Committee Reports > List of Committees > Joint > 1991 > Committee on Commercial State-Sponsored Bodies (6th Committee) > Report No. 04 - Bord Na Mona

TITHE AN OIREACHTAIS

SIXTH JOINT COMMITTEE ON COMMERCIAL STATE-SPONSORED BODIES

FOURTH REPORT

BORD NA MONA

INTRODUCTION

1.Having considered the documentation submitted to it by Bord na Mona and by the Department of Energy for the purpose of this inquiry, and having reviewed the oral evidence given by Company representatives, the Joint Committee decided that, rather than carry out a wide-ranging examination of all aspects of Bord na Mona’s activities, it would focus attention in this report to the Houses on the past investment/financial performance of the Company, its current financial position, and the options for its future viability. Therefore, this report does not address directly the social contribution the Bord makes to the economy particularly in the midlands. However, the Joint Committee recognises that Bord na Mona has been a substantial provider of employment over the years notwithstanding the considerable reduction in employment levels and staff costs (see Appendix VI) that were secured in order to restructure and revitalise its operations. In that regard, the co-operation of the work force and the trade unions in progressing the process of change was exemplary at all times despite the sensitive nature of the various problems involved such as the voluntary redundancy package. Nevertheless the analysis undertaken does highlight quite dramatically the urgency of putting the Company’s financial operations in order; otherwise unaddressed financial realities will dictate or create undesirable social consequences.

2.The Joint Committee also reviewed the following consultancy reports relating to the financing/restructuring of Bord na Mona:

-Davy Kelleher McCarthy: Report on Financing Options and Financial Structures,

-Stokes Kennedy Crowley: Report on Bord na Mona for the Department of Energy,

-Price Waterhouse: Report on Equity Requirement of Bord na Mona,

-NCB Corporate Finance Ltd: Report on the Financial Restructuring of Bord na Mona.

3.The Joint Committee appointed Mr. Michael A. Kehoe as its specialist adviser for the purpose of this inquiry and Mr. Kehoe had a number of meetings with the Chairman, Chief Executive and other senior officials of Bord na Mona. The Joint Committee wishes to express its appreciation of the invaluable assistance given by Mr. Kehoe.

4.The Joint Committee took oral evidence from representatives of Bord na Mona and wishes to acknowledge its thanks to the Chairman, Chief Executive and other senior representatives.

SUMMARY OF RECOMMENDATIONS/VIEWS

(a)Bord na Mona’s adverse financial position was giving cause for concern as early as 1981/82 (Par. 1.4).

(b)The Government’s approach to financing State companies from 1980 was notable in that, rather than funding companies by way of Exchequer advances, it encouraged them with the aid of Government guarantees to borrow from the financial institutions (Par. 1.6).

(c)The Joint Committee draws attention to the weakness of using comparative operating profit data as a yardstick of achievement and it emphasises the importance of evaluating projects on the expected rate of return on the investment. The Joint Committee, while recognising that the National Planning Board favoured a specific policy guideline on what should be the expected return on investment (not less than the cost at which the funds to finance it can be borrowed plus 5%), and also not wishing to advocate an unrealistic rate of return, does, however, recommend that there should be some minimum return target agreed between the Bord and the Departments of Energy and Finance which should be strictly adhered to. The Joint Committee further recognises that the guideline is a good indicator of an investment return and that a strong case would have to be made to justify a lower rate of return e.g. where overriding social issues might arise as in the case of Bord na Mona (Par. 1.17).

(d)The Joint Committee urges the company to implement as a priority further significant debt reduction measures (Par. 1.26).

(e)It is not clear to the Joint Committee why substantial repayments of £19.615m in respect of Exchequer advances were made by the Company in 1989/90 while the Balance Sheet at the end of the year reflected net current liabilities of £10.024m (Par. 1.30).

(f)The Joint Committee recommends that at least one of the present vacancies on the Board of the Company be filled by a director with financial qualifications, appropriate financial experience and preferably knowledge of Bord na Mona (Par. 1.35).

(g)The Stock Exchange requires that the identity of non-executive directors, together with a short biographical note on each director be disclosed in the annual reports and accounts of listed companies. The Joint Committee recommends that this information be incorporated into the reports and accounts of commercial State-sponsored bodies (Par. 1.36).

(h)The Joint Committee questions the rationale for the purchase of a company in France for £2.179m by way of borrowings which had net assets of £291,000, a deficit in working capital of £293,000 and bank borrowings of £839,000 (Par. 1.39). The total French operations had within a 19 month period a total of write off and losses of £2.8m and of associated borrowings of almost £5m as at March, 1990 (Par. 1.41).

(i)The Joint Committee is not satisfied that the Board’s diversification plans have been sufficiently analysed with particular reference to how the expected results are to be achieved; likewise the funding mechanism to achieve those results (Par. 2.17).

(j)The acquisition of distribution companies across Europe would not appear to be a realistic proposal at this time if the acquisitions are to be financed by borrowings. To minimise risks and get the operation underway the appointment of agents and/or distributors should be considered as an interim measure and as a practical alternative in the circumstances (Par. 2.18).

(k)The Joint Committee does not consider it appropriate that the Company should pursue the proposed activities of the Environmental Products division at this time, except by way of minimal R & D funding. This could possibly be the type of operation which could be financed by joint venture funding (Par. 2.22).

(l)The Joint Committee considers that the setting up of a holding company is the most appropriate and practical course of action to secure the future of the Company (Par. 3.9).

(m)The Joint Committee supports in principle the provision of an Exchequer subsidy to the Company. It believes that it may not be possible for the Company to continue to trade without an injection of Exchequer funding by way of an annual subsidy over a specific period (Pars. 3.10-3.11).

(n)Solutions to the Company’s problems should be considered in the context of a national energy policy. The Joint Committee believes that if a national energy policy was developed, cost savings would accrue not only to the Exchequer but also to the taxpayer (Par. 3.13).

(o)The Joint Committee recommends that the board of directors of Bord na Mona and indeed the boards of all the Commercial State-sponsored bodies clearly define in writing their modus operandi and terms of reference for nominee directors on subsidiary and associate companies and that it should specifically provide for:

(i)the required reporting and accounting format,

(ii)the approval procedures in relation to capital expenditure and borrowings (i.e. on and off-balance sheet),

(iii)contractual agreements,

(iv)the circulation of minutes of all subsidiary board meetings to members of the main board, and

(v)the separate submission to the Department of Energy of the accounts for each subsidiary company and investments to date in associate companies and dividends received (Par. 3.14).

