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Seanad Éireann debate -
Wednesday, 18 Nov 1987

Vol. 117 No. 14

Nítrigin Éireann Teoranta Bill, 1987 [Certified Money Bill]: Second and Subsequent Stages.

Question proposed: "That the Bill be now read a Second Time."

The purpose of the Bill is to increase Nítrigin Éireann Teoranta's facility to borrow under ministerial guarantee from the existing level of £150,000,000 to £180,000,000.

I will now outline the background which gave rise to the necessity for this legislation.

NET was incorporated in 1961 with a nominal share capital of £100 and with ministerial power to guarantee up to £1 million in borrowings. Through a number of subsequent legislative Acts the authorised share capital was increased to 77.5 million shares of £1 each. All the authorised share capital has been issued and all the shares are beneficially held by the Minister for Finance, except for one each held by the directors. Similarly, successive legislative Acts have increased the Minister's power to guarantee NET's borrowings up to a limit of £150 million. This facility is currently fully utilised.

NET was formed for the purpose of manufacturing nitrogenous fertilisers and the company commenced production at its plant in Arklow in 1965. The chief products were ammonium sulphate and the fertiliser, calcium ammonium nitrate (CAN), both of which were based on ammonia which in turn was produced from heavy fuel oil. Then the discovery of the natural gas field off the Kinsale Head offered NET the opportunity of using an attractive feedstock for the manufacture of ammonia. At the beginning of 1974, NET received an allocation of gas from the field and at the end of that year with Government approval they commissioned Kellogg to build a world-scale ammonia and UREA plant at Marino Point, Cork, with annual capacities of 435,000 tonnes of ammonia and 310,000 tonnes of UREA. However, as Senators are only too well aware, major problems were incurred in the construction of the plant which resulted in its construction being delayed by 17 months. The final cost of the Marino Point plant was £137.3 million, an increase of 116 per cent on the first detailed estimate of £63.5 million.

This cost overrun, coupled with net trading losses, placed the company in extreme financial difficulties resulting in the State having to inject £50 million in extra share capital in 1981. This share capital is, of course, included in the issued share capital of £77.5 million to which I have already referred.

Despite this capital injection, NET did not immediately move into a profitable situation. It lost £12.2 million in 1982 and £25.3 million in 1983. However, it made a profit of £2.9 million in 1984 and £4.8 million in 1985. These profits were significant results as they were achieved after the servicing of the company's heavy debt burden.

Unfortunately this trend did not continue. The company lost £19.5 million in 1986 and lost about £14 million to end September 1987, by which time its total debt was £180 million. In fact, 1986 was a most difficult and unrewarding year for the fertiliser manufacturing industry and all European producers suffered losses due to a slump in world prices which resulted from cheap imports into the European market.

The ongoing losses, combined with difficult trading conditions in Europe compelled the senior management of NET, following a review of NET's strategic position, to conclude and recommend that an association with a major fertiliser producer was necessary to ensure the long-term viability of the company. Their review identified Richardson's Fertilizers Ltd. (RFL), Belfast, a wholly owned subsidiary of Imperial Chemical Industries plc (ICI), as the most suitable partner.

The strategic need for an association with a major fertiliser producer arose because NET's prospects in the medium term were uncertain. The company's debt placed an enormous strain on its cost base and on its ability to develop or survive. There seemed little prospect of NET making any significant reduction in its debt in the medium term. It was quite obvious that, unless some significant remedial action was taken, NET's ongoing losses could not be sustained and that these would place in serious doubt the very future of the company with a possible total loss of employment. This currently amounts to 615 people of whom 301 are in Arklow, 277 in Cork and 37 in Dublin and other locations.

It was against this background and the belief that a strong native manufacturing fertiliser industry was of strategic importance to any agricultural country, that the Government decided that discussions should be opened with ICI aimed at creating a joint venture company involving NET and RFL. In January of this year the Government approved the joint venture arrangements which had been agreed in principle following lengthy, detailed and complex negotiations.

I should say that the financial analysis and examination which preceded the setting up of the joint venture involved looking in detail at a two-year plan up to the end of 1988 for both NET and IFI. It also involved carrying out a five year analysis of the situation using a variety of assumptions. The House should note that IFI are operating in a fiercely competitive environment and it would be unwise of me to reveal any details of their projections and plans.

