Dáil Éireann debate -
Tuesday, 6 Dec 1977

Vol. 302 No. 5

Nítrigin Éireann Teoranta Bill, 1977: Second Stage.

Minister for Industry, Commerce and Energy (Mr. O'Malley)

I move:

"That the Bill be now read a Second Time."

The purpose of the Bill is to increase the limit imposed by the Nítrigin Éireann Teoranta Acts, 1963 to 1975, on the amount that NET may borrow under Ministerial guarantee. It is further proposed to widen the scope of the ministerial guarantee powers to permit the guaranteeing of the due payment of commission and incidental expenses arising in connection with loan guarantees. In addition, the opportunity is being taken in the Bill to introduce legislative controls over the remuneration of the chief officer of the company and over the superannuation schemes operating in the company.

The principal provision in the Bill is that which proposes that the limit on the guaranteeing by the Minister for Industry, Commerce and Energy of borrowings by the company be raised from the present limit of £30 million to a new one of £100 million. The increase is required to enable the company to complete the financing of its ammonia-urea project at Marino Point, Cork Harbour. So that Deputies can fully appreciate the necessity for an increase of this size in the statutory guarantee powers, I propose to outline briefly the developments over the last two years which have led to this situation.

As Deputies are aware the Nítrigin Éireann Teoranta Act, 1975, was enacted specifically for the purpose of assisting the company to finance their Marino Point project. The Act increased the authorised share capital of NET from £7.5 million to a new limit of £27.5 million. It provided that the Minister for Finance could take shares in the company up to a limit of £22.5 million, and that he could take up additional shares in excess of that amount up to the new authorised share capital limit of £27.5 million with prior Government approval and it increased the limit on the guaranteeing by the Minister for Industry, Commerce and Energy of borrowings by the company from £2 million to the present statutory limit of £30 million.

In mid-1975, these provisions were considered more than adequate to complete the funding of the project which was then estimated to cost £63.5 million and which it was envisaged would be financed by way of £15 million Government equity, £5 million IDA grant and the balance of £43.5 million in borrowings. However, there have been two significant developments since then, one being substantial increases in the project cost and the other being demands by the different lending institutions for 100 per cent guarantees for all borrowings. These developments have seriously upset the company's best calculations and have led to the present situation where further legislation is essential to enable the company to complete the financing of the project.

Firstly, I will deal with the question of the project cost. The latest estimate from NET suggests that total expenditure could be in the region of £90 million. This represents an increase of about £27 million on the mid-1975 estimate. The company have attributed almost 45 per cent of this increase to material and labour costs, over 30 per cent to sterling devaluation and additional interest charges, and almost 25 per cent to additional project requirements which had not been budgeted for in the mid-1975 estimate.

It is, I consider, a matter of regret and of grave concern—and I have made my views on this clear to representatives of the company—that costs have spiralled in this manner during the construction of the project. It must be conceded, however, that expenditure on the project has been incurred during a period when inflation reached heights never experienced before in these islands. It was, in fact, precisely because of these massive inflationary trends that NET were unable, despite their best efforts, to arrange a fixed price contract and were obliged to operate on a basis of reimbursable costs for the major proportion of the contract for the project.

The second reason for the increased guarantee limit now sought is the demand by all lenders that total borrowings by NET in respect of the Marino Point project be fully secured. This is a development the company did not foresee prior to the enactment of the 1975 amending legislation. It had then been anticipated that the institutional lenders, such as the European Investment Bank, who were participating in the funding of the project, would require partial ministerial guarantees for borrowings but that the other source of loan finance, a consortium of banks, would not require any such guarantees.

However, it has since become clear, following protracted negotiations between NET and the lenders, that the institutional lenders must have full guarantees and that the bank consortium wishing to be treated on a par with all other lenders would require similar guarantees. In addition, due to the financing of earlier capital projects at NET's Arklow factory by way of short term borrowings over a number of years, an unfavourable imbalance between current assets and current liabilities had developed in the company's account. Because of this, it was considered prudent to re-arrange these borrowings as medium term borrowings through the bank consortium.

