Committee Reports > List of Committees > Joint > 1980 > Committee on Commercial State-Sponsored Bodies > Report No. 13 - Comhlucht SiÚicre Éireann, Teoranta

COMHLUCHT SIÚICRE ÉIREANN, TEORANTA

CONTENTS OF REPORT

THIRTEENTH REPORT

COMHLUCHT SIÚICRE ÉIREANN, TEORANTA

I INTRODUCTION

(a) Background

1. Comhlucht Siúicre Éireann, Teoranta (CSET) is a major manufacturing and trading company engaged principally in sugar and food processing and the manufacture and distribution of a range of agricultural inputs. It was established in 1933 as a State-owned sugar manufacturing enterprise. Initially, it took over a Government-sponsored private operation which had opened at Carlow in 1926. It immediately set about building a further three sugar factories at Mallow, Thurles and Tuam. In the 1934 production campaign over 44,000 acres of sugar beet were sown and more than 66,000 tonnes of sugar produced. Production has grown over time, and in the last five years has averaged 178,000 tonnes of sugar produced from approximately 86,000 acres of sugar beet sown. Through the efforts of the Company, Ireland has been essentially self-sufficient in sugar during the past four decades.

2. Sugar production remained the sole business of CSET until the late 1940s. At that time, in response to difficulties experienced during the war years, the Company diversified into fertiliser distribution and the manufacture of agricultural machinery. In 1962 the Company established a food processing operation, Erin Foods. The Company’s activities now include sugar manufacture, sugar distribution, food processing, animal feedstuffs production, agrochemicals trading, fertiliser trading, limestone quarrying, and general and agricultural engineering. A characteristic of its diversification experience is that most of the ancillary activities have sprung from the basic operation of sugar manufacturing. Gross turnover in recent years has been evenly divided between sugar and the other activities, though if the by-products of sugar manufacture (pulp and molasses) are added to the sugar side, its share rises to about 60 per cent of the total. Turnover amounted to £126¹ million in 1979, placing the Company in the top 20 Irish companies in terms of sales. The Company has 3,600 employees.

(b) Legal character

3. CSET is a limited liability company established under the Sugar Manufacture Act, 1933 which sets out its objectives, constitution and financing. The issued share capital is £7.0 million, consisting of £6.5 million ordinary shares held by the Minister for Finance, and £0.5 million cumulative preference shares held by various members of the public. An amending Act in 1962 enabled the Company to establish and hold shares in a subsidiary company, Erin Foods Ltd.

4. The member of the Government with primary responsibility for CSET is the Minister for Agriculture. This responsibility was transferred to him from the Minister for Finance in February 1980 as part of the programme of public service reorganisation. The Minister for Agriculture oversees the general policy of the Company, is advised of major investment expenditures and is generally kept appraised of the progress of the Company. The Minister for Finance remains the principal shareholder.

(c) Context of this inquiry

5. The Joint Committee has undertaken this inquiry into CSET at a time when the Company faces a series of difficult and interrelated problems. The accounts for the 1979/80 financial year are expected to show that the Company has moved into a substantial loss-making position for only the fourth time in its 47 year history. Part of the reason for this loss is the current recession in the agricultural industry which has adversely affected some of the Company’s activities. However, some of its subsidiaries, in particular the food division and agricultural engineering, have over a period of years been a charge on the Company’s resources. In addition, the Company began a capital investment and modernisation programme in its sugar factories in 1975 which has involved the expenditure of almost £30 million up to 1979. A further three-year £40 million investment programme is currently underway. This capital investment has been financed in the main from borrowings, and has resulted in a serious deterioration in the financial structure of the Company. It has given rise to large recurrent interest charges which are a further drain on the Company’s resources. On the sugar side also, proposed changes in the European Community’s (EC) sugar regime would, if implemented, adversely affect the Company’s operations. In this situation, it was clear from much of the evidence to the Joint Committee that the Company is uncertain about its future objectives. In particular, it is uncertain about the relative importance to be given to commercial and social goals, where the actions necessary to restore the Company to profitability conflict with other objectives held by the Company.

6. There is at present no formal statement of corporate objectives for the Company as a whole. However, the Company identified two major objectives and a number of minor ones in its submission to the Committee. ² First, the Company intends to expand and diversify as a manufacturing and trading enterprise, primarily based on the agricultural and food processing sector, within the dictates of commercial viability. Second, the Company seeks to maintain employment on a company-wide basis, and as far as possible at all locations, and if possible to expand job opportunities by means of viable new activities. Subsidiary objectives include, inter alia, the maintenance of its position as the sole producer and primary distribution agency for sugar on the Irish market; the fostering of sugar beet growing; the improvement of processing efficiency; the restructuring of its food processing activity away from commodity selling towards the development of branded production for the home and export markets; and the maintenance of a capability for technological excellence in all its areas of activity.

7. Other objectives were seen for the Company in other submissions.³ It was argued that the Company had a regional development objective, and that this had influenced the initial siting of the four sugar factories and also the location of subsequent diversification activities.⁴ A closely-related view is that the Company has social objectives in addition to economic ones. This appears to be interpreted to mean that the Company should continue to operate enterprises which are no longer viable in commercial terms because of the employment they give. A social objective is also implicit in the Company’s own admission that it pursues expansion and employment creation, subject to the constraint of commercial viability rather than long-term profit maximisation.

8. The potential for conflict between these objectives is obvious. Commercial viability is undermined by the provision of jobs for social reasons. Regional development objectives may conflict with improvements in processing efficiency. Nor is it obvious that in the future the Company will have sufficient resources to fulfil all its stated objectives. There is a clear need to think hard about the basic goals of the Company. Given its present precarious financial position, it is essential that the Company has a mandate setting out its future role and responsibilities unambiguously so that management can tackle the Company’s difficulties in a realistic fashion. In this report the Joint Committee hopes to have contributed to this redefinition of the Company’s role in the years ahead.

II PROFITABILITY AND FINANCING: PLANNING AND CONTROL

(a) Sales performance and profitability

9. The Company is justifiably proud of the fact that since it was established in 1933 it has reported profits in all but three years. An analysis of its trading performance over the period 1970-1979 is shown in Appendix 1. Total sales have risen from £27.3m in 1970 to £126.3m in 1979, although much of this growth has come about through price rather than volume increases. The contribution of the three main divisions to total sales has changed over the decade. The trends are summarised in the following table:

TABLE 1

Analysis of CSET Group Sales by Activity

10. Agricultural trading and engineering activities have overtaken food division sales and now account for almost one third of total Group sales. In spite of the Company’s diversification policy, sugar still represents about half of total sales and it has contributed, on average, more than three-quarters of the Group’s profits in recent years.

11. Though the Company has reported profits in nine of the last ten years, its rate of cash flow and profitability on sales and its return on capital employed have been unsatisfactory when compared with commercial criteria. Key ratios measuring its profitability performance are shown in Appendices 1 and 3. In 1979 the operating profit margin on sales⁵ was 4.7% and it averaged similar figures in previous years. The return on capital employed⁶ was 10.2% in 1979 compared with 11.0% in 1978. The Joint Committee is of the opinion that the return on capital is low, as it is calculated on balance sheet data which show the Company’s assets on a historic cost basis. The Company has advised the Joint Committee that the current value⁷ of its fixed assets is about double the figure shown in its published accounts. This information suggests the Company’s ’real’ rate of return on the current value of capital employed would have been about 7% in 1979.

12. The Company claimed⁸ its overall rate of profitability has been “quite respectable” as compared with large Irish companies and UK sugar manufacturers. However, the evidence summarised in an analysis in Appendix 3 indicates that large Irish listed companies achieved average profit margins on sales of 7.6% and a return on capital employed of 15.1% in 1978. This rate of return on capital was calculated on the basis of up-to-date asset valuations in most cases—which would tend to depress the return as compared with the basis adopted by CSET. Financial and other information on the British Sugar Corporation Ltd. (BSC) were also reviewed. The principal activity of BSC is the manufacture of sugar from sugar beet and consequently it is comparable with the Company. The shares of BSC are quoted on the London Stock Exchange and the UK Government holds 16.7% of BSC’s share capital. The comparisons in Appendix 3 show that BSC is more profitable than CSET in relation to both its sales and capital employed. In 1979 BSC achieved a profit margin on sales of 10½% and a return on capital employed of 19.0%. Thus the profitability record of CSET appears less than satisfactory in comparison with other manufacturing firms.

13. Among the reasons why BSC is more profitable than CSET are higher levels of output per person employed and a much larger amount of investment in plant and equipment in relation to output and employees. In 1979 BSC sales per employee amounted to £64,180⁹ compared with £34,933 for CSET. In BSC total employee remuneration accounted for 9.2% of its total sales value, compared to 15.7% in CSET. The Joint Committee is aware of the dangers of drawing firm conclusions from this sort of comparison. However, the magnitude of the difference in performance between the two companies suggests that CSET has considerable scope to improve the efficiency of its operations. The data also indicate a need for a high level of investment in equipment in CSET if it is to match the performance of BSC.

(b) Profitability of sugar, agricultural trading and engineering activities

14. Up to 1978 CSET provided limited information in its annual accounts about the profits or losses of its different activities. This important information was not contained in its 1979 accounts. The analysis in Appendix 1 summarises the published divisional profitability over the period 1970-1978. The Company has not published a detailed profit analysis of its sugar, and agricultural trading and engineering activities—they have been combined for annual accounts reporting purposes. The Joint Committee understands that the rate of profit on sugar sales is much higher than the profit margins on the agricultural trading and engineering operations. On the data available, it is questionable as to whether the agricultural trading and engineering division is earning an economic return on resources employed.

(c) Profitability of food division

15. Between 1970 and 1976 the food division incurred losses totalling £4.2m, as summarised in Appendix 1. Although the published accounts show that a break-even position was achieved in 1977 and a modest profit was reported in 1978, the division’s profits are overstated, and its losses understated, to the extent that they do not include overhead and working capital charges borne by the Group. The Joint Committee understands that the performance of the food division deteriorated sharply in 1979, and further losses were incurred. The Company has acknowledged¹⁰ that the food division has been a serious drain on Group resources and that this adverse position is continuing. The opportunity cost (or the effective losses) of this division in terms of the capital resources of the Company has been very high. Over the period 1970-1979 sales in the food division aggregated to £136m. If this division had, on average, earned a modest profit margin of 4.5% p.a. then in the last decade it would have contributed pretax profits of £6m to the Company —instead of aggregate losses for the decade of about £5m. The effective “cost” of the food division’s poor performance—at least £11m over the decade—depressed the Company’s overall profit margins and return on capital employed. In particular, it reduced the Company’s cash flow and contributed to its heavy dependence on bank borrowing.

16. On the information available to it, the Joint Committee has serious doubts that the Company will be able to achieve an economic return from its food division, as at present constituted, in the near future. A number of reorganisations of this division have been undertaken in the past—without any significant success in terms of profitability. The Company is engaged in another reconsideration of its strategy in the food area. In order to monitor the success or otherwise of this strategy, the Joint Committee believes a firm target, in terms of a rate of economic return on resources employed, should be set by the board of the Company for this division to be achieved within a stated time period. The cost of any obligation to maintain aspects of its food operation which are economically non-viable, but which the Government wishes to maintain for social or other reasons, should be explicitly recognised by the payment of a State subvention in compensation.