Under the joint venture arrangement the business of NET has been merged with that of RFL to form a new company, Irish Fertiliser Industries Ltd. (IFI), to service the fertiliser markets in the 32 counties of Ireland. NET at present manufactures straight nitrogenous fertilisers at Marino Point, Cork, and calcium ammonium nitrate at Arklow. Both of these products are based on ammonia which is produced in Cork. By contrast RFL — which employs approximately 340 people — manufactures a compound fertiliser at its factory in Belfast. The new company will, therefore, be able to supply its customers with a broad range of fertilisers through its own production and also, of course, if desirable, by trading with other suppliers. It will also supply at commercial prices the Richardsons' plant in Belfast with ammonia about equal in quantity to that imported by Richardson's from the United Kingdom at present. This ammonia has been surplus to NET's requirements and by its transfer to Belfast the necessity to sell it on the open market at whatever price it could obtain will be removed.

The company also intends to produce and sell intermediate products and byproducts of its fertiliser manufacture. It will also sell on foreign markets products surplus to the requirements of the home territory. It is the company's intention to establish and maintain a competitive cost base and a strong distribution sales system throughout the country and to utilise, wherever possible, indigenous raw materials, services and labour. It shall also be open to the company to develop further investment opportunities, which in the opinion of the board can be separately and economically justified.

The structure of the joint venture provides that Irish Fertiliser Industries will be a subsidiary owned 51 per cent by NET and 49 per cent by ICI. NET will, of course, continue to be a 100 per cent State-owned company. NET has retained its gas contract with Bord Gáis Éireann. It will sell the gas purchased under this contract to IFI at a price which has been subject to detailed commercial negotiations between the Government, NET and ICI to ensure that it is a market-related arms length price.

Disclosure of the gas price arrangement between NET and IFI would be extremely detrimental to IFI which is operating in a fiercely competitive market as it would reveal confidential commercial information about IFI's cost structure to its competitors. The gas will be sold to IFI under a complex formula and all projections show that it would be sold at a profit. This profit, plus its share of the dividends of IFI, will be used by NET to service its debts. As to when the debt will be repaid, I have to say that this depends on so many variables that no one can hazard a guess. For instance, an upsurge in oil prices, which are part of the gas price formula, if unaccompanied by a compensating increase in interest charges, could reduce the debt very quickly. It is, therefore, not realistically possible to even hazard a guess as to when the debt might be cleared.

The company's liabilities now stand at approximately £168 million following the transfer down to IFI of about £20 million of NET'S debts in respect of working capital. This £168 million includes bank borrowings of £160 million and other liabilities such as interest payments and provision for the cost of gas delivered before the joint venture took place.

I must stress that the joint venture was never envisaged in terms of asset sales. It was negotiated as a pooling of resources to create a stronger indigenous fertiliser company. The financial terms were structured to ensure that the returns to the two parties would be commensurate with their relative earnings contributions. From NET's point of view this has been achieved through a commercial gas price coupled with 51 per cent of the dividends from IFI. On this basis, approximately 75 per cent of the profits of IFI will come to the Irish State and 25 per cent to ICI.

This latter company which is a world leader in technology of ammonia production will contribute to IFI through the input of Richardson's and its technical expertise in ammonia production. It will also contribute through its purchasing and marketing facilities and through the sheer size of its presence in the international marketplace.

As I have already indicated NET had heavy losses over the past two years. These losses have been funded largely through short term borrowings which were due for repayment in the near future. With the implementation of the joint venture the opportunity was taken of putting these borrowings on a longer term footing and also to provide some additional facilities. In addition, NET had £150 million of guaranteed borrowings.

