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EIGHTH REPORTBORD NA MÓNAI BASIC INFORMATION1.1 Technical background1. Once a bog has been acquired, several years’ preparation is needed before it is ready for production. The main purpose of this preparation is to drain the bog until the water content is low enough for the peat to be harvested and for the land to be firm enough to carry the harvesting machinery and the railways needed to carry the turf away from the point of production. When harvested, turf is left in the open air to be dried by the wind and it is this fact which makes Bord na Móna’s operations vulnerable to the weather. Year-to-year fluctuations in output occur primarily because of variations in weather conditions during the drying season. Substantial stocks are carried but on occasion they are insufficient to prevent reductions in output from being translated into reductions of sales. 2. Bord na Móna produces four products. First, machine turf—also known as sod peat—is harvested in sods. By the time it has dried, machine turf has a calorific value of about one-third that of the same weight of fuel oil. Second, there is milled peat. This is won by scraping the surface of the bog. When sold, one ton of milled peat has the same calorific value as about one-fifth of a ton of fuel oil. Unlike machine turf, milled peat is not sold direct to the public: about three-quarters of it is sold to the Electricity Supply Board and the remainder goes to Bord na Móna’s own factories to be compressed into briquettes which are then sold to the public. Briquettes constitute the third product. The fourth product is not a fuel but a soil conditioner—peat moss—much of which is exported. The nature, location and size of any bog determines which product is produced from it. 3. When a bog has been exhausted of the peat fuel and moss which can be extracted from it, it is said to be cutaway. In some cases the bog then becomes useable for agricultural or horticultural purposes. 1.2 Historical background4. Governmental interest in the exploitation of Irish boglands goes back at least to the first decade of the nineteenth century, but modern developments really began with the reports of commissions set up in 1917 and 1920. The essential feature of those reports was the idea that the use of turf for electricity generation should play a central role in any programme of bog development, and to this day the Electricity Supply Board is of crucial importance to the turf industry. 5. Significant steps were taken in the early 1930s. In 1933 a section was established in the Department of Industry and Commerce with special responsibility for the promotion of turf production and use. In 1934 the Turf Development Board, a private company financed by grants-in-aid, was set up. This Board developed mechanised methods of peat production, acquired and drained bogs and, in 1940, took over a briquette factory from the Peat Fuel Company. 6. Bord na Móna was established in 1946 by the Turf Development Act of that year. Under this Act Bord na Móna took over the assets of the Turf Development Board. The immediate responsibility of the new organisation was the implementation of a national programme of peat development whose main features were: an annual output of one million tons of machine turf (sod peat) much of which was to be used for electricity generation; an annual output of 20,000 tons of briquettes; and an annual output of 50,000 cubic metres of moss peat. The first station designed to use Bord na Móna’s product was commissioned by the Electricity Supply Board in 1950. 7. The same year saw the institution of a second development programme which, in its essentials, governed Bord na Móna’s activities until the mid-1970s. It provided for an annual output of 0.9 million tons of machine turf, 3¼ million tons of milled peat (for use in power stations and for making briquettes), 0.3 million tons of briquettes and one million cubic metres of moss peat. 8. An important constraint upon turf development was, until recently, the severe competition from imported oil. In particular, the source of about one-half of Bord na Móna’s revenue—the Electricity Supply Board—could produce power considerably more cheaply at oil-burning than at turf-burning stations. The situation changed dramatically with the four-fold increase in oil prices in 1973/4 and Bord na Móna took advantage of the new circumstances by adopting a third programme which provides for a massive expansion of output with the following annual targets: 6 million tonnes of milled peat; three-quarters of a million tonnes of briquettes; and 1.9 million cubic metres of moss peat. It is this programme which provides the context for Bord na Móna’s current activities and plans. 1.3 Present operations9. Bord na Móna has works at 21 locations, all of which are in the midlands apart from five comparatively small operations in Counties Donegal, Galway, Kerry and Mayo. The greatest concentration is in the counties of Offaly and Kildare: in 1978/79 works in those counties accounted for 60 per cent, 51 per cent, 100 per cent and 49 per cent of the output of machine turf, milled peat, briquettes and moss peat respectively. This geographical concentration is of some significance for the economic and social impact of the turf industry. 10. The volume of production and sales in 1978/79 is set out in Table 1. TABLE 1
11. The vulnerability of turf harvesting to weather conditions has already been mentioned, and for this reason figures for a single year can give a misleading picture of the scale of Bord na Móna’s operations. Production in 1978/79 fell short of that in the previous year for all products. In the case of machine turf the reduction was slight (2½ per cent) and is a reflection of the general trend in the output of this product. In fact, the target for machine turf production was exceeded by over 10 per cent. 12. Briquette production was adversely affected by industrial disputes and was 11 per cent below both the target and the previous year’s level. The main effect of bad weather was a shortfall in milled peat production, which declined by 11 per cent compared with 1977/78. In fact, output of this product, which is planned to be a major focus of the Third Development Programme, was the lowest for four years. 13. The overall reduction in output was translated into a fall in the volume of sales of all products compared with the previous year: 4 per cent, 9 per cent, 11 per cent and 8 per cent for machine turf, milled peat (including deliveries to briquette factories), briquettes and moss peat respectively. Perhaps the most serious case was briquettes, a product where there is significant excess demand and where rationing operates, but where the volume of sales was the lowest for ten years as a result of the failure to meet production targets. 14. The value of sales in 1978/79 was £33,495,000 of which machine turf accounted for £10,281,000, milled peat for £12,355,000, briquettes for £6,224,000 and moss peat for £4,635,000. The meagre increase in the value of turnover compared with the previous year (a mere 3 per cent) reflects the substantial decline in volumes already mentioned. 15. By far the most important user of peat fuel is the Electricity Supply Board. By volume, sales to that body accounted for 29 per cent of total sales of machine turf (the lowest proportion ever, reflecting primarily the diminishing importance in the ESB’s system of the generating stations fired by this fuel) and 77 per cent of sales of milled peat (a proportion which, after a period of growth, has remained stable over the past three years). 16. Employment varies seasonally, the numbers employed at the peak being approximately 20 per cent greater than the average for the year. Average employment in 1978/79 was 5,102 with a peak of 6,255. 