Committee Reports > List of Committees > Joint > 1981 > Committee on State Sponsored Bodies > Report No. 16 - Nitrigin Eireann Teoranta

MIONTUAIRISC NA FIANAISE

(Minutes of Evidence)

Dé Céadaoin, 2 Iúil, 1980

Wednesday, 2 July, 1980

Members Present:

SENATOR EOIN RYAN in the chair

NÍTRIGIN ÉIREANN TEORANTA

Professor J. P. O’Donnell, Chairman; Mr. G. T. Paul Conlon, Managing Director; Mr. P. McSweeney, General Manager; Mr. F. Crumlish, Assistant General Manager—Finance; Mr. C. Cowran, Assistant General Manager—Development and Mr. L. O’Brien, Assistant General Manager—Sales, of Nitrigin Éireann Teoranta, called and further examined.

Chairman.—We may begin now.

Professor O’Donnell.—Before we start would you permit me to refer back to two matters that arose last time? One was the question which Senator Cooney put a couple of times in various forms concerning the period during the seventies and the question broadly asked was what the company did in relation to CCF’s lack of profitability. With your permission I would like to elaborate on that.

First of all, NET went into CCF manufacture with a decision in 1965 which was dictated by a shift from the use of ammonium sulphate in compounds. The initial plant of NET at Arklow had an ammonium sulphate unit. There was a shift away from the use of ammonium sulphate in compounds. For example, Gouldings at that period had just built their new NPK plant using technology without the use of ammonium sulphate. Our plant started up in Arklow in 1965, our CCF plant in 1967. At that period CCF’s were very profitable. Raw material and labour costs were low and so plant problems were not so critical. The rated capacity of that plant was 300 tons a day over a range of compounds of varying N-concentrations.

There were problems right from the beginning with that plant. There were difficulties first in making formulations with low nitrogen content which at that time were fairly widely used and our technologists made modifications in 1969 to meet that problem. In the early seventies there was a shift in the market towards high N compounds. We were now faced with adapting the same plant to make higher N compound formulations such as 15-5-10, 15 nitrogen, 5 phosphate and 10 potash, and later 18-6-12, the same materials. We were able to make these but only at rates of production which were well below those at which we could make lower N compounds like 10-10-20. By that time we had de-bottlenecked that plant for low N compounds, for the ordinary 10-10-20s, to about 600 tons per day, about twice the original capacity, but we could only make 300 tons a day of the higher N compounds. There were technical problems. We worked at that problem through the period 1970-1975. For example, in 1975 we commissioned a study by Stamicarbon, part of the Dutch State Mines Group, one of the leading companies in this field, with a view to using their process in our plant to make higher N compounds, that is 18-N and higher, at rated capacity. They presented a proposal but our engineers’ evaluation of it was that the process was not really suitable for use in our plant. Then we went to blending of 10-10-20 with calcium ammonium nitrate to make a higher range of higher N compounds. In fact, we still produce compounds like 25-2½-5, which is very high in N, by this route but we still cannot make big tonnages at that level of nitrogen content.

Still on the problems of the CCF, in 1978 we retained Fisons as consultants with the aim of trying to achieve a substantially increased output of about 200,000 tons a year of high N CCFs. This study was completed early in 1979 and indicated that the aims we set them could in fact be achieved but would need a capital expenditure of about £3½ million and would need the plant being shut down for about six months to make the necessary modifications and new plant additions.

This was considered by the company not to be a feasible step because, first of all, the loss of contribution which would arise from the downtime was a disadvantage and, secondly, and related to that, the low margins which in any case were achievable on NPK at that time would hardly make the investment worthwhile. Markets for NPK had dropped away after the oil crisis at the end of 1973 because prices of phosphates and potash went away up after that period. That is a kind of break point at the end of 1973 in relation to markets on those products. Generally, if you consider the period since the oil crisis at the beginning of 1974 it is important to point out that the CCF market dropped in 1974/75, particularly in relation to NPK consumption here, and in fact, it is only in 1978 that the Irish market in NPK has come back to the 1974 levels. That can be seen on page 10 of the submission which we have already made.

Up to 1979 the CCF plant always covered its direct production costs. However, in most of those years it made very little contribution to fixed overheads but it was considered that shutting down the plant could not have made a significant reduction in fixed overheads unless a major reduction in manpower was made. This would have involved the workers in the following plants: sulphuric acid and pyrites roaster; phosphoric acid, the CCF plant itself, the Arklow Gypsum plant, which takes waste gypsum from the phosphoric acid plant, and the materials handling section. The reduction in manpower would have been about 600 out of a total of 1,100 on the Arklow site. In addition, there would have been significant financial effects on the Avoca Mine if we had shut down the CCF activity.

In the period from the end of 1973 CCFs have been loss makers, that is since the oil crisis period when raw materials and labour costs went up. The company, with a limited nitrogen base, decided to remain in production of CCFs in order to protect their market share and their general sales. From 1974 onwards the Marino Point project was seen by the Board and the management as providing the necessary strengthening of the company’s base and the means whereby they could sustain the Arklow CCF operations.

The escalation in costs and the late start in Marino Point project, coupled with increasing difficulties in CCF production and marketing, have forced the company to review fundamentally their participation in this sector of fertiliser production. As Mr. Conlon pointed out the last day, we are now engaged in that particular evaluation and in examining our whole role in this sector.

The second point I wish to refer to is the question which came from Senator Cooney and Deputy Lawlor in different forms, which is in effect a criticism of NET’s financial expertise. It was put by Deputy Lawlor in terms that the company had made two very serious mistakes, one in relation to the Marino Point cost projections and the second in relation to the changes we had made in the financial projections between November 1979 and the recent ones which we submitted to you. I must at the very least, in fairness to my management colleagues, comment on this point. In relation to the Marino Point cost projections, the company’s forecasts of capital costs were made in consultation with the three main contractors who were asked to tender. They were also examined and approved by the Government Departments involved, the Department of Industry, Commerce and Tourism, the Department of Finance, and the IDA were consulted in connection with them. The cash flow projections, which we made at various times in the initial stage in presentation to the Board and at later stages, were subjected to detailed appraisal and comment by the banking consortium as well as scrutiny by the institutional lenders like the European Investment Bank, the British Export Credit Guarantee Department and so on. These were the main ones. There were smaller ones like the Dutch and the French export credit units which were to a lesser extent involved.

Further, in the course of the progress of the project any revisions of capital cost or trading projections were subject to analysis and we had advice on their preparation by the consortium lenders. That, in effect, takes up the point about the suggestion of lack of financial expertise in relation to the Marino Point project. In relation to the changes we made in the financial projections between November 1979 and May/June 1980, Mr. Conlon has, in a letter to you which has been handed in today, listed the reasons for the changes in recent projections. I could read them out briefly if you wish.

Chairman.—It is not necessary if they are available in a letter.

Professor O’Donnell.—They are in the last paragraph at the end of page 2 and the beginning of page 3 of the letter.

Chairman.—We will circulate that to the Members. Is that all you wish to say in your opening statement?

Professor O’Donnell.—Yes.

106. Deputy B. Desmond.—We were discussing the last day in a general way and attempting to get to grips with the financial structure of NET. In relation to the debt equity ratio of NET capital gearing, around 1974 they had a debt equity ratio of 1:1. It now appears from the latest accounts that as at the end of this year the debt equity ratio stands at 15:1. It may be somewhat higher, but it is at least that. How long have the management been aware of this particular problem? What exactly are the capital repayment commitments which the company have entered into which have to be met this year and up to 1985? I would like to try to sort out that basic question first.

Mr. Conlon.—The capital gearing started to go wrong after the oil crisis in 1974-75. Because of continuing losses and the need to borrow money to finance the Marino Point project this put the gearing haywire. Perhaps Mr. Crumlish would comment, as he would be more conversant with the actual commitments up to 1985.

Mr. Crumlish.—The company are committed to repayment in relation, first, to the institutional loans that were negotiated in 1974-75 at the outset of the Marino Point project and, secondly, to the bank consortium loans that were negotiated in 1976 and which were negotiated further in 1978. In relation to the company commitment for the next three years we are required to repay in terms of £8 million per annum in 1980, 1981 and 1982 in respect of the institutional borrowings, while in 1983-84 we commence repayments in respect of the first bank loans. This will bring our total capital repayments for those years to £12 million per annum.

107. Deputy B. Desmond.—That will be a total of £48 million?

Mr. Crumlish.—Yes.

108. Deputy B. Desmond.—That amount must be paid between now and 1985?

Mr. Crumlish.—That is so.

109. Deputy B. Desmond.—If, say, the company were to receive £50 million in the morning from the Government, would it not be true to say that, leaving aside trading losses in 1980 and also any losses than can be projected for the years up to 1985, such money would be gone by way of repayments and in terms of projected losses?

Mr. Conlon.—I would not agree. Assuming that we could get this money, we would turn the corner by 1985-86 and the deferred liabilities of the company, which would be the borrowings, would fall from £157 million to £97 million. Therefore, it is not true to say that the £50 million would be gone. Even within the period up to 1985-86 the company would have a cash flow in some of the years. In 1981, in terms of cash flow, the company would break-even on trading.

110. Deputy B. Desmond.—Would that take into account depreciation of the Marino Point plant?

Mr. Conlon.—Yes.