17. The Joint Committee recommends that future annual accounts of the Company should provide relevant information on the profits and losses and rates of return on capital employed in each of the different activities. This analysis should distinguish between sugar, food and agricultural trading and engineering. Indeed, because of the different product groups, it would be desirable that a profit breakdown of the agricultural trading and engineering activities be reported, as this is now a very large division with annual sales of £39m. The Committee also recommends that Group overheads and interest on working capital should be allocated in accordance with the use made of these resources by each of the Company’s divisions. The foregoing information is necessary if the Company is to account properly for the management of its affairs and the use of Exchequer funds subscribed to it. The Committee does not believe that publication of this information would place the Company at any trading disadvantage.

(d) Inflation adjusted annual accounts

18. Annual accounts prepared on the traditional historic cost basis can be misleading in times of high rates of inflation. Generally, the profit reported overstates the ‘real’ rate of profitability, mainly because certain charges such as depreciation of equipment are based on their original cost and not on their current (most probably higher) cost. The Joint Committee noted that inflation adjusted accounts have not been published by the Company. The Committee was advised that internal inflation adjusted accounts had been prepared for the Company’s own information.¹¹ The Committee understands that these internal accounts indicated that the revised figure for profits was less than half the profit figure reported in the published accounts for 1977 and 1978. The information, that the depreciation charge in the published accounts would have to be doubled to reflect the current cost of equipment, suggests that the Company may, at best, have been only marginally profitable in 1979 on the basis of inflation adjusted figures. The Committee recommends that the Company should publish inflation adjusted financial statements in future, in line with recently developed professional accounting standards.

(e) Capital structure and financial position

19. As compared with commercial criteria and the norms for large companies in the private sector, the capital structure of CSET has been unbalanced for most of the past decade. Selected balance sheets are shown in Appendix 2. They show that the Company has become unduly dependent on borrowings from banks and credit from suppliers in the financing of its assets growth. In 1970, the issued ordinary share capital subscribed by the Minister for Finance amounted to £4.5, in addition to £0.5m (6% cumulative preference shares) subscribed by the public. This helped finance total assets of £23m. In the early and mid-1970s the Minister converted an existing loan advance of £lm and provided an additional £lm to bring the issued ordinary share capital up to £6.5m. No further capital has been subscribed, even though total assets reached £77.5m in 1979 and are expected to increase rapidly as a result of a major equipment modernisation programme. As shown in Appendix 3, shareholders’ funds financed almost half of total assets in large private sector companies compared with about a quarter of total assets in the case of CSET in 1979. Bank borrowings are well in excess of shareholders’ funds. The level of borrowings is more than double commercial norms and about four times higher than the proportion shown by the accounts of the British Sugar Corporation. By 1979 total borrowings had reached £30m and the interest cost had become an excessive burden on operating profits. A widening ’funding gap’ has been developing in recent years—as illustrated in the following table.

TABLE 2

Funds Flow Analysis and ‘Funding Gap’ 1977-1979

The above analysis shows that net cash flow generated by the Company was just sufficient to finance working capital increases but left little to support investment in new equipment. Consequently, a ‘funding gap’ developed which was bridged by increasing levels of bank borrowing —totalling over £18m over the three years. Additional share capital had not been made available to the Company at the time (June 1980) the Joint Committee met representatives of the Company. The absence of a share capital injection or any major asset disposal, combined with heavy trading losses and continued high investment outlays, suggests a 1980 ‘funding gap’ of up to £20m. This information indicates bank borrowing rising to about £50m—which would leave the Company with a strained financial position and an abnormally high interest burden because of its unbalanced capital structure.

20. The Company has indicated¹³ that its target capital structure is that borrowings should be about 75% of shareholders funds. This target debt/equity ratio does not seem unreasonable—though a lower proportion of borrowing might be more appropriate for the next few years until the Company has completed the restructuring of its manufacturing capacity and reached a stronger rate of profitability. The Company has stated¹⁴ that it needs an injection of £25m in share capital and some incremental capital funding for some years forward while it is carrying through the planned £40m modernisation programme. The Joint Committee supports the Company’s view that an immediate injection of £25m in ordinary share capital is needed to enable it to redress the capital structure imbalance with which it currently operates. The Joint Committee also recommends that an agreed debt/equity ratio and a firm forward financing plan, over three year cycles, be agreed between the Company and the relevant Government departments. This should be agreed as a matter of urgency.

(f) Working capital

21. The summarised balance sheets in Appendix 2 and the ratio comparisons in Appendix 3 suggest that the Company’s working capital position was relatively tight in recent years. The ratio of current assets to current liabilities was of the order of 130% for some years until 1979. This ratio is low by the norms for manufacturing industry—due to a high dependence on short term bank facilities and the large amount of funds tied up in stocks and debtors. In 1979 a sizeable amount of bank debt was restructured on to a medium to long term basis. However, the level of stocks carried is high by comparison with large Irish firms generally. One of the reasons for the high stock level is the EC requirement that sugar manufacturers maintain a minimum stock equal to 10% of their basic quota (para. 34). However, information made available to the Joint Committee showed that in value terms the stocks of the food division were the largest in the group at September 1979. It would seem that the level of stocks carried in the food division was close to four months sales. This seems a very high amount of stock—though seasonal factors are a partial explanation.

(g) Dividends

22. In 1979 the Company paid a net dividend of £162,000 in respect of the ordinary share capital of £6.5m subscribed by the Minister for Finance. This payment represents a yield of 2½% p.a. on capital. This is a very low return in relation to yields on large listed companies and the cost of funds to the Exchequer. The Company has paid a modest dividend every year in the past decade. The Joint Committee understands¹⁵ that the Department of Finance has requested a higher rate of dividend in recent years. The Company felt it was unable to afford a larger dividend because of its low profitability and the need to retain some profit in order to strengthen its equity base. Higher dividends will require a more commercial rate of return on the Company’s assets, which in turn suggests that the Company would need to adopt a more commercial approach to its operations. This has implications for the Company’s social role in a number of its activities. The Joint Committee notes the apparently contrasting policies of the Department of Finance and the Company with regard to the Company’s corporate objectives.

(h) Investment programme

23. The Company has embarked on a major equipment investment programme to modernise its sugar operations. The cost of the programme was indicated¹⁶ at £30m, but more recently a figure of £40m¹⁷ has been mentioned. The spending is to be spread over three years. It is a very large investment outlay in relation to the Company’s existing level of assets and share capital base. This programme was not justified to the Committee on the grounds that it would yield a worthwhile economic or financial return. The Company states the investment is essential to ensure the survival of the sugar industry as it will replace obsolete equipment and increase production efficiency. The need for the investment programme in the light of the Company’s operating efficiency is considered further in Section III.

(i) Planning and control

24. The Company has advised the Joint Committee that it operates a comprehensive system of yearly and monthly budgets for every activity.¹⁸ Monthly accounting reports are prepared comparing actual performance with budget. However the Company advised the Joint Committee that it was not operating within a formal strategic medium or long term corporate plan, based on agreed business objectives.¹⁹ The Committee noted the absence of a document setting out a blueprint for the development of the group-particularly in view of its range of activities and the scale of the investment programme proposed. The Joint Committee understands that the Company is currently preparing a medium-term planning exercise. It is recommended that the board of the Company ensure that planning and control systems and information appropriate to the needs of the Company are developed, implemented and regularly reviewed.

25. In February 1980, the Company’s Financial Controller initiated enquiries regarding certain entries in the debtors ledger. These enquiries led to the uncovering of prima facie evidence of fraud. The incident received widespread attention in the national media. A fullscale internal enquiry began at once. The Garda Authorities were notified and a Fraud Squad investigation was commenced and is still underway. The Company requested an independent firm of auditors to carry out an examination of the nature of the fraud and of the circumstances which made it possible and to make appropriate recommendations.

26. The Company has made available to the Committee details of the main findings of the independent audit examination. This indicates that, as a result of a conspiracy, a substantial cash sum had been misappropriated and that large quantities of processed food products had been shipped abroad on the oasis of false documentation. The total cost to the Company has been estimated to be in the region of £1.8-£2.0 million, mainly arising from stocks of goods which have not, so far, been sold.

27. This situation arose from a carefully planned conspiracy which exploited certain weaknesses in the Company’s structures and procedures, loopholes in control arrangements and errors of judgment. While the fraud was revealed by normal internal checks the damage had been done. The auditors’ report made a series of recommendations for the improvement of procedures, systems and controls. The Company has indicated that a programme of improvement based upon these recommendations is being implemented as a matter of priority in the context of the general corporate reorganisation which is underway at present. The Committee trusts that every possible step is being taken by the Company to ensure that a repetition of this unfortunate affair will not occur.

(j) Current lossmaking position

28. The Joint Committee has been advised by the Company that it would incur a heavy loss in 1980 and that the outlook for 1981 was also poor. Recent information received by the Committee suggests the level of net loss for 1979/80 has been of the order of £9.0m. The Company states that this very sharp deterioration in trading is due to a combination of factors; tighter margins on sugar operations as a result of cost increases not recovered in selling prices; continued losses in the food division and a downturn in profitability in the agricultural trading and engineering division because of weak home market demand. Also, the Company indicated it may have suffered a loss of about £1.5m (included in the foregoing total loss for the year) due to the strike in one of its factories during the summer. Finally, high interest rates on the very heavy level of borrowing was a major contribution to the level of loss.

(k) Conclusion

29. The Joint Committee found that the Company has been moderately profitable over the last decade. Its profit margins on sales and rate of return on capital employed have been below the performance of large Irish listed companies and the British Sugar Corporation. CSET’s return on capital has not compared favourably with the cost of long term funds to the Exchequer. The Committee was concerned to learn of a sharp deterioration in trading in 1980. Heavy losses are projected and the position is not expected to show much improvement in 1981. The Company currently has an unbalanced capital structure and a strained financial position. Bank borrowing has exceeded shareholders’ funds for some years. The debt/equity ratio exceeds commercial norms and interest charges have become a very heavy burden on the Company’s operating profit. In spite of its undue dependence on bank borrowing the Company has spent almost £30m on new equipment over the past five years. It now plans to carry through an additional £40m investment programme in order to modernise its sugar operations. Production will not be increased—the Company claims the investment is necessary to enable production efficiencies to be achieved to ensure the survival of the present sugar industry.

30. A large company in the private sector would already have raised additional share capital by way of a ‘rights issue’ to strengthen its equity capital base and to maintain a balanced capital structure. CSET claims it needs an injection of £25m in equity capital immediately. The Joint Committee supports this view. The Company has indicated that further injections of equity capital will be required to help fund the investment programme over the next few years. The call on Exchequer resources to support a prudent and stable capital structure for the Company will thus be larger than the £25m required to correct its current strained financial position. The Joint Committee is concerned that the Company’s finances were permitted to deteriorate to their present state. It would appear that discussions have been proceeding with relevant Government departments for some time without any firm decisions or action being taken.

31. The Joint Committee questions whether the Company and the relevant Government departments have fully explored the opportunities for innovation in financing the Company’s development. There is the question of widening the ownership base and the provision of funds from suppliers’ resources. Alternatively, participation by the staff in the equity of the Company might be considered. It may be possible to reduce the cost of finance by the utilisation of medium to long term leasing facilities, because of the Company’s future tax position. Finally, a sale and leaseback arrangement in respect of the Company’s valuable head office premises might be considered.

III SUGAR DIVISION

(a) Introduction

32. The Sugar Division is central to the Company’s overall operation. It has accounted for just over half of the Company’s turnover over the past ten years. Sugar manufacture now takes place within the context of the European Community’s (EC) common organisation of the sugar market. As some of the problems of the Company stem from the way this market is organised, this section begins with a description of the EC sugar regime and its implications for sugar manufacture in this country.

