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, 15 Deireadh Fómhair, 1980

Wednesday, 15 October, 1980

Members Present:

SENATOR PATRICK M. COONEY 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. C. McGovern, Secretary and Mr. J. B. Hynes, former Managing Director, of Nítrigin Éireann Teoranta, called and further examined.

Acting Chairman.—I should like to apologise for our Chairman who is unavoidably absent today. We shall proceed until six o’clock. We are sorry to have kept you waiting but we had preliminary discussions which will help to expedite what we want to do. When we finished the last day we asked you for details of the various documents and submissions made at the beginning of the project which you sent to Government Departments and to the Government. You have furnished us with a comprehensive set of documents and we will commence with some questions in relation to them.

Professor O’Donnell.—It might be helpful if Mr. Hynes were to summarise the documents.

Mr. Hynes.—I am anxious to have the opportunity of speaking at this stage. On the occasion of the last meeting I had inaccurately remembered things that had happened. After all, six years have passed. I have since had an opportunity to refresh my memory by seeing the files again. Due to the complexity of the business I thought it proper that you should see the file of correspondence and, indeed, you asked for it.

The big problem in relation to Marino Point was securing equity from the Exchequer for the project. At the beginning it was thought by the Department that the Company could proceed without equity. We started our original discussions about expansion of the Company before natural gas was discovered at Marino Point. We had various projects in mind. They were submitted in 1972-1973 to the Government. At that time we had expanded considerably at Arklow using borrowed money. We felt we had over-borrowed and could not undertake new development without additional equity. Unfortunately we did not succeed in making any progress with the Department of Finance in that respect. When the Marino Point project developed, Marino Point had been selected as a site for a factory and before natural gas was found the Company had arranged to purchase it. Having reached that stage it was clear that a much larger factory was necessary and justified. We endeavoured to pursue the question of equity through 1974 while we were negotiating with Marathon, on the instructions of the then Minister, and with contractors. We had a series of negotiations going on simultaneously, all of which were geared to come to a head towards the end of 1974. By that time we felt we should be in a position to place a contract for the type of factory we were discussing and should be able to recommend to the Minister a contract with Marathon for natural gas and secure the necessary equity capital to enable us to finance the project.

The capitalisation which we were envisaging was additional equity from the Government and a grant from the IDA, which would be normal. We were raising money from the European Investment Bank at a subsidised interest rate and we were also envisaging securing the money from organisations like the ECGD and other credit organisations which operate to finance exports of their own industrial equipment. This operation continued but, unfortunately, despite our best efforts and our arguments which were supported by our financial advisers, we never did succeed in getting a decision during 1974 for equity for the Company. Indeed, we got a decision from the Government on 27 November 1974, which increased the authorised share capital of the Company, approved in principle the project and decided to approve the IDA grant, but did not give us any equity. We were then in the position that we had a Government decision which in the opinion of the Board was inoperable in the sense that our financial advisers were unable to assist us in raising cash in the absence of an injection of equity. This is the point we reached at the last meeting.

Following that decision at our Board meeting on 2 December, 1974, we pressed the Department for a meeting to discuss the situation and that meeting took place on 3 December. Among the papers here is a report of the meeting. It took place at lunch hour in the offices of NET because everybody was extremely busy and could not fit it in at any other time. It is fair to say that it was a rather vigorous meeting after a year-and-a-half of frustration. A certain amount of indignation was expressed because I felt wrong-footed with Marathon, Kellogg and the Banks. At that meeting it became clear that NET could not and would not go ahead with this project if there was not going to be an injection of equity capital. The report of that meeting, which has been circulated, is expressed moderately. In consequence, I presume, a further Government decision was taken on 6 January. I have mentioned to the Committee previously about Government memoranda, and that we did not know what was in the first one. Indeed, if we had known what was in the first one it would not have been recommended and we would have registered a protest more clearly than we did. We did not know, neither did we know what was in the second one until we were notified on some day in January. The Committee have a copy of the letter which told us that we were getting £15 million in equity and £5 million grant. Subsequent to this we were to find that the Department did not know what the cost of the plant was. The figure before the Government on both occasions was the figure which was supplied initially by us to the IDA and it represented the cost of the eligible fixed assets relating to grant payments and was so expressed clearly in the documents. It was expressed clearly throughout that these fixed assets were the basis for a grant but that there would be interest charges, escalation and various other costs, which the Committee will see referred to in virtually every letter or communication which we had with the Government Department concerned. I have made a note of what I said and I would like to leave a copy of it with the Chairman.^* I offer that as my explanation. As I said at the last meeting, I did not recall the sequence of events. I would like the Committee to understand that at the time we were working full time on the Marathon negotiations which we delivered to the Minister on 5 January 1975. We were more than busy at that time and my recollection of it is not what it should be. In any event, a lapse of over six years is a long time to remember details.

551. Deputy L. Lawlor.—On the figures which the Government agreed to, an increase in equity and IDA grant, was that, in the opinion of the Board, adequate or still falling short of their requirement?