The re-scheduled borrowings which amount to almost £10 million will also require guarantees. Overall, therefore, total borrowings by the company in the region of £80 million, representing about £70 million required to complete the Marino Point financing and the £10 million adjustment of Arklow borrowings, will have to be guaranteed by the Minister for Industry, Commerce and Energy. In proposing a new statutory loan guarantee limit of £100 million, I considered it prudent that a realistic limit be provided to cover adequately the company's immediate requirements and possible requirements in the future.

I want to stress at this point that the attitude of the lenders in no way reflects any lack of confidence on their part in NET or in the Marino Point project. It simply illustrates the desire on the part of the different lenders involved in the overall financing package to be treated equally by NET and, since the institutional lenders must have full guarantees, it is not at all unreasonable for the bank consortium to seek the same facility. There is, however, no doubt that the company retain the full confidence of their bankers with regard to their ability to repay all borrowings. Under the loan agreements entered into by the company, all borrowings have to be repaid before the end of 1984. In fact, on the basis of their latest financial projections the company would have no difficulty in repaying these borrowings at an earlier date.

In addition to proposing a new statutory loan guarantee limit, I am taking the opportunity at this stage of extending slightly the scope of the powers of the Minister for Industry, Commerce and Energy with regard to guarantees. In section 3 of the Bill it is proposed that the Minister be empowered to guarantee the due payment by NET of commission and incidental expenses arising in connection with moneys borrowed by the company. In practice the amounts of commission or other expenses that might be payable by the company would represent a very minute fraction of the actual amount being borrowed. Nevertheless, the absence of this power did create difficulties for NET when completing a recent guarantee agreement and the amendment proposed in section 3 will get over this problem and bring the NET legislation into line in this respect with that of some other State companies.

The types of controls proposed in sections 4 and 5 of the Bill in relation to the remuneration of the chief officer of the company and to superannuation schemes covering employees of the company are now being inserted in relevant statutes governing the different State companies as the opportunity arises. The power to control the chief officer's salary and to regulate superannuation schemes is already contained in the Memorandum and Articles of Association of the company; so in fact these new provisions will not affect the controls operating at present but will merely give them a statutory backing.

Now that I have dealt with the reasons which have made it necessary to introduce this Bill, I would like to refer to the Marino Point project itself. This vast petrochemical complex, which will be using as feedstock some of the Kinsale Head natural gas, will in broad terms have an output sufficient to meet the nitrogenous fertiliser requirements of Irish agriculture until at least the mid 1980s. This level of output will undoubtedly play a significant role in the continuing expansion of the agricultural industry and will, for the first time, ensure the availability of nitrogen supplies to our farmers. In the early years of production and until the home market demand for nitrogen expands sufficiently to absorb the total output surplus production will be disposed of on foreign markets through marketing arrangements already completed.

The actual construction of the Marino Point plants is now at an advanced stage. There have been some disruptions in the construction programme due to intermittent industrial disputes at the site but generally the rate of progress has been satisfactory. At this stage and due to the size and complexity of this undertaking it is difficult to say precisely when the plants will be ready to come on stream. It seems reasonable, however, to expect that the ammonia plant could be ready to commerce production by about mid-summer 1978, followed by the urea plant within perhaps a further two months. This time scale should tie in with the landing of the first natural gas supplies which it is expected will arrive at about that time.

NET's new plant will undoubtedly have a revitalising effect on the Irish fertiliser industry as a whole and this is to be welcomed. There is little doubt that the industry has had more than its share of problems over the last couple of years and some of these are still with us. Last year, in particular, was an exceptionally difficult one for Irish firms in the business. Yet despite this situation companies have been able to maintain the same level of employment during the past year. The latest expectations are that the overall market situation will improve in 1978. The NET project will obviously help in this regard as the availability of home-produced nitrogen based on an indigenous raw material will from the middle of next year onwards be of benefit not alone to NET but also to the different companies involved in the production of NPK compound fertilisers in this country. Therefore, the NET project quite apart from generating an additional 500 jobs in the industry and in ancillary servicing industries will also help to secure the future of existing employment in the Irish fertiliser industry generally.

I confidently recommend the Bill for approval.

Mr. Kelly

This party accepts and supports this Bill and I merely want to say something about its setting. We particularly welcome the growth of the domestic fertiliser industry and we welcome the demand for the growth which has seen quite a large increase in the use of fertiliser by Irish farmers compared with what was once the case. Even now we are very far behind in the table showing use of fertiliser or consumption of fertiliser for agricultural purposes. It is only a fraction, one-seventh I think, per acre or per hectare of what is used in the Netherlands. They are at the top of the table and absorb as much fertiliser as the whole of Latin America does in a year. We do not aim, and perhaps do not need to aim for that level of land utilisation but obviously we have a long way to go.

