I move: "That the Bill be now read a Second Time".
Under European Community rules, member states are prohibited from providing operating or investment aid to steel undertakings after 1985.
When I moved the Supplementary Estimate in the Dáil last July, I indicated that the Government were not prepared to provide additional funds to Irish Steel unless there was agreement between the company and their workforce on a cost-cutting rationalisation package which involved: (i) a pay freeze to the end of 1986; (ii) a redundancy scheme which would have the effect of reducing the company's present labour costs by at least 10 per cent, and (iii) the elimination of restrictive practices.
I also indicated that the Government were not prepared to support Irish Steel at any price as the taxpayer had already contributed handsomely to the maintenance of employment at Irish Steel. On the other hand, I indicated that the Government were very conscious of the adverse impact that the closure of the company would have on the economic life of the Cork region.
As Deputies will be aware, the rationalisation measures were eventually accepted by Irish Steel employees and this cleared the way for the payment of £6 million to the company.
Following the Government decision last July to invest an additional £6 million, I requested the board to reassess all aspects of the company's operations with a view to making the Haulbowline plant more efficient, productive and, hopefully, profitable. I also asked Irish Steel to continue their investigations towards finding a joint venture partner or third party investor.
Irish Steel had just four months to report back to me about the prospects of the company becoming financially viable. I have considered very carefully the submission made to me by the company in mid-November. On my recommendation and having regard to the company's financial projections, the Government have decided to invest a further £18 million.
I would like to outline to the House some of the main considerations which prompted the Government to approve this additional investment. There have been a number of positive developments in recent months which resulted in Irish Steel being able to demonstrate that, at long last, there is a real prospect of the company having a long term future. The most obvious development is the saving which will result following on the acceptance by Irish Steel's workforce of the package of cost-cutting proposals put forward by the board of Irish Steel. Last July, I said that as a first step towards achieving viability, the company's workforce would have to make sacrifices and should recognise the acute financial position of the company. Despite a hiccup or two, along the way, a sensible cost-cutting package was duly accepted. The realism displayed by Irish Steel's workers augurs well for the future but I must emphasise the absolute necessity for the longer term continuation of this realism. By accepting a pay freeze until the end of 1986 and in accepting 117 redundancies, the company should cut costs in excess of £3 million in the 18-month period to the end of 1986. In other words, the company's labour costs will be reduced by over 10 per cent on an annual basis.
The second factor which has improved Irish Steel's position is the recent decrease in scrap prices. As scrap represents nearly 34 per cent of the cost per tonne of finished steel any significant price development affecting this essential raw material impacts quite significantly on the financial prospects of the company. I explained to the House last July that a main cause of Irish Steel's poor performance in 1984-85 was the high price of scrap relative to the sales price of steel. The fall in scrap prices which was evident in July has continued and while it is very difficult to say if this reduction will be maintained there are some signs that the market has stabilised somewhat. I would hope the price of scrap will not exceed its current level and allowing for seasonal variations in prices, that the average price Irish Steel pays will not increase in real terms over the years.
Although Irish Steel have been successful in achieving a gradual build-up in sales volume, they have found it very difficult to increase their prices in the face of keen competition in a depressed market. There have, however, been some signs of a very modest recovery in prices in their markets in 1985 and it is hoped that this will continue into 1986. Latest reports from Brussels are that the market is relatively stable. The Commission is, however, very cautious about forecasts for the steel market and its report General Objectives 1990 indicates that price increases will continue to be modest in the years ahead. I should point out that a relatively small variation in the selling price of steel and in variable costs such as scrap could have a substantial effect either favourable or unfavourable, on the company's financial position. This said, I am encouraged that Irish Steel, so far in their financial year (which ends on 30 June 1986), are achieving the prices they had projected, which was not the case in previous years.
The fourth factor which has influenced the Government in taking their decision to invest more money in Irish Steel, is the results of consultancy studies which have been carried out in recent months into practically all aspects of the company's operations. The board of Irish Steel, management and employees must do their utmost to implement, with an urgency which I could not over-emphasise, the improvements in working practices and operational efficiencies which have been identified by the consultants. Any failure in this regard can only be detrimental to the company's long term interests.
