Committee Reports > List of Committees > Joint > 1980 > Committee on Commercial State-Sponsored Bodies > Report No. 07 - Arramara Teoranta

SEVENTH REPORT

ARRAMARA TEORANTA

I INTRODUCTION

(a) General Background

1. Alginate Industries (Ireland) Limited was established in 1947 as a private company to harvest, dry and mill seaweed. The name of the Company was changed to “Arramara Teoranta” in 1955.

2. In 1949 the Government acquired a majority shareholding in the Company, the other shareholder being Alginate Industries Limited, a British company. In July 1979, Alginate Industries Limited, which holds 49 per cent of the share capital in Arramara Teoranta, was acquired by Merck & Co. Incorporated, a multinational company. However, the Government continues to hold a majority shareholding of 51 per cent in Arramara Teoranta.

3. In 1978 Arramara had a turnover of £1.1 million. The number of employees engaged by the Company was 62 in that year. In addition the Company’s activities involve the services of families who harvest seaweed on the west coast of Ireland. In each of the past thirty years the Company has made a profit on its operations. For the past four years, it has paid a dividend of 10% on issued shares.

(b) Legal Character

4. The authorised share capital of Arramara Teoranta is £100,000 divided into shares of £1 each. At the end of 1978 the issued share capital was £77,000—of which the Government held £39,000 and Alginate Industries the balance of £38,000. State investment of £5,100 in the company was initially authorised by the Alginate Industries (Ireland) Limited (Acquisition of Shares) Act, 1949. An amending Act in 1954 increased the limit on State investment in the Company to £43,000.

5. The Company is obliged to submit audited annual accounts and a report on its work directly to the Minister for the Gaeltacht each year. The Articles of Association of the Company provide that as long as that Minister holds a majority of the shares he shall have the right to nominate three of the five directors and that Alginate Industries Limited shall have the right to nominate two directors as long as it holds the remaining shares. The Board of Arramara meets eight or nine times a year. Since Arramara is not a designated company under the Worker Participation (State Enterprises) Act, 1977 there are no worker directors on the Board.

6. As regards management, the Company has two managing directors. One represents the Minister for the Gaeltacht and the other represents Alginate Industries Limited. In the course of the taking of evidence, the Joint Committee was told that the two managing directors had different spheres of authority—one deals mainly with the financial side of the business; the other deals mainly with the operational side.¹ Both are engaged part-time on Arramara’s activities. The Company’s secretary also works part-time for the Company. He is an officer on the staff of Roinn na Gaeltachta who works extra hours to discharge his duties for both the Company and the Department. The Company has a full-time chief executive—the general manager—and a full-time management team comprising an accountant, two factory managers and three weed managers. Below management level, staff consists of office staff and factory staff. The latter are represented by the Irish Transport and General Workers’ Union.

II SEAWEEDS AND ALGINATES

(a) Seaweeds

7. Seaweed has been used for many centuries as a source of food. It has also had widespread usage in the agricultural sector both as a fertiliser and as an animal feeding stuff. In the seventeenth century it was discovered that the ash of burned seaweed contained soda. To meet the demand for soda from the pottery, glass and soap industries as the Industrial Revolution gained momentum, a considerable industry developed along the coasts of Western Europe involving the collection, drying and burning of seaweed to produce kelp. However, the kelp industry declined in the early nineteenth century when other sources of soda became available. The discovery of the presence of iodine in kelp has helped to keep the industry alive.

8. Seaweeds belong to the group of plants known as algae. They are classified in turn into a number of groups, two of which are red algae and brown algae. Carrageen, which is widely used in milk products, is produced from red algae. A number of brown seaweed species are suitable for the commercial extraction of alginates. In chemical terms alginates are salts and esters of alginic acid, a carbohydrate which is an essential structural material present in brown seaweed. Appendices 2 and 3 show the main locations where the several types of seaweeds are found. The two main types of seaweed located off the shores of Ireland are ascophyllum nodosum (rock weed) and laminaria hyperborea (sea rods).

9. Many families on the west coast of Ireland supplement their income by gathering rock weed and sea rods. The rock weed is harvested throughout the year and is generally cut by hand, when it is exposed at low tide, roped or gathered in nets and towed ashore at high tide. The sea rods are gathered from about October to March²; they grow in deeper waters and are torn from rocks and cast up on the shore particularly during winter storms; they are then collected from the beaches. Depending on the requirements of the factories, seaweeds are transported to the drying and milling plants either as wet weed or air-dried weed.³

(b) Alginates

10. The drying and milling of seaweed under carefully controlled conditions represents the initial processing stage in the production of alginates. Alginates belong to the class of products known as hydrocolloids. The latter are products which form viscous or jelly-like substances upon dispersal in water and are thus used as thickeners, stabilisers, gelling, film-forming and extrusion agents. Depending upon the alginate required, blends of some or all the main types of seaweed are used in the manufacturing process. Alginic esters⁴ stabilise water-in-oil emulsions (e.g. in salad dressings) and act as foam stabilisers. In short, alginates have a wide variety of applications, ranging from use in food production to use in the pharmaceutical industry.