A very large part of Irish land is unreclaimed and before fertiliser can be applied to it a great deal needs to be done to drain and clear it. That is only the beginning of the job. There is this enormous national task ahead in which Nítrigin Éireann is gearing itself to assist. Anything this Party can do in helping the company, particularly in helping it to overcome times of difficulty, will be willingly done.

It is a particularly happy accident— I think it is an accident—that the NET plant at Marino Point was decided on before any natural gas was found in the area, certainly before there was a commercial strike. It is perfectly appropriate and the right type of development that natural gas should be used as far as possible to supply the hydrogen element for the manufacture of synthetic fertiliser. There is, however, the other problem regarding natural gas which does not arise on this Bill but I should like to draw it to the Minister's attention—I think he mentioned it himself in former debates on this subject—and that is what will be the final destiny of the balance of the natural gas apart from what is used for the production of nitrogenous fertiliser. This naturally is an important point and a difficult one for the Minister and his Department because they must weigh up many factors, some of which are, perhaps, very difficult or impossible to calculate at present.

Obviously, the amount of this limited resource—gas will not be available forever—which is to be devoted to the manufacture of fertiliser means so much less gas left for production of energy. Even on the energy side there are very serious decisions to be made as to the form of energy into which the gas not absorbed in the fertiliser industry will be converted.

The most economic way, were it not for the expense of laying a pipe-line and the capital installation of a distribution grid would be to sell the gas as gas. As the Minister himself pointed out on a former occasion, the conversion of the gas into electricity, although it means that use can be made of a ready-made grid in the shape of the ESB network, is very highly wasteful and while that wastefulness might have been tolerated for the sake of simplicity or benefit to the balance of payments in the past, in the world into which we are moving where these resources will be limited, hazardous and subject to all kinds of political instability over which we have no control, the economic use of our energy resources, however small they may seem, will be a very difficult matter.

These things all belong together. The policy of the State even in regard to the production of fertiliser from our own natural gas will not be capable of being confidently stated until we have a State policy on energy generally. I fear we are as far from having that now as we were about a year go when the then Opposition moved a motion condemning the then Government for not having an overall policy. I am well aware of the difficulties and snags and, as has often been said, of the very serious decisions that have to be made and perhaps wrongly made in the best of faith. There is not an unlimited time for making these decisions which will bear very strongly on the future of the fertiliser industry also. As time goes on, I shall be pursuing the Minister to make sure that we have no undue delay in formulating an energy policy that will leave us as far as possible— it cannot be done completely—selfsufficient and independent of foreign sources not only in the remainder of this century but in the coming century.

The Minister explained clearly enough the reasons why he is seeking this enormous increase in the limit of guarantees. The first of the NET Bills which envisaged only the Arklow operation and did not envisage anything based on natural gas production or the Marino Point complex, envisaged the limit of guarantees at only £1 million. That was as recently as 1963. This limit has now increased in the space of 14 years by 100 times but we accept that we just cannot work on the basis of being surprised by simple mathematical calculations like that since quite new factors are now at work.

There are a couple of matters I want to mention to the Minister. They might more appropriately be raised on Committee Stage but if I mention them now he may get a chance to polish them off before Committee Stage. Although the Minister says that the proportion borne by commission and incidental expenses through borrowings is minute I wish him to give some indication of what kind of commission this is, on what kind of sums the commission is calculated, at what percentage and who gets it. I am not making any allegations but I want to know if it is possible to economise in this regard or if it is possible to direct the work represented by such commission to an Irish recipient, if it is not already in the hands of an Irish receipient, which may well be the case?

