior manager, Mr. Michael Cunningham, head of finance, technology and risk, Mr. Oliver Whelan, head of funding and debt management, all three of whom are from the NTMA, Mr. Brian Murphy, chief executive and Accounting Officer of the National Development Finance Agency, and Mr. Gerard Cahalane, deputy director of the NDFA.

I now call on Mr. Buckley to introduce the 2008 annual report from the Office of the Comptroller and Auditor General. The full text of chapters 3 and 4 can be found in the annual report of the Comptroller and Auditor General or on the website of the Comptroller and Auditor General at www.audgen.gov.ie.

Chapter 3 sets out information about the national debt, which stood at €50.4 billion at the end of 2008 and is an increase of €12.8 billion in the year, which was almost totally due to the funding of the State deficit. This figure is calculated after netting Exchequer cash balances which amounted to €22 billion at 31 December 2008.

The large cash balance was due to the fact that a considerable amount of pre-funding or advance borrowing had been undertaken in 2008 and, in gross terms, €72.5 billion was owed in respect of the central Government at the end of the year. A further €7.7 billion of borrowing by or in respect of other agencies and projects brings the general government debt to more than €80 billion at 31 December 2008. In the subsequent year, net debt increased by a further €25 billion. The report outlines the reason for the large borrowings of €22 billion — mainly in short-term debt — in advance of that immediately required to fund the budget deficit. The Accounting Officer has explained this in terms of a need to build up a reserve in the Exchequer to manage the liquidity risks that then pertained. He also noted that, in building up the cash balance, the additional interest cost of pre-funding was €22 million, with the interest payable largely offset by deposit interest receivable on the surplus cash. The chapter also analyses the debt by type of borrowing and maturity profile.

Service costs in 2008, at €2.1 billion, were 3.5% of the GDP of that year. The chapter outlines the factors that may impact on this cost going forward. It notes the downgrading in Ireland's debt rating by some credit rating agencies and sets out the impact in terms of relative borrowing costs in the euro zone. The gross funding requirements over the period 2009 -13 were forecast at €97 billion. This takes account of replacing maturing long-term debt but excludes any borrowing debt in connection with measures to address the capital shortfalls in Irish financial institutions. At the point the report was finalised in mid-2009, it was projected that debt service costs would increase to 4.2% of GDP by the end of 2013. In the meantime, GDP has contracted and the additional servicing costs in 2009 are of the order of €1.1 billion.

Turning to administration, the agency has a number of functions and the range of entities under its aegis includes the State Claims Agency, the National Development Finance Agency and the National Pensions Reserve Fund. The State Claims Agency in 2008 settled claims against State agencies in an amount of €54 million including legal fees and is managing a contingent liability of more than €500 million. Its administrative costs were €7.5 million. The National Development Finance Agency has a direct procurement and delivery role in projects involving partnerships with private sector entities, and its running costs in 2008 were €10 million. The National Pensions Reserve Fund manages an asset portfolio on behalf of the State and has been already examined by the committee.

In 2009, the National Asset Management Agency has been added to the entities that the NTMA services and, in addition, certain advisory functions related to banking have been added. The overall administrative cost of all functions of the National Treasury Management Agency in 2008 was €33 million.

Chapter 41 outlines the cost of additional advisory services which the agency procured based on a request from the Minister for Finance. The chapter notes that €2.4 million had been incurred in 2008 for advice in regard to structural issues in the financial markets and a further payment of €4.9 million had been made in 2009 in regard to advice about the investment by the National Pensions Reserve Fund in preference shares in financial institutions.

In engaging these advisers, the agency was directed by the Minister for Finance to enter these arrangements under section 4 of the National Treasury Management Agency Act 1990. The need for advice arose out of the deterioration in the international financial environment during September 2008 and the funding problems experienced by the Irish banks. The Accounting Officer informed us that the time constraints at the time did not permit a full tender process, that there was only a limited number of potential advisers and that these were also being sought at the time by the Irish banks. The agency was requested by the Minister to secure investment banking advisers who were not conflicted. The agency, on the instruction of the Minister, appointed Merrill Lynch as exclusive advisers. The contract expired on 30 June 2009 and the total all-in cost to that point was estimated at €7.3 million, including VAT and out-of-pocket expenses.

I welcome this opportunity to meet the committee today. As Mr. Buckley noted, the NTMA's remit has expanded considerably over the past 12 months and, to set our discussion in context, the committee may find it useful if I first touch on the NTMA's structure and how its new functions are being integrated into the organisation.

As committee members are aware, the NTMA was originally established in 1990 to manage the national debt in a commercial manner and, in our debt management role, we report directly to the Minister for Finance. The period 2000-03 saw the NTMA's functions expanded significantly with the establishment of the State Claims Agency, the National Pensions Reserve Fund and the National Development Finance Agency. In the case of the NPRF and the NDFA, we do not report directly to the Minister for Finance but to the NPRF commission and NDFA board respectively.

Last year saw the establishment of the National Asset Management Agency. While NAMA is a statutory body in its own right, with its own board and chief executive, it operates under the aegis of the NTMA and all NAMA employees are staff of the NTMA. In common with the NTMA's other business functions, it draws on the NTMA's shared services in the areas of human resources, IT, financial control and internal audit. In addition, the NTMA treasury unit provides treasury execution functions to NAMA for the purposes of balance sheet management.

In March of this year, the Minister for Finance delegated a number of banking system functions to the NTMA. As with its debt management functions, the NTMA reports directly to the Minister in the performance of these new functions and is required to carry them out in accordance with his directions. Broadly speaking, the main functions delegated to the NTMA and the parameters set out in the ministerial directions are, first, to lead discussions with the covered credit institutions to determine their likely capital requirements, second, to negotiate the terms and conditions on which any capital support provided by the State will be invested and, third, to manage any ministerial shareholdings in these institutions.

As I said when appearing before the Joint Committee on Finance and the Public Service last week, I believe the NTMA can bring two particular attributes to the implementation of Government policy which are of particular benefit in the challenging environment in which the State is currently operating. These are, first, a market-facing expertise and experience with dealing with capital markets on a day-to-day basis and, second, an ability to recruit professionals from the private sector, in mid-career where necessary. In the past this has enabled us to skill up quickly to manage new functions. We are going through this process currently with NAMA and with the new banking functions which have been delegated to us.

Turning to our original business activity of debt management, the challenges which Ireland faced in the international bond markets coming into 2009 were exceptional in terms of the level of our funding requirement, investor sentiment, competition for available funds and market volatility. However, the strong liquidity position that we built up in 2008 — where we accumulated a "war chest" of €22 billion — enabled us to time our entry into the markets carefully and to take advantage of more positive investor sentiment towards Ireland as the year progressed.

We raised €35.4 billion in long-term funding in 2009. As the year progressed, international investors showed greater appetite for Irish debt, thus allowing the NTMA to sell larger amounts of bonds with longer maturities to a greater number of international investors. The uptake by international investors of a bond issue by us in February 2009, which was a three-year maturity, was 45%, while the international uptake of a bond issue in October, which was a 15-year maturity, was 91%. Stable, long-term investors such as insurance companies, pension funds and other investment funds accounted for 21% of investors in February. By October, that figure had risen to almost 60%. During 2009, we also launched a new treasury bill programme and a new US commercial paper programme in order to diversify the pool of funds from which Ireland draws its short-term borrowings.

