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, 22 Deireadh Fómhair, 1980

Wednesday, 22 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 and Mr. C. McGovern, Secretary, of Nítrigin Éireann Teoranta, called and further examined.

Acting Chairman.—Gentlemen, thank you for coming to see us again. We hope today will be the last time we will have to trouble you in terms of oral evidence. Could I ask you to keep your voices up when answering questions because the reporting staff had some difficulty last day in hearing the speakers. We can ask questions and receive answers but should not engage in cross-talk because that confuses the recording apparatus.

Professor O’Donnell.—Before we continue, could I refer to a document we received in the last few days which we think might be of value? It is a report of a statement by the Chairman of the Fertiliser Industries Advisory Committee made at a meeting of United Nations Industrial Development Organisation in Sao Paulo, Brazil, from 29 September to 3 October. It is a fairly long report but we have underlined certain sections which we think the Committee ought to read and take note of.

Very briefly, there are important comments in respect of two points. The first is in respect of contract forms. One of the documents discussed at that meeting was a draft form of contract, which we have already submitted to you. We gave you two draft contracts—one from the United Nations Industrial Development Organisation and one from the Institution of Chemical Engineers. Briefly, the comments made on the draft UNIDO form by the Chairman of FIAC reinforce the explanations we have already given on the form of contract between NET and Kellogg. This question of the form of the contract has been raised repeatedly, particularly by Deputy B. Desmond, and we now consider that we have given authoritative references on this which establish that the contract was not unusual in form, nor was it defective in its penalty clauses. Here I should remind you again that we wrote to the Committee in May 1980 and suggested that you might consult the World Bank—we suggested that one of their experts would be available. The document I am now referring to, and which we are submitting, underlines all we said about the contract form and we trust that this question has now been fully and satisfactorily answered.

The other point the document refers to is the worldwide lack of profitability in the fertiliser industry at the present time. It refers particularly to the critical importance of investment costs and feedstock costs. Again we feel the remarks in the document add weight to submissions we have already made to the Committee. I will give you a copy of this document. It is all of interest, but obviously you are busy men and we would not expect you to read it through but the underlined sections, we think, are particularly of relevance.

606. Acting Chairman.—We will read it with interest and in the light of the evidence we have heard. Thank you.

The last day we had a lot of discussion on the initial capital cost of the project and when the figure of £63.51 million became known to the relevant Government Departments. We established that the project, at a cost of £63.51 million, was approved by the Board on 2 December 1974. We also established that that specific figure, as such, was not mentioned at the meeting on 3 December 1974 between the Company and the two Government Departments. It appears from perusing the documentation submitted to us that that figure of £63.51 million capital cost, as such, was not specifically mentioned though it might have been inferred, in the period from 2 December 1974 to 9 April 1975. The Department of Industry and Commerce stated that their first formal notification of the figure was in April 1975. It was mentioned in your confidential memorandum of February 1975, but there is no record of when that document was first sent to the Department of Industry and Commerce. We have not established that they received it prior to 9 April 1975. Can you now confirm, as was suggested last week, that the figure of £63.51 million representing the then current capital cost estimate of the project, was specifically referred to in the discussion of 3 December?

Professor O’Donnell.—I cannot confirm that.

607. Acting Chairman.—Can you confirm that the figure was referred to in any subsequent communication, apart from the memorandum, to the Department of Industry and Commerce or to the Department of Finance prior to 9 April 1975?

Professor O’Donnell.—Again I cannot confirm that. I do not know whether any of my colleagues can answer that.

608. Acting Chairman.—Does anybody want to say anything further on this?

We move now to the selection of the main contractor. The three final bidders were Kellogg, Foster Wheeler and Uhde who were licensed to use the Stamicarbon process which is one process for the production of urea. There were other processes available at that time, but you limited yourselves to the three contractors mentioned. In effect, this limited you to the use of the Stamicarbon process. Did NET take a specific decision to restrict themselves to the Stamicarbon process and, as a consequence of that decision, make their selection of the final bidder?