1.4 Organisation and finance17. Responsibility for the conduct of the affairs of Bord na Móna was vested by the Turf Development Act, 1946 in a Board of seven members appointed by the Government. One member is appointed as Chairman and one of the places is filled by the Managing Director who performs the functions of chief executive. To accommodate the provisions of the Worker Participation (State Enterprises) Act, 1977 the size of the Board was increased to twelve. There are now on the Board four members elected by and from the staff of Bord na Móna and appointed by the Taoiseach. 18. The executive structure consists of seven functions whose heads are immediately responsible to the Managing Director: secretary, engineering, general works, personnel, sales, accounts and land development. Line responsibility is from individual works managers to the general works manager.1 19. The financial responsibilities of Bord na Móna are set out in the Turf Development Act, 1946 as amended by ten subsequent Turf Development Acts. No precise financial objective—in terms of, for example, an average rate of return on capital—has ever been laid down, but losses are ruled out in two ways. First, section 53 (1) of the 1946 Act permits the Minister for Finance to make advances to Bord na Móna but section 53 (3) of the same statute requires that these advances be repaid with interest. Second, none of the relevant legislation provides for subventions to cover losses. The only exception to this is the provision in section 57 (1) of the 1946 Act (a provision periodically renewed in subsequent legislation) for the Minister for Finance to waive interest temporarily on advances from the Exchequer. This power has been invoked very rarely. 20. Thus, Bord na Móna is required to remunerate capital fully—i.e. to provide out of revenue for the payment of interest and the amortisation of debt. By the end of 1978/79 a gross sum of £45.4 million had been borrowed and of this £12.7 million had been redeemed. 21. The Exchequer has been by far the most significant source of capital funds for Bord na Móna. At the end of 1978/79, capital liabilities totalled £39.6 million, of which 74 per cent was represented by loans from the Exchequer, 8 per cent by loans from other sources and 17 per cent by internal funds (half of which were accumulated surpluses). 22. On current account, total costs in 1978/79 were divided as follows: depreciation (or, perhaps more accurately, debt amortisation) 4 per cent; interest 4 per cent; wages and salaries 67 per cent other costs 25 per cent. The overall surplus of £206,000 represented less than one per cent of turnover. The below-normal production levels of 1978/79 somewhat distorted these figures, particularly by inflating the payroll proportion. More typical of recent years was 1977/78 where the cost breakdown was depreciation 9 per cent, interest 4 per cent, wages and salaries 55 per cent, other costs 32 per cent, and the surplus represented 1½ per cent of turnover. II ECONOMIC ASPECTS2.1 Profitability and financial performance23. It has not been the usual practice in Ireland to define the financial objectives of State-sponsored bodies with much precision. Minimal objectives are set implicitly by means of governmental decisions concerning sources of capital, the conditions under which the Exchequer provides capital, subvention policy and, more recently, the rules applied by the National Prices Commission. Thus, in the case of Bord na Móna, losses are ruled out by the requirement to service loan capital out of revenue and by the absence of any provision for subsidisation. Over and above that, however, there is no restriction imposed on the Board, except as may be applied by the National Prices Commission if Bord na Móna attempted to increase profitability by raising prices. 24. In these circumstances, it is difficult to know what criteria to apply in judging the financial performance of Bord na Móna. The conventional wisdom among economists can probably be summarised as follows in the case of a public enterprise operating in a not very competitive market (as would be the case here): set an investment rule to ensure that the enterprise has optimal capacity; then set a pricing rule such as that prices be determined by long-run marginal costs; and the financial outcome then falls out as a residual. Among the difficulties with this approach are: even economists disagree among themselves as to the prescriptive strength of these rules in a world where few economic outcomes are determined by competitive market forces; there are severe difficulties in applying these rules in practice (for example, how does one determine the long-run marginal cost of a product?); and there is a universal desire among governments to use public enterprises for purposes other than the pursuit of what economists define as efficiency, including some notion of distributional equity or fairness. 25. In the light of these complexities, one is bound to pay direct attention to profitability. The Joint Committee takes the view that there are no significant unexploited opportunities for cost reduction, and so any discussion of profitability is essentially a discussion of revenue and, in particular, of the level of prices. This is the subject of the next section, but as a prelude the financial performance of Bord na Móna over the past five years is summarised in Table 2. TABLE 2 Financial Performance
Key to Table 2 Row 1. Trading profit gross of depreciation and interest (£m). 2. Trading profit net of depreciation and gross of interest (£m). 3. Surplus=trading profit net of depreciation and interest (£m). 4. Net assets (average of beginning and end of year) (£m). 5. Row 1 as a percentage of row 4. 6. Row 2 as a percentage of row 4. 7. Row 3 as a percentage of row 4. 26. One of the difficulties encountered in interpreting these figures results from the somewhat unclear meaning to be attached to the term “depreciation” in Bord na Móna’s accounts, and this point will be taken up in a later section. Aside from that point, attention should be focussed on rows 6 and 7 in Table 2. The smallness of the figures in row 7 indicates that, over the years, Bord na Móna has earned very little more than is necessary to meet its contractual and statutory obligations. Financially it has performed exactly as if it were an organisation with no equity operating in an intensely competitive environment. Certainly it has no equity, and therefore no dividends to pay, but equally certainly it does not operate in an environment sufficiently competitive to pare profits to the bone, particularly in the period covered by the Table. With higher prices, a larger profit could have been earned. The average net rate of return (row 6) has been extremely low by the standards expected in the private sector, although such comparisons are confused by the way Bord na Móna treats depreciation. 27. This low level of profit, given that a high level of efficiency exists, can be explained only in two ways: either it has been the deliberate policy of the Board to earn low profits or the Board’s policy has been constrained by the operation of national control over prices. These conjectures are now examined in greater depth. 