Committee Reports > List of Committees > Joint > 1994 > Committee on Commercial State-Sponsored Bodies (7th Committee) > Report No. 03 - Arramara Teoranta

1. Summary of Conclusions and Recommendations

1.1The principal finding of the Joint Committee was the satisfactory manner in which the company has survived a period of difficult trading conditions in the early to mid 1980s, and restored its financial well-being. (Paragraph 5.1) Detailed profit and loss accounts and balance sheets for the period since the company last appeared before the Joint Committee are set out in Appendices IX and XI.

1.2The Joint Committee found that the reversal of the company’s declining trading fortunes came about as a result of the company embarking on a reorganisation programme to cut costs, improve productivity and improve the quality of product being supplied. (Paragraph 5.1.5) The Joint Committee believes that Arramara’s commitment to quality and cost control has enabled it to continue operating and expanding over the past decade, despite difficult trading conditions. (Paragraph 4.1.11) This has resulted in growth in turnover of 35% in real terms and in production volumes of almost two thirds in the period 1986 to 1991. (Paragraph 5.1.7)

1.3The Joint Committee noted that production costs per tonne in 1991 were 53% in real terms of the 1981 level. (Paragraph 5.2.1)

1.4The Joint Committee noted that after unprecedented losses in 1980, 1982, 1984 and 1985 the company returned to consistent, if modest, levels of profitability. However, the rates of profitability as measured against turnover have improved significantly in the period since the mid 1980s. The Joint Committee regards the improvements in profitability, both relative and actual, as a success. (Paragraphs 2.1.3 and 5.3.3)

1.5The Joint Committee is satisfied that these improvements in profitability and production costs per tonne have not been achieved at the expense of the seaweed gatherers. (Paragraph 5.3.6)

1.6The payments per tonne to weed gatherers in 1991 have, in real terms, remained broadly in line with the 1981 level. At the same time the tonnage purchased has doubled. (Paragraph 5.3.7)

1.7The Joint Committee noted that, by maintaining this payment to weed gatherers in real terms, the company has succeeded in fulfilling the primary objectives set out for it by the Government when investing in Arramara in 1949, namely providing a steady income along the western seaboard. (Paragraph 5.3.8)

1.8The Joint Committee is particularly pleased by the satisfactory state of the company’s balance sheet. (Paragraph 5.4.1)

1.9The company has invested in excess of £800,000 in fixed assets in the period 1981 to 1991, of which £169,000 has been provided by way of grants from state agencies. These investments were funded primarily from the company’s own resources. (Paragraph 5.4.2) The Joint Committee noted that the level of turnover being achieved from the company’s fixed asset base is acceptable and in line with what would be expected from a manufacturing concern. (Paragraph 5.4.3)

1.10The Joint Committee noted that the company entered into a purchasing agreement with Kelco in 1990 on a two year basis governing sales of seaweed meal, with options to extend the agreement up to 31 December 1998. (Paragraph 4.1.4) The agreement provides an “overriding philosophy” for interpreting the agreement which recognises Kelco’s commitment to maintaining the viability of Arramara and Arramara’s commitment to cost control and quality improvement. (Paragraph 4.1.5)

1.11The Joint Committee noted the unique nature of the agreement entered into between Arramara and Kelco, which, in essence, sets out the terms of a joint venture between state-sponsored company and a private commercial enterprise, enabling both parties fulfil their respective statutory obligations and commercial requirements. The Joint Committee further noted the key role this joint venture played in ensuring the survival of Arramara and, as a consequence, in the continued contribution that the company has made to the economy and employment of the western seaboard. (Paragraph 4.1.8) The Joint Committee is of the view that the joint venture has worked well in the past. The Joint Committee is also of the opinion that the relationship will continue to operate for the mutual benefit of both parties provided the company expands its production facilities (see recommendation 1.15) to meet the conflicting demands arising from commitments to supply Kelco and from diversification of the customer base. (Paragraph 6.11)

1.12While the Joint Committee noted the importance of this agreement, and the long term commitment of Kelco by virtue of its 49% shareholding in the company, the Joint Committee is concerned that over-dependence by Arramara on one customer could seriously jeopardise the financial future of the company should that customer decide to cease or significantly restrict its purchasing of seaweed meal from Arramara. (Paragraph 4.1.9)