1. PAST INVESTMENT/FINANCIAL PERFORMANCE

1.1The factors which affect both the level of Bord na Mona’s production and sales are

-Harvesting weather conditions,

-Demand factors associated with mild/severe winters,

-Competing energy supply position, and

-Energy price fluctuations.

Because of the critical impact of these factors on the financial returns of the Company, a review of performance over a five year period, which minimises annual oscillations and enables relative trends to be established, would be a more meaningful exercise than an evaluation of returns on an annualised basis. The following analysis of performance which provides a background to the Company’s present position is, therefore, based on two five year periods, 1979/80 to 1983/84 and 1984/85 to 1988/89.

1.2Five Years - 1979/80 - 1983/84

Table 1 outlines the key factors associated with the Company’s activities in this period.

Table 1

1.3It could reasonably be maintained that, as Bord na Mona entered the 1980s, it was a marginally profitable Company. Its modus operandi was very much influenced by the fact that it had a guaranteed market for a high percentage of its production. During the financial year 1979/80, the ESB accounted for £12.4m of the Company’s £12.6m sales revenue of milled peat. However, demand for briquettes was in excess of supply and the price was controlled.

1.4At 31 March 1980, the Company had capital employed (i.e. total assets minus current liabilities) of £60.988m which was financed by Exchequer advances of £33.932m and loans amounting to £10.1m guaranteed by the Minister for Finance. In other words, 72% of the capital employed was financed by way of advances and borrowings. Net profit for the year was £3.482m before extraordinary items, which was equivalent to 8.3% of sales, and the return on capital employed was 5.7%. This rate of return, even if it were doubled, would have to be regarded as a poor commercial performance. In this context the following extract from the Company’s Annual Report, 1981/82 is pertinent:

“The level of borrowings required to fund new development combined with high interest rates and uncertain pricing makes investment in new projects financially hazardous. Such investment has seriously threatened the Board’s solvency and must be very critically appraised henceforth.

The Board urges that consideration be given to adopting funding arrangements more suitable to its needs than those currently applied so that commitment to the national enterprise of turf development will be sustained into the future.”.

It is clear from the foregoing that as early as 1981/82 the Company’s adverse financial position was giving cause for concern.

1.5In response to the second oil crisis of 1979, the Turf Development Act, 1980, was enacted to facilitate an extension and expansion of the Company’s third development programme which had been approved initially in 1973 as a response to the oil crisis of that year. Over the five year period the Company received, by way of Exchequer advances and guaranteed loans, the amounts set out in Table 2.

Table 2

It will be noted that only £10.22m was received by way of Exchequer advances during the period, while on the other hand, guaranteed borrowings increased from £10.1m at 31 March 1980 to £90.88m at 31 March 1984.

1.6The Government’s approach to financing state companies during this period was notable in that, rather than funding companies by way of Exchequer advances, it encouraged them with the aid of Government guarantees to borrow from the financial institutions. In this connection it is appropriate to recall the view expressed by a previous Joint Committee (See Appendix 1) that guaranteed borrowings are an inapproriate solution to the long-term financial problems of commercial organisations and that such guarantees should be in place only for a limited period of time.

1.7Although 72% of the capital employed in the Company in 1980 was financed by advances and borrowings, the Company continued with its capital expenditure programme which was part of the then Government’s programme for the provision of an indigenous energy supply. Expert opinion at the time confirmed that the investment programme was a logical and a necessary development. The Littleton briquette factory and the Derryfadda works were completed during the period. Similar substantial investments in the development of solid fuel programmes were also undertaken in other countries.

1.8A significant feature of a decision to commit funds for capital expenditure to develop a bog is the long lead-time between the initial decision date and the date of completion. This matter is adverted to in the Company’s Annual Report for 1980/81:

“An especially burdensome feature of investment in turf development is that up to seven years will elapse from initiation of a scheme before a bog will be capable of producing peat and yielding a revenue. Capital servicing at high interest rates impacts heavily on annual production revenues which is modest in scale relative to capital investment.”.

It was also indicated in the same Annual Report that the Company’s planned investment in current development programmes was £182m. Because of the lead-time factor it is understandable that interest payable on Exchequer advances totalling £29.4m was capitalised for the five year period.

1.9The shift in borrowings from “soft” interest rates associated with Exchequer advances meant that the Company incurred a substantial increase in interest charges associated with loans from financial institutions, even though these loans had the support of a Government guarantee. Therefore, from a weak balance sheet position in 1980, the Company undertook substantial capital expenditure programmes which were financed by increasing and more expensive borrowings and which did not have an impact on the revenue generating capacity of the Company for a number of years. For the five year period 1979/80 - 1983/84 cumulative net profit amounted to £31.76m, depreciation amounted to £19.5m, while capital expenditure incurred totalled £131.6m. However, the fact that the Company recorded profits after extraordinary items* for four of the five years may have diverted attention from the inherent weakness in the balance sheet position and the risk factors involved.

1.10The Company again acknowledged the inadequacy of its funding arrangements in its Annual Report and Accounts, 1983/84, in the following terms:

“Throughout most of the year, the Board were optimistic that they could proceed with the Ballyforan Briquette Factory project, but towards the end of the year, it became increasingly clear that it would not be prudent to do so. A review of the solid fuel market indicated that the proposed output of Ballyforan could not be absorbed by the market in its present state at an economic price. Falling demand due to the continuing recession and intense competition were the key factors and to continue with the project on present funding arrangements (which in the Board’s case means borrowings) could only lead to a serious cash deficit position. It was finally decided that the project should be suspended for a period of one year at which date the position would be reviewed.”.

1.11The change from Exchequer advances to borrowing from the financial institutions as a method of funding the Company’s development programme prompts the following questions:

(i)During the progress of the Company’s projects were there significant deviations from the original assumptions on which the investment decisions were based and, if so, were these deviations monitored?

(ii)Was an on-going cost-benefit analysis undertaken?

(iii)Was the source of funding of the capital expenditure identified and provision made for its servicing and repayment?

A planned approach, if adopted, would have facilitated an early detection of slippage and initiated a prompt reappraisal of the investments.

1.12The continued use of the Government guaranteed borrowing mechanism as a source of funding for a Company that was already “waterlogged” in debt raises a serious question as to whether the long-term implications of this policy were fully appreciated. The interest rate on these borrowings has to be compared with the gross return on net capital employed* which for the period was an average of 10.4%.