Mr. Hynes.—At that time we thought it better, being prepared, to go ahead with it, even though it was said at the meeting that escalation continued to trouble us. Our understanding with our financial advisers was that with this injection of equity they could organise capital loans with a consortium of banks to fund the operation. We did in fact go to the consortium in the following year and raised a large loan with them.

552. Deputy L. Lawlor.—Was that in 1975?

Mr. Hynes.—Yes, it was.

553. Acting Chairman.—I think you inadvertently said “1975”. Was not the Government approval for the increase in share capital on 27 November 1974?

Mr. Hynes.—That was approval in principle for the increase in the nominal share capital. What the banks wanted was an increase in the equity issued capital. The subsequent decision we now know — we have a copy of the letter — practically authorised the issue of equity. That was a significant difference.

554. Deputy L. Lawlor.—Was that increase in equity required before the Marino Point project could be considered?

Mr. Hynes.—No, that was to enable us to kick off with Marino Point. During that year we had been negotiating with contractors and we had told the Department in writing that our objective was to place the contract by October, 1974. The reason for being so specific about that was that at the same time negotiations for the Marathon gas contract were proceeding. It was quite clear that we were running up to a contract situation in which there would be a “Take or Pay” contract which would require us, NET, to be able to take gas by March 1978. On the basis of a 36-month schedule for construction it seemed to us that we should place our contract by October 1974 or at latest by the end of that year. Our construction job would be finished and we would be ready to take gas when Marathon would be able to deliver it. We had a, tie-in time-wise with the Marathon negotiations.

555. Acting Chairman.—The Government gave approval in principle on 27 November 1974 to the increase in the authorised share capital, to increase the Company’s facility to borrow under Ministerial guarantee and to the making by the IDA of a grant. I take it that met with the approval of NET because subsequent to that on 2 December 1974 this project came before your Board for approval and was approved by the Board?

Mr. Hynes.—Subject to the proviso which we made clear at a meeting on the 3rd that adequate finance would be available for the project. That would be the note of the discussion of 3 December. That is why the discussion had been organised so urgently.

556. Acting Chairman.—That discussion was apparently satisfactory because on 12 December a letter of intent was issued to Kellogg?

Mr. Hynes.—We were told that a recommendation was going to the Government to give us the equity we required and we had a contract we had negotiated with Kellogg which was negotiated on the basis of all being completed at the end of September. We had persuaded them to maintain their proposition until the end of November. In any event, we had this problem that Kellogg had personnel and everything ready to go and were being held back by us.

557. Deputy Deasy.—Who held the discussions on 3 December?

Mr. Hynes.—I did, with the Secretary of the Company, one other officer and officers of the Department of Finance and one officer of the Department of Industry and Commerce. The report is in your folder.

558. Deputy Deasy.—So the Department of Industry and Commerce and the Department of Finance were aware of the increased cost of the project as early as 3 December?

Mr. Hynes.—The meeting, as I mentioned, was rather stormy but the report presented the facts which were sent to the Departments at the time. If you read it, I think you will see a reference to the fact that the cost of escalation had already exceeded the £15 million we were looking for. There was no hesitation on our part in talking about the cost of the project. Our problem was simply to get equity to launch the project. There are notes of the meeting——

Acting Chairman.—Yes, we have those.

Mr. Hynes.—There are some interesting points in them, such as paragraph 2 which is a notation by Mr. McGovern who was the Secretary. These minutes were sent afterwards to the Departments concerned. You will note there that Mr. O’Reilly, the Department of Finance representative, interjected that equity was not in the mind of the Department of Finance. I just refer to that to indicate that this was one of our problems at the time. We had said at our Board meeting the day before — if you look up the minutes you will see it — that the approval of the estimates given to the Board were on the condition that appropriate financing would be available. Reference was made to the Government’s decision in those terms.

559. Acting Chairman.—It appears to us from the documentation submitted that when the Board approved the Marino Point project on 2 December 1974, the estimated capital cost was £63.51 million. At that time, it also appears to us from information we have from the Departments of Industry and Commerce and Finance, that the Government then and earlier in November 1974 had under consideration an estimated capital cost figure of £42 million. Again, we understand from this correspondence which you have furnished to us that the Department of Industry and Commerce were made aware of the £63 million figure some time — and we cannot find out exactly when — between 10 February and 9 April 1975. Industry and Commerce say that they were formally notified of the £63 million figure for the first time on 9 April 1975. We are puzzled as to how there could be such a discrepancy between the knowledge of the Department as to what the capital cost of the project was going to be and what they understood it was going to be. When it went from £42 million to £63.5 million why were the Departments not immediately notified?

Mr. Hynes.—They are not the same sums of money. As was explained to the Dáil subsequently, the £42.5 million figure was the cost of the eligible equipment. The £63.5 million included £10 million for estimated escalation. They are two different sums of money and two different decisions. The cost of financing the programme, when you have to cover interest charges, escalation costs, wages and so on, is a certain sum. I was not aware that the Departments of Finance and Industry and Commerce had gone back to the Government with the sum of £42 million.