The final factor which has worked in Irish Steel's favour in recent months is the value of the dollar and a consequential reduction in interest payments.
The Government have decided that a further £18 million should be invested in Irish Steel before the end of the year. This will bring to £24 million the total amount of State investment in the company in 1985. This is the maximum amount which the Government may provide to Irish Steel in 1985 under the ECSC aids code for steel undertakings. Of the £24 million, £6 million has already been paid to the company. The House will recall that a Supplementary Estimate was passed on 10 July this year to enable a grant of £5 million to be paid to the company in the period to December 1985. An additional £1 million was provided by way of share capital under existing legislation.
The purpose of this Bill is to facilitate the additional investment of £18 million in Irish Steel by way of advance from the Central Fund and to provide retrospectively for the conversion into share capital of the £5 million grant already paid to the company. The Bill also provides for a reduction in the statutory limit on State guaranteed borrowings bringing this into line with the amount of guaranteed borrowings currently held by the company.
Specifically, the provisions of the Bill are as follows:
—to increase the authorised share capital of Irish Steel Ltd. from £120 million to £125 million;
—to provide, as a consequence, a similar increase in the value of the shares which the Minister for Finance may take up;
—to reduce the limit to which the Minister may guarantee borrowings by Irish Steel from £100 million to £32 million; and
— to enable the Minister for Finance to advance up to £18 million to the company from the Central Fund.
The House and indeed the taxpayer will want to know why such a substantial sum as £18 million is now being provided to Irish Steel. Deputies might well ask why a sum below £18 million would not suffice. In answer to this question, I would first of all point out that the £18 million is being provided to the company by way of an advance from the Central Fund. Certain conditions are being attached to the advance. For instance, the Exchequer will be able to recoup part or all of these funds in due course, should they at any time become surplus to the company's requirements, which I hope they do. I should stress that there is no set time for the repayment of the advance and that any demand for repayment will take account of the company's financial position at the time, and their ability to make a repayment. Given the vast investment which the State has already made in the company, I consider it is not unreasonable to expect Irish Steel to repay the advance to the Exchequer, when the company's financial position permits.
The additional £18 million will be used by the company to repay one of their State guaranteed loans; to meet increased working capital requirements which will arise as the company continue to increase their level of output; and to cover capital expenditure items.
Perhaps I might explain a very important point. This £18 million equity is being used to reduce debt which is already guaranteed by the Exchequer. This means that if the company were to close we would have to pay this £18 million one way or the other. What we are doing by converting it into equity is making sure that the company will not have to pay the interest to the banks. We are not increasing the State's exposure, but simply saying that the State will have to pay the interest, not the company. That is the essential effect of this transaction. We are not giving them £18 million, we are simply transferring the responsibility for the interest on £18 million because if the company were to close the State would have to find some money since all borrowings are guaranteed by the State. I hope that will be taken into account and that this £18 million will not be seen as a gift to Irish Steel. We are converting debt, which we already guarantee, into equity on which we hope eventually to get a profit, but not immediately, and the effect will be to reduce the financial charges facing the company and, unfortunately, increase those facing the State. That may not be explained as fully as it should be in my circulated speech and I wanted to put it on record in case tomorrow's headlines screeched a story which may not be entirely in "synch" with the facts, although I know that rarely happens.
The main reason why the Government accepted that further investment should be made in Irish Steel was the clear improvement in the company's forecasts and the indication that the company are capable of making a trading profit and a net profit in the not too distant future. The Government would view with grave concern any significant deviation from the company's financial projections, particularly if Irish Steel make trading losses and the additional Exchequer funds were being used to finance such losses.
For some months now, the company's chairman and chief executive have had discussions, on my instructions, with potential joint venture partners. I have asked the company's chairman to continue to search for a partner. I would add that the Government's commitment to support Irish Steel with additional investment will improve the company's prospect of finding a potential partner.