2.2 Pricing policy28. Until the mid-1970’s, Bord na Móna was able to survive only because it could sell half of its output on a market which had been “artificially” created for it—that is, turf for electricity generation. In effect, turf development was subsidised by electricity consumers and successive Governments wished to minimise the “subsidy” associated with any given scale of turf production. Thus, Bord na Móna’s prices, and therefore profits, were kept to the minimum required for the maintenance of the desired level of turf output.2 29. With the dramatic increases in the price of oil since 1973, the situation has completely changed and, in particular, the point of balance in the conflict of interest between Bord na Móna and the Electricity Supply Board over turf prices has shifted markedly. Electricity generation is of course only one use of primary energy, but this sector provides the most convenient illustration of the recent turnaround in the relative costs of turf and oil, a change which would be equally manifest in other areas where these fuels are technically feasible substitutes for each other. In 1972/73, the average fuel cost of units generated at stations fired by machine turf was 297 per cent of the average fuel cost of units generated at oil-fired stations, the equivalent figure for milled peat stations being 212 per cent and for all turf-fired stations 231 per cent.3 By 1978/79 these proportions had fallen to 91, 77 and 79 per cent respectively. In other words, average fuel cost is now one-fifth lower at turf than at oil-fired stations whereas five years earlier it was 2½ times higher. 30. Another relevant piece of information is that, since 1976. Bord na Móna has been unable to meet the demand for briquettes and has been obliged to operate a system of rationing. 31. These points invite two comments. First, they demonstrate the complete change in the competitive position of Bord na Móna in the market for primary energy. From an organisation which could survive only because its major customer was obliged to pursue policies contrary to its own commercial interest, it has been transformed into one which can operate comfortably while charging prices considerably lower than those of competing products and, in the case of briquettes, so low as to require rationing to clear the market. Second, there is the question as to whether or not, given this situation, turf prices are too low. In its Annual Report 1978/79, and in evidence to the Joint Committee4, Bord na Móna expressed the desire to increase prices to nearer that of oil and this matter is now considered. 32. The first thing to be stressed is that, even with present policies, the existing situation of relatively low turf prices cannot last. The average interest charge on Bord na Móna’s past borrowings is barely 5 per cent whereas the average charge on the borrowings needed to finance the expansion of output under the Third Development Programme will be more than twice that rate. The problem which this creates was recognised in the Turf Development Act, 1975, section 3 of which empowers the Minister for Finance to waive interest on Exchequer loans under that Programme and by the Minister’s decision in 1976 to operate that provision by permitting the capitalisation of such interest charges. The objective of this was to produce as smooth as possible a transition from an era of low interest costs to one of high interest costs. 33. Another way of effecting this transition is to reduce future interest liabilities by increasing the proportion of new capital financed from sources internal to Bord na Móna. This, regardless of the way it appears in the accounts (for example it could be done by accelerating depreciation and so improving cash flow in the short run or by increasing the surplus), can be achieved only by increasing the extent to which revenue exceeds operating costs and the most obvious way to do this is to increase revenue by increasing prices5. 34. In summary, the position is therefore that in the next few years new, high-cost capital will become important in the balance sheet of Bord na Móna and the need to service this capital will cause the real price of turf to rise substantially. The case made by the Bord is that prices should be increased in advance of this, the resulting increase in the surplus being used to finance capital formation which would otherwise have to be financed from loans, thus reducing future interest charges below what they would otherwise be and so reducing the rate at which prices have to be increased in the future6. 35. How one views this argument depends on how one wishes to treat present compared with future consumers since it involves, compared with the alternative, increasing present prices in order to reduce future prices. This is a classic problem formally analogous to one aspect of the question as to whether a government should finance capital spending out of taxation or borrowing. Given its terms of reference, the Joint Committee does not see any obvious criterion for making this kind of judgement and so attention is now focussed on other arguments for increasing turf prices. 36. These arguments have to do with efficiency (in the economic rather than the engineering sense). First, our turf resources are a wasting asset and if, because they are too cheap, we exhaust them too quickly, we shall, earlier than is desirable, deny to Irish people in the future an alternative source of energy. This is not so much the previous question of how the interests of present and future consumers should be weighed against each other but the more fundamental one of whether future consumers should count at all in present decisions. (The present accounting policies of Bord na Móna do not take account of this fact and this is a matter to be taken up later in this report). The absence of turf in the future is a real cost of consuming turf now; the scale of that cost depends upon how much turf is consumed now; and the lower are current turf prices the higher is current turf consumption. 37. The second argument in a sense combines the two mentioned so far. At present prices, Bord na Móna could sell much more turf than it is currently able to produce: briquettes have to be rationed and load factors at turf-fired generating stations have been, in recent years, much higher than at any time in the past. In these circumstances the best policy is usually either to raise prices to reduce demand or to expand output. However, in this case, the present rate of output cannot even be maintained, let alone expanded, unless there is substantial investment in the development of new bogs. The cost of this new development is therefore a cost of current consumption, and there is no hope of achieving an efficient rate of use of this irreplaceable natural resource unless this cost is reflected in current prices. Because of what has happened to interest rates, this cost of new development (long run marginal cost) is higher than the present average costs by reference to which present prices have been fixed. 38. The final argument is that if the economic system were organised in such a way that we were getting the maximum standard of living permitted by our limited resources, one feature of that world would be that marginal energy costs would be the same regardless of which fuel was being used. The case of electricity generation illustrates that this is not the case at present: marginal fuel costs are much higher at oil than at turf stations. The implication to be drawn from this is that better use would be made of the limited supplies of primary energy if the prices of competing fuels were brought nearer together. One way would be to subsidise the use of fuel oil in uses where turf is a substitute, but this would require an increase in general taxation and there are so many objections to that that the alternative—an increase in the price of turf—is to be preferred. 