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 much of the debts owed by Irish Steel and guaranteed by the State to be converted into equity. We are not putting in new money, really, but providing for the redemption of debts already owed. That is a matter that is extremely important.
A lot of the controversy about the Irish Steel decision in recent times has been on the assumption that we were putting in new money. The fact of the matter is that we are not putting in new money. As to the vast majority of this money, it is simply going to redeem debts that are already owed by the taxpayer, guaranteed by the taxpayer, and have to be paid by the taxpayer anyway. It is simply a question of whether it is better to close the thing down and pay them all off now, or keep it going and see if by keeping it going the profits that it might make, keeping going, would at least in some small way reduce at the end of the day the amount of overall debt that has to be met by the taxpayer. I stress again that this money which is going in is going in to cover debts that are already owed and guaranteed. I shall perhaps illustrate that in the remainder of my contribution here.
Irish Steel is, as I say, a wholly-owned State company with share capital of £50 million held by the Minister for Finance. It also received a grant of £25 million in 1981-82. The company's accumulated losses at 30 June 1983 were of the order of £43 million and it is expected that the loss for the year to 30 June 1984 will be in the region of £21 million. It has borrowings of £99 million. All of these borrowings, as I say, are guaranteed by the State under guarantees extended over the years by various Ministers.
These borrowings accumulated over the past six years as follows: 1979, £13.5 million; 1980, £28.6 million; 1981, £52.2 million; 1982, £62.1 million; 1983, £77.2 million and 1984, £99 million, which is now owing. It will be seen, therefore, that the vast bulk of the money now due relates to debts incurred in 1982 or before that.
It is clear that the level of borrowings and consequential interest is far too high and that a significant amount of it must be eliminated if the company is to have any chance of becoming viable. Otherwise the drain of interest payments will simply be too much and will smother the company. In converting some of the £99 million guaranteed debt into equity, we are not increasing the capital liability of the taxpayer. 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 were not provided, Irish Steel would close straight away. Then the entire debt would fall to be met by the State anyway.
The decision the House is being asked to take in approving this Bill is whether Irish Steel should be closed without being given a last chance to prove itself. That is the essential decision the House is being asked to take on this occasion: whether, if the company keeps going, it can make some profits which will contribute to eliminating the accumulated losses, or whether it will close straight away which will happen if we do not pass this Bill. If it did, all the money would have to be paid anyway. In assessing this question the Government availed of the advice of the consultancy firm SOFRESID of Paris.
The House will be aware that under the "Aids Code" 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. The aid proposed for Irish Steel is classified by the Commission as aid for continued operation. Therefore, we must get their consent. A notification of the maximum level of aid which the Government might provide to Irish Steel was sent to the Commission as far back as September 1982 to meet the deadline set by them 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 of £12 million in interest on previous debt, £4.1 million in 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, thereby eliminating most of the £12 million. The depreciation of £4.1 million 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 therefore are the most immediately relevant factor in deciding on the continuance, or otherwise, of the mill. The projected losses on operation in 1983-84 of £4.9 million represent a significant improvement on past performance. The operating losses in 1980-81 were £8.2 million, in 1981-82, £6.4 million and in 1982-83, £5.7 million. We are down to a significantly lower figure of £4.9 million.
The question as to whether this downward movement in operating losses would continue, and whether the company would get into a profit situation, has been the subject of deep study both at national and at EEC level. Obviously, if the company was 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 was closed straight away, all of 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 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 the orderly functioning of the Common Market and might not be paid to the company unless the Commission was satisfied, on the basis of information supplied to it by 31 January 1984, that the company could be financially viable by the end of 1985 without any further financial 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. This is effectively interim aid. 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 on an interim basis and recently approved the giving of Government guarantees of a further £3.5 million. This was an interim decision.
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 previous report in September 1982. The consultants in their report of December 1983, the second report, 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 had overcome the most difficult hurdle, namely, 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 took place with the appropriate Commissioners and with Commission officials. Resulting from those discussions the Government and the Commission decided in May 1984 jointly to reengage for the 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 a production quota upon which the report is based. On the basis of that report the Commission took an interim decision on 27 June 1984 which allows £36 million to be provided to Irish Steel pending a decision on the quota question. I will be dealing with the quota question later, the crucial outstanding factor in this matter.
