I move: "That the Bill be now read a Second Time."
The purpose of this Bill is to increase the authorised share capital of Irish Steel Limited from £50,000,000 to £120,000,000 and to provide, as a consequence, a similar increase in the value of shares which the Minister for Finance may take up. This will enable debts owed by Irish Steel and guaranteed by Exchequer to be repaid by means of an injection of equity.
Irish Steel owe £99 million. All of this is guaranteed by the State under guarantees extended by various Ministers. It has also received a grant of £25 million in 1981-82 and equity of £5 million in 1982-83 from the taxpayer, all of which has been expended.
These debts (net borrowings) increased in the following way — 1979, £13.5 million; 1980, £28.6 million; 1981, £52.5 million; 1982, £62.1 million; 1983, £77.2 million; 1984, £99 million. The cost overrun for the new plant which was completed in mid-1981 was £26.5 million, above an estimated £38 million, and this amount is included in the above figures.
All of this money is already owed. In converting some of the £99 million in guaranteed debt into equity we are not increasing the capital liability of the taxpayer. These debts are already guaranteed by the taxpayer, and most of the debts, 53 per cent, were incurred prior to 1982. We are simply relieving the State owned company of the need to meet the interest payments out of trading profits and transferring the liability for these interest payments to the Exchequer.
If this equity injection were not made Irish Steel would close straight away. Then the entire debt would fall to be met by the taxpayer anyway. The decision the House is being asked to take in approving this Bill, is whether Irish Steel plant should not be closed without being given a last chance to prove itself. The key factor here is whether continued operation will add to, or reduce, existing losses. In assessing this question, the Government availed of the assistance of the consultancy firm SOFRESID of Paris.
Irish Steel Limited is a wholly State owned company with fully paid up shares amounting to £30 million held by the Minister for Finance. The company's accumulated losses at 30 June 1983 were of the order of £43 million. While it is expected that the loss for the year to 30 June 1984 will be in the region of £21 million, it is clear that the level of borrowings is far too high and that a significant injection of equity is necessary in order to correct the major imbalance in the company's financial structure if the company is to continue in operation.
Deputies will be aware that no financial aid may be provided by a member state to a steel undertaking without the prior approval of the European Commission and aid for the continued operation of a steel undertaking may not be paid after 1984. A notification of the maximum level of aid which the Government might provide to Irish Steel was sent to the Commission in September 1982 to meet the deadline set by the Commission for the receipt of such notifications. The maximum aid envisaged in that notification was the guaranteeing of further borrowings of £25 million and the provision of share capital of £89 million.
While it is expected that the loss for the year ending June 1984 will be £21 million, this will be made up as to £12 million by interest, £4.1 million depreciation and £4.9 million in operating losses. This equity injection will enable much of the debt on which the interest arises to be repaid. The depreciation is relevant only in so far as the eventual replacement of the mill at the end of its useful life is envisaged. The operating results are the most immediately relevant factor in deciding on the continuance, or otherwise, of the mill. The projected losses on operation this year of £4.9 million represent an improvement on past performance. The operating losses in 1980-1981 were £8.2 million, in 1981-1982 £6.4 million and in 1982-1983 £5.7 million.
The question as to whether this downward movement in operating losses would continue and whether the company would get into an operating profit situation has been the subject of deep study both at national and EEC level. Obviously if the company were able to get into a permanently profitable situation it would be able to make some contribution towards the redemption of the debts incurred in the past. If it were closed straight away all the debts would fall due and no contribution would be made.
The House will recall that the consultants, SOFRESID, were jointly appointed by the Government and the Commission in July 1982 to carry out a major assessment of Irish Steel's viability prospects. They concluded in September 1982 that the company's costs were not competitive. Nevertheless, on the basis of certain assumptions in relation to prices, reductions in production costs, including a £15 per tonne of steel produced reduction in the cost of electricity, growth in sales and revenue and the provision of additional State funds of up to £89 million, the company could, in the consultants' opinion, be viable in the long term and should be allowed to continue in operation. The consultants warned, nevertheless, that if it were decided to keep the company in operation and to provide the additional funds, there remained the risk of failure due to the extreme difficulty of breaking into the export markets.
