Mr. Conor O'Kelly:

I thank the Chair and committee for the opportunity to present before it.

The committee has received my opening statement, which I do not intend to read. We have also provided some slides which I will use only for the discussion of the national debt, if that is all right. It would probably be easier to go through that with the slides in front of us. I will give a quick overview of some of the businesses in Vote 2018, our outlook for the markets and what is informing our views of strategy and decision-making at the current time. I thank the board of the NTMA and, in particular, our former chairman, Willie Walsh, who stepped down at the end of 2018 having been there since the beginning of 2015 on the newly constructed board. I thank him for his contribution. We have seven excellent non-executives and a new chairman, Maeve Carton, former chief financial officer of CRH. We are very fortunate to have this quality of non-executives, who give us plenty of support and challenge. I also acknowledge the Committee of Public Accounts and the challenge it has given us, particularly in the areas of diversity, tobacco and fossil fuels. It is fair to say the committee has kept those issues high on our agenda over the last few years. We have made some progress there and we still have plenty to do. I wanted at the outset to acknowledge the contribution and challenge of the committee in that regard.

I will start with the Ireland Strategic Investment Fund, ISIF. The key fact is that for 2018, the ISIF lost 1% in value. Members will be aware that 2018 was one of the worst years for stock markets since the early 1920s. The S&P 500, the US index, was down 6% and the Irish stock market was down 22%. Virtually all asset classes lost money and were in negative territory in that year. The ISIF exposure to global equities meant that overall it lost 1% of its value. I am glad to say that markets have recovered very significantly in 2019 and all of that loss - and then some - has been recovered. In total, since the ISIF was first instituted, a total of €850 million in investment gains have been added to the value of the portfolio. That is a return of 2.3% annually on the money, which is invested across Ireland with some exposure to global markets, as that cash remains to be invested in the mandate. A 2.3% return when we are borrowing money at an average of less than 1% is pretty good business for the State to date.

One of the other key features of the ISIF is that we always co-invest in any of the investments we make. The €4.4 billion we have committed to the Irish market since inception has been matched by €8.1 billion in private investment. That means a total of €12.5 billion has been invested in the Irish economy right across all the different sectors and regions. I do not want to outline all the investments we made this year; they are listed in the annual report. Investments were made at a rate of about one every two weeks in total, with over €700 million deployed in the year. I will come back to the rate of deployment a little bit later on. Investments included MilkFlex, a fund which provides financing to dairy farmers, Shannon Airport, the Port of Cork, Green Isle Foods, Donegal Catch and Vectra, a company which uses artificial intelligence to provide cybersecurity and which has set up a Dublin office. Vectra has already employed more than 40 people following our investment. We invested across the alternative energy space in 2018, backing a fund called Temporis Capital, which is set to commit and develop alternative energy, as much as 1,000 MW, which is almost 25% of Ireland's total requirement in that space. We have also backed a solar energy company in the last 12 months. Another feature of the ISIF to which I referred springs from legislation enacted by the Oireachtas in respect of fossil fuels. The ISIF has divested of the 38 holdings it had in fossil fuel stocks and additionally has produced an exclusion list of 148 stocks in which it is precluded from investing under the Act.

The fund has had a review and tries to be adaptable to economic conditions. It was set up in 2015, when the economy was in a different position and there was more of a shortage of the kind of capital that we have. We have been adapting over those years and always look to be flexible in terms of moving with the times. We are not there to replace other capital that is available; we have to go where capital does not flow as easily as that is the purpose of the fund. That is what we call the dead weight test. If other capital is available, we will not invest. As the economy has recovered and there is a lot of capital available, we have found ourselves more in the space of tenure, meaning the term of the investment we are prepared to make. There is lots of private equity and investment capital for a term of five or seven years, but going out to ten, 12 or 15 years there is very little capital available. We find ourselves now engaged in projects that have a much longer-term horizon and focus. That is probably where the committee is going to see more of our activities over the coming year to 24 months. I also suspect we will deploy less capital than we did in the initial four years of the fund, when we deployed between €700 million and €800 million per annum. The size of the projects is beginning to decline. Many of the projects that were pent up from the crisis have come into our portfolio. As we normalise and as other capital is becoming available, I see the deployment rate declining somewhat. This is a good thing. If there is other capital available, that is good news and probably reflects where we are in the cycle. We do not have to spend the money. We are not anxious to spend it. We only want to invest the money if it is good value for the State and makes that economic impact. If the money is not invested, it is still an asset of the State and sits on the balance sheet as an asset.