Total debt service costs in 2009 of €3.2 billion were €686 million below budget. Approximately half of this difference is explained by the interest rates achieved by the NTMA on 2009 borrowing, which were lower than those prevailing at the time the April supplementary budget was agreed. The balance arises as a result of timing issues related to the cash accounting treatment of the payment of coupons on debt issued in 2009.

We plan to raise up to €20 billion in the bond markets in 2010. This requirement is significantly less than in 2009 because of a smaller projected Exchequer deficit of €18.7 billion and a lower refinancing requirement of €1.2 billion. We are planning a series of presentations to investors in the main international financial centres in the coming weeks to support our issuance programme.

Bond auctions, worth between €1 billion and €1.5 billion each, are being held each month. We have also taken advantage of the more positive sentiment towards Ireland to raise €5 billion through a syndicated issuance of a ten-year bond in January. Coupled with our monthly auctions, this has brought the total amount raised to date to approximately €11.7 billion, almost 60% of our planned issuance for the year. I would also note that the yield premium, or spread, over Germany which Ireland pays on its bonds has narrowed to about 1.5% compared with nearly 3% just over a year ago.

I will briefly speak about the National Development Finance Agency, NDFA, and the State Claims Agency. The NDFA has been providing financial advice to State authorities undertaking major infrastructural projects since its establishment in 2003. In addition, since 2007 it has had responsibility for the procurement and delivery of PPP projects in sectors other than transport and the local authorities.

The NDFA is currently active in the procurement of PPP projects with a total estimated value of more than €2 billion. These projects include the building of 18 schools providing 13,100 pupil places. The first four of these schools, providing for 2,700 pupils, are under construction and are due to be completed by September 2010. The contract for the second bundle of six schools providing for 4,700 pupils is due for signing in June with construction due to commence immediately thereafter. Other projects include third level facilities involving 16 buildings across nine campus locations and facilities for the delivery of radiation oncology services as part of the national cancer care strategy. My colleague, Brian Murphy, who is chief executive of and Accounting Officer for the NDFA, will discuss the work of the NDFA with the committee in more detail in a few moments.

Acting as the State Claims Agency, the NTMA manages personal injury, property damage and clinical negligence claims brought against certain State authorities, including Ministers and health enterprises. It also has a risk management role, advising and assisting State authorities in minimising their claim exposures.

Since the establishment of the agency in 2002, the number of employer liability claims associated with incidents in that period has fallen by 86% and the number of public liability claims has fallen by 36%. The drop-off in these claims has been more than offset by the increased claims activity brought about by the delegation of a number of additional categories of historical claims. The number of active clinical claims managed by the State Claims Agency remains broadly unchanged compared with 2008.

The State Claims Agency's remit was substantially expanded earlier this year following the delegation of the Health Service Executive's employers' liability, public liability, third party, property and motor claims and associated risks. Further claims categories to be delegated during 2010 include bullying and harassment claims involving personal injury and claims by gardaí and Defence Forces personnel resulting from accidents occurring on service abroad.

With regard to the National Pensions Reserve Fund, I appeared before the committee in February to discuss the work of the fund along with the fund chairman, Mr. Paul Carty. As regards NAMA, while I am an ex officio member of the NAMA board, my colleague, Brendan McDonagh, is the chief executive and Accounting Officer and I note that NAMA is not the subject of this morning’s agenda. However, since the announcement of the policy decision to establish NAMA by the Minister for Finance 12 months ago, a small team within the NTMA has worked closely with the Minister for Finance and his Department and the Attorney General’s office to develop the legislation and to secure EU Commission approval. In addition, we have put in place the necessary human resources and support services to make NAMA operational. Today, NAMA exists, having passed all those hurdles and with the transfer of €16 billion of loans, the first and largest tranche of its planned loan transfers, well under way.

As we are all only too keenly aware, the country faces very considerable economic and financial challenges. The NTMA has evolved from a single function organisation to one that now provides a range of risk management and financial services to the State. These services are a central part of the policy response to these economic and financial challenges and the NTMA is committed to doing its utmost to deliver the very best results possible for the State in each of the functions entrusted to it.

The National Development Finance Agency, NDFA, was established on 1 January 2003 to advise State authorities on the optimal financing of public capital investment projects of €20 million or more, subsequently amended to €30 million. The NDFA's overriding objective in this regard is to ensure value for money for the State.

In its capacity as financial adviser, 140 projects have been referred to the NDFA of which it has completed its formal advice on 47 projects, with a capital value of €6.6 billion. The NDFA is currently working on 53 projects in conjunction with the sponsoring Departments and various State agencies.

The National Development Finance Agency (Amendment) Act 2007, enacted on 10 April 2007, widened the remit of the NDFA by mandating it to undertake the procurement and delivery of PPP projects in all sectors apart from transport and local government. There are currently 11 projects in either procurement or pre-procurement across the education, health, justice and arts sectors. The sponsoring Ministers continue to be responsible for all aspects of the assessment and approval of each project. Following handover from the relevant Department, the NDFA is then responsible for procuring the project within these parameters. The NDFA has already commenced work on the procurement of more than €2 billion worth of projects in the education, health, justice, tourism, culture and sport sectors.

Achieving value for money remains the overriding consideration in the procurement of each public investment project and is central to the role of the NDFA. The public sector benchmark,PSB, is used to appraise a project and to test for value for money. The PSB remains the responsibility of the sponsoring authority.

The current global financial crisishas adversely impacted the funding available for all investments. There has also been a significant decrease in the number of banks providing funding for infrastructural projects, although an improvement has been noted during the early part of 2010. An important aspect of the NDFA's work, especially in the current environment, is assessing the financial standing of the consortia members selected to deliver the infrastructure projects.

The PPP model is robust and infrastructure PPPs have survived the current market difficulties better than most other asset classes. EU policy supports PPPs as outlined in a comprehensive communique in November 2009 from the EU Commission, which is appended to my statement to the committee. PPPs spread the cost of financing infrastructure over the lifetime of the asset thereby better matching payment and usage. Irish PPPs got a boost when the European Investment Bank recently announced its intention to support in principle the metro north project with up to €500 million of funding. The European Investment Bank is also participating in our second schools bundle. The support of the European Investment Bank is a vote of confidence for PPPs in Ireland.

There are necessarily limits to the detailed information that I can provide, due to commercially sensitive considerations. However, I will mention a couple of the projects. In education, thePPP programme comprises 27 schools and approximately €320 million of capital expenditure. A total of 18 schools have already been identified and are at various stages of procurement or pre-procurement. The first schools bundle reached financial close on 6 March 2009 and construction works have commenced on site with all four schools due to be occupied by September 2010. With regard to the second bundle, a preferred tenderer was appointed in October 2009 with financial close and contract award planned for early June 2010, subject to the outcome of the planning process. The third bundle of schools comprises eight schools in counties Donegal, Leitrim, Galway, Wexford, Waterford, Westmeath and Limerick and we expect to bring the project to the market in May 2010.

