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, 24 Meán Fómhair, 1980

Wednesday, 24 September, 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. Gowran, Assistant General Manager—Development; Mr. G. B. Casey, Assistant General Manager—Technical; Mr. F. McCoy, Assistant General Manager—Personnel; Mr. F. P. Hoey, Factory Manager, Marino Point; Mr. J. B. Hynes, former Managing Director, of Nítrigin Éireann Teoranta and Mr. A. M. Cusack, Managing Director of Arklow Gypsum Limited, called and further examined.

Chairman.—We can now start. We are on tape and I should like to point out that some difficulty has been experienced about the microphones. I would ask everybody to speak up when questions are being asked or answered. We will follow the same procedure today as we have done in the past. Questions will be addressed to the Chairman of NET, Professor O’Donnell, and he can refer them to whichever of his team seems appropriate.

311. Deputy B. Desmond.—What is the up-to-date position regarding the closure of the project at Arklow?

Mr. Cusack.—The closure date is 30 September, as requested by Government directive. The plant has been shut down and the finalising operation, which has been taking place for the second time, will have been completed by Friday of this week.

312. Deputy B. Desmond.—The figure mentioned has been 138 in respect of job losses.

Mr. Cusack.—The accurate figure is 132.

313. Deputy B. Desmond.—One of the matters which has occupied the Committee is the pre-planning in regard to this plant. In your latest submission to us it is stated that the total expenditure on this plant is nearly £11 million. First of all, what are the prospects of recovering any of that money? In previous sessions we spoke about a total expenditure of £7 million to £8 million but your latest submission suggests that it will be £10.57 million up to 30 June next. In effect, how much of that is to be written off as irrecoverable?

Mr. Crumlish.—In our accounts to 31 December 1979 we have written off a figure of £3,373,000 and in our submission to the Committee this year we indicated that in the event of closure we would require to write off a further £6.5 million. These figures were set out in our submission where we said that the expenditure up to the end of June was £10.57 million. We are of the view that the value to be recovered out of that, taking into account stocks and the value of the plant not sold on a going concern basis, would be of the order of between £1 million and £2 million.

314. Deputy B. Desmond.—I use the phrase “write off”, and I use the phrase “recoverable”. How much in effect of that £10 million is irrecoverable?

Mr. Crumlish.—Between £8½ million and £9½ million would be irrecoverable depending on the resale value of the assets in the case of a close down.

315. Deputy B. Desmond.—That is a serious situation. As a result of the feasibility study that was submitted to the Board in February 1973, a decision was taken to go ahead in April 1973 and the Board got authorisation for an IDA grant at the same time. Right through to 1979 it is fair to say that millions of pounds were being lost. The Board made statements in their submission to us that inflation was not taken into account and that it was assumed that the prices of raw materials, services and personnel would inflate at the same rate as the product price. The Board also proposed at that time to market some 60 per cent of the product on this island, 35 per cent in the Republic and 25 per cent in the North. How accurate were the feasibility studies? I am thinking purely in terms of marketing prospects in 1973-1974. What exactly happened?

Mr. Cusack.—In relation to the comment about inflation not being taken into consideration at that time, from February to April 1973, it must be remembered that the Six Day War and the ensuing oil crisis had an effect. At that time it was general commercial practice in feasibility studies to take it that prices and costs would inflate at the same rate. That is not the situation now since we had this tremendous differential in energy cost increases. That procedure was the normal commercial practice at that time. What then happened is fairly well detailed in our submission with regard to the commercial viability of the Company, which is, of course, the main point on which the shut-down decision had to be made. We had a tremendous inflation difference between prices and costs and this was experienced not only by us but by many other industries of this nature. Neither we nor anybody else could predict that in 1973.

316. Senator Cooney.—In the winter of 1973 because of the oil crisis, the whole scene had drastically changed. Was any re-assessment study undertaken then?

Mr. Cusack.—If we look at the history of that time, the commercial community in general did not become aware that the oil crisis would be as severe as it eventually turned out to be until well into 1974. The Six Day War occurred in October but it was well into 1974 before the ramifications of it were felt. At that stage the Company had re-assessed the situation on a continuing basis but the capital was fairly well irretrievably spent. We had a stage payments contract, and, whereas we were at that stage looking at much lower pay back of capital, we were still looking at some pay back of capital. Having spent the capital, we were trying to rescue as much of the situation as we could. That way of thinking continued right up to our shut-down decision when the commercial situation got to a point where we could no longer project a cash profit.

317. Senator Cooney.—Would it not be fairer to say that in 1974 the Company had committed their capital rather than that they had spent it?

Mr. Cusack.—No, we had spent it.

318. Deputy B. Desmond.—In your submission you stated that mechanical completion was delayed until November 1975 due to contractor design delays. Was it not apparent in mid-1974 and early 1975, with the quadrupling of oil prices at that time, that the inherent economics of the whole project were totally off target? At that stage you had spent £2 million. Did the Board take any decision at that stage not to proceed with the project? It also appears that the basic design technology of the whole project had not been effectively done on a feasibility basis. For example, reservations you had about particular plants were met by sending 100 tons of gypsum from Arklow to Germany where it was processed into plaster and subsequently converted into plasterboard on a Babcock-BSH built plant in Yugoslavia. On that basis the Germans were awarded the contract. It would appear that the mechanical equipment supplied was apparently not effectively working until 1979 by which time £8 or £9 million was lost. The whole technological feasibility of the equipment proposed, the selection of contractors, the nature of the technology, for example the autoclave failed on its initial pressure test, the construction problems through 1974 to 1979—the whole thing appears to have been a total technological shambles with £10 million gone. Did the Board at any stage say “This is 1976, we have lost £4 million and cannot go ahead”?

Mr. Cusack.—Could you repeat the question part of the statement?

Deputy B. Desmond.—On the basis of information given to us by way of your submission on page 4 you stated that projections prepared in June 1980 represented the best that could be achieved on the basis of nothing going wrong. You also stated, and this is perhaps the current position, that “furthermore substantial technical problems remain to be solved in the area of stream plant factor”. As of now if the market situation improved and there was never an oil price crisis it would appear that you still have stream plant factor problems which are not resolved. Did the technology of the whole project work or is it working at present?

Mr. Cusack.—Which question will I answer first?

Chairman.—Take the question on technological efficiency. If there had not been an escalation in the cost of oil and so on, would it have been viable?

Mr. Cusack.—If we take the projections we have made which were central to the decision to shut down, they represented the best that could be achieved on the basis of nothing going wrong. These projections assume that in 1981 the plant performs at its original contract designed output and efficiency of use of raw materials. The situation is that the projections made in 1973 on the prices of raw materials and finished products showed fairly healthy pay back on capital and so on. The same technical data matched up with today’s commercial data shows continuing heavy cash losses. The main reason is the vital difference in the inflation rates between prices and costs, with energy the big factor.

319. Senator Cooney.—During the period from 1974 to 1976 when snags were being encountered and the viability of the project must have thrown up question marks, did the Board consider in a global way that they had committed £X million a year or ask how much more would they have to commit or were any options put to them to continue or not?

Professor O’Donnell.—It never came to the Board in the form of an explicit suggestion that the project should be abandoned. It is important to remember and visualise the way in which a project such as this will run. Commitments are made. Plant problems arise. As Mr. Cusack said earlier, a large part of the capital investment was already committed by the end of 1974. The Company at that stage and in the years up to 1976 felt that despite the change in the ratio between the cost and sales the project could be made to work. Taking the balance of the question, it was better to proceed with it than to abandon it.

320. Deputy Deasy.—If you were the Board of a private company would you have continued at that stage?

Professor O’Donnell.—It would depend on the situation and the situation of the private company. It is not a question one can answer and say categorically that the private company would have done one thing and the State company another.

321. Senator Keating.—We have been told by Mr. Cusack that by early 1974 the capital was substantially spent.

Mr. Cusack.—That is correct.

322. Senator Keating.—The projected commissioning date was early 1975 leaving aside the delays. Was it normal or prudent to pay in full, five years before actual commissioning and nine months before the promised commissioning?

Mr. McSweeney.—The plant was being built between 1973 and 1974. The contractor gets what are called progress payments, which is normal. It is the way of keeping the price within the agreed bargain. These progress payments are stopped at a point where progress is deemed not to be progress. We have retained that money from the contractor. There is no question of having paid in full. That is the situation at present.

323. Senator Keating.—The total expenditure to date is £10½ million. The recoverable value is somewhere between £1 and £2 million. The difference is approximately £9 million. There are salaries and financial charges. If you have a commitment and the contract is written to deliver your plant by a certain date which is to perform according to a specification—if it is delivered four years later—I am not clear whether it has performed up to specification or not—is it normal that all the costs of the four year delay are borne by the commissioning party and not by the contracting party?