1.13The question even then should have been raised as to whether a statutory corporation like Bord na Mona which contains no equity capital and which normally had been financed by Exchequer advances should have been left in situ. It seems to the Joint Committee that having regard to the very substantial investment programme initiated by the Company, other types of corporate structure would have been more appropriate.

Five Years 1984/85 - 1988/89

1.14At 1 April, 1984, the Company had record loans of £121.180m associated with Exchequer advances and other borrowings and it had net capital employed of £188.125m. Key statistics relevant to this period are set out in Table 3.

Table 3

It will be noted from the Table above that sales increased by only £10m for the five year period, while for the previous five year period sales increased by £60m i.e. from £42.1m to £102.9m.

1.15If the Company had adopted a strictly commercial approach a target rate of return on capital employed would, under normal conditions, be expected to be in excess of 20%. The diagram below illustrates the ratios associated with the financial results for the year ended 31 March 1985:

1.16From the diagram it will be seen that the Company generated a 9.6% return on capital employed. However, if interest of £14.374m expensed is compared with the total debt of £134.042m the average cost of borrowings in the year was 10%. If capitalised interest of £3.683m is included in interest charges, then the average cost of borrowings would be 13.5%. In other words, the Company was earning a return on capital employed less than the cost of servicing borrowings. This position may be commercially acceptable in the development phases of an organisation and/or where there is a low debt equity ratio, but it should certainly have signalled danger when debt represented 65% of capital employed and when further borrowings were utilised to finance capital expenditure.

1.17The Joint Committee wishes to draw attention to the weakness of using comparative operating profit data as a yardstick of achievement and it emphasises the importance of evaluating projects on the expected rate of return on the investment. The Joint Committee, while recognising that the National Planning Board Proposals for Plan - 1984-87 favoured a specific policy guideline on what should be the expected return on investment (not less than the cost at which the funds to finance it can be borrowed plus 5%), and also not wishing to advocate an unrealistic rate of return, does, however, recommend that there should be some minimum return target agreed between the Board and the Departments of Energy and Finance which should be strictly adhered to. The Joint Committee further recognises that the guideline is a good indicator of an investment return and that a strong case would have to be made to justify a lower rate of return e.g. where overriding social issues might arise as in the case of Bord na Mona.

1.18The results for the next four years, i.e. 1985/86 - 1988/89 saw a dramatic downturn in the Company’s finances. These results were particularly affected by the Company’s dependence on achieving its milled peat production target. The 1986 Report and Accounts show that the Company achieved only 39% of its target and, consequently, a net loss of £10.128m was recorded. This position was further influenced by a provision of £7.365m arising from the Board’s decision to write off expenditure to date (including accrued interest) on the Ballyforan Briquette Factory. Accordingly, a total loss of £17.664m was carried into the Balance Sheet. The 1985/86 Annual Report and Accounts commented, as follows, on the situation:

“The combined effects of 1985 and 1986 have also heightened an underlying financial difficulty facing the Board. This is the unsatisfactory nature of its capital base and of its financial relationship with government. At present the Board’s capital consists almost exclusively of Exchequer, European Investment Bank and commercial bank loans. This unbalanced capital base increases the Board’s financial vulnerability in periods of difficulty such as the past two production seasons. The time is therefore right for a conversion of existing Exchequer loans into equity and for an injection of new state equity in the context of a fundamental review of Bord na Mona’s capital structure.”.

1.19During the financial year ended 31 March, 1987, a further loss of £15.868m was recorded. The Annual Report and Accounts for that year included the following statement:

“In September 1986 the Government, having considered the implications of the second successive disastrous Summer for an Board’s finances, agreed to underwrite a loan of £25m. While this did not address the fundamental issue of the capital structure of Bord na Mona, it nonetheless was a welcome help in a very difficult situation.”.

1.20The question must be raised as to whether an adequate analysis was undertaken of the Company’s capacity to service even existing interest charges on borrowings without compounding the situation by increasing borrowings still further. These borrowings were in addition to the £134.065m debt which the Company had at the beginning of the financial year. Clearly, this was a short-term expedient.

1.21The severity of the Company’s financial position at that time is also reflected in the fact that during 1986/87 it incurred capital expenditure of £6.88m which was funded by short-term loans and bank overdraft facilities. The Company also incurred capital expenditure of £9.2m in 1987/88 under similar funding arrangements. The Joint Committee can only conclude that these were also short-term measures as the financing of capital expenditure by way of short-term funding violates the basic criteria of financial management. While it is understandable that capital expenditure has to be incurred on an annualised basis to provide for costs such as maintenance and plant replacement, it is the funding mechanism adopted which gives cause for concern.

1.22Losses of £3.385m and £11.729m were recorded for the financial years ended 31 March 1988 and 1989, respectively. When provision is made for exceptional items, totalling £79.234m, a massive loss of £90.936m is recorded for 1988/89. These exceptional items related to a provision for the permanent diminution in the value of assets of £49.675m and redundancy costs of £29.559m. The deteriorating financial position of the Company is further highlighted by the fact that there was only a very marginal difference between current assets and current liabilities. If Government guarantees had not been in place, the degree of insolvency of the Company would have been £74.996m which reflects the shortfall in the capital funding.

1.23The Annual Report and Accounts for 1988/89 contained the following statement by the Company’s auditors:

“The Accounts have been prepared on the going-concern basis despite the loss for the year, the exhaustion of the Board’s accumulated reserves and the excess of liabilities over assets. The Directors believe the going-concern basis to be appropriate because as set out in Note 1, they expect that, following the completion of a major reorganisation of the Board’s activities, the Board will achieve significantly improved operating profitability and they anticipate continuing state support for the Board’s activities. I have received assurances on the 23rd May 1990 that the Minister for Energy intends Bord na Mona to continue in being for the foreseeable future.”.