When approving of the joint venture in January, 1987, the Government decided, that if possible the additional medium/long term funding should be obtained from the banks on an unguaranteed basis, but that if the funding were not available on terms acceptable to the Minister for Industry and Commerce and the Minister for Finance the Government would introduce legislation to guarantee the required borrowings. Following this decision, discussions took place with a number of banks and, while offers to provide the funding on an unguaranteed basis were received, the terms attaching thereto were not acceptable. These terms were a mortgage on the gas contract and higher interest rates which would mean an additional £120,000 to £200,000 a year in interest payments. Consequently, the Government decided to introduce legislation to guarantee the additional borrowings required which is £30 million. The banks were notified of the decision and in anticipation of the introduction of this legislation, they provided the funding on terms acceptable to myself and to the Minister for Finance. Medium and long term facilities of £30 million have been arranged on acceptable terms, replacing NET's existing short term borrowings and providing the company with a contingency margin during the initial, transitional period of the joint venture in what remain unpredictable market conditions. The provision of these facilities cleared the way for the establishment of the joint venture which was put in place on 9 October last.

I must emphasise that NET`S financial position was and is quite serious and that the joint venture will not of itself necessarily provide sufficient money to service the debts. A company which lost £34 million over the past 21 months will not produce significant profits for its parent Irish company immediately after joining with a profitable company in Belfast. It must be pointed out that NET will be very exposed to movements in oil prices and to exchange rates because of the gas price formula and it will also be exposed to changes in interest rates. For example an increase of 1 per cent in interest rates would cost NET £1.6 million per annum.

Also, if oil prices slump it could result in NET getting a reduced return from IFI. Hence the need to provide a hedge for NET to allow it scope to service its debts over the first year or so of IFI's operations. However, the joint venture will create a stronger, more viable operational company better able than an independent NET to meet the fierce competitive pressures existing in the fertiliser industry. I am confident that through its gas price and dividend payments to NET the joint venture company will contribute much more significantly to servicing the debt than NET could if it had remained an independent company.

Nevertheless, it will take a tremendous effort on behalf of all concerned, plus a significant improvement in the international fertiliser industry and related markets if the debt is to be serviced out of the moneys to be received by NET and without recourse to Exchequer support. In this regard, it should be noted that it will be the responsibility of NET to monitor the performance of IFI on behalf of the State, and to keep the Government and the Oireachtas informed as to its progress and the contribution it is making towards the servicing of NET's debts. In addition, the accounts of IFI will be incorporated into the annual accounts of NET which company, as I have already stated, will remain 100 per cent State owned and will, therefore, be subject to Government and Oireachtas scrutiny as at present.

Several amendments to this Bill were moved by the Opposition during the passage of the Bill through the Dáil, the effects of which were to provide for a maximum figure lower than the £180 million proposed or else to reduce the £180 million limit over time and that such lower limits would then become upper limits. However, it is emphasised that there is no point in fixing a limit lower than the £180 million proposed as it is necessary not only to cover borrowings that are outstanding at present but also to provide the company with a contingency margin during the initial transitional period of the joint venture.

In relation to a sliding scale of limits I wish to say that as the limit reduces, my approval and the approval of the Minister for Finance will be required to let it go back up again. However, if lower limits were provided for in the legislation then any increase, no matter how small, would require new legislation. I do not think that this is practicable.

Another Opposition amendment proposed that in the year 1992 the guaranteed limit of £180 million would revert to £150 million which is the limit obtaining at present. This is essentially a review mechanism which, if accepted, would mean that the agreements which NET have already made with the banks would have to be renegotiated which could affect the margins, rates and terms of the loans.

I undertook to consider an Opposition amendment which proposed that within the overall limit of £180 million. I could, if I so wished, give either a 100 per cent guarantee or lower guarantees, e.g. 90 per cent, 80 per cent etc. My Department have consulted the Attorney General's Office on this and the advice received is that such an amendment is unnecessary since I already have such discretion. Even if only a portion of a loan is unguaranteed that element of the loan would attract higher interest rates and unacceptable security in the case of a company like NET which has no manufacturing operations of its own but is dependent on another company for its income. For these reasons the Seanad will note that we have not accepted the above amendments.

During the Dáil debate several Deputies referred to the role of worker directors who will be on the board of NET. I have to emphasise that their role will be the same as for the other NET directors which is to monitor the performance of IFI and to manage the gas contract and the company's debts.

I am confident that the Nítrigin Éireann Teoranta Bill will commend itself to the Seanad and I recommend the Bill for its approval. Before I sit down I should say that I will have to go to take Questions in the Dáil. I will come back later on to go through the Bill.