On 29 June 1983 the Commission gave its decision on the application of the Government for approval to invest up to £89 million in Irish Steel in 1984. The main provision of the Commission decision was that the proposed aid was not compatible with orderly functioning of the common market and might not be paid to the company unless the Commission was satisfied, on the basis of information to be supplied to it by 31 January 1984, that the company could be financially viable by the end of 1985 without any further aid.
The Commission decision of 29 June 1983 also stated that the aid necessary for the continued operation of Irish Steel up to 31 January 1984 could be paid as long as the company was not in breach of the rules of the European Coal and Steel Community, particularly those relating to quotas and pricing. The Commission subsequently approved the giving of Government guarantees in respect of an additional £14 million which was necessary for the continued operation of the company and recently approved the giving of Government guarantees for a further £3.5 million.
In September 1983 the Government again engaged the consultants to reassess Irish Steel's viability prospects in the light of the company's performance since their report in September 1982. The consultants in their report of December 1983 commented very favourably on the results achieved by Irish Steel since their earlier report and indicated that the company had set up a distribution network, diversified its product range, kept to its rolling production programmes and placed its customer relationship on a sound basis. The consultants expressed the belief that from a marketing point of view, Irish Steel has overcome the most difficult hurdle: a significant breakthrough into the European market.
Information to enable the Commission to decide whether in its opinion Irish Steel would be financially viable after the end of 1985 without further State aid, given a conversion as of that time of £89 million of debt to equity, was forwarded to the Commission in January 1984. Arising from that information discussions with the appropriate Commissioners and with Commission officials have continued since then. Resulting from them the Government and the Commission decided in May 1984 to jointly re-engage for a third time the consultants to undertake a further investigation in order to reconcile the varying views and to indicate whether Irish Steel could meet the Commission's requirements for financial viability after 1985. The indications in the consultants third and most recent report are that Irish Steel can meet the Commission's requirements for financial viability after the end of 1985 provided the company is given the quota upon which the report is based. I understand that the Commission took an interim decision yesterday which allows £36 million to be provided to Irish Steel pending a decision on the quota question.
I would now like to turn to the market in which Irish Steel must sell its products. The company has made considerable strides in the past year or so but the situation in the overall market remains depressed.
However, the Commission's forecast for 1984 does envisage a slight improvement. Community production of crude steel in recent months has shown an increase over corresponding months in 1983. Overall the state of the Community steel industry is better in 1984 than it was in 1983 but recovery remains fragile. Because of the major overcapacity which has existed in the Community steel industry for some years, there has been a tendency for supply to exceed demand. This has meant a consequent downward pressure on prices, a deterioration of the financial position of producing enterprises and a consequent restriction on the creation of resources enabling them to finance plant modernisation. The Commission are trying to remove this excess capacity through the implementation of the "Aids Code" which restricts aid by Governments to steel undertakings. Present indications are that capacity reductions are likely to go beyond the targets set by the Commission and could be of the order of 30 million tonnes by 1986.
Among other measures currently being operated by the Commission are a system of production and delivery quotas, minimum prices for certain steel products, and more stringent measures to prevent infringement of the quota and price rules.
The House will be aware that the Commission have since 1980 operated a system of production and delivery quotas which is due to terminate at the end of 1985. The main objective of the system is to control the supply of steel products coming on the market so as to prevent prices from collapsing and thereby allow the steel industry to restructure within a stable context.
To date the quota system has not created major problems for Irish Steel. This is because so far, Irish Steel has been operating well below its technical capacity because the mill is only recently commissioned. From now on, however, it will need additional quotas, as the present system is unduly restrictive in its case.
Indeed the basis on which SOFRESID has expressed confidence that Irish Steel Limited can reach profitability is that it has so far been working well below capacity. If it could approach its capacity output and sell that output at reasonable prices, it has excellent prospects of making operating profits. At the moment it is only producing at little over 40 per cent of its capacity. That is to say that unless appropriate increased quotas are granted to Irish Steel it will not be able to become viable and will have to close very quickly. I raised this problem at the Steel Council meeting on 26 January, 1984. The Commission at that time declared their readiness to submit a proposal to the Council for alleviating these problems. This was on condition that the restructuring programme had enabled it to acknowledge the viability of the undertaking after 1985. While it is not certain that the Council of Ministers would agree to such a proposal from the Commission, I would hope that, in view of the relative insignificance of the capacity of Irish Steel's plant in the total European context, the Council would agree.