Mr. McSweeney.—In NET we have been involved in up to 20 major contracts in the course of 20 years existence. It is normal to provide in each contract for what is the commercial risk being undertaken, in other words to build a certain plant in a certain way. Some of the plants we built, for example, nitric acid plants, were standard and finished before the time. In those cases there would be a straight-forward payment a year after the plant was finished, and it had performed to specification and was now OK. A plant like Arklow Gypsum had a certain amount of novel features in it. The first half of the plant had a certain amount of prototype work and the second half of the plant was normal plant. This was recognised in the contractual situation including a licence fee from Giulini for the first half of the plant. We would not be able to make a contract which provides for a contractor to be responsible for our losses after the completion date. The losses which the Committee are talking about are NET losses mainly. The contractor did not get that money.

324. Deputy L. Lawlor.—On that point, on page 3 of the submission, there is a question of a special pressure vessel supplied by a reputable German engineering company and they replaced the item under guarantee. Surely there must be a consequential loss claim for the 14 months’ delay because that was as a direct result of their failure, and NET are picking up the consequential loss on the basis of the item not living up to what was contracted.

Mr. Conlon.—Under the contract that had been agreed to previously between the contractor and the Company unless we could prove fundamental breach of contract we could not claim consequential losses.

325. Chairman.—You could see to it that they delivered what they were contracted to do, an efficient piece of equipment.

Mr. Conlon.—I do not think so. That would be arguable and the advice that we have is that that would be difficult in this instance to prove. To revert to Deputy Desmond’s question about the technology, the technology to be adopted was, of course, most important. A number of the existing processes were not available to us commercially because of understandings which board manufacturers had with the equipment suppliers. Of those available the Giulini process was considered the most viable. To make plasterboard, gypsum has first to be converted into hemihydrate. The Giulini Company had a full-scale plant in Germany which produced this hemihydrate and a full-scale test using Arklow gypsum was made and produced good quality hemihydrate. The conversion to plasterboard on a commercial scale had not been done with this form of hemihydrate and, as we have said, a full-scale plant test was organised by the main contractors on a plasterboard plant, and from the results plus some research work it was concluded that it constituted a reasonable technical venture and an acceptable risk commercially, particularly as it was established that the plasterboard had a certain advantage over that made in the traditional fashion.

326. Deputy B. Desmond.—Is it not the case that NET sent 100 tonnes of gypsum from Arklow which in the Giulini plant in Germany was processed into plaster and then sent off to Yugoslavia to a Babcock-BSH plant over there to be converted into plasterboard? Apparently this was the whole feasibility study. How much did the Germans get as a result of the operation? The Germans were doing the feasibility study on NET’s gypsum export. What were the Germans paid for bringing over the plant?

Mr. Cusack.—We do not know how much the Germans lost exactly but it was a very large amount of money.

327. Deputy B. Desmond.—How much did NET pay for it?

Mr. Cusack.—We paid them the fixed price contract.

328. Deputy B. Desmond.—How?

Mr. Cusack.—We do not have a direct contract with Giulini.

329. Deputy B. Desmond.—You had it with Babcock-BSH.

Mr. Cusack.—That is right.

330. Deputy B. Desmond.—How much did you pay Babcock-BSH?

Mr. Cusack.—We paid them the fixed price contract less a retaining sum which we have still retained.

331. Deputy B. Desmond.—How much was that?

Mr. Cusack.—Ten per cent.

332. Deputy B. Desmond.—How much did you pay originally?

Mr. Cusack.—I do not have the exact figure of the contract with BSH.

Mr. Crumlish.—We paid them £3.7 million.

333. Deputy B. Desmond.—Are you retaining 10 per cent of that for non-commissioning?

Mr. Cusack.—For non-commissioning, yes.

334. Deputy B. Desmond.—They have got £3.7 million less 10 per cent and the plant effectively from 1974 to 1979 was uncommissionable.

Mr. McSweeney.—Originally the plant should have been commissioned at the beginning of 1975. This would have thrown up the commissioning problems. However, we lost a year when the autoclave ruptured. Legally you cannot prove that it was a grave failure on the part of the contractors. The reason for the rupturing was an engineering matter.

335. Deputy B. Desmond.—In their submissions to the Committee, NET have stated that Babcock-BSH were a German company offering a combination of their own plasterboard and plaster technology of another German company, Giulini. There were other companies offering as well such as A.P.V. Mitchell and Lummus, an American company, and so on, but they decided to award the contract to the Germans. I question whether NET had the technological expertise to know what they were doing. I say that with humility because we are only parliamentarians trying to find out what they were up to. We do not have the technological expertise ourselves and can go only on NET’s submissions.

Professor O’Donnell.—I will ask Mr. Hynes to speak on that in a moment. I think Deputy Desmond is using the concept of a feasibility study in a way different from what is understood normally. The feasibility study referred to on the first page of our submission is concerned with our best attempts to predict what the economics of that project will turn out to be like in terms of whether it is likely to prove profitable and what the prospects are in terms of DCF return and so on. That is the normal process of a feasibility study. Assuming that a company does such a study and comes out with a favourable result, unless it is a technology that a firm like NET has done already many times and knows what it is back to front, it is quite normal to go to the next stage of bringing under study the technical aspects of it and looking at the alternative tenders that are available—in this case from the firms that are listed on page two. There is nothing at all unusual about a firm like NET deciding that the only safe way of testing out the technology is to process samples of their raw material through the two stages, in this case, the Giulini plaster stage and the plasterboard manufacturing stage, in plant designed and built to the kind of specification that these firms are offering. That is what we did and there is nothing unusual about it.

336. Deputy B. Desmond.—I am asking a specific question and that is whether NET had the expertise to assess what kind of equipment these people were offering.

Professor O’Donnell.—We had in the sense that we had the technical expertise of our own engineers at the time we were doing these tests in Germany and Yugoslavia. Cement Ltd. were still interested in the project and we had technical people from Cement Ltd. involved in these tests, one of whom certainly is still with that company and had worked previously in the plasterboard industry. He was involved in the tests in Yugoslavia. I am not sure whether he was involved also in the tests in Germany. I consider that we did have the technical knowledge adequate for us to be able to access the results of the pilot tests we were doing in Germany and in Yugoslavia.

337. Deputy B. Desmond.—In the feasibility study which was submitted to the NET Board, presumably by their own expert staff, a total investment of £2.7 million was proposed, with a return on capital of 18.5 per cent and a DCF return of 21 per cent and a pay back period of 4.4 years. Presumably people who make statements of that nature allegedly know what they are saying. Your experts, even by a factor of three, did not even have the plant built or ensure that it was built. I do not propose to question any further on the matter because I can only say that the sequence of events seems to me to be quite incredible.

Professor O’Donnell.—Mr. Desmond is speaking with the benefit of hindsight. I still say that I do not think it is a valid criticism to say that because in the outturn, given the period we are talking about, the project cost a lot more money than estimated and ultimately failed, that proves that the initial feasibility study was wrong for its time.

338. Chairman.—We have to try to separate the question of the escalation of raw materials and the question of how the market reacted from the question of the efficiency of the plant. At the moment the questions are directed to the kind of plant that was purchased and whether it was effective and whether it was possible to take any action because it was not. In relation to the plant that we are talking about at the moment, is it still performing effectively or has it ever performed effectively?

Mr. Cusack.—We would say that the performance at the moment in terms of output, quality and raw materials is at or around that originally stated by the contractors.

339. Chairman.—But has it only reached that stage in recent months?

Mr. Cusack.—Yes, over the last six months and it was very near that stage during the past year. We do indicate in our submission that there are continuing problems. The situation is that, having achieved the technical factors, because in the intervening period the commercial situation has changed so much that that sort of performance now gets nowhere near a commercially viable project.

340. Chairman.—I appreciate that. But for the moment let us assume there are no problems of escalation of raw materials or a declining market. We would like to know whether the plant has ever lived up to the expectations, lived up to what was paid for it. For instance, the plant only really achieved the position of being effective six months ago. Is there no method of claiming under any guarantee for the fact that it only reached that stage then?

Mr. Cusack.—The plant operates at about the level expected of it and for the purposes of this Committee I do not think we need to go into details. With regard to the contract we placed, any contractor with whom such a contract is placed will not enter into this unless we have a limited liability clause and the limited liability clause in this case was typical of such contracts which allowed for 5 per cent for late completion which, of course, we will never pay obviously, and 5 per cent for non-performance in terms of efficiency and output which we, to date, have not paid and which is subject to discussions between us even at this stage. Whether we like it or not, our legal opinion is quite definite on the point that we would be wasting our time to look for anything consequential on the situation. If one were to go to any major contracting firm today and ask them to enter into a contract which does not have this limited liability clause they will simply not enter into the contract.