Mr. Gowran.—Before we selected the three final contractors we had gone through a pre-qualification exercise with other contractors in the field for ammonia and urea, and we considered the alternative processes available for urea. The alternative processes available are limited, and most of the urea produced is by the Stamicarbon process. We were satisfied during the pre-qualification exercise that we wished to adopt the Stamicarbon process, but that did not limit us in the selection of the final contractors. As it happened, the contractors we finally selected were all in the position to quote us for the Stamicarbon process.

609. Acting Chairman.—What you are saying is that you decided on the Stamicarbon process having considered the other processes and preferred the Stamicarbon process. There were other contractors, apart from the three with whom you finally negotiated, but you isolated it down to these three. Is that what happened?

Mr. Gowran.—Yes.

610. Acting Chairman.—The selection of the process came first.

Mr. Gowran.—Yes. We looked at all processes before we selected our final contractors.

611. Acting Chairman.—We understand that the procedures for the approval of spending gave a lot of authority to certain key personnel to approve bids, no matter how much they might have been in excess of budget, provided the total value would not be in excess of a certain figure. We understand, for example, that the Head of Development could approve a bid that was in excess of budget provided the total value of a particular item of plant did not exceed £500,000 and there was a similar arrangement for the General Manager for individual items above £500,000, but with no upper limit. It would appear that the Board, having given its approval for the project at original budget estimate, thereafter delegated what was virtually unlimited authority to the General Manager and limited authority to the Head of Development to commit the Company to increase in cost over budget, no matter how great. This seemed to be putting an incorrect emphasis on the value of the plant being procured rather than on the limit of the excess over the original budget. Could we have your comment on these points?

Professor O’Donnell.—Before I call on Mr. McSweeney to deal with this, I might refer you to the bottom of page 14 and the top of page 15 of our submission which deals with this point. Once the revised budget figure of £80 million was adopted, the Board received regular progress reports. The management had responsibility for controlling the cost of the project against the budget, and the Board did not consider that they should approve separate cost transactions or cost areas because they considered that this would have involved delay in sanctioning expenditure. The Board were satisfied that management were in control of the cost situation. We have been criticised by your consultants for the extent of the authority delegated to the General Manager and to the Head of Development to sanction the purchase of equipment. Surely the critical point in all this is that the eventual expenditure on material procurement, which was the area of activity being talked about, was within a few per cent of the budget figures. The second point which is very important is that we are talking about an activity in relation to the purchase of materials, the total cost of which amounted to less than quarter of the final project cost. Taking these facts into account, the Board were fully aware, knowing the general form of a contract of this kind, that material procurement would be a fraction of the total cost. The Board felt that their action was reasonable.

Mr. McSweeney.—The function of management is to manage the business, to make sure that the Board’s policy decisions are carried out and that the Board are kept fully informed of what is going on. In this major project we were concerned to develop a system which the Board could readily follow in their normal meetings, and any special meetings they wished to hold. Therefore, we developed from the point where we got the contractors’ estimate, from which the project was originally approved by the Board for £63 million based on June-July 1974 figures. We told the Board that we would come back with the contractors’ up-to-date figures which would then represent the budget for the job. So you have to go forward a year then to late 1975 when we developed a budget for the job. This special procedure for approval by Mr. Gowran and myself that we are talking about was only to cover items where the budget was for some reason exceeded. There were a few items for which the budget estimate was out of line for reasons which would have to be explained in respect of each item. It was the management’s function to approve everything but in order to show that something was out of line with the budget a special signature was required. Where something was not out of line, staff who were permanently in the Kellogg London Office could approve certain figures within limits and the Head of Development in his regular work approved anything they did. It was an ongoing operation with a huge number of small transactions taking place and I was involved in some major ones. The whole purpose was that the Board would then be reported to by the management on how the project was going against the budget they had. This, as our Chairman has said, related to equipment which is not the cause of the overall escalation. The escalation in respect of equipment was something around 2 or 3 per cent whereas the cost of the job went wrong for reasons which occurred on the site itself and which were not involved in any approvals of the kind that have been mentioned.

612. Acting Chairman.—In cases where there was exercise of this delegated authority for substantial sums, was it the practice to inform the Board on an ongoing basis of the exercise of this authority?

