Oireachtas Joint and Select Committees
Thursday, 9 October 2014
Public Accounts Committee
2013 Annual Accounts of Shannon Free Airport Development Company
I ask members, witnesses and those in the public gallery to turn off their mobile phones, as they interfere with sound quality in the transmission of the meeting.
I advise witnesses that they are protected by absolute privilege in respect of the evidence they are to give this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given.
They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a Member of either House, a person outside the House or an official by name or in such a way as to make him or her identifiable. Members are reminded of the provision within Standing Order 163 that the committee should also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government, or the merits of the objectives of such policies.
I welcome Mr. Neil Pakey, who is the chief executive officer of Shannon Group. I ask him to introduce his officials.
Mr. Neil Pakey:
I thank the Chairman. I am accompanied by Mr. David McGarry, who is our chief financial officer; Mr. Ray O'Driscoll, who is the managing director of our commercial properties; and Ms Mary Considine, who is our group company secretary. We are also joined by Mr. Stephen Curran of the Department of Jobs, Enterprise and Innovation, with whom the members of the committee might be familiar.
Mr. Seamus McCarthy:
I thank the Chairman. The Shannon Development Group financial statements for 2013 cover the activities of Shannon Free Airport Development Company Limited and two subsidiaries, Shannon Castle Banquets and Heritage Limited and Kilrush Creek Marina Limited. Shannon Development's core functions in the mid-west region over many years have included industrial and tourism development and management of industrial property. The group was substantially restructured in 2013, with certain functions being transferred to other public bodies with national remits. The changes that are taking place are summarised in a diagram in the statement I have furnished to the committee. The diagram indicates that Shannon Free Airport Development Company's indigenous enterprise and foreign direct investment activities have transferred to Enterprise Ireland and IDA Ireland, respectively. It also shows that the company's tourism development responsibilities have transferred to Fáilte Ireland. Under the Shannon Airports (Shannon Group) Act 2014, the residual parts of Shannon Development and Shannon Heritage became subsidiaries of Shannon Group plc. The diagram shows that the property management activities will transfer to Shannon Commercial Enterprises Limited and that the activities of Shannon Castle Banquets and Heritage Limited will transfer to the Shannon Heritage Company as part of the Shannon Group. Finally, Kilrush Creek Marina Limited is being disposed of by the company.
Under the 2014 Act, the audit of the financial statements of Shannon Commercial Enterprises Limited will no longer be performed by my office. The 2013 financial statements reflect the changes occurring in the group, including a disaggregation of the group's income and expenditure for the year between the continuing and discontinued operations. In 2013, the Shannon Development Group recorded a deficit for the year of €1.6 million. Its income for the year included €10.8 million in rental income from its commercial property assets, €11.2 million from its tourism activities, €5 million in profit on the sale of assets and investments and €5.2 million in Oireachtas and EU grant funding. The Oireachtas grant funding was provided to cover the costs of grants to industry and exceptional costs of €3.4 million arising from a voluntary redundancy and early retirement scheme, which was part of the group's restructuring. Expenditure in 2013 totalled €34 million. This included €16.7 million in operating expenses, including pension-related costs, depreciation of €5.7 million, €5.2 million in direct property management expenses, €3.7 million in direct tourism expenses and €1.7 million in grant payments. Some €1 million was incurred in 2013 in costs directly related to the restructuring of the company. These costs are analysed in further detail in note 10 of the financial statements. This expenditure is in addition to the redundancy and early retirement expenditure of €3.4 million, which is included under the other headings.
Shannon Development held a significant portfolio of property assets. At 31 December 2013, the group held tangible assets with a net book value of €64 million, comprising €51.9 million of industrial land and buildings and €10.9 million of land and buildings associated with its tourism activities. The net book value of the property assets reflects the effect of significant impairment amounts charged in previous years. Total asset impairments of €32.9 million were recognised in the 2012 financial statements as a result of a comprehensive valuation of assets undertaken with external professional assistance, conducted as part of a due diligence review prior to the transfer to Shannon Group. Under the terms of the State Airports (Shannon Group) Act 2014, the liabilities, duties, obligations and funding of the pension scheme for Shannon Development up to the date of its transfer to the Shannon Group plc will be taken on by the Minister for Jobs, Enterprise and Innovation. The group’s financial statements for 2013 received an unqualified audit opinion.
Mr. Neil Pakey:
I thank the Chairman and the Deputies for giving us an opportunity to address the committee. We have been invited to discuss the 2013 annual accounts for the Shannon Free Airport Development Company, or Shannon Development, as it was known until recently. I would like to set out the context to the changes that have occurred within the company since the Government decided in December 2012 to separate Shannon Airport from the Dublin Airport Authority and bring it together with a restructured Shannon Development. Much of last year was spent devising and implementing a major change management programme at Shannon Development to ensure a smooth transition. This involved employees transferring with their functions to Fáilte Ireland, Enterprise Ireland and IDA Ireland, or redeploying to Government agencies and the Civil Service. Other employees chose to exit under a voluntary early retirement or voluntary redundancy scheme. Employees who were engaged in property activities for Shannon Development become part of Shannon Group plc and are now based at Shannon Airport with the rest of the team.