11. For many purposes alginates are in direct competition with other hydrocolloids—Arramara stated in evidence that “carboxymethyl cellulose is one and then there are natural gums which are all competitors: pectin, the locust bean gum, gum tragacanth and so on”.⁵ The factors which determine whether an alginate, a natural gum or other form of hydrocolloid is used vary from application to application. It would appear that, as between alginates and their substitutes, there is considerable competition and a high degree of substitutability.

12. The market for alginates has been expanding in recent years. In the course of evidence, the Joint Committee was told that the market “… has been quite buoyant for a number of years past.”⁶ The continuing increase in the market for alginates was confirmed by the recent report on alginates published by the U.K. Monopolies and Mergers Commission.⁷ That Commission stated “the market is estimated to be increasing at about 3-5 per cent per annum.” They also pointed out that Alginate Industries Limited is now the world’s largest supplier of alginates, Merck the second largest, whilst Protan (a Norwegian company) is third and CECA (a French company) is fourth. In short, the alginate industry is dominated by a small number of large companies.

III THE ROLE OF ARRAMARA TEORANTA

(a) Operating Environment

13. In the early years of its existence. Arramara’s activities consisted solely of harvesting, drying and milling sea rods. In the early 1960’s, as the harvest of sea rods began to decline, the Company embarked on the harvesting and processing of rock weed, the product of which—asco meal—was initially sold as animal feed but trials indicated that it was eminently suitable for alginate production; and the entire output was switched to that outlet.

14. Arramara at present has two factories—one at Kilkieran, Co. Galway, and one at Meenmore, Co. Donegal. These factories carry out the initial processing of seaweed involved in the production of alginates and the resultant products are then exported to Scotland for further processing. The Company has drawn attention to the fact that its “entire production is sold to Alginate Industries Ltd, who carry out the final process at chemical factories in Scotland”.⁸ At one stage the Company did engage in the production of animal feeding stuffs and did market carrageen at home and abroad. However, it was pointed out in evidence that the supply of carrageen was now “too small and too difficult to market”.⁹ It was also pointed out that the price obtainable for seaweed meal as in animal feed, is “far less” than that obtainable for alginates.¹⁰ According to data supplied to the Committee by the Department of Agriculture the production of seaweed meal has been contracting in recent years.

15. Only a handful of Irish companies is now engaged in drying and milling seaweed. Of those who remain in the industry, two firms use the raw material for seaweed meal.¹¹ Of the firms which export seaweed to Alginate Industries Limited (A.I.L.), Arramara is the main Irish supplier. In evidence, the Committee was told that Arramara supplies about 25 per cent of A.I.L.’s weed requirements.¹² The total supply of seaweed to A.I.L. from Ireland currently accounts for about 34 per cent of their requirements, as expressed in terms of calcium alginate equivalent. About 20 per cent of their requirements comes from Scotland and the balance, 46 per cent, from various other sources. In its memorandum to the Committee Arramara stated that in order to maintain its market it must compete with these other sources in quality and price.¹³

(b) Employment

16. The Government’s Second Programme for Economic Expansion stated that while Arramara operated at a profit, “its main object is the provision of employment in the Gaeltacht areas”.¹⁴ At that stage the Company provided direct employment for about 40 people. The number employed had increased to 62 by 1978. Since the Company’s establishment, its annual reports have consistently referred to the fact that “good relations are maintained between management and workers”. The Joint Committee was pleased to note this fact.