1.24The Joint Committee does not share the Directors’ confidence that “a significantly improved operating profitability” will provide the Company with the capacity to trade its way out of its very serious and fundamental capital structure problems as portrayed in the Balance Sheet. The policy of funding the necessary capital requirements of the Company by way of increased borrowings in an already overborrowed position substantially increases the exposure of trade and other unsecured creditors. This situation gives the Joint Committee cause for considerable concern. To service loans and other debt of £154.557m in the 1988 Balance Sheet say at a 12% rate of interest, an operating profit of £18.55m would be required just to break-even the following year, assuming that no further borrowings were undertaken. While the commendable initiatives taken by the Company for a divisionalised approach to its management structure are to be welcomed, the Joint Committee is unable to share the optimism expressed by the Chairman of the Company in the following terms in the 1988/89 Annual Report and Accounts:

“Indeed by year end the process of transformation had reached a point where it could legitimately be described as irreversible and where all concerned could look forward with justifiable confidence to the emergence of a new Bord na Mona capable of prospering in even the most demanding of competitive conditions.”.

1.25Regardless of the external risks associated with the Company’s performance, the cost load factor is one that is far too high for the Company to carry without a radical and fundamental restructuring of its Balance Sheet. This is acknowledged, as follows, in the Company’s written submission to the Joint Committee:

“The Company is on a knife-edge equilibrium, heavily geared and hence extremely sensitive to adverse movements in margins and interest rates.”.

1.26The Joint Committee appreciates the magnitude of the task involved and the financial resources required to rectify the adverse Balance Sheet position. It must be clearly understood that, in the absence of Government guarantees, the Company is insolvent and this major problem must be addressed without delay. The Joint Committee is of the view that despite the Company’s best endeavours it will not trade its way out of its problems and it is clear that the actions taken over a number of years did not address the fundamental issues. In a letter dated 30 January, 1991, the Chairman of the Company informed the Joint Committee of a Board decision to adopt a debt reduction policy (see Appendix II). While the Joint Committee welcomes this development, the measure can, realistically, only be considered as an initial step in coming to terms with the Company’s high level of debt financing. The Joint Committee would urge the Company to implement as a priority further significant debt reduction measures. If the Company can demonstrate that it can achieve significant debt reduction within its own resources, the Government may adopt a more sympathetic attitude to a request from the Company for assistance.

1.27The Accounts for the financial year ended 31 March 1990 serve to reinforce the Joint Committee’s concern. An operating profit of £21.114m was achieved, yielding a net profit of £2.550m after interest charges of £20.068m. However, of the £2.550m net profit recorded, 59% was attributed to profit on foreign currency borrowings.

The Balance Sheet shows the extremely unsatisfactory position of current liabilities exceeding current assets by £10.024m and only a slight reduction in the negative net worth of the Company, i.e. £72.446m compared to £74.996m in the previous year.

1.28Exchequer Advances and Guaranteed Borrowings

Exchequer advances in the ten year period under review totalled £10.484m while repayments up to 31 March 1990 amounted to £47.05m (See Appendix III). On the other hand, loans guaranteed by the Minister for Finance, which were £3.156m at the beginning of the 1979/80 Financial Year had increased to £138.567m at 31 March 1990 and repayments on these loans amounted to £52.008m (See Appendix IV).

1.29The increase in guaranteed borrowings was facilitated by the Turf Development Act, 1983, which raised the limitation on such borrowings from £100m to £180m. In the course of the debate on the Second Stage of the Bill in the Dail, the Minister of State at the Department of Energy made the following comment [Official Report Vol 455, Col 1861] about the change of policy with regard to the funding of the Company’s capital requirements:

“In the early years of the third programme the Exchequer funded by way of repayable advances the bulk of Bord na Mona’s capital requirements. Since 1978, however, the Board has had to meet expenditure on its development programme and related capital charges mainly by borrowing.”.

1.30A notable feature of the Annual Report and Accounts, 1989/90 is that £19.615m was repaid in relation to Exchequer advances. It is assumed that in order to effect interest saving costs, £39.006m was repaid on loans guaranteed by the Minister for Finance while, on the other hand, new loans totalling £41m were created. It is not clear to the Joint Committee why substantial repayments of £19.615m in respect of Exchequer advances were made by the Company in 1989/90 while the Balance Sheet at the end of the year reflected net current liabilities of £10.024m.

Capital Expenditure

1.31Capital expenditure for the ten year period 1980 to 1989 was £194.924m while depreciation provisions were equivalent to approx. one-third of this amount, i.e. £65.765m. (See Appendix V). Yet, the net valuation of fixed assets only increased from £44.42m in 1980 to £94.401m in 1989. Clearly, some level of investment in fixed assets is vital if a business is to continue to operate. Because of the interest burden, the cash flow generated by Bord na Mona is limited and this in turn, restricts its ability to invest in fixed assets and to repay existing borrowings.

Depreciation

1.32Over the past number of years, Bord na Mona has been faced with the option of investing in fixed assets or repaying borrowings. The Company changed its methods of depreciation from time-related to the depletion method in 1988/89. The depletion method is normally used by companies which have natural resources among their assets and is regarded in accounting practice as the best approach to estimating the annual depreciation charge for such companies. The change in method is likely to represent for Bord na Mona a better measure of depreciation than the time-related approach used previously. The rationale for such a change in calculating depreciation is that the new method achieves a more accurate “matching” of costs with revenues associated with them. The method involves the estimation of the total remaining recoverable tonnes of peat at various works located at the beginning of the year under review and the percentage of this figure which was actually produced in the year is applied to the original costs of the asset involved to arrive at the depreciation charge for the year.

Employment and Staff Costs

1.33Details of employment and staff costs are outlined in Appendix VI. In 1979/80 peak employment numbers were 6,256 and average employment was 5,222 and staff costs were £26.863m. representing 70.8% of turnover. Over the ten year period 1979/80 - 1988/89 peak employment was at its highest in 1983/84 but by 1989/90 it had decreased to 3,966 and staff costs likewise decreased to 44.5% of turnover for that year. The decline in numbers employed is attributed to the Company’s policy of endeavouring to reduce its manpower cost base. To achieve this, a number of packages such as voluntary redundancies and early retirement option schemes were introduced in May 1988 following negotiations with the trade unions. The 1988/89 annual accounts includes an exceptional item for £29.559m. to accommodate this position.

1.34The cumulative staff cost for the ten year period 1979/80 - 1988/89 was £540m. It has to be recognised that Bord na Mona has been a substantial provider of employment over the years. Assuming an average of 20% deductions by the Revenue Commissioners, ie PAYE and PRSI, the Exchequer receipts from this source could be estimated at approximately £100m.