111. Deputy B. Desmond.—Nevertheless, I am sure you would accept that the situation is critical.

Mr. Conlon.—I agree that at present the company has a critical cash situation.

112. Deputy B. Desmond.—What action do the company propose taking in these circumstances?

Mr. Conlon.—In a letter that I have submitted to the Chairman of the Committee but which may not have been circulated yet, I have enlarged on a statement that I made here last week when I said that investigations were being pursued actively. In the letter I have listed four major areas in this regard. In respect of Arklow Gypsum, we are proposing to dispose of our interest in that company.

113. Deputy B. Desmond.—We have not seen the letter yet but what will be the loss on the disposal of Arklow Gypsum?

Mr. Conlon.—I should prefer that question to be taken in private. Information in this regard is set out in the letter.

114. Deputy B. Desmond.—In your published accounts, leaving aside trading losses, there is reference to a loss of between £6 million and £7 million in so far as the disposal of the interest in this firm is concerned.

Mr. Conlon.—Yes. We would have to write off £6.5 million.

115. Deputy B. Desmond.—How many jobs would be lost there?

Mr. Conlon.—Approximately 138.

116. Deputy B. Desmond.—Is this the number of workers currently employed there?

Mr. Conlon.—Yes.

117. Deputy B. Desmond.—When are they likely to be declared redundant?

Mr. Conlon.—Negotiations are on-going with two interested parties regarding the purchase of the interest of the company.

118. Deputy B. Desmond.—So that there may not necessarily be redundancies?

Mr. Conlon.—That is so. There may not be redundancies to the extent of 138.

119. Deputy B. Desmond.—But notwithstanding that, the company would still lose almost £7 million?

Mr. Conlon.—Yes. The second aspect of the letter relates to compound fertiliser production and to our involvement in the production of CCF. The production of CCF has been unprofitable since the energy crisis of 1973-74. In my letter I have listed the losses that were incurred last year on our CCF production. This situation is being actively investigated.

The general overheads of the company are of the order of £16 million. This excludes financial charges but includes interest on working capital. With an anticipated cutback in activity the company would anticipate a reduction of at least 5 per cent in the general overheads.

The fourth area relates to selling prices. Currently there is an imbalance in the price of CAN in favour of urea. This will have to be corrected. However, it should be appreciated that this is really our first year to put urea on the Irish market. To all intents and purposes the prices we are charging could be regarded as introductory prices. On the assumption that we can correct this imbalance—and we are confident of being able to do this—we will add £1 million net to the company in 1981, rising to almost £2 million in 1984. The reason for the projected increase is the extra tonnages we propose putting on the home market. In addition there is about £3.5 million in terms of price increases that have been approved by the National Prices Commission but which have not been applied yet on the home market. The company intend to claw back this amount over a three year period as well as recovering current cost increases. These, then, are the four areas in which we can envisage savings or changes in the fortunes of the company.

120. Senator Cooney.—Is there any other underlying assumption in your projections to turn the corner by 1985-86? Can you indicate any other such assumption for the purpose of your projections?

Mr. Conlon.—The other major assumption in our projections is an injection of capital to the extent of £50 million.

121. Senator Cooney.—Do I take it that this is purely an assumption?

Mr. Conlon.—Yes. I want to give an indication of what the effects would be. Bringing the amount up to £90 million would mean that it would be 1984 when we would turn the corner, that is without doing anything else with the company but keeping it as it is and assuming the plants would get stable running, particularly the two plants in Cork. Then we would get a production of 90 per cent of the design capacity.

122. Chairman.—Would you not regard that as being extremely optimistic? Is it not assuming there would not be any breakdowns such as hold-ups of raw materials or labour problems? Is it not assuming an almost ideal situation?

Mr. Conlon.—These figures have been achieved by other ammonia and urea industries.

Mr. McSweeney.—We are talking about 322 days operation per annum.

Professor O’Donnell.—We are talking about 1,350 tonnes per day, for 322 days per year, and the capacity for urea is 1,000 tons per day for 300 days per year. When we talk about 90 per cent we are talking about 90 per cent of these figures.

Mr. Gowran.—We are talking about normal figures for plants of this kind—330 days per year for both ammonia and urea. We based this ammonia figure on 322 days per year, taking a more conservative view. We took a still more conservative view on urea production, reducing it to 310 days per year. We are talking about 90 per cent of 310 days in the year. We attempt to operate the plants on a 365 day basis. When talking about 90 per cent in comparative terms it is equivalent to 74 per cent or 75 per cent in 365 day terms.

123. Senator Cooney.—What comparative studies did you do in this regard? How many plants did you look at in arriving at your projections for the output of your own plants?

Mr. Gowran.—We looked at the figures in recent years for plants in Europe and the US, the developed countries, where there is an operating time of 86 per cent or 87 per cent for ammonia and urea, a somewhat similar operation, in terms of percentage of a calendar year. The 322 day figure is equivalent to 86 per cent.

124. Chairman.—You operate three shifts a day?

Mr. Gowran.—We have to work 24 hours a day, 365 days a year.

125. Senator Keating.—How are the plants operating on the basis of pre-commissioning projected capacity?

Mr. Gowran.—For the first year of operation of the ammonia plant we achieved 77 per cent, which is a little more than 90 per cent of 322 days.

Senator Keating.—The urea plant did not come into operation until late in the year.

126. Deputy B. Desmond.—Why are the company assuming a very substantial increase in tonnage sold on the home market bearing in mind that urea is a new product and the suggestion that its price will be increased substantially? How optimistic are you about your predictions?

Mr. Conlon.—Urea is a relatively new product on the Irish market. This year we think we will achieve 65,000 tonnes and therefore we are confident we will meet the targets we set out.

Mr. O’Brien.—On the selling end we must look to predictions being realised. Looking back over six or seven months we have produced more than 63,000 tonnes in the first few months of production. It is fair to look confidently to the following year and to say that we will be able to make at least 150,000 tonnes available for the home market. If production falls it will be exports we will have failed to make up because it will be only surplus production that will go for export. We are confident that we will both make and sell sufficient for the home market and if production falls it will be at the expense of exports.

127. Senator Cooney.—Have you taken into account the gloomy predictions about farming, about the drop in production and the possible consequent unwillingness of farmers to invest?

Mr. O’Brien.—We would make two points on that. When things are going badly for the farmer we urge him to use more nitrogen rather than less in order to help him in his production. Last year there was a fall in usage of NPK but nitrogen held its own. Even in bad times we would think it reasonable to expect that nitrogen would hold its own. Its consumption has gone up more than 10 per cent.

128. Senator Cooney.—Have you historical evidence for the rise in your graph?

Mr. O’Brien.—When we made our projections we predicted a 9 per cent per annum increase. It has been approximately 10 per cent and we look to that sort of figure for the future.

129. Senator Cooney.—Your sales projections are based on historic evidence plus your market research?

Mr. Conlon.—Might I revert to production because there seems to be some confusion about what we have assumed for production. The design capacity of our ammonia plant at Marino Point is 1,350 tons a day. In our projections we have assumed that when a plant is commissioned it will run for 322 days of the year at that capacity. On occasions the plant has in fact run at 1,500 tons a day but we have ignored that. Particularly with the urea plant we have taken it to be 310 days at 1,000 tons per day. That is just to clarify the situation. I might add that our sales pattern is based on achieving that output.

130. Senator Cooney.—Your sales projections then are on the basis of historical evidence available to you plus advice from market research?

Mr. Conlon.—Yes. But the total N usage in Ireland for 1971-72 has risen from 96,781 tons of nutrient N to 263,603 tons of nutrient N last year. I foresee a continuing increased consumption, even taking into account the recession that is with us, in the agricultural sector. I think I said before that the days of large price increases for Irish farmers would appear, for the present anyway, to be over. Nevertheless we continue to live in an inflationary era. If the farmer is to recover his cost increases he must, of necessity, increase his productivity. The way open to him to do that is to apply more fertiliser. The company’s main product is nitrogenous fertiliser, which is a grassland fertiliser and, as I think I said at the last session, there are some eight million acres of pasture. If one applied a minimum application of two cwts to the acre—and there are many farmers applying a much larger quantity of fertiliser to their grassland—but taking a minimum of two cwts to the acre, that is 800,000 tons of product. For that reason we feel there is still potential and that there will be growth in the market place.

Senator Cooney.—That is a critical factor in your projections.

131. Deputy B. Desmond.—Might I put it rather emphatically to the company representatives here: we have had a number of projections made over the years. I have been looking at the annual accounts from about 1972 onwards. One is talking about a growth here of 50,000 tons to 150,000 tons and so on and about recovering £4 million or £5 million of price increases on the urea side. I am not necessarily expecting the company’s new chief executive to comment on it. The fact of the matter is that in the past ten years, with the exception of 1971 and 1973, the company has lost very substantial money every year. According to the annual accounts the company lost close on £13 million last year.