341. Deputy B. Desmond.—It would appear that you entered into a contract with this company and subsequently found out that the contractor was unable to resolve the problems. The contractor apparently could not commit himself and you paid him an enormous amount of money to produce a plant for you, giving him the limited liability contract, with apparently no great bond other than the 5 per cent plus another 5 per cent. Apparently the contractor, although it seems he lost money on the exercise as well, nevertheless got £3.7 million on foot of a contract which in terms of technological assessment should not have been given to him at all—is that so?

Mr. Cusack.—On that question, every project is a technical and commercial risk to some extent. If we or any other semi-State body only did projects which did not have these risks we would have no projects at all.

342. Deputy B. Desmond.—When it did become apparent about 1976-77, or at the very latest, 1978, that relations with a particular contractor should have ceased, the Company, bearing in mind that the losses were irrecoverable even at that stage and should have been regarded as irrecoverable, should have reported the matter to the Board and the Board should have reported the matter to the Minister. A salvaging operation could have been got going, a new contractor brought in which would cost, perhaps, an additional £2 or £3 million and then perhaps the operation might have, even on a technological feasibility basis, got off the ground irrespective of any marketing problems which you would also have to face. Let me bring this to your attention: one German firm whom you said were interested in taking over the Company suggested that a further £2.5 million should be invested in equipment to reduce operating costs. Apparently this other German company who recently were approached by you felt that a further £2.5 million capital should be invested in equipment to reduce operating costs and then they would consent to supply management and technical knowhow to the enterprise for a fee. I ask you to comment on that in the light of total cost.

Mr. McSweeney.—I am sure the Chairman is going to comment on the wider implications of that but there is one thing that we cannot forget. This contract is the same as dozens of other contracts we have made and which worked quite successfully without any problems and there is no way one is going to get a contract which covers one for total loss of one’s own profits due to weakness in the plant. One can only relate liability to the actual money invested in a contract.

343. Senator Cooney.—Is it true that people in this technological area will not offer a contract without a limited liability clause?

Mr. McSweeney.—Related to their own investment.

Professor O’Donnell.—It is important to remember, and it is stated here, that it was not a case of the contractor showing at an early stage that he could not do the job, that he was not capable of delivering what he had said he would deliver. The autoclave failed. The autoclave was a sub-contract where the main contractor ordered that plant from a vendor in Germany, a vendor who has supplied many a one before which did not fail. This one did fail. It was replaced at the expense of the vendor. That is not our worry. As far as we are concerned it was replaced at the expense of our contractor. Later there were problems with filters which had to be abandoned and replaced. They were replaced at the expense of the contractor. If we had had a situation in which, when the autoclave failed the contractor had said “That is not my fault and I am not going to do anything about it”, one would think the contractor should be sued for fundamental breach of contract, when all his limitations of liability would disappear, but that was not happening. There were problems all right but the contractor was living up to his side of the contract in the legal sense. Along the line one could not have said that he was abandoning the contract or that he had shown that he could not complete it. By the year 1976 most of the money had been paid. One cannot make a contractor wait until a plant is finished. It is like building a house, one must pay the contractor in stages as the building progresses. One can hold back a certain amount of money but one cannot hold back everything. In this kind of business one cannot get a contractor to enter into a contract with unlimited liability or indeed to enter into a contract in which he takes on liability for consequential loss.

344. Senator Cooney.—In view of the fact that that was the only type of contract into which you could enter, would not that have made it of critical importance that the assessment of the capacity of the contractor and the study of the particular specifications he put forward be done with the highest degree of expertise possible? Can you tell us what steps were taken to ensure that they were the best contractors and that the specifications they offered were designed to meet the project requirements?

Mr. Casey.—The company, Babcock-BSH, had the largest record for building plasterboard plants in the world. I believe, at that time, including Russia, so that their record was excellent in that field. The area in which the problems occurred was in the new or, if you like, prototype area which was the handling of our hydrate stocks in the plant process. The failure of the two items which occurred unfortunately, one after the other, caused a delay in excess of two years in that area which involved this new technology. But the failure of the autoclave was a mechanical engineering failure which was very difficult to understand, coming from an engineering company of such reputable background. The failure of the filtration unit was possibly more readily understandable in the light of the process being developed. One must remember that this was a process which was new in that it would normally have been developed by a company like ours through a pilot plant operation, which would be the normal approach to a new technology. We went further than that. We went to full scale plant tests, which constituted a more conservative approach to evaluating the process and technology involved. Even with that we experienced those problems, which occurred in series, and which spread the whole project over such a long time. Had they all happened together we would have lost perhaps a year or one-and-a-half years. But, as it happened, we lost three years because of failures which showed up as we were commissioning. In that way it was a very sad result in that we were not producing that much earlier.

345. Senator Cooney.—While Babcock were a highly reputable firm in this field, with a vast amount of experience behind them, nevertheless you were asking them to design and install something that was, in essence, a prototype?

Mr. Casey.—Part of the plant certainly was prototype.

346. Senator Cooney.—What expertise was available to you to assess their proposals to undertake a prototype operation?

Mr. Casey.—We had our licence from Giulini, who were the people who licensed the preparation of the process. It was from them we bought the licence.

Senator Cooney.—It was on their assessment that you accepted the Babcock tender.

347. Deputy L. Lawlor.—Might I revert to the question of the autoclave unit. It says here that it failed on its initial pressure test. That would be literally in the area of safely. Normally something would be made to conform to a particular engineering standard. Is that not still in their area of operation in that I assume that it was their commissioning staff who were on site at the time it failed? Would that not indicate that while there would be limitations in the contract, that could be attributed to the area of negligence—the failure on pressure tests—that was a very elementary part of the process? I would have assumed that it would have been pressure-tested back at their works as a very basic part of the supply of that piece of engineering equipment.

There is a reference also to the Deutschemark doubling in value. Surely when the autoclave failed, when the currency situation was becoming so serious, the Board should then have been assessing the very lengthy delay running into two years, plus the doubling of the currency they were using to finance the project? There must have been some reportage to assess the situation from late 1975 right through to 1977 as regards the problem with the autoclave. There appears to have been a very ineffective way of reporting this series of mishaps, along with the problem of currency, as such. I want to revert to the negligence with regard to the autoclave. I should have thought that that would have been a very elementary procedure.

Mr. Casey.—The autoclave was tested in Germany, was hydrostatically tested, that is, pressure tested, under the supervision of the German statutory body, the TUV. Therefore to say that it failed on its initial pressure test on site is not entirely correct because it failed when it was put into operation for the first time, when it was subjected not alone to pressure but to temperature also. It was on the basis of the TUV test reports that we were able to establish that this plant had been properly supplied by them and, having failed subsequently, the contractor was able to claim full costs under insurance.

348. Deputy L. Lawlor.—Then, on the currency point?

Professor O’Donnell.—On the first page of our submission, under item I there appears a note which says:

Some 60% of the projected capital expenditure was in the form of a Deutschemark Fixed Price Contract for Plant & Machinery, in staged payments. A doubling of the value of the DM through the life of the project was the main factor in raising the eventual capital cost to £3.7 million.

We could have added there: “From about £2.7 million” so that the effect of the Deutschemark was taken into account. The hardening of the Deutschemark was not responsible for the larger part of the £10 million which appears on page 6.

349. Deputy L. Lawlor.—The Board would not feel they should approve of £1 million extra capital costs on the original projected cost of £2.7 million, so that an extra £1 million capital was automatically picked up?

Professor O’Donnell.—We would not have accepted automatically.

350. Deputy L. Lawlor.—This is an earlier point. What about a reassessment as you went along?

Professor O’Donnell.—It is not that one day it is going to be £3.7 million instead of £2.7 million. Various aspects of the contract were costing a bit more here and a bit more there and it did not ever come clearly to the situation where you could say “Well, it is now going to be £3.7 million instead of £2.7 million” at a stage early enough for one to stop because of that.

Mr. Crumlish.—The feasibility of the operation was progressively assessed and reassessed as it became apparent that delays would be incurred. Also, it is to be borne in mind that at a fairly early stage a team had been built up to operate the plant and continued on the basis that, while there was deterioration, the return looked a very attractive return in the initial stages, as referred to by Deputy Desmond, which was 18.5 per cent return on capital and a pay back of 4.4 years. However, it became evident that nothing near that return could be achieved once the first failure of the operation took place. Even at that there was still some return to the Company continuing, because it had already invested large sums of money and it was taken that, as long as there was some positive contribution to be made on the investment, it was worth while continuing with it. It was only in the very latter stages in the case of an assessment carried out in 1979 and early 1980 that it became apparent that the future was negative, in that not only would it not make a return, not only would it not cover its own operating expenses, but there would be no contribution made to NET in respect of its investment. At that stage the final decision was taken in respect of shutting down the operation. However, all along these stages, while it was seen that the investment was becoming less and less attractive, there was still a hope that it would cover its own operating costs, and consequently, that no further drain would be made on the Company’s finances invested in it.