Board of Directors

1.35Currently vacancies exist on the Board. In view of the Company’s decision to implement a debt reduction programme the Joint Committee believes that the membership of the Board should be strengthened, particularly in the financial area. It, therefore, recommends that at least one of the vacancies be immediately filled by a director with financial qualifications, appropriate financial experience and preferably knowledge of Bord na Mona.

1.36The publication “Admission of Securities to Listing” issued by authority of the Council of the Stock Exchange sets out details of what a company must include in its annual report and accounts. It requires, inter alia, that “the identity of independent non-executive directors together with a short biographical note on each” be disclosed. The Joint Committee recommends that this practice be adopted by all commercial state-sponsored bodies and that such a listing be incorporated into their annual report and accounts.

Subsidiary Company

1.37In October, 1988, Bord na Mona established a wholly-owned subsidiary company Du Mona France, S.A. The objective was to have its own distribution company and establish a vehicle for subsequent investment and for raising local finance. Du Mona France had a share capital of £520,000 and a seven member board, with Bord na Mona’s Managing Director as its Chairman and Bord na Mona’s Company Secretary as Managing Director. Its offices are located in Lyon.

1.38In February 1989, Bord na Mona through Du Mona, purchased the entire shareholding of Pouget-Solami, S.A., a company in the horticultural products industry, which itself has three subsidiary companies also incorporated and operating in France. Financial details of the acquisition are given in the Company’s Annual Report and Accounts for the year ended 1988/89. These show that the consideration paid was £2.179m, including a figure of £1.888m for goodwill, which was subsequently written off against reserves in accordance with generally accepted accounting practices. The capital necessary to fund the company was raised from French banks without the need for Government guarantees.

1.39Notwithstanding the details supplied by Bord na Mona in respect of the past record and projected profits of the Pouget-Solami Group of Companies, the Joint Committee questions the rationale for the purchase of a company which had a deficit on working capital of £243,000 and bank borrowings of £839,000. The purchase consideration paid of £2.179m was equivalent to a multiple of almost 7.5 times of “the net assets acquired at fair value” of £291,000 and represented a multiple of 12.9 times the average profits of the company for the previous four years. The fact that the purchase had to be financed by way of borrowings only raises further questions regarding the commercial criteria against which the purchase was evaluated.

1.40The results of Du Mona S.A. are consolidated in Bord na Mona’s Accounts from the date of incorporation, i.e., September 1988 and those of Pouget-Solami from the start of the financial year April 1989 to March 1990. Pouget-Solami mixes and distributes a wide range of peat-based compost, mainly for the retail market and is also a supplier of compost to professional growers throughout France. This French group of companies had a turnover of £6.1m in 1988/89 and had approximately 70 employees.

1.41While Bord na Mona have defended their investment by reference to profits in Pouget-Solami and to market analysis, nonetheless in reviewing Bord na Mona’s Board and Group balance sheet, the Joint Committee has come to the view that on consolidation the Company’s French subsidiary generated losses of £213,000 in 1988/89 and £684,000 in 1989/90. Some of these losses were associated with the establishment of Du Mona which was the vehicle used to acquire Pouget-Solami. The losses over the period from September, 1988 to March, 1990 totalled £897,000. It will be noted also from consolidation that in order to finance the French operations, borrowings over the period (up to March, 1990) were increased to £4.99m. The outcome of this investment shows a write-off of £1.888m and accumulated losses of £897,000 within a 19 month period i.e. a total of £2.785m.

1.42While it is appreciated that it can be difficult to manage new ventures during their initial years, the Joint Committee would have to express its disappointment that such substantial losses were incurred. It recognises the primary and growing importance of distribution in developing a competitive marketing strategy and that the acquisition should help consolidate the Company’s position in the French market and also provide it with opportunities for development. Nevertheless, when funds have to be borrowed to finance such an acquisition, and particularly when the Company is likely to incur operating losses during the initial period, the cost benefit analysis in the short term of the new ventures must be called into question, especially when the acquisition involved is made by a Company which itself, is in serious financial difficulty.

1.43Notwithstanding the very considerable volume of information furnished to it by the Company, the Joint Committee remains concerned about the costly approach adopted by the Company in relation to the French market. The Joint Committee is strongly of the view that any proposals for further acquisitions by the Company should reflect positive results and not contribute to the Company’s already significant debt burden.

2. DIVERSIFICATION

2.1The Company’s proposals, as outlined in its five year plan 1990/91 - 1994/95, focus on improving its profitability by

-strengthening its core business in peat extraction, and

-growing through diversification founded on, and related to, its core business.

The Company has divided its functions into separate divisions, namely peat energy, solid fuels, horticulture, and a fourth division, environmental products, is proposed. These divisions are controlled by a corporate division (See Appendix VII). Each of the current three operating divisions serve different markets and have different long-term prospects. This information was given in a memorandum submitted by the Company to the Joint Committee in June, 1990. However, the Company has since informed the Joint Committee that it is up-dating its 5 Year Plan.

Peat Energy Division

2.2The Peat Energy Division does not appear to have a long term future. In excess of 75% of milled peat output is sold to the ESB. Two significant factors are that milled peat prices are not competitive with coal, natural gas or heavy fuel oil and that more than 50% of the ESB’s total milled peat burning capacity is over 25 years old. However, it is understood that the thermal efficiency of these ESB plants compares unfavourably with plants using other energy sources. The remainder of the milled peat sales worth approximately £7m per annum are made to the Solid Fuels Division.

2.3There has been no significant investment in machinery in the peat energy division for a number of years and, consequently, there have been high costs associated with annual machine maintenance. The Company proposes to achieve a reduction in its production costs through the phased introduction of the HAKU process which will render peat harvesting more flexible and weather independent. Traditionally, Bord na Mona used the production system known as PECO, but the HAKU system of peat stockpiling will require considerable investment to replace obsolete equipment to accommodate the new system. On the other hand, the Company will be under pressure from the ESB to secure a price reduction. In summary, the peat energy division has production problems associated with its ageing harvesting equipment on the supply side and ageing energy processing equipment on the customer side.

2.4The division has a high market share in a low/declining market. It can be regarded as the Company’s “cash cow” despite its high level of fixed costs. Nevertheless, the Company expects that 80% plus of its cash-flow will be generated from this division. The cash flow, i.e. after interest and capital expenditure, will be £51m as outlined in the Company’s five year plan and the capital expenditure to accommodate the proposed changes amounts to £32m for the period.

2.5The Company estimates that over thirty years of developed peat reserves exist. The division’s employment level is expected to fall from 2,178 in 1990 to 1,767 in 1994 and associated redundancy costs are projected at £7.758m.

