Mr. Seamus McCarthy:

In the earlier years of the last decade, the Department of the Environment, Community and Local Government supported a policy of acquisition by local authorities of land banks for the provision of social and affordable housing. The land acquired to create the land banks was purchased with loans from the Housing Finance Agency, HFA, generally provided for a term of seven years. The intention was that the loans and the accrued interest would be repaid by the local authorities from capital grants paid by the Department from its social housing investment programme, when housing on the land was brought into use. In total, the HFA advanced €821 million to local authorities for such land purchases.

Because of the reduction in the amount of capital funding available for development of social housing, some local authorities ran into difficulty in meeting their commitments to repay the loans to the agency when the loan term ran out. The land aggregation scheme was established by the Department in 2010 to help alleviate the financial burden of the loans on local authorities. Initially, the scheme provided for the Department to make funds available to the relevant local authority to redeem in full the maturing loans, including the accrued interest. In return, the local authorities were required to transfer the residential development land related to the redeemed loans to a special purpose body called the Housing and Sustainable Communities Agency, which is referred to as the Housing Agency.

Under revised arrangements for the scheme introduced in June 2012, maturing loans could be converted to equivalent annuity loans provided by the HFA. Under that arrangement, local authorities make annuity payments to the HFA and, on condition that the related lands have transferred to the Housing Agency, may recoup the payments from the Department. The scheme closed on 11 December 2013. No submissions were accepted after that date, and applications made but not approved by that date were not accepted into the land aggregation scheme.

The Department asked local authorities to identify land and loans that might be suitable for inclusion in the scheme. They identified 259 sites covering 775 ha with related loans and interest amounting to €500 million. The Department approved applications for 47 sites, with an aggregated area of 173 ha, under the original terms of the scheme. The Department paid grants totalling €111 million to redeem the 47 loans. The original purchase cost of the associated land is estimated at around €86.6 million. The accrued interest element on the redeemed loans is estimated at around €24.5 million or 28% of the original purchase cost.

A further 25 sites were approved for inclusion in the scheme under the revised conditions, and prior to the scheme closing in 2013. Twenty five year annuity loans with a combined value of €52.15 million, including €12 million in accrued interest, were approved to refinance the matured loans. If all of the 25 approved sites are transferred to the Housing Agency, the annual commitment to be met by the Department is estimated at around €2.68 million per year. The annuity payments will continue until 2038.

The examination found that local authorities retained parts of many of the sites associated with loans approved for the scheme. However, there was no formal procedure in place to adjust the value of the loan accepted into the scheme where the entire original site purchased was not transferred. The Department considered each case on an individual basis, and the general practice was that up to 100% of the outstanding loan could transfer to the scheme where more than 75% of the site area related to that loan was transferred to the scheme. The Department did not consider whether any of the area retained by the local authority was of greater or lesser value per hectare than the area accepted into the scheme.

Under the original arrangements for the scheme, land did not have to be transferred before the grant issued to redeem the loan. The revised scheme required the land transfer to have taken place before the Department made any annuity payments. At June 2014, we found that the transfer had been completed for 41, or 56%, of the approved transfers. The Accounting Officer will be able to provide an update on progress since then. The examination also noted that land was not valued prior to or after its transfer to the Housing Agency.

The original HFA loans were intended for land that was suitable for residential development. Despite that, the examination found that local authorities had proposed 25 sites, with associated HFA loans to the value of €37 million, for inclusion in the scheme that were rejected by the Department because they were, or had become, unsuitable for residential development.

The total value of housing land acquisition loans drawn down from the HFA in the period from 1999 is €821 million. By end December 2013, the total amount of loans outstanding was €507 million. The profile of the maturity of the outstanding loans is shown in the figure now on screen. The darker bars on the right of the graph represent original land purchase loans that have matured and have been converted into long-term annuity loans. At end December 2013, these amounted to €226 million, including loans annuitised under the land aggregation scheme.

The annexes to chapter 6 were included to provide relevant information to readers about the individual loans and the related sites. I must draw the committee’s attention to Annex D, and point out that the caption is not correct. It should read ‘Amount borrowed from HFA for residential site purchases since 1999, and outstanding balances at 31 December 2013, by local authority’. The data are correct, and the incorrect caption has no effect on any findings in the report. I am arranging for a revised annex to be submitted to the library to correct the record.

Chapter 7 deals with a couple of issues that arose in the course of audit of Vote 25. The first part of the chapter deals with capital commitments under the Vote in relation to water services projects. As the committee is aware, Irish Water took on responsibility for water services from the local authorities with effect from 1 January 2014. It also took over all the assets and liabilities related to the authorities' water supply and discharge business. The legal transfer of contractual obligations to Irish Water from the local authorities was effected on 21 February 2014 and 25 April 2014 under orders made by the Minister for the Environment, Community and Local Government.

Prior to the establishment of Irish Water, the Department provided funding to water services authorities for the provision of major water and wastewater schemes to meet key environmental and economic objectives. Department expenditure under the water services programme was €241 million in 2013, and the total cost of the programme from 2007 to 2013 was €2.9 billion.

In the 2012 appropriation account for the Vote, the Department recorded that it had outstanding capital commitments to local authorities to provide a total of €340 million in respect of local authority water services projects. The disclosure of such commitments is required under the standard accounting policies for appropriation accounts. The Department did not include any capital commitments that existed as at end December 2013 in regard to the water services investment programme in the Department’s appropriation account for 2013 on the basis that they became the responsibility of Irish Water in 2014.

The second part of the chapter deals with EU penalties in regard to control of septic tanks. In December 2004, the EU Commission notified Ireland of its conclusion that Ireland had infringed its obligation to fully and correctly transpose the requirements of the 1975 waste management directive, which aims to protect human health and the environment against harmful effects caused by the collection, transport, treatment, storage and disposal of waste. The infringement related to the management of domestic waste disposal through septic tanks and similar systems. The Commission requested that Ireland rectify that infringement by February 2005. A subsequent European Court judgment in October 2009 found that with the exception of County Cavan, Ireland had failed to fulfil its obligations under the directive in regard to such systems. Further legal proceedings resulted in the imposition of penalties that eventually amounted to €2.648 million. This was borne on the Vote in 2013.

Members will be aware that legislation to comply with the directive, the Water Services (Amendment) Act, was passed by the Oireachtas in February 2012. The Act requires the registration of all septic tanks and the development of a risk-based national inspection plan for septic tanks by the Environmental Protection Agency, EPA. Following a public consultation process in October 2012, the agency developed an inspection plan that required a minimum of 1,000 septic tank inspections to be carried out across all local authorities in the 12 months commencing July 2013.

At 31 July 2014, the number of systems registered on the domestic wastewater treatment system register was 450,620. Based on census 2011 information, which recorded almost 500,000 septic tanks and wastewater systems in Ireland, this suggests a registration compliance rate of over 90%.

The results of the first round of risk-based inspections under the EPA’s inspection plan revealed that over half of the tanks examined failed the inspection. While all failures represent a potential risk to human health or to the environment, care must be taken in interpreting the results of the initial inspections as the inspection plan was based on prioritising higher risk areas. In order to establish an estimate of the overall level of compliance across the State, inspection of a random sample of systems would need to be undertaken.