The Minister's Department contacted me yesterday to say that the Minister on Committee Stage—I think the object was to accelerate this Bill— would be moving an amendment which would have the effect of replacing the existing section 5 in the Bill with a completely new section, a much shorter one, the object of which was simply to leave the existing superannuation scheme provided for in the Articles of Association of this company as it stands and to provide that any alterations in the terms of the operation of the scheme would require the approval of the Minister given with the consent of the Minister for the Public Service. I agree that on the face of it that is a simpler and a shorter way of doing things. If it is just an oversight let it be so and I will not make a fuss about it. I would like to know, if that is so, why it was thought necessary in the first instance to put down the section, the replacement of which the Minister now proposes? It seems to me, on the face of it, that the provision in the existing section 5 (6) is one which perhaps may be more restrictive than whatever provision is at present in force in the company's superannuation scheme. I observe also that the more or less standard sub-section (7) in regard to laying orders before the House will not operate if we adopt the new section 5 which the Minister has circulated. Apart from referring to those matters which the Minister may be able to deal with on this Stage I have nothing more to add, except to join with him in welcoming the Bill and wishing it every possible success.

Mr. B. Desmond

I welcome the introduction of this Bill because it makes provision for a significant expansion of the activities of this important State-sponsored body. I am sure the House will be unanimous in agreeing to the adoption of the Bill. I share the concern of the Minister regarding the cost of the Marino Point project and I also share the concern not only of the Minister but I am sure of the other Members of the House who will contribute that a project which two years ago was estimated at approximately £63 million should have worked out in the region of £90 million.

I know that Government equity was involved in the first instance and IDA grants were also involved at that stage. It strikes me as rather strange—the Minister's predecessor may have more to answer for it than he—that when the State put £15 million equity into a project and the IDA gave a further £5 million grant aid into it that fairly rigid supervision should not have been maintained and matters brought to the notice of the House before now rather than that we should have over-expenditure of some £27 million on the late 1975 Estimate. It strikes me as excessive that there should be a 25 per cent cost attributable to additional project requirements in relation to the project. This was only budgeted twoand-a-half years ago and was in the melting pot for the best part of seven or eight years. It does not speak well for design and accurate projections that one has to have a 25 per cent additional project requirement in terms of finance.

It is possible, no matter how rigorously attacked by inflationary increases to estimate even for two years ahead. One should be able to estimate on a fairly reasonable basis a projection for material and labour costs. This is done nearly all the time in the city and is done in the case of all the State-sponsored bodies on a very rigorous basis. The ESB, for example, might well have done this more effectively in many ways. It is possible to estimate two years ahead within reasonable limits. When one sees here that 45 per cent of the increase of £27 million is attributable directly to materials and labour costs one wonders how exactly the work was done on the budget in the first instance.

I do not in any way hold the company responsible for the 30 per cent sterling devaluation as that was outside the scope of the company but I am concerned that in this country once the State is picking up the tab there is a tendency at all levels of professional and construction work in projects of this nature, when contracts tend to be based on reimbursable costs, for people gaily to add on whatever they feel like. Professions in the construction industry are fairly liberal in their interpretation at that end and once construction firms have an open-ended contract of a reimbursable nature they simply add on to it knowing that the State will pick up the tab.

That bodes ill for the necessary expansion, which I totally support, of the role of State-sponsored bodies. I hate to imagine what we would be faced with if in building the nuclear energy project in Carnsore Point at a cost of a few hundred million pounds we had budgetary projections of such a shoddy nature. I would not be too critical if this was a new State-sponsored body but they have had a lot of experience in the Arklow end, in particular, in this regard. We were entitled to something better from this State-sponsored body. I hope the cost will not exceed much more than the £90 million, although I would not be surprised if it touched £100 million by the time it is completed.

Mr. O'Malley

The Deputy might be encouraging them now to be lax.

Mr. B. Desmond

Despite this criticism on my part in relation to the project I am pleased to note that it is geared to the nitrogenous fertiliser requirements of Irish agriculture at least into the mid-eighties. I recently read an interesting contribution by the Parliamentary Secretary to the Minister for Agriculture in relation to the use of fertilisers in Irish agriculture. I was interested to hear some of the critical comments on radio programmes in this regard—for example, the comment of the County Westmeath CAO, in which it was pointed out that Irish farmers by and large have been on a plateau in terms of the use of nitrogenous fertilisers in the sphere of general productivity development.