Shannon Development has been renamed Shannon Commercial Enterprises Limited, trading as Shannon Commercial Properties, and is engaged in commercial property management and development. Shannon Commercial Enterprises Limited is now a wholly owned subsidiary of Shannon Group. Shannon Heritage, which was previously a subsidiary of Shannon Development, remains a subsidiary of Shannon Commercial Enterprises. After the enactment of the State Airports (Shannon Group) Act 2014, Shannon Group was incorporated on 29 August 2014. On 5 September 2014, following the transfer of shares under the Act, the company became a subsidiary of Shannon Group plc. Shannon Group is a commercial semi-State company comprising four strategic business units: Shannon Airport, Shannon Heritage, Shannon Commercial Properties and the International Aviation Services Centre.
I will give the committee some background on myself and my management team. In terms of relevant experience, I was employed by Manchester Airport for 14 years, during which time we established our property business, which has now grown in scope to 1.4 million sq. ft. of logistics and warehousing, 1.5 million sq. ft. of offices and 650,000 sq. ft. of manufacturing space. Over that period of time, we developed a sustainable business through further airport investment and acquisitions. When I was employed by a UK airport and property company, Peel Holdings, we invested £80 million in Liverpool Airport and increased traffic levels from 700,000 to 5.5 million passengers per annum, while at the same time developing property assets across the north-west region of England.
I was appointed as chief executive officer of Shannon Airport on 10 June 2013. I was subsequently appointed as chief executive officer of Shannon Development on 1 September 2013. On 5 September 2014, I became chief executive officer of the newly established Shannon Group. During 2014, in preparation for the establishment of Shannon Group, I began the process of assembling our executive management team. Mr. David McGarry was appointed chief financial officer of Shannon Airport on 1 February 2014 and subsequently chief financial officer of Shannon Group on 5 September 2014. Mr. Ray O’Driscoll was appointed managing director of the property division of Shannon Group on 23 April 2014. Ms Mary Considine became the group company secretary of Shannon Group on 5 September 2014.
Today, Shannon Commercial Properties continues to own and manage over 400 buildings and 2,000 acres of land in over 50 locations in the Shannon region.
The property portfolio ranges from prime office buildings and multi-let technology parks to engineering, manufacturing, warehousing and logistics facilities. In addition, Shannon Commercial Properties has a portfolio of fully serviced sites available for sale and development. The largest business park in the portfolio, which is known as the Shannon Free Zone, is the largest multi-sector business park in the Atlantic corridor. A 600 acre business park, it accommodates more than 100 companies. The Shannon Free Zone was established in the 1960s and grew significantly in the following decades, during which it was focused primarily on manufacturing and assembly activities. Many of the buildings in the zone were constructed prior to 1990 and significant investment is now required to bring it to the standards required in today's Ireland.
In addition to the Shannon Free Zone, Shannon Commercial Properties owns and manages technology parks in Limerick, Tralee, County Kerry, Ennis, County Clare, and Thurles, County Tipperary. The company also owns numerous other facilities across counties Clare, Kerry, Limerick, Offaly and Tipperary. In the current depressed property market, the valuation of many of these properties is significantly less than their initial acquisition and construction cost. Many of the properties were developed when the company had a regional development remit and constructed in locations to enable enterprises to create employment locally.
One of my key goals for Shannon Commercial Properties is the redevelopment of our commercial property portfolio in the region around Shannon Airport and other key strategic locations. We now have a new team in place and we are finalising a development strategy for our portfolio. As part of this, we have begun upgrading some existing buildings in the Shannon free zone and we are also evaluating redevelopment opportunities for the zone.
In 2013, the Shannon Development accounts recorded an overall deficit of €1.569 million. This includes costs related to tourism and enterprise activities which no longer form part of the business of Shannon Commercial Properties. The company recorded a €4 million profit on the sale of assets during the year. This was generated through the sales of 11 properties, the largest being the sale of land and buildings at the University of Limerick and the sale of a warehouse building in the national technology park, Limerick. Some €6 million in capital expenditure was invested in property and tourism assets, with the largest investment being spent on revamping King John's Castle. At the end of 2013, the company was debt free with a cash balance of €12 million, a substantial increase in the €7 million cash balance recorded at the end of 2012.
To bring the Chairman and members fully up to date with recent developments, the Shannon Group team has been assembled and we have a collective determination to seek out and maximise the potential of all business opportunities and drive growth and profitability in all areas of our group's activities, including Shannon Commercial Properties. The group is firmly focused on fulfilling our objective of securing a sustainable future for all of our operations and becoming a catalyst for economic growth for the west. We are developing a five year business plan for the group, which is due to go before the Minister for Transport, Tourism and Sport for his approval in December. We are here to help the committee and we will be pleased to discuss the 2013 Shannon Development accounts.
