Mr. Seamus McCarthy:

Given the elapse of time since the committee last considered this matter, I propose to outline briefly the background to and the key findings made in the report. On the basis that the Dublin Docklands Development Authority, DDDA, was a State body operating with a commercial mandate, the audit of the authority's financial statements was carried out by a commercial auditing firm up to and including 2009. The first financial audit of the authority by my office was carried out for the financial year ending 31 December 2010. In that context, the special report before the committee was prepared to give a full account of the overall financial position of the authority and significant events that had contributed to its difficulties.

The authority's financial statements for 2010 reported a deficit of almost €2 million for the year. At the end of 2010, the authority had current liabilities of €32 million, including a bank overdraft of €12 million. Its capacity to fund itself depended on the continuing availability of banking facilities until such time as it could liquidate its property assets and collect its debts. Because it had limited cash reserves, any failure to realise projected income or any requirement to advance the timing of payment liabilities would have required the identification of other sources of funding.

The authority reported a surplus of just over €1 million for 2011 and had liabilities at year end of more than €26 million. The audit of the financial statements for 2012 has not yet commenced because draft financial statements have not been provided.

A key factor contributing to the authority's strained financial position was its participation in a joint venture with private developers to buy and develop the Irish Glass Bottle site. In October 2006 the authority and its partners in a joint venture company, Becbay Limited, agreed to bid €412 million for the Irish Glass Bottle site in Poolbeg. Other related expenses brought the total acquisition cost to €431 million, of which €291 million was borrowed. The authority provided equity and loan funding for the joint venture company and guaranteed the repayment of loans by Becbay Limited which were initially provided by the then Anglo Irish Bank. Subsequently, Becbay Limited's loans, which I understand by then were in excess of €345 million, were taken over by the National Asset Management Agency, NAMA. A settlement was agreed between the authority and NAMA in 2011 under which the authority agreed to transfer to NAMA a portfolio of property assets to settle sums due under the guarantee. Ultimately, the cost to the authority of its involvement in the Irish Glass Bottle site purchase was around €52 million.

The examination noted a number of concerns regarding the authority's decision to become involved in the Becbay Limited venture. In October 2006 the authority's management presented to the executive board an assessment of the level of investment, benefits and risks of the project, but there is no evidence that a detailed analysis of these factors, commensurate with the scale of the proposed investment, was carried out. Management advised the board that the property market was overheated, but it nevertheless recommended the investment for strategic reasons.

The authority did not obtain its own independent valuation when it was deciding on the bid that Becbay Limited should make for the site. After the bid had been lodged, Becbay Limited engaged professional valuers who confirmed, for bank borrowing purposes, that the value of the site as at 3 November 2006 was €412 million - the exact amount of the bid. The authority had to seek ministerial approval to increase its borrowing capacity up to the statutory limit of €127 million and engage in the joint venture. The information submitted to support the application stated the value of the site was approximately €220 million. It appears that the authority did not update the Department when it decided to bid almost double that amount. Consequently, consent by both the Minister for the Environment, Community and Local Government and the Minister for Public Expenditure and Reform for increased borrowing and the authority's participation in the joint venture was evidently given on the understanding an investment to the value of approximately €220 million was being contemplated.

The critical factor in the Departments' assessment of the application for approval of increased borrowing and participation in the joint venture was the authority's capacity to service the borrowing involved. The Department of the Environment, Community and Local Government received assurance from the authority that it had the capacity to service the borrowing without recourse to Exchequer resources. The audit found no evidence of a formal analysis by the Department in that regard, or any testing of the sensitivity of the authority's servicing capacity to different outturns for the joint venture. The Department has stated it would have undertaken a full assessment if Exchequer funds had been sought.

In the course of the examination my office reviewed the management by the executive board of conflicts of interest around the decision to invest in the joint venture. Clearly, there is a risk of conflicts of interest occurring in any situation where boards of State bodies include persons either with an interest in a business that is regulated by the body, or which provides services for the body. In the case of the decision to purchase the Irish Glass Bottle site, some board members disclosed their connections as directors of banks that were providing project finance and these were handled as provided for in the authority's code of practice. The executive board minutes do not record disclosure of any other personal, professional or business interests of board members that could represent a conflict of interest in relation to the decision to acquire the Irish Glass Bottle site.

The examination looked at the response of the authority to the findings of the High Court in October 2008 in a case taken against the authority regarding a section 25 application, which is a form of planning permission. In response to the case the authority amended its section 25 application process in December 2008. Owing to the substantial reduction in the number and scale of planning applications received by the authority since the conclusion of the High Court case, there was limited scope for my office to examine the effectiveness of the revised procedures in the course of this examination.