39. In response to these arguments, the Joint Committee concludes that the price of turf is currently too low and recommends that Bord na Móna be permitted to raise its prices. In this inflationary age, no Committee of the Oireachtas could find it easy to recommend an increase in the prices of a State-sponsored body which is currently making a profit—albeit a modest one. Nonetheless, the Committee is convinced by the arguments that an increase in prices is inevitable in the future if Bord na Móna is to meet its obligations and that the best use of this valuable natural resource will be made if prices are increased by a small amount sooner rather than a large amount later. 40. The precise scale of the price increase is not something upon which the Joint Committee wishes to make a recommendation. To equalise fuel costs at oil-fired and turf-fired generating stations would have required, in 1978/79, an increase of over 10 per cent in the price of machine turf and of 30 per cent in the price of milled peat delivered to the Electricity Supply Board, the increases required to achieve the same objective probably being even greater now. Such an increase is certainly too large to be introduced at one stroke and, indeed, since non-fuel marginal costs at turf stations are probably higher than at oil stations, it would in any case not be desirable to raise the price of turf to that of oil. The Joint Committee recommends that the actual increase be determined by reference to the need to have the high capital costs of the new development programme reflected in Bord na Móna’s prices immediately. 2.3 Investment and capital finance41. As Bord na Móna enters an era of high investment (total assets increased by £9½ million or 32 per cent during the year 1978/79), it is appropriate to consider the method of financing which has remained relatively unchanged in the 33 years of the life of the organisation. 42. The outstanding feature of the capital structure of Bord na Móna is that, at the end of 1978/79, 83 per cent of the net assets was financed by repayable loans on which there is a statutory (or, in the case of non-Exchequer loans, a contractual) obligation to pay interest at, typically, half-yearly intervals. Of the remainder, 8 per cent consists of a reserve built up by continuing to depreciate assets already written off and 9 per cent of a reserve compiled from surpluses. 43. If the increase in prices recommended in the previous section is effected, the result will be a rise in the last item at the expense of the first—that is, an increase in the proportion of capital financed from internal sources—and no more needs to be said on that point. This is, however, an appropriate place to refer to two other matters. 44. First, at various times during the life of Bord na Móna doubt has been cast upon the wisdom of establishing as a statutory corporation with no equity capital an organisation whose activities are vulnerable to the vagaries of the weather and therefore whose trading profit can fluctuate quite severely from year to year. In the private sector a company with an excessively highly geared capital structure would find itself in difficulties in such an environment. The question has therefore been raised as to whether Bord na Móna should be converted into a limited company with equity shareholding, in the hands of the Government. The Joint Committee would answer that question in the negative. The periodically renewed provision for the Minister for Finance to waive the interest due on advances from the Exchequer seems to the Committee an entirely adequate means of dealing with any short-run problem created by the random effects of the weather on trading profit. In a sense it is analogous to the failure to pay a dividend to equity holders in an unusually bad year: if the Minister held equity rather than being a creditor he would forego a dividend instead of waiving interest. Furthermore, there is a subtle, but important, distinction between the two situations. In the present case, it is the Minister, and not the Board, who decides if interest is not to be paid, whereas in the case of equity it is the Board and not the shareholder (the Minister) who decides whether or not a dividend is to be paid. Of course, persistent failure to pay a dividend would require the acquiescence of the Minister and such acquiescence (which has been forthcoming in relation to some State-sponsored companies) in effect converts the Minister’s shareholding into a capital grant. The Joint Committee takes the view that the present system of advances imposes a beneficial discipline on all parties concerned and that sufficient flexibility is achieved through the provision for the waiving of interest. 45. The second point concerns a matter raised with some force in the memorandum submitted by the Rural Workers Group of the Federated Workers’ Union of Ireland7. Bord na Móna has never received any subsidisation on capital account and is therefore different from many private firms, who receive subsidies through such agencies as the Industrial Development Authority, and several public enterprises who have received capital subsidies in one form or another. Despite the strong case made, the Joint Committee rejects any proposition that Bord na Móna be made eligible for such capital subsidies. In the first place, for a quarter of a century Bord na Móna could sustain a high level of output and employment—and, at the same time, remunerate its capital in full—only because of what was in effect a continuing current subsidy paid for by electricity consumers. That is no longer the case, which provides the second point. The purpose of the system of grants operated by, for example, the Industrial Development Authority, is to induce investment which would otherwise not take place. But Bord na Móna’s competitive position is now strong enough for any investment it is likely to make to be financed without any form of subsidisation—current or capital, overt or hidden—as long as prices are increased. Therefore, capital subsidisation would achieve little or nothing in the way of extra jobs in turf production and, since it would be at the expense of other public or private projects which need subsidies to survive, it would be a waste of resources. 2.4 Depreciation policy46. Bord na Móna’s policy in regard to depreciation is described in the following terms in its Annual Report, 1978/79: “The depreciation charge is based on the repayment of capital advances and loans over a period of twenty-five years. Where loans have been repaid and assets fully written off, the annual charge has been continued … In addition amounts have been written off factory and other works buildings erected in recent years.” The first sentence was even more explicit in earlier Annual Reports: “The depreciation charge is the amount of the capital repayments made during the year plus a provision for advances not yet due for repayment.” 47. From this it is quite clear that, for Bord na Móna, depreciation does not have the more usual meaning of payments into a fund for the purpose of replacing assets as they deteriorate in value: it means payments into a fund for the purpose of liquidating liabilities. The third sentence in the above quotation does, however, indicate that there is an element of asset depreciation included in this procedure, and this is confirmed by the fact that the accounts for 1978/79 show a writing-down of fixed assets by £848,000 (within a total “depreciation” charge of £1,214,000) in that year. 48. Bord na Móna has a statutory obligation to repay advances and so there can be no objection to the compilation of sinking funds for this purpose. The Joint Committee does, however, feel that clarity would be served if the provision for depreciation proper were distinguished in the Revenue Account from the appropriation for the amortisation of debt. This is done in the accounts of, for example, the Electricity Supply Board, and the Committee recommends that that procedure should be emulated by Bord na Móna. 49. Confusion is also introduced by the practice of continuing the depreciation of assets already written off. This is either an attempt to engage in replacement-cost depreciation or an attempt to disguise what is really a surplus. Both may be commendable objectives but, if the Board wishes to engage in inflation accounting or to build up reserves for the purpose of financing expansion, it would be better to do so explicitly. The Joint Committee recommends that any “depreciation” charge over and above what is required for the amortisation of debt or the historic-cost write-off of assets should be included in the surplus and not in the item called “depreciation”. 