(b) The EC sugar regime

33. The EC sugar regime covers both beet and cane sugar, as well as some derived and substitute products. Sugar is unique among the agricultural commodities covered by the Common Agricultural Policy in that it is the only market regime in which production quotas are used to regulate the market. The Commission has presented proposals to revise the sugar market regime from the 1981/82 season but the present structure is first outlined in this section. Each year a target price is set for white sugar in the Community’s area of greatest surplus (Northern France). A white sugar intervention price is also set for the same region, and derived, and higher, intervention prices are fixed for the deficit areas of Ireland, Italy and the United Kingdom. Two minimum prices are also set for sugar beet each year. One relates to production within a basic quota (called the ‘A’ quota), the other covers production in excess of the basic quota but within a maximum quota (the ‘B’ quota). The minimum price for ‘A’ quota sugar beet is related to the intervention price for white sugar, and it takes into account the sugar yield from beet, processing costs, costs of stock-holding and, wherever relevant, the cost of delivering the beet to the factory. ‘B’ quota sugar is subject to a production levy which, however, cannot exceed a fixed proportion (at present 30 per cent) of the intervention price for ‘A’ quota sugar, so that effectively there exists a lower minimum price for beet in this category. The levy is intended to help finance the cost of export restitutions which are paid to enable the export of ‘A’ and ‘B’ quota sugar, surplus to Community requirements. Sugar produced in excess of the ‘A’ and ‘B’ quotas must be disposed of outside the Community without any aid from Community funds and so cannot depend on any minimum price guarantee. Sugar manufacturers are required to pay at least the minimum guaranteed price to producers for beet produced within the maximum quota, subject to quality differentials. Threshold or minimum import prices, related to the target price, are also established for white sugar, raw sugar and molasses. When world prices are lower than Community prices, levies equal to the difference between the relevant threshold price and the lowest representative offer price are charged on imports. When world prices exceed Community levels, export taxes are generally applied.

34. A further feature of the EC sugar market is the import under a Protocol attached to the Lome Convention of 1.2 million tonnes of white sugar annually from the sugar-producing African, Carribean and Pacific (ACP) States who are signatories to that Convention at a price related to the intervention price guaranteed for Community sugar. A further 80,000 tonnes can be imported under separate but similar agreements with India and some other territories. A levy/reimbursement system is operated on the production of white sugar in the interests of orderly marketing under which sugar manufacturers pay a levy on each tonne of sugar sold. This levy is intended to finance the reimbursement of the storage costs incurred on white sugar. A manufacturer who sells early in the marketing year is penalised as he will have to pay this levy but will receive little or no reimbursement of his storage costs. Sugar sold into intervention does not have to pay this levy, so the effective floor market price is the intervention price plus the levy. In addition, because of the Community’s experience in the early 1970s when sugar became extremely scarce, provision is made for a system of minimum stock-holding to ensure normal supplies. Each manufacturer is required to hold a minimum stock equal to 10 per cent of its basic quota (or 10 per cent of production if this is less), the costs of which are taken into account when fixing the white sugar and sugar beet intervention prices.²⁰

35. In 1975 the Council of Ministers adopted an ‘A’ quota for the Community of 9.136 million tonnes and a ‘B’ quota equivalent to 45 per cent of the ‘A’ quota giving a maximum quota of 13.25 million tonnes. Since then the ‘B’ quota has been reduced on two occasions and now stands at 27.5 per cent of the ‘A’ quota, giving a maximum quota of 11.6 million tonnes. The current ‘A’ quota for Ireland is 182,000 tonnes and the ‘B’ quota 50,000 tonnes, so it can be seen that Ireland is a relatively insignificant producer of sugar in European terms. The trend has been for EC consumption of sugar to remain static at around 9.5 million tonnes while production has increased steadily. Output in 1979/80 was a record 12.3 million tonnes due to above average yields. Taking account of preferential imports of 1.3 million tonnes, exports of about 4 million tonnes were needed last year to balance the market. The Commission has been concerned about the high degree of self-sufficiency for sugar within the Community and has produced proposals aimed at reducing production. The implications of these proposals for the Irish industry are considered in paragraphs 39 to 48.

36. The purpose of this discussion is to emphasise that the operation of sugar manufacturing enterprises is closely circumscribed by EC market regulations. On the input side, processors are bound to pay a minimum price for sugar beet to farmers. On the output side, the white sugar price will generally be close to the guaranteed minimum price because of the overall supply/demand balance within the Community. The processing margin is administratively determined at the annual price-fixing exercise in the light of average processing costs throughout the Community. A manufacturer who faces cost levels significantly higher than those generally prevailing in the Community has little opportunity to recoup these higher costs through either a higher white sugar price or a lower beet price to farmers.

37. Although under the Common Agricultural Policy all food processors operate in a highly managed market, a unique feature of the sugar industry must be emphasised. It is the only sector of the food processing industry in which growers are guaranteed a minimum price (in all other sectors—including grain, given the structure of the grain trade—the price guarantees are implemented at the wholesale level). It is relevant to point out that in both the beef and dairy industries Irish producers receive less than the intervention equivalent for their products, thus suggesting, for whatever reasons, that Irish food processors may be subject to higher cost levels than their European competitors. If this is the case, then in the situation where the procurement price for the industry’s raw material and its selling price are related to levels elsewhere in Europe despite processing costs being substantially higher, the financial viability of that enterprise may be in jeopardy. Unfortunately, this has been the situation of CSET in recent years.

(c) Raw material availability

38. The EC sugar market is in a surplus position, particularly when account is taken of the preferential imports of sugar from the ACP and other countries. This would not be a problem in itself if there was a buoyant world market on which this surplus could be sold at remunerative prices. Much of the sugar which enters the world market is traded under special agreements or contracts, and the price on the residual free market is notoriously volatile. Despite the fact that on two occasions in the past six years the world price of sugar has exceeded the EC price (thus leading to the imposition of a tax on exports of sugar from the Community), the Commission believes that its export surplus will normally impose a financial burden on the Community and that this requires changes in the EC sugar regime. Naturally, any attempt by the Commission to reduce sugar production to bring the EC market more closely into balance or to alter the nature of the sugar regime will have profound repercussions for the future of CSET.

39. The prospect of competition from artificial sweeteners, and particularly high fructose glucose syrup (isoglucose), in the market for liquid sugar must also have a bearing on future Community action. Isoglucose is produced from starch, usually maize, and its economics depend on the price relationship between maize and sugar. Since 1979 the production of isoglucose within the Community has been controlled by production quotas. Even without this restriction, however, the impact of isoglucose on the EC itself would be limited; its potential market is estimated at around 600,000 tonnes, or 6 to 7 per cent of EC sugar consumption. Production in other countries such as the United States is likely to be more significant, and could be stimulated by the present high world price of sugar. Isoglucose could therefore have an indirect effect on EC policy through its impact on the world supply/demand balance for sugar. Its effect will be to strengthen the Commission’s case for a reduction in the maximum quota level.

40. The Commission’s aim is to move eventually to a sugar regime which is regulated solely by price. If production quotas were entirely removed, and if the present sugar beet price was maintained, then production would expand, particularly in Denmark, France, West Germany and The Netherlands. To prevent an increase in production, the minimum beet price would have to be substantially reduced to make the crop less attractive to farmers, possibly by at least 25 per cent according to Commission calculations. In this situation, sugar production in this country, which is less suited to beet growing than some of the Continental EC member States, would be adversely affected.

41. The Commission’s current thinking is to retain production quotas but at levels closer to EC consumption. In its original proposal for the 1980/81 sugar regime, the Commission suggested a maximum Community quota of 10.4 million tonnes, or a reduction of 1.2 million tonnes on the previous maximum quota. It also proposed that this maximum quota be distributed with reference to the two best ‘A’ and ‘B’ sugar crops during the 1975/76 to 1978/79 campaigns, diminished by a coefficient of 0.9283. It further proposed that the ‘A’ quota should be 80 per cent of the maximum quota and the ‘B’ quota 20 per cent. These proposals were not acceptable to the member States.

42. The Commission has now put forward new proposals for the 1981/82 regime and subsequent years. Despite the fact that the world price of sugar has escalated to the point where taxes on the export of sugar from the EC are now in force, the Commission argues that the reasons for the present production shortfall are unlikely to persist, and that the current high world prices will stimulate future production and lead, as in the aftermath of the 1973/74 period, to a further period of low prices. It, therefore, has continued its attempt to reduce the present size of the Community maximum quota.

43. The main principle of the new regime is that it should be self-financing with the exception of the EC’s commitments under the Lomé Convention. The Commission proposes that ‘A’ quotas would be maintained at their current levels and that ‘B’ quotas would be defined according to reference production in the period 1975/76 to 1979/80, subject to the condition that no enterprise would be allocated a ‘B’ quota of less than 5% of its ‘A’ quota. This would have the effect of reducing the maximum Community quota from its present 11.6m tonnes to 11.2m tonnes. However, because the reduction would be achieved by shedding some of the existing ‘B’ quotas held by countries which have not used them at all, the practical effect of the proposed regime on EC production would be slight. In order to ensure that losses incurred in the disposal of surpluses of Community quota production over consumption are covered by contributions from producers, the Commission proposes that these losses should be covered, in the first instance, by means of a basic production levy with a ceiling of 2.5% of the intervention price for white sugar imposed on the combined ‘A’ and ‘B’ quota production. Should this be insufficient, it proposes the balance would be met by a levy on ‘B’ quota sugar alone up to a ceiling of 37.5% of the intervention price. Any remaining losses would be carried forward to the next marketing year. The Commission also proposes the abolition of the regionalised beet intervention prices.

44. This is not the place for a full review of the Commission’s proposals. The Joint Committee, however, was concerned to assess their implications for the viability of beet production and the sugar industry in this country. The proposals would result in the following quota allocation for Ireland:

Although the Irish industry has not to date produced up to 191,100 tonnes, the Company would prefer a larger ceiling on production, say a ‘B’ quota of 10% of the basic ‘A’ quota. Of more serious consequence is the proposed arrangement for financing the export of the Community’s surplus production, which would penalise production within the ‘A’ quota for the first time. If the levy followed the system applicable to the current ‘B’ levy, which is borne jointly by growers and manufacturers, a 2½% levy on ‘A’ quota production would reduce the beet price in Ireland by £0.60 per tonne (though no levy would be enforced at present because world prices exceed EC levels). The Company argues that this financing should be by means of a ‘B’ sugar levy only. Nevertheless, it welcomes the maintenance of its ‘A’ quota as a step forward on the Commission’s previous proposals.

45. The retention of the current Irish ‘A’ quota does not in itself guarantee that there will be domestic growers willing to contract sufficient acreage to supply this quota. The availability of raw material to the sugar industry is also influenced by the relative profitability of the sugar beet enterprises compared to other farm enterprises. Irish sugar production within the ‘A’ and ‘B’ quota levels in the past five years has been:—

These figures show that in three of the last five years, the Company has failed to produce enough sugar to fulfil its basic quota (182,000 tonnes). The Company argues the reason was below-normal yields due to adverse weather conditions rather than inadequate acreage. There are, however, warning signs on the horizon.

46. First, the relative attractiveness of the beet enterprise compared to other farm enterprises, as measured by the gross margin obtainable, appears to have declined in recent years. This point is demonstrated in Table 3.