351. Deputy Deasy.—Now that the plant is operating almost at the level originally projected, could you tell us if it remains in operation what the losses would be in 1980? What would your forecast be and what would be the losses projected for 1981, that is for the full year of proper plant operation?

Mr. Cusack.—The projection for the full year of 1980 is a loss of £3.1 million and for the full year of 1981 a loss of £2.2 million. The fact that that figure comes down reflects on the fact that we would hope to make some progress by executive decisions over the period. One must also take note that those projections were made in June 1980 and represent the best that could be achieved on the basis of nothing going wrong — in other words, before you take in the element of risk Since then the economic climate has worsenc further and projections prepared today show a further major deterioration with no prospects of ever showing a positive cash flow.

352. Deputy Deasy.—The biggest question is—did you ever really have a commercially viable product? Would you tell us the position regarding the home market? Is there under-or over-capacity for your product? British Gypsum in Kingscourt, County Cavan, produce much the same product. Also, what markets were available abroad?

Mr. Cusack.—Again, from page three, in answer to a letter of request for information from the Chairman of this Committee, we had shown that the original plan was to put 24 per cent of the plant production into the home market. That 24 per cent of our plant production would, at the time, have represented 35 per cent of the then home market. That was the plan at the time. Eventual market activities were fairly similar, except that mainly because of exchange fluctuations, great differences in exchange rates over the period, Belgium replaced West Germany as a worthwhile Continental market.

353. Deputy Fitzsimons.—You had substantial technical problems. Is it these problems or the lack of demand for the Arklow product that is now causing the demise of this enterprise?

Mr. Cusack.—The decision to shut down the plant was based on the commercial realities of today and could not be said to be due to the technical performance of the plant in the sense, as we said earlier, that the technical performance of the plant is at or around that which was originally envisaged. The main change has been in the relationship of the price of raw materials to the price of the product, which changed very adversely in the ensuing period. We might also add that the technology available in the world, though not necessarily available to us, has also improved quite considerably in the intervening years, particularly in the area of energy usage.

354. Deputy Fitzsimons.—Deputy Deasy mentioned Gypsum Industries which are quite successful, as you know, with a product of the same type. Despite the world economic recession, they seem to be holding their place in the market.

Mr. Conlon.—We should add to what Mr. Cusack has said by advising the Committee that the plant is just not an economically sized unit. British Gypsum Industries and their parent, British Plasterboard, have virtually a full monopoly in these islands. They have a product range which is greater than that of Arklow Gypsum. We do not have a full range of products.

355. Chairman.—Before you move away from that question, must it not have been known, when the plant was originally commissioned and the original feasibility studies undertaken, that it was going to be too small a plant to be economically feasible?

Mr. Conlon.—In 1973, when the plant project was approved, energy was not a very major cost factor. Because of the inflation and escalation in the cost of energy — and it is a high consumer of energy — that situation has changed and has given rise to the situation that Mr. Cusack has outlined. If I can go on and answer a question which Deputy Desmond asked earlier with reference to the fact that Rigips had suggested that some £2.5 million would require to be invested to bring the plant up to an acceptable level, the reason why Rigips need £2.5 million is, indeed, to deal with this question of energy. It is a high cost plant in terms of energy and it would need much additional expenditure in order to reduce that cost. Also they want to install a system so as to make the plant capable of using gypsum other than chemical gypsum. When we were having our talks with prospective buyers, we were asked to give a commitment on the availability of gypsum for the plant. This we were unable to do. This question of gypsum is tied in with the availability of phosphoric acid, sulphuric acid and pyrites from the Avoca Mines. We could not at this stage pre-empt any decision or tie our hands in any way. That is why Rigips felt that if they were to become interested in acquiring an interest in the plant, they would have to make provision to use gypsum other than chemical gypsum.

356. Senator Cooney.—This is a general question with regard to involvement of the Board from 1974 on. What was the procedure for Board involvement in monitoring the on-going saga of this project?

Professor O’Donnell.—There were regular reports to the Board on the project as it was going on, at ordinary Board meetings. Naturally, difficulties were encountered such as lack of experience and so on, but there was regular Board meetings on the situation.

357. Senator Cooney.—Would the Board ever have put it to its executives for an assessment of the continuing viability or was it implied all the time that viability was continuing and this was taken for granted?

Professor O’Donnell.—As time went on it was obviously understood by the Board that viability was becoming more and more questionable. I have not got it in front of me now but, to the best of my memory, the Board never formally spent time considering whether it should abandon the project.

358. Senator Cooney.—I wonder was that ever put by the Board to the executive.

Mr. McSweeney.—It came up with the Board at times.

Mr. Hynes.—The Board had a report in 1979 indicating the feasibility of continuing with it. It was decided in 1979 to continue to operate the plant and give the plant one year to come up to scratch. During that year, unfortunately, we had a strike which interfered with the production of gypsum. When the plant was running, it came up pretty well to capacity. Subsequently, energy costs in particular continued to move against it. Again the Board was reported to and decided that the plant should be given an opportunity right through 1980 to establish whether it would bring about at least a break even situation. The purpose of that decision was to preserve the employment that existed in the plant. As it happened, during 1980 there were two major energy hikes. That created a situation in which the viability of the plant could no longer be foreseen.

359. Senator Cooney.—Were those considerations as to viability ever considered prior to 1979 — in 1975, 1976 and 1977 — between the management and the Board?

Mr. Hynes.—They were considered in the sense which Mr. Crumlish had explained. Feasibility studies were continued and it was shown that, whereas it had been an attractive project in the first stages, that attraction was wearing away somewhat but it was still there.

360. Senator Cooney.—The recommendation from management to the Board during those years was to continue?

Mr. Hynes.—Yes.

361. Chairman.—May I take it that the incidence of defects in the plant was higher than one would normally expect?

Mr. Hynes.—Absolutely.

362. Chairman.—The fact that the contractor’s suppliers were not supplying on a fixed price basis seems to suggest that they expect that there will be a fairly high incidence of defects. If they are not prepared to give a firm contract does this not suggest that they visualise that there may be the kind of problems which took place?

Mr. Casey.—I could not accept that. No contractor will accept liability for failure in equipment. It is in no contractor’s interest to have equipment designed by him fail. His reputation would be ruined. The performance on this job in Arklow has done severe harm to the engineering company who supplied the equipment.

363. Chairman.—Then why not be sure to their equipment and say: “If it does not meas ure up, we will accept the cost”?

Mr. Casey.—That is totally against any sup plier’s interest.

Mr. McSweeney.—There may be some mis understanding about what I said earlier. The contractor will give a fixed price contract and some form of guarantees and limitations o liability if it does not perform within that area

364. Chairman.—There was a delay as result of this plant which they replaced. The did not replace it for 18 months and there was a very serious loss to Gypsum as a result. Has the customer to accept the full cost for this?

Mr. McSweeney.—It is a legal position. If we considered he was negligent under the normal laws we would certainly pursue it but legally he was continuing to build the plant.

365. Chairman.—What I am suggesting is that anybody embarking on a plant of this kind, knowing that this is the practice and knowing that there are distinct possibilities of defects, breakdowns and delays, should have a fairly high contingency figure in the feasibility plan.

Mr. Casey.—The only way in which you can cover that sort of thing is by what is known as advance profits insurance which a company can enter into. We initiated that.

366. Chairman.—Apart from trying to cover yourselves, would it not be prudent in view of what you have told us about these things occurring, to have a very big contingency figure in any feasibility plan?

Mr. Casey.—The danger about that is that you would never proceed with any projects. You would price it out of business if you wanted to insure against total failure of a contract.

Mr. Conlon.—I think the answer to your question is that in 1973 we did not regard this as a high risk project.

367. Chairman.—I am not talking about the market. I am talking about the equipment.

Mr. Conlon.—As we explained earlier, this was a prototype. We had more tests than is normal and in 1973 we did not regard it as a high risk project.

Professor O’Donnell.—The main basic plant in Arklow was built in 1961-1965. There were three successive nitric acid plants. They all worked successfully, obviously with some minor problems. There were some price escalations but none of them ever presented major technical problems. In the light of that there would not have been strong evidence to force us to make the kind of large contingency plan you suggest. Your point is a fair one and I would not attempt to deny that. But there is nothing unusual about this type of project The contractor will tend to relate his liabilities to the profit he makes, not to the absolute value of the contract. He will not take on himself liability for the capital cost of the plant. He will look much more closely at how much he is at risk and at the risk that instead of making a profit of a certain sum, he might lose that sum. He will always attempt to limit his liability, and he will do it very successfully. There is the history of projects done by the World Bank overseas and by the IDA in this country. There are a lot of data available. There are very substantial over runs on cost and on time in a very wide number of these plants. It might be said, in the light of this type of experience which is growing and is particularly noticeable in contracts in Britain and Ireland, that a prudent process operator should in future build in much bigger contingency allowances into his plans.