560. Acting Chairman.—That was the only figure they had. They say the estimate of the capital cost was £42 million, and they would have been perfectly entitled to assume that that figure would have included the escalation figure.

Mr. Hynes.—Specifically not. All the correspondence you have, and notes of meetings suggest clearly that cost escalations, interest charges and so on were not included. We have said this so often that we are inclined to have a fixation about it.

561. Deputy Deasy.—I do not see here any mention of a figure of £63.5 million.

Mr. Hynes.—No. At that time we were not talking about the costs of plants—we were talking about the injection of equity, about whether there would be equity. I mentioned that cost escalations had advanced by about £15 million.

Professor O’Donnell.—Deputy Deasy has said that the figure of £63.5 million does not appear in that document. That is true. I was not at that meeting, I have to rely on this document. I would be surprised, though, if that figure of £63.5 million was not mentioned at that meeting because there are two internal pieces of evidence in that document which lead me to that view. The first is in paragraph 3 where Mr. Hynes is reported to have said that £15 million was the minimum equity required—“Since that submission was prepared, escalations have accounted for that £15 million”; that statement alone clearly indicates that the cost would be at least £42 million plus £15 million. If you look at paragraph 7 on the second page you will see that Mr. O’Shea, one of our representatives at the meeting, pointed out that the existing debt/equity ratio was three to one—the normally accepted ratio would be one to two—and that would give a total debt of £12.8 million. He went on to say that if we did not get any further equity and still embarked on the project we would finish up with a debt/equity ratio of 15 to 1. That would indicate that without further equity we would raise our debt by a factor of five. Five times £12.8 million is £64 million. That is internal evidence. Reading this without further information, it seems to me that we were talking about a project in the order of £55 to £65 million. It is surprising that has not appeared as a stated figure. It would be clear to any experienced official present that we were not talking about £42 million.

562. Acting Chairman.—Clearly there was a misunderstanding because the Department of Finance in May 1975 indicated their serious displeasure that they were only then aware that the latest estimate was £63.5 million. They had taken the earlier figure of £42 million as being the overall cost figure. That £42 million was the figure for funding.

Mr. Hynes.—The £42 million was the cost of the equipment and was said to be so by the IDA. I think the document is with you.

Acting Chairman.—There is a letter to the IDA from you dated February or March 1975.

563. Deputy Deasy.—The Minister for Finance’s letter in May 1975 stated that that was his first information of an increase on the October 1974 figure from £42 million to £63.5 million. You are saying that at the meeting on 3 December 1974 the Departmental officials must have known that the figure had escalated well beyond £42 million—up to £55 million. In other words, the insinuation or the suggestion is that there was lack of communication between the officials of the two Departments and the Ministers concerned.

Mr. Hynes.—I would not think so. The problem is that there was confusion between the cost of the plant and the finance required to put the total project into operation. There are two figures occurring regularly in correspondence. I do not believe for a moment that the Departments’ officials attempted to conceal anything.

Deputy Deasy.—There may have been a breakdown in communications.

Mr. Hynes.—We were looking for equity—

Mr. McSweeney.—Perhaps I may be able to explain—I was close to it all at that time, though I was not at the 3 December meeting, for obvious reasons. You will see in the record that the Board’s decision was discussed, and it is inconceivable to me that that was discussed without a discussion on what we have been discussing today. It would surprise me if that is not so. What we are discussing is the importance to the people at the meeting whether it was £42 million or £63 million that was being discussed. It is the policy of the Civil Service we are really talking about rather than whether we took a straightforward decision. Though Departments will approve a development programme, as they did in our case, they will strongly contend that no Exchequer finance should be involved. Therein lies the difference in approach of civil servants and executives of State bodies who are asked to be enterprising in undertaking programmes but they must be expected to pay the financing. Therefore, the issue of the capital cost was not the large issue that has been referred to here.

564. Acting Chairman.—Surely the Department could not advise on taking a decision unless they knew accurately the capital cost, and surely the capital cost would include figures for escalation and pre-production expenses.

Mr. Crumlish.—On 2 December the figure submitted to our Board for financing was £63.5 million. The basis of the expectation of finance was also outlined to the Board and it was a condition of Board approval that that would be the financing format. That in effect resulted in the Government giving an additional equity of £15 million and an IDA grant of £5 million financed through export credit finances of the UK, France and Holland and a European Investment Bank loan. One missing aspect was that though an IDA grant was approved, and so forth, there was not approval for any increase in the issued capital. As a result of that a meeting was held on 3 December to bring to the attention of the Departments the fact that the Board of NET had agreed in principle to go ahead with the project at the cost stated to the Board. The one missing element was the input of equity. In the course of discussion, the burden which would be imposed on the Company if it were to borrow the additional money was pointed out. It would raise their net equity ratio from 3:1 to 15:1 resulting in borrowings of £75 million as against £12 million at that time.

565. Deputy B. Desmond.—I regret having to belabour this point but I am not clear as to the sequence of events. The Board of NET approved the Marino Point project at an estimated capital cost of £63.5 million. We have a definite date for that—2 December 1974. Are you contending that on 2 December 1974 the Departments of Industry and Commerce and Finance and the Government were fully aware of the estimated capital cost of £63.5 million?