I welcome the merger of NET and RFL. It is the proper way forward. There are a couple of questions I would like to ask in the context of my speech. I hope the IFI merger will secure the 615 jobs already there at present and that the company will become more competitive in selling fertilisers within the 32 Counties. There are a number of points I would like to make. As I understand it, the previous Government decided in January that the additional borrowing necessary for NET would be undertaken on normal commercial terms without the benefit of a State guarantee. Normal commercial terms are the appropriate way in which any commercial business should raise money because in that way the company must not only convince the Government and their own board of directors but also the banks whose money is at risk.

By changing their minds about a State guarantee the Government have essentially absolved the banks of their responsibilities in vetoing the project in that they will be repaid whether the project works or not. Why did the Government decide to finance this deal on a guaranteed basis. The banks offered to fund the deal on a non-guaranteed basis. Why were the terms the banks offered unacceptable? I accept that the savings from a guarantee are not very large but I cannot understand why the Government decided not to opt for a normal commercial loan to finance this deal which, in the event of failure, would leave the banks at risk rather than the Government and the taxpayer.

At the end of September 1987 the debt of the old NET company was in the region of £180 million. How much of that debt is being transferred to the new company and how much will remain with IFI? Quite a large part of that debt is related to the working capital. If the working capital debt is remaining with IFI there is no question of guaranteeing that as we are only guaranteeing the debt of NET and the new holding company — and if the debts of the new holding company are to be £180 million minus the working capital, that will leave the Government giving a guarantee of NET of less than £180 million. Depending on what the working capital was, the Government may not have to guarantee as much as £180 million. The company lost £19.5 million in 1986 and about £14 million to September of this year. What is the Minister's forecast of the likely profit or loss for the company in 1988? I know it is a difficult question, but it is one that has to be asked.

We need to have the best available estimates for the next year before we can make a judgment on giving the guarantee on behalf of the taxpayer which otherwise would have to be met by the banks. Can the Minister say when he expects the debt inherited or retained by NET to be extinguished under the arrangements being made? As I understand it, Irish Fertiliser Industries will pay a dividend on any profit they make which will go towards the reduction of the debt on NET which we are now guaranteeing to further extend. The main contribution towards the extension of this will come from the profit NET will make on the gas they sell to Irish Fertiliser Industries. NET have a contract in regard to gas which must rate as one of the best contracts around and are paying probably 4p or 5p per therm when the going price is somewhere in the region of 30p. What commercial price have the Government decided with IFI?

I would like to state that, coming from a Border area, in the past number of years I have seen a lot of fertiliser being imported from Northern Ireland and sold in the Republic. It is necessary that this merger would leave the companies more competitive. I have been informed that nitrogen has been brought from Northern Ireland, then imported back there and resold at a cheaper price. This is anomaly that must stop.

I wish the merger every success and I hope the company will be trading with a profit in a number of years time.

As the Minister has pointed out, the purpose of this Bill is to increase NET's facility to borrow under ministerial guarantee from the existing level of £150 million to £180 million. I welcome the fact that the Minister is introducing this Bill. Despite all the problems of NET, I see this in many ways as a recognition of NET's genuine efforts to restore order to its finances and to the general operation of the major rationalisation programme which is now almost complete.

It is not the first time that NET has been mentioned in this House or in the other House. I recall the severe criticism of the company over the years. Its performance was not the best, and that is being kind to it. The overriding aspect of the criticism was the fact that we had so much over-expenditure in the construction of the Marino Point complex. That criticism still remains and will remain forever to haunt that company. The Minister has given us the actual figures. The final cost of that exercise was £137.3 million or 116 per cent over the first estimate of £63.5 million. Therefore, we know the company had problems from the very beginning. One cannot but look back at the operations of the company, the contracts that were handed out at the time, perhaps the bad advice that was given to the board members, not forgetting the disastrous Marino Point project which will remain forever as a severe criticism levelled at the company. One might argue that that is a monument to bad management.