Chairman.—Perhaps we should now pass on to Marino Point.

368. Deputy B. Desmond.—Could I lead off on Marino Point with a general comment that my main pre-occupation is with the question that relates to the total cost of the project to date. I would like the representatives of the Board to take us through the process by which the open-ended contract grew from an original feasibility study cost of about £20 million which was mentioned in 1973. I have difficulty in placing the exact source of the £20 million figure but it seemed to be mooted in early 1973, perhaps at Board level. It would appear that around 1974 a figure of £30 million was given as an NET estimate. On 26 November 1974 the Government approved the financial proposals relating to the project at a cost of about £42 million. It transpired that five days later, on 2 December 1974, the cost had grown, to £63.51 million in a statement issued by your Company.

The next note I have refers to the 1978 Annual Report of NET where the cost was given as £106 million. Then the Minister for Industry, Commerce and Energy in a statement that may have been made in the Dáil — I remember raising the matter — gave a figure — it was given either by the Minister or in a departmental statement in 1979 — of £115 million. Now, in 1980, it appears that the figure for the total cost of building Marino Point is £137 million. I would particularly like the Board to bring us through two points: the main contractors in the context of the design and placing of the contract are Kellogg. That is well known. What was the contract agreement between NET and Kellogg for the payment of the fee they got? Was this fee on the total contract price? Was it in the region of 7 per cent? Could I ask what exactly Kellogg got of the fixed fee payment on the totality of that contract? Was it 7 per cent of £137 million? It is a general question and I regret having to speak at some length on it, but it is the main question at this time because around this revolves the whole question of the borrowing of NET, the financing of it through the consortia and the current seeking by NET of £80 million from the Department to meet half of its outstanding borrowing liability. I should like to be answered first in relation to the Kellogg situation. What exactly was the fee relationship?

Professor O’Donnell.—The fee is stated. In the case of what is commonly known as a reimbursable contract the basis of payment of the contractor is that he is paid a fixed sum for certain services that he gives, to pay him for what are called home office costs, that is costs associated with work which he does in his own home office of the contractor — in the case of Kellogg there are two home offices involved, London and Amsterdam. The reimbursable element is for other parts of the contract such as, for example, the purchase of major items of equipment. The contractor will do the actual procurement or purchasing of these items. He will pay for them on behalf of the client and will be reimbursed without profit in respect of what he paid for particular items. That is broadly the situation. The fee which was paid to Kellogg was — the initial fee I think was of the order I have stated and was escalated only very slightly.

Mr. Crumlish.—The initial agreed fee in respect of the original design for the job was a fixed sum and not a percentage of the final capital outturn of the project. It was a fixed sum in respect of the items which the Chairman has mentioned, engineering, design, procurement and management. It only changed during the course of the job by agreed amounts where any changes the client asked for in the nature of the job from what was originally agreed as the scope covered by the fee went up. As a point of interest, the fee went up by less than 5 per cent from what was originally agreed to what was finally paid to them for their main contract.

Professor O’Donnell.—The fee is not a percentage of the contract at all and was never calculated in that way.

369. Deputy B. Desmond—What did the fixed fee amount to? Did it amount to 7 per cent of the total contract cost?

Mr. Crumlish.—It was of the order of less than 5 per cent of the total outturn cost of the project.

370. Deputy B. Desmond.—Are you saying that you paid Kellogg 5 per cent of £137 million?

Mr. Crumlish.—No. We agreed to pay them a fixed fee based on the work input which Kellogg assessed at the start of the contract and any changes in that were not related to the final outturn on the job but to additional work inputs requested by the client, NET, in respect of changes in specifications.

Professor O’Donnell.—Sorry, Chairman——

Deputy B. Desmond.—It is a simple question.

Professor O’Donnell.—And I shall give a simple answer. It is wrong to talk about the fee being negotiated in terms of being a percentage of the outturn. It was a fee negotiated at the beginning of the contract as a sum of money and we could give you the document that contains it. We would consider it a matter that should be confidential but the Committee are perfectly welcome to have the document in which it is given. It is important to make the point that it is not based on a percentage, as I know has been loosely suggested sometimes in the media, that Kellogg had a situation in which they were going to be paid a percentage of the cost of the job in which case there would be an obvious advantage for them in escalating the cost. That is not the case.

371. Deputy B. Desmond.—If the matter is of such confidentiality that the Committee looking after the taxpayers’ money is not in a position to be apprised of it, can you advance any reasons for this?

Mr. McSweeney.—We know the amount of money. We have it here. We are saying that it is a matter of contract privacy between us and another party and we should at least advise the other party before we make it public.

Deputy B. Desmond.—We are talking about historic costs involved in the construction and presumably £137 million was the final cost. What I want to know is the cost of the building and all the input costs.

372. Senator Cooney.—How do you define a fixed fee?

Mr. McSweeney.—A fixed sum of money.

373. Deputy B. Desmond.—That was originally agreed on foot of the signing of a contract and it was subsequently changed — is that correct?

Mr. McSweeney.—No.

374. Deputy B. Desmond.—You said that in the event of NET making contract changes that the fixed fee would be subject to revision and, therefore, subsequently the amount must have changed.

Mr. McSweeney.—Only where it involved additional engineering work on behalf of the contractor.

375. Deputy B. Desmond.—Therefore, it was fixed to a degree that it would become “unfixable” if both parties agreed. I am asking for information which members of the Committee must know if they are to discuss any matter.

Chairman.—The position is that if something in the opinion of the body concerned is of a highly confidential nature they are entitled to say that but it must be based on very solid grounds. Deputy Desmond is correct in saying that if you think you cannot give this sum you will have to explain the reason.

Professor O’Donnell.—I will be guided by my management colleagues in this. It is mainly a question of the ordinary degree of confidence that exists between clients and contractors in this business. I am quite happy to give the figure.

Chairman.—I think it should be given. Every other figure has been given.

Professor O’Donnell.—I am quoting from the letter of intent which NET wrote to Kellogg International on 12 December 1974. It states:

Therefore the agreed lump sum, fixed price and fixed fee under the contract are as follows: lump sum fixed price comprising £3,504,000 sterling plus Dutch guilders 11,814,000, plus US $100,346; the fixed fee £200,000 sterling.

Mr. McSweeney.—If I may clarify, that was a letter of intent which allows one to proceed with the contract before the actual document is signed, which was very shortly afterwards.

Mr. Gowran.—If we translate those figures into pounds at that time, at the signing of the contract the figure was approximately £6 million.

376. Deputy B. Desmond.—Was that in 1974?

Mr. Gowran.—Yes. The total amount paid to the contractor in respect of these services was just over £6.3 million.

377. Deputy B. Desmond.—Was that in 1979?

Mr. Gowran.—No. In 1980.

Mr. McSweeney.—Money was paid to the contractor for employees whom he had on the site.

378. Deputy B. Desmond.—Of course that would be additional?

Mr. McSweeney.—Yes.

Senator Keating.—The stated total sum in 1974 for the whole project was approximately £30 million.

Professor O’Donnell.—I was going to return to that aspect of Deputy Desmond’s question. Does the Chair wish me to elaborate on that?

379. Senator Keating.—As I recall, he stated the 1973 figure was £20 million; the first 1974 figure was £30 million; the second 1974 figure was £42 million and the third 1974 figure was £63 million. At the time of signature, what was the relevant figure of the total cost?

Professor O’Donnell.—It was £63.5 million.

Mr. McSweeney.—The letter of intent was signed in December and the Board had the figure of £63.5 million before it in November for approval.

380. Chairman.—In rough terms it was a 50 per cent increase, although you say it was not necessarily related——

Mr. McSweeney.—The Board’s figure in November 1974 was certified by the contractor in relation to quotations for equipment that he had obtained in June 1974. In fact, that equipment would not have been bought until 12 months later. The percentage would vary.

381. Senator Cooney.—You said the Board issued a letter of intent on the basis of a figure of £63.5 million and that decision was taken at a Board meeting on 2 December 1974. Can you explain to us why it was that on 26 November — five days previously — the figure that was put up for Government approval was £42 million.

Professor O’Donnell.—Senator Keating was then Minister for Industry and Commerce and he made a statement in the Dáil in July 1975 on the NET Bill which explained the discrepancy. He said: “The capital cost of the project is estimated at £42 million and allowing for other costs such as working capital requirements, price escalation, pre-production expenses and pre-production interest repayments, the total cost could be as high as £63.5 million”. The sum of £42 million was never intended to be taken as the total cost of the project.