The third level PPP programme involves three bundles comprising 16 buildings across nine sites, with an estimated capital value of approximately €270 million. The Minister for Education and Science announced the bundling selection for the first bundle on 15 January 2008 and procurement is progressing well. The project was handed over to the NDFA for procurement on 23 July 2009. Contract award and financial close is expected in the first quarter of next year, subject to the receipt of planning permission.

As for the second bundle of third level institutions, this project is expected to be handed over to the National Development Finance Agency, NDFA, to commence procurement in the next few weeks. Pre-procurement work on the third and final bundle commenced in December 2009 and the project is expected to be handed over to the NDFA for procurement in the third quarter of 2010.

In respect of the arts, the National Concert Hall project was handed over from the Department of Arts, Sport and Tourism to the NDFA for procurement in May 2008. Tenders are currently being evaluated with a number of issues under consideration by the Department. In the area of health, the major project is the national plan for radiation oncology, NPRO. This involves the procurement of a network of facilities as part of the national cancer control programme, NCCP. The NPRO comprises two principal work streams, known as phases 1 and 2. The second phase of the project will shortly be handed over to the NDFA for procurement via public private partnership, PPP. Phase 1 is progressing at the two hospital sites concerned, namely, St. James's Hospital and Beaumont Hospital and is due for completion at the end of 2010. The NDFA is working closely with the NCCP on the phase 2 project and the public sector benchmark was approved last week. The project is on schedule to deliver the full network of services by 2014, as mentioned in the Minister's speech of 19 January 2007.

In the area of transport, the NDFA is financial adviser to several projects including the interconnector, which is the underground DART line between Heuston Station and docklands. CIE and Iarnród Éireann referred this project to the NDFA in July 2008 for financial and risk advice. The application for the railway order is due to be submitted shortly. As for metro north, tender submissions were received in February 2009. Two of the consortia subsequently were selected to participate in a best and final offer, BAFO, stage, which originally was scheduled for the second half of 2009. This is now expected to commence in the third quarter of this year, subject to receipt of the railway order, which originally it had been hoped would be issued in mid-2009. Financial close is targeted for the second half of 2011.

In respect of the second roads PPP programme, four schemes currently are planned in the National Roads Authority roads PPP programme, three of which are now in procurement. The indicative financial close for the N17-N18 Gort to Tuam scheme is October 2010. The second scheme is the N7-N11 Arklow, Rathnew and Newlands Cross scheme, for which the indicative financial close is the fourth quarter of 2010. The third project, which is the M11-M25 Gorey to Enniscorthy and New Ross bypass scheme, has recently been launched. The fourth scheme, which is the M20 Limerick to Cork southern section, is expected to launch over the next few months.

In the area of justice, the Thornton Hall prison campus is currently being scoped by the Irish Prison Service and the NDFA is providing financial and project management advice. The outline business case for the project is currently being prepared and is due to be completed shortly. Competitions for the appointment of technical and legal advisers to the project are under way.

In conclusion, the NDFA will ensure that value for money will be obtained in the delivery of public infrastructure in the current challenging economic environment. We will work closely with both the public and the private sectors to facilitate the efficient delivery of all infrastructure projects in which we are involved, irrespective of the method of procurement employed.

I welcome the witnesses. At the outset, my first question pertains to the NTMA's in-house procedures. I note the Comptroller and Auditor General's opening statement referred to how it engaged outside advisers, namely, Merrill Lynch, without a tendering process. It stated there was a limited number of advisers that were not conflicted and that the NTMA was obliged to engage within a short timescale. I seek more detail in this regard. How many is a limited number of potential service providers and how short was the timescale?

The crisis hit us in September 2008 and we received a direction from the Minister for Finance to engage outside advisers. Off the top of my head, we probably approached five or six international advisers, many of which were conflicted. In the time available, we were obliged to bypass the procedures as we found ourselves in a serious emergency and we responded to that by appointing Merrill Lynch.

The general Government debt, which is the higher of the two figures, is a gross measure of the debt that is measured in accordance with European Union conventions. Consequently, it does not allow one any credit for cash balances that one may have on hand. The national debt, which is the figure we use colloquially, is the lower figure and is net of the cash balances. Therefore, in the situation in which we find ourselves, as pointed out by the Comptroller and Auditor General in his opening remarks, we have been obliged to hold substantial cash balances for precautionary reasons and in such a case one will find a substantial difference between the two figures. However, that is the main difference.

The total debt service cost for 2010 and 2011 is €5 billion and €6.5 billion, respectively. Various components are included in that figure, the biggest of which is the interest. The other is provision for sinking funds but for 2010, the interest bill is forecast to be approximately €4.4 billion of the aforementioned €5 billion, while the interest bill in 2011 is forecast to be €5.7 billion.

Mr. Corrigan's opening statement made reference to the cost of funds to Ireland and indicated that Ireland's position is improving and that the cost to us of funds has reduced. Mr. Corrigan should expand a little more on that subject and might provide members with an overview on Ireland's respective positions vis-à-vis Greece, Spain and Portugal with regard to the cost of funds.

The cost of debt generally is measured on the basis of the spread to Germany. In other words, it is measured on how much we pay for ten-year bonds, which is a benchmark maturity. In an auction we held yesterday, we paid a spread of 158 basis points or 1.58% over Germany. This was reflected in the yield, which is equivalent to the interest rate, of 4.7%. That spread has been as high as 2.8% and blew out to that level in February and March 2009, which was when financial markets were at their most extreme in respect of the turbulence that hit them. In March 2009, for example, the equity markets were at their lowest point in the recent difficulties and our spread at that time was out at 2.8%. Therefore, there has been a dramatic improvement in the spread.

At present, as I noted, the spread is approximately 158 basis points. Deputy Collins mentioned Greece and the spread on Greek bonds is more than 5% at present. On ten-year money, if they could get it, they would be obliged to pay in excess of 8%, compared with the 4.6% that we paid yesterday in the auction we ran. For completeness, I should add that in that auction, we raised a total of €1.5 billion, consisting of €750 million in the ten-year maturity and €750 million in a five-year maturity. The Deputy also asked about Portugal and Spain. Focusing on Portugal in particular, its spread is now 175 basis points over Germany's. Were we having this discussion a month ago, that spread would have been lower than Ireland's. The Portuguese bonds in the ten-year area have been under extreme pressure in the past three or four weeks. The Portuguese spread is higher than Ireland's. The other country mentioned was Spain. Its spread is considerably lower than Ireland's at approximately 80 basis points over Germany's. I hope this answers the Deputy's question.

The National Pensions Reserve Fund, NPRF, on the direction of the Minister for Finance, invested €3.5 billion in each of those institutions in preference shares, which carry an interest rate of 8.5% per annum. In addition, the State, through the NPRF, was given warrants that entitle the State to buy shares in the banks at a future date at a fixed price. For example, there are two strike prices at which we can buy shares in AIB through the warrants. Those strike prices are 37.5 cent for parts of the warrants and 97.5 cent for the remaining warrants. The current share price is €1.55. Were those warrants exercised today, the State would stand to gain somewhere between €200 million and €300 million.