17. In a minute to the Joint Committee, Roinn na Gaeltachta pointed out that:

“Both of Arramara’s factories are in Gaeltacht areas and this Department and Gaeltarra Éireann, a statutory body under its auspices, are particularly interested in the provision of employment in those areas. It may be mentioned that a higher level of employment than in Arramara has been attained by several of Gaeltarra’s subsidiary and associate companies”.¹⁵

However, the Joint Committee feels that it should be borne in mind that in addition to direct employment Arramara does provide indirect employment for collectors of seaweed. Over £½ million was paid to gatherers in 1978—a real increase (having adjusted for inflation) of nearly 330 per cent over the 1950 figure. In evidence Arramara stated that it had “. . . about 300 gatherers of rock weed and possibly the same number gathering sea rods . . . some gatherers supply, say 10 tons a year and earn £80 or £100 for it”.¹⁶ At another stage in the evidence, it was stated that the average payment per collector would probably be between £40 and £60 per week.¹⁷ This average relates not only to gatherers who collect all the year round but also to those who collect only in the summer. Increases in payments to gatherers are generally related to “the going increase in wages.”¹⁸ The Joint Committee accepts that this is as it should be, but it would recommend that continued efforts should be made to devise incentive schemes to provide supplies in the winter period when the throughput at the factories is low.

18. The livelihood and life style of seaweed gatherers could be affected if, for example, some mechanical means of harvesting were employed. The gatherers are not employees of the Company and would not appear to have any legal rights to compensation in the event of their services being no longer required. The Joint Committee was told that if Arramara ever went into mechanisation it would be a “confession of failure”.¹⁹ At the same time, the widespread introduction of mechanical harvesters would be constrained by the uneven terrain of the west coast of Ireland. Nevertheless, the possibility of mechanisation being, or becoming, both practicable and more economical, cannot be ruled out. While the Joint Committee recognises that it would be unreasonable to expect the Company to give unqualified assurances concerning payment of compensation should a decision to mechanise be taken, it nevertheless suggests that the gatherers should be treated sympathetically if such circumstances should arise. At present, however, it is cheaper to have seaweed cut by hand.¹⁹

(c) Output and Costs

19. The raw materials used by Arramara at its two factories are sea rods and rock weed (see paragraph 8 and Appendix 2). Sea rods, which are more profitable, now account for quite a small part of Arramara’s production—about 7 per cent. They are more profitable because they produce a better grade of alginate than rock weed. The total production of the Company was down 6 per cent in tonnage terms in 1978 as compared with 1977. This decline is attributable to the closure of the Kilkieran factory for six weeks for a major overhaul of the plant. Data relating to factory production and harvests of sea rods and rock weed for the period 1976 to 1978 are set out in Appendix 1.

20. The Company’s costs of production have been increasing by over 16 per cent per annum in the past few years. In 1978 the cost of production was nearly £130 per tonne. The trends in Arrramara’s direct and overhead costs over the period 1976 to 1978 are reproduced in Appendix 1. Arramara’s entire production is sold to Alginate Industries Limited and Arramara stated in evidence that “as long as we charge reasonable prices and give good quality they are prepared to buy”.²⁰ Arramara has a seven year sales agreement with A.I.L. which ends on 31 December 1981. In evidence, Arramara stated that “under the agreement we are free to increase our prices to take account of increases in our costs and at the same time to preserve our profit at a reasonable figure”.²¹ The Joint Committee would recommend that Arramara should start to plan its approach to a new agreement (for 1982 onwards) at an early stage, in order to ensure that a firm and satisfactory basis for the successful development of Arramara is agreed with Alginate Industries Limited.

(d) Financial Performance

21. The turnover (or sales) of Arramara increased from just under £33,000 in 1950 to over £1.1 million in 1978. When allowance is made for inflation, this represents a real increase of almost 450% over the period.

22. The Company in its submission to the Joint Committee argued that “The history of Arramara is a history of steady expansion and profitability”.²² Indeed, since 1949, the Company has been recording profits in each year. The net profit before taxation in 1950 was £1,870; by 1978 it had increased to £55,411. This represents a real increase of 376 per cent over the period, having allowed for inflation. In the past four years the Company has paid a dividend of 10 per cent on issued capital. The average net profit after tax in the four years 1974 to 1978 was over £33,000. Appendix 4 summarises some of the main financial statistics of the Company for the five years, 1974 to 1978.

23. In the course of evidence the Joint Committee was told that “the return on investment is quite good”.²³ Any profit can be considered to be favourable or unfavourable only when measured against the investment which has been used to produce it. By relating profits to turnover (or capital employed) for a period of years a company can judge its comparative performance over time. The ratios obtained will vary from industry to industry but within an industry the ratios serve as a good indicator of performance. The following table contains statistics for the years 1974 to 1978 in respect of Arramara:

Source: Arramara’s Annual Reports (Various Issues)—see Appendix 4.