50. Consideration is now given to a much more fundamental issue. Every tonne of turf harvested runs down the capital value of the bogs, but this depreciation in value is not recorded in the accounts of Bord na Móna. There is nothing abnormal about this: companies in extractive industries such as coal or ore mining or oil exploitation typically would not account for the diminution in the natural resource they own and it would obviously be unreasonable to expect Bord na Móna to act contrary to international practice in this respect. 51. Nonetheless, the present rate of production means that the turf will be exhausted in, approximately, the year 2030 which means that, if one foregoes a year’s production now, those living in 2031 will have turf otherwise unavailable to them. This is exactly analogous to the depreciation of a piece of machinery: if it is expected to last for 20 years, leaving it unused this year means that it becomes available to those living in 21 years’ time. 52. The fact that an undeveloped bog is virtually worthless is beside the point. The relevant fact is that the capital value of a developed bog far exceeds the cost of the drainage works, railways, buildings, etc. required to develop it, whereas the balance sheet of Bord na Móna fails to record that fact. The essential problem is that turf is irreplaceable and so its use now imposes a real cost upon future generations. Since this cost is not recorded in the accounts it does not influence the current price of turf. As a result, we now use turf at a rate which entirely ignores the fact that a future Ireland will, as a result, have no turf to use. 53. Traditional forms of accounting cannot easily deal with this problem and, therefore, the Joint Committee is in no position to make a firm recommendation. Furthermore, it could be argued that the problem is less severe with turf production than with, say, coal mining because the former may actually create useable land. However, the productive value of cutaway bog is still little more than conjectural (this issue is considered later in this Report) and it would be imprudent to allow complacency in that matter to excuse failure to consider the effects of current exploitation of an irreplaceable, indigenous natural resource. The Joint Committee can do no more than draw attention to the question. 2.5 Other accounting matters54. In recognition of the fact that statutory corporations have no shareholders but are responsible to the people of Ireland through their Government, Bord na Móna (along with other State-sponsored bodies) publishes accounts which are far more informative than those required of a limited company by the Companies Acts. The Joint Committee does, however, feel that there is room for some improvement in the informational content of these accounts, in addition to the recommendations already made in paragraphs 48 and 49. 55. Up to and including 1975/76, the Revenue Account distinguished among the four products and so the reader was able to see the extent to which each product contributed to the overall financial performance. Since then this Account has shown only aggregate results. It is recommended that the former practice be restored. It is also recommended that the Revenue Account give more information regarding costs and, in particular, identify wages and salaries as a separate item. Aggregate labour costs are shown at present in a separate table, but this should be disaggregated by product in the revised Revenue Account, thus permitting the identification of the important matter of unit labour costs by product. 56. The Joint Committee also wishes to draw attention to what the Board admits is a very conservative policy concerning the accounting valuation of stocks. The Annual Report, 1978/79 states: “The valuation is substantially below cost or market value (and so, particularly in the case of milled peat, this) creates an undisclosed stock reserve of considerable magnitude”. The Report also notes that one member of the Board wished to be recorded as disagreeing with this policy. 57. The aforementioned policy is of long standing and has, of course, met with the approval of the Comptroller and Auditor General. There are many reasons why accounts may give a misleading impression of the performance or worth of an organisation, but where this effect is the result of a deliberate policy a question is bound to be raised. An under-recording of any increase in the value of stocks during the year means that the surplus for that year is under-recorded, whereas if the balance sheet values end-year stocks at less than market value, the worth of the organisation is under-stated. For these reasons, the Joint Committee recommends the adoption of a more realistic policy of stock valuation and, specifically, recommends that this valuation be based upon market prices. 2.6 Relations with the Electricity Supply Board58. The use of turf for electricity generation has dominated the activities of Bord na Móna from the beginning. In 1978/79, the Electricity Supply Board took 77 per cent of Bord na Móna’s milled peat, 29 per cent of the sod peat, and accounted for 44 per cent of the latter’s total revenue or 51 per cent of revenue from the sales of turf fuel. In general terms at least, this dominance is expected to persist, especially because of the importance of the ESB as a purchaser of milled peat upon which, on the fuel side, the whole of the expansion planned under the Third Development Programme is concentrated. At 24 per cent, the proportion of electricity generated from turf supplied by Bord na Móna in 1977/78 was exactly the same as five years earlier, in itself a testimony to the dramatic improvement in the competitiveness of turf already referred to, although this proportion fell below 20 per cent in 1978/79. Until the mid-1970s, turf had for some years been declining in relative importance as a fuel for electricity generation. The change in relative fuel prices and the institution of the Third Development Programme have had two significant effects: first, load factors at the turf-fired stations have been substantially increased, thus stabilising the proportion just mentioned; and second, after several years in which there had been no expansion in turf-fired capacity, the Electricity Supply Board is now installing additional sets at Shannonbridge and Lanesborough. 59. The very high degree of mutual inter-dependence between these two bodies explains why their relationship has been a complex mixture of relative bargaining strength and sensitivity to each other’s needs. For 25 years or so, Bord na Móna’s position was weakened by the fact that they were being subsidised by electricity consumers, but there is no evidence that this situation was exploited by the Electricity Supply Board. The position is now reversed and, in turn, Bord na Móna has not exploited its strength. As evidence can be cited the fact that, in 1978/79, the price (revenue per tonne) of machine turf delivered to the ESB was almost 30 per cent lower than that of the same product delivered to other users (£8.80 as against £12.10). The quality of the machine turf supplied to the ESB may be somewhat inferior and certain delivery costs may be lower, but it is difficult to see how such factors could explain a price difference of such magnitude. The same lack of willingness to exploit competitive strength is demonstrated by the fact that only now is Bord na Móna seeking, by applying to use ‘energy-related’ prices, to take advantage of increases in oil prices which began six years ago. 2.7 Employment and productivity60. Table 3 sets out certain figures relating to production, employment and wages for the past five years. TABLE 3 Production, employment and wages