In the case of the Bank of Ireland, the State has warrants attached to its preference shares. The strike prices in respect of those shares are 20 cent for part of the warrants and 52 cent for the remainder. Were those warrants exercised today, given that the share price is €1.82, the State would probably stand to gain somewhere between €400 million and €480 million. The pension fund is attaching nil value to those warrants at the moment, so the potential return is not reflected in the valuation.

I mentioned an interest rate of 8.5% on the preference shares, but it is 8%. In February, we discussed with the committee how, in the case of Bank of Ireland, the European Commission had issued a direction that, as part of its burden-sharing requirements, the bank should not pay interest on those preference shares. In that event, a payment-in-kind arrangement, which was part of the deal with Bank of Ireland, was triggered and we got bank shares equivalent to the cash we should have received. These shares were vested at a value of €250 million in the pension fund. If they were marked to market today, they would be worth €341 million, representing a profit of approximately €90 million for the pension fund.

In the case of AIB, the dividend on the preference shares is due on 13 May. I cannot say with absolute certainly, but the Commission will probably issue a direction in a similar vein to the one issued in respect of Bank of Ireland shares. We will probably be vested with shares as part of the payment-in-kind mechanism.

No, we have little interaction with the public interest directors. In the case of Bank of Ireland and AIB, where we have been concentrating our efforts, the NTMA has a small banking team. Currently, it has two people, but we propose that it will have five people when at full strength. The banking team's members are technically insiders and have access to all of the banks' internal documents that they require. We are satisfied that we have a good insight into both institutions. We also have access to their senior managements at board level and to their chairmen. We have full disclosure. There are no problems on that front.

Regarding the national debt and the presentation of the national account, the NAMA product is off balance sheet and does not appear as part of our national debt. However, the recent announcement concerning Anglo Irish Bank, EBS and Irish Nationwide will amount to approximately €26 billion. Are discussions ongoing with the European Commission as to how that figure will be treated? Will it be on balance sheet or off balance sheet? Has any decision been taken or communication received?

In the case of Anglo Irish Bank, promissory notes worth €8.3 billion were written earlier this year. In the case of the Irish Nationwide Building Society, the figure was €2.6 billion. Both amounts go onto the stock of debt. I must distinguish between the stock of debt and the flow of debt. Since the promissory notes will be drawn down over a ten to 15-year period in terms of debt market operations, they will not have the full impact in year one. They will be spread out over ten to 15 years, but the full amounts have gone onto the stock of debt. As to the balance, I imagine that those notes will also go onto the stock of debt when written.

At the start of 2008, the national debt was €42 billion. At the end of 2008, the national debt was €72.5 billion. What were the main reasons for the unbelievable increase in the national debt, which is projected to go to €94 billion in 2010 and €112 billion in 2012, more than three times the national debt at the start of 2008?

It was more or less stable in 2005, was reduced in 2006 and was stable in 2007. Then there was the extraordinary increase in the national debt for the reasons that are well known, including squandering of money in all directions. People lost all sense of reality in the boom years, as if we could waste and use money any way we liked. This has led to an extraordinary increase in our national debt. I wanted to establish the figures to compare them with the situation at the end of 2008, with a national debt of €72.5 billion, more than double what it was in 2006.

Approximately 4.5% is my recollection. Our first decision is whether the debt rate will be fixed or floating. The second key decision is the duration or the maturity of borrowing. From the perspective of credit rating agencies, they prefer to see a longer-term duration so the average duration of the debt is five and a half to six years.

I might pose that question to the Minister.

Considering the administration accounts, I note that salaries increased by €3.6 million in 2008. What is the reason for that?

The main reason for the increase in awards was the growing number of catastrophic injury cases, particularly in the area of medical negligence, cerebral palsy being the principle area. With regard to the maturity of the portfolio, there is a lead-in period from the time that an incident occurred to when the claim was made and resolved and a number of cases of high value were settled in that period. Also during that period we inherited some legacy cases. There were cases where an insurer, whose limit of indemnity had been exceeded, had been on record for a hospital for periods extending back over 15 years. We had to take over those cases as the insurer of last resort.

We were not surprised by that. We expected that between 2004 and 2009 many cases on our books would come to maturity. The Deputy will recall that in 2004, consultant obstetricians and other consultants came within the ambit of the State Claims Agency. Therefore, their cases came on-stream then in addition to those of non-consultant hospital doctors.

No, it is roughly approximately 9% or 10% below what is standard in the insurance industry. While I agree with the Deputy that it is high, it is what is being awarded in taxation. If we go through the taxation of costs system, which is where costs are formally taxed, it certifies that these costs are correct.

That does not make it right either.

How does the present economic environment affect progress on very important National Development Finance Agency projects?

I suppose that at the heart of this are developments in the banking industry and finance generally in recent years. For some time last year, the situation was quite difficult. The nature of the current credit system is complex but the impact on the PPP market can be summarised as that the decline of interbank lending caused a shortage of funding. Many banks pulled out of the market and, effectively, the syndicated market dried up for project finance. This caused us some problems last year. However, matters have improved considerably with many banks having come back into the market. The European Investment Bank, EIB, has shown great support for the market. It already stated it would support the metro project. It is also supporting the second schools bundle, which we hope to close within the next month or two.

The closing of some projects certainly did get delayed. However, the market has eased considerably and we are confident that the projects in the pipeline will be financed.

This was an initiative of the Department of Finance. It was reported that we were in discussion with various parties in the private pensions industry. Infrastructure investment is a natural asset for pension funds. However, the private pensions industry must find attractive the returns it makes on investments. The discussions between the Department and the pensions industry may be ongoing but we have not had much involvement in it.

There has been no progress in the sense that we certainly have not seen any private pension investors come into the marketplace to finance projects. That is not to say it may not happen in the future; it probably will. There are probably a number of initiatives at present which may lead to it. The pensions industry has not financed any projects in which we have been involved.

To follow on briefly prior to calling Deputy Shortall, will Mr. Murphy elaborate on the significance of the EIB funding, taking metro north as an example? I appreciate Mr. Murphy cannot go into too much commercial detail but I assume that even though projects are on a PPP basis the costs which were originally projected have been revised downwards.

We have extensive dialogue with the EIB and have regular meetings with it. It has already supported some projects in Ireland. On a recent visit, the vice-president of the EIB stated publically that, in principle, the bank would support metro north to a sum of up to €500 million. We are discussing a number of other projects with the bank and it has been very positive and supportive.

We must remember that when we launch a competition it is a very competitive process. The prices tendered tend to be competitive at that time. The procurement process for many of these projects is very extended. It can take four to five years from conception of a project to signing the financial close and beginning construction. The tenders we see coming through now are very competitive and prices have come down.

I welcome Mr. Corrigan and his colleagues. I will begin with the issue of national debt. This morning, I received information that EUROSTAT has issued a statement reclassifying the Government deficit as a percentage of GDP for last year. The deficit is now recorded as the worst in Europe at -14.3%; it is the largest Government deficit, with Greece at -13.6%. Will Mr. Corrigan explain the reason for the deterioration in our position? In the same publication, EUROSTAT put our national debt at €104 billion whereas the National Treasury Management Agency puts it at €79 billion. How does Mr. Corrigan account for the difference and how do the NAMA bonds fit in to this?