The profit to turnover percentage was quite small in 1974. However for 1975 to 1978 the average was just over 5 per cent. As regards profit as a percentage of capital employed, it is clear that there has been a relative decline in Company performance in recent years, although the 1978 percentage did exceed 13 per cent. In its evidence, the Company argued that “the return on the share capital is far higher. The issued share capital is only £77,000 and the profit of £55,000 on a share capital of £77,000 is a respectable figure”.²⁴ The Company’s turnover in 1978 was over fourteen times its issued share capital. The Joint Committee believes that, if the Company can maintain (or even increase further) its profit rate, the Company can help to minimise its requirements for additional share capital in the future.

(e) Capital Structure

24. The Company’s issued share capital of £6,000 was increased to £10,000 in 1950. It has subsequently been increased on four occasions—by £26,000 in 1955; by £10,000 in 1964; by £4,000 in 1968 and by £27,000 in 1973. At the end of 1978 the issued share capital was £77,000 and the authorised share capital £100,000.

25. State investment in the Company was authorised initially by the Alginate Industries (Ireland) Limited (Acquisition of Shares) Act, 1949. That Act limited the Minister to the sum of £5,100 in the acquisition of shares. The Alginate Industries (Ireland) Limited (Acquisition of Shares) Act, 1954 raised the limit to £43,000. Given that the authorised share capital of the Company is £100,000, the Joint Committee notes that the Minister for the Gaeltacht would not be empowered under existing legislation to maintain a majority shareholding in the Company, should the balance of the authorised shares be issued. Accordingly, notwithstanding the comment at the end of paragraph 23, the Joint Committee recommends that the Government should consider increasing the authorised limit on the State’s investment in the Company, to ensure that the Minister would be empowered to continue to hold a majority of the shares if the balance of the authorised shares were to be issued.

26. A company may finance its capital expenditure from internal sources (retained profits or increased equity), it may borrow or it may receive grants. Arramara’s investment has been financed mainly by retained profits and to a lesser extent by the issue of additional share capital. Arramara has also resorted to bank borrowing to a limited extent. At the end of 1978 its long term borrowing amounted to just over £29,800, which was a reduction of over £12,200 on the previous year. One additional source of finance that can be availed of by companies is investment grants made by Government towards the cost of acquiring fixed assets. Roinn na Gaeltachta pointed out in a minute to the Joint Committee that “In more recent times Arramara has received grants in the normal way from the Industrial Development Authority.”²⁵

27. At an overall level, the Joint Committee concurs with Arramara’s view that “The Balance Sheet shows that the Company is in a sound financial position”.²⁶ The Joint Committee does recommend, however, that Arramara should examine the feasibility of increasing the levels of depreciation used in its accounts, over and above the levels calculated by reference to the historic cost of assets.

IV FUTURE DEVELOPMENTS

(a) Future Plans

28. The Company informed the Committee that it is at present concentrating on consolidating the progress made to date, by ensuring continued efficiency at all stages in order to safeguard the market against the continual competition from suppliers in other countries. At the same time, it is planning to refine the existing process by an improved system of milling, at an expenditure estimated at £100,000, to be spread over the years 1979-80. The Joint Committee recommends that the Company should aim for a sufficiently high rate of return on this latter investment.

(b) Production of Alginates by Arramara

29. In the course of evidence, the question of whether Arramara should carry out the entire process of alginate manufacturing was raised. The Company stated in its submission that it maintains contact with developments in the alginate field, and that it is ready to study any promising propositions that may come forward. In evidence, it drew attention to the fact that “there was an effort made some ten years ago to establish an alginate factory in Galway but it ran into difficulties over planning”.²⁷ A feature of alginate production is its dependence on the availability of large quantities of cheap, fresh, calcium-free water. A concomitant feature is the effluent which has to be discharged. Arramara stated that “the health authority in Galway found the effluent, to put it mildly, a rather dirty effluent and they would not give permission to have it drained off into the bay.²⁷

30. Leaving aside the matter of water supply and effluent, there are the questions of technology, finance and economies of scale. Arramara argues that alginate production is a highly complicated process, requiring heavy capital investment and the addition of expensive chemicals; that the employment content would not be great and that there would have to be a very large scale throughput for the industry to be economic.²⁸ Certainly the industry, although only concerned with a single product, is a complex one requiring continuing control and attention in a wide range of activities. There is also the ever present possibility that a competing hydrocolloid might totally displace alginates for a particular application and the possibility too that a major alginate user might switch to another alginate supplier.