TABLE 3

Percentage Change in Gross Margin Per Acre for Certain Enterprises, 1974-76 to 1977-79^a

Source: An Foras Talúntais, Irish Agriculture in Figures, September 1980

The price per tonne of sugar beet at 16 per cent sugar content has increased from £23.10 per tonne in 1977 to £27.00 per tonne in 1980, an increase of only 17 per cent. Although the absolute return to beet remains high relative to other enterprises, the level of inputs required is also high, with the greater risk that this entails. These factors are reflected in a fall in the number of beet contract acres being sought in recent years. The Company has admitted that in the 1979 campaiGn they would have taken more acres than they were offered. Second, the average scale of the beet enterprise on farms has grown considerably in recent years. Given a relatively constant acreage, this implies a fall in the number of skilled growers. There was in fact a decline from 11,200 in 1975-76 to 9,500 in 1978-79. Each grower who leaves the industry now reduces the total acreage by nearly 10 acres of beet compared to only 3½ acres ten years ago.

47. Changes in the future competitiveness of beet vis-a-vis alternative farm enterprises are hard to evaluate. Beet is grown as part of a tillage rotation, and its popularity will depend in part on the attractiveness of tillage in general. Future relative price movements and technological developments in increasing yields will also influence acreage. The Company has placed a strong emphasis on the importance of beet research and development in order to keep beet competitive. An increase in the relatively low sugar content would considerably enhance the profitability of the crop. The introduction of autumn-sown beet, on which research work is underway, could significantly increase potential yields and prof itability to the grower, although a pessimistic view suggests that winter beet types are not likely, to be economic realities in the 1980s²¹. An important reason for the investment programme to modernise the sugar factories is to shorten the length of the campaign period, thus contributing to higher beet and sugar yields as well as improving grower satisfaction. Another option the Company intends to explore is the possibility of long-term contracts which would provide attractive premia to growers willing to commit themselves to the crop for some years. Given that one of the reasons for the loss of attractiveness by sugar beet is its yield variability, the Joint Committee recommends that the Company should explore the feasibility of a crop insurance scheme linked to long-term contracts. Another option for the Company is to engage in beet growing itself, either indirectly through an extension of the land pool idea it has pioneered in the West (see para. 59 below) or directly through the leasing of land for this purpose. The Company regards the role of its agricultural services staff as vital to maintaining the future competitiveness of beet.

48. There are clearly many uncertainties with regard to the future availability of beet supplies for the Company’s factories. The Joint Committee notes the Company’s view that, on balance, yield increases will be sufficient to counteract any contraction in acreage, so that the total beet supply available to the Company will be maintained.²² This will require vigorous action by the Company to realise the potential for increased yields and to maintain the attractiveness of the crop from the farmer’s point of view.

(d) Plant efficiency

49. The Committee has earlier remarked (para. 33 to 37) on the way the EC sugar regime has highlighted the importance of processing costs for the financial viability of sugar manufacturers. In this context, the Committee now makes some comments on the efficiency of the Sugar Division’s operations. Economic efficiency in the sugar industry may be defined as the cost of producing one unit of white sugar after taking the value of by-products into account. The Committee did not have comparative figures on unit processing costs in sugar plants in different Community countries. However, the Managing Director of the Company in evidence to the Committee agreed that in many cases production costs per tonne in other EC factories would be only 60 to 70 per cent of costs in CSET.²³ These figures suggest the need for definite remedial action. The more important factors which influence efficiency include technical performance, plant size, the siting of plants in relation to raw material procurement, the age of plant and equipment, and management. Although the Committee did not have the resources to undertake a comparative study into each aspect of CSET efficiency, the following observations can be made.

50. Table 4 gives details of some measures of technical performance in the EC sugar industry. The data support the view that efficiency in the Irish industry lags considerably behind its competitors. Further evidence can be found in the evidence of the Company to the Committee that fuel efficiency in Irish factories averaged only 60 to 70 per cent of the Danish figure.²⁴

TABLE 4

Measures of Efficiency in the European Sugar Industry (1977-78)

Sources: CSET information based on figures by CEFS (European Sugar Manufactuires’ Association).

51. Two factors which adversely affect efficiency in Irish factories are their out-dated equipment and the small average size of plant. The Company’s factories are still operating with basically the same plant and equipment they had when they started. Very little investment was put in over the years to modernise equipment and keep the factories up to date.

52. The Company has embarked on a three-year £40m capital programme to improve the productivity of the Company’s factories. Although safety and environmental reasons and the need to improve product quality played a part in justifying the investment, its main purpose is to enlarge the throughput of the factories by about 20 per cent to enable a shortening of the campaign period. Table 5 indicates the changes in factory capacity as a result of this programme. The current programme follows the investment of about £30m between 1975 and 1979. A disquieting feature of the investment programme to date is its failure to bring about much of an improvement in the Company’s labour productivity. Calculations based on data presented in confidence to the Joint Committee show that an improvement of about 21% took place in the period 1973-74 to 1979-80. However, the greater part of this improvement took place in the two years prior to 1975-76 and there has been relatively little improvement since then. This is strange in view of the additional investment over the period 1975-79, even taking into account the company’s contention that much of it was required to meet higher safety, environmental and quality standards. A much higher rate of growth of productivity will be required from the remainder of the investment programme if the Company is to go some way towards offsetting the rice in labour costs it is experiencing.

TABLE 5

Sugar Factory Throughput—tonnes per day

53. The Company is also disadvantaged by the small average size of its plant. Its average throughput per factory per day is 3,600 tonnes whereas the Danish figure, for example, would be over 6,000 tonnes.²⁵ The throughput capacity of the four Irish factories is at present as follows: Carlow (4,900t.); Mallow (3,900t.); Thurles (3,500t.); and Tuam (2,200t.). Tuam in particular suffers from diseconomies arising from its small size and could not be justified on purely economic grounds. The Company, in evidence to the Committee, indicated that the production cost per tonne of beet is considerably higher at Tuam than for the other three factories.²⁶

54. The siting of the Company’s plants relative to the beet growing areas is a further unfavourable factor. On the Continent, the average distance over which beet is hauled to a factory is less than 10 miles, whereas the average distance to CSET factories is about 30-35 miles.²⁷ These long haulage distances are reflected in costs to the Company of around £2 per tonne of beet in the 1979 campaign. The problem is aggravated by the need to haul beet from East Cork and the southern counties to the Tuam factory.

55. Sugar manufacture is a highly energy-intensive process, and the costs of processing have risen sharply in response to the dramatically increased cost of energy. The company originally used coal in its factories and switched to take advantage of cheaper oil some 10 to 15 years ago. It is now one of the largest users of oil in the country, requiring around 90,000 tonnes annually. Three of its four factories have been converted to coal operation for the 1980-81 campaign ²⁸ which will reduce its oil needs by half. The Company was successful this year in obtaining its coal supplies from local merchants, but longer-term arrangements for the import of coal need to be considered. the possibility of a joint project to import coal with the ESB (for its Moneypoint coal-fired power station) should be investigated. It is also possible that natural gas could be used as a power source in the future, and the Joint Committee recommends that this be kept in mind in the future planning of a national gas grid.

56. The haulage of beet is left to private hauliers and CIE with whom a contract price is negotiated annually. However, with so many plants and ancillary activities throughout the country, the Company also operates its own road transport fleet which is one of the largest in the country. The Company has on occasions investigated whether there would be cost savings in using private hauliers to a greater extent but it has concluded this would not be to its advantage ²⁹ Rail haulage is an important element in the logistics of the beet campaign and is vital for the supply of the Tuam factory. In response to pressure from CIE the Company has built a collection depot at Wellingtonbridge in Co. Wexford which enables a considerable saving to CIE in the number of wagons required to transport a given quantity of beet. CIE has now asked the Company to build three more such depots, two of which would be used for the supply of the Tuam factory. The reluctance of CIE to continue rail transport of beet is a further element to be taken into consideration in deciding the future of the Tuam factory.

57. This discussion of the efficiency of the company’s sugar operation suggests that the present size, age and location of the Company’s plants results in a higher level of operating costs than can be sustained in the European environment. In order to remain competitive, the Company must try to reduce these costs relative to its competitors.

(e) The Tuam sugar factory

58. Tuam is a drain on the Company’s resources for two reasons. First, the small scale of plant makes it a high cost producer. In recent years the factory has processed on average around ten per cent of the Company’s sugar throughput but in 1979 it employed 21 per cent of the workforce in the four sugar factories. Second, insufficient beet is grown in the Western counties to supply the factory³⁰ This makes it necessary to pay premium prices as an incentive to grow and transport subsidies to haul beet from as far as East Cork to keep the factory going. CIE’s reluctance to continue to transport beet by rail to the factory, at least until CSET is prepared to make substantial investment in handling facilities, has already been adverted to. In Tuam’s favour, it should be said that its capacity has been necessary to the Company in the past to enable it to process an amount equivalent to Ireland’s ‘A’ quota within a reasonable time.

59. The Company is pursuing a variety of policies to try to reduce the adverse cost consequences of maintaining the Tuam plant in operation. Growers who produce for the factory are eligible for a subsidy of £35 per acre in the current year through being allowed one tonne of pulp per acre of beet sown at £60 per tonne instead of the standard price of £95 per tonne. Western growers qualify for a freight subsidy rate 50 per cent above that applicable to growers in other parts of the country. The Company is also developing a land pool whereby it leases land from farmers for renting to other farmers willing to grow a tillage rotation, including beet, over a number of years.

60. Nevertheless, the prospects for increasing or even maintaining the beet acreage in the West are not bright. The Company has restricted investment in the Tuam factory to a minimum, and its capacity will not be enlarged under the current modernisation programme (see Table 5). The closure of Tuam, when all factors including the need to extend the other factories to make up for the loss of its capacity are taken into account, would result in considerable savings for the Company. The Committee believes that the closure of Tuam is inevitable, and that there is a strong case for doing it now rather than later. The interests of growers and employees must be considered in the manner suggested in paras. 115-118, where the Committee recommends that closure should take place only when suitable alternative employment has been provided in the town. In the meantime, the cost to the Company of maintaining employment in the Tuam sugar factory should be separately indentified and reimbursed by the Government for this temporary period.

(f) Cane refining at Carlow

61. The Committee would like to make reference to the cane refining operation at Carlow to complete this review of sugar operations. Each year the Carlow factory processes approximately 30,000 tonnes of cane sugar imported from ACP countries. The origin of this arrangement lies in the pre-EC period when the Company imported cane sugar in order to have a supply of cheap sugar for sale to the confectionery goods industry exporting to the UK. It also gave some extra guarantee of security of supply at a time when the Company was breaking into the Northern Ireland market for the first time. When the sugar protocol to the Lome Convention was signed, the Company argued successfully that its imports should form part of the statistical base. The Company considers that over the years the operation has been beneficial to it, although with increases in the cost of refining there has been a squeeze on profitability over the last two years.³¹ If this arrangement is to be continued, then it requires further heavy investment to keep it efficient and competitive in addition to the investment programme under way on the beet processing side. The cane refining operation is subject to the same constraints as beet processing, in that both the raw material and sugar prices are essentially outside the control of the Company. The Joint Committee is not convinced that the operation will be sufficiently profitable in forthcoming years to yield an adequate return on the investment required, and it urges that a thorough financial appraisal be undertaken before funds are committed to this project.

(g) Sales and marketing policy

62. The Company markets sugar on the domestic, Northern Ireland and export markets, and to both consumer and industrial users. The home market accounts for the greatest share (160,000t.) of total Company sales of 212,000t. Although this market is now open to imports under EC rules, the Company remains virtually the sole supplier. Sales to Northern Ireland have expanded following a concerted marketing operation after entry to the EC; the Company is now the major supplier to that market. Export sales opportunities are of a sporadic nature with some regular activity in the U.K. market.