382. Senator Cooney.—It was not the contract figure?

Professor O’Donnell.—No.

383. Senator Cooney.—You subsequently issued a letter of intent on which the contract was entered into on the basis of £63.5 million——

Mr. McSweeney.—The letter of intent to which you refer was issued in December relating to the fixed fee — there was never a contract on the basis of £63.5 million. What we had was Board approval for £63 million.

384. Senator Cooney.—In your discussions with Kellogg regarding a reimbursable contract, there had to be some figure. What was the figure? What was under discussion on the table between you and Kellogg in this matter?

Mr. McSweeney.—We were talking in June 1974 about £42 million.

385. Chairman.—It says here that the contractual basis for agreement was the agreement of NET on 11 April 1974. NET’s job specification date was 29 March.

Mr. Gowran.—The estimate was for £42 million.

386. Senator Cooney.—When?

Mr. Gowran.—In the middle of 1974.

Professor O’Donnell.—That was the total cost to Kellogg.

387. Senator Cooney.—When you engaged in it formally, what was the estimate?

Professor O’Donnell.—£63.5 million.

388. Deputy B. Desmond.—You say in your submission that the initial revised estimates submitted by Kellogg were referred back to you and that a final estimate was available in October 1975 at a final cost figure of £72 million.

Mr. McSweeney.—We do not want to confuse anybody. In October 1974 the Board had before them the figure relating to the June 1974 estimate for equipment — £63.5 million, an increase on the other figure of £42 million already given. We then got approval from the Board to go ahead with the project on the basis that we could quickly get on with the work of fixing the budget cost for the project, but it took longer than the six months we had agreed on. It did not finally come out until October when the figure was £71.8 million. That is the explanation.

389. Senator Cooney.—I am puzzled why there should be such delay in getting the figures tied up with the contractor.

Mr. Gowran.—This is a major contract. To produce a definitive estimate for the total project we had to do a great deal of engineering work which could not have been done at the tendering stage. We estimated this work could take six months; in fact, it took longer. We produced an estimate which, when increased by NET costs, came to £71.8 million in October 1975. This was based on actual quotations for some major equipment and the estimation was based on engineering work already carried out.

390. Senator Cooney.—What figure had changed from the previous December?

Mr. Gowran.—The figure of £42 million had increased to approximately £56 million.

391. Senator Cooney.—Was that the Kellogg figure?

Mr. Gowran.—Yes.

392. Senator Cooney.—What was the explanation for that increase?

Mr. Gowran.—The cost of equipment had increased. We were starting this project when prices were escalating. Equipment costs were not fixed. When the actual prices for equipment were submitted, such as ammonia converters or main compressors, they were considerably higher than in the original estimate. A reassessment of production costs produced an increase in the October estimate. These figures were closely scrutinised by NET staff to satisfy the Board that Kellogg had carried out the proposal——

393. Senator Keating.—Were those figures agreed in October 1975?

Mr. Hynes.—In reply to Senator Cooney’s question, one of the reasons it took so long to get a firm price was that we had insisted that, if possible, Kellogg would buy the equipment at a fixed price. This meant that Kellogg had to negotiate fixed prices at a time when vendors were not very keen on fixed prices.

394. Senator Keating.—Does that mean you had a continuous exchange with Kellogg?

Mr. Hynes.—Yes. They could not place a firm order for any equipment without our agreement.

395. Senator Keating.—And the ultimate firming up was in October 1975?

Mr. Hynes.—That was for the major items.

396. Deputy B. Desmond.—Is it true that in late 1974 the contractor’s estimates were around £42 million, subject to inflation, and, bearing in mind the additional project costs which could arise, that they could increase to £63 million? It appears that without very much delay the estimates reached that figure. Seven or eight months later the figure rose to £72 million.

By August 1976 it had risen to £80 million. It was at that time that you sent out your prospectus in connection with the syndication of the £40 million Dublin-London credits. I am interested to know how, within two years, a project could cost almost double the original figure quoted, even bearing inflation in mind.

Professor O’Donnell.—The Deputy is comparing £80 million with £40 million.

397. Deputy B. Desmond.—In December 1974 the Board of NET approved the project of the contractor’s estimates valid from 1 July 1974—that was for £42 million——

Professor O’Donnell.—That was the contractor’s part of the total cost.

Deputy B. Desmond.—with provision for escalation of other project costs. That increased the total to £63 million.

Professor O’Donnell.—The £80 million to which the Deputy refers is the 1976 forecast of the total cost. The earlier figure with which he compared that was £63.5 million, not £42 million.

398. Deputy B. Desmond.—What do you mean by “contractor’s estimates”? It says here that the Board approved the contractor’s estimates valid from 1 July 1974.

Professor O’Donnell.—The contractor had to procure major items of equipment. That meant he had to submit to NET a list of suitable vendors of, say, large compressors for a particular kind of plant. At that stage, when NET were considering bringing this to the Board, they had to ask the contractor for some estimate of what would be the cost of the main items. He obtained that information on the basis of his knowledge of previous contracts with vendors. Since he was not in a position to place a firm order he could not get a firm price at that time, but with the best information available to him he provided a set of figures.

Mr. Casey.—In 1974 we were not dealing just with Kellogg but with two other contractors; and when you are in that sort of situation you can, if you are prepared to pay for it, succeed in getting them to get prices as firm as if they were doing real business. But that is not the way this is done normally. In a situation of a competition for a contract the prices that are supplied are based on previous experience. It was in this way that the £42 million was arrived at. It compares pretty well with what the other two firms were quoting at the same time. Therefore, when we went to the Board in December we produced this figure of £42 million plus our own other costs. Then our task was to try to fix prices as early as possible and under the contract Kellogg were obliged to produce what in their terminology is known as a check estimate or an estimate as close as possible to a fixed price based on actual firm quotations of doing real business with the vendors. It was in that way that the figure of £56 million was arrived at, with the equipment and materials being supplied by Kellogg by about October 1975.

399. Deputy B. Desmond.—The £42 million was the quotation from the contractors on 1 July 1974 and there is reference to provision for escalation and other factors.

Mr. Casey.—That was not in it.

Deputy B. Desmond.—That is what it says here.

Mr. Gowran.—The escalation was estimated on the £42 million for the period intervening and also on the estimate during the life of the project as well as for the NET project costs and for the interest on the projected borrowings. At that time we were considering selling ammonia forward so that the interest was reduced by about £2.5 million.

400. Deputy B. Desmond.—I am still very much at a loss because it appears that the Board are suggesting to us now that at about 1 July 1974 the true estimated cost was known to them, that being about £63 million, based on an aggregate of the £42 million proposed in the contractors’ estimate, valid at 1 July, and it appears there was being taken into account provision for escalation in other costs to the tune of about £23.5 million. When was that notified to the Board and when was it notified to the then Department of Industry and Commerce? Somebody somewhere must have been monitoring the cost of the project because on that would hinge the whole question of feasibility, of validity and of future borrowing requirements in respect of the project. I am dealing with the question of the initial stages of the assessment of cost. It would appear that the figure of £63 million was given to the Department some time in 1975.

Mr. McSweeney.—The managing director at the time will agree with me here: we had regular contact with the Department throughout 1974 which resulted in the case going before the Government. Obviously, the matter had to go before the Government before we would enter into a contract. Therefore, the figure of £42 million was well known as the latest figure, it being subject to escalation in respect of the other costs. The figure of £63 million was not mentioned until about September but it was known earlier that the final figure would be much greater than the £42 million.

401. Deputy B. Desmond.—When was that information made available to the Department?

Professor O’Donnell.—The Department of Finance were given the figure in June 1974 and a copy was sent to the then Department of Industry and Commerce. Mr. Hynes who was then managing director sent that information by way of letter to the Department of Finance with a copy going to the other Department referred to. In that letter he referred to the general problem of finance for this project. In one paragraph he referred to the question of the IDA grant when he said that any short-fall in the IDA grant would have to be found by the Company by way of additional borrowing together with such further increases in costs which would undoubtedly arise as a result of the escalation of costs during construction and that in present circumstances these increased costs would be bound to be massive. He went on to say that it should be noted that the figures for capital costs did not take account of escalation and that therefore it represented the very minimum of the Company’s outlay on the project.

Mr. Hynes.—The situation at that time was that escalation was becoming greater worldwide so that there was no way in which it was possible to arrive at a reliable estimate. Accordingly, when we gave those figures we excluded escalation. I do not know whether the presentation from the Department has made that clear but the figure of £10.5 million adopted by us in the first place turned out to be too low. We warned the Department that escalation and other costs were not included in the figure, that it was a contractor’s figure. There is nothing peculiar about that. As soon as we had reliable figures we made them available to the Department. The company had no idea of the date on which this project was coming before the Government. It was with the Department for some months. We had final figures for the Department, coincidentally, a few days after the matter going to the Government for the first time but it went to the Government again in January 1975. In other words, it was before the Government on two occasions.