Mr. McSweeney.—The first thing that happened was that the management approved of whatever was to be done. Then the management in their regular reporting of the project to the Board informed the Board of anything that was unusual.

613. Deputy L. Lawlor.—On that basis, what was the ongoing arrangement for the availability of finance to meet any overspending in those circumstances? We appear at the end of the day to have had an overspend for a variety of reasons. When management informed the Board of that situation, what arrangements did the Board make with regard to preparing a case for the funding either with the Department and the Minister responsible or with banks, and if with banks, was the Minister responsible informed?

Mr. Crumlish.—Originally, in putting together the financial package the Company made provision for contingencies of something of the order of 10 per cent. Therefore, costs being incurred to that amount did not require further financing. As the job progressed and it became evident that there would be increased costs in excess of what had been planned, the Company negotiated additional facilities with the consortia of banks who were a party to the financing agreement of 1976 and also rescheduled the original loans with later repayments due to the fact that the plant was coming on line later. The Board were constantly aware of the financial requirements to meet first of all, the capital cost and after that, the Company’s requirement to generate funds to repay particular loans.

614. Deputy L. Lawlor.—As of today we are led to believe that there is a tremendous need for additional working capital in the form of equity. Did the Board decide during the course of the development that purely bank finance was to be the source of funding or was there a request for additional working capital to match the actual increased borrowings to keep the ratio in order? If we take the original £63 million figure and add a further £6 million, being the 10 per cent flexibility built into the costings that brought you up to £70 million approximately, you went well over that and it appears to have been met by bank borrowings—or was there a request for equity as well, to match the bank borrowings?

Mr. Crumlish.—There were requests to the Department towards the latter end of the development of the project when costs had reached a level which the Board deemed were in excess of what the project could carry by way of borrowing. We are talking about the 1978-1979 phase when the interest rates on any level of borrowing were at a level which were beyond what a normal commercial project could carry. In 1979 approaches were made to the Department and submissions were made also requesting a revamp of the Company’s equity and a revision of the legislation to support further equity and further guarantee powers for the Company.

615. Deputy L. Lawlor.—Has this been forthcoming?

Mr. Crumlish.—It is still under review in the Department of Industry, Commerce and Tourism.

616. Acting Chairman.—This contract was larger by far than anything that was embarked on previously by the Company. Am I right in thinking that it was your first experience of a reimbursable contract?

Professor O’Donnell.—Yes.

617. Acting Chairman.—You kindly submitted to us curricula vitae of your executives and of members of your Board but could you expand on those for us by way of document, giving us a short resumé of management’s previous experience at senior management level in the management of a capital project of nearly comparable size to Marino Point and referring in particular to any undertaken on a re-imbursable cost basis? And, again, if you could also in a short document distinguish for us between the responsibilities of the Assistant General Manager — Technical and the Assistant General Manager—Development, in relation to Marino Point and indicate if there was any alteration or change of responsibility between those two people during the course of the project.

Professor O’Donnell.—We shall do that.

618. Deputy Deasy.—There are some reservations as to whether the management was competent to decide as to whether this was a viable proposition. That is something that concerns us. Should the project have gone ahead? Did your management have the expertise to really know if it could work or not within the price range projected?

Professor O’Donnell.—We will submit a written document in that regard.

619. Acting Chairman.—At one of our earlier sessions when we were discussing future prospects and the present cash position of the Company, you gave us a revised cash flow and profitability forecast. That showed a worse position than you had previously projected. Have you any reason to think that the projections submitted in July last will need to be changed in the light of the last three months trading and the development of the economic scene generally?

Mr. Conlon.—Yes, the future losses incurred will have to be adjusted. We are still experiencing some problems with the plants at Marino Point and we have lost additional production over what we had, at that stage even, budgeted for. Certainly the deterioration in the value of the punt as against external currencies particularly sterling will throw up a greater currency loss at the date of the balance sheet. I would remind the Committee that when we stated the projected losses, we stated that they were before taking account of currency losses because these losses can only be identified at a particular date, that will be the 31st December, but with the deterioration in the punt as against the £ sterling this loss has escalated substantially.

620. Deputy Deasy.—Could you tell us what is your present financial position? What are your trading losses and what are you paying by way of interest on loans?