Mr. Crumlish.—On 3 December, the day following NET approval of the project in principle, a meeting was held with representatives of the Departments of Industry and Commerce and Finance to bring to their notice the fact that the Company required a minimum injection of £15 million equity.

566. Deputy B. Desmond.—That is not the question I asked. We are not talking about equity but about the cost of the project as estimated by your Board and whether the Departments concerned had knowledge of it. On 2 December the NET Board approved the Marino Point project at an estimated capital cost of £63.5 million. At that point of time were the Departments of Industry and Commerce and Finance fully apprised and totally aware of the fact that that was the estimated capital cost to which your Board had given approval?

Professor O’Donnell.—You are asking whether they were told the actual figure of £63.5 million and I cannot say for certain that they were. It is stated in the minutes of the Board meeting of 2 December that on the proposal of Mr. J. B. Hynes, seconded by the Chairman, it was resolved (1) that approval be given to proceed with the Marino Point project as set out in the report dated November 1974; (2) that the contract be awarded to KIC, Kellogg International Corporation, on the basis of their tender documents as amended in negotiations; (3) that these decisions were subject to satisfactory arrangements being made to finance the capital outgoings on the project. It is also stated that in making these decisions the Board took account of a Government decision conveyed by letter of 27 November 1974 from the Secretary of the Department of Industry and Commerce and referred to earlier. It was reiterated that the Company should seek the immediate issue of £2.1 million balance of authorised share capital and should pursue with the Government the request for a minimum equity investment of £15 million.

567. Deputy B. Desmond.—Is it clear that the Board approval given on 2 December was for a cost of £63.5 million?

Professor O’Donnell.—To the best of our knowledge at that time.

568. Deputy B. Desmond.—You then proceeded to issue letters of intent and these were signed by NET and Kellogg on 12 December. The contract for £63.5 million was entered into and letters of intent were exchanged at that time. Our difficulty is that we have been informed by the Department of Industry and Commerce that the first formal notification they received that the cost was £63.5 million was on 9 April 1975, four months later. We have also been informed by the Department of Finance that the first time they were notified that the cost was £63.5 million was on 28 April 1975. To what extent were these Departments aware that you had signed a contract for £63.5 million which was almost 50 per cent greater than what had been assessed by them as the capital cost of the project?

Mr. Hynes.—No contract was signed for £63.5 million. A contract was entered into for the design, engineering, supply of technology, and organisation of production equipment and so on. At no stage could anyone say what escalation of costs might follow. That has been made clear in all documents. To say that a contract had been signed for £63.5 million is not correct.

569. Acting Chairman.—Letters of intent to embark on a contract which would cost an estimated £63.5 million were signed in December 1974. I understand Deputy Desmond’s question to be that at that stage you were aware it was £63.5 million and so were your Board but the relevant Governments Departments thought it was £42 million.

Professor O’Donnell.—I cannot find a document which conveys the figure of £63.5 million to the Department of Industry and Commerce between December 1974 and April 1975. However it is incomprehensible to me how senior officials of the two Government Departments concerned could come away from the meeting of 3 December 1974 believing the total figure to be £42 million.

Deputy Deasy.—Obviously we need those officials here.

Professor O’Donnell.—I am not suggesting that the record is not complete although it does look odd that the figure was not mentioned. There is a memorandum among the documents we submitted in which the date of February 1975 appears on page 14. There is no covering letter with it and I do not know the origin of the document. The figure of £63.5 million is mentioned in that. We have no record of that being transmitted to either Department.

570. Acting Chairman.—Do I understand your case to be that the figure of £42 million excluded escalation, interest and other pre-production costs?

Professor O’Donnell.—If you look at the document which came before the Board at the December meeting £42 million appears there and then additional——

571. Acting Chairman.—The £42 million was the capital cost. In the document headed NET-Marino Point Project, the capital cost is shown in that as £55 million to which interest, pre-production expenses and LPG facilities are added to give a total of £63.51 million. There is a discrepancy between the £42 million, the sum understood by the Government to be the total capital cost, and the capital cost of £55 million.

Professor O’Donnell.—If you look at the document we considered at the Board meeting in December you will find the same format—£55 million was stated in that document and the figures given there for interest, pre-production expenses and LPG facilities were added. There is no difference between what is in that February document in detail and what came to the Board.

572. Acting Chairman.—I understand that the figure £55 million represents what is represented by the figure £42 million. Is that correct?

Professor O’Donnell.—I see what the Acting Chairman means.

Mr. Crumlish.—The £42 million is made up of the basic engineering equipment plus stocks which amounted to £39.7 million plus £2.1 million which is £41.8 million. On to that, to arrive at the £55 million, was added a figure for escalation estimated at that time as being £10.5 million together with some site civil works of £2.7 million to give us a figure of £55 million. In all cases we are talking of going from the same base of £42 million which was included in the Board document of 2 December.

573. Acting Chairman.—So, does the £55 million include escalation?

Mr. Crumlish.—Escalation of £10.5 million.