Again I put it strongly to the representatives here, even with substantial price increases in the next six months—assuming that farmers will pay these increases, assuming a very substantial increase in usage, and assuming £50 million minimum from the Exchequer—the company will still lose a lot of money, anything up to £20 or £30 million between now and 1985. My extreme difficulty is knowing what is the real economic cost at this point in time of producing a ton of nitrogenous fertiliser or urea. What is the true economic cost? Has anybody done that calculation internally in the company? Supposing you do have a growth of 40,000 to 50,000 tons in the next six to eight months from the plant and it is exported, what is the export subsidy, as such, from the Irish taxpayer? Frankly it is quite impossible to come to grips with the dimensions of what we are talking about. I am not suggesting that the data are readily available. But bearing in mind the fact that the company has grown from being a £20 million company to £176 million in the past six or seven years, bearing in mind the disastrous current cash situation of the company—a not unduly harsh description and I think one that has been accepted by you—what would you really have to charge for a ton of fertiliser to get yourselves out of difficulty without the Exchequer subsidising every single ton? I am now trying to ascertain global figures as distinct from production, man-days, work-to-design plants, or relatively minor cost savings and so on which might be £1 million or £2 million, which is a lot of money when it comes to cash flow but, in the context of the tens of millions of pounds we are talking about in the company it is not so outlandish. Can you put hard figures on what we are talking about?

Mr. O’Brien.—On the marketing side we can say that if the capital structure of the company was in a reasonable state the price we could get for our fertilisers at home and abroad, and particularly in relation to urea, is such that we could make a substantial trading profit. In this regard we must say that we have not really been exporters of urea now for many months. Because of production problems we have fallen very far behind the original tonnages sold. It is only now, when our home spring season has finished, that we can get out and export again.

132. Deputy B. Desmond.—But even if you were exporting urea as of now at cost per ton, export price, and bearing in mind the Exchequer subsidies apparently being sought and bearing in mind the production at loss, is it not bad enough that one would be subsidising domestic sales which presumably would have a cost benefit to the economy as a whole, but in terms of subsidising exports to the Continent——

Mr. O’Brien.—In regard to exports, looking at the past rather than the future is somewhat unfair. I came back from the United Kingdom yesterday where I was offered for urea the equivalent of approximately £128 per ton, that is bagged urea to England. That is the sort of price we will be seeking. We have seen a lot of publicity about a huge differential between export and home prices. That is somewhat unfair. As our chief executive said in a recent letter to the ICMSA, like is not being compared with like. For example, one cannot compare the price of a bottle of milk delivered to your home with the price of a 10,000 ton tanker delivered to a co-operative. Similarly one cannot compare a 10,000 ton bulk, F.O.B. price urea with a ten-ton lot delivered on pallets, in bags, shrink-wrapped, to a farmer’s premises. Taking like with like, export prices will be quite comparable, we would hope, in the future. Again one takes an export price, one does not make it and surplus tonnage not required by the Irish market will have to be exported to survive, whatever about——

133. Deputy B. Desmond.—Even exporting right up to 1986—and presumably you have done projections on export prices to be obtained on the United Kingdom market, the Chinese market or whatever market you are using, even taking all that into account, bearing in mind that it is not that unstable a product in terms of projections of costs and quantities, your managing director has said that, doing all that, in the middle of 1985 you will still have very substantial losses running into some millions of pounds per annum. Taking into account depreciation of plant there will still be net losses. Quite frankly I am boggled to put figures on that situation. Have you any comment?

Mr. Conlon.—By 1986 we will turn the corner, that is having charged full depreciation.

134. Deputy B. Desmond.—And you said you would still owe £97 million?

Mr. Conlon.—Yes, we would owe £97 million then.

135. Deputy B. Desmond.—That is still a lot of money?

Mr. Conlon.—Yes, of course. At present we owe £168 million, so there is a reduction.

Deputy B. Desmond.—It is becoming clear, but I wished to get the dimensions.

136. Chairman.—In your five-year projection your net tangible assets would go from minus £22 million to plus £1 million in 1984?

Mr. Conlon.—Yes.

137. Chairman.—To that extent you would have improved your situation?

Mr. Conlon.—Yes.

138. Chairman.—Should that be weighed against the £50 million.

Professor O’Donnell.—It was said that we were building in increased sales prices in our projections but this is not the case.

139. Deputy B. Desmond.—Both domestic and export sales, I presume?

Mr. Conlon.—The projections are based on current price levels.

140. Deputy B. Desmond.—You have said that projections are prepared on a non-inflation basis and it is assumed that future increased costs will be recovered in the selling prices. I am very worried about that form of projection in terms of conventional accounting. Any comment?

Mr. Conlon.—The two major items of charge in our accounts at present are finance charges and depreciation. Depreciation on a historical cost basis is fixed and will not inflate. For some time now the country has experienced historically high levels of interest rates and I would not anticipate these rates going any higher. The level of borrowing is fixed, apart from the losses which we have in the interim period between now and the time when the company gets into a break-even trading position, cash flow wise.

141. Deputy Deasy.—If the projections are based on the price at which NET are purchasing natural gas at present, are such projections based on the going price for this gas? I believe it is being purchased at present for something like half the going price and this in itself would be a major subsidy.

Mr. Conlon.—The company are purchasing gas at the contract price which was negotiated with Marathon and which has now been passed on to An Bord Gáis. There is an escalation clause in the contract. The prices were negotiated between officials of the company and officials of Marathon and I feel that NET is entitled to the benefit of those negotiations.

142. Deputy Deasy.—Are reports correct in stating that you are paying about half the going rate?

Professor O’Donnell.—That is really an over-simplification. There is a lot of loose talk about going rates and world prices for energy, but one has to look at the situation as it is. There is no use in talking about comparing the prices one can get for gas in this country with the prices which are paid in other countries. It is necessary to look at the alternative market. Who else will use the gas? It may well be said that it is better economics not to use it at all or not to use part of it and keep it in the ground; that is a debating point. It is not accurate to say that we are getting gas for a price which is very significantly lower than the going price. I would argue that the going price must be related to what can be obtained. The IDA have tried very hard under Government pressure to find alternative users for substantial quantities of gas and have not succeeded. It is also very important to stress that the price formula on which we operate contains a factor which relates the price each year to the average bulk prices for the previous 12 months in Rotterdam. It is not accurate to say that we are getting gas at a price which is not related to world prices.

143. Deputy Deasy.—Surely there are alternatives. It could be converted into energy as the ESB are doing at present and there have been very strong representations for its use by the Dublin Gas Company. Are they not paying a price far in excess of that being paid by NET?

Professor O’Donnell.—At an international conference on natural gas in Dublin in 1976 I argued that there was a good case for a gas pipeline to Dublin if one assumed that the ESB would burn gas in some of their power stations in Dublin as an alternative to building a power station in Cork. I said that a substantial base load is needed, such as one could get from the ESB, in order to justify the cost of such a pipeline. People forget that the total national town gas load in 1976 was 11 million cubic feet per day and that the Cork gas field produces 125 million cubic feet per day. I do not know the exact figure for the current town gas load but my information is that it is not substantially bigger than the figure I quoted for 1976. It is not immediately understandable to me how a strong case can be made for an alternative to NET by saying that their supply should be cut off and the gas should be piped to Dublin.

144. Deputy Deasy.—I put the question because it has been stated in articles that the price at which the gas is being obtained by NET should be considered as a direct subsidy.

Mr. McSweeney.—We are not permitted to disclose the price of gas and would not do so, but we have studied what is paid by people in our business for gas for major heavy chemical business. Gas is available in some cases at unbelievably cheap prices under old contracts and there are modern prices which are related to today’s conditions. The price we pay is within the general range.

145. Senator Cooney.—It is fair to say that you are happy with the deal you have for gas?

Mr. McSweeney.—Yes.

Chairman.—Deputy Deasy’s comment is correct in that there is an element of subsidy.

Senator Keating.—I have heard this said but I do not understand the point. Perhaps the Chairman would indicate how he feels there is an element of subsidy.

Chairman.—NET are getting gas at a cheaper price than the price at which it could be sold for other purposes.

146. Deputy Deasy.—Economic commentators make that point. Is allowance being made for this point by NET officials in making projections of profitability in years to come?

Professor O’Donnell.—Our projections are based on the price formula we have at present. The price goes up every year.

147. Senator Cooney.—There is a freely negotiated contract?

Mr. Conlon.—There is a freely negotiated contract and I feel strongly that we are entitled to the benefit of the expertise shown at the negotiating table. I would not subscribe to the view that there is a subsidy.

148. Deputy Deasy.—The criticism is that it amounts to about £13 million a year in subsidy when compared with the going rate. Any comment?

Professor O’Donnell.—The phrase “going rate” is a very intangible concept. I know what is meant by the going rate for steak or shoes but not for natural gas in a situation of limited market.

Mr. O’Brien.—Our information is that our biggest competitor and much bigger than ourselves, in England is paying a little less, or if it is more, it is only infinitesimally so, than we are paying. So, I cannot see how we are subsidised in that respect.

149. Senator Hillery.—What is the duration of the contract for the natural gas?

Mr. McSweeney.—Twenty years.

150. Senator Hillery.—But is the price escalating?

Professor O’Donnell.—There is an escalation clause. The escalation clause is based on the average of the bulk price for 12 months and not 12 years. I think I may have said 12 years earlier.