402. Chairman.—When was the figure of £63 million before the Government?

Mr. Hynes.—Early in January of 1975.

403. Chairman.—But it was known to you a good deal earlier.

Mr. Hynes.—When I say it was known to us, I am talking of figures that we were compiling.

404. Chairman.—But you had done your sums and estimates and arrived at the figure of £63 million much earlier.

Mr. Crumlish.—On 2 December 1974 we presented that figure to the Board of NET as being our best estimate of the total costs requiring finance in respect of the project.

405. Deputy B. Desmond.—Let us suppose we are presenting a capital investment programme to the Government; let us suppose I am a member of the Board of Cement Limited, or the ESB, or any other body which wants to have a comparable engineering job of work done, and Kellogg, which are a company renowned throughout the world, tender for the job. Would not one know, within five or ten per cent, what the cost of the project would be? Would not one know, for instance, the cost of the civil engineering works on the site, what would be required to estimate the lifetime of the project, and then move along to interest finance terms, if a finance consortium was involved? In January 1975, it was perhaps mid-January 1975, a project cost of £63 million was tendered. That seems a reasonable proposition, but let us take your submission. Within 18 months of the issue of your prospectus seeking a credit of £40 million, you stated that the total project cost to be financed had risen to £80 million. About 18 months later, one has to add another £40 million, plus other project costs. I am seeking an explanation of how that magnitude of under-estimation came about.

Professor O’Donnell.—Deputy Desmond keeps on comparing £80 million, which was an estimate of the total cost, with £40 million, which was never an estimate of the total cost.

406. Deputy B. Desmond.—What was it?

Professor O’Donnell.—It was £63.5 million. The contractors——

407. Deputy B. Desmond.—When I refer to contractors I mean people who are known to be able to provide a given service, a urea plant or an ammonia plant. You want a contractor, and Senator Cooney made a point on this. My inquiry concerns a reimbursable contract. How is all this worked out? The contractors may say: “We will provide you with an ammonia plant, or a urea plant; we will give you a jetty, perhaps an expensive jetty, if necessary”. There would be capital costs and so on, other expenses associated with contractors’ developments. You can add on other costs. There would be the cost of expert staff, some of which could be called into question. You arrived at a figure of £63 million. That was in December 1974. But by August 1976, when finally you went to look for money, that figure had grown to £80 million. Even in the context of the growth of inflation it could not have been under-estimated by 30 per cent. How come there was a growth of £17 million?

Professor O’Donnell.—I will ask two of my colleagues to comment, but before they do that, it is important to point out that the situation is not as Deputy Desmond has been suggesting. Deputy Desmond conveyed the impression that we were involved in a fixed price contract. That is not the case.

Deputy B. Desmond.—I asked about how reimbursement is effected.

408. Senator Cooney.—Would you tell us how exactly there is reimbursement on a contract?

Professor O’Donnell.—A fixed price contract is one in which the contractor says: “I will build this plant and hand it over to you, ready to run or running, for £X”. There may be a clause about cost escalation, but that is the essence of what he says. Then there is the reimbursable contract in which the contractor says: “I will build a plant for you. To build it I have to design certain aspects of it, and I have to buy the equipment to be installed on your site. I have to supervise its construction, and so forth. I will break down all this activity into a number of factors. For the work I do in my office, designing and the use of my staff, to get pumps, pipes and what have you, and for assessing the cost thereof, I will charge you a fixed fee of £X. Then, for the actual equipment, if I buy you a pump, I, Kellogg, will write a cheque for the pump, manufacturer for the price of the pump, and you, NET, will reimburse me the amount I wrote”. That is the major feature of that contract, the contractor spends certain moneys on behalf of the client and he is reimbursed without any added cost to the client. In the fixed fee situation, a sum of money is paid to the contractor as a fee for professional activity. There is the element of fixed fee. Mr. Crumlish may be able to elaborate on that.

Mr. Crumlish.—I will try to deal with the difference between the figures.

409. Deputy B. Desmond.—Let us go back. Did not Kellogg give you a contract figure for work?

Professor O’Donnell.—A contract estimate.

410. Deputy B. Desmond.—My understanding is that in June 1974 Kellogg gave you a tender.

Professor O’Donnell.—Yes.

411. Deputy B. Desmond.—I want a definite answer on this. I understand that that tender was adjusted at that time to include cost escalation. It included project costs, pre-production expenses, finance charges and working capital — that meant a total project cost in June 1974 of £63.51 million. You made that figure available to the Department of Industry and Commerce. I understand that originally Kellogg had a project cost estimate of about £42 million. Due to cost escalation they had to add about £10 million. They had to make provision for other costs which they had not already provided for, totalling £13 million. That made a total cost, as envisaged for completion, of £63.47 million. That was the breakdown provided by Kellogg at that time, and that is the figure submitted by you to the Department of Industry and Commerce. How come everything changed thereafter?

Chairman.—It might be better if the Deputy stuck to one figure, say, perhaps, the £80 million.

Deputy B. Desmond.—I am particularly interested in how the figure which appears to be the original figure submitted by Kellogg came up to £63.5 million and then went up to £80 million in the prospectus that was submitted.

Mr. Crumlish.—The Kellogg document of 1 June 1974 covered the reimbursable cost elements of the contract plus the fixed fee, which we discussed earlier on, and amounted to £42 million. In addition to that, in consultation with Kellogg who were expert in building these plants, the NET project management assessed the other costs which were likely to be incurred in the course of the execution of the project. These other costs were the financing of the project, in other words the borrowing and the paying of interest, and the costs which NET would incur in the course of controlling the project. In that respect we had technical, engineering and accounting people located in the offices of Kellogg in London and in Amsterdam supervising the project at the earlier stages. There was also an assessment of the escalation over the life of the job. A final forecast cost of £63.51 million was arrived at in that manner. That is the explanation of the £42 million to £63.5 million.

Deputy B. Desmond.—I accept that.

Mr. Crumlish.—The basis of the £42 million was a tender document submitted by Kellogg and by two other major contractors to NET and they were all of the same magnitude in respect of items of equipment to be supplied, licensing, civil engineering, erection and commissioning work. However, when the letter of intent was signed with Kellogg, they undertook to come back with a check estimate to the Company indicating a more accurate cost of reimbursable supplies. When that check estimate came back to the Company increases had taken place in respect of materials. They gave more accurate designs, more accurate quotes from vendors and from machine shops in respect of supplies and, as a result, the Kellogg cost increased from £42 million to £56 million. At the same time NET had in their original plan proposed to finance a certain amount of the project cost by the forward sale of ammonia, thus reducing part of the interest charge which, the Company would have to bear. This was a feature of marketing in 1973-74 when one could sell forward ammonia, having the benefit of the money and supplying the product later on. However, as the energy crisis and the cost of energy-related products dramatically changed in the course of 1975-76 it no longer looked a feasible or advisable prospect. In the final assessment of the cost at £80 million there were certain changes which the Company were now implementing as a result of planning permission requirements and in order to meet certain conditions of the County Council which added to the overall project costs. That is how the cost, without any change in the scope of the job, moved from £63.51 million to the forecast of £80 million which was the basis for financing the project with the bank consortia in August 1976.

412. Deputy Deasy.—Is it correct that there was no liability on the contractor, Kellogg, to keep his costs within any maximum limit?

Mr. Crumlish.—The project was reimbursable in all senses and the fixed fee for engineering, licensing and supervision was fixed regardless of time.

Mr. McSweeney.—We had control of the costs in so far as they could be controlled. They did not go out and spend what they liked.

413. Deputy Deasy.—There was no liability on the contractor?

Mr. McSweeney.—No.

Professor O’Donnell.—There was no penalty clause which makes the contractor liable for total cost.

414. Deputy Deasy.—There was no liability on the contractor either, to finish within the scheduled time. Is that correct?

Professor O’Donnell.—There was no penalty for completion date of the contract. This is a normal feature of a reimbursable contract and one could not get a contractor to negotiate on this.

415. Deputy Deasy.—What was the schedtiled completion date and the actual completion date?

Mr. McSweeney.—It was three years from 1 July 1975 and the actual completion date was 15 months later.

416. Chairman.—Is the gist of what the witness said that Kellogg underestimated the cost of buying the equipment? It seems from what was said that, leaving out the difference between £ 42 million and £ 63 million which was mainly financing and escalation and so on, that Kellogg’s actual estimates went up from £42 to £56 million.

Mr. McSweeney.—Yes.

417. Chairman.—Is that represented by the fact that they estimated that the cost of the equipment would be £42 million and in fact when they got in firm estimates they found that it would be £56 million?