Mr. Crumlish.—To answer this in reverse order, in relation to interest we are paying £2 million per month in round figures. We are continuing to operate at the loss which we indicated to you in our projections of July which again is of the order of £2 million a month.

621. Deputy Deasy.—How much do you owe?

Mr. Crumlish.—We owe £190 million reserved debt. On the point made by our Managing Director, of that debt there is £40 million in sterling. A nominal £40 million borrowed in sterling means that we owe effectively £46 million, because of the deterioration of the punt versus sterling. Also in our total borrowing of £190 million we have 130 million US dollars.

622. Acting Chairman.—You made the point to us in the earlier session that your capital gearing was all wrong and that this was contributing to the adverse financial position, and you were seeking to reorganise your capital structure. Can you tell us what action to date has been taken and what results have been achieved?

Mr. Crumlish.—Proposals have been made to the Department of Industry, Commerce and Tourism in relation to the capital structure of the Company and we have made proposals based on what we in the Company would deem to be an appropriate level of funding by way of debt and equity. These proposals were made in early July to the Department and have been under review by the Department since then. I cannot state the actions being taken by the Department but I understand that they may be awaiting some outcome from the discussions which are going on around this table.

623. Deputy Deasy.—Have you any hope of improving your trading position in the near future?

Mr. Conlon.—No, we have no hope of improving the trading position this year.

624. Senator Hillery.—Looking beyond the one-year period, what are the market prospects?

Mr. Conlon.—May I deal with that question by saying that the Company is beset at present with many problems and you can divide these into external problems over which we have little control and internal problems. The external issues are much more fundamental and it is not only the viability of the Company that is in question but also the whole Western European chemical fertiliser industry. The costs in the fertiliser industry are energy-related. Regretfully, in recent years selling prices have not moved in sympathy due to the fact that cheap imports of both nitrogenous solutions and phosphatic fertilisers from such places as Tunisia, Morocco, Middle-East countries and the United States, are coming into Europe in ever-increasing quantities. These countries have a cheap source of energy. In the United States the prices charged to producers for natural gas, which is the main feed-stock for the fertiliser industry, are on average a shade under $2 per million BTU’s. In addition most of the countries mentioned have a natural resource in their phosphate rock mines. This together with the cheap energy can be converted into low-priced fertilisers for sale on a worldwide basis.

These imports are causing injury to the European industry and the industry has made approaches to the EEC Commission to do something about it. The Commission recently increased the duty applicable to the imports to 12.2 per cent but even with this the imports continue unabated. Imports are becoming an ever-increasing percentage of the fertilisers consumed in Western Europe. Because of the lack of profitability in the industry there is not any incentive to invest money in additional or new capacities. In the period 1975 to 1980 the increases in consumption by European farmers outstripped the additional capacity that was installed by a factor of 1.8. The estimate is that in the next four years between 1980 and 1984 again consumption increases will outstrip new capacities by a factor of 3. This is a very serious situation particularly for Western European countries. Perhaps the Committee may well ask themselves the question whether it is right that Western economies should have to rely on imports for an essential raw material for one of its main industries, that is agriculture, particularly remembering the sources of the imports. I suppose one could draw an analogy here with the energy crises that we have been experiencing since 1973. We all know the disastrous effect these had on world economies; they are being held up to ransom.

From the Irish point of view the situation is not as critical as it is for others in European countries. We at least have the Marino Point complex albeit at a cost much greater than originally envisaged. Marino Point could well be the last ammonia-urea complex to be built in Western Europe. In future it is likely that ammonia plants will be located adjacent to the source of their feedstock—their source of energy. Agriculture is still the mainstay of our economy and it is imperative that we as a nation should have control over one of the essential raw materials. We have in Cork sufficient capacity to meet the farmers’ requirements right through the eighties. At the same time, because of the additional capacity available to us, we should be in a position to take any advantage in an upsurge in world market prices and particularly in the Western European scene where we would be regarded as a major and a reliable supplier. That is very important. In recent weeks the price for urea, one of the products produced at Marino Point, has improved and is showing signs of strengthening in the world markets. Unfortunately that is not the situation with ammonia. If anything, the price is weakening, but this could be seasonal. There is a seasonal nature in that business. That deals with external problems but the Company have a lot of internal problems as well.