31. The financial data of Alginate Industries Limited serves as a good indicator of performance of an alginate producer. Appendix 5 summarises some of AIL’s main data for the five year period 1974 to 1978. It can be seen from the Appendix that for the years 1974 to 1977 the return on turnover averaged 18 per cent—over three times the comparable rate for Arramara Teoranta. However, in 1978 AIL’s profit before interest and taxation as a percentage of turnover declined to 9.7 per cent. Again, in the case of a second measure of profitability for AIL——return on average capital employed—a significant drop occurred in 1978. Profit as a percentage of average capital employed had exceeded 27 per cent per annum on average in the years 1974 to 1977; but in 1978 it dropped to 12.5 per cent.

32. It is interesting to note that AIL’s return on average capital employed was smaller than Arramara’s in 1978. The size of such ratios do vary from industry to industry and it must be recognised that AIL is a final producer of alginates, whereas Arramara merely produces a raw material for alginate production. It must also be recognised that AIL had an average capital employed of over £14 million in 1978, as against less than £½ million in the case of Arramara. The larger capital base allowed AIL make a net profit before interest and tax of £1.8 million as against £0.06 million in the case of Arramara. But Arramara argued, in evidence, that there is a “bigger risk factor involved in the operation over there than there is in our operation so that we would expect that they would look for a higher return”.²⁹

33. To sum up, at present Arramara only processes seaweed to a limited extent. Further processing of the raw material brings in crucial economies of scale, sophisticated technology, large scale investment and complexities of chemical inputs. In the view of Arramara there are no half-way stages, “it has to be all the way”. ³⁰ Notwithstanding such evidence, the Joint Committee would recommend that Arramara should continue its efforts to explore the possibilities of alginate production—either under licence or by concentrating production on a small number of specific alginates.

(c) Takeover of Alginate Industries Limited

34. The U.K. Monopolies and Mergers Commission published a report in July 1979 on the proposed merger of Alginate Industries Limited with either Merck & Co, Inc. or FMC Corporation. The Commission concluded that both merger situations might be expected not to operate against the public interest. In reaching its unanimous conclusions, the Commission took into account the fact that the acquisition of Alginate Industries Limited by Merck would result in an already large market share in alginates becoming only marginally greater. The Commission did recognise, however, that both of the proposed mergers could, in certain circumstances, have adverse consequences for AIL’s employees in Scotland but thought that the future prosperity of AIL and hence its ability to contribute to the maintenance of employment in Scotland would be more secure if AIL were acquired than if it remained independent.

35. Shortly after the publication of the Monopolies and Mergers Commission’s Report, the merger between Merck and AIL was effected. Arramara, while recognising that its future development would clearly be influenced by the merger, stated in evidence: “The only change with Merck was that they were going to have a new chairman. Otherwise there will be no change and it will still be an autonomous company. So Arramara will still be dealing with Alginate Industries rather than with Merck or FMC”.³¹

V CONCLUSION

36. The Joint Committee was impressed by the evidence of Arramara’s continuing expansion and profitability over the past thirty years and by the fact that it has met its objective of providing employment in the Gaeltacht areas, while continuing to achieve a good financial performance.

37. The Joint Committee wishes to express its appreciation of the help given to it by its consultant Mr. Thomas P. Ferris, in the course of this enquiry.

(Signed) EOIN RYAN

Chairman of the Joint Committee

23 January 1980

¹See Evidence (Question 2).

²See Evidence (Question 85).

³See Evidence (Question 39).

⁴See paragraph 8.

⁵See Evidence (Question 38).

⁶See Evidence (Question 37).

⁷The Monopolies and Mergers Commission, “FMC Corporation /Merck & Co, Inc/Alginate Industries Limited: a report on the proposed mergers” (H.M.S.O)., London, July 1979).

⁸See Appendix 1.

⁹See Evidence (Question 51).

¹⁰See Evidence (Question 35).

¹¹See Evidence (Question 39).

¹²See Evidence (Question 46).

¹³See Appendix 1.

¹⁴Part II of Programme, page 240; Pr. 7670; July 1964.

¹⁵See Appendix 6.

¹⁶See Evidence (Question 94).

¹⁷See Evidence (Question 82).

¹⁸See Evidence (Question 91).

¹⁹See Evidence (Question 12).

²⁰See Evidence (Question 34).

²¹See Evidence (Question 75).

²²See Appendix 1.

^*As the 1975 profit related to a fifteen month period ended 31 December 1975, 80% of the profit was taken in computing the ratio to ensure a “like-with-like” comparison.

²³See Evidence (Question 66).

²⁴See Evidence (Question 66).

²⁵See Appendix 6.

²⁶See Appendix 1.

²⁷See Evidence (Question 9).

²⁸See Evidence (Questions 9 and 45).

²⁹See Evidence (Question 45).

³⁰See Evidence (Question 84).

³¹See Evidence (Question 98).