574. Deputy B. Desmond.—When it became apparent to the Board in the first week in December that the then best estimate they had was £63 million, which was clear to them at that stage, why did they not, prior to signing letters of intent, notify both Government Departments saying that now the best estimate they had for this project was £65 million and possibly, ask the Departments for their observations on the matter, particularly since the Board had made such strenuous approaches to them in regard to equity?

Mr. McSweeney.—It was I who signed the letters of intent. I thought it had been decided at the meeting on 2 December and that it was all in good faith.

575. Acting Chairman.—Obviously there is serious misunderstanding as between the Board’s understanding of what the Department thought it was and what the Company thought it was.

Deputy B. Desmond.—The Minister for Finance subsequently made his views known. It is stated here that the Minister was concerned that these other expenses, which he considered must have been a relevant part of the project in the earlier estimate of £42 million put forward, had never been brought either to his notice or to the notice of the Government before then. This was 16 May 1975.

Deputy L. Lawlor.— Going back slightly, the Department of Industry and Commerce were saying that the first formal notification that it received in this connection was at a meeting on 9 April 1975. An estimate of £63.5 million was given by the Company representatives on the basis of a confidential Company document forwarded to the Department shortly before the meeting. Both Government Departments, one saying 9 April and the other referring to 28 April, refer to the information they have. The Department of Industry and Commerce were not aware until April of 1975 of the £63.5 million figure as the total capital outlay, including an escalating figure of something around £10 million.

Mr. Hynes.—I cannot throw any further light upon that.

576. Deputy B. Desmond.—I want to ask about an entirely different aspect relative to the intentions of the Board. At that stage the Minister for Finance, in relation to the proposed funding by NET of the whole project, as late as May 1975 said that he was not aware of any undertaking which had been secured by NET in respect of EIB loans to the Company and that he understood that at that stage discussions between NET and the EIB were at a very tentative stage. Yet the Company had signed a letter of intent with Kellogg some six months previously to go ahead. The Minister also made it quite clear that NET at that stage—May 1975—had not yet made any submission to the Bank furnishing the necessary technical and other information for the Cork project, at which time they said that the application would be processed by the Bank in the normal way. The reason the Minister makes this point is that the Department of Finance were involved in all of the public sector applications to the EIB. Naturally, the Department of Finance want to have an opportunity to comment on all public sector applications. I suggest that when letters of intent were signed with Kellogg a very serious course of action was entered into in relation to the development of the project without at that stage even having made an application to the EIB or without having cleared the financing of the project.

Professor O’Donnell.—There is a reference in the notes of the meeting of 3 December 1974 to EIB financing to the extent of £15 million, so the official in the Department of Finance at the meeting clearly knew that much about it at that date. There can be no suggestion that it came as a bolt from the blue in May 1975. The signing of a letter of intent in a less than totally certain state of knowledge about financing is not unusual. I will ask Mr. McSweeney to talk about that.

Mr. McSweeney.—The signing of the letter of intent would have been part of the programme which the Company had adopted to fulfil their negotiations with this contractor who had organised himself to get on with the job. We had the certain knowledge that once we had the agreement of the Government to the project, our ability to fund the project would be satisfactory for the Government, as we had done at least ten other projects in Arklow of £1 million or more. There was nothing unusual for us in this one.

577. Deputy B. Desmond.—There was the unusual aspect that one was talking about £63 million even at that stage. With great respect to Arklow, Arklow was chicken-feed relative to that. It is almost not relevant to this discussion. Was there any firm undertaking given by the EIB to provide money to the Company at that stage? This was when they signed the letter of intent with Kellogg.

Professor O’Donnell.—Certainly they would not give a firm undertaking until they had examined the whole project.

578. Deputy B. Desmond.—Surely it is the normal commercial practice that one secures one’s funding, one has one’s feasibility study done, one has one’s assurances received, and on foot of these assurances and subject to certain conditions, such as money being made available, one then proceeds to enter into a contract?

Mr. Hynes.—A letter of intent is not a contract. It was very essential to go ahead with the project subject to general conditions. I have not seen the letter of intent for very many years now. I would like to see it, but without any doubt we reached the contract signing stage much later when we had organised our finances. At the time we speak of, in any event, we were in discussion with our financial advisers who were sure enough of our ability to raise the funds required for this job. We wanted EIB money because it was cheaper and we got it as soon as we had those stages completed in full.

579. Senator Keating.—In the opening statements made by Mr. Hynes—perhaps I am not quoting him exactly but approximately—he said that the decision of the Government was, in the opinion of the Board, inoperable. That Government decision had been notified to the Secretary of the Department of Industry and Commerce on 27 November. It covered three headings: the increase to some £7½ million in share capital, the increase from £2 million to £7 million in guaranteed borrowing facilities and the IDA grant of £5 million. There was also a commitment that the necessary legislation to implement those decisions was being prepared. Those decisions were considered by the NET Board as being inoperable. I am not quite sure what that means but that is what is said. In the light of having received information on those decisions a meeting was called on 3 December, the day after the Board meeting, attended by people from the Department of Finance, someone from Industry and Commerce and people from NET. Again in Mr. Hynes’ words that was a rather vigorous meeting. My question is: in those circumstances was it a proper thing seven days later—that was 10 December—to issue the letter of intent? While a letter of intent is not a contract it is nonetheless some sort of instrument that lays one open to damages unless proceeded with.