151. Chairman.—To get back to the projections again, I think that what the Committee are concerned about is that there is a difference between a company which makes projections on the basis that they have no critical funding problem, that they have sufficient reserves and they are projecting what they hope to do in the next five years. In this situation we are dealing with a company which, to survive for that five years, needs an injection of public funds of £50 million or possibly more. In that context, I think we must look very carefully at every assumption that is made. Whereas NET are perfectly right to make projections and give their best estimate of the various inputs into that estimate, it is much more critical, much more important that these assumptions should be correct. I would certainly be concerned about the margin for error that is possible. We are talking about, first, sales, the demand for products; we are talking about the prices you are likely to get, about the inputs, the materials, wages, maintenance and overheads. Whereas I accept that the projections have all been worked out very carefully, is it not true to say that they could turn out to be very seriously wrong and, if so, the additional funds required will not be enough. In fact it might not be £50 million but £100 million that would be necessary for them even to survive for that five years.

Professor O’Donnell.—Any projections could turn out to be wrong. Your point of view has to be taken on the basis of the company’s recent history and you have to look on these projections somewhat more critically than you would in the case of a company with success behind it. Our best judgment —and Mr. Conlon will elaborate on this—having looked very closely at the figures again very recently—a point was raised earlier about the revision of these estimates since November—is that these projections are as good as we can make them.

Mr. Conlon.—Time does not permit and I would have preferred to have had more time to have been a bit more sophisticated in the preparation of these projections to take account of the items that the Committee are naturally concerned about. I accept the point that, in the light of experience, projections in recent times that the company prepared, these have been off target. Nevertheless, as I said earlier, I was anxious to update the projections originally given to the Board to a situation that I personally felt would represent the position more accurately.

On the point about having more reserves on our estimates I have already mentioned two. There are two major items of cost in those estimates, the financial charges and depreciation. They are non-inflationary. We cannot see them going higher. In the inflationary era in which we live and which would seem to be with us for a number of years—hopefully on a reducing basis—we have assumed that the inflation in the other costs would be taken account of by the inflation in our sales revenues. I do not think that this was an unreasonable assumption to make in view of the fact that the financial charges and depreciation represent almost 40 per cent of our net sales revenue. So, we are really saying that the other items that will move represent 50 per cent of our input. Even if our sales revenue only goes up half as quickly as our other costs, we would still be covered. So far as tonnage is concerned, I think the company has a good record in Ireland. It has made forecasts in advance for many years and tonnage-wise has achieved its target. The present forecast for nitrogen use in this country—basically I am talking about straight nitrogen—was made in the early seventies, covering the seventies and now, ten years on, they are line-ball. Up to this year we were ahead. You may say we are now in a recession but for the reasons I have stated earlier I have confidence that the company will be able to achieve its sales targets, tonnage-wise.

152. Deputy Deasy.—I want to go back to a point I was raising earlier. The article is one of several of which we have extracts before us today. The particular one from which I am quoting is written by Colm Rapple of the Sunday Independent of 22 July, 1979. He says that the belief is that NET are paying 7p per therm for this natural gas. He goes on to say that the present going price in Britain for natural gas supplied by the British Gas Corporation to big commercial users on contract is 15.3p per therm and that a spokesman for the British Gas Corporation said during the week that that price was possibly the lowest obtaining in Europe. He then says that if NET is paying, as reported, 7p per therm for the gas and if it is using 160 million therms per year this would be worth about £13 million a year. He refers to this as being a direct subsidy. Am I to take it that you would refute these comparisons?

Mr. McSweeney.—Yes, we would refute these comparisons but we would prefer to give the Committee in private any information they need about our price for gas.

153. Senator Cooney.—Yours is a 20-year contract. What are the provisions in it for renewal?

Mr. Crumlish.—It is related to the life of the field and at the time of signing or drawing up the contract the life of the field was determined as 20 years from the start of production. Our contract runs for 20 years from commencement of production, from 1979.

Mr. McSweeney.—The point to which the Deputy is referring would arise if there was a much larger field or a number of fields. Then it could be quite relevant to have it renewed, but as it is this contract is associated with one field which will expire.

154. Senator Cooney.—That is looking very far ahead. Has some thought been given to what your feedstock will be in twenty years time?

Professor O’Donnell.—Some thought has been given to it.

155. Senator Keating.—If pressures are exerted NET might have to pay more for the gas so that amounts to giving Marathon more money. There is the question of producing a product and selling it. In your most recent accounts this year you show £5 million trading profit. Then you have an immense debt and debt servicing which is a problem. Some of that debt is short term and medium term. In Mr. Conlon’s letter he itemised four mechanisms where he saw a possibility of improving the situation. What about the question of debt restructuring where you see some erosion of interest rates in some other parts of the world? We saw very recently our Government invoking mechanisms to help industry and agriculture here. Is there a possibility of you getting the money more cheaply and restructuring repayments?

Mr. Crumlish.—As of now, in terms of our total debt, more than 60 per cent of it is in currencies other than the Irish pound. Of the 60 per cent that we are talking of about 20 per cent would be in sterling which is both expensive and carries the greatest risk from the point of view of Irish business. We have considerable borrowing in dollars as of now and we also have borrowing in EEC currencies. We are of the view that in the question of restructuring our first priority is to relieve ourselves of our sterling borrowings where the rates are high and the risks are even greater. We have taken deliberate steps but we are restricted to some extent, because to go into the European market one has either to have a record and reserves or a guarantee. Unfortunately we have neither of those. If legislation were introduced to increase, first of all, our share capital and to issue some of it, it would also increase our borrowing powers. We would then immediately seek to restructure our debt. There is a limit to what we can do in relation to that.

Senator Keating.—It seems to me that a major difficulty is that the costs paid to the main contractors seem to escalate more than would be normally warranted by the mere considerations of the inflationary situation in the world. Is there anything under the heading of plant costs which can be done?

Chairman.—We have decided to defer the plant cost to our third session. We should not go into it apart from a passing reference to it.

156. Senator Keating.—I am happy about that but I want to go back on a few other areas which we have covered already. There has been a 10 per cent growth per annum in nitrogenous fertiliser usage. I am a urea user and have been even before it was much used in Ireland. What is the trend in relation to urea in the USA and Britain?

Mr. O’Brien.—The market in the United States is a very big one but not terribly attractive in terms of money for us. The market in the UK is an increasing one both in terms of agriculture use and the industrial feed grade. It has not been strongly promoted as a grassland fertiliser but this may be for other commercial reasons. We feel that there is quite a hopeful market there. Already 10 per cent of our output goes to the UK and we expect this to continue. Similarly, in European countries, especially in France, there is the same sort of trend as there is here.

157. Senator Keating.—Is this a sub-stitution of urea for what was previously CAN or ammonium nitrate?

Mr. O’Brien.—Yes.

158. Senator Keating.—It seems to me that since the oil crisis in 1973 the price for energy has expanded more rapidly than the price of nitrogenous fertiliser—in a sense you use feedstock which can be converted into energy very readily. There must be very sophisticated projections regarding the cost curve of nitrogen fertiliser. In the long run one expects that the markets will not be too difficult in relation to urea and that energy prices will get back in line some time or other. Has the gap been closing in the last year or so in relation to urea or rising more rapidly? I am not particularly interested in what NET get gas from Marathon for. I am talking about world prices.

Mr. Conlon.—When we started off the plant in last September or October we had to go into the export market in order to get orders. The world prices then were around £75 a ton FOB Marino Point. On 3rd June this year we exported urea in the order of 3,000 tons at a price of £95 per ton FOB. There has been a significant increase in the price of urea over the past year. That was a bulk order. Mr. O’Brien earlier quoted a price of £128 a ton in bags to merchants in the UK. That compares with the price to merchants in Ireland of £118 delivered to the nearest railway station. The prices are rising and the company expect them to rise higher.

Mr. O’Brien.—As you rightly say, the price of nitrogen has been up and down like a jack-in-the-box over the last 15 years, many times unrelated to true energy costs. Over the last 12 months we have had a steady increase in world prices. We hope that this trend will continue. We think that the nitrogen prices are becoming more related to energy costs. We hope that this will continue especially in relation to our exports.

Professor O’Donnell.—A number of studies have been done by the World Bank, the United Nations Industrial Development Organisation and others on the price level required to justify the capital investment of urea and ammonia. This figure is increasing all the time.

159. Senator Keating.—I would like to go on to something which arises from that—the question of world capacity and world competition. In round figures, about 5 per cent of the world ammonia demand is supplied by the merchant market. But places like the Gulf States who have a lot of gas, have a choice as to whether the gas comes out as urea or whether it comes out in rather expensive natural gas or liquified petroleum gas and has to go into expensive handling facilities requiring a good deal of capital at the recipient end. Is there much stuff coming on stream of, for instance, urea? Presumably if only such a small margin of world production is traded the percentage of world production traded could fluctuate very easily and this would mean that world prices could fluctuate quite easily. What are the prognostications in that area? Is there a cartel in urea in the world sense?