There has been excess surplus in the fund, which stands at €9.4 billion now. There is €4.4 billion in Irish investments, which leaves us with €5.1 billion. As the committee is aware, €3.5 billion of that has been reallocated by the current Government, with €1.5 billion going into the rainy day fund, €750 million allocated to Home Building Finance Ireland, HBFI, and €1.25 billion to the Land Development Agency, LDA. That sum has been taken away, as it were, as excess reserve to be used elsewhere by the State, reducing the overall size of the ISIF. The €4.4 billion will already start to recycle because some of the investments are already yielding returns in the shape of dividends and even capital to the fund. The idea is that it becomes an evergreen fund and funds itself to be able to grow and invest long into the future. That is the ambition.

The National Development Finance Agency, NDFA, provides advice in respect of most big projects and particularly public-private partnerships, PPPs. We have had a lot of discussion of PPPs at this committee over the years. We had probably the most significant year of real challenge and stress in respect of the collapse of Carillion in the UK, one of the biggest liquidations of a project management construction firm in that country's history. It has had a devastating effect across many projects in the UK. Carillion was only involved in one project in Ireland, which we call "schools bundle 5". That was the building of six schools in Wicklow, Wexford and Meath. It was an interesting test of the PPP model. One of the discussions around PPPs is whether the risk transfers to the private sector; does the private sector really take the risk or, when something happens, does the State ends up picking up the tab. In this case, four of the schools are already open although they were a year delayed. The rest of the schools will open this September but there will be no additional cost to the taxpayer. That PPP contract has completely stood up and remained intact. From the taxpayer point of view, no additional cost has been incurred. The equity providers and financiers of that PPP contract have lost all their equity money and have had to take a lower return. That is the purpose of that contract when we transfer risk, and there is a cost associated with it. The idea is that in theory, when a stress event occurs, they do own the risk. It is an interesting real-life example where the PPP contract stood up. At a time when we have many projects to construct, it is worth reflecting on the robustness of that contract in that particular live situation.

I will touch on NewERA, which is in many ways the in-house corporate finance adviser to the State. It has advised on 132 different projects, acquisitions or disposals of commercial semi-State companies. NewERA tries to bring together all of the assets owned by the State under one umbrella in the context of the shareholder so that the State has consistent analysis of investment criteria, return on capital and dividend policy. NewERA brings them all to account in a similar and consistent fashion. The mandate that the team is being asked to deliver advice on continues to grow. There were 132 advisory projects done on behalf of the State for different Departments and clients this year. That figure is up from 81 in 2017.

Representatives from the State Claims Agency are with us and I know we have a separate session on that work but I will touch on it. There are 146 State bodies with more than 200,000 employees. Considerable footfall goes through there. Earlier, the Comptroller and Auditor General mentioned that the vast majority of the 1,500 claims are clinical in value terms. The provision is €3.15 billion. This is the current estimated liability and 74% of that is provided for the clinical sector.

We deal with and have dealt with many sad and difficult cases in the State Claims Agency. That is the nature of the mandate. However, we have never before had a situation like we have had in 2018. I know we are going to discuss extensive technicalities and legal positions today but it has to be seen in the light of the extraordinary devastation and grief caused to so many women by this situation. There are no good outcomes. We and the team try to walk that line as sensitively as we can but it is not an easy task. It all pales in comparison to the grief and devastation caused to the women involved in the overall issue.