63. The Company stepped up its marketing activities in the wake of EC membership. The brand name “Siucra” was introduced for all its products on the home market. It took a majority shareholding in Sugar Distributors Ltd., the largest undertaking in the sugar distribution sector. Although these policies have been successful, the Company’s very predominance in its two major markets leaves it vulnerable to increased competition. Some penetration of its home market base must be expected in the years ahead. The Company is forecasting some growth in sales to the manufacturing sector, but these forecasts must be judged in the light of current difficulties in the sugar confectionery and sugar goods industries and possible competition from substitutes such as isoglucose. Its market position in the North, although protected by its association with a well-known Northern brand name, could be threatened by its main competitors. Any loss of sales on either the home or Northern Ireland markets would require additional efforts to find export markets, with the prospect of lower unit returns.

(h) Pricing policies

64. The Joint Committee has already noted that the Company’s pricing options for either raw material or product are narrowly circumscribed by the operation of the EC sugar market regime. The producer price for sugar beet is settled each year by negotiation between the Company and the growers. Since 1974 the contract price has been based on a formula made up of three elements: the basic price for sugar beet applicable to Ireland as determined by the EC; a contribution in respect of the price at which beet pulp is sold over and above the cost of drying; and a payment in respect of sugar sold over and above the intervention price. This last payment is based on an agreed division of the excess price on a 60/40 basis between the grower and the Company respectively. The actual price paid to the grower depends on the sugar content of the beet. Should production exceed the ‘A’ quota and come within the ‘B’ quota, the excess is subject to a production levy which is borne, again on a 60/40 basis, by the grower and the Company, although in the last two years in which ‘B’ quota sugar has been produced the entire cost of the levy was borne by the Company for the relatively small amounts involved. The price received by Irish growers has tended to be a little above the basic minimum EC price in recent years because of the sugar-sharing element.

65. Because of the timing of the EC annual price review and the necessity to accurately determine pulp prices, it is not possible to confirm the actual price of sugar beet until late in the marketing year. The grower is, in fact, only given an outline of the price early in the year and he contracts to grow beet on that basis. For the 1980 campaign, the Company for the first time guaranteed that the formula would yield a minimum price (£27.00 per tonne at 16 per cent sugar content). This price was a little higher than could be justified on the basis of the three elements at the time of negotiations. The Company, however, was concerned to ensure that beet growing remained attractive compared to alternative enterprises in order to retain its body of growers. It was also important to maintain acreage in view of the threats to Ireland’s sugar quota under the Commission’s 1980 proposals. The beet price has in fact increased rather slowly in recent years, particularly when account is taken of the rapidly growing costs of production (para. 46). Under the Commission’s latest proposals for the 1981-82 sugar regime, the application of a levy of up to 2½% on ‘A’ quota beet would reduce the price of beet by up to £0.60 per tonne. In addition, the Commission’s proposal to abolish regionalised intervention prices, if accepted, would reduce the grower’s guaranteed minimum price by £1.04 per tonne, though some of this would be recouped through the sugar-sharing element. The Company does not believe it would be practicable to reduce the beet price by these amounts and still maintain the desired acreage level.

66. The grower is also entitled to financial support towards the cost of transporting beet to the factory under EC regulations, and an element is built into the factory processing margin to take account of this. In the Irish situation, the Company has an agreement with growers to subsidise transport on a mileage basis, the amount of subsidy working out at around 50 per cent of the total cost. The total amount paid in subsidy according to the Company, is approximately what is allowed by the EC.³² The Company also makes available items such as seed, herbicides and fertilisers to growers on credit arrangements where the rate of interest is equal to the average cost of borrowed funds to the Company.

67. With respect to the pricing of white sugar, the Company must seek approval from the National Prices Commission (NPC) for price increases. The NPC has its own criteria by which firms must justify applications for a price increase, and these are based largely on cost considerations. The Company believes that in earlier years the market could have borne a higher price increase than that approved by the Commission, to the extent of additional revenue to the Company of £6 to £7 million, but that this is no longer the case. ³³ Thus, the threat of external competition rather than the NPC is now the major factor in determining the sugar pricing policy of the Company. However, the Company has been critical of the cost to it of delays by Government in sanctioning price increases recommended by the NPC. CSET quantifies the loss of revenue in the two years to September 1978 at up to £4 million. In view of the deterioration in the financial position of the Company, the Joint Committee urges that the Minister for Industry, Commerce and Tourism should deal promptly with CSET applications in the future.

68. The cost of Company support to the sugar confectionery goods industry in the past should also be recorded. This industry was under pressure between 1974 and 1976 because of the operation of the Monetary Compensatory Amount (MCA) system. No MCAs were paid on the sugar in such products as biscuits and confectionery and, as a result, the Irish sugar confectionery industry was at a serious disadvantage relative to its UK competitors. At the request of the Government, the Company sold sugar to the firms involved at a reduced price calculated to make up for the loss of MCAs, the cost of which was borne by the Company itself.

(i) Conclusion

69. The Company’s sugar operation will require vigorous remedial action to secure its long-term viability. There are threats from four different directions:

(i) Ireland has a comparative disadvantage in sugar beet production within the Community. Production here is maintained only by the Company’s heavy investment in beet research and development, and by the protection given by the quota structure of the EC’s sugar regime. The Company is vulnerable to any change in the EC sugar regime which would reduce the real returns from growing beet.

(ii) The nature of the EC sugar regime imposes a unique discipline on sugar manufacturers, in that not only is there a common selling price for sugar in the Community related to the Community intervention price, but growers are also guaranteed a common minimum price for beet. To the extent that processing costs are rising here at a faster rate than elsewhere in the Community, without any compensating price increases due to exchange rate changes, then the margins of the Company are continually squeezed.

(iii) Even if the rate of cost increases was brought into line with that in other Community countries, the Company would be disadvantaged by its high unit costs of production (on average 50% higher than those of its competitors) imposed by the size, age and location of its plant. The consequence of this is that the Company is unable to generate a sufficient flow of funds to finance modernisation and reinvestment. Even if the Company was permitted to lower the price of beet to farmers to compensate for this cost disadvantage (as it would be, for example, if the proposal to abolish regionalised intervention prices for beet was accepted), it would feel unable to, because of the loss of growers and acreage this would entail.

(iv) The Company faces greater competition on its major markets for sugar in the Republic and the North of Ireland which may result in a reduced market share, with a consequent reliance on lower-priced export sales which would further erode the Company’s profitability.

70. In the face of these difficulties, the Company embarked in 1975 on a modernisation programme which will involve the expenditure of £70 million over an eight-year period. £30m has already been spent and a further £40m is to be spent over the period 1980-82. This programme was not justified to the Committee on the grounds that it would yield a worthwhile economic or financial return. It was presented as a matter of survival. It is a question for public discussion whether the survival of the Company’s sugar operation, for a possibly limited future, is worth the investment of a further £40 million of public resources, in addition to a possible public subvention on an annual basis for some time, given that these funds have an opportunity cost in terms of employment opportunities foregone both in the State-sponsored sector and elsewhere.

71. The Joint Committee accepts that the modernisation programme is justified to ensure the survival of the Company. However, it appears to the Committee that the Company will be unable to service its borrowings unless it achieves substantial improvements in its processing efficiency, even if the Government takes steps to improve its capital structure. In the Committee’s view, this implies that the Company must in future concentrate its sugar operations at its most viable plants. The additional investment necessary to ensure that adequate capacity is available at these plants to handle the Company’s beet intake within a campaign period of 100 days should be made in the context of the arrangements to safeguard the interests of growers and employees proposed in Section VII (paras. 115-118).

IV FOOD DIVISION

(a) Background

72. The Company moved into the food processing business at the time of the First Programme for Economic Expansion (1958-63) in response to a call from the Government to the State-sponsored bodies to contribute to the industrialisation effort. The Erin Foods division was set up as a processor of vegetables using the techniques of dehydration, freezing and canning and as a manufacturer of formulated products such as soup mixes. Processing plants were established in the Company’s four factory towns and, in addition, links were established with a number of joint-enterprise plants. These joint-enterprises involved the Company and local farming and commercial interests at Midleton, Skibbereen and Glencolumbkille. The Limerick processing firm, J. Matterson & Sons, was acquired in 1968. In its early years, Erin Foods was subject to restrictions on selling on the home market, and gave early emphasis to export sales. An initial attempt to establish the Erin brand in the U.K. retail market was unsuccessful, and the Company has since concentrated there on bulk sales of dehydrated vegetables and on sales to the catering sector through the joint marketing arrangement with the H.J. Heinz Company. CSET began selling on the European market in 1966. A feature of the Food Division’s development has been its high level of technical expertise and product quality. It is today the only major Irish-controlled enterprise in the branded food processing sector.

73. Since entry to the EC, turnover of the Food Division in nominal terms has grown from £9.2 million in 1972-73 to £21.0 million in 1978-79. In real terms, however, volume throughput has been static, and the proportion of Group turnover contributed by the Food Division has fallen from around 28 per cent in the early 1970s to approximately 17 per cent in 1979. In 1972-73, 5,900 acres of peas and other vegetables (excluding potatoes) were grown for the Company. Additional acreage was grown in some subsequent years, but the total had fallen back to 5,900 acres (excluding potatoes) again in 1978-79. The Division is responsible for approximately one-third of the vegetables grown in the country. Payments to growers were worth £1.6 million in the 1978-79 crop year.

74. A breakdown of Food Division sales indicates the predominance, particularly in export markets, of industrial and bulk sales which tend to be uneconomical due to low margins and severe competition. The Joint Committee has singled out six aspects of the marketing area for comment. These are: the Division’s performance on the home market; the problems with industrial dehydrate sales; the Heinz-Erin link; the development of new markets for value-added products; future prospects on the frozen foods side; and the possible development of a joint marketing strategy by Irish food processors under a common brand name.

(b) The home market

75. The domestic market now accounts for the bulk of the Food Division’s sales. Its share of the total has been increasing in recent years. The Division markets a range of dried soups, sauce mixes, Hot Cup instant beverages, air dried vegetables and potato flakes on both retail and catering markets, and in addition a range of canned and bottled products under the Matterson label. The Erin brand has a significant brand share and is the market leader in the instant beverage market. This segment of the Company’s total food business is viable in its own right and market prospects should continue buoyant although the Division’s very success to date will make the further expansion of sales more difficult.

(c) Industrial dehydrate sales

76. The Food Division faces its main problems in the production and sale of dehydrated vegetables to industrial users. The Division is a major processor of such products by world standards. It accounts for around 30 per cent of EC production of dehydrated vegetables. The industry has been adversely affected by EC market regulations in that the application of the Common Agricultural Policy in the main agricultural commodity markets has created a very difficult commercial environment for the vegetable dehydration industry. In order to obtain its raw material, the industry must pay growers prices which make the production of vegetables competitive with other commodities protected by the CAP, whereas the final output of the industry does not benefit from equivalent protection. In fact, the price of dehydrate output is determined by the level of competition from external suppliers to the Community, and this has intensified in recent years with reductions in the level of EC tariffs.