Undoubtedly there is room for continued significant expansion in output and, to this end, in the use of nitrogenous fertilisers. The Minister did not refer in his speech to any prospect of a reduction in the price of fertilisers. Perhaps that aspect does not come formally within the context of the Bill. However, it was the expectation of some people that the Marino Point project would result in a general reduction in the over-all cost. But if this result is not achieved the fact remains that we are using essential indigenous raw material. There is massive scope for the further use of nitrogenous fertilisers in Irish agriculture during the next ten or 15 years. Since price increases at the level of agriculture are not likely to rocket very much in the years ahead, the increased use of fertiliser will be very necessary in terms of increasing over-all production.

This Bill will add a new dimension to the commercial role of State-sponsored bodies and to their general contribution to this nation. I have always supported the NET project. Even at times when certain Irish commercial interests were trying to screw that body out of existence, I continued to support them as I supported strongly their setting up. They are making a distinctive contribution to the Irish infrastructure for agriculture, to our overall industrial expansion and to the provision of employment at their Arklow and Cork plants. My criticisms of the financial operation will have to be seen in that context. I believe in efficient State-sponsored enterprise with a high productivity level and a high employment content. It is only when State-sponsored bodies are operating in this way that they are contributing to the national interest. The Labour Party find it easy to give full support to this measure.

Mr. L. Lawlor

Obviously, this Bill is necessary to enable the completion of the NET project. The industry in which this body are involved is of a high-escalation type in terms of costs. Consequently, the figures mentioned by the Minister are colossal. It is our hope that the plants at Arklow and at Marino Point will meet the targets of pay-back in 1982 as outlined.

The gas finds off our coast and the constraints that these finds have placed on our technical consultants represent a whole new development for us. Recently there have been expressed some words of caution regarding certain standards. As this new industry will be of a highly technical nature I trust that the people concerned will ensure the enforcement of the necessary safety regulations and standards. To a large extent non-Irish consultants were engaged on the Marino Point project and these people have brought with them a large amount of technology from abroad. Perhaps this has been the cause of much of the escalation. However, much has been learned by Irish professional organisations and contractors as a result of the Marino Point project. Perhaps this will lead to much greater control in regard to the spin-off industries that are likely to result from these gas finds.

Hopefully, too, the gas that is found off our coasts will be put to maximum use by such bodies as NET and the ESB. I urge the Minister to give urgent consideration to the question of the possibility of using this gas to supply the city of Dublin. As the Marino Point project is at an advanced stage, it will be necessary shortly to begin transporting the chemical to Arklow. This will put on our rail system demands of a kind not experienced up to now.

I welcome the Bill and wish it a speedy passage through the House.

Minister for Industry, Commerce and Energy (Mr. O'Malley)

I am obliged to the House for the welcome that has been given to this Bill and also for the very helpful and constructive tone of the remarks. Before dealing with the more general matters I should like to refer to a point raised by Deputy Kelly on the question of the commission. This is covered in section 3. I am advised that the commission is of the order of a ½ per cent and is payable on the amount raised. So far as I know this is payable to the leading bank who arrange the finance. It covers such items as commitment fees and legal fees. I am advised that the necessity for this section was brought to the attention of the Department by the Attorney General. I am advised, too, that Irish banks and that worthy body of men, Irish lawyers, will be the main beneficiaries of this commission. I understand that in some instances the commission payable would be a ¼ per cent.

Mr. Kelly

I take it that the incidental expenses mentioned would be even smaller.

Mr. O'Malley

That is so. The commission would be the main item of expenditure. Perhaps it would be better to deal with the amendment that it is proposed to introduce on Committee Stage in respect of subsection (1) of section 5 at that time rather than to deal with it now and then have to repeat later what I would say now.

In my opening speech I expressed regret and concern in relation to the question of costs and in particular to the escalation in this regard. I went on to give the reasons for this situation, but in fairness to NET it should be said that for the most part the reasons were very much outside their control. That is true particularly of the last two years. The problem was created more than two years ago when the arrangements for the building of the plant was made. On the Bill that led to the 1975 Act I spoke at some length about my reservations and doubts as to what NET were doing in entering into the arrangement with Kellogs. I expressed concern then with the nature of the arrangement. It got fairly hot and heavy between myself and my predecessor so far as certain aspects of that arrangement were concerned. He showed the House that all was well and that the possible escalation of costs which I foretold as being likely was in his view unlikely and the whole situation would be controlled. There is a temptation to simply say "I told you so" and leave it at that. It is unfortunate that it has worked out the way it has.