The EUROSTAT figure of €104 billion is the monetary amount that is consistent with the debt-GDP ratio of 64% I mentioned earlier. The variance between this and the national debt figure of €75 billion is accounted for by a difference in definitions. In the case of EUROSTAT, the general government debt, GGD, is measured on a gross basis and makes no allowance for cash balances. There are also other minor definitional differences but the variance in the two figures is largely accounted for by the netting effect of the cash balances and, as noted by the Comptroller and Auditor General, we have been running higher cash balances than normal due to the financial situation.

The reclassification by EUROSTAT is technical and retrospective in nature. The money put into Anglo Irish Bank was formerly classified as a financial transaction and, as such, was not included in the current budget deficit. It has now been reclassified as a capital transfer with the result that the reported budget deficit technically rises. It has no implication for the debt-GDP ratio because irrespective of whether it is a financial transaction or a capital transfer the borrowing that it gave rise to has already been accounted for in the debt-GDP figures we described earlier.

The main item of off balance sheet debt will clearly be NAMA, which will issue Government guaranteed securities in an amount of approximately €40 billion for the loans it acquires from the banks. That debt is technically off balance sheet but we are fully aware of the volume and nature of the transactions. If one adds the NAMA figure to the national debt, the total for the end of 2010 would rise from 84% to 108% of GDP. A key metric the rating agencies apply is the ability to service debt. Notwithstanding NAMA's estimate that the proportion of performing loans will fall from 40% to 33%, the rating agencies regard it as positive that it will be self-sufficient in regard to servicing those loans because tax revenue will not be pre-empted in the same way as would debt borrowed for general budgetary purposes.

I understand that the arrangement which allowed us to put the debt for NAMA off balance sheet was made on the basis of a precedent created by the German and French authorities which was approved by EUROSTAT. It was not on the back of an initiative on the part of NAMA but it benefited from the aforementioned judgment by EUROSTAT.

I have not seen an off balance sheet debt league but I would expect that the credit rating agencies will compile such a table because it is likely that they will examine off balance sheet arrangements in assessing debt. When they make their assessments of Germany, France and, possibly, Ireland they may well add back that debt, notwithstanding the fact that it is technically off balance sheet.

There are pressing statistical reasons for putting the debt off balance sheet. As this applies equally to the National Pensions Reserve Fund, NPRF, and to NAMA, I will outline an example involving the former. If the NPRF purchases a financial security which is secured on a building, that transaction is contained within the fund and it receives the economic benefit of the rent, and so on, through the financial security. If, however, it directly purchases the same building, EUROSTAT rules would treat it as government expenditure. Applying the analogy to NAMA, the loans it purchases from the banks are regarded as financial transactions. If the loans are on balance sheet and NAMA forecloses on them, the underlying assets would technically be treated as government expenditure because of this statistical quirk. The off balance sheet arrangement was allowed not just to get the debt per se off balance sheet but also to avoid the anomalies that the statistical arrangement creates.

NAMA currently employs 21 staff and 13 people have signed contracts and will join the agency in the next couple of weeks. A further seven have indicated verbally that they will accept the offer of employment NAMA will make to them. It is expected that NAMA's head count will probably rise to between 75 and 80 people.

I did not mean for the comment to come out as it did. The NAMA employees are employees of the National Treasury Management Agency. However, their contracts differ from other contracts within the agency in that they are technically fixed-purpose contracts. They have been hired for a specific purpose, which is related to NAMA. When that purpose ceases to be required, their contract will terminate.

Under the NAMA legislation, agency staff must make formal declarations on their recruitment. I have seen all those declarations as I ultimately sign the contracts of employment for all the employees within the NTMA. If it was felt there was a conflict which was of such magnitude that it could not be managed within the conflict of interest management arrangements we have in place throughout the agency, hiring of that person would not proceed in the first instance.

What about the case of somebody who has worked in the property or banking industry and was part of the frenzy associated with the boom and who may have made much money from it? Could there be circumstances where a person who worked in that area could subsequently manage loans in which they would have had a role?

The people we hire must have the required experience in the general property area so a balance must be struck between getting people with the right experience and potential outright conflicts as mentioned by the Deputy. The statutory framework for NAMA addresses that in a formal way and it is comprehensively managed within NAMA and the NTMA to the extent that we are involved in hiring those people.

Mr. Corrigan referred earlier to his previous visit to this committee when we discussed the dividend and preference shares for Bank of Ireland and AIB. At that stage, the due date was imminent in respect of Bank of Ireland. He said at that stage that he was anxious to get cash rather than shares, and he would be prepared to leave it some time until it was decided that this was allowed. Very suddenly, the preference shares were called in. How did the position change so dramatically in the space of a week or so?

The Deputy's description is accurate as the position changed fairly dramatically. The last time I spoke to the committee we were in discussions with the European Union. From earlier discussions with the Commission in Brussels last year, we had been led to believe there was a prospect that we would be allowed the latitude of waiting with a view to getting the cash payment instead of the payment in kind. Within a couple of days of my giving evidence before the committee, the Commission indicated that it would not be prepared to allow any latitude, notwithstanding the indications given in 2009. The payment in kind provision was triggered and we got the shares as a result.

With regard to NAMA's involvement with Anglo Irish Bank, the chief executive of NAMA is the Accounting Officer. I do not want to avoid the question but he is in a much better position to speak with authority on his experience. The first transfer of debt from Anglo Irish Bank has yet to physically take place but the haircut will be substantial, reflecting the poor quality of the business written by the bank and its very poor lending policies. Beyond that I am not involved in a day-to-day fashion in the process.

I would expect that it will be in the next two or three weeks. We have begun the process of taking it over. We must bring more staff on board, as I mentioned earlier. We currently have two senior banking analysts who are very experienced in that area. Two more, including the head of that function, are due to join us in early May. At that stage we will have taken over responsibility from the Department of Finance. There is a framework agreement between the Department and Anglo Irish Bank which defines the nature of the relationship between the two; that framework arrangement will be switched over so that it applies to the NTMA and the bank.

All right. Obviously, no return is envisaged in respect of the money that is being put into Anglo Irish Bank. The ESRI has recently stated that there is little likelihood of the State's recouping anything from its investment in Anglo Irish Bank or Irish Nationwide. Would Mr. Corrigan concur with this view?

We will have to see. Anglo Irish Bank must prepare a viability plan and submit it to the European Commission by the end of May. When we are privy to the inner workings of that I will be better able to give the Deputy a view. The thinking within Anglo Irish Bank at the moment seems to be that it would be preferable to split it into a good bank and a bad bank, with the dud assets, so to speak, going to the bad bank, which would then become an asset management company; as such, it would not have any capital requirements as defined by the regulator. That is what Anglo intends to suggest. It will require rigorous examination, but I am satisfied we are properly equipped with the skills to perform that examination.

I welcome Mr. Corrigan and his colleagues to the committee.