77. As a result, although European demand for dehydrate product has remained approximately steady, imports have been gaining a growing share of this market and production within the EC has declined. Many dehydrate producers have gone out of business or, as in the case of Erin Foods, have suffered considerable losses. The European industry has asked for protection in the form of a production subsidy which would enable it to maintain employment but the Commission may take the view that this is not in the overall interest of the Community’s trading relationships with non-EC suppliers. In the absence of protection at EC level, the future would seem to lie between continuing financial losses or reduced employment in industrial dehydrate production within the Food Division.

(d) The Heinz-Erin link

78. The Heinz-Erin link has two elements. In the U.K., a joint marketing company established by Erin Foods and the H.J. Heinz Co. sells a range of specially formulated catering products through the agency of the Heinz salesforce. In the Republic, the Food Division acts as a sales agent for Heinz products. It has been argued that the procedure in the U.K., whereby the products of Erin Foods are sold by the Heinz salesforce, results in some of these products being treated in a ‘second best’ fashion, particularly in lines such as soups where Heinz have their own competing range, but CSET do not regard this as a serious disadvantage. Nor has the alternative of going it alone and setting up an independent sales infrastructure proved attractive. CSET also views the agency for Heinz products in this country as an advantage for it. Sales of catering products to the UK market have generally been a reasonable business for the Company in the past, but extreme competition has led to a decline in volume sales to this sector.

(e) New markets

79. The Company has tried to develop markets for branded/added value products in Europe and further afield in recent years. Sales have increased from about £¼ million in 1976-77 to over £1 million in 1978-79 and the Company has devoted increased marketing resources to this area. Difficulties in Erin Foods relating to the Far East market may provide a setback to this growth.³⁴

(f) Frozen food sales

80. In evidence to the Joint Committee, the Company was not at all optimistic about its involvement in the frozen foods sector. At present, its sole direct involvement is through the “Harvest Time” range of catering pack frozen vegetables sold on the home market and both sales volume and market share are low in a highly competitive market dominated by the major U.K. producers. It also does some packaging on contract for other companies as opportunities arise. The Company pointed out that the frozen vegetable sector of the frozen food business in Ireland was worth only £5 million of a total market of £70 million. To make a venture worthwhile, the Company would need to be able to offer a range of frozen products, apart from vegetables, under its own brand name, possibly in co-operation with other Irish food producers. The Company, however, felt there would be difficulties in co-ordinating the marketing efforts of a group of food processing enterprises, some State-sponsored, some private and some co-operative, to the extent that they would be prepared to merge their marketing identity under a common brand name. To establish a presence in the market place would require a major investment in marketing. Because of the small size of the Irish home market, a frozen foods venture would have to develop sales to the U.K. with few obvious advantages for doing so. Although these difficulties do not give grounds for optimism about the likely success of any expansion of the Company’s involvement with frozen vegetables, the Committee suggests that the Horticultural Development Group established by the Minister for Agriculture should discuss the issues involved in the context of its review of future prospects and developments in the horticultural industry in Ireland.

(g) Plant operations

81. A serious problem for the Food Division is the scattered nature of its production facilities, which include seven plants in all. The problem is compounded by the inadequate utilisation of this capacity. As was forcibly stated in written evidence from the Fastnet Co-operative Society³⁵ the value of some of the smaller plants in remoter areas cannot be measured in commercial terms alone. The Company’s operations were the earliest, and sometimes the only, experience of industrialisation in these districts, and they have contributed greatly to regional development. On the other hand, the very success of the drive for regional industrialisation has reduced the force of the argument for maintaining Company operations at some locations for social reasons.

82. As part of its efforts to reduce its losses from its Food Division, the Company announced in November 1980 its decision to close its Carlow food factory and to cease market and financial support for food products processed at the Fastnet Co-operative Society Ltd., Skibbereen. It has also stated that it will take every reasonable step to secure alternative productive employment in Carlow and Skibbereen to coincide, if possible, with the phaseout in 1981 of the food processing. The Joint Committee appreciates the reasons for the Company’s decision. It believes, however, that in the event of alternative projects not coming on-stream within this time period, the cost to the State of higher unemployment (in terms of taxes foregone and unemployment benefits paid), arising from any redundancies from the closure of these factories, would justify the payment of a subvention from the State to keep these factories open for a temporary period until such time as alternative jobs have been provided. This argument is spelled out in more detail in paragraphs 115-118.

83. The Joint Committee asked the Company about its experience with the Tuam potato processing plant. This plant purchased potatoes on contract from farmers to produce dehydrated potato products. The operation faced the price and cost problems created for dehydrate processors by EC regulations described in paras. 76 and 77 above. In the case of dehydrate potato products the selling price was determined by competition from American and Canadian processors. The Tuam plant was also disadvantaged by its small scale of operation, and the profitability of the plant was adversely affected by the failure of growers to honour their contracts in some years. The Company announced its intention to phase the plant out of production. Local farmers and other interests then formed a co-operative to market branded potatoes for the ware market, while CSET agreed to maintain the plant to process off-cuts from this operation. In evidence to the Committee, the Company agreed that the co-operative had a good approach to the question of procurement, but suggested that it would remain a marginal type of operation financially unless throughput can be considerably increased and control maintained over its members.³⁶

(h) Conclusion

84. The Committee estimates that the cumulative trading loss of the Food Division has amounted to about £5 million on the basis of the Company’s published figures over the ten years to 1978-79. The true losses are considerably higher if account is taken of overhead and working capital charges borne by the Group. A further substantial loss is expected in 1979-80, to which the financial irregularities uncovered during the year have contributed. In the past, Food Division losses and overheads have been carried by the Sugar Division, but the analysis of the latter’s situation in Section III has indicated that this is no longer possible. There is a need to redefine the Company’s role and responsibilities in the food area.

85. The Company has stated its objective for the Food Division is “to achieve a realistic return on its investment in the food processing area by reduction of dependence on commodity selling and by the development of profitable new business in branded products on home and export markets”. Until recently the preservation of employment in the Company’s food plants has taken priority over the need to prune its operations if profitability is to be achieved. The Company has now decided to reduce the scale of its operations in food processing with its decisions regarding the Carlow and Skibbereen plants. The problems with bulk dehydrate production were analysed in paras. 76 to 77. It is apparent that without EC intervention, the production of industrial dehydrates will continue to lose money. The Committee agrees with the Company’s decision to reduce its dependence on this business. The development of new branded business may be facilitated by the introduction of new “instant food” products at present in the pipeline which continue the Company’s record of technological innovation in this area. However, given the fierce competition which the Company faces in the branded market also, the Joint Committee believes that the Company’s strategy to remain a viable business in this market needs to be spelled out in greater detail. If the Company fails to meet the financial targets suggested in para. 16 within a reasonable period, then the Joint Committee’s opinion is that the Company should dispose of its food operation under the arrangements suggested in paras. 115-118. If, however, the Government decides for employment or regional development reasons that it wishes the Company to maintain its food operation, a financial subvention to compensate the Company for losses arising from this course of action would make explicit the opportunity cost of using public funds to maintain employment in this way.

V AGRICULTURAL TRADING DIVISION

(a) Introduction

86. Although food processing has been the most spectacular of the Company’s diversification initiatives, the Company is involved in a range of other activities ancillary to, though related to, the main sugar operation. These activities include animal feedstuffs manufacture, agrochemicals trading, fertiliser trading, limestone quarrying and general and agricultural engineering, and are grouped under the Agricultural Trading Division. The share of this Division in Group turnover has risen from 24 per cent to 31 per cent of the total between 1970 and 1979. Total sales in the latter year amounted to £39 million, compared to £66 million for the Sugar Division and £21 million for the Food Division. The Joint Committee has not examined the operations of each ancillary activity within the Agricultural Trading Division in detail. Given that further diversification away from the sugar operation would mean either the expansion of existing ancillary activities or the addition of new activities to the range, the main focus of the Committee’s examination has been on the problems and possibilities of the existing activities in order to assess their potential for future development.

(b) Animal feedstuffs

87. The Company’s involvement in the animal feed market arose because of the need to dispose profitably of the main by-products of the sugar manufacturing process, beet pulp and molasses. Sales in the year ended September 1979 amounted to about £14 million. Under EC regulations, the grower has a contractual right to the free return of fresh pulp ex-factory. What happens in practice is that the Company dries the pulp, sells it to growers at its market value and growers are compensated for the excess of the sale price over drying costs by an element in the sugar beet pricing formula. The demand for beet pulp as an animal feed fluctuates from year to year, but in recent seasons the Company has had no difficulty in disposing of its total output. Production in the 1978-79 season totalled 130,000 tons.

88. The return from beet pulp is a function of the sale price and the cost of drying. Recently, returns have been squeezed both because of competition from substitute feeds and the vastly increased cost of drying which is the central element in processing costs. In principle, this should not affect the profitability of beet pulp to the Company, as the contract price arrangement means that it is, in effect, selling on commission on behalf of the farmer. However, to the extent that the Company’s full marketing and drying costs are not charged to the grower, then the beet pulp activity acts as a drain on the Company’s resources.³⁷ The Company is pursuing a policy of upgrading the beet pulp through the addition of molasses to make a more balanced ration. The pulp element in the upgraded product has a higher value, and this gives room for higher returns both to farmers and the Company. Up to 40,000 tonnes of upgraded pulp products were sold last year.³⁸ Over the longer term, beet pulp should make a marginal contribution to Company profitability particularly through the Company’s share of the value added through upgrading, but the potential for expansion is obviously limited by the volume of sugar beet production.

(c) Molasses trading

89. The molasses by-product from the beet processing operation is used, in part, as an input into the Company’s own animal feed operation in the production of dried molassed pulp and, in part, is sold direct to the feed compounding trade. The demand for molasses has grown rapidly in Ireland in recent years, and now greatly exceeds the surplus available from the Company’s own production. The Company therefore became involved in the import of molasses, and total sales have increased from 22,000 tonnes to 65,000 tonnes over the last five years. The greater share of these sales has been to the animal feed trade with the remainder going to farmers for direct on-farm use.

90. Other companies have followed the Company’s lead and have become involved in molasses trading, and there is now greater competition in this area. The Company has made the case for a deep-sea terminal which would permit the import of molasses in bulk in large cargo ships if it is to remain competitive. It is also considering the desirability of a link with a Tate and Lyle subsidiary that is established in the North of Ireland market to plan a total Ireland marketing arrangement. The profitability of molasses trading will be affected by the fact that the price of molasses is subject to regular fluctuations, but the Committee agrees that the prospect of a longterm growth in Irish demand would seem to justify the capital expenditure necessary for the Company to consolidate its market position.

(d) Agricultural engineering

91. The Company became involved in the production of agricultural machinery as a result of the efforts in the late 1940s to mechanise the harvesting of sugar beet. The original brief of the Agricultural Engineering Division was to service the Irish sugar beet industry and to function as a commercial machinery producer. It has been very successful in producing a range of machines specially designed to meet Irish conditions and it has also achieved export sales. Total sales amounted to around £4 million in 1978-79, of which about half went to export markets. The Division’s range of machinery now includes vegetable harvesters designed to meet the requirements of the horticultural industry. The Company took a further step in the engineering area in 1979 when a new plant was opened at Tuam to supply mainly specialist engineering facilities for the Company’s capital programme.

92. The Division has operated under a number of constraints which have adversely affected profitability. It caters for a rather specialised sector of the farm machinery industry, and is concentrated on harvesting machinery, sales of which are bunched at one particular time of the year. There are production cost problems because of the relatively small scale of output. In addition to these problems, which have been more or less inherent in the Division’s operations since its foundation, it has been hit in the last two years by falling demand both at home and abroad. Uncertainty over the future impact of the EC sugar regime on the British beet industry and the squeeze on farm incomes here at home has led to a reluctance on the part of farmers to invest in new machinery.