I thank and welcome Mr. Pakey and his team. They appear to have successfully restructured and put together the various elements to establish the new Shannon Group plc. I propose to first ask a few questions about the new entity. It is my understanding that it has been a long-term goal of Shannon Development to have a consolidated entity with a commercial focus. What are the major challenges facing this new company as it commences operations as a semi-State commercial entity, with a new direction and new principles of operation?
Shannon Development received some €5.1 million in grants from the State in 2013. Does Mr. Pakey expect the company to continue to receive State grants now that it is a commercial entity or will it be a stand-alone and profitable commercial semi-State company?
Mr. Pakey stated that significant restructuring remains to be done in terms of investment. I note that €1 million was spent on restructuring in 2013. How much will be spent on restructuring in 2014? How much has been spent on consultants in restructuring the new public limited company?
Some €3.4 million was spent on an early retirement and redundancy scheme in 2013. Given that 33 people took the early retirement and redundancy package, this works out at approximately €100,000 per person, which is a sizeable amount. The package appears to have been a generous one. Will Mr. Pakey outline its terms, for example, the number of weeks of salary that were awarded per year of service?
A major debate is taking place on defined pension benefits. To what extent did the Irish aviation superannuation scheme operate, if at all, in the Shannon Development arena? Given that this scheme has a deficit of approximately €760 million, will this have any impact on Shannon Development and, if so, will any liabilities arising transfer directly to the Department?
On the restructuring, I presume the company will be answerable to the Department of Jobs, Enterprise and Innovation. What oversight role does Mr. Pakey envisage for the Department? Is there merit in the company continuing to be audited by the Comptroller and Auditor General and its representatives continuing to appear before the Committee of Public Accounts?
Mr. Neil Pakey:
I will endeavour to answer each question in turn and see if I am able to answer them all sufficiently. In terms of what are the new challenges facing the business, there are challenges and, in fact, the challenges are driven out of what brought us together in the first place. It is fair to say that the companies were brought together under the Shannon Group out of need and this need was driven partly by performance. For example, in terms of Shannon Airport's performance, it had experienced five years of successive decline in passenger numbers, which has an economic impact and an impact on prosperity. Similarly, Shannon Development was in need of regeneration and transformation.
Mr. Neil Pakey:
I would not have joined the company if I had not believed that this was the right way forward for the business. I had seen similar business models in different circumstances work successfully elsewhere so I felt that it was a good thing. In terms of the challenges, there are challenges about growth, investment and the ability to generate enough profit to reinvest in the businesses. Clearly, there are good investment opportunities out there. It is a matter of identifying the right opportunities and stimulating the market. The biggest challenges are probably related to growth and investment and having a business model that is fit for purpose.
We will not be able to rely on grants. I spent three years in the European Commission so I am well aware of state aid rules. We need to be stand-alone business entities going forward so there will be equal focus on the performance and accountability of each of the business units to make sure they work and generate enough return to be able to invest in the respective businesses.
If I may just find my note on the €1 million restructuring costs.
Mr. Neil Pakey:
Thank you for the clarification. I will give a breakdown. The single biggest part of this was the due diligence process. Due diligence was required by the Companies Act. We had a new board and the board was very clear that due diligence was warranted and necessary. In terms of my own background, it would be normal good company practice to have the due diligence done. Following a tender process, we selected the lowest tender which happened to score the highest number of points in terms of the tender evaluation. The total cost of the due diligence exercise was €260,000.
Mr. Neil Pakey:
Yes. Due diligence includes all professional fees. That includes property evaluation due diligence. Given the 52 estates, 400 plus properties and some of the assets having their own liabilities, it was very necessary to get a very close handle on what was coming into the group. That accounts for €260,000. I will now turn to the rest of the breakdown. We had other professional fees including taxation advice at €50,000. Legal costs totalled €170,000. That covered not only the memorandum and articles of association of a new company and legislation, but also an examination of all the contracts, the change of name and so forth. There was no legal person transferring with the Shannon Development people so we had to go outside for support in that area. We had a project manager who cost €50,000. That totals what might be classified as consultancy or professional services fees. On the rest of the breakdown of the €1 million, €130,000 is for relocation costs of Shannon Development staff and employees to the new company. Some of that concerned the IT equipment required and upgrading of some of the tools. IT costs totalled €130,000. We had a €130,00 provision for signage, given all the sites with Shannon Development logos, signs and so forth. We would have included a small amount for branding.
Mr. Neil Pakey:
There is a note in the 2013 accounts - note 11 on page 24 - which may contain the answer the Deputy is looking for. It states that VER/VR costs of €3.439 million paid by the company during the year were fully funded from the Oireachtas grants. Some 33 staff exited under the scheme that consisted of a severance payment of three weeks pay per year of service plus statutory entitlement under the Redundancy Payments Acts subject to an overall limit of two years' pay or, if less, one half of the salary payable to preserve pension age.