The NTMA's Ireland Information Memorandum 2009, which was published in April of last year, refers to ratings agencies and so on. I also note that in September 2006, the Fitch agency stated that the Irish banking system was a volcano waiting to erupt. Mr. Corrigan clearly considers the ratings for Ireland — in terms of our economy, debt and so on — closely with regard to sourcing loans for the country. Was anything done about this report from Fitch, which stated so spectacularly that we would have a major banking bust, as we have had?

Did it cause alarm to Dr. Somers, Mr. Corrigan and their colleagues in the NTMA? We have had discussions in the Dáil about agencies such as Moody's and how seriously we should take them, but because we were going to the market for money, surely they must have been taken seriously. Did it not ring alarm bells such that those in the NTMA might have picked up the phone to the Central Bank, the regulator or the Minister to discuss the ominous nature of the report? It was not within its remit, obviously, but it did affect the NTMA in terms of revenue raising capacity. Should it have warned the Government that a major agency was forecasting an explosion here?

I certainly heard my predecessor, Dr. Somers, refer in concerned tones to the growth in bank lending on the basis that it could not continue to grow at a rate that outstripped the rate of nominal growth in GDP. As he put it in his own folksy way, the textbooks would need to be rewritten or we would have a problem. As he said at this committee — I looked back at his evidence — we had no particular insights into the situation. We had a counter-party credit limit for Anglo Irish Bank, but the amount we actually put on deposit with Anglo Irish Bank, mainly on the basis of our discomfort with its business model, was well within the credit limit our credit model would have thrown up. Thus, there was a degree of concern.

However, I must stress that the number of staff in the regulator's office and the Central Bank is a multiple of the number we have at the NTMA. On our debt management team, for example, we have eight or nine people, while the aforementioned bodies employ hundreds to watch these institutions.

These are issues to which we may return with the regulator.

Mr. Corrigan's predecessor always seemed to have a nice little stash of cash on hand. What is the exact figure at the moment? Will the NTMA try to pre-fund for 2011? What is the global position in terms of borrowings for this year?

The cash balances we have at the moment are of the order of €23 billion or €24 billion. This reflects the proceeds of the bond issues that have been carried out. We have front-loaded our bond issuing programme this year; this is reflected in the fact that, of a total requirement of €20 billion, we have raised about €12 billion to date, including from the auction yesterday. In recent years we have been running cash balances of the order of €20 billion, given the uncertainty of the situation. While we are cautious, we believe we are entering calmer waters, and it is part of our plan to reduce those cash balances. The mechanism for this is to reduce the volume of short-term paper on issue in the market.

Is it the case that we used up our annual pension fund contribution this year by giving it to the banks? I refer to the pre-funded 2010 proportion of the payment into the national pension reserve fund. I know it is a policy issue, but does Mr. Corrigan expect there will be a pension reserve fund payment for 2011?

The pension fund is pre-funded up to the end of 2011, so the question of the continuity or discontinuity of the payment does not arise until 2012. We are funded up to the end of next year.

The bank investments to which the Deputy refers — that is, the €7 billion — were made in early 2009. Thus, the fund currently stands at a value of about €24 billion, approximately €7 billion of which is in the banks, as represented by the preference shares. The performance of the fund last year, as I mentioned previously, was 20.9%. In the first quarter of this year, the fund's discretionary portfolio, for which the board of the fund is responsible, achieved a return of 5%.

I note the month-by-month interest table showing interest payments to the end of 2010 which reaches to just over €5 billion at year end. It has returned to be a very large component of Exchequer spending for interest on Government debt. How does Mr. Corrigan anticipate that proceeding in the future? The new Financial Regulator attended another meeting recently and said he anticipated a general rise in interest rates because now that the Government has an advantage the incredibly low rates cannot be continued. Does it concern Mr. Corrigan that this country might again reach a situation of significant interest payments, as in the 1980s? They acted as a significant damper on economic and general fiscal strategy.

In the first place, we agree with the regulator's view on interest rates. They are at an all-time low. As I mentioned when I was asked about the ingredients that go into the NTMA's debt management decisions, one such is whether we borrow on a fixed or a floating rate basis. Reflecting our view that rates are likely to rise from now, 95% of the debt portfolio is on a fixed rate basis.

It would have. The figure is currently 95%. As it currently stands, that debt portfolio is more or less immune from prospective rises in rates. However, the amounts that clearly must be borrowed in coming years will give rise to an increase in the debt bill. To put it in perspective, this year we expect that interest will be approximately 14% of estimated tax revenue. Based on the budgetary trajectory up to 2014 as published, we would expect that figure to rise and stabilise at about 20%. I should point out that historically it has been as high as 26% to 27%, or possibly higher.

I return to the counting of debt, as for example by the National Development Finance Agency. We are now used to the NRA agreements. In the most recent one the repayment concession schedule goes as far as 2052. Those are major projects in which the finance agency is involved. There is the blanket bank guarantee until at least September and there is NAMA, with some dismal reports on its first tranche of loans.

The Wall Street Journal categorised Ireland as the most indebted country in the world, putting our external debt at 1,352%. Some of the other so-called PIIGS countries of the eurozone are also quoted at a high figure, with Portugal given as number 10. Does Mr. Corrigan believe that is unfair? Is it based on more austere or valid auditing or accountancy rules which attempt to quantify total debt? We are a small open economy but have had a huge banking industry relative to our size. Switzerland, Holland and Britain are possibly the only comparable countries in Europe in this regard. Is it fair to characterise Ireland in that way as having those enormous levels of debt and as being the most indebted country on the planet? That table was made on 19 February.

I do not know where that figure came from. The general Government debt at the end of 2009 was 64% of GDP, according to the European Commission and again, according to the Commission, that compared with the euro area average of 78%. Figures have been published which, either mistakenly or mischievously, added the balance sheets of banks located in the IFSC and that may have given rise to that extraordinary figure. However, in terms of the assessment of Ireland, the two figures I read out are those that are material and relevant.

Would Mr. Corrigan accept that there is concern? EUROSTAT appears to be thinking deeply about the separate nature of revenue and capital and the type of structure we have used for PPPs and NAMA itself, with its special purpose vehicle, and so on. It appears to be thinking profoundly about how the basic debt burden of the State should be characterised.

We discussed earlier the reclassification of the €4 billion payment made to Anglo Irish Bank. That was reclassified retrospectively, from being a financial transaction to being a capital transfer. The effect of that pushes up the reported general Government balance for 2009 to above 14%, as Deputy Shortall observed. However, as I pointed out, it is already counted into the stock of debt because the debt to which that gave rise was included in the debt stock regardless of whether it was a capital transfer or a financial transaction.

In respect of NAMA and the SPV, I am not aware the Commission is reconsidering that matter. It spent a long time, under considerable pressure, particularly from the French and German authorities, before coming to that conclusion. I have no reason to believe the Commission will change that.

The Deputy's comments about other off-balance sheet arrangements are valid. I remember roadshows we did in the mid-1990s when Ireland was top of the debt league in Europe. If one adds into that debt league the unfunded pension liabilities of the public authorities, for example, which are as real a liability as any other, Germany went to the top of the league. Perhaps that will inform the Deputy as to what informs EUROSTAT's thinking.

