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.