A previous Oireachtas grant would have been roughly the same and that would have been used for grant and aid and various other purposes. So there would have been a deficit in relation to the uses of the previous year to allow for the larger part of the Oireachtas grant in 2013 to be used for staff redundancies.
Mr. David McGarry:
If I may refer the Deputy back to the 2013 accounts, in particular note 3 to the accounts on page 21. There are two separate grants. One was a grant - there was a special vote - of €3.4 million in favour of the company for the voluntary severance and early retirement scheme. Then there was a separate vote - a completely separate funding allocation - for industrial support purposes. In 2013, that was €1.7 million.
However, on the dichotomy of the imbalance or the disproportion between the quantity in 2012 that went to industries and what went to industries in 2013, Mr. Pakey says there is no connection, but nevertheless there is a strange gap there.
Ms Mary Considine:
Shannon Development staff are members of the Exchequer pay-as-you-go scheme. The Irish Aviation Superannuation Scheme reference relates to active members in the airport authority. It is an entirely separate situation. There are proposals on the table that would involve the principal employers in that scheme, the Dublin Airport Authority and Aer Lingus, making a one-off contribution to a new scheme to resolve the current deficit in the IAS scheme. One proposal is that scheme would be frozen and staff would move to a new scheme, but that is entirely separate from the Shannon Development.
That is for the future and people who are active at present will be covered by that. However, what about people who are no longer active? Are there deferred payments in respect of any of the staff Shannon Development has been dealing with in terms of the superannuation scheme?
Mr. Neil Pakey:
There were some questions on auditing. We are governed now by the Department of Transport, Tourism and Sport. We have a regular schedule of meetings lined up with the Department. We must report to the Minister by the end of this calendar year with an updated five-year business plan. We will do what is consistent with the obligations of any commercial semi-State company when it comes to this committee. I cannot answer the question directly but we will do whatever is required in terms of compliance and what is required of a commercial semi-State company. In future we will be externally audited in line with other commercial semi-State businesses.
Will the deputation come to some of the nitty gritty of in the report in terms of the sale of assets and rental income? Mr. Pakey remarked that €5 million was realised following the sale of assets in 2013. Can Mr. Pakey give us some idea of what assets were sold? There is a reference to impaired assets which were not performing as well as assets that were in fact revalued upwards and their associated categories? How does Shannon Development dispose of assets? Are they advertised in the public arena or are they sold within a narrow arena? Is it done internally within Shannon Development? How does Mr. Pakey ensure the company is getting the best market price? What were the proceeds of the sale used for?
I have another question relating to the rental income, which, I note, was €11.1 million. Property expenses amounted to €5 million. Does this mean there was in fact a net figure of approximately €6 million? How many Shannon Development properties are actually generating rental income? Can the deputation give us a breakdown of these properties? Are these all the properties in the revalued sector? Does Shannon Development have a range of properties that are vacant at present or that are not being utilised or that are underutilised? Can Mr. Pakey give us an idea of the occupancy of the various properties and holdings of the company? My questions relate to the ongoing operation in 2013.
Mr. Ray O'Driscoll:
The first point related to the profit in 2013 of €5 million. Fully €4 million of that profit was generated from the sale of 11 properties across Clare, Limerick and Kerry. It was a mixture of buildings and land. The largest property sold was next to the University of Limerick in Limerick city. It generated a profit of €4 million.
Mr. Ray O'Driscoll:
Properties were sold in two forms. Occasionally, the executive team in Shannon Development would identify certain properties that they sought to put on the market. These properties would have been handed over to professional estate agents. They would have been put on their websites and in their windows and they probably would have been on the daft.ie website and other related-----
I understand that, but what were the criteria for choosing them? Shannon Development carried out a review of all properties and land-holdings and determined that some were impaired. Then, some were revalued. How did Shannon Development decide to dispose of 11 properties out of that? Presumably the decision to dispose of the properties was made after the survey and review had taken place of the entire portfolio.
Mr. Ray O'Driscoll:
In many of the 11 cases the company was approached by businesses or business people in the region looking to acquire the properties for their business development or employment creation purposes. When that arose the executives would evaluate the request and look at the business proposal behind it. We should bear in mind that during this time the company had a regional development remit. They would evaluate the employment opportunities that might result from these requests. If they believed the business case was worth evaluating they would request an external evaluation to be carried out by an independent expert. Assuming they were happy with the valuation advised by the independent expert, when the valuation was submitted they would put the given price to the potential buyer. If they could sell the property at that valuation point or above, they would recommend it to the senior team in Shannon Development for approval. Once that was approved it would go to the board for final approval.
Is Mr. O'Driscoll suggesting that the sale of the 11 properties was not at a proactive move on the part of Shannon Development arising out of the revaluation of the existing properties, but rather a response to individual business people coming to Shannon Development seeking to purchase the properties?