It is important that the House understand why I asked Irish Steel to look for a joint venture partner. It is not that we want to achieve a position where the Government no longer own 100 per cent of the company, but we want to achieve a situation where the company's debt will be reduced, hence the interest charges they have to pay will be reduced. If somebody buys a share in the company for cash, and that cash is used to reduce debt, then the ongoing expenses of the company are thus reduced and the prospect of the survival of the company is increased.
The relevance of a joint venture partner is, first, that the money invested would be used to reduce the debt, hence to reduce continuing interest charges and to improve the company's prospects. The Government cannot invest more than we do because the ECSC rules do not allow it, but if the company can make a deal with another investor, that is not forbidden by ECSC rules. The effect of that investment would be the same as a further equity injection in the sense that it would further reduce debt levels which, even after this injection, will be too high, and consequently the interest payments would be too high.
The second reason why it makes sense to look for a joint venture partner is that Irish Steel is a small single plant in a very big and aggressive market-place and association with another company, which is bigger or has other technical or marketing capacities, to bring to the board of Irish Steel and the policy of the company, would be valuable in ensuring Irish Steel's long term survival. That is why I am glad the company's chairman has spent an enormous amount of time travelling around the world looking for a joint venture partner. This is an extremely valuable exercise, which, if successful — and I cannot guarantee that it will be, nor can the chairman — will further strengthen the position of the company.
I would like to take this opportunity to pay a personal tribute to the chairman. Mr. Kevin McCourt, for the work he has done in the company over the last few months and in particular for the personal effort he has put into this joint venture activity which had to be undertaken, alongside other internal matters.
The House may be aware that I asked my Department to make an application to the EC Commission to secure funds from the European Coal and Steel Community to assist Irish Steel workers who were made redundant in recent months. When the workers voted on the company's rationalisation plan last August, the availability or otherwise of EC funds for redundant workers was a key issue. I have been keeping a close eye on developments since the application was lodged with the Commission. I understand that a decision on the application is expected before Christmas and funds could be paid in the early New Year, all going well. It will be recalled that we have applied for £832,000 in respect of a package of social measures which includes redundancy lump sum payments, tideover allowances, which are a supplement to unemployment benefit, as well as allowances for early retirement, wage support and retraining. I am hopeful of a Commission decision very soon though it is possible that we may not get a positive response in regard to all these areas. If the Commission indicate their willingness to provide funds in the New Year I am sure this will be welcomed by the House and the redundant workers and their families.
Deputies should appreciate that Irish Steel are trading in a difficult environment. It would be unrealistic to expect a dramatic improvement in the steel market in the foreseeable future. The surplus production capacity in Europe, combined with the liberalisation of the quota system may well put a downward pressure on prices. The behaviour of exchange rates and, in particular, changes in the dollar rate, can have a substantial impact on results. Thus the company's path to viability will, to a very large extent, depend on Irish Steel achieving significant efficiencies and improvements in productivity and, above all, reducing costs to a minimum.
I would like to take this opportunity to pay special tribute to Irish Steel's employees and their union representatives. The realism and co-operation displayed by them in accepting the rationalisation measures clearly demonstrated a high degree of commitment and loyalty to the company. There is no doubt that they have made a major contribution towards securing the future of Irish Steel.
I appreciate that the morale of Irish Steel's employees and management must have suffered because of the uncertainty facing the Haulbowline plant over the past few months. By committing further scarce Exchequer resources the Government have. I hope, reassured the company's workforce that Irish Steel have a future and a future that is worth working for. The task facing Irish Steel in the coming years should not be underestimated. The company and their workforce must do all in their power to produce as much steel as possible and more competitively and efficiently than has been the case in the past. For example, yield factors can be improved significantly in my view.
To conclude, it is my view that Irish Steel have the potential to reverse their fortunes and to make a modest net profit in the foreseeable future. Because of this the Government have done all within their power to assist the company. Under EC rules, no more money may be made available to Irish Steel from the Exchequer. The success or otherwise of this Cork company rests fairly and squarely in the hands of their board, management and workforce themselves.
I am confident that the Bill will commend itself to the Dáil and I recommend it for approval.