Apple has been mentioned. The first financial results for the Apple fund were announced yesterday and released by the Department of Finance. As committee members are aware, the National Treasury Management Agency was directed by the Minister to establish the escrow fund to essentially look after those funds while the legal case is going on. Apple and the NTMA jointly have an investment policy. A sum of €14.2 billion sits now in an investment account of which the NTMA and Apple have oversight. The easiest way to describe it is as a conservative cash box of sorts. The purpose of the fund is a return of capital rather than a return on capital. That is the focus of the fund. It is about capital preservation. The fund has been established and it is currently operating satisfactorily.

I will turn to the slides to discuss the debt. It might be easier to talk through from slide 16. The slides cover the positives and negatives or challenges. I will touch on each of these in turn. On the left hand side of the slide we are looking at the positives of the national debt and the servicing of the debt. Committee members can see the so-called chimneys or refinancing stacks of 2018, 2019 and 2020. We have talked about these at the committee during previous years. It is fair to say at this point, when we are exactly half-way through the refinancing period, that we can safely put the refinancing risk that has existed behind us because of what has happened. I will come to that in more detail in a moment. The debt has been smoothed out in terms of the future profile of maturities. There are no such refinancing cliffs ahead in the foreseeable future. That is important from a debt management point of view; it is important to have a smooth profile.

The interest bill continues to fall. I will come back to that again. The interest bill has fallen from €7.5 billion in 2014 to a projected €4.5 billion next year. I will come back to the reasons that saving has been so dramatic. It is largely due to the interest rate environment we are in.

I want to touch on diversification. Ireland issued its first green bond in 2018, becoming only the fourth European sovereign country to do so. I will come back to the rationale behind that as well.

The debt is still elevated though. That is still a significant issue. It is four times what it was in the 2000s before the financial crisis. We have paid a very significant amount of interest. People may have heard me say that we have paid €33 billion in interest over the past five years. This interest bill is enormous. We paid €60 billion in interest over the last decade. That compares to €20 billion in the previous decade. That is all to do with the elevated amount of debt rather than the rate of interest, which many people concentrate on. Some may suggest that since rates are so low we should borrow more etc. We have to remember that it is the stock of debt that is really significant in this regard for Ireland.

We rely on foreign capital for the largest portion, 90%, of our borrowings. That is unusual versus other European and global sovereigns. It makes us slightly more vulnerable than others to financial markets. Of course there are significant external risks on the horizons of which committee members are well aware.

Before 2018 we talked about the refinancing chimneys to the tune of €60 billion. In the first instance we repaid the International Monetary Fund and that reduced the size of the chimneys. Since then, we have repaid the 2018 bond that matured. That was a €9 billion bond and it matured in October 2018. We have also repaid the €7 billion bond in June, some weeks ago. There is another maturity of €6 billion in October. There is a €10 billion maturity coming early next year. Then there is a final maturity of €6 billion in October 2020. That will remove the chimneys completely. However, given the cash we have already raised and the repayments we have already made of those maturities, we can say now for the first time that the refinancing risks of those chimneys is now behind us. This is because of what we have already repaid and the cash we have already raised at today's market rates. The key thing about the coupons that we have been repaying is that a total of five large bonds fell due over a short period. The range of coupons was from 4.4% to 5.9%. They are the really high coupons and they are all retiring. We are replacing them with debt that is 1% and under. That is where the big savings come from. That is why the savings really start to fall post 2020. It is why this refinancing period was so important for us. It was important for us to be able to try to lock in today's interest rate environment while we had that significant need. We can now put that risk safety behind us.

Let us consider the profile now. The debt manager normally looks three or four years ahead. We were looking at 2018, 2019 and 2020 in 2015, 2016 and 2017. Now we are looking ahead to 2022, 2023 and 2024. Committee members will see the smoother profile of maturities. That represents a far lower risk profile from the point of view of the State in terms of maturing debt over the long period and looking out to the future.