Key to Table 3 Row 1. Output of machine turf (1978/79=100) 2. Output of milled peat (1978/9=100) 3. Output of briquettes (1978/9=100) 4. Output of moss peat (1978/9=100) 5. Employment at peak (nos.) 6. Employment at peak (1978/79=100) 7. Wages as percentage of total costs (revenue less surplus) 8. Wages as percentage of current costs (revenue less surplus, interest and depreciation) 61. Although the extreme annual variability of output — especially of milled peat — and the problem of constructing an index of overall output create difficulties in making a clear judgement, the least that can be said from these figures is that they show no definite evidence of a recent improvement in labour productivity. Comparing the first and last years, only moss peat output has shown a greater rate of increase than the increase in peak employment. (Peak, rather than average, employment is relevant here because one would expect it to be more responsive than average employment to random fluctuations in output.) Again, with the exception of moss peat, output of all products was substantially lower in 1978/79 than it had been in 1975/76, yet employment was 10 per cent higher. 62. Despite this, however, Table 3 does not suggest that Bord na Móna is experiencing difficulties because of labour costs. The figures in row 7 are influenced by fluctuations in capital charges — which helps to explain, for example, the very high figure for 1978/79 — and those in row 8 give a clearer picture. These indicate that, for the past five years, there has been no systematic tendency for labour costs to rise faster than other costs. 63. Since much of Bord na Móna’s employment is in activities and locations where alternative employments are relatively scarce, a case can be made for not pursuing to the commercial limit all opportunities for increasing output per employee, as long as unit labour costs do not become excessive. In such an area as this, a higher unit price, a lower surplus or lower remuneration per employee may be a socially desirable price to pay for the maintenance of a high level of employment. III ORGANISATIONAL ASPECTS3.1 Industrial relations64. The continuing relationship among the Board, management and staff of any organisation, while it (and, in particular, its malfunction) may have external ramifications, is a delicate ‘domestic’ matter into which an outsider intrudes at his peril. The Joint Committee did not consider it either necessary or desirable to investigate industrial relations within Bord na Móna in any depth, especially since there has been no evidence in this case of the kind of national, public concern as has manifested itself regarding this matter in some other State-sponsored bodies. Nevertheless, this is an important subject and the Joint Committee considers it appropriate to place certain points on record. 65. First, although it wishes to make no comment on matters of detail, the Joint Committee notes with approval the general principles by which wage levels are determined in Bord na Móna.8 The only way in which collective bargaining can be economically efficient in the public sector is by finding the most relevant basis for comparison when applying principles of comparability. This requires the identification of employments offering similar work in similar locations. For manual staff, the proper comparison is with other rural workers and, from the national point of view, there seems no reason to challenge the groups chosen for comparability in this case: staff in the Office of Public Works, Córas Iompair Éireann, the Electricity Supply Board and county councils, and forestry workers. For non-manual staff in general, there is less of a rural bias and the comparison is with CIE, the ESB, Nítrigin Éireann Teoranta, Comhlucht Siúicre Éireann Teoranta and Aer Lingus.9 Without doubt, higher wages and salaries could be paid if, as the submission from the Rural Workers Group of the Federated Workers’ Union of Ireland recommends, capital were available free to Bord na Móna through such agencies as the Industrial Development Authority. However, this would involve a major change in policy and, as stated earlier in this Report, the Joint Committee sees no reason to recommend such a change in the case of Bord na Móna. 66. An area of significant concern for Bord na Móna arises from the fact that because of externally-imposed limitations the Bord is unable to determine independently the remuneration of its managerial staff. The Managing Director stated in evidence that Bord na Móna were losing its best people to the private sector.10 Although he explicitly denied that he was complaining about the coordinating role of the Department of the Public Service, the Joint Committee could only draw the conclusion that this was another manifestation of the concern expressed in other State-sponsored bodies regarding the difficulties for public enterprises in competing for scarce managerial talent with the private sector. The recent recommendations of the Review Body on Higher Remuneration in the Public Sector (Report No. 20), if implemented in full by the Government, should ease this situation. The Joint Committee recommends that the salaries of senior managers be kept under continuous review, particularly with respect to the effect present policy has on the quality of recruitment to senior managerial positions. 67. Second, the Joint Committee notes the willingness of the Bord, as expressed in evidence, to improve the level and range of benefits available under the superannuation scheme.11 Although it may be difficult in times of high inflation and low real rates of return for pension funds, it is important that these schemes be fully funded. The Joint Committee therefore trusts that agreement will be reached regarding the level of contribution needed if enhanced benefits are to be provided under the Bord na Móna scheme. 