Mr. Hynes.—In using the word “inoperable” I was not reflecting in any way on the Government. It had been made clear to us by our financial advisers, leading Irish and British banks, that it would not be possible to raise funds with the commercial banks unless there was investment of equity. That is what was meant by “inoperable”. As regards being rather vigorous, I felt very angry that I had spent a year working extremely hard and believing that I was being encouraged by the civil servants, that a decision should have been sought from the Government in terms which I had made clear a dozen times could not work. That is what I mean by being angry. The meeting was conducted specifically on the basis that we either got equity or the job would have to be abandoned. We were assured at the end of that meeting that equity would be provided. The letter of intent was intended to keep Kellogg in a holding position. We had been holding them since the end of September and we were continually promising them decisions without any possibility of knowing when we were to have a decision. The letter of intent held them; that is all it did.

580. Deputy Deasy.—I cannot accept that the civil servants who were at the meeting on December 3 were told that the figure of £63.5 million was the latest estimate. First, it was not mentioned in the note of that meeting. Secondly, I find it hard to believe that even one set of civil servants would not report back to their senior civil servants and thence to their Minister, but to think that two sets of civil servants, one from Industry and Commerce and one from Finance did not do so—I just do not believe it. It is inconceivable. If we are to pursue the matter further we will have to get the civil servants here before us. As it is, it is too much to ask us to believe. Is there a possibility that the figure was not mentioned and that the letter of intent was signed because there was a fear that the Government might not agree to the project going ahead if they knew the escalation had been from £42 million to £63.5 million?

Mr. Hynes.—There was no question of that. My intention at that meeting on 3 December was to call the whole project off. I made it quite clear that not only would I call the whole project off but I had reached the stage where I intended to retire. That is the kind of meeting it was. Any suggestion to the contrary is a lie.

Mr. McSweeney.—If there is this conflict of evidence I would ask that we should be told what the record of the people who attended from the civil service is. We made a record at the time. Surely we are entitled to know what their record is of that meeting on 3 December.

581. Senator Hillery.—Was your record of the meeting forwarded to whoever was concerned?

Mr. McSweeney.—Yes, on 6 December. In a letter on 6 December the minutes of the meeting were forwarded.

582. Deputy L. Lawlor.—Your interpretation of the discussion?

Mr. McSweeney.—Yes.

583. Acting Chairman.—Is there any information about, or could anybody throw any light on why the Department of Industry and Commerce and the Department of Finance thought that the total figure was £42 million? Was that figure as such put to them?

Mr. Hynes.—That figure was put to them by the IDA. It was put to them I believe in connection with a submission to the Government about a grant. The IDA must have written or spoken to the Government about this major grant. We would say that we decided on that figure as the actual cost of the eligible equipment for a grant. It has a different meaning from the total capital cost or the total finance required for the project. I think that is where the misunderstanding of our decision arose.

584. Acting Chairman.—Do you think it was an IDA source that gave the figure to the Department?

Mr. McSweeney.—I wrote to the IDA on 10 February 1975 to say that these estimates did not include provision—that is in reference to the £42 million figure—for escalation, interest on working capital and these items are being taken into account——

585. Acting Chairman.—This was in February 1975 but the Government made the decision in November 1974. Would the IDA have had that figure before November 1974?

Professor O’Donnell.—There is a letter dated 10 January 1975 from the then Secretary of the Department of Industry and Commerce to Mr. Hynes, in which in the very final paragraph he quotes the Government decision of 26 November 1974 and says that this decision of the Government was taken on the basis of all eligible fixed assets worth £42 million. That would appear to be the source of the misunderstanding.

586. Acting Chairman.—That would seem to be the source. Could we turn then to the question of the carrying out of the project in so far as the scheme that was provided by Kellogg was concerned? We understand that some 18 months or so after the project got under way there was serious dissatisfaction on the part of NET in regard to the performance by the Kellogg team on the job and that this led to changes on the Kellogg team. Could we have some comment from you on when the dissatisfaction first arose and why it was allowed to go on for as long as 18 months before steps were taken to take up the matter seriously with Kellogg or why the initial team supplied by Kellogg were not acceptable to you?

Mr. Gowran.—The start of the project was at the end of April 1975 when we got planning permission. Up to that time the people concerned from Kellogg were in the company’s London office. The team supplied had a project manager and other project people, including a project engineering manager and specialist engineering people who would carry out different parts of the project, plus a project manager and staff from the Amsterdam office. They also employed a construction manager. In 1976 it was in the construction planning area that we were not satisfied with the way some aspects of the work were being handled and we asked that some more people be put on the team. As a result of our representations, Kellogg appointed an overall project co-ordinator, a vice-president of the company who subsequently brought in a construction manager from the US to take over the running of the operation. The project was at the very early stages of construction when we expressed our dissatifaction and requested changes to further the progress of the project.