Notwithstanding the quota system, the price of certain steel products deteriorated considerably in the second half of 1983. The Commission therefore felt it necessary to introduce minimum prices for these products with effect from 1 January, 1984. The Commission also introduced tougher measures to prevent infringement of the quota and price rules. Under these measures each steel producer of the products covered by minimum prices is obliged to lodge with the Commission a security deposit, based on his quarterly quota for delivery on the Community market, which will be refunded to the producer the following quarter provided he has not been found to have infringed the quota or price rules during the quarter question. If, however, the Commission finds that a producer has infringed the rules it may require heavy fines to be deducted from the security deposit.
A favourable decision by the Commission on the viability question, a suitable adjustment of quotas and the investment of £89 million by the State will not of themselves ensure the future of Irish Steel. The company must continue to increase the volume of its sales, reduce production costs and obtain realistic prices for its products at a time when the international steel market is still very depressed.
As far as production costs are concerned, it must be stated that one of the disadvantages facing Irish Steel is the high price it pays for its electricity supply compared to the prices prevailing in other member states. The SOFRESID consultants state that the ESB tariffs represent a disadvantage to Irish Steel of £15 per tonne of steel produced compared with a reference plant in France. This was a feature of their 1982 and 1983 reports and they recommended in their first report that if this disadvantage could not be eliminated by a reduction in electricity tariffs or other cuts in costs, Irish Steel should be closed. In their 1983 report they regard the total cost disadvantage as having been reduced to £12 per tonne but the electricity component of that still remains at £15 per tonne which is compensated as to £3 by other reductions.
A comparison of domestic and industrial electricity tariffs, exclusive of tax, in Ireland with those in seven other member states of the Community indicates that the tariff structure in Ireland is substantially less favourable to industry than is the case in all of the other seven member states. An indication of this disadvantage is that at given levels of consumption Irish industry pays over 93 per cent of the domestic rate per kilowatt hour compared with an average of less than 72 per cent of the domestic rate for the other seven. The consultants concluded that electricity tariffs in Ireland, unlike those in the other countries, provided no incentive to industrial development. Because of the importance of electricity charges to heavy industrial consumers, such as Irish Steel, the Government have decided that the Minister for Energy should bring before it within a month an assessment on energy pricing policy.
It will be clear to Deputies from what I have said that the difficulties facing Irish Steel are considerable. The company must achieve an increasing level of sales at a time when the steel market continues very depressed and when many producers in the Community are being compelled to reduce their production capacity because of the imbalance between supply and demand.
Irish Steel has a modern, flexible plant which can adjust to changing patterns of demand and which, according to the consultants, is one of the most technically advanced plants in Europe. As far as sales are concerned, the company have made considerable progress in the past year in that the volume of sales for the year to 30 June 1984 is expected to be some 40 per cent higher than that achieved in the year to 30 June 1983, which was more than double that achieved in the previous year. While this performance is encouraging, much more remains to be accomplished in relation to costs, prices and sales if the company are to have a secure viable future. The task facing the company should not be underestimated, and a dramatic improvement in the steel market simply cannot be expected or assumed.
As I have already stated, the company have State-guaranteed borrowings amounting to £99 million and this Bill allows for the redemption of debt. It is our hope that after this conversion of debt into equity the company will become viable. If it does it will be able to service and repay all the remaining Government-guaranteed loans and make a return to the State on its investment. There is, of course, the risk that the company might fail to make the necessary progress towards viability. The additional risk to the Government between the cost of closing Irish Steel now and its closing at a later date if not viable, is in the region of £5 million. This limit arises from the fact that, if the trading position deteriorated to that extent, the company would have to be closed because the Commission will not permit the State after the end of 1984 to assist the company any further by way of investment, grant or guarantee. Therefore the additional risk capital represented in the decision to introduce this Bill and allow Irish Steel a last chance is £5 million in current money terms.
From the end of this year the company will have to finance their operations in a normal commercial manner without any recourse to the Government.
I repeat that much remains to be done before the company's future is secure. It will be up to all who work in the organisation to co-operate in ensuring the efficiency necessary to safeguard the future of the company.
To conclude, I hope that, in spite of the many difficulties facing Irish Steel, the future of the company can be assured. I am confident that the Bill will commend itself to the Dáil and I recommend it for approval.