There is an imbalance in the capital structure and, as Mr. Crumlish pointed out, we have made an application to the Minister for Industry, Commerce and Tourism for additional share capital. We have written to the Department and pointed out the urgency of our situation. We understand they are making progress in vetting it with the other institutions and Government Departments involved. We believe they may be awaiting the report of this Committee.

625. Deputy Deasy.—What you are saying is that there is really no short-term or long-term solution to your financial problems. The taxpayer will have to subsidise you in the foreseeable future. Would I be right in saying that?

Mr. Conlon.—The Deputy is right that there is no short-term solution to the problem without an injection of capital. We can only do so much within the Company. The Chairman of this Committee, Senator Ryan, is quite right when he says we can only pare down so much but——

626. Deputy Deasy.—Are you saying that it is a social necessity to keep the agricultural industry supplied with fertilisers and save us from importing?

Mr. Conlon.—In the short-term, yes.

Mr. Crumlish.—In the long-term it will represent an investment from a national point of view because we will have a urea and ammonia complex which, although it cost £137 million, in not so many years hence the value of that plant in any terms will certainly have doubled. From the point of view of subsidy or a drain on the taxpayer, we see this as an investment which in the long-term would remunerate any investment made now. You must bear in mind that the plant has been built almost totally on borrowed money. There was no type of investment, least of all a fertiliser investment, in the late seventies where the total amount was borrowed and expected it to pay for itself over a very short period. In the medium term we are talking in terms of ten years before we we could see a real return on the investment.

627. Acting Chairman.—Is that on the capital requirement you submitted, £80 million?

Mr. Crumlish.—Yes.

628. Acting Chairman.—You have not revised that? Would you be content to maintain your projections on that basis?

Mr. Crumlish.—Yes, we would be content.

629. Senator Hillery.—On the assumption that you will get your present request for capital from the Department, does that mean the Company will not break even until ten years ahead?

Mr. Conlon.—No. On the assumption we get what we need the Company will break even, as we previously advised the Committee, around 1984-1985.

630. Senator Hillery.—Notwithstanding the external and internal pressures do you still expect to break even?

Mr. Conlon.—Yes, by 1984-1985.

Mr. Crumlish.—One must realise that we have built up a very large deficit in “profit and loss”. To get an overall return on our investment, we first have to eliminate our “profit and loss” adverse balance and get back to a position where we are generating real profits.

631. Acting Chairman.—That is subject to getting your capital requirements set on course, is it not?

Mr. Crumlish.—Yes.

Professor O’Donnell.—The favourable effect of this project on the balance-of-payments situation, even at the present time, should not be forgotten.

632. Deputy Deasy.—I would like to go back on something I questioned previously because I did not get an answer. I do not know who you are paying—An Bord Gáis or Marathon—but what are you paying per therm for gas from the Kinsale gas field?

Professor O’Donnell.—We gave comments on this on pages 17 and 18 of our submission. I have to say directly in answer to Deputy Deasy’s statement that we thought very hard about this and do not consider we can quote a figure. This is commercial information which no company could be expected to divulge. It is a question which I do not think the Chairman or any of the Committee would ask were we a private company. If you press me on this, I will have to say we cannot give that figure. You will have to find other ways of getting it. The most we can do is, in private session, to give you the figure on a confidential basis.

Acting Chairman.—You are entitled to ask for that privilege and confidentiality.

633. Deputy Deasy.—Is it correct that Marathon have asked for the terms to be renegotiated in the light of subsequent energy price increases?

Professor O’Donnell.—We have a contract with An Bord Gáis. We buy gas and pay An Bord Gáis for it. We have no dealings with Marathon in respect of gas. My colleagues might like to add to that.

Mr. McSweeney.—Recently I was in negotiations with An Bord Gáis discussing a price review which will be included in our annual negotiations. I am not aware of the implications of Deputy Deasy’s question that there will be any vast change. There is an escalator factor which applies but I am not aware of anything else, and I am talking about a year hence.