The main reason for the increase is the Exchequer borrowing requirement to fund the day-to-day costs of running the State. I refer to the investments in the banks. The preference shares in the two main banks, which amount to €3.5 billion each, were invested by the National Pensions Reserve Fund on the direction of the Minister for Finance. They had no direct impact on the debt or the cost of the debt. In the case of Anglo Irish Bank, the payment of €4 billion to which I referred earlier came out of the Exchequer and affected the level of the national debt.

NAMA currently has a staff of 21 people and there are another 20 people who have either signed contracts or have indicated they will accept offers. That will push the number up to 40 and we expect the number will probably rise to 80 by the end of the year, at which stage we hope it will be fairly close to it's full complement.

A question was asked by my colleague Deputy Broughan about interest. At present in the European Union interest rates are at 2%. We are borrowing from the European Union and the banks apply a margin. Where does Mr. Corrigan see that going from here? Businesses are borrowing money at present at 2.5% or 3%, or at two plus 1% or two plus 1.5%.

Interest rates will rise from here, including short-term interest rates and longer-term bond yields. Our funding activities are concentrated mainly at the longer end of the bond market. Typically, we would borrow for ten years. Yesterday, we held an auction for ten-year and five-year bonds. In the case of the ten-year bond, the rate of interest or the yield on that would have been approximately 4.6%. I may be repeating myself here but we have locked in 95% of the State's general Government borrowings at fixed rates, largely reflecting our view that internationally yields will probably rise.

No. This is an auction we conduct on a monthly basis. We have a panel of primary dealers which distribute the bonds to end institutional investors such as insurance companies and pension funds. We hold an auction electronically each month and whoever bids the highest price for the auction is allocated accordingly. In the main, it is concentrated in the European Union although there is interest in Irish Government paper from the Far East. There is also some US interest but interest is largely concentrated in the European Union.

The European Central Bank meets every month to fix interest rates. What is the trend in interest rates? We are represented at those meetings by the Central Bank. I made the point that money is coming from Europe at a wholesale rate of 2% plus the margin. Where does Mr. Corrigan see that going from here? Why is there a need for an increase? I read in a newspaper that the increase in mortgages was blamed on the fact that the banks sought payback. However, I do not altogether accept that.

The question of where the European Central Bank will pitch euro denominated interest rates is a matter for the Central Bank. As the Deputy is aware, the Governor of the Central Bank of Ireland is a member of the governing council of the ECB. As a general statement, I am not privy, nor are any of my colleagues, to the inner thinking of the European Central Bank. However, we believe the general market view that interest rates will rise, as will bond yields, over time.

NAMA was set up to relieve the banking system and the property sector. It was envisaged at the time, although it was unwritten, that the haircut would be in the region of 30%. It seems now the haircut will be 45% on average. The idea of NAMA was to rescue the banking system and put more money into the State for development purposes and small businesses and so on. However, there will be a very significant shortfall, some 10% to 15% of the amount under discussion running to billions. It will be a huge shortfall. It was sold by journalists and economic commentators and it was suggested the cost would be approximately 30%, which was thought to be very high. However, given the way prices are rising it now appears that cost will be 45%. Does Mr. Corrigan believe this vehicle to save the economy, the construction and banking sectors, is as valuable now as it was then?

In the world in which we operate, that of funding and debt management responsibilities, the key opinion influencers are the rating agencies. These are the people we love to hate, so to speak. However, they have unanimously welcomed NAMA as a solution to the problem. As regards the haircuts, as the Vice Chairman stated, that is a matter for NAMA. However, I point out, as did my colleague Brendan McDonagh at the Joint Committee on Finance and the Public Service, that the figure of 30% circulating in the public domain was based on the original estimates as supplied by the banks. In fact, the figure is closer to 50% than 30%.

The immediate effect of the bigger haircut will be that the banks will have to recognise a higher volume of impairments that they had previously indicated. The effect of this is reflected in the statement issued by the regulator on 30 March with respect to the capital requirements of the banks. The corollary of the higher haircut is higher capital requirements for the banks. The regulator set out his stall with respect to all of the credit institutions. In the case of Bank of Ireland he indicated that there was a requirement of €2.7 billion. The immediate effect is that they need more capital.

There was a return of 21.1% for the average Irish pension fund, compared with our return of 20.9%, so we were slightly behind the average. However, since the fund was set up the annualised performance to the end of March on the discretionary portfolio, that is, the portfolio for which the board is responsible, was 3.1% compared with the annualised return for the average Irish pension fund of 1.1%, an excess return of 2% per annum over that period.

Okay. Mr. Corrigan mentioned the ratings agencies. He said his agency is very open with them and commented on the ratings agencies' view with regard to NAMA and various things. Where stands our credit rating at the moment with those ratings agencies? When the Irish rating was downgraded by Standard & Poor's and various other agencies it made a lot of news. Is there any imminent review of Ireland's credit rating or has one happened recently?

As the Chairman said, during 2009 the credit rating agencies reduced Ireland's long-term rating to AA from AAA, which is the top class rating. Across the main ratings agencies we have an AA rating. There are different grades within the AA ratings. Moody's rating was AA1 but we are on a negative outlook. Standard & Poor's was AA, and again we are on a negative outlook. In the case of Fitch, we are AA minus, with a stable outlook.

It is fair to say that we are talking regularly, that is, at least once a month, to the ratings agencies which are continually reviewing Ireland's fiscal and banking position. While the ratings were downgraded during 2009 and technically we are on a negative outlook, they have been happy to maintain the rating through the budget and the announcement on the banking crisis. Sentiment towards Ireland, as reflected in the bond spreads, has improved and we believe there is a reasonable prospect of the negative outlook moving to a stable outlook.

How does that compare with Spain, Greece, Italy and Portugal? Is there any sense that we are a little bit lucky that the Greeks are battling for their lives on the pitch? At the moment we might be in the dressing room but we are not on the pitch. On the negative outlook to which Mr. Corrigan referred, is there any possibility that at some stage some of the agencies might turn their attention to Spain or Ireland?

To continue with the Deputy's analogy, we were out on the pitch this time last year when the spreads were at 280 bases points. Happily, we have now retired to the dressing room, with the spreads having fallen to 150 basis points. In the meantime, the Greek spread has blown out to more than 500 basis points. My colleague, Mr. Oliver Whelan, will correct me if I am wrong but the Greek credit rating agency is at or close to junk bond status. It is below investment grade.

In the case of Portugal, its spread is now approximately 20 basis points higher than ours. I do not have the detailed ratings for the other countries in front of me; with the agreement of the Vice Chairman I can send them to the committee in writing. A rating of AA is perfectly respectable. The terms of operation of most investment funds would allow them to invest in AA-rated countries and A-rated countries. When one goes below an A rating one is in trouble.