Mr. O’Brien.—There are a few points here. Urea will continue to come in ever-increasing quantities from developing countries that have energy. These are the countries that we consider to be the competitors of the future rather than the European producers. As against that we find, as we have found in our own country, that where there is an indigenous industry, the use of the product tends to increase on the home market almost as rapidly as production is increased. Therefore, countries like India and China that are building many new plants seem to be increasing their imports rather than decreasing them. For instance, India is importing more than 2 million tonnes of urea although the rate at which new plants are being constructed is three or four per annum. In the past there tended to be an up-and-down situation in regard to urea but during the past 12 months there has been a gradual upwards tendency. Europe generally is tending to use increasing quantities of urea and we regard this as a good sign in terms of exports, that is, if we must continue to export. We hope, though, that in between five to seven years time we will be in a position of being just about able to produce sufficient of these products to cater for the Irish market. This is because Irish farmers are still using four times less of these products in grasslands than is the case in some of our European counterparts such as Holland.

160. Deputy Deasy.—What has been the demand in Ireland in the current year for nitrogen products generally?

Mr. O’Brien.—For this calendar year the quantity of urea being used is of the order of 85,000 tonnes but for our financial year we estimate the figure at 100,000 tonnes. We anticipate this being accurate, because between now and the end of December it is fair to anticipate the sale of another 15,000 tonnes.

161. Deputy Deasy.—Your projections indicate that by the mid-eighties your production will be just about keeping pace with demand on the home market. In these circumstances are there plans for expansion in the following years?

Mr. O’Brien.—That is the point that I have just made. If the home market expands its use of straight nitrogen at the rate of the average expansion in this regard of the past ten years, we anticipate that by 1986 the straight nitrogen produced by NET will meet only the requirements of Irish farmers.

162. Deputy Deasy.—Are there plans for the future in terms of expansion?

Mr. O’Brien.—It is a question of a shortage of money.

163. Deputy Deasy.—But are there not plans for the period after 1986?

Mr. O’Brien.—There are plans in relation to ammonia but that would have to be converted into some other form of straight nitrogen. This process would involve somebody investing money in the project.

Mr. Conlon.—Regarding world demand for urea, when we are talking about this product we are talking also about ammonia because without ammonia we cannot have urea. The graph I have here for the year up to 1985 in terms of production and demand shows a consistent increase, the demand curve from 1981 being slightly ahead of production availabilities.

In the past week we have had visits from two foreign nationals. One of these purported to represent the Indian Government or to act for them. Because of there being a shortage of urea in India this gentleman wished to enter into a long-term contract with the company for the supply of our exportable surplus. The other person was a European national whose company is interested in becoming involved not only in our exportable surpluses but in establishing a further unit for the production of ammonia at Marino Point.

164. Chairman.—Is it correct to say that the Arklow plant takes ammonia from Marino Point?

Mr. Conlon.—That is so.

165. Chairman.—At present would it be possible for ammonia to be bought cheaper for Arklow on the world market?

Mr. Conlon.—Because of fluctuations and because the Arklow plant can take only in small quantities we would have to pay between £20 and £25 per tonne more on the world market for our requirements than is the case in respect of the Marino Point product.

166. Senator Cooney.—Would it be cheaper to buy on the world market if the Arklow plant could take the product in bulk?

Mr. Conlon.—We do take it in bulk.

Mr. Crumlish.—To take it in bulk really means in 10,000-tonne ships but the maximum size of a ship that can enter Arklow Harbour is the 800-tonne size in terms of liquid ships. For most of the winter, however, the harbour is capable of taking only the 300 and 500-tonne ships.

167. Senator Cooney.—In those circumstances, have you any idea as to why Arklow was chosen in the first place?

Mr. McSweeney.—I was involved in that decision originally. Arklow was chosen at the time of the early years of mining at Avoca. They had a spare raw material, pyrites, which could be used in the manufacture of sulphuric acid. It did not work out that way at the time but that did happen sub-sequently years later. The original intention was to be as close as possible to the raw material and to the sea as well as being near the markets generally.

Professor O’Donnell.—In the early years Arklow was not importing ammonia but as capacity built up in the CAN plant it outstripped ammonia capacity at Arklow.

Mr. Crumlish.—For the importation of the other raw materials such as phosphate rock or potash we can use Wicklow Harbour which is reasonably convenient but from the point of view of ammonia, which must be pumped from the harbour of delivery to the plant, Arklow is used.

168. Deputy Fitzsimons.—Is the Arklow plant now being sold off?

Mr. Gowran.—The only change has been the closure of the ammonia plant at Arklow. This was as a result of the ammonia from Marino Point coming on stream.

169. Deputy Fitzsimons.—Is the Arklow plant not being sold off?

Mr. Conlon.—No. We had already closed the ammonia plant at the beginning of this year. Secondly, we are proposing to dispose of our interests in Arklow Gypsum.

170. Deputy Fitzsimons.—That is what I was talking about. Considering that it has only began production last year, is it not very soon to be selling it off?

Mr. Conlon.—The parent company, NET, have a critical cash situation. The Board have accepted that a number of factors, one being the selling price/cost relationship of Arklow Gypsum, would be to the disadvantage of the company. We feel that the best interests of the employees and the industry could best be served if Arklow Gypsum formed part of a larger group who have the expertise and who have the muscle to purchase paper which is the major raw material in the manufacture of board. Technologically, we are talking about using a lighter paper which would reduce the cost of the end product.

171. Deputy Fitzsimons.—Was the writing not on the wall when it was set up?

Mr. Conlon.—When the project was conceived in the early sixties after the company had decided to embark on the manufacture of CCFs, which involved the production of phosphoric acid, part of the raw material for Arklow Gypsum was a waste by-product from phosphoric acid and at that time viability studies indicated that it would be a profitable venture to undertake. Since that date the cost/price structure has gone against the company.

172. Deputy B. Desmond.—What detailed viability study was undertaken in regard to the Arklow Gypsum project? There was a submission to the Department and the IDA put some money into it.

Mr. Conlon.—The company purchased technology from a European company for the manufacture of wallboard from gypsum.

173. Deputy B. Desmond.—What went wrong with Arklow Gypsum within such a very short space of time?

Mr. Gowran.—There were technical problems in regard to the plant. First of all, there was failure of major equipment and also in the adaptation of the particular technology. We had to do a great deal of research in our efforts to resolve those problems. Before the plant was envisaged we had done elaborate tests and we had used our gypsum to make board in a plant in Europe before we proceeded with the project. We had done a detailed examination of the viability of the project. The major inputs in the product, paper and energy, have made the cost of production considerably higher than could be recovered from the price of the end product. We have solved the technological problems so that the plant can produce now at its rated capacity, but we have not been able to solve the problem of the cost of the raw materials, and energy which has increased in price. At best it would be a break-even prospect for NET because of the change in cost relationships.

174. Deputy Deasy.—What is the bill for your annual import of paper, approximately?

Mr. Conlon.—Somewhere in the region of £500,000 to £600,000 per annum.

175. Senator Cooney.—When did you start the projections which led to going ahead with the project?

Professor O’Donnell.—At the end of 1972.

Mr. Conlon.—The contract was completed in December 1974. The plant was not commissioned until early 1979. In 1976 there were considerable delays, mainly due to contractor design problems and in relation to the supply of equipment. The plant failed in its initial test and it took over a year to surmount that problem. In 1977 there were attempts to overcome equipment design faults in the preparation plant which converts the gypsum into plaster. One major filtering system had to be abandoned and replaced by equipment of a completely different design, at the expense of the contractor. We were bedevilled by a multitude of failures and shortcomings in both the preparation plant and the board plant and it took some time to sort them out.

176. Deputy B. Desmond.—We know that in 1974 energy costs quadrupled and if energy costs were the overriding factor at that time, would it not have been wise to have pulled down the curtains before incurring a cost of £7 million? If they were the criteria by which viability of the project was reckoned—I know you are not necessarily in a position to answer the question—what happened between 1974 and 1979?

Professor O’Donnell.—What Deputy Desmond has said is true in hindsight. Things that are clear now were not necessarily clear then. The crucial importance of energy and paper costs were not as clear-cut then as now. One gets to a certain stage in a project when one becomes committed to it and it is not so easy to pull out of it. There were technical difficulties at the beginning and there was every reason for the company to believe these would be resolved.

177. Chairman.—Was this project originally thought of as a method of using a by-product or was it thought of as a profit making undertaking?

Professor O’Donnell.—The main emphasis was the pollution problem inherent in waste gypsum. The company knew of other manufacturers of fertilisers in the country who met this problem, and decided that the problem of waste would have to be tackled sooner or later. Of course the other aspect that impelled us towards it was that the phosphoric acid-type process which we had, the Nissan process, a Japanese one, produced a gypsum which was particularly suitable for plaster production.

178. Senator Cooney.—When the project was accepted by the Board in 1974. I think it was—

Professor O’Donnell.—Actually the decision to proceed was taken in March 1973.

179. Senator Cooney.—What time scale on the erection and commission of the plant was contained in that projection?

Professor O’Donnell.—The original completion date was to have been May 1974, I think.

Mr. Conlon.—The original contract completion date for the Arklow plasterboard plant was December 1974.

180. Senator Cooney.—Therefore it was five years late coming into operation. If it had come into operation, as scheduled, would it have made a profit for the last five years?

Mr. McSweeney.—It would have been a contract for £3 million fixed price. At that stage, if it had come straight on stream in 1974, probably it would have made a profit then but energy price increases and so on would have hit it.

181. Senator Cooney.—When did building start?

Mr. McSweeney.—In late 1973, went through 1974, was due to have been finished in 1974, and then struggled on for three years after that.