If the company had not been established our large agricultural industry could not have counted on an assured supply of nitrogen. In fact, if it was not established we would be totally at the mercy of foreign manufacturers. Today NET employees number about 600. At one stage it was probably double that number or even more. I hope it has shed all the non-profitable operations and is now an efficient and progressive organisation. We cannot ignore the fact that agriculture is vital to our economy. It can be said that NET has been a great friend to our farmers. It has supplied us with the vital element of nitrogen as a fertiliser. The company never let the farmers down. I believe when there were labour problems the company imported the appropriate fertiliser and sent it around the country so that farmers would be able to continue with their farming operations. Surely that is a very practical example of the genuine concern that the company has always had for the farming community.

There are one or two points I would like to raise. The Minister might outline in greater detail the basis on which the loans have been granted. I have always believed that a loan, whether it be a personal loan or a loan to a company, should be given by banks, or whoever, on the merits of the case. Unfortunately, banks do not operate in that way and they tend to have that extra support. In the knowledge that this is a semi-State company, it would be a nice gesture if the banks granted the money without this extra ministerial guarantee. However, that is the way banks operate and we will have to accept it.

By introducing this Bill the Minister has recognised the merit of this company. He recognises the very important role it is playing in the industrial and agricultural sectors. Like all of us in this House the Minister wants the company to move forward rather than backwards. For a company with such important national consequences it is right that the Minister should involve himself in a practical manner in this industry. I hope the company will continue with rationalisation and a forward thinking approach, and with the fusing of ICI and the Richardson concern in Belfast on the 51:49 basis so that the company can go on to great heights.

I wish the new company, Irish Fertilisers Industry Limited, the best for the future. Like the Minister I am confident that this joint venture will create a stronger and more viable company which will be better able to meet very real and very strong competition than an independent NET and that this company will continue to exist for a long time in the area of the fertiliser industry, that it will continue to show growth in the years ahead and that the aspirations, hopes and beliefs of the Minister will be proved right in time to come.

I will be very brief on this Bill. It is obvious that the House supports the measures put forward here today by the Minister for Industry and Commerce. It is very important that we have a strong company such as NET to provide nitrogen and all the other things it provides for the Irish farmer. We know that the company needs money at present. The Minister has outlined the reasons why it needs this money. While there may be arguments put forward regarding the method of procuring that money and people might ask why did the company not go to the banks and get the money from them without the necessity for a State guarantee, I believe that for a company such as NET it is important that the Government should give the necessary guarantee. That is what we are doing in this legislation. We are increasing the existing level of £150 million to £180 million.

NET has given tremendous service to the country since its foundation in 1965. Like many other Irish companies NET had bad years such as 1985 and 1986. The worst thing that could have happened was what happened in Cork in 1974, when they started to build a world scale ammonia and urea plant at Marino Point in Cork. There has been a lot of argument and a lot of criticism of the Government and the company as a result of the overall cost there, an overrun of 116 per cent. The original estimate given for this work was £63.5 million and the actual cost was £137.3 million.

There were problems with that plant. Naturally those problems were handed on to NET and they are still with NET today. It is easy to be wise after the event. There were problems with employment, problems with unions and many other problems. I have no doubt that this company will go on from strength to strength. It is giving tremendous employment at present. I understand there are over 600 people employed in the industry; at one stage there were over 1,500. Like every other company in the State at the present time there had to be streamlining; there had to be pruning done in order to ensure that it was run in an efficient manner.

The important thing about this company is that it assures a regular supply of nitrogen to Irish agriculture. That is very important when we think of the part agriculture is playing in the development of the economy. Agriculture is our main industry. It is very important that farmers should have a regular supply of nitrogen. Particularly in recent years farmers are becoming more conscious of the need for nitrogen. Over the past few years they have gone into silage making in a big way. They have developed their grasslands and made sure they have an early supply of grass for their cattle in the spring.

NET contributed enormously to this by having nitrogen available to farmers. It produces at the moment 51,000 tonnes of calcium ammonium nitrate, 490,000 of ammonia and nitrate and 365,000 tonnes of urea. That is the contribution the company is making to Irish agriculture. We then have to consider the tremendous spin-off industries from this company. CIE benefit enormously from transporting the products around the country. We have the private hauliers, dockers, shipping agents, engineering suppliers and the people who make the plastic bags for the urea and all the other products. Not alone is NET giving good employment in the factory but it is also providing spin-off jobs in other industries. That is why it merits our support. In time it will come back into profitability. There is no doubt about that if the demand is there for the industry and if the demand is there for the product. I believe farmers will see to it that that demand is there. NET will be able to meet that demand. That is why over a period of years I believe we will see this company going into profitability again. I believe the arrangements that have been made in the company and the amalgamation that has been outlined by the Minister here today will ensure that we have a good sound company able to produce a product that is in demand by Irish agriculture at a reasonable price. That will ensure its viability.