There seems to be an anomaly. Shannon Development carried out a review of all of its properties and determined those that were impaired and that had to be revalued upwards.
The only ones that are sold are ones that have been in receipt of individual expressions of interest from individual business people. It does not seem to be done in an holistic fashion. It seems to be very piecemeal, considering the restructuring of Shannon Development.
Mr. Neil Pakey:
To elaborate, the due diligence process, including all property, was an evaluation of the whole company. It started at the beginning of September. There is a business case by business case approach to the opportunities available. When there are over 400 properties and someone comes in with what seems to be the right price for a commercial property company, we have to look at it and make our valuations and then have the process in place to back it up with board and property sub-committees.
I agree entirely, but Shannon Development is restructuring. As a result of the review, it was determined that the value of 49 industrial buildings and 61 industrial land holdings required to be written down. It was also determined that the value of approximately another 400 required to be written up. There was engagement to a certain degree in sales, but only two of the 11 properties were actually advertised. It does seem a little strange that there was not a more proactive or structured approach to the sale of the properties.
Mr. Ray O'Driscoll:
We need to go back to what the remit of Shannon Development was at the time - it was that of a development agency. It has only had a more commercial mandate since September this year. Given that we were not there in 2013, we have to take the view that the focus was on the development remit, as opposed to the active sale of properties.
Will Mr. O'Driscoll give us a note on the 11 properties disposed of? Will he tell us what their value was and to whom they were disposed? Will he give the same information on the two that were actually advertised? How were they advertised?
Mr. Seamus McCarthy:
Deputy Costello may wish to know that in the course of the audit of the 2013 financial statements we did look at property disposals and that I have flagged to the company that we may issue an audit query about the disposals. There are some issues, exactly of the kind the Deputy has been raising, which we propose to raise further with the company. On that basis, there may be a further opportunity for the company to come and answer more detailed questions.
Mr. Ray O'Driscoll:
Rental income in 2013 was down by about 4% or 5% on the figure for the prior year. Almost 60% of the rental income comes from the Shannon Free Zone where we have our largest portfolio, while the balance comes from the full range of properties in the dispersed property portfolio. Our goal now, given that rental income has declined in the past couple of years, is to arrest this decline. We need to understand the decline is probably due to the current economic climate and the fact that many of the properties are not necessarily fit for purpose in today's business environment. That is where our focus on redevelopment and reinvestment will be. We will focus, in particular, on what we consider to be our core properties, including the Shannon Free Zone and our technology parks. With further investment in these parks, we believe we can grow rental income in the years to come.
Mr. Ray O'Driscoll:
We can provide that information, but we do not have it to hand. We need to understand many of these properties were built in the 1960s, 1970s and 1980s when Shannon Development had a regional development remit. They were built in locations where one might not necessarily have built if one had had a purely commercial mandate. In addition, a number of blocks in the Shannon Free Zone which was a very successful business park in those decades now require demolition and an upgrade. Our focus is on using the resources we have available to evaluate the portfolio, redevelop and upgrade buildings that can be upgraded, knock buildings that cannot be and build new properties. We aim to work with the IDA Ireland and Enterprise Ireland in identifying the properties we should build in order that we can enable employment creation in the locality. That is very much our focus.
As I make out from the first part of Mr. O'Driscoll's review, 61 industrial land holdings were subject to a write-down, while 43 were subject to upward revaluations. That is over 100 land holdings in all, some of which are being used productively. To what uses are they being put ? The majority, 61, or 60%, are being used unproductively or not at all.
Mr. Ray O'Driscoll:
That is correct. Almost 60% are not being used at all for two reasons.
The first is that vacancy levels are high generally at this time owing to the economic climate. Second, many of these properties are not occupiable because they are not of the standard required by businesses today. We need to evaluate the situation, decide what our plan is for each of the properties and invest, where appropriate, to enable them to become productive units.
I understand the review undertaken of asset values led to a determination that there was a considerable degree of asset impairment. The value of the write-downs was €32.9 million, as recorded in the 2012 accounts. At the same time, as part of that review, the valuation process indicated that there was a total market revaluation upwards of other assets to the tune of €39 million. While the impairment is reflected in the 2012 accounts, the upward valuation is not reflected in the accounts, even though they more or less cancel each other out. Presumably, that €39 million goes into the public limited company rather than being reflected in the 2012 accounts. It strikes me that the way to conduct the business would be to deal with the impaired assets cheek by jowl, with the assets that increased in value. However, there is mention only of the impaired assets in the 2012 figures. Why is that, given that the survey revealed the existence of productive assets, the value of which had significantly increased?