68. Third, Bord na Móna was one of the first State-sponsored bodies to implement the Worker Participation (State Enterprises) Act, 1977 which provides for staff involvement at Board level. Some reservations are expressed in the Union’s memorandum but these — which related to such things as the number of worker-directors and whether the traditional form of accounts is the most appropriate for a Board with worker-participation — can, and should, be reviewed as this concept develops. Of particular interest to the Joint Committee is the enthusiasm of the senior management for the new Board structure. When asked for his view on this innovation, the Managing Director stated in evidence: “Very good…. In a very significant way, particularly from the Chairman’s or the Chief Executive’s point of view, it has widened the whole spectrum of contribution to decision-making on the Board.”12 69. Finally, although it is misleading to refer to industrial disputes in isolation from the context in which they occur, public concern over strikes in State-sponsored bodies makes it worthwhile recording the situation in Bord na Móna. Although the scale of a stoppage is what affects production, the number of stoppages often gives a truer idea of the state of industrial relations in an organisation. In the 33 years of Bord na Móna’s existence there have been only five official stoppages. The last was in 1976 on the part of craftsmen when production, especially of briquettes, was seriously affected. There have been a number of unofficial stoppages, but two points are worthy of note. First, over the last four years the proportion of man-hours lost through industrial disputes has in Bord na Móna been half of the equivalent figure for transportable goods industries as a whole. Second, the Joint Committee is struck by how rarely production has been noticeably curtailed by an industrial dispute. This fact alone, while no cause for complacency, suggests that there is little fundamentally wrong with industrial relations in Bord na Móna. 3.2 Relations with Government70. The relationship between the roles of Minister and Board is a fundamental and continuing cause for concern in the field of public enterprise. For this reason, the Joint Committee regarded it as important to discover whether or not the Board of Bord na Móna felt any misgivings regarding the recognition of its legitimate autonomy on the part of the relevant Minister and departmental officials. It was reassuring that, in evidence, the Chairman was able to state: “In 15 or 16 years on the Board I cannot recall ever having any major dispute with a Government Department. We have debated things and we do not feel inhibited by any action of the Department. Relations have been good. We have had informal discussions and we have not been restricted in any way.”13 71. In two areas the Board has experienced significant resistance from other organs of government to policies it wished to pursue. Each of these has been dealt with earlier in this report. First, in the days when oil was cheaper than turf for the purposes of electricity generation, the Electricity Supply Board on occasion contested proposals by Bord na Móna to expand turf utilisation and the Minister for Transport and Power supported the ESB. Since we are now in an era when turf can effectively compete with oil in this market, such difficulties are unlikely to arise again in the foreseeable future. 72. Second, the power of the Board to determine the price of its products has been limited by the activities of the National Prices Commission. In evidence, the Chairman stated: “…our ability to generate capital for ourselves has been severely held back by the Prices Commission. We prefer to develop our capital resources….”14 As reported earlier, Bord na Móna is currently attempting to change the situation in this matter. 73. In the aforementioned two instances the Joint Committee sees no reasons for disquiet. There is nothing unusual about conflicts between the self-perceived interests of two public agencies and there are well-developed and accepted means for dealing with such conflicts, culminating in the legitimate exercise of decision-making powers by a Minister or the Cabinet. In the first instance, one agency — Bord na Móna — properly saw its objective as promoting the maximum use of turf whereas another — the Electricity Supply Board — equally properly saw its objective as minimising the cost of electricity to consumers. These two objectives were in conflict and a decision could only be made by a superior power, in this case the Minister to whom both Boards were responsible. In the second instance, the objective of Bord na Móna to increase the proportion of investment financed from self-generated funds was in conflict with that of the agency charged with ensuring that price increases were held to the minimum consistent with the continuing viability of the activity in question: again a conflict which, if pursued, any form of organisation can resolve only by the exercise of superior authority. In this instance, Bord na Móna was not peculiarly vulnerable because it is a State-sponsored body since the National Prices Commission also has a role in determining prices in the private sector. 74. In summary, therefore, the Joint Committee is confident that the complementarity between the roles of Board and Government has operated satisfactorily in general. IV WHEN THE TURF HAS GONE4.1 Cutaway bog75. Since the main imput is not reproducible, it is in the nature of an extractive industry that it has a finite life. In about fifty years’ time the bogs developed by Bord na Móna to date, or planned for development under the Third Programme, will have been worked out and turf production will cease. However, where this industry differs from, say, mining is that the production process actually increases the value of the land for other purposes. Since nothing can be grown or built on virgin bog, it is literally valueless, but a bog which has been drained and exploited until the remaining peat layer averages only half a metre clearly has potential as cultivable land. 76. However, cutaway on the scale in question is a new phenomenon and it is by no means clear for what purposes such land is most suitable. This problem was foreseen and for over twenty years Bord na Móna and An Foras Talúntais have been engaged in major research programmes on the use of cutaway. The Joint Committee does not wish to describe or comment on that research since that has been done in a recently-published report of an inter-departmental committee set up specifically to consider the technical issues at stake.15 The Joint Committee does, however, note that difficulties have been experienced with regard to all of the agricultural, horticultural and silvicultural uses so far subject to experimentation and so cautions against the comforting belief that Ireland will, by the year 2030, have extra good land to the extent of 150-200,000 acres. Also, the Committee does find it appropriate to comment on two points. 77. First, the best use of cutaway is not merely, or even fundamentally, a technical question but an economic one. On the one hand, problems so far revealed (for example, needs for deep ploughing, pumped drainage, heavy fertiliser use, animal nutritional supplementation, etc.) are important not so much because they are technically difficult to solve but because they are expensive to solve. On the other hand, one cannot decide upon the optimal use of any land, including cutaway bog, without forecasting the future levels of prices of different types of land output. As a fuller understanding is gained of the technical and economic aspects of cutaway use, this latter aspect will increase in relative importance as an input to any decision. 78. The present state of knowledge indicates that cutaway is best considered as akin to what is traditionally considered marginal land: all the signs are that it will not be cheap to bring into cultivation and the expense of making it fit for use will vary according to the product being considered. In these circumstances, one cannot ignore the possibility that it will turn out that, at least for some of the cutaway, the best use is no use. It is best to plan on the basis that cutaway use must be commercially viable if it is to be acceptable: such a basis would not only give a proper place to costs and prices in any decision but would also protect against the simplistic view that turf production somehow creates a free, natural resource. There is no reason for pessimism, but it is as yet far from clear what range and scale of opportunities will exist when Bord na Mona has finished with the bogs. 79. The second point concerns the organisation of the use of cutaway bog, including the matter of ownership. Since the optimal pattern of land ownership varies according to the use to which that land is to be put, it would be unwise to attempt to come to any firm conclusions on this issue until further research clarifies the technical and economic features of alternative uses. Thus, for a bog where afforestation is the best use, one option would be to hand that bog over to the Department of Fisheries and Forestry, whereas if grassland is the optimal use the bog may best be sold to private interests, including co-operatives. 