93. The future of the Company’s agricultural engineering activities should be considered in the light of plans for the industry on a national scale. The virtual absence of a national agricultural machinery industry (CSET, despite its restricted and specialised nature, is still by far the largest enterprise in the industry), and the consequent need for imports to meet farmers’ demand for machinery, has drawn much unfavourable comment and many suggestions to create a bigger Irish Presence in this field. To do this successfully, it would be necessary to restructure the Company’s engineering operation and to properly capitalise it to enable it to undertake development. The Joint Committee understands some proposals are currently being considered in a joint study by the National Board for Science and Technology and the Industrial Development Authority, and it hopes that these will provide a basis for further progress in this area.

(e) Fertiliser trading

94. The involvement of CSET in fertiliser distribution began during the Second World War, and has grown and expanded since then. Beet compound fertilisers are blended under contract for the Company and, in addition, non-beet fertilisers are procured and delivered to the Company’s growers and, to an extent, to non-growers. Fertiliser sales were valued at about £9m in 1978-79. The Company has accounted for between 7 and 11 per cent of the national fertiliser market over the last decade. In 1977, the Company made an attempt to enter the blending business itself. It purchased a blending plant in Waterford, but because of pressure from those interests that would have been adversely affected by the move, this development was not permitted to proceed.³⁹ Since then, a number of other private firms have entered the blending business, so it is no longer feasible for the Company to do so. The Waterford premises are at present used as a store for animal feeds.

95. Future developments in this area will depend on trends in beet and vegetable growing. The Company has a strong marketing position among the country’s tillage farmers and the Joint Committee believes fertiliser trading should continue to make a contribution to the Company’s overall performance.

(f) Quarrying

96. The Company has been involved in the quarrying business since the early 1950s. Ground limestone is an important aid to increasing sugar beet yields through correcting soil acidity. The Company at present operates six quarries and holds a one-third share of the national market for ground limestone. Sales amounted to around £2 million in the year 1978-79. Since the early 1970s, the Company has begun to exploit the potential for by-products from its quarries; and sales of other stone products, such as crushed stone, have increased steadily. The withdrawal of the transport subsidy for ground limestone and the depressed situation prevailing in farming has resulted in a sharp drop in sales in the current year. However, there is a continuing requirement for ground limestone given Irish soil conditions. Provided the Company can remain competitive vis-a-vis other quarries the business should be able to maintain its market share and contribute to the profitability of the Group.

(g) Agricultural chemicals

97. The distribution of agricultural chemicals on an agency basis is a relatively new development for CSET. The Company maintains a warehouse in Dublin and a range of depots throughout the country. An efficient packaging facility has been installed at the Dublin store, and the Company hopes to persuade its principals to package in this country. The section relies totally on trading, and its continued development and profitability depend on its being able to procure new products and lines of business. The manufacture of chemicals, whether for the agricultural industry or not, is not contemplated by the Company at this moment.

(h) Third world consultancy

98. In recent years the Company has had some experience in advising on food processing operations in less developed countries. It has now formed a company, Devimpco, in conjunction with two engineering consultancy firms and in association with An Foras Taluntais, to offer a consultancy and project management service in agricultural and food processing development to the less developed countries primarily. This activity should make a minor contribution to Group performance in the coming years.

(i) Conclusion

99. Almost without exception, the activities in the Agricultural Trading Division have been developed because of the need to service and support the basic sugar operation. This has been both the strength and weakness of these activities. For those products where the Company’s prime interest is in trading, the Division has ensured a strong marketing position for the Company. However, further expansion must be constrained by the rate of growth of the domestic market, and this is unlikely to be rapid. Only agricultural engineering has broken out of this constraint through the development of export sales, despite the problem of being specialised in a narrow range of machinery. These ancillary activities have been developed and supported on the basis of funds generated by the sugar business. The inability of the sugar side of the Company to sustain this support in the immediate future will limit the possibility of extending or adding to them. The Committee concludes that, if a new initiative is taken to reduce the losses sustained in the agricultural engineering operation, the existing activities in the Agricultural Trading Division will make a worthwhile contribution to the Company. On their own, however, it would be unrealistic to expect these activities to alter dramatically profitability or employment prospects.

VI ORGANISATION AND MANAGEMENT

(a) Management structure

100. The present Company structure has evolved to accommodate its growth from a homogeneous business to a multi-activity firm. The main features of the present structure are the various specialist functions emanating from Head Office and a divisional operating arrangement which groups activities under three headings—sugar, food and agricultural trading—with control of operations through four area managers, one for each sugar factory area.⁴⁰ As the Company has grown, so this management structure has come under increasing strain. In 1979, the Company commissioned a firm of consultants to recommend changes in its management structure. In the light of the consultant’s report, the Board has now proposed changes to come into effect from the year 1980-81.

101. The reorganisation is designed to create a structure consisting of a Holding Company, which will be responsible for Group functions, and six subsidiary operating entities, or divisions, acting as independent profit centres. It is intended that each division will have the necessary powers and resources to carry out its functions as a separate entity in all practical matters, within a framework of Group decision-making and policy. The divisions envisaged at present are Sugar, Erin Foods, Engineering, Quarries, Animal Feeds and Agricultural Chemicals. The advantages to be gained from the new arrangement include greater clarity of divisional objectives and responsibility, greater transparency of the divisional financial structure, the creation of a divisional climate of enterprise and accountability, and the creation of a structure suitable for diversification. The Joint Committee welcomes the proposed reorganisation and hopes, after proper consultation with the staff interests involved, that it will be implemented at an early date.

(b) Industrial relations

102. The Company has had a record of industrial peace on the shopfloor over the years. The absence until recently of industrial relations problems has been attributed to a number of factors⁴¹: a management tradition in which personnel policy and industrial relations are considered an integral part of each manager’s function; agreement early-on to a system of written agreements with the unions setting out dispute procedures; a system of consultation developed through works committees over a period of years; and the small town social environment in which the Company’s factories are located. The dispute in 1980 at the Carlow sugar factory was the first industrial dispute in the Company for over 30 years.

103. The Company has indicated that it intends to develop further its communications channels with its workforce. It has recommended that the factory works committees be converted into Works Councils. The Company also has experience of worker directors on its Board under the Worker Participation (State Enterprises) Act, 1977. A representative of the Association of Scientific, Technical and Managerial Staffs Trade Union, who is also a worker director of CSET, stated that the advent of workers on the board would bring about some change. The Managing Director of the Company went further and stated that the worker directors were contributing very constructively to the operation of the Company. He went on to say that “... we need to strengthen the organisation underneath so that there will be a better means of reporting back and getting it speeded up. We have so many factories, different unions and locations, that it is not easy for the directors to keep in touch”.⁴² The ASTMS also stated that there were great difficulties in communications and made the point that adequate structures were required to elucidate and communicate the views of employees.⁴³

(c) Conclusion

104. The Company has undergone rapid growth and change in the past two decades. It is now embarking on a management reorganisation to reflect these changes that have taken place. The workforce is also affected by existing and proposed changes in company activities, technology, work practices, etc. The Company has developed an elaborate set of procedures for communicating with its workers which has contributed to the good industrial relations record in the Company in the past. The Joint Committee supports the efforts of the Company to improve and develop these procedures. It hopes that the recent industrial dispute does not indicate the beginning of a new trend in the Company’s industrial relations.

VII CONCLUSIONS

(a) Overview

105. The previous Sections have described the operations of the Company, its current plans and its financial position. A number of problem areas have been identified, the most important of which can be highlighted as follows:

(i) The Company’s history of consistent if unspectacular profitability appears to be at an end for the immediate future. Among the causes of this change in the Company’s fortunes are unfavourable cost/ price developments, high interest rates and depressed market conditions, arising from the downturn in agricultural incomes, for some of its ancillary activities.

(ii) Financing of the Company’s sugar factory modernisation programme almost solely through borrowing has led to a very unbalanced capital structure in which the Company’s debt/equity ratio is seriously out of line with comparable manufacturing enterprises. It needs a £25m share capital injection to overcome its present financial weakness, and further injections of share capital to support its additional £40m modernisation programme.

(iii) The ability of the Company to overcome its difficulties in the sugar sector is limited by the nature of the EC sugar regime. As long as the processing margin allowed under this regime is related to cost levels close to some European average or norm while Company costs exceed these levels, the financial viability of the Company will be at risk.

(iv) Fixed overheads represent a problem in relation to the current level of throughput in some areas, particularly food and agricultural machinery. Whereas these activities could be carried by the remainder of the Company in more profitable times, this is no longer possible.

(v) As a State-sponsored company, CSET undertook a non-commercial role in relation to regional development. This was a pioneering role in the 1950’s and 1960’s when Company factories were often the first experience of industrialisation for many rural areas. This has left the Company, however, with a factory structure which is scattered and with many plants which are below an economic size, thus raising unit processing costs.

106. In approaching these problem areas, the Company also has a number of strengths. These include:

(i) the management expertise and physical infrastructure of a major Irish company with sales in excess of £130 million.

(ii) a strong market position on the home market—its main sales area.

(iii) a significant capacity to undertake applied research and development work in all of its main areas of activity.

(iv) a background of good relations with farmer growers and the agricultural community generally, and a tradition of good industrial relations with its workforce, notwithstanding its first strike recently at the Carlow factory.

107. In this concluding Section the Joint Committee has focussed on three key areas of decision for the future of the Company. These are: the measures necessary to ensure the viability of the sugar operation; the role of diversification in the Company’s future plans; and the weight to be given to social and regional development responsibilities in the Company’s overall goals.

(b) Sugar

108. It would be hard to overstate the seriousness of the situation now facing the sugar business of the Company. Ireland does not have a natural advantage in sugar beet production within the EC. It follows that, to remain competitive, the industry here must be either more efficient at the production and processing stages of sugar manufacture, or it must be able to obtain its inputs at a lower cost than its rivals. The Company faces difficulties on four fronts at present; the constraints imposed by outdated plant and equipment; the possibility of a reduced supply of beet because of the greater attractiveness of other farm enterprises; the prospect of greater competition on its major markets in the Republic and Northern Ireland; and the pricing constraints imposed by the EC sugar regime.

109. Because of the squeeze on the Company’s margins at present, its pricing policies with respect both to product and raw material are of vital importance. The Committee has already noted (para. 67) that the Company’s room for manoeuvre on the white sugar price is now limited by the threat of external competition. It recommends, however, that where the National Prices Commission has recommended approval of a price increase application, that this should not be delayed as in the past at Government level.

110. The price paid for sugar beet is also constrained by EC regulations. In principle, there are four areas where the Company might seek adjustments to the beet price in consultation with its growers, namely, the sugar-sharing element in the beet price formula, the beet pulp price adjustment, the transport subsidy, and the abolition of the regionalised beet intervention price system which means that the Irish guaranteed minimum beet price is higher than elsewhere in the EC. It might be possible, for example, to revise the sugar-sharing element in the beet pricing formula to alter the proportions in which the growers and the Company benefit from any excess in the market price for white sugar over the intervention price. With respect to beet pulp, the Company admits that its full cost of marketing and drying is not reflected in the beet pulp element paid to growers in the beet price formula. There is in theory some scope here for an adjustment in favour of the Company. The extent of the transport subsidy could be revised to reduce the burden on the Company while still remaining within the spirit of the EC regulation. The abolition of the system of regionalised intervention prices would also be of net advantage to the Company, even though the sum involved is fairly small if account is taken of the way growers would recoup 60 per cent of the price reduction under the present sugar-sharing formula. The Committee recognises, however, that there is a tension between the Company’s desire to keep raw material costs down and the need to ensure an adequate beet acreage. At the present time, there does not appear to be any margin to play with; indeed, the Company has opposed the abolition of the system of regionalised intervention prices for this reason. If technological developments enhance the profitability of beet relative to other crops, then this could increase the Company’s room for manoeuvre in the future.

