Mr. Tom O'Mahony:

CIE is a commercial semi-State organisation, which means it is required to operate to a commercial mandate. Its directors are responsible for ensuring that the group delivers on that mandate, that it complies with its legal requirements and complies with the Government's code of practice for the governance of State bodies. The directors also have fiduciary responsibilities and are responsible to the Minister in terms of governance.

A commercial semi-State body will usually operate without Government subvention. There is no question of the Government giving a general purpose grant and so on to CIE but it can engage with Government Departments or agencies in terms of funding for services for particular purposes. Most of the services which the CIE companies provide would not be possible without public service obligation support. This is not unique to Ireland and would be true of public transport everywhere in the world. The PSO support is governed by EU rules to ensure there is no unfair subsidisation to the detriment of other providers or potential providers and so on.

As the National Transport Authority appeared before the committee a couple of weeks and gave the committee a detail exposition on how the PSO contracts operate, I will not repeat that information. The Department provides the NTA with the funding to procure PSO services, in respect of which the NTA has contracts with Irish Rail, Dublin Bus and Bus Éireann. The committee has already discussed monitoring of the NTA with Mr. Gerry Murphy. However, for the sake of completeness, Bus Éireann has an arrangement with the Department of Education and Skills for the schools transport scheme and is accountable to that Department in that regard. The NTA forgoes a substantial amount of income through the free travel scheme and, as such, has a relationship with the Department of Social Protection in terms of funding in that regard. That is the situation in respect of current funding.

On capital funding, the State makes significant investments in the network, particularly the railway. Maintenance of the rail network requires substantial ongoing capital expenditure to ensure safety and enable service improvements. The rationale for the State investment is to enable provision of the PSO services. While the PSO subvention compensates for the operating costs, the capital provision meets the capital cost directly. In so far as buses are funded by the State through the NTA, there are now legal agreements in place which provide that if any of the services are subsequently taken over by other operators, the NTA can repurchase those buses for a nominal sum. I think the amount is €1. This ensures their continued use for the PSO service.

In normal circumstances, where CIE is operating smoothly and is not experiencing financial difficulties - which was the case until the recession hit in 2008 - our interaction with it would be satisfying ourselves that from an accounting and management point of view, it is okay. We would regularly review its compliance with the code of governance and undertake spot-checks and monitoring of capital expenditure and so on. As I said earlier, the NTA closely monitors its performance on contracts. However, the situation, financially, over the past couple of years has not been okay. From 2009 onwards, CIE suffered a succession of knocks, with almost everything with which it dealt going in the wrong direction, including the substantial fall in passenger fare income owing to the deepening recession, the cut in PSO subvention owing to the Government's need to make substantial savings, the significant increase in fuel prices, the abolition of the tax rebate scheme on excise paid on diesel, which previously benefited the company substantially, and the introduction of the carbon tax, which resulted in the company losing a significant amount of money. The company's response to these hits was to engage in a range of cost cutting measures, including voluntary redundancies, reductions in premium pay and so on. While a process has been ongoing, the company has continued to lose money.

Everything came to a head at the beginning of 2012, when the company "suddenly" - I use the word "suddenly" because this was a failure of systems in the company, which we have subsequently had to address - discovered that it was going to breach its borrowing limits and would not have funding to meet its commitments, which would have been extremely serious and required the Minister and Department to engage extensively over a long period. The purpose of this engagement with the company, which has been ongoing for the past nine or ten months, is to ensure that the hole that had emerged could be plugged, that measures would be put in place to enable the company to trade its way out of its difficulties and get back to financial stability and to ensure that financial and other systems in the company change to ensure this type of problem does not recur. Substantial changes in the company have been made.

The Government gave a further €36 million to the NTA for PSO subventions. The NTA, in engaging with companies, was able to establish that the losses being made by them meant that the €36 million in additional PSO payments could be paid without there being any question of a breach of EU regulations. Companies are allowed to make a small profit on PSO routes, but subventions can only be used to subsidise losses and to ensure a normal rate of return.

The companies involved changed their financial systems and new people and systems have been introduced. Most significantly in terms of the relationship between the Department and CIE, given that this issue had arisen and with the financial reporting arrangements not fit for purpose, new arrangements were put in place. The Department has been assisted in this by NewERA, a unit of the National Treasury Management Agency. The Department engaged Deloitte to examine the companies and cash management arrangements, as well as processes for a recovery plan, treasury and debt risk management procedures, and make an assessment for a reporting framework. It made a number of recommendations, all of which have been implemented. We agreed a memorandum of understanding between the Department, CIE and NewERA and now receive weekly updates on CIE's cash position, with representatives of NewERA assisting the Department and providing technical support.

There is a turnaround plan in place which includes the various issues being negotiated through the Labour Court. There are also issues of budgets, cash flow, the process for disposing of non-core assets and so on. Apart from ensuring this will put the company back on the route to viability, as well as ensuring it will not again run into unforeseen crises, it will also enable it to engage with banks, as it is now doing. New credit facilities are being opened. When the overdraft limits were breached last year, the banks indicated that they would not allow any more breaches or extend the limits, but the company is now engaging with them, with the expectation positive that it will be able to return to normal funding patterns.