2.6The stated objective of Bord na Mona’s productivity drive is to increase its production from 1,759 to 3,400 tonnes per man year over the five year period. In order to reduce the fixed cost element associated with peat harvesting, an Employee Enterprise Scheme was introduced which provided for greater variability in the cost of production, thereby reducing overall costs. The Scheme was based on the formation of small companies as joint venture partnerships between Bord na Mona and teams of four or five of its former staff. The gains from the resultant higher productivity would be shared by the Company and the joint venture partners. Negotiations with the trade unions led to the proposal of a second type of enterprise scheme called the Autonomous Work Group Scheme. Both schemes were tried out during the 1989/90 season on 15% of the production to establish which would be the most effective. It is understood that the schemes were extended to 49% of production in 1990 and that the results have shown substantial improvement in productivity. Currently both the Company and the trade unions are reviewing both schemes and discussing proposals for their further expansion and implementation.

2.7The Company does not have any major proposals for diversification within this division other than improving the quality of milled peat produced and implementing changes in the production process. The Joint Committee welcomes these developments as they should enable the Company to achieve

-a reduction in its cost of sales,

-a greater percentage of its milled peat production target, and

-improved price competitiveness.

Solid Fuels Division

2.8The future of the Solid Fuels Division is difficult to predict as the market is generally declining and competition increasing. The Company will have difficulty in achieving substantial growth for peat briquettes, which are generally regarded as a secondary fuel. The Solid Fuel Division is responsible for sales of briquettes, sod peat and turf on the flat and its headquarters are located in Newbridge, Co. Kildare. In excess of 80% of sales are associated with briquettes. The Company operates four briquette factories and two sod peat factories. The Company informed the Joint Committee that sales from their factories are now something of the order of 375,000 tonnes per year and that it is capable of producing 550,000 tonnes per year.

2.9The Company proposes to achieve consistency in product quality, increased distribution arrangements, and improved price competitiveness. Peat briquettes are mainly used as a secondary fuel to supplement other fuels used by householders. The banning of bituminous coal may have both a positive and negative impact on briquette sales which will also be influenced by the impact of competitor activity, i.e. gas and electricity for home cooking and heating. Bord Gais announced that it does not propose to increase the price of gas before the end of 1991 and through their aggressive promotional packages they have been particularly successful in increasing product sales in the urban Dublin market.

2.10The Joint Committee recognises the critical importance of the distribution factor in achieving sales volume. It considers that a joint venture arrangement with a distributor is a cost effective mechanism to achieve increased sales. However, the Company has now established in Dublin its own distribution operation from rented premises.

2.11The Company projects capital expenditure of £6m to achieve an increase in sales revenue from £30m in Year 1 to £37m in Year 5. Investment is required to -

a)provide for greater distribution,

b)improve briquette quality,

c)produce less expensive briquettes.

In order to compete effectively in the battle for the Dublin fuel market, Bord na Mona planned to spend over £1m on promotion during the 1990/91 winter period which represents an increase of £250,000 on the previous year.

2.12The Joint Committee would regard the division’s target of a 20% increase in sales revenue over the five year period as ambitious, particularly as the total market is in decline. It recognises the fundamental importance of distribution in the Company’s marketing strategy and believes that a joint venture arrangement with a distributor at this time is the most cost effective and low risk arrangement to achieve the Company’s objective of increasing its sales.

Horticultural Division

2.13The Horticultural Division is regarded by Bord na Mona as having the greatest potential. The Company is endeavouring to re-position its product from being sold as a commodity (straight peat) to a substantially increased value added product (compost). Diversification is, therefore, related to products and markets. The key success factor in the marketplace associated with these products is brand awareness, distribution and price.

2.14The Company’s brand name “Shamrock” has strong recognition in the U.K. but this is not the case generally in Europe. The development of a brand name is an expensive operation and takes time. While the Company has through Du Mona S.A. increased its potential distribution in France, other European distributors will only be attracted to the product relative to the margin of profit available on sales and the amount of advertising support. In other words, the significant factors which will influence purchasers to establish the “pull factors” in the marketplace, have to be clearly identified. It can be assumed that, generally, peat/compost products are relatively price-sensitive for the largest sector, which is the non-professional/amateur gardener. Success in the marketplace is put at greater risk when the two variables, i.e. new products and new markets, are present. Therefore, diversification into new products and new markets has to be critically examined against a backdrop of brand awareness, distribution and price.

2.15Sales of horticultural products are projected to increase from £36m in Year 1 to £58m in Year 5, i.e. a 61% increase in sales revenue. To achieve this increase, Bord na Mona proposes

-acquisition of distribution companies across Europe,

-investing to support the Company’s brand name,

-developing physical channels of distribution across Europe, and

-continually cutting costs to meet an extremely competitive international situation.

A total of £21m in capital expenditure is envisaged over the five year period to achieve these results, but it must be recognised that the division will have a negative cash-flow for the first three years of the Plan.

2.16The division has available significant quantities of quality horticultural peat. Its location in relation to mainland European markets entails extra transport costs in comparison with competitors. However, Bord na Mona is not generally regarded as a low-cost peat producer and can only rectify the problem through increased efficiency. To accommodate the Company’s change in emphasis from straight peat sales to compost sales, additional capacity will be required in the area of compost manufacture. To provide for greater product responsiveness to market requirements, the management of the Company considers it essential that the processing plants be located in selected target market areas.

2.17However commendable the Board’s diversification plans may be, the Joint Committee is not satisfied that its diversification plans have been sufficiently analysed with particular reference to how the expected results are to be achieved; likewise the funding mechanism to achieve those results. It is the shortfall in the resources area and the level of additional investment required that creates a serious problem. It is noted that the Company’s involvement with its French subsidiary has to date been an expensive operation.

2.18It would be logical, indeed prudent, for a company which does not have to cope with financial difficulties to consider diversification plans to exploit opportunities in the marketplace. But in the case of Bord na Mona, it cannot afford to take the risks associated with ventures which would have to be financed from increased borrowings, unless and until the adverse balance sheet position of the Company itself is first rectified. To minimise risks and get the operation underway, the appointment of agents and/or distributors should be considered as an interim measure and as a practical alternative in the circumstances. The acquisition of distribution companies across Europe would not appear to be a realistic proposal at this time particularly if the acquisitions are to be financed by borrowings.