80. This is an exceedingly complex question involving economic, social and political issues and the Joint Committee does not consider itself the appropriate body to make recommendations on the matter. Nonetheless, one major point does seem clear. Bord na Móna has created very large pieces of land under a single ownership by acquiring the fee simple of a multitude of smaller holdings. In general, it would be quite inappropriate to think in terms of returning the cutaway to private ownership in small pieces. The consolidation of holdings achieved by Bord na Móna is an advantage for most forms of potential use and an inappropriate land tenure policy would dissipate such an advantage. This is even more emphatically so since the land in question is cutaway bog. Bord na Móna, in its Annual Report 1976/77, validly make the following point in relation to the land left after the private winning of turf: “Many thousands of acres of privately owned cutaway and marginal land remain underdeveloped because of the fragmented structure of ownership which inhibits drainage and development essential for the full utilization of the real potential of these lands.” It would be unfortunate if Bord na Móna’s cutaway were eventually disposed of in a manner which failed to achieve the real advantages which large-scale holdings provide for many purposes. Co-operative ownership would be one way of achieving these advantages. 81. The Joint Committee takes the view that it is now opportune for the Government to initiate formally the process of developing policy in relation to the future ownership of Bord na Móna cutaway. This subject is not within the terms of reference of the existing Inter-Departmental Committee and that Committee is in any case not optimally constituted for this purpose. A new Committee representative of the various public and private interests needs to be established so that consideration of both use and ownership of this land can proceed in tandem. 4.2 Employment and unemployment82. Quite clearly, the decisions regarding the use of cutaway are relevant to the question of employment. As regards those actually employed by Bord na Móna, the problem need not be a difficult one. If it can be validly assumed that the time profile of output incorporated in the Third Development Programme is realised, then the level of employment can be accurately forecast, bog-by -bog, for many years ahead. In particular, the reduction in employment as each bog is exhausted can be foreseen with confidence. In these circumstances, and as long as the time structure of factors (such as age) causing workers to leave Bord na Mona voluntarily is appropriate, one does not need to have forced redundancies: the run-down in the labour force can be achieved by what is usually and perhaps unfortunately called “natural wastage”. Furthermore, workers not “naturally wasted” in this way may well obtain employment in the activity set up on the cutaway. 83. How to run down the labour force as painlessly as possible for those actually employed is not, however, the major problem. Of greater significance are the facts that the demise of Bord na Móna will reduce the demand for labour and that much of this reduction will take place in localities where alternative employment opportunities will, in the absence of positive action probably be hard to come by. The gross direct job-loss as turf production runs down and ultimately ceases will be of the order of 7,000 representing a gross financial flow to the local economies in terms of wages alone of perhaps £35 million at 1979 prices.16 84. Of course, the net job-loss to the national economy will not be as large as this but, unless specific action is taken, the net effect on the local economies could be of this magnitude. One of the social benefits of Bord na Mona’s activities derives precisely from the fact that those activities are concentrated in areas which find it difficult to attract new investment. Whole communities depend upon — and indeed, have been created by — the turf industry. An obvious local substitute for this industry would be investment in the use of the cutaway bog. With one exception there are no estimates available of the employment content of the alternative uses of cutaway, but the single exception does illustrate the scale of the problem. In a report on forestry policy for the National Economic and Social Council17, it was estimated that less than 4,000 jobs would be created at full production if the entire 175,000 acres of Bord na Mona cutaway were afforested. Even this figure would be achieved only several decades after planting. 85. The run-down of turf production and employment will therefore represent a considerable problem for local economies and a challenge for regional policy. This decline can, however, be precisely forecast over the next fifty years and the Joint Committee urges such agencies as the Industrial Development Authority, AnCO and the relevant local authorities to take advantage of this all-too-rare opportunity to see into the future. V CONCLUSION86. Over the years, Bord na Mona has made a substantial contribution to the economic and social well-being of the country through its development of an important national asset. It has annually given considerable assistance to the balance of payments through the export of moss peat and, especially, by providing a substitute for imported fuels; it has provided secure employment in communities where alternative sources of economic activity are scarce; it has, through its housing schemes, directly created sub-communities in rural Ireland; and, through its research on the uses of cutaway, it is attempting to ensure that the benefit of its activities will continue to be felt even when the turf has been exhausted. In the course of doing all this, it has become the second largest producer of peat fuel in the world, has generated its own technological innovations, and its skills have been internationally recognised, not least by the claims which other countries have made on its expertise. 87. The Joint Committee has felt obliged to make certain recommendations for change, especially in the financial area and most significantly in relation to pricing, where inappropriate policies could lead to wasteful use of an important native source of energy; but in no case should a recommendation be taken as an indictment of Bord na Mona’s past performance. 88. Two written submissions received from Bord na Mona are set out in Appendices 1 and 2. A written submission received from the Rural Workers Group of the Federated Workers’ Union of Ireland is set out in Appendix 3. The Joint Committee was gratified that the union—a major representative of Bord na Mona’s staff—responded so fully to the invitation to submit written evidence. 89. The Joint Committee is indebted to Professor John Bristow of Trinity College Dublin for his invaluable help throughout this enquiry. (Signed) EOIN RYAN Chairman of the Joint Committee 12 March 1980 4. See Evidence (Questions 5-40; and 44-52.) 6. See Evidence (Questions 5, 6, 10, 14 and 15). 8. See Evidence (Question 139) 9. See Evidence (Question 139) 10. See Evidence (Question 147) 11. See Evidence (Questions 140-143) 12. See Evidence (Question 145) |
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