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 but the situation in the overall market remains depressed. However, the Commission's forecast for 1984 does envisage a slight improvement in the market. 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. If I may interrupt to say that steel consumption in the European market over the next four or five years which is crucial to Irish Steel depends very much on the general European recovery. If that recovery does not occur the prospects for the steel market are very dim. The predictions are that it is occurring and even though there may be a slight recession in the United States in the later end of 1985 and most of 1986, it is not expected that that will unduly affect the European recovery. If that does not happen for one reason or another, if the European economic recovery is detailed, then the prospects not just for Irish Steel but for all steel producers must be very dim.
Apart from the problems as far as the economic recovery is concerned, there have been a number of technical changes in the steel consumption pattern which has affected all steel producers to their detriment. That has been mainly the advances in technology which have enabled, for instance, motor cars to be constructed now with much less metal in them than in the past and much lighter bodies have been devised partly in response to the energy crisis. This, of course, has had an effect on the demand for steel. The effect on the steel market of the recession has been compounded by technical advances which have enabled users of all sorts of products involving steel to achieve their end results with a lower steel input.
Because of the major over-capacity which has existed in the Community steel industry for some years, there has been a tendency for supply to exceed demand. This excess of supply over demand caused prices to drop below the break-even point of many producers and seriously eroded the financial viability of the European steel industry. The Commission is trying to remove this excess capacity through the implementation of the "Aids Code" which provides that aid to a steel undertaking must be linked to a restructuring programme including where appropriate a reduction in capacity. Present indications are that capacity reductions are likely to go beyond the target set by the Commission and could be of the order of 30 million metric tonnes by 1986. That is against a background in which we are increasing our capacity.
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 has since 1980 operated a system of production and delivery quotas. The present system 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. The quotas for each company are based on its historical production, with some adjustment for companies which have brought new capacity on stream. Senators will appreciate that Irish Steel's historical production was extremely low. For some of the base period upon which the quotas are calculated Irish Steel was not in production at all because the old mill was being replaced by the new one. Hence a quota based on that base period puts us completely at a disadvantage, hence the crucial need for us to get effective renegotiation of the application of the quotas in our particular circumstances.
To date the quota system has not created major problems for Irish Steel. This is because so far, it has been operating well below its technical capacity because, relatively speaking, the mill is only recently commissioned. From now on, however, it will need a higher capacity utilisation rate and a higher output than is possible under the present system. At present the plant is only producing at a little over 40 per cent of its capacity but to be economic it must be producing very nearly 100 per cent. If it does that it will obviously break through the quota barriers that are in existence at present. Unless those are lifted they cannot reach profitability.
Indeed the basis on which SOFRESID has expressed confidence that Irish Steel can reach profitability is that it has so far been working well below capacity. If it could operate at a more realistic level and sell its output at reasonable prices, it has excellent prospects of making operating profits. However, unless Irish Steel is granted appropriate increased quota 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 declared its 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, I would hope, in view of the relative insignificance of the capacity of Irish Steel's plant even at full production in Community terms 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 strengthen the market organisation measures by introducing in addition to quotas 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 the following quarter provided the producer has not been found to have infringed the quota or price rules. 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, I must state that one of the disadvantages facing Irish Steel is the high price it pays for its electricity supply compared with the prices prevailing in other member states. The consultants stated that the ESB tariffs represented a disadvantage to Irish Steel of £15 per metric 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 regarded the total cost disadvantage as having been reduced to £12 per tonne but the electricity component of that remained at £15 per tonne. This is a feature of the way that our tariffs are structured in this country and overall electricity costs.
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 advantage 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 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 them within a month, an assessment on energy pricing policy.
It will be clear to the House 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 to be depressed and when many producers in the Community are being compelled to reduce their production capacity under the European Commission's "Aids Code".
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 has 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 is to have a secure and viable future. The difficulties facing Irish Steel are considerable and a dramatic improvement in the steel market simply cannot be counted upon.
As I have already stated, the company has 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. If I may respectfully suggest to the Seanad, that is the figure we are really talking about because the rest of the money provided in this Bill is money that is already owed. This limit arises from the fact that if the trading position deteriorated to that extent the company would have to close because the Commission would 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 its 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 is clear that Irish Steel's future depends on the whole-hearted co-operation and dedication of all those who work in the organisation and on the way in which the markets for its products develop.
To conclude, I hope that, in spite of the many difficulties facing Irish Steel, the essential performance required to safeguard the future of the company will be achieved.
I am confident that the Bill will commend itself to the Seanad and I recomment the Bill for its approval.