Environmental Products Division

2.19The environmental products division was recently established to sell a number of pollution abatement products based on peat and peat fibre. The Company is currently selling a Puraflo unit which is a modular treatment system for domestic septic tank effluents and also a Biophore unit which is a biofiltration system for the removal of noxious industrial odours. In its submission to the Joint Committee the Company stated that negotiations were at an advanced stage with a German company to set up a production facility for Activated Carbon, subject to feasibility studies. However, it must be recognised that the proposed diversifications lack commonality in markets, distribution channels, possible production technology, and R & D thrust to provide the opportunity for synergy except in the utilisation of the raw material base.

2.20While the Company is to be complimented for the initiatives it has taken in relation to new product development, it must, nevertheless, be mindful of the high failure rate generally associated with new products. Furthermore, substantial investment will be required at the commercialisation stage (See Appendix VIII). The Joint Committee’s concern is about the risk factors involved and the availability of substantial funding to finance the various stages of product development. In this regard it is noted that no provisions are made within the Company’s Five Year Plan in relation to expenditure and revenues associated with this division. However, the sum of £1.3m per annum is included in the Corporate Division for expenditure on peat research and new business.

2.21In its submission to the Joint Committee, the Company estimated capital expenditure of £14.8m for the Environmental Products division over the period and estimated sales revenue increasing from £750,000 in Year 1 to £15.4m in Year 5. This is certainly a very ambitious target. The estimated number of employees in the fifth year is expected to reach 99. Comparing capital expenditure with the number employed, the capital cost per job is approximately £150,000. Even if this figure were halved, the cost per job seems excessive.

2.22The Joint Committee does not consider it appropriate that the Company should pursue the proposed activities of the Environmental Products division at this time, except by way of minimal R & D funding. This could possibly be the type of operation which could be financed by joint venture funding.

Corporate Division

2.23The Company’s plan envisages a small corporate headquarters whose functions would be to coordinate the Divisions and new businesses, to administer policies common to all divisions, to coordinate financial control and to consolidate all financial statements and, above all, to act as corporate treasury. The proposal is that the core divisions, i.e., peat energy, solid fuels and horticulture, should be established on the basis of each being financed by 50% debt and 50% equity. This would leave a sum of £129m of debt at the corporate centre. It would be financed by dividends from the divisions and possibly other sources.

Diversification - Conclusions

2.24The fundamental question that arises in relation to the Company’s diversification plans is whether financial resources will be available to fund them. Financing these plans, no matter how attractive they may be, by way of borrowings is undoubtedly a hazardous exercise. During their initial stages, new products/projects are generally “cash-eaters” and are unlikely to be self-financing for a number of years. The Joint Committee is of the view that the Company’s “war-chest” as disclosed in the Balance Sheet is far too weak to enable it to undertake a number of diversification programmes, excepting those programmes which are likely to generate immediate cost savings, i.e. changes in the production processes of milled peat and, possibly, the establishment of a joint venture operation for the distribution of briquettes.

2.25As many of the diversification proposals are at an embryonic stage, it would be commercially prudent to either “shelve” or “freeze” them. The efforts of the Board’s management and employees must not be deflected from the achievement of the projected results of the core divisions and with proposals to rectify the problems of its subsidiary company. It must be emphasised that new projects will only increase borrowings further and that, realistically, the Company cannot do so with its “waterlogged” debt position. The Five Year projections show an accumulated net loss of £2m on cumulative sales of £663m. Any adverse margin of error will undoubtedly impact negatively on an already very difficult financial situation. While the Company has been involved in a difficult period of restructuring, the Joint Committee believes that the next five years should, nevertheless, be a period of consolidation. The Company’s policy with regard to debt reduction can be seen as a step in this direction.

3. HOLDING COMPANY

3.1The Company has implemented a divisional organisation structure reporting to a Head Office. The management thinking of the 1980s very much favoured decentralisation and strategic business unit accounting. On the basis of the information supplied to it, the Joint Committee would support the rationale of the restructuring because a strategy of diversity forces a decentralised structure. The Company operates in three separate industry markets using peat as a common raw material source.

3.2The Turf Development Act, 1988, enabled Bord na Mona to, inter alia, -

-promote, form, take part in or acquire companies;

-delegate some of the functions of the Board to sub-boards;

-engage in activities not strictly related to peat.

It also specified the role and functions of the sub-boards.

3.3The Company, therefore, has the option of managing its divisions

-currently as operating units reporting to headquarters,

-through the allocation of appropriate assets and liabilities to each division and the establishment of profit centre criteria,

-by way of incorporating the divisions into limited companies classified as subsidiaries whose accounts would be consolidated into the current statutory corporation, Bord na Mona, or the establishment of a new holding company.

3.4Whichever proposal is implemented it will not of itself rectify the Company’s adverse balance sheet position. Any proposal, therefore, has to be examined as an appropriate mechanism to achieve the objective of dealing with this serious problem.

3.5Having regard to the serious financial position of the Company, the Joint Committee considered the following options for the Company from a purely commercial viewpoint: That it

-remain as it is,

-be liquidated,

-receive an equity injection equivalent to the unmanageable portion of its debt,

-reduce in size its operations,

-be formally structured into divisional/subsidiary companies reflecting the appropriation of relevant assets and liabilities to each. The level of borrowings allocated would only relate to the divisions’ capacity to service those borrowings and the balance would be allocated to a “holding company” or corporate unit.

3.6If no changes are implemented, the Company’s position undoubtedly will continue to deteriorate and both employees and unsecured creditors will be further exposed. The Company’s financial problems have been recognised, documented and highlighted for a number of years and it is no longer acceptable that this situation should be allowed to linger on without the implementation of appropriate and immediate remedial measures. The debt reduction policy is acknowledged by the Company to be a minimum token measure. In the absence of comprehensive remedial measures, the Joint Committee would be apprehensive about the future and inevitable demise of the Company.

3.7The Joint Committee is of the view that the option to liquidate the Company should not be considered. In such an event, the Exchequer would have to honour its guaranteed borrowings of approx £140m as at 31 January, 1991. After the realisation of the assets of the Company, a net cost to the Exchequer could be in the region of £70m plus. In such circumstances it is appropriate that the net cost should be compared on a discounted cash flow (D.C.F.) basis with the provision of a subsidy over a specified period. If the Government were to provide the Company with, say, a subsidy of £18m per annum for a five year period, then at a discounted rate of 10% the present value of these payments would be approximately £70m.