Earlier I said the interest bill was €7.5 billion and is down to €4.5 billion. There are three reasons this has occurred. First, and most important, is the interest rate environment created by the European Central Bank quantitative easing and the extraordinary low interest rate environment. Committee members do not necessarily watch financial markets in the same way that we do, but since Christine Lagarde's potential appointment as the ECB President, interest rates have fallen dramatically during the past 48 hours and there has been a dramatic move lower in bond market yields. She is considered to be a dovish ECB President potentially versus some of the alternatives. The market has reacted and moved rates even lower. The interest rate environment looks like it will remain low at least for the foreseeable future. This extraordinary low interest rate environment happened at a time when Ireland had its greatest refinancing needs and at a time when the credit rating of the country was improving. These three things came together and this environment has enabled Ireland to save so much interest.

Those high coupons all fall away and get replaced by lower ones. That is why the savings are so significant. I will revert to why that will not always be the case in a moment.

Some of the Deputies are interested in the topic of the green bond. While it is good news from the point of view of leadership and ensuring that sustainable projects get delivered and identified, the NTMA has a slightly narrow way of looking at it. This is the fastest growing pool of capital in the world. We are accessing new investors by issuing green bonds. From a funding perspective, that helps to diversify the risk. One of the few ways we can diversify and mitigate our risk is to widen the investor base that owns Irish bonds. When we issued our first green bond, more than 50% of the investors who bought it and loaned us money had never invested in Ireland before. Besides the ability to finance sustainable projects, that was the attraction for us.

The next slide shows the other side of the balance sheet with the negatives and challenges. This is our gross debt, which has effectively remained unchanged since the crisis. As the Comptroller and Auditor General stated, it stands at €205 billion currently. Let us just call it over €200 billion. It is four times what it was in the 2000s. I describe this as a mountain of debt, and there is only one way to get down a mountain, that being, very slowly and carefully and without taking alternative routes or going back up the mountain. We must try to find a way to reduce this debt over time. That will only happen slowly, but we must stick to the path and do that. The risks to the country of having very high debt levels are the risks that any of us would have as individuals, householders or businesses in the event of a downturn, in that we would obviously be more vulnerable. It is no different for a sovereign.

Regarding debt, by comparison with our European peers and other countries, we rate poorly in some of these statistics. The European average is shown at the bottom of the table. I draw members' attention to our debt-to-Government revenue figure, which is still at 251% and one of the highest in Europe. Although our interest bill has reduced as a percentage of Government revenue to 6%, it is still way higher than our European peers. Even at today's interests and with the savings we have made, that is where it still ranks among our European peers. Ireland is not in a good position from a debt point of view. We must continue to bear that in mind and be vigilant.

The next slide shows the interest bill dating back to the mid-2000s. I showed how it was falling from €7.5 billion to €4.5 billion, but that will still be three times what it was in the 2003-08 period. Even though interest rates then were 4% and are less than 1% today, our current interest bill is three times what it was in that period because of the size of our debt.

I will show how challenging that will be in future. Consider the bonds that are now going to mature. I mentioned bonds maturing with high coupon rates. One of the bonds that will mature in 2022 was issued by us in 2017 and has a 0% coupon. The chances of the NTMA refinancing that bond in 2022 at a lower interest rate are slim. That is why we will be refinancing through low-coupon bonds and unlikely to make savings in future.

The next slide shows the investors from whom we borrowed this sizeable amount of debt. They are all overseas, which is unusual. There is not a large domestic savings market for our bonds. This makes us particularly vulnerable. These investors can change their minds quickly, move away and charge us more. Our reputation, creditworthiness and positioning in the marketplace are important. Obviously, we are quite exposed.

I will not necessarily go into the challenges ahead that are listed on the next slide in any detail, although we can take some questions. Our investors are telling us that they are worried about Brexit and corporation tax changes. The financial markets are concerned and are looking at Italy and some of the challenges it faces from a debt perspective. The spreads in Italy are volatile at the moment.

That concludes my presentation. I am happy to take members' questions.