182. Senator Cooney.—How much would have been lost if you had taken account of the ominous signs of increased cost of inputs at that stage and decided, as Deputy Desmond said, to pull down the curtains?

Mr. Conlon.—Approximately £3 million.

183. Senator Cooney.—In real terms it is £7 million now. There is not that big a difference.

Mr. McSweeney.—It is very difficult to make a judgment in the middle of a project as to whether or not it should be stopped immediately or continued in the hope that it will be put right.

184. Chairman.—Might I revert to a question I asked earlier about the cost of ammonia to Arklow? I think the answer I received did not fully cover the situation. Arklow could not import ammonia any cheaper from abroad because it cannot take a large ship. But if ammonia was imported from abroad to Marino Point and transferred from there, could Arklow buy its own cheaper abroad?

Mr. McSweeney.—We have imported ammonia to Marino Point and transferred it to Arklow.

185. Chairman.—Was that cheaper than Arklow is now getting it from Marino Point?

Mr. Conlon.—No, because it was in substitution. We borrowed it because our own ammonia, we brought it into Cork and then swapped products with another producer of ammonia, we brought it into Cork and then trans-shipped it from there to Arklow.

Mr. Crumlish.—Even in cases where we would have bought directly, to supply Arklow via the Marino Point tankage system, we would have had double freightage on it, in that we would have to freight it by ship into Marino Point and then convey it to Arklow by rail. Taking these two costs into account it would still come out that the cost of ammonia from our own production at Marino Point into the Arklow plant would become level with purchasing on the world market and holding in storage at Marino Point. Therefore, on that basis one must assume that one will have a terminal facility there to be used only for the benefit of keeping Arklow supplied. To gain that benefit, and to get the benefit of freight, would mean bringing in large ships of ammonia, say, 10,000 tonners. At present we send up roughly 500 tonnes a day, so a ship would come in only at infrequent intervals. But one would have to man a facility on a terminal or transmission basis and there would be the cost related to it. In that case one could not envisage a situation in which one would actually import ammonia to send to Arklow and manufacture ammonia for further processing at Marino Point.

Mr. Conlon.—If one considers the freight from most places in Europe to Arklow for ammonia it would cost somewhere in the region of 35 dollars to 55 dollars per ton. The difference in the price that we now have to pay overall is nothing like that.

186. Deputy Deasy.—I believe you are now on the point of transporting all your ammonia from Marino Point to Arklow by rail, that you are phasing out sea transport. Is there any reason to believe that possibly there is a danger being created by this transportation by rail? I believe the trains in question have to travel to Dublin through built-up areas and back out again to Arklow.

Mr. Gowran.—Before we entered into this business we reviewed the situation in Europe. Ammonia has been transported all over Europe since the early part of this century. There are very substantial tonnages of ammonia transported by rail in Europe and there has not been a serious accident in the European situation. We and CIE have adopted the strictest safety precautions we can and that prevail within the industry in Europe. Therefore we are quite satisfied that we have a safe operational system. Again, in conjunction with CIE, we have emergency procedures that will come into effect in the event of any incident occurring. It is a safe way of transporting this product. It is well proven in Europe from the early part of this century.

187. Chairman.—What are the advantages as compared with shipping it?

Mr. Gowran.—We are moving by rail trains of 250 tonnes. We are moving two trains a day at present, approximately 500 tonnes of ammonia a day. The advantage is in the cost of the freight and, of course, we are giving business to CIE. We did have to start the business by sea. Before the plant was started and before we envisaged a rail transport system we sought competitive tenders for sea freight. We did receive a proposal from one Irish company but it could not stand up to the competition of transport by rail; transport by rail was much cheaper. We can still move ammonia by sea, if necessary, from Cork to Arklow.

188. Deputy Deasy.—Are the local authorities en route advised of these shipments by rail?

Mr. McSweeney.—I have been involved in discussions with the local authorities at both ends on this. We are aware that the local authorities en route have been kept informed through their own Department and through CIE. We have a system in existence for handling any emergency which arises, which involves our technical staff as well as CIE.

189. Deputy Deasy.—Are you satisfied that the local authority safety services along the routes in question are capable of dealing with any accident that might occur?

Mr. McSweeney.—We are in constant touch about this. All I can say is that the best possible system is in existence for handling any such situation. We realise that it is an area in which we must be very careful.

190. Deputy Deasy.—As laymen we do not understand the exact toxic effects of the ammonia in question. Could you outline for us very briefly the possible effects if there was a derailment and a fracturing of one of the tanks in question?

Mr. McSweeney.—Mr. Gowran will outline the technical aspects of ammonia. I am satisfied that it would be most unlikely that any of the tanks would rupture in the event of a derailment.

Mr. Gowran.—The tanks are of a special design so that there are no exposed valves. There are no safety valves on the tanks. The tanks are of a sufficiently heavy metal to withstand anything that might raise the pressure of the ammonia, such as a local fire. There is nothing on the outside of the tanks which could be damaged. The valves are internal and in the event of an accident it is a very remote possibility that the tanks could be ruptured. This is the main basis of the safety of the system.

191. Deputy Deasy.—Have any local authorities or other bodies expressed concern at these shipments being made by rail?

Mr. Gowran.—Certainly the local authorities have been fully informed.

192. Deputy Deasy.—Have they expressed concern or shown apprehension about the possibility of an accident?

Mr. Gowran.—An inter departmental committee was set up which looked at the transporting of ammonia. They had already examined the transport of other chemicals by rail. They looked at the precautions being taken and the facilities being provided by CIE at both terminals and were satisfied with what was proposed.

193. Deputy B. Desmond.—Could the company put a figure on the cost per ton of material shipped by rail, bearing in mind the cost of the special equipment which was necessary and the cost of special precautions, as well as the inherent risk in transporting such a cargo through the two major conurbations in the country? I am a member of Dublin Council Council and I do not know of any consultations with an inter-departmental committee and that local authority. I gather that the committee made the decision approving of the precautions taken but it strikes me as a unique situation of inherent danger. Was this quantified in terms of the cost of transport either by rail or by sea?

Mr. McSweeney.—We went through this aspect when we were making the decision and we can give a presentation of the difference in cost which shows an enormous advantage in favour of transport by rail.

Chairman.—We would be glad if you would furnish this information.

Mr. McSweeney.—I am aware that the local authorities were advised and we have been in close touch with CIE to make sure that everybody does the right thing. Certainly we have not been remiss, nor, I believe, have CIE been remiss in looking after safety aspects. It had been thought that if the rail system in the south-east were improved in one area the traffic could move through that system. However, this has not happened.

Mr. Gowran.—I should like to take up Deputy Desmond’s point about this transportation being unique. Ammonia is moved by rail through most of the main cities and towns of the European mainland and Scandinavia. This has been going on since the twenties and to the best of my knowledge there has not been a serious incident in Europe. There have been accidents in the US where maintenance of the rail system is on a completely different basis.

194. Deputy Deasy.—My fear is the same as Deputy Desmond’s. There is a traditional lack of co-ordination between one semi-State body and another or between semi-State bodies and local authorities. Is there not an onus on the company to see that local authorities are informed when shipments are taking place so that in the case of an emergency they will be prepared?

Deputy B. Desmond.—I used the term “unique” in the context of the volume of this cargo. I accept that this is a relatively commonplace matter in Europe but such is not the case here when this cargo goes through two major urban areas.

Mr. McSweeney.—We can undertake to follow it up and reassure the committee.

195. Chairman.—Will the company send us a memo on the reasons for transporting material in this way and also to comment on the extent to which concern has been conveyed to the company with regard to traffic through urban areas?

Mr. McSweeney.—We can undertake to follow it up and reassure the committee.

Mr. Gowran.—These rail movements are on a very strict timetable and I would have thought the information would be available to local authorities from CIE. If one looks at a timetable covering train movements throughout Europe one will find on the schedule the trains from Marino Point. Any train timetables include the movements of ammonia from Marino Point.

Deputy B. Desmond.—As a member of a local authority in Dublin I have no conception of when they are passing through.

196. Deputy Deasy.—There is a figure contained in our consultants’ report on which I should like to comment. It deals with output projection. The report of the consultants contradicts the company’s figure in regard to the production of urea and I should like to know what effect it would have on the company’s financial projections if their figure is correct. You project that consumption on the home market will increase from 100,000 tons in 1980 to 310,000 tons in 1986, whereas the consultants predict that consumption on the home market will be 80,000 tons in 1980 rising to 250,000 tons in 1989. Is there not a considerable disparity between the two figures?

Mr. Conlon.—On what basis did the consultants make this assumption? Did they have access to any particular market research?

Deputy Deasy.—They are rather lengthy. Obviously, they are going on tests undertaken by the Grasslands Nutrition and Ecological Department at Johnstown Castle Research Centre who are not as optimistic as the company as regards the use of nitrogen in the years to come.

Mr. Conlon.—In view of the wide disparity in the calculations mentioned by the consultants and those used by ourselves could I suggest that you might send us, Chairman, their comments and we will comment back to you?

Chairman.—Yes, we can do that.

Mr. Conlon.—We have already discussed at length here the market as we see it for urea.