Mr. David McGarry:
The impairments were recorded in 2012. The Deputy is correct that we did not record the upward revaluation in the 2012 or 2013 accounts. This is in line with the accounting policies of Shannon Development, whereby we record our assets - fixed assets, in particular - at what is called, in accountancy terms, depreciated historic cost. Having carried out the holistic due diligence process and ascertained the property values, it was correct, under Irish generally accepted accounting principles, GAAP, and the current accounting policies of Shannon Development, to record the impairment without at the same time recording the revaluation. Now that the Shannon Group has been created under statute it is the appropriate time to record in the books the upward revaluation.
Is Mr. McGarry saying that the write-down took place prior to the establishment of the public limited company and that the upward revaluation of €39 million moves into the figures not as a deficit but a plus? In other words, the write-down is no more at this point in time but the new company has the benefit of the write-up?
Is it the case that from 5 September, there is no impairment in regard to what was dealt with in the 2012 accounts, but there is a revaluation upwards in regard to the €39 million which was not registered in the 2013 accounts?
Mr. David McGarry:
It is a technical accounting issue. We take the impairment, but the revaluation goes through what is called the revaluation reserve on the balance sheet of the company, not through the profit and loss accounts. We are not suddenly creating a false profit. We revalued the assets, which is recognised through the reserve. It is not a case of creating profit in the sense in which that is usually understood.
Mr. Seamus McCarthy:
As Mr. McGarry said, I am satisfied that the accounting treatment in 2012 is correct. The impairment exercise was carried out in 2013 and when we were completing the audit of the financial statements for 2012, we recognised it as a post-balance sheet adjustment that needed to be made. That is why, even though the exercise was carried out in the latter part of 2013, it had an adjusting effect on the 2012 financial statements. When I saw the impairment and the loss that was recognised in 2012, I did have a concern that a going concern issue might be arising. We looked in great detail at the impairment exercise. On the other hand, we were aware of the upside for other properties that was not being recognised. To a certain extent, it somewhat assuaged our concerns that there was a serious loss that could not be sustained by the company.
I will not be auditing the 2014 accounts for the new company and do not, therefore, have particular detail on them. The concern I have for a new company setting up is that it should fully recognise all of the resources being put into it. I would be more concerned if Shannon Development were not recognising the upside at this stage because that is the base on which one would expect to see a return being calculated. If the assets were simply taken across without adjusting and revaluing everything, one would not have a sense of their economic potential and what capital should be remunerated. The treatment, as I understand it from what is being presented, is actually the correct reflection of the economic reality in the company.
I thank Mr. McCarthy for his clarification. I have no doubt that proper accounting practices were used.
My final question relates to the sale of HL Commodity Foods Limited.
There were two units in the Hospital enterprise centre in Limerick, which was owned by Shannon Development, and they were sold to Munster Packaging Limited. I understand a clause was written into the contract that stated the property should be used only for the purchaser's business activity. The purchaser undertook not to utilise the property for speculative purposes. I understand those properties have now been sold by Munster Packaging Limited to a Mr. Robert Ryan - I do not know who he is. They have been offered to HL Commodity Foods Limited on a 13-year lease and this seems a clear abuse of the terms on which the sale took place.
Are these the same units that were mentioned as having been sold and advertised on the open market? When did the sale take place and was it advertised publicly? Who is Mr. Robert Ryan and when did Munster Packaging Limited buy the units? How did Shannon Development satisfy itself in the auditing process that it got the best market value for the units?
Was this the same process as the one that was used after Munster Packaging Limited indicated an interest? The witnesses indicated that all 11 sales took place because business people expressed an interest.
Mr. Ray O'Driscoll:
I will answer as best I can based on the information I have. I understand that HL Commodity Foods Limited approached Shannon Development on a number of occasions with a view to purchasing the property. I am led to believe that when Shannon Development had the property valued and put that price to HL Commodity Foods Limited it declined the offer.
The answer to that is "No," because this has been rumbling on for some time. I am surprised Mr. O'Driscoll answered the questions as he did. He said "I believe they are in the estate". They are either in the estate or not.
Well then, say things as they are. Deputy Costello's line of questioning arises from the fact that HL Commodity Foods Limited contacted the committee on a number of occasions. I am surprised the witnesses have requested to come back with further information when this is such a major issue. I will come back to Deputy Costello's line of questioning: what activity is Munster Packaging Limited involved in? Deputy Costello is a new member of the committee and there has been much correspondence on this.
I inform Deputy Costello that Mr. Pakey cannot both read the notes and answer questions. Only politicians can do that.
From the Department's perspective, does Mr. Curran know anything about this?
Mr. Stephen Curran:
I know that we were contacted by the committee about this and we inquired about HL Commodity Foods Limited and the sale. We were assured that proper procedures were followed in the sale of the property to Munster Packaging Limited and the chairman of the board wrote to the Department to give reassurance.
Mr. Seamus McCarthy:
As I said earlier on, I intend to put certain questions to the company on the disposal of properties. We examined this property disposal but we also looked at other property disposals because our concerns tend to relate more to systemic issues and weaknesses rather than to individual cases. We have the facts of this case but we would like to put the findings to the company and give it the opportunity to put answers on the record.