The purpose of the Bill is to increase NET's facility to borrow under ministerial guarantee from the existing level of £150 million to £180 million. One must pose the question: why is this increased facility necessary? Reading through the debate in the Dáil and looking at the historical facts I believe the roots of the problem rest with the decision to commission Kellogg to build a world scale ammonia and urea plant at Marino Point in Cork in 1974. The purpose of the operation was to manufacture large quantities of these substances.

It is important to note that the initial detailed estimate for the project amounted to £63.5 million. The project was beset by many disruptions and the construction was delayed for 17 months. The final cost of the project was £137.3 million, a staggering increase of 116 per cent. One has got to ask: who should bear the responsibility for such a gross overrun?

Everyone is to well aware of the industrial problems which plagued that project. However, an overrun of this magnitude cannot be attributed to industrial problems alone. The major reason for the overrun was that a decision was made at that time to give the green light to a project, which was an unproven technology, whereby gas obtained as a byproduct of oil production could be used for the production of nitrogenous fertiliser.

The plant at Marino Point was the first of its kind ever built by Kelloggs the main contractor. This new technology was developed and perfected at great expense to the Irish taxpayer. Unfortunately, this type of cost overrun is not confined to NET. Historical records indicate that the initial cost plan for the majority of Government contracts has followed the same trend. Again I ask: who is to blame?

I believe the professional design team must come in for scrutiny, with no exceptions. The design team is made up of architects, structural engineers. mechanical and electrical engineers and quantity surveyors. Is there proper coordination of the different services? Are the specifications and design drawings comprehensive enough to close loopholes and to eliminate claims for all types of extras and variations?

The trading record of the company is not good. In 1982 losses amounted to £12.2 million and in 1983 there were losses of £25.3 million. However, in 1984 and 1985 there was an upturn and there were profits earned amounting to £2.9 million and £4.8 million respectively. These profits were significant as they were achieved after the servicing of the company's heavy burdens. Unfortunately, this trend did not continue and the company lost £19.5 million in 1986 and about £14 million up to the end of September 1987. We must look on the positive side of NET. If we take stock of the positive role and contribution that NET is making to the economy in terms of employment and services provided to our premier industry, agriculture, the consensus is that the company has served the industry very well.

NET was set up in 1961 by the Government as a private limited company. Its aims were to establish a nitrogenous fertiliser industry and provide the necessary requirements to our agricultural sector, thus removing our dependence on imported products. NET is also responsible for many downstream industries. The company has a close working relationship with CIE and a wide distribution system has been developed. As a result, the industry has a network of storage depots throughout the country giving a tremendous service to the farmer.

Generally speaking, I believe governments should not guarantee loans unless there is a reasonable possibility of the company returning to profitability within an agreed timescale and allowing the redemption of such a guarantee. The new joint venture the management has recommended with Richardsons Fertilisers, Belfast, which is a wholly owned subsidiary of ICI, will result in a profitable company. For this reason I believe we are justified in guaranteeing such a loan. I am confident that the loan will be paid back in time. Also, apart from the economic consideration of guaranteeing loans, there must be social and other reasons which are reflected in employment and services to the community which would favour the provision of such a guarantee.

The question must be asked: why should NET be singled out for this treatment? In line with major efforts the management have made together with all State agencies to recruit employment and in the context of this joint venture with ICI, the company will have a bright future and will continue to serve the farming community.

I am pleased that the comments of Senators have been generally supportive of this NET Bill. We realise how important it is. I know we have been asked for some details on various items of the loans. Unfortunately, at this time I am unable to furnish them. I ask the Members to support this Bill.

Question put and agreed to.
Agreed to take remaining Stages today.
Bill put through Committee, reported without recommendation, received for final consideration and ordered to be returned to the Dáil.
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