197. Senator Hillery.—Could I turn to Joe Sefton Ltd. and ask the representatives of the company for an assessment of that organisation?

Mr. Conlon.—Joe Sefton Ltd. is the marketing arm of the company in the North of Ireland. It employs three people and we use it for strategic purposes in the marketing of our products both in Ireland and the UK. Does that answer your question?

198. Senator Hillery.—It does. I have one further question. In view of the company’s poor trading performance during 1977-78 and the value of its net asset base as at 30 April 1978, how do you account for the value of £22.69 per £1 share paid by the company in purchasing the remaining 25 per cent of ordinary share capital in November, 1978? Would you like to comment on that?

Mr. Crumlish.—The managing director stated that this company was used for strategic purposes. One of the strategies was that it would be rather remiss of us to incur profits in the North of Ireland which would be subject to tax and incur losses in the Republic of Ireland which would be subject to no benefit. Therefore, it is relevant to the relationship between turnover and profit shown. In a capital re-organisation to put that right the company purchased the remaining interest from the original shareholder which was Joe Sefton. An agreement existed between the company and the shareholder in that he had a consultancy basis to advise the company and it was in effect part of the purchase price of the company that he be retained as consultant for a certain number of years. In the course of 1978 the remuneration for his consultancy was based on turnover and the management realised that as a lot of business was being channelled through this company the reward to the other shareholder was disproportionate to the effort he put in. So, we negotiated with him, based on the commission paid over a previous number of years, that we would buy out his remaining consultancy interest. It was not a case of putting a price on the shares in relation to the profit of the company but in relation to the benefit the other shareholder would have got out of the company in the course of the next five years. We decided it was cheaper to do it this way.

Mr. Conlon.—If I might comment on the loss for the year ended 30 April 1978, since the Senator has drawn attention to it, at that time there was a strike in NET, Arklow and we could not supply material. As a result Joe Sefton Ltd. had to go out and purchase material to honour its commitments. That was the reason for the loss in that year.

199. Senator Cooney.—When was the initial arrangement made with Joe Sefton Ltd?

Professor O’Donnell.—The 75 per cent purchase was in August 1974.

200. Senator Cooney.—How long had you been using the company?

Mr. O’Brien.—We were selling through him for four or five years, I think from about 1969 to 1974 at which time we were anxious to spread our market more in order to compete with another big company in the North which was selling vast tonnages down here and we decided to take control of it. Since then we have increased fairly regularly the tonnage going up there and endeavoured to give the equivalent through a commission to Joe Sefton Ltd. to cover the overheads up there. By and large it is the equivalent of an export arm in that part of the country, selling our products and other products if they can trade profitably.

201. Senator Cooney.—You were exporting, using this company as a selling agent, in the North between 1969 and 1974?

Mr. O’Brien.—No, we were selling to him in the area. Then we bought it over to take control.

202. Senator Cooney.—You bought a 75 per cent interest in it?

Mr. O’Brien.—Yes.

203. Senator Cooney.—When did you make the commission arrangement with the principal Joe Sefton?

Mr. O’Brien.—When we made the original purchase of 75 per cent. It was part of that deal and was based on turnover.

204. Senator Cooney.—Was his rate of commission graded to the level of turnover or was it a flat, open-end commission?

Mr. O’Brien.—It was related to a mixture of tonnage and turnover, in other words, a ton of any product other than an NET product was related to the then going price of a ton of NET fertiliser. After two or three years of that we decided that as our tonnage up there would probably increase and prices would be increasing, it would be opportune for us to buy him out, his last 25 per cent.

205. Senator Cooney.—Did that consideration enter into your thinking on this arrangement before you bought the 75 per cent share?

Mr. O’Brien.—I think it is fair to say that we went in for the 75 per cent to get the feel of it and to keep an involvement on his part. He was the principal at that time and obviously had a lot of contacts up there. Bearing in mind the situation there we felt it was the right thing to do until we had our own people.

206. Senator Cooney.—How much commission was he paid in the last year?

Mr. O’Brien.—I would not have that available but it would be the equivalent of a reasonably good salary.

Mr. Conlon.—As there is a third party involved there I think we will submit that to you in writing.

207. Senator Cooney.—Was he the managing director of this company?

Mr. O’Brien.—Yes.

208. Senator Cooney.—Was he being paid a salary by you?

Mr. O’Brien.—No.

209. Senator Cooney.—From the company, was he getting a salary?

Mr. O’Brien.—Sorry, he was managing director of the company before we took an interest in it. Therefore, he was a director; he was not paid any salary.

210. Senator Cooney.—He was paid a commission?

Mr. O’Brien.—That is right, yes, which without having a figure was the equivalent of a salary.

211. Senator Cooney.—Did you provide capital for this company to enable it to trade?

Mr. O’Brien.—We provided it with credit rather than capital, credit facilities in order to buy in for re-sale through the year.

212. Senator Cooney.—What way was that credit provided? Was it in a guarantee or actual cash?

Mr. Conlon.—We provided it in a number of ways, by supplying stock or underwriting banking facilities which they would negotiate with their own assets backing it. In effect, for their working capital, we would underwrite the facilities with merchant banks or commercial banks in the North and in the UK.

213. Senator Cooney.—Who were the interest charges on those facilities charged to?

Mr. Conlon.—They would be picked up by Joe Sefton Ltd., not by Nítrigín Éireann.

214. Senator Cooney.—They would be involved in the year-end accounts of Joe Sefton. Would they have any effect on the commission?

Mr. Conlon.—No. The commission was related to the turnover not to costs.

215. Senator Cooney.—Was there a written agreement with him?

Mr. Conlon.—There was.

216. Senator Cooney.—Could we have that?

Mr. Conlon.—Yes.

217. Deputy Fitzsimons.—In relation to the ammonium nitrate plant, there is a continuous problem there in relation to pollution. Deputy Deasy and Deputy Desmond spoke about this earlier on. As a member of a local authority and being fairly involved with the Tara Mines and Bula in County Meath, I would be glad to know if there were stringent conditions in relation to planning permission and in relation to this project?

Mr. McSweeney.—The position in relation to Arklow is that we were within the legal limits at all times apart from the volume of water vapour, which is a form of pollution. We got into difficulties when we built this plant in 1974 which has caused pollution in relation to the ammonium nitrate in dust form. We are trying to rectify that and we have to do something very substantial to overcome the problem. The whole matter is the subject of a High Court action which is taking place.

218. Deputy Fitzsimons.—Is that sub judice?

Mr. McSweeney.—It is.

219. Deputy Fitzsimons.—What is the future of the plant in relation to that? How serious are the pollution problems?

Mr. Gowran.—I should like to comment on this particular problem. When we decided to build this plant in 1973 we intended to produce 34 per cent N product. We hoped to substitute this product for the traditional 26 per cent CAN material. Our motivation was to reduce the cost per unit of N to the farmer through the more efficient production and packaging of the more concentrated product. While the plant was being designed the Department of Justice prevented us from producing 34 per cent product. We had to make further modifications to the design so that we could produce the traditional 26 per cent material in this plant. In order to do this we had to use limestone to dilute the ammonium nitrate so that we got within the legal limit which the Department of Justice set on this material. A 34 per cent material had been used in Northern Ireland for explosive purposes so we were prevented from manufacturing 34 per cent, which was part of the original design. In order to produce the 26 per cent we had to use limestone. In fact, we had to use a very special sort of limestone. We used dolimitic limestone. There is only one source of this limestone in the country. We had to use lower dolimitic limestone which we could only get from one supplier. We had great difficulty in getting it. If we could produce 34 per cent N we would not have the pollution problem as we would be within the limit but because we produce the 27½ per cent materials—we went as far as we could to the legal limit—we have some reaction between this particular limestone and the ammonium nitrate which results in dust being emitted. This is part of the problem we have been trying to solve in the last few years.

In 1976 we did an extensive research programme with the co-operation of the Department of Justice and of the Institute for Industrial Research and Standards to try to find a way to produce a 34 per cent material which would be non-detonable and which would be acceptable to the Department of Justice. We failed in this attempt. We made a subsequent attempt on this in 1978-79 but again we did not succeed. We have to replace that tower with an alternative process. That is the only solution to our problem.

220. Deputy Fitzsimons.—Do NET admit that they are causing a great pollution problem in the area?

Mr. Gowran.—It is causing a problem in the immediate area of the plant.

221. Deputy Fitzsimons.—In relation to planning permission granted by the local authority were you not subject to all those questions in relation to safety, pollution and so on?

Mr. McSweeney.—We complied with the legal limits except for this particular problem and one other problem.

222. Deputy Deasy.—Mr. Gowran referred to the fact that there was an embargo placed by the Government on the production of ammonium nitrate because of the possibility of this potentially explosive substance falling into the hands of subversives. That has obviously cost the firm money. Can you quantify what the cost has come to?

Mr. Gowran.—It has cost us a great deal of money not only in our straight ammonium CAN business but it has also cost us money in terms of how we might have operated our CCF system. If we could have blended 34 per cent ammonium nitrate with one of our normal CCF products we could have produced the high N compound which the market is now demanding. We have had a dual loss from this restriction.

223. Deputy Deasy.—Can you put a figure on this?

Mr. Gowran.—We have not quantified it.