Does the list of questions which forms part of the Comptroller and Auditor General's investigation relate to the general disposal of property or is there specific mention of HL Commodity Foods Limited and the relevant transaction?
This matter has been raised at this meeting and in correspondence to the committee. I am of the view, therefore, that for the purposes of this meeting, Deputy Costello's question is valid. Before I ask the Comptroller and Auditor General to answer that question - if he can do so - will he indicate whether Munster Packaging Limited actually manufactures packaging?
It does manufacture packaging. Before we get into the nitty-gritty of discussing this matter, will our guests indicate whether they believe that it is a strange policy for an agency to locate a company which manufactures packaging alongside one which deals with food? Would that not have been a consideration in the context of the sale? Would it not have given rise to concern on the part of Shannon Development that this was happening to one of its clients, namely, HL Commodity Foods Limited? Am I correct in stating that it is also involved in exporting? I am seeking to get to the point in respect of this matter.
They were not answered in terms of satisfying either HL Commodity Foods Limited or me. We did not really receive a proper explanation as to how the manufacturing company was allowed to purchase the buildings occupied by HL Commodity Foods Limited. Our guests will have to provide a comprehensive explanation as to why - on a policy matter - the property was disposed of in the way it was. Then comes Deputy Costello's question with regard to whether Munster Packaging Limited bought the property and who is Mr. Ryan.
I am also seeking to establish the circumstances relating to the sale and whether it was advertised publicly. It was stated earlier that two of the 11 were publicly advertised for sale. How could the terms of the sale, namely, that the property would be used solely for the purposes of the purchaser's business activities, when the purchaser has now offered the existing tenant a 13-year lease? This seems to be a clear breach of the terms under which the sale took place. I am seeking, therefore, to establish the manner in which the sale occurred, how it was advertised, how the best value for money was obtained and what has happened in the interim.
Mr. Ray O'Driscoll:
Based on the information we have, the property was sold to Munster Packaging Limited. A valuation was undertaken at the time. Shannon Development staff organised for a valuer to visit the property in order to conduct a valuation. They have been led to believe and understand that HL Commodity Foods Limited understood this to be part of a transaction.
Who is Robert Ryan? In light of the conditions under which the property was sold to Munster Packaging Limited, how could the company dispose of it for speculative purposes? It is clear the property is now being used for such purposes. If it was to be sold to the company, the condition which attached was that the property would be used for the sole purpose of carrying out its business. There is a trail of events here which needs to be explained.
Let us put a timeframe on this. We have been examining this matter and receiving correspondence in respect of it for a long period. The Department confirmed earlier that it has also received correspondence. In order to satisfy members, I am of the view that a comprehensive response is required in respect of the timeline involved, the date on which the property was sold, to whom it was sold, whether the condition to which reference has been made was attached to the sale to the first purchaser and whether the latter has breached that particular condition by selling on to Mr. Ryan, if, in fact, he exists. In addition, Shannon Development must outline the action it is going to take if the condition in question has been breached. If the property was bought by Munster Packaging Limited for its own use - as seems to be the suggestion because the company entertained the inclusion of the condition to the effect that it be used for its business and not for speculative purposes - what did our guests expect HL Commodity Foods Limited to do? I would appreciate it if they would return to the committee with a comprehensive response to the questions we have posed in the shortest time possible. We will, of course, give them sufficient time to gather the necessary information with the assistance, I am sure, of the Department. The officials from the Department have indicated that they were satisfied in respect of the sale. I would like to know how satisfied were all of our guests were and the inquiries that were made in respect of it. Perhaps the officials from the Department and those from Shannon Development can provide the committee with the comprehensive response required in order that it might deal with this issue.
I am in complete agreement with the Chairman. However, it was stated that HL Commodity Foods Limited was made an offer and that in 2006 it was asked if it would be interested in purchasing the property. A valuation has been placed on the property at that time. Was a further offer made to it when the property was purchased by Munster Packaging Limited in 2013? Was it aware of the offer to the latter? Did that offer relate exclusively to Munster Packaging? Was a further valuation placed on the property at that point?
Could I ask that this be included in the report along with information in respect of the first question the Deputy asked, namely, was this one of the 11 properties that was or was not advertised?
Depending on the comprehensive response we will receive from you within a reasonable length of time from the date of this meeting, it may be necessary to ask you to come back to deal with this particular issue. Is that agreed?
I welcome Mr. Pakey and his colleagues. I compliment his team on what is being done in Shannon Airport, the new group and the success to date with Shannon. That is very positive for Shannon and more particularly for the region. I represent the Limerick City constituency and such success is very important to us.
On the agency's property portfolio, it appears that, effectively, 60% of the properties are idle. I assume they are more or less of a similar size although they may not be, but that percentage seems very high. What is the agency's strategy for its property portfolio over the next year, three years or five years? Mr. Pakey might indicate the locations of these properties and what is the agency's commercial plan for them over the next number of years. Is it seeking to sell or rent them or what is its strategy?