NET were in the difficulty that they could not, because of the nature of the operation, enter into a different type of contract. Due to the inflationary situation which existed at the time, they could not enter into a fixed price contract. There were a great many imponderables in the situation. In any event, that is history. They entered into an arrangement and one of the results is that there has been very substantial escalation in costs.

I thought Deputy Kelly might have dwelt more on this difficulty. I was surprised, but nonetheless glad, to find that Deputy Desmond drew the attention of the House to it. He drew attention to an attitude of mind that because the State is picking up the tab, the contract, or the job, is fair game. That is a widespread belief and is frequently put into practice. In my view Deputy Desmond was right when he said that it was a very dangerous practice. This mentality exists today as much as it did five, ten or 20 years ago. This is a reality which should be borne in mind by some people who are proposing certain types of solutions to another major problem that faces this country in the industrial field today and about which we will talk later. As I said, it is a reality that this mentality exists. Some people often make full use of the opportunity to take the State for a ride because the taxpayer is picking up the tab. This is something we have to be extremely careful about.

Mr. P. Barry

Does that include politicians and political parties?

Mr. O'Malley

It does indeed.

Mr. Kelly

They are the ones who are most to blame for that development and the Minister's party are the worst of the lot.

Mr. O'Malley

Deputy Kelly raised the question of the gas usage. As he properly said, this is one great difficulty. It is recognised that the use of this very limited amount of natural gas for electricity generation is not by any means the optimum use. We are faced with a difficulty of considering whether any gas should be used for this purpose or if a smaller amount than is at present projected should be used.

When I came into office I found that there were not, as I hoped there might be, exact costings of the alternative uses to which this gas might be put. In particular, there were not exact costings of the possible grid to bring the gas to Dublin. I asked that these costings be prepared by independent people. I expect that the result of that study will be available within the matter of a few weeks and after that a decision may be made. One's freedom of decision is to a fair extent inhibited by the fact that a decision was made three-and-a-half years ago and a lot of things have happened since then as a result of that decision.

Mr. Kelly

In regard to the adaptation of the grid——

Mr. O'Malley

Yes, in regard to the allocation. Considerable expenditure has been incurred by another body on the basis of that decision. I am hopeful it is not an expenditure down the drain if a change is made, because it might be possible at a comparatively small additional cost to change the nature of the power station in question which has been under construction for the last 12 months. These are matters that will have to be gone into in more detail on another occasion and on which major decisions will have to be made over the next couple of months.

Mr. Kelly

Would the Minister consider getting the advice of the new board which we now have for such matters—the Board on Science and Technology?

Mr. O'Malley

I am in the process of getting advice from two economists —one in my Department and one in the Department of Economic Planning and Development or Finance, I am not sure which Department he is in at the moment. So much advice is being given by so many people already that I have to draw the line somewhere. The Deputy will be aware that one of our difficulties in this respect is that one firm of consultants gave different advice to two different clients in this field about this matter. If I am sceptical about the kind of advice one gets from some quarters, it is understandable. Therefore I have asked two accomplished public servants to give me the most dispassionate advice they can on the costings of these matters. These economists are working in close co-operation with the IIRS who are competent to assess these matters dispassionately and in the public interest.

So far as the use of the remainder of the natural gas from Kinsale is concerned, over and above what will be used by NET at Marino Point, my own feelings and enthusiasm would be that the bulk of the remainder, if at all possible, would be used in a further chemical plant by a State company preferably in that area. From the national point of view this would be the most beneficial and economic use of the gas. I would like to see sufficient gas brought to Dublin to provide reasonably priced fuel for the domestic market. That depends entirely on whether the economics are right and I hope to have advice on that which will enable me to take a definite decision one way or the other within a short time.

These were the main points raised in today's short debate. I am grateful to Deputies who have taken part for their welcome of the Bill and for their understanding of the need for these higher limits. I hope that the considerable difficulties which were incurred by NET in the course of construction are at an end and that the ammonia and urea project at Marino Plant, will have a long and successful period of production with considerable profit to the Irish people generally and specifically to the agricultural sector. All the indications are that notwithstanding the escalation in costs this will be the case. I wish them well in their endeavours. Notwithstanding the delays and cost escalations it is only right that congratulations should also be given to the NET executives and engineers for the way in which they have overcome enormous difficulties in the building of what is far and away the largest and most complex industrial plant ever erected here.