Mr. Gowran.—It also included an estimate for the construction. The material costs went up as well as the construction costs.

Chairman.—That was the main thing.

418. Deputy B. Desmond.—The Company were talking about a commencement date of July 1975 for the project. When was the project work actually commenced?

Mr. McSweeney.—There was site work in May, 1975.

419. Deputy B. Desmond.—The Company had spent money but they had not actually signed the contract. To what extent then was the question of the viability of the whole project reviewed by the Board bearing in mind that questions of the advance sale of the product and so on had been discarded, that the cost of energy was well known by August 1976 and it was anticipated that it would increase substantially within 12 months, in terms of the cost per ton of product, and sale prices in the country and in exports? Where is the evidence of the review at that time?

Mr. Casey.—The evidence in relation to that is in documentation which we presented to the banks with the approval of the Department in relation to the financing of the £80 million. A total review of the project was done, presented to the Board and approved by the Board and the Department and offered to our bankers who had to be satisfied that it was a viable project. On that basis the initial £40 million loan was advanced by the bankers.

Mr. McSweeney.—We had a number of feasibility and sensitivity analyses, one in October 1975 and another before the bank consortium document was prepared in May 1976.

420. Deputy B. Desmond.—These sensitivity studies, in terms of future market projections and so on, and the studies relevant to costs, were done by you?

Mr. Casey.—Yes.

421. Deputy B. Desmond.—Would you accept that your views might not have had the desired degree of objectivity and that your degree of commitment would have been quite substantial at that stage?

Mr. Gowran.—At that stage we had on order the bulk of the material and equipment required for the project. The cost of that equipment was coming within the check estimate figure which the contractor had provided us with. We had no reason to doubt at that time that the contractor was wrong in his estimate. The materials did come within the check estimate figure which was established.

422. Deputy B. Desmond.—I have gone on from that point, You had a commitment of £80 million. You were seeking financing for £40 million. You knew what you would have to sell at the base line. You knew Irish market prices and you did sensitivity studies. I am concerned to know how comprehensive and detailed your review of the project was, bearing in mind that you would have to finance, through foreign borrowings and the international banking consortium, £40 million. You were then entering into commitments of repayment of capital monies borrowed and so on. How comprehensive was the study at that time?

Mr. Casey.—In relation to the marketing side of it, actual projections in relation to N, whether nitrate or urea, have been growing and have been on a par with the Company’s projections in 1974 and 1975. In relation to the viability of the project at £80 million, at the time we went on the market to finance the £40 million, the bulk of the major materials had been purchased or committed for. Therefore there was no area of uncertainty in relation to what the price would be with the exception of currency problems. The site was only at an early stage in development and unfortunately it was the execution of the job, the delays referred to as 15 months and the financing of the investment which was spread over a much longer period which increased the costs drastically and raised question marks. The project is still, given a proper base, viable at £137 million and there was never a question about its viability at £80 million. This was borne out by the fact that we had engaged banking managers in relation to putting together the financial package who were deeply involved in the feasibility studies, analyses and various commitments which the Company were undertaking in relation to the money market, to borrowing and the ability to repay.

423. Deputy B. Desmond.—What kind of specialist professional staff did the Company employ at that time to undertake a massive exercise of that nature?

Mr. Casey.—In relation to the market expertise we retained a marketing organisation in Europe who had undertaken a market survey on our behalf and had an undertaking to sell the product on our behalf. In relation to the other aspects of the staff it would not be appropriate for me to comment.

424. Senator Keating.—As regards the conditions of contract, Professor O’Donnell said there was no penalty on the contractor having regard to contract delays or in regard to lateness of completion. They were 15 months late. We have here a contract between a huge company, Kellogg, and an Irish State company. The normal constraints of bankruptcy of the client would not, in Kellogg’s mind, apply to NET. In the circumstances is it normal not to have time penalties or cost estimation penalties? A contract favours the supplier or the client or lies somewhere in the middle. Did this contract, in the opinion of NET management, lie in favour of neither side and was it the commercial norm that these were normal things not to be written in or try to safeguard?

Professor O’Donnell.—They were normal things. It is not normal in a contract of this kind on a reimbursable basis to have financial penalties on the contractor either for final cost or completion date.

Deputy Deasy.—It seems extraordinary.

Professor O’Donnell.—It is the case.

Mr. Gowran.—It is true on a long-term contract from the time of initiation to the time of completion. In regard to short-term contracts, in the past year we got information from contractors that they would not undertake erection work because they did not want to put themselves at risk. They would supply the design and equipment but wanted us to take care of the erection work. Penalties have gone out the window.

Mr. McSweeney.—We have recently concluded a contract in relation to a specific item of equipment which is being delivered next November which has a bonus/cost penalty clause. It is a three month job and it has been agreed. At present it is earning a bonus.

425. Deputy Deasy.—As regards the delay in the completion date of 15 months, six months of that is accounted for by the delay in planning appeals; six months due to industrial disputes and three months due to a bad winter.

Mr. McSweeney.—We broke it down as design and procurement six months; industrial relations, absenteeism and bad weather, nine months.

426. Deputy Deasy.—Did the planning appeal hold you up?

Mr. McSweeney.—Yes and unfortunately it was a long time after the appeal was heard in public that we got the actual authority. We could not start work on the site even though we had everything ready.

427. Deputy Deasy.—Did that planning appeal delay cost you anything?

Mr. McSweeney.—I do not know because other work went on.

Mr. Gowran.—We were doing design work while we were waiting for the planning permission. We got the planning permission finally on 28 April 1975 so we lost the first four months of 1975 with regard to starting on the site.

Mr. McSweeney.—We got wonderful weather then and we picked up.

428. Deputy Deasy.—On the industrial disputes, is it correct that NET had approximately 76 unofficial strikes within a three-year period and during that period there were hardly and official strikes?

Mr. Hoey.—We have tabulated on page 13 of our submission the industrial relations record of the job and we have broken it down into disputes where actual pickets were placed at the gates of the site, work stoppages which did not involve pickets on the gates, overtime bans which again did not involve pickets and which did not necessarily apply to all the contractors’ employees, and there is another heading “Work Embargoes” which relates to bans on certain types of working, bans on working on heights, demarcation disputes and so forth. In that tabulation we show the number of working days affected by disputes.

429. Deputy Deasy.—I understand that the industrial relations on the site were left to the Kellogg Company and the general opinion was that they were not fit to handle the type of problems which arose because they did not have previous experience in that field.

Mr. Hoey.—I have to disagree with that. Kellogg as the main contractor for Marino Point had overall responsibility for industrial relations management. Each individual sub-contractor on the site also had a responsibility for the management of industrial relations in his own organisation. We as NET had a team resident on the site and we had the responsibility to supervise the total construction effort, that is Kellogg’s work and the work of the subcontractors. In our team we had industrial relations personnel. Therefore, there was Kellogg as the main contractor with an industrial relations team, the individual subcontractors and their personnel and NET personnel monitoring the industrial relations performance.

To answer the question about Kellogg’s suitability or experience, Kellogg are very experienced contractors who have handled many large contracts in the UK and in other parts and they are very familiar with industrial relations and the problems of industrial relations particularly as they apply to the larger sites. The industrial relations problems of large sites such as Marino Point are in many cases quite different from the problems you would get on, say, a small site, an office block or something of that type.

430. Deputy Deasy.—By any standards would not 76 industrial disputes over three years be exceptional?

Mr. Hoey.—I accept that there were very many work stoppages and industrial disputes at Marino Point but I would stress that they were all unofficial. To answer the Deputy’s question, you have to decide whether you hold contractors’ management responsible for unofficial action taken by the labour force. I would not subscribe to that point of view.

431. Deputy Deasy.—Have NET been able to put any figure on the losses incurred due to the unofficial stoppages?

Mr. Casey.—The answer to that is that the cost per month of delay was in the order of £2 million.

432. Deputy Deasy.—Would it not have behoved the NET Board to have made extended efforts to improve the industrial relations aspect?

Mr. Casey.—We put in a considerable amount of effort on our part and we had our personnel chief on the site. He had his own appointees and we had other people available around the clock to deal with it.

Chairman.—It is 5.05 p.m. and we are not going to finish tonight. What is the feeling of the Committee? If we are not going to finish this evening should we adjourn now?

Professor O’Donnell.—It might be helpful if Mr. Gowran were to elaborate a little on this question of liability in the contracts. I may have given the impression that there were no contractor liabilities on any aspect of it. There were. I said that there were no liabilities in relation to total cost or completion date but there were other liabilities. Another point I would like to take up next day is that at the outset of these questions Deputy Desmond referred to estimates of cost of £20 million and £30 million for this project and I would like to dismiss those because they refer to quite a different matter.

The witnesses withdrew.