3.8The proposal to reduce the Company’s size would involve possibly disposing of its milled peat processing to the ESB, and its briquette manufacture and horticultural processing to private concerns. The Company would, therefore, retain only the ownership of its bogs and basically become a production/supply company of raw peat products. The hoped-for income from sales of its disposable units would help to reduce borrowings. However, the Joint Committee considers that this radical proposal would only be appropriate for consideration as a “death’s door” option.

3.9In all the circumstances, the Joint Committee considers the holding company proposal to be the most appropriate and practical course of action to secure the future of the Company. It would protect the jobs of the majority of the employees and retain the Company’s unique assets in state ownership. It would also provide the Company with a breathing space to reap the benefits of its recent rationalisation programme and provide it with an opportunity to achieve the results it so confidently, if perhaps over optimistically, projects.

3.10Appendix IX shows that £67m of the Company’s £196m borrowings for 1990/91 would be allocated to the divisional/subsidiary companies and the balance of £129m to a holding company or the corporate division. The Company’s projected results for the Five Year Period show accumulated losses of £2m. The total debt during Year 1 (1990/91) will increase to £196m and peak in Year 3 to £213m before reducing to £206m in Year 5, (i.e. 1994/95). The Group Balance Sheet as at 31 March 1990, shows net current liabilities of £10.024m and a deficit in capital funding of £72.446m. It may not be possible for the Company to continue to trade under such circumstances without a meaningful injection of Exchequer funding which the Joint Committee recommends should be over a specified period. There is no way the Company as it is currently operating can trade its way out of its adverse financial position. The practical alternatives are either “major surgery” or an injection of funds.

3.11The next five years should be a period of consolidation and, accordingly, the Company should have only a minimum involvement in new ventures and/or products which are likely to require capital funding. A proposal to provide for an annual Exchequer subsidy to the Company for a specific period is the most realistic and practical course. During the period the Company’s performance should be strictly monitored by the responsible Government Departments i.e. Energy and Finance, to ensure that the continuation of the subsidy is justified and that VFM (value for money) is being achieved through economy, efficiency and effectiveness so that the Company in the future can be supported by its customers rather than the taxpayer. The amount of the Exchequer subsidy would relate to the projected corporate division’s debt of £129m and the impact of varying amounts would have to be assessed.

3.12The Joint Committee supports in principle the provision of an Exchequer subsidy. Whether the Corporate Division should become a holding company or whether the divisional operations should become subsidiary companies is really a matter for decision by the board and management of the Company. The Joint Committee believes from its review of the Company’s operations that it would be inappropriate to prescribe a detailed mechanism for such operations.

3.13There are three other commercial state bodies involved in the energy sector which impact one on the other, i.e. ESB, Bord Gais and INPC. While competition for the domestic market share is undoubtedly a healthy situation, the Joint Committee believes that if a national energy policy was developed, cost savings could accrue not only to the Exchequer but to the provider of funds to those organisations, i.e., the taxpayer. Therefore, it is appropriate to consider proposed solutions to the Company’s problems in the context of such an energy policy. However, remedial action for Bord na Mona should not be delayed in anticipation of such a development as its problems are too fundamental and urgently need attention.

3.14While the Turf Development Act, 1990 [Number 22 of 1990] contains provisions relating to the membership and operation of sub-boards, it does not provide for matters such as the appointment of the Board of Directors of subsidiary companies. However, many of the commercial State-sponsored bodies operate subsidiary companies without such provisions. In the event that Bord na Mona invests in further subsidiary or associate companies, the Joint Committee recommends that the board of directors of Bord na Mona and indeed the boards of all the commercial State-sponsored bodies clearly define in writing their modus operandi and terms of reference for nominee directors on such companies and that it should specifically provide for:-

(i)the required reporting and accounting format,

(ii)the approval procedures in relation to capital expenditure and borrowings (i.e. on and off-balance sheet),

(iii)contractual agreements,

(iv)the circulation of minutes of all subsidiary board meetings to members of the main board, and

(v)the separate submission to the Department of Energy of the accounts for each subsidiary company and investments to date in associate companies and dividends received.

Implementation of this procedure would ensure that the directors of the main board would have adequate information on the operations, developments and commitments of subsidiary and associate companies.

4. ESB CONTRACT

4.1The ESB is Bord na Mona’s largest customer, accounting for 54% of its annual turnover. In February 1986, the Board and the ESB completed an agreement on a pricing arrangement for three years effective from April 1986. This arrangement related to the following scheduled tonnage of milled peat:

4.2The price agreed in 1986 was £18.565 per tonne up to 2.7 million tonnes and £16.037 over that level and £26.418 per tonne for sod peat. The annual adjustment in price was based on the Consumer Price Index increase less one percentage point. This agreement was extended until March, 1990 to facilitate the negotiation of a new contract.

4.3The agreement reached between the Company and the ESB for the period 1990/1995 was as follows:

Sod Peat: Price £27.295 per tonne at 35% moisture content.

4.4The Company in its submission to the Joint Committee stated that the prices it charged to the ESB for the first two years of the contract were similar to those charged in 1989. In March, 1990, Bord na Mona and the ESB signed a milled peat contract for supplies up to 1994/95. Indicative target consumption levels up to the year 2004/5 were also agreed. In December, 1990, a contract valued at £6m was signed between the parties for additional peat supplies during the period 1/1/91-31/12/95. Bord na Mona has already received payment of the £6m. The Company maintains that the quality of peat sold to the ESB in terms of moisture content, consistency, granulation and ash content has been, and will be, steadily improved. Bord na Mona estimates that the accumulative value of the benefits to be passed on to the ESB over the five years of the contract will be approximately £30m.

4.5Table 4 compares the ESB’s typical fuel cost on a sent-out basis:

TABLE 4

It will be noted that the sent-out cost of electricity per megawatt hour generated by steam coal and gas shows a decrease while the costs associated with fuel oil, milled peat and local coal show an increase.

(Signed) Dick Roche, T.D.,

Chairman of the Joint Committee.

17th December, 1991

* Before extraordinary items

** Percentage of milled peat production target achieved

* These totalled £14.75m for the period

* Operating profit/net capital employed

* Before Extraordinary Items

** Percentage of milled peat production target achieved

* Operating Profit = Profit before interest and Tax (PBIT)

** Capital employed = Total assets minus current liabilities