587. Acting Chairman.—Was time lost as a result?

Mr. Gowran.—Time was lost at that stage of the project due to delays in the company’s London office: drawings were not going out in time—the contractor in London was suffering from what was described as “the revolving door syndrome”; there were restrictions on pay by the British Government and the only way people could get increases in salary was by moving from one office into another.

As a result, there were delays in that area and in procuring materials. There was delay in the availability of piping arising from an error made in requisition.

588. Acting Chairman.—How much time was lost?

Mr. Gowran.—The delay then was three to four months, but the overall delay was six months.

589. Acting Chairman.—Could you put a figure on that in money terms?

Mr. Gowran.—We calculated it at approximately £2 million per month lost.

590. Acting Chairman.—Is there any redress open to the Company for that?

Mr. Gowran.—The redress was only in terms of the contract, and as we said on the last occasion, we were not able to get a time——

591. Acting Chairman.—In view of the fact that the contract limited your redress, was it not of critical importance that any lack on the part of the contractors should have been dealt with immediately it became apparent? You commented on the considerable time lag between NET expressing dissatisfaction with the contractors and remedial steps being implemented.

Mr. Gowran.—The record will show that NET took steps immediately we became aware the problems were arising, and we got the contractors to take remedial measures as soon as the problems arose, as far as it was possible.

592. Senator Hillery.—Were you satisfied at the rate of advance?

Mr. Gowran.—Again, the record will show that we had many high level meetings with Kellogg: the management of Kellogg met the management of NET on a number of occasions, when we expressed our dissatisfaction at the performance.

593. Deputy B. Desmond.—You paid Kellogg a £6 million management fee, in the conventional sense to ensure that project would be treated in the conventional way. Delays arose which added £10 million to the cost, and you had to bear the total. Is not that so?

Mr. Gowran.—The £6 million was for the engineering aspect of the project, for the procurement of all the equipment, for the licence fees involved in the various processes and the supervision of the construction and commissioning of the plant.

594. Deputy B. Desmond.—But would that not have been done to a time scale, and when delays occurred which were attributable directly to Kellogg, is it fair to say there was no provision in the form of contract entered into by you with Kellogg for any redress in that situation?

Mr. McSweeney.—We are back to the matter of contract, which we discussed on the previous occasion. The contract is in respect of the performance by the contractor. Our Chairman said on the last occasion that when you do not have performance you pursue the contractor through common law. That would arise at the stage of acceptance of the plant.

595. Deputy B. Desmond.—You gave figures the other day about industrial relations problems on the site costing approximately £10 million. Presumably, Kellogg must bear some responsibility for the state of industrial relations on the site. Subsequently, delays attributable to Kellogg gave rise to another loss of £10 million, making a total of £20 million. This is all attributable to the role of the contractor on the site. You have told us you also paid the contractor £6 million to ensure that kind of thing would not happen, but in the heel of the hunt, you apparently bore all that loss. Therefore, the question must arise was the contract deficient?

Professor O’Donnell.—The last day we spoke at some length about the question of the cost to the Company of industrial relations problems and mentioned a figure of £2 million a month for five months. It is no less than disingenuous for Deputy Desmond to suggest that all of the £10 million is attributable to Kellogg. We established the last day that this was not so. As far as the question of Kellogg being at fault where delays in design and procurement is concerned, one has to bear in mind the fact that once one has started on a project such as this, one’s main concern is to get it completed. It is not good to get into a dispute situation with the contractor unless it is unavoidable. It was our best judgment that despite this serious defect of failure by Kellogg we should not pursue them formally according to penalties in the contract at that time. We felt it would be wiser to get the project finished and pursue all the deficiencies at that stage.

596. Deputy B. Desmond.—Take, for example, the ESB construction at Aghada. They contracted to get a power station built over a six year period. The contract price was £59 million, completion after six years £61 million. The ESB tell the contractor his job is to build it, a contract is signed, and if there is a strike he bears the cost of it or if there are delays in procurement he bears the cost. They tell him that they are contracting him to do a job for them and if he does not do it, they, the clients, will hold him responsible. The ESB have large constructions at Poolbeg, Tarbert and so on, where such problems would arise in relation to procurement and industrial relations but in no instance would the ESB bear the cost. Have you any response to a situation where you paid Kellogg £6 million and in the process of construction, delays occurred in procurement which cost £10 million and bad industrial relations cost a further £10 million? All the guns seem to have been in the hands of Kellogg and you seem to have no redress.

Mr. Gowran.—My understanding of the way the ESB operate is that they are their own main contractor. They do all their own design and sub-contract the work. They took six years to complete the job at Aghada which was much smaller than the one at Marino Point which, in the end, took four and a quarter years.