634. Deputy Deasy.—Would I be correct in saying that the ESB will be paying almost twice what you are paying An Bord Gáis for this Marathon gas?

Mr. McSweeney.—I cannot answer that question for the E.S.B.

635. Deputy Deasy.—We have asked An Bord Gáis for a memorandum listing the uses of the gas and where it would be best utilised. I was wondering if Marathon’s activities are inhibited by the fact that they are not getting what they would consider to be an open market place price for their commodity.

Mr. McSweeney.—The price Marathon are getting is the contract price An Bord Gáis pay them.

636. Deputy Deasy.—It is an indirect deal?

Mr. McSweeney.—Yes.

Mr. Crumlish.—But it has cover for energy escalation in it. I do not propose to give full details but there are certain provisions covering escalation and energy prices.

Deputy Deasy.—We will also have to wait for the memorandum from An Bord Gáis.

Acting Chairman.—Professor O’Donnell offered us information in private session.

Professor O’Donnell.—I would prefer if you got the information on gas prices from another source. You can ask the Minister for it but if you would rather we give it to you the only way we could do it would be in private session.

Acting Chairman.—That is in order. It is within the Committee’s terms of reference. Before we finish we will go into private session for that purpose. Are there any other questions?

637. Deputy B. Desmond.—To go back to the Marino Point site and the final follow through, I want to inquire about the auditing and the payment arrangements with Kellogg. It has been represented to us that the system of internal control, general auditing and general verification—the system instituted by you with Kellogg—was sound and in accordance with standard practice. I want to make that initial comment very emphatically. It has been represented to us that the main contract in Cork incorporated the principle of advance funding, and retrospective audit by NET, of payments made by Kellogg in respect of plant procurement. Why did NET agree to these arrangements and to that particular form of advance funding?

Mr. Crumlish.—NET did not agree to advance funding. It was however part of the initial contract terms proposed by the main contractor. We rejected it out of hand. Their proposal was that they would advise use of requirements over the next three months and we would fund them. We felt this would be making available a lot of money at our expense which would not necessarily be involved in payment of goods or services for the NET project. We agreed on a system whereby we had an account funded by NET but which could be drawn on only by Kellogg and NET jointly. We paid for goods and services as they fell due for payment, not in advance. In relation to retrospective audit the fact that payment was made did not lose us our right to audit. To facilitate the Kellogg control system and the Kellogg creditors control and accounts payments, we agreed to allow them to proceed with the payment, provided it had been authorised by our technical people. At that point we still did not give up our right to auditing the background to any particular payment. In the case of materials we audited over 90 per cent of purchases out of the London office, and, in the initial stages, a substantial proportion of the payments out of the Amsterdam office. In the latter days, we did not carry out a full audit because of the involvement of our audit team in actual accounting and site auditing functions.

638. Deputy B. Desmond.—Could you elaborate on the general procedure adopted?

Mr. Crumlish.—Two major bank accounts were opened in London. An account was opened in a merchant bank in London, funded and guaranteed by NET. Bills, as they became due, would be presented for payment to NET through the Kellogg accounts clearance system, and on NET personnel agreeing to the bill being due, a cheque or draft would be drawn on this particular account funding Kellogg, who were going to pay for the item out of their own account because the purchase requisition was placed in their name and the goods were actually being purchased by them. We jointly signed a cheque releasing funds from the merchant bank in London and paid them into the Kellogg account. They then paid the third party with whom the order had been placed.

639. Deputy B. Desmond.—The audit would be subsequent?

Mr. Crumlish.—Yes.

640. Deputy B. Desmond.—Would it be an unusual system, for you to transfer funds to your account—there were a number of bank accounts in London and Cork—which would be used to pay on foot of prospective invoices?

Mr. Crumlish.—On foot of actual invoices, not prospective invoices, the veracity of an actual invoice would not have been checked. Any internal audit system can only act retrospectively, not in advance. We were carrying out an internal audit function on the Kellogg system but we had to carry it out retrospectively. Where possible, this was done when the actual payment vouchers were presented but time did not always permit this. We would have to be fully satisfied that a total audit function was carried out and that every payment made by the Company to the main contractor was in order and fully covered.