Mr. Ray O'Driscoll:
It is too early yet to ascertain that. We are going through that evaluation process right now. We have identified some blocks for demolishment and currently we are reviewing some of the other properties there to confirm their structural status. Some may need demolishment and some may need an upgrade. It is a bonus if the property needs an upgrade but that process is being undertaken as we speak. We have technology parks in Kerry, Ennis, Thurles and in Limerick. They are all high quality properties, multi-let buildings and are relatively modern.
Is it the agency's intention to dispose of them, invest in them or that they would be directed specific types of industry because obviously it is hugely important for the region? I expect that the agency is the largest holder of property in the region?
Mr. Ray O'Driscoll:
Let us focus on that initially. We are currently evaluating all the properties on site there. As I said, some require demolishment and we have identified those. We have sought planning permission and it has been received for the first block and we will start that process in December. We will go down through the other blocks in due course. Our goal here is to commence redevelopment in the zone. This is not something that will happen overnight; it will be sustainable growth. We will build new facilities there that are yet to be determined. We will engage with organisations like the IDA and Enterprise Ireland to identify what is appropriate. We want to enable employment in the area. We will build the property structures there to enable that. That is very much our focus and in particular in the Shannon area.
Mr. Ray O'Driscoll:
We can build buildings but there needs to be demand for the properties. There is no point in building ten buildings if there is not the demand for them. The economic climate is recovering, of that there is no question. We are getting more calls and queries in terms of our rental properties. We are upgrading some rental properties as we speak for identifiable tenants so certainly the market has picked up. We are quite confident of the future of the zone but it will take time. It will take a significant amount of investment yet to be determined and that is our number one focus.
Mr. Ray O'Driscoll:
Within the Shannon Free Zone area, there are about 100 companies operating there. Approximately 40% of those are aviation related and being close to Shannon Airport is a bonus. Shannon Airport has assets such as aircraft hangars and a lot of our aviation companies and our customers in the Shannon Free Zone supply and have relationships with these hangars and the people who operate them. The aviation cluster is very important, and also very important to the airport, but we also want to focus on non-aviation businesses. We want to focus on the tech sector, medical devices, financial services supports, back offices-----
Mr. Ray O'Driscoll:
Let us look at the positives. I believe they are the Shannon Free Zone, the technology parks and a number of other locations. The challenges will be some of the more remote locations where the old Shannon Development purchased and constructed properties decades ago, in some cases for the purpose of creating employment in the region. Many of the units are unoccupied or in poor quality and it is a big challenge for us to work out what we are going to do with them.
Mr. Ray O'Driscoll:
My recollection is a significant portion of the rent is paid by a small number of tenants. In the main, the tenants are high quality ones who pay their bills. A large proportion of the rental income is from between 50 and 70 high quality tenants. We do not have many issues with rent collection from the high quality tenants. There are more problems the lower down the scale one goes. We have a credit committee and frequent credit meetings. We go through the legal process where required and we interact and engage with the tenants to see whether we can work with them and come up with an agreement and strategy to help them work through their problems.
Mr. David McGarry:
We are a very prudently managed organisation. We take such a view because we are starting out as a new group. It is a transition for the entire range of companies that form part of the new Shannon group. We are quite prudent and we will be prudent in our borrowing. In due course, once we build up our profitability in the airport and Shannon Heritage and as the rents grow and we can economise and be efficient in our costs, we would look to borrow prudently in line with the Shannon Act for reinvestment and job growth.
I have one final question for Mr. Pakey. Could he give a general outline of where the company is at and what he envisages for the future of Shannon Airport? Shannon Development has a large property portfolio. How does he see it integrating in terms of the normal commercial activity in terms of passengers using the airport?
Mr. Neil Pakey:
The airport has turned a corner in terms of passenger numbers. That is not coincidental. We have been carrying out a very deliberate strategy in terms of growing the number of airlines and routes. We hope and expect that to continue. The announcement this week about new capacity for next summer looks favourable. Beyond the airport, working together with Shannon Heritage is very important to us. That is working well. We are doing joint marketing which gives us greater reach and influence over the airline decision-making. The heritage side of the business tends to focus very much on tour operators, which means it merges very well.
In terms of the overall landbank, we are looking building hangars and developing more aviation related businesses into the region. We have a sales pipeline process that is very important to us. We are working with the property side to enhance it, keep it growing and bring it back to its former glory.
Could both the Department and Shannon Development let us have whatever correspondence they received on the matter just discussed? We have a note – note 10 in the accounts - on the €1 million in restructuring costs. Could Mr. Pakey provide some details on the companies involved?
We wish to have a copy in writing. Could Mr. Pakey provide a few lines on each property, for example, how long it is vacant, how long parcels of land are available and the company’s intentions on the properties?