Mr. Conlon.—This issue is sub judice and we are getting near the bone here.

224. Deputy Deasy.—Has it had an appreciable effect on your profits?

Mr. Crumlish.—It has had a substantial effect on our profits over the last few years.

225. Deputy Deasy.—In relation to the Arklow premises?

Mr. Crumlish.—Yes.

Mr. Gowran.—I would like to make one further comment. If we replaced this tower with a different unit which will not have this pollution problem we would realise the profits we have been losing over the years from this unit. The particular problem has nothing to do with our court case.

226. Deputy Deasy.—There is another point in your submission which is of interest. You said you would like to diversify. You made particular reference to the fact that you could produce methanol and that you could enter into the production of fuel oil. Could you tell us in some detail what this would mean? Would it have major beneficial effects on the economy?

Mr. Conlon.—Can we put this development into context? The company have a tremendous potential to diversify but at the present time we have no money. We are really on a survival course.

227. Deputy Deasy.—Have you made a submission to the Department on those lines?

Professor O’Donnell.—The Department are aware of our interests in methanol. Any ammonia producer who has suitable feedstock such as natural gas would be bound to be interested in the possibility of methanol as a product.

228. Chairman.—The Department are aware that there is a potential there?

Mr. Conlon.—Yes.

229. Deputy Deasy.—How attractive do you consider this diversification to be?

Professor O’Donnell.—Perhaps it is somewhat premature to go into this. At the moment, while we could perhaps put a figure on it, we would regard it as a distraction from our immediate task.

Deputy Deasy.—I just mentioned it since it was referred to in your submission.

Mr. Conlon.—For this sort of project we are talking in terms of £50 million to £60 million.

Deputy Deasy.—I merely wanted an idea of what would be involved.

Professor O’Donnell.—There may be some misapprehension here. Deputy Deasy mentioned our being interested in producing fuel oil.

Deputy Deasy.—There is a reference in the submission to methanol.

Professor O’Donnell.—I think that is a reference to the use of methanol for blending with petrol.

Mr. Conlon.—While we are on the subject of diversification, I might mention that the company have harnessed some by products. For instance, we produce carbon dioxide in liquid form. That plant was at Arklow originally but has now been transferred to Cork. Also, while the company at Arklow was producing ammonia it produced also carbon black from the gasification of slurry but the ammonia production has ceased at Arklow. However, we are continuing the carbon plant in operation. The company is a joint company with AKZO International and has been quite profitable. We are continuing in business by importing the slurry from Finland and processing it at Arklow. We are also experimenting in the use of the gasification plant at Arklow for the production of slurry and at the same time to produce waste steam for the rest of the complex.

There is another small development, that is, the production of ammonia water for supply locally in Ireland.

230. Senator Cooney.—What is your representation on the board of that joint company?

Mr. Conlon.—There is equal participation. The company has a 51:49 shareholding in favour of the Dutch. We have two directors and the chairmanship alternates between the two companies.

231. Senator Cooney.—Are there options on either side to purchase?

Mr. Conlon.—No.

232. Senator Cooney.—Is that the position also regarding the plastic subsidiary?

Mr. Conlon.—It is not a subsidiary. In that case, we are an associated company of Irish Plastic Packaging, having a 20 per cent interest in that firm. We have two directors on the board of that company.

233. Chairman.—There is one other small point. Successive accounts for your company have brought the comment from the Comptroller and Auditor General that although the remuneration of the managing director must be with the consent of the Minister for the Public Service, the necessary ministerial consent was not obtained in any of these years. Have you any comment to make on that?

Professor O’Donnell.—There is quite a history associated with this situation. It goes back to 1974 when the Board met the then Minister for Industry and Commerce, prior to which there had been a series of submissions over a long period in relation to the salary of the chief executive of the company. At the beginning of 1974 the Board put to the Minister the case that the salary of the chief executive was much too low and they proposed a figure that they considered appropriate. The matter had been debated very strongly at Board level and a resolution had been passed to the effect that he should be paid the salary level that they decided was appropriate. The Minister was informed of that resolution and it was put to him that unless he refused to permit them to do so, they proposed to pay this salary to their chief executive. The Minister acceded verbally to the Board’s proposal and the Board proceeded to implement their resolution, informing the Minister of their intention to do so, telling him the date by which they proposed to implement this new salary level and telling him that they awaited his comments. However, as we did not receive any instruction informing us not to go ahead we implemented our proposals. The Minister then informed us that he was regarding the letter I had written to him as a request for the consent of the Minister for Finance and that he would forward the letter to that Minister. We have continued to pay the chief executive in accordance with the proposal we made to the Minister but we have never received any formal instruction in the matter.

233A. Chairman.—I am surprised that certain other bodies did not adopt the same formula.

Professor O’Donnell.—In recent times the matter has been raised and while I would prefer not to go into too much detail, I can say that we are now in a situation of having discussions on this subject with the Minister for the Public Service. Is that an adequate answer to your question?

234. Chairman.—Yes. Do you have worker participation on Board level?

Professor O’Donnell.—We do.

235. Chairman.—Have you developed worker participation and decision making at plant level?

Mr. McSweeney.—In pages 16 and 17 of our submission there is a brief note on that. We have mentioned in the note the fact that we have brought our internal discussions to the point where we brought in the Tavistock Institute to act in a kind of advisory refereee capacity or as a promoter. That has reached the point where some of the decision making we had in mind could have eventuated but the unions did not think it had been done in such a way that they could see their own position being safeguarded. At present we are seriously involved in this matter and are probably heading towards a works council. We do not want to impose this but we would welcome it as a normal development if it comes from the people themselves. We are having in-depth discussions with them about what we are doing and why we are doing it.

236. Senator Cooney.—We have had a NESC report in regard to involvement of Departments in the activities of semi-State bodies. By and large the report is critical of the role of the sponsoring Departments and there has been reference to interference. We have put this point to some of your colleagues who have gone before us and all of them have expressed satisfaction with the relationship between the State-sponsored bodies and the sponsoring Departments— that there has been co-operation and that there has not been interference in regard to initiative. Do you agree with that?

Professor O’Donnell.—In my experience we have not had examples of interference by our mother Department in the day-to-day activities of the company. We have good relation with the Department at all times.

Mr. McSweeney.—We have had first class relations with the Department.

Mr. Conlon.—I have made inquiries into this because I have seen the NESC report referred to and the comments therein. I cannot find anything to justify these comments as far as we are concerned in our relations with the sponsoring Department.

237. Deputy Deasy.—I was bemused by the whole thing because one of the coauthors of this report was before us as a senior executive of a semi-State body and he gave us the same answer as you have given. Any comment?

Mr. McSweeney.—The difficulty usually arises in relation to finance. It has not got anything to do with co-operation but with companies trying to get finance for their needs and it is not available.

Mr. Conlon.—I agree with that. It is necessary for Departments to inquire from semi-State bodies about finance needs. The semi-State bodies might complain about having to go through the exercise with the sponsoring Department and repeat it with the Department of Finance. One wonders if structures could be established in regard to such a situation through which the three interested bodies, the sponsoring Department, the Department of Finance and the company concerned could get together. This would save time and energy.

238. Senator Hillery.—Over a period of years the company has encountered a series of industrial relations problems. Could you isolate the key factors which contributed to these problems?

Mr. McSweeney.—You start off with a new plant in a small town which will operate day and night, 365 days a year. This is a major problem which creates its own problems for the workers. They work the shift system. They work four days and they have three off and this involves the pressures of an unusual working system. I would point out that we have not had serious industrial relations problems, but we have had a series of unofficial actions arising from one reason or another. The one most obvious cause has been overtime. This creates enormous problems. It causes an imbalance in take home pay and relativities are created.

239. Senator Hillery.—Do you have a document on industrial relations policy?

Mr. McSweeney.—It is in the form of quite a large book, something like the Treaty of Rome, perhaps.

240. Senator Hillery.—Are you satisfied that policies on industrial relations are being implemented?

Mr. McSweeney.—They are not fully implemented but we are at a point when some of them have been implemented and others are struggling badly. The realisation of the economic problems of the company has created a much better climate. What we are concerned about is productivity, increased output per man. That is our biggest single problem.

Professor O’Donnell.—There are also demarcation problems.

Mr. Conlon.—There are restrictive practices that we must get rid of. One of the problems is the employment of outside contractors, the employment of which is essential in our annual overhauls. We keep running for 365 days a year.

241. Senator Hillery.—Whom do you regard among the management team as having primary responsibility for industrial relations policy?

Mr. Conlon.—We have an assistant general manager for personnel who is directly responsible.

242. Senator Hillery.—Do you regard industrial relations as part and parcel of the responsibility of all assistant general managers?

Mr. McSweeney.—We involve a number of people. It is not a one man job. They are all part of a committee.

243. Deputy Fitzsimons.—Your Arklow operations involve a lot of shift work. Is there much absenteeism there? Is there shifting around in the shifts? How costly is it?

Mr. McSweeney.—It is quite costly. It is my opinion that the modern social welfare system in relation to pay-related benefits encourages absenteeism.

244. Deputy Fitzsimons.—Is it true that if a worker was to do another worker’s shift he would be paid treble time?

Mr. Sweeney.—Yes. There has been reference to double bubble.

The witnesses withdrew.