641. Deputy B. Desmond.—It has been suggested that the transfers of moneys were made on trust with a strong reliance on a subsequent audit verification that they were in order. The general suggestion is that the retrospective audit was haphazard and was not a 100 per cent foolproof check on all payments made.

Mr. Crumlish.—No system of control is 100 per cent. We are happy that the system we adopted was the least expensive from the Company’s point of view, and was the most effective from a control point of view. It was audited by our internal auditors. It was also fully audited twice yearly by our public auditors; the Comptroller and Auditor General’s Office and your advisers had access to it and found no area of difficulty in the operation of the system.

642. Deputy B. Desmond.—In examining the audit procedure carried out, particularly in relation to the Amsterdam arrangements, for example, it appears that between April 1976 and June 1977 there were nearly 200 payments made and only about 150 were audited. It also appears that between July and December 1977 there were 92 payments and only seven were audited. The information is that between September 1978 and December 1979 there were 60 payments made and none of them was audited.

Mr. Crumlish.—These were final stage payments in relation to purchases of materials. Through the Amsterdam office were purchased the requirements for the urea plant and payments made in respect of items of equipment where we had actually made the initial payment and verified it. At this point we were actually talking of having the plant built in Cork but there was no point incurring additional costs sending people to Amsterdam to check out the veracity of payments when we were making the final payments in respect of an item of equipment already installed. These were retentions on items which were being released in accordance with the terms of the purchase contract.

643. Deputy B. Desmond.—It is understood that payments were being made to the Kellogg Continental bank account on the basis of, and almost simultaneously with, a telex request which only specified the invoice and that only a copy of the invoice was sent subsequently to Ireland. It is understood that this particular procedure would not be a normal one for making payments in a project of this nature.

Mr. Crumlish.—The alternative which was proposed to us was that we would have funded in advance. In other words that Kellogg would advise us at the beginning of month one of what would be their requirement for the following three months. We would then fund them, and at the end of the three-month period they would advise us of what they had spent. We could then check it. We totally disagreed with that and we funded them in accordance with the terms of trade under which they were purchasing. Again I have to come back to the point that there is no system that is going to give 100 per cent full control. You have to rely on the individuals—controls are only as good as the people who operate them—but in no case have we come up with any problems in the case of our payments to Kellogg.

644. Deputy B. Desmond.—In relation to the payment of cheques, it is understood that uncrossed cheques were issued for payment of certain invoices in respect of the Cork site and that these uncrossed cheques were drawn on the Kellogg Construction account which was funded by NET. Can you assure us in this regard that there were no irregularities and can you make a comment on it?

Mr. Crumlish.—In relation to the operation of one bank account which was a bank account in Ireland, it came to our notice in the course of the project that we were actually using uncrossed cheques not by request or by desire but purely as a result of them not having been printed crossed and we did not deem it to be a major flaw in our overall controls. It was the clearing account in respect of payments again to the main contractor. Again, it was being fully audited and the only comment I could make is that I do not really think that a crossed cheque gives you any greater protection than an uncrossed cheque in today’s experience when you can present it anywhere you want to get it cashed.

Mr. Conlon.—As a final comment on that, our own Company Chairman handed you a document from the chairman of the Fertilizer Industry Advisory Committee and that document makes reference to the fact that there must always be a degree of mutual confidence and respect between the contracting parties.

645. Acting Chairman.—In retrospect do you think that the policy adopted proved satisfactory?

Mr. Crumlish.—Yes. Tremendous effort was put into it by the people who were directly involved and you have to rely on that as well as on the complete control system.

Professor O’Donnell.—As we have reached the end of our deliberations in public, there are a few words I should like to put on record.

During the past few years NET have been subjected to an unusual degree of public scrutiny and to attacks of the most extreme kind by some of the media and by other interested bodies. The Board of the Company, there-welcomes an unbiased review of the kind that is now being conducted by this Oireachtas Committee.

I would reiterate on behalf of the Company that we are satisfied that the Company and the State possess in the Marino Point complex a highly valuable asset which in the longer term will unquestionably prove to be profitable. At the present time, the Company, far from being a drain on the Exchequer, is making a substantial contribution to the balance of payments.