111. The Committee has already commented (para. 71) that the Company must seek substantial improvements in its processing efficiency if it is to be in a position to service its borrowings. The small size and scattered location of the Company’s present four factories contribute substantially to its higher unit costs in comparison with its competitors. The Joint Committee recommends that the Company should in future concentrate its sugar operations on its most viable plants. The additional investment necessary to ensure that adequate capacity is available at these plants to handle the Company’s beet intake within a campaign period of 100 days should be undertaken.

112. These steps to improve the Company’s processing efficiency will not eliminate the need for a substantial injection of State capital to redress the Company’s seriously imbalanced capital structure. Its bank borrowings are significantly in excess of shareholders’ funds, and the interest on this borrowing is an unreasonable burden on operating profits and working capital. The Company needs an immediate injection of £25 million in additional share capital. Given that the modernisation programme of the Company’s sugar factories is vital to the Company’s survival, and that the Government wishes this operation to continue, the Joint Committee believes the Government should make this capital available without delay. Additional capital will be required over the next three years to support the prudent financing of the additional £40m investment programme.

113. The Committee considered whether farmer growers should be invited to invest in the Company as one potential source of additional capital. Under the 1933 statute, it is possible for shares in the Company to be sold to private interests with the consent of the Minister. The argument in its favour is that the Company is as vital to the growers as an outlet for a remunerative crop as the growers are to the Company. This material dependence might appropriately be recognised by a financial stake by farmers in the Company. However, the Committee saw a number of problems. Farmers might not favour a minority stake in a State company whose objectives were wider than pure profit-maximisation. The Committee also recognised that it would not be a propitious time to launch a share capital drive among farmers at present. Nevertheless, the Committee suggests that this idea might be explored further by the Company, the farming organisations and trade unions.

(c) The role of diversification

114. The theme of diversification was mentioned frequently in Company evidence in the light of the Company’s objective to maintain employment on a company-wide basis and, if possible, at all locations.⁴⁴ Any diversification activity would have to be fairly sizeable to have any impact on the Company’s employment potential. For a number of reasons, the Joint Committee believes that diversification is unlikely to provide an answer to the Company’s problems at the present time. First, the Company’s core operation, sugar manufacture, is under serious threat on a number of fronts. Some of its existing ancillary activities, notably food and agricultural engineering, are also in difficulty. The Committee believes that management resources would be better used in ensuring the future viability of the sugar enterprise than deployed in a major new diversification activity. The management reorganisation at present underway also needs time to settle down. Second, the opportunities for diversification are not self-evident. All the previous Company initiatives, with the possible exception of food, have been linked to some operation in the sugar manufacturing process. Despite the existence of a special unit within the Company to investigate potential ideas no profitable opportunities have as yet materialised. Third, even if a profitable opportunity not linked to sugar is identified and it is agreed that this opportunity should be developed within the State-sponsored sector, it is not obvious why this task should be given to the Sugar Company rather than to another State-sponsored company or indeed a new company specially set up for the purpose. A management structure linked to sugar may not be the most appropriate base from which to cope with a major diversification in a non-sugar area. Fourth, the Company does not have the resources at present to provide risk capital for a diversification venture. While additional resources might be forthcoming from the Government, the Committee’s view is that the modernisation of the sugar manufacturing business alone will be sufficient to absorb any funds that might be made available for the foreseeable future. The Committee recognises that the Company has a considerable research and technological capability, and hopes it will continue to investigate the possibilities for new projects for development within the State sector as a whole. When the sugar business has been put back on its feet, the Company will then be in a position to undertake the development of one or two of these ideas on its own. In the meantime, the Joint Committee stresses that diversification is not likely to provide a solution to the Company’s problems, and that it should not be used to avoid or delay necessary decisions on Company restructuring in other areas.

(d) The social and regional development responsibilities of the Company

115. In evidence to the Committee, there was frequent mention of the need to clarify the relative weight to be given to social goals in the future strategy of the Company. By social goals was generally meant the Company policy of maintaining in operation plant in scattered locations and of uneconomic size for the purpose of providing employment in these areas. The Company is well aware of the drain on its resources due to these uneconomic operations, but it is reluctant to close them down unless it can provide alternative employment opportunities.

116. The Committee accepts that the avoidance of unemployment in the future is a reasonable and legitimate constraint on the activities of the Company. However, it believes the fallacy in the Sugar Company argument is the presumption that it itself must be seen to provide the alternative jobs. This viewpoint looks at the responsibilities of the Company in isolation from a strategy for the State-sponsored sector as a whole, or indeed from the State’s industrial policy in general. The Company pioneered rural industrialisation in various localities when it established its plants. It is more difficult to justify this pioneering role now given the diffusion of industrial employment opportunities throughout rural areas through the last decade. Many of the Company’s factory locations are now industrial centres in their own right. The Committee believes it would fully meet the Company’s responsibilities to its workforce to ensure that alternative employment opportunities with a roughly equivalent skill level are made available in the locality, either by another State enterprise or by an IDA-assisted industry, where it wishes to close an existing plant.

117. The Committee recognises however, from the State’s point of view, not to say the interests of the workforce as well, that it makes no sense for the Company to close a plant until alternative employment opportunities have come on-stream. The cost to the State of unemployment, in terms of tax receipts foregone and unemployment benefit paid, will usually exceed the difference between the value of what the workers produce and their wage. Provided this condition is met, it is “cheaper” for the State to subvent the Company to maintain its plant in temporary operation rather than allowing its workers to go on the dole. Until alternative employment opportunities are provided, the Committee recommends that the Company should receive a temporary Government subsidy to keep its uneconomic plants in operation. Unlike the present situation, however, where the State is effectively asked to take on an open-ended commitment to meet the losses due to the operation of uneconomic plants, in the proposed situation there would be a clear commitment to provide alternative, more viable jobs, within a short period of time. This transfer of employment opportunities should, of course, be done with the full participation of the unions and workers involved.

118. The closure of some of the Company’s operations could also adversely affect the interests of growers/suppliers to these factories. This problem should not be overstated. Growers retain the use of their land for alternative enterprises, so the net cost to them of the closure of a Company outlet is the difference between the profitability of beet or vegetables and the next best use of their land. As was shown in para. 46, this difference appears to have decreased in recent years. In the specific case of the Tuam sugar factory, the acreage of beet grown west of the Shannon is relatively small and has been declining in recent years. Also, the importance of providing an outlet for remunerative crops as a way of supporting farm incomes, particularly in the West, is of much less importance since accession to the European Community. However, given that there are Western growers who have been prepared to supply the Tuam factory, the Company should be prepared to pay a transport subsidy on beet grown west of the Shannon for transport to one of the Company’s remaining factories for a specified number of years in the event of Tuam’s closure. In other cases where disruption occurs, there is a case for compensation depending on individual circumstances.

(e) Conclusion

119. The Company faces difficult decisions in a number of areas in its attempt to restore its profitability and to correct the imbalance in its capital structure. This review has indicated a number of areas where Government action and assistance is required, for example, with respect to the early provision of a share capital injection, and also in providing where appropriate a financial subvention to compensate the Company for specifically social responsibilities which it undertakes. Government action alone, however, will not be sufficient to help the Company through its present difficulties. Particularly on the sugar side, problems with respect to the uncertainty over domestic beet supplies, greater competition from foreign suppliers of sugar, the nature of forthcoming modifications to the EC sugar regime, and the level of the Company’s processing costs which are exacerbated by the age, size and location of the Company’s plant, will require vigorous management action. Over almost fifty years the Company has been built up into one of the major industrial enterprises in the economy. It will need the full co-operation of all concerned if it is to continue in its long-standing development role in key areas of the Irish agricultural industry.

120. The Committee took oral evidence from representatives of Comhlucht Siúicre Éireann Teoranta and of the Association of Scientific, Technical and Managerial Staffs Trade Union. The Committee received written submissions from Comhlucht Siuicre Eireann Teoranta, the Fastnet Co-operative Society Limited, the Irish Transport & General Workers Union and the Association of Scientific, Technical and Managerial Staffs Trade Union. The written submissions are reproduced in Appendices 4 to 8. The Committee wishes to thank all those who gave oral evidence or made written submissions.

121. For this enquiry the Committee appointed Mr. Alan Matthews, Lecturer in Economics and Mr. Edward Cahill, Senior Lecturer in Accounting and Finance at Trinity College, Dublin, as specialist advisers. The assistance they gave proved invaluable throughout the enquiry.

122. In view of the deteriorating financial position of Comhlucht Siuicre Eireann, Teoranta, the Committee requests that a debate on this report take place in the Seanad in accordance with the Order of that House of 14 May 1980.

16 December 1980

¹Unless otherwise stated, the symbol £ in this report denotes Irish £s.

²See Appendix 4.

³See Appendices 6 and 8.

⁴See Evidence (Question 252).

⁵Profit before charging interest or taxation in relation to sales.

⁶Profit as per⁵ above. Capital Employed = issued share capital + reserves + development grants + pension provisions + all loans and borrowings.

⁷See Evidence (Question 290).

⁸See Evidence (Question 286).

⁹Original figure in £s sterling converted at exchange rate £1stg = £IR 1.035.

¹⁰See Evidence (Quesiton 180).

¹¹See Evidence (Question 289).

¹²Plant and equipment spending is shown net of grants received of £1.3m over the three years.

¹³See Evidence (Question 321).

¹⁴See Evidcncc (Question 337).

¹⁵See Evidenee (Question 296).

¹⁶See Appendix 4.

¹⁷See Evidence (Question 38).

¹⁸See Evidence (Question 294).

¹⁹See Appendix 4.

²⁰See Evidence (Question 333).

^aSoil Class 1.

^bEstimated

²¹ Gallagher, E. J. “Increasing Productivity in the Eighties: Crops”; Paper to the Agricultural Science Association Conference (1980).

²²See Evidence (Question 17).

²³See Evidence (Question 27).

²⁴See Evidence (Question 26).

*Projected throughput assuming implementation of capital programme. Source: CSET submission to the Joint Committee.

²⁵See Evidence (Question 25).

²⁶See Evidence (Question 31).

²⁷See Evidence (Question 29).

²⁸See Evidence (Question 72).

²⁹See Evidence (Question 71).

³⁰Beet yields in the Tuam factory area are considerably lower than in the rest of the country which explains some of the reluctance of Western farmers to grow beet. In the 1979 campaign, for instance, the yield of beet in the Tuam factory area was 12.0 tonnes per acre compared to 15.5 tonnes per acre in the rest of the country.

³¹See Evidence (Question 64).

³²See Evidence Question 84.

³³See Evidence Questions 95 and 96.

³⁴See paras. 25-27.

³⁵See Appendix 8.

³⁶See Evidence (Questions 221-230).

³⁷See Evidence (Question 119).

³⁸See Evidence (Question 123).

³⁹See Evidence (Questions 114 through 167).

⁴⁰See Appendix 4.

⁴¹See Evidence (Questions 110 and 274).

⁴²See Evidence (Question 112).

⁴³see Evidence (Question 275).

⁴⁴See Evidence (Question 10).