The precise relationship, to use the Deputy's term, is spelled out in the framework agreement which currently exists between the Department of Finance and the bank. The framework agreement is in the public domain and if the committee wishes me to forward it to it, I am quite happy to do so. The major milestone in the near term is the submission by Anglo Irish Bank, with the agreement of the Irish authorities, of its viability plan to the European Commission. The whole future of Anglo Irish Bank, in whatever form or guise, will be determined in the context of the Commission's adjudication on that viability plan. We have become involved with the Department of Finance and will be intimately involved in the appraisal of that viability plan before it goes to the European Commission.

With respect to our banking function, we report, as in the case of the debt, directly to the Minister for Finance. Certainly we furnish him with our understanding of the situation. Ultimately, then, it will be a matter for the Minister or the Government to make that decision before the plan is forwarded to Brussels.

I did not mean to put anyone on the spot, these are delicate issues. There has been a Government decision, however, that Anglo Irish Bank will remain in existence while there is a counter view that it would be better for the taxpayer and the country if it was wound down over a period of time. What is the process? How did the Minister reach that decision and can it be reconsidered?

A policy decision has been taken but in terms of the NTMA doing its duty, it might conclude that it is better to wind down the bank. Would there be an option to provide that advice to the Minister when it comes to managing his shareholding? Is there any possibility it is not a foregone conclusion, that there may be an option in the future, if the NTMA was to come to the view that it should be wound down, that such advice would be given?

It is not entirely clear we will. It depends on where the bonds are held. In the national debt, there is a central registry, Euroclear, which is where the bonds are held electronically. I could not say who the precise holders are of the Irish national debt. I have a fair idea from my engagement with investors but I could not tell the committee who they are. I do not know if I would be in a similar position with Anglo Irish Bank but it would not surprise me if circumstances were similar.

The NTMA was not directly involved in either of those two institutions. We were aware that work was done for the regulator by PWC but we were not directly involved. In the cases of AIB and Bank of Ireland, to the extent that the investment in those was done through the National Pensions Reserve Fund, we conducted an exhaustive due diligence, including legal due diligence, on both institutions.

On the motorway building programme, and the widespread use of public private partnerships, has there been any look back at the cost of those motorways, not just the cost of building them but the cost to the taxpayer in terms of the 30 years of tolls on them? Was any value for money audit done on those?

The NDFA is not the procuring authority for the motorways, that is the National Roads Authority. We have had a financial advisory role in the last couple of years for the provision of motorways, particularly the most recent programme of four projects.

I am unaware of any look back audit having been conducted yet for any of the motorway projects. We have not been involved in any such audit, if it has been done. Our role as financial advisors is to look at value for money and financial robustness of various contracting parties.

Absolutely. The comparator used to test for value for money is the public sector benchmark. That is a financial model that shows the cost of delivering the project on a traditional basis and including the risks that have been transferred to the private sector under the PPP. It is a robust model that is used internationally to determine value for money. There is a well established methodology.

The general principle of doing a look back audit to see if value for money has been delivered versus the first estimate is a good idea and will be put in place. It is instructive to look at PPPs in general and the recent projects that have been delivered. The criminal courts complex was delivered on budget and ahead of schedule, and is viewed as a successful project. The new national convention centre, which will open in September, is also a PPP project.

I agree with the principle of having a look-back audit; it is a good idea.

Yes. We have been engaged as financial advisers on the metro north project and more recently on the interconnector project. The interconnector project is at a relatively early stage, as I explained in my opening statement, and we were engaged by Iarnród Éireann to advise on it in the middle of last year.

We have been involved as joint financial advisers on the metro north project, and I explained in my opening statement why that is. It is hoped that the planning appeal process will finish and the railway order will be issued in the middle of this year.

Those are both major infrastructure projects. Most of us would have hoped that they would have been built by now, but the planning work is still going on, although it is getting closer. You have carried out future discounting for the projects, because they are often challenged by the media, which asks how they can be justified. However, the State's annual commitment, through its agencies, would be quite significant for both those projects.

It was more of a top-down process. The NAMA process has involved a loan-by-loan evaluation. The sense of disorder that has emerged from the NAMA exercise would have been apparent to us in the course of the due diligence exercise, but it is at a higher level. My colleague, Brendan McDonagh, has examined things on a loan-by-loan basis, and the evidence has been pretty damning.

No, the legislation that empowered the pension fund to invest in the two banks was confined to the quoted institutions. There were only three prospective institutions: Irish Life & Permanent, which clearly had no exposure in that sector, and the two main banks. We were involved in discussions on the situation in Nationwide and in Anglo Irish Bank, and we assisted the Minister and the Department in forming a view, but we were not directly involved in the due diligence exercise.

Did anyone raise queries about why EBS was included as part of the quoted institutions? Was there any discussion of that at the time? There would be a general view among some members of the public that it was a political move in that EBS was brought in to cover Nationwide, although it had had perhaps more of a true building society role. Were any reservations expressed about the fact that EBS was involved?

It is clear that the scale of the disaster in Irish Nationwide bears no relation to the situation in EBS. Nevertheless, EBS had a land and development book. It got into that business quite late, and consequently it assisted projects that were costing top dollar. It did not have the benefit of having averaged out the cost during the boom years.

The extent to which EBS was exposed to land and development, and to which that exposure has given rise to a capital need, justifies the legitimacy of including it in the scheme.

That is debatable.

I have one last question, on carbon credits and the social insurance fund. What is the latest position on those? Am I correct to say that the NTMA manages the social insurance fund?

We managed the surplus in the social insurance fund, but that is exhausted — there is nothing left in it at the moment.

We ceased purchasing carbon credits in early 2009, on the request of the Department of the Environment, Heritage and Local Government. The Department is reworking the need for the purchase of credit, given the downturn in the economy and the reduction in carbon emissions that will follow. It has been working with——

I will comment on two things. First, the structure of debt is changing quite a lot. Our interest is in transparency and ensuring that we report on things whether they are on or off balance sheet. We began that process last year with chapter 1 of our report, in which we pulled together all the major liabilities of the State.

In this instance, we are dealing with much more that is off balance sheet, in the form of NAMA bonds, on top of what is there in the form of PPPs and so on. It is clear that there will be changes in the recognition rules, as has been signalled today, and that will be taken into account in the course of the accounts and the auditing process. There are also new forms of debt such as promissary notes and so on. Our challenge is to create a transparent account of the total debt. As I said, we began that process last year and it continues with those new forms of borrowing.

With regard to NAMA, the accounts will be certified around April next year. In advance of that, we will try to produce an account of the systems and structures that are in place, the arrangements for taking over the debt and the preliminary arrangements for governance and internal control.

I wanted to update the committee on those two things.

I agree, but with one caveat. When we have the regulator in, it might be important for us to refer back to the NTMA with regard to how the regulator carried out its job — in other words, what the available knowledge was about our banking system in 2006, 2007 and 2008. That was the point that I was making earlier.

Absolutely, that is relevant. That is agreed.

I thank the witnesses for their time, and I wish all three agencies the very best during the next few months in carrying on the good work that they are doing.

The agenda for next Thursday is the 2008 Annual Report of the Comptroller and Auditor General and Appropriation Accounts, on social and family affairs.

The witnesses withdrew.

The committee adjourned at 12.50 p.m. until 10 a.m. on Thursday, 29 April 2010.