The nature of some of the criticism directed at the Company will be of the greatest concern to all State companies—bluntly one could say that the lessons to be learned appear to me to be: be cautious, keep voluminous records, cover every action you take, build in comfortable contingency provisions and, above all, go slowly. This is hardly the message that the National Economic and Social Council have recently attempted to preach in their report Enterprise in the Public Sector nor indeed would the board of a State company which adopted such a policy be likely to get many commendations from Government. If the Kinsale Head gas field were being discovered only now, instead of in 1973, would the Government take a “go-slowly” attitude in developing the field? I suggest that there could be no question of that. The Government would, as they did in 1973, seek out the one or two large organisations who could put the gas field into use without delay.

The plant at Marino Point was built in a period of extremely rapid inflation; an indication of the severity of this is given by the following relevant figures:

This is the framework within which the plant at Marino Point was being built and one must not forget this.

Despite close monitoring by management and Board and their best estimates of cost, all of which we fully set out in our submissions to your Committee and to your consultants, the project was severely over-spent. We maintain that this was mainly due to exceptional inflation, higher interest rates, construction delays and the consequent heavy financing charges, factors which were very largely outside the Company’s control; this must not be forgotten. In this connection, again I would like to reiterate:

(i) The incomparably greater size and complexity of this plant as compared with anything that had previously been built in the country.

(ii) The well-documented record of cost and time over-runs in corresponding plants worldwide and in Irish chemical process plants at that period. We stress that this record must be given its full weight by the Committee. We have made submissions to you; we have provided data which the Committee can confirm for itself.

(iii) The constant need to keep the project moving, once started. This is a factor that has to be remembered. Momentum on a project like this had to be maintained, there could be no question of abandoning the project in mid-stream, and hindsight is very unkind to the pressures that are on a company in dealing with a project like this.

In its analysis of this project, the Committee should also remember that the experiences encountered at Marino Point are not unique; thus:

I. Very few firms in the world process industry made adequate provision for cost escalation in projects completed over the relevant period. We have provided evidence of this fact which the Committee can check for itself.

II. No contractor would have quoted a fixed price for the construction of such a plant in these islands at that time or, indeed, at the present time. Neither would a contractor take on financial liability for completion time or for final cost.

NET holds a unique position in being the sole company representative of the heavy chemical industry in Ireland, a position which has been built up over 15 years of operation with the positive encouragement of successive Governments.

The Company have been accused of not keeping the Government Departments fully informed of the escalations in estimated cost which were occurring at the end of 1974 when the decision to proceed was being made. We have submitted the relevant documents which gave to the Departments concerned, we submit, an adequate indication of the then best estimates even when exact figures could obviously not be provided. The overriding fact is that at that period the main concern of the interested Departments was in keeping the Government equity contribution as low as possible—they were less interested in the total cost of the project than in ensuring that NET would assemble the finance for it by means other than equity to be made available from the Exchequer. The Departments certainly were not suggesting that NET should not proceed with the project.

The Board reject the suggestions that the form of contract with Kellogg was inadequate, that the Company’s management of the project was defective or that the community is being penalised by reason of the price which the Company pays for natural gas. The Board are satisfied that the Company have management and staff who are capable of operating the Company successfully. They have been subjected to enormous pressures in conducting the affairs of the Company in recent times, aggravated by the widespread and too often ill-informed criticisms of their efforts. They now want to be permitted to get on with their jobs.

Acting Chairman.—May I, on behalf of myself and my colleagues, thank you and your colleagues for your co-operation in conducting this review of the operations of NET. In particular, we are grateful to you for having facilitated us by coming in on the days that we have suggested because we are well aware from what we saw on our visit to Marino Point, and from what we have heard here in our sessions, of the immense burden that is on all of you and we would like to express our gratitude to you for your co-operation with us. We have no doubt that it has been a very useful and informative exercise and I think this will appear subsequently.

Professor O’Donnell.—I should like to convey to you and to your colleagues our appreciation of the courteous way in which you dealt with the inquiry.

The Committee went into private session.

The witnesses withdrew.