597. Deputy L. Lawlor.—The information available to the Committee is that the UK director responsible for the project, because of complaints made by you, was relieved of this responsibility and it was handed over to the European director. The two most senior persons on the project were replaced. I appreciate that you have dealt with it at length as a reimbursable contract. The time to have dealt with these problems was when you owed Kellogg most. Taking them up now with them is very much like trying to bolt the door when the horse has gone. Kellogg made senior managerial changes as a result of your complaints. The cost of delays and errors by Kellogg were picked up by NET. Kellogg contracted to provide competent technical and managerial staff for the project and they fell down to the tune of £10 million. Some action should be taken. Could you comment on the changes in senior personnel during the life of the project?

Mr. Conlon.—We should at the outset have apologised for the absence of Mr. Hoey, the construction Manager and our General Manager—Technical, Mr. Casey, both of whom are ill. Mr. Hoey dealt with this question last week. He said that in any large contract of this kind the situation is likely to arise that the people first assigned to the job by the main contractor would not prove to be acceptable when difficulties arise. In such a situation if the contractor does not voluntarily replace that person the client has a duty to ask for it to be done. In this case we did ask. Marino Point is not the first project where it was necessary for the contractor or the client to arrange for people to be removed.

Mr. Gowran.—We got the senior man in the European Kellogg organisation to take charge of the project and subsequently the construction manager and later the project manager in London were replaced. There were other changes made in the organisation as well. This was as a result of our representations to the Kellogg management and our monitoring of the way the project was going. Due to the reimbursable nature of the contract it is true that we have to bear the costs. The commitment of the contractor under the contract was that he made his best endeavours to carry out all the work required to complete the project. The only redress we had was to have people replaced and we did that.

598. Acting Chairman.—What form of security have NET in the event of the plant failing to meet its guaranteed performance?

Professor O’Donnell.—The clause is in the contract.

Mr. Gowran.—We have a number of guarantees covered in the contract with regard to output, product quality and efficiency and each of these has a sum of money assigned to it for failure where the performance is not met. The total amount in terms of the ammonia plant is approximately £300,000 sterling and the amount is equivalent for urea. Therefore, the total amount recoverable from the contractor, as we said the last day, is £600,000.

599. Acting Chairman.—Is the plant guaranteed in all aspects of performance, or is it too soon to consider that?

Mr. Gowran.—We have done some of the guarantee tests and the plant operated very satisfactorily under the test runs. We have not completed all the tests which are required by our own job specification and the plant has to meet not only the guarantees but the job specification set out by NET and we have to be satisfied on both counts before we have acceptance.

600. Senator Keating.—Is it not the case that penalty amounts of that size are practically valueless?

Mr. Gowran.—The penalties that this type of contractor is prepared to give—and it is laid out in various forms of contract—are in proportion to the amount of his fee and in either the Institution of Chemical Engineers form or the United Nations Model Form the type of liability we are talking about is approximately in this area.

601. Senator Keating.—I take it that it is not indexed to the escalation of job cost or to inflation.

Mr. Gowran.—The fee was not indexed and that was the fixed part of the contract, so the contractor did not get any additional money for the extra cost which he incurred as a result of escalation in costs and the delay in the project.

Professor O’Donnell.—Do the Committee want more details of the performance guarantee penalties? We have that information.

602. Acting Chairman.—Yes. Could we have that information?

Professor O’Donnell.—There is a penalty in respect of ammonia plant capacity if the plant does not meet the output figure. There is a penalty in respect of the cost of feed materials and utilities if the cost of what the plant uses is bigger than a certain figure. There is another penalty in respect of the quality of the ammonia product. There are similar penalties in the case of the urea plant for the cost of feed utilities, for urea quality, for urea capacity, for the size of the urea prills—the actual size of the grains. These are the main ones. We can let the Committee have these in writing and perhaps that is the best way to deal with it.

603. Deputy L. Lawlor.—Could we be provided with an up-to-date column of the actual performance as against the projected?

Professor O’Donnell.—Mr. Gowran will correct me if I am wrong, but the ammonia plant has had one performance test run in which it performed quite well but not fully up to the guarantee requirement and another test will be done in due course. We are not accepting the plant until then.

Mr. Gowran.—There is no problem whatsoever in terms of plant capacity or product quality and any problems in terms of the guarantees are marginal.

604. Acting Chairman.—What is the total financial penalty?

Professor O’Donnell.—£600,000.

605. Deputy Deasy.—For the next day I would like some additional information. The Company have supplied us today with the curriculam vitae of their senior management. Their Board have made some very major decisions obviously and the Board consists of something like 12 members. Apart from Professor O’Donnell, I do not know any of the members and I would like to be supplied with their names, credentials and qualifications. Also they might tell us who decided originally that the plant at Marino Point was feasible and who did the studies, what experts they employed to advise them or whether they decided themselves.

Professor O’Donnell.—Shall I answer now or leave it to the next day?

Acting Chairman.—Do the members feel we need another day? The information the Deputy has asked of the Board members can be documented.

Deputy B. Desmond.—There are some remaining questions. This will be a final wrap up of most of the outstanding aspects.

Acting Chairman.—We will meet again next Wednesday at 3 p.m.

The witnesses withdrew.

*See Appendix 8.