1.13The company in recent years has made efforts to diversify the customer base, most notably in the soil conditioning/composting market. At present in excess of 10% of production output is being supplied to a variety of customers in these markets, from a position in 1988 where 100% of output was sold to Kelco. (Paragraph 6.6) As part of its efforts to diversify the customer and product base Arramara has initiated contacts with Bord na Móna with a view to forming a joint venture peat/seaweed-based compost. The Joint Committee regrets that no formal response has, as yet, been received by Arramara from Bord na Móna. (Paragraph 6.8) The Joint Committee noted with regret that the potential for a joint venture involving a peat/seaweed based compost has not, as yet, been developed. (Paragraph 6.9)

1.14However, the Joint Committee noted that the freedom of Arramara to service customers other than Kelco is limited by virtue of the commitments given in terms of tonnage to be supplied by Arramara to Kelco under the purchasing agreement and the significant proportion of production capacity that this commitment represents. The Joint Committee welcomes moves to diversify the company’s customer base and the recognition that future expansion of the company will be based on such diversification. (Paragraph 4.3.1)

1.15The combination of the diversification of the customer base into non-algin product markets and the commitments to supply Kelco have resulted in Arramara’s current output representing the limit of its production capacity. While the Joint Committee welcomes moves to diversify the customer base, any further expansion would be at the expense of Arramara’s commitment to Kelco and equally any growth in demand from Kelco would be at the expense of other markets. In such circumstances the Joint Committee recognises the need for the company to expand its production capacity. (Paragraph 6.11)

1.16Arramara currently has proposals to seek funds from its shareholders (the Minister of the Marine and Kelco), the IDA and other parties, such as banks, to enable the company develop a third production facility in Newport, Co Mayo. (Paragraph 4.3.4) Underlying this proposal is the intention that ultimately 80% of Newport’s production will be sold to customers other than Kelco. (Paragraph 4.3.2) The Joint Committee urges the Department of the Marine to support the company’s proposal for developing a third production facility and to assist the project financially. (Paragraph 4.3.8)

1.17Arramara estimated that twelve full time jobs could be created at the new production facility in Co Mayo (see paragraph 1.16 above). In addition, increased demand for seaweed would result in increased employment for part-time seaweed gatherers. The Joint Committee noted the employment potential of the proposed third production facility and recognised the benefit that such full-time and part-time employment would bring to the community. (Paragraph 4.3.6) The Joint Committee is of the view that the employment potential of the project reinforces the need for the Department of the Marine to support the proposal as a matter of urgency. (Paragraph 4.3.8)

1.18The Joint Committee welcomes the efforts of the company in the ongoing training of staff and, in particular, the emphasis on increasing staff awareness of and participation in the operation of the company. (Paragraph 6.3) The Joint Committee recommends that the company continue to undertake the training of staff to enhance skills, productivity and to continue to improve quality. (Paragraph 6.4)

1.19The Joint Committee, as previously outlined, is satisfied with the measures taken during the period since the company last appeared before the Joint Committee to secure the financial viability of Arramara. In particular, it was felt that credit is due to the non-executive directors of the company for providing the strategic basis from which the operational improvements could be made. However, the Joint Committee believes that Arramara has a limited executive base and that undue reliance is placed on the general manager for the operational well being of the company. (Paragraph 6.14)

1.20It is recommended that the company actively consider appointing a suitable candidate with a view towards supporting the general manager in the day to day running of the company and providing the necessary continuity of management when a successor to the general manager is required to be appointed. In particular, the Joint Committee believes that, given the company’s desire, and the Joint Committee’s wish to see diversification of the customer base, consideration should be given to splitting the operational and marketing functions of the executive management. Such considerations will become more pressing should a third production facility come into operation. (Paragraph 6.15)

2. Background

2.1 General Background

2.1.1Alginate Industries (Ireland) Limited was established in 1947 as a private company to harvest, dry and mill seaweed. The name of the company was changed to “Arramara Teoranta” in 1955. Arramara Teoranta is referred to as the company in this report.

2.1.2In 1949, the Government acquired the majority shareholding in the company, the other shareholder being Alginate Industries Limited, a British company. The Government’s aim in allowing the Minister to buy shares in the company was to provide employment at the company’s factory at Kilkieran, Co Galway and to provide a source of steady income along the western seaboard. In July 1979, Alginate Industries Limited, which holds 49% of the share capital in Arramara Teoranta, was acquired by Merck and Company Incorporated, a multinational company which subsequently changed its name to Kelco International Limited (referred to as Kelco in this report). However, the Government continues to hold a majority shareholding of 51% in Arramara Teoranta.

2.1.3In 1991 Arramara had a turnover of £1.7 million and 25 employees. In addition, the company uses the services of families which harvest seaweed on the west coast of Ireland and the people involved number approximately 570. In over forty years of trading the company made a loss on only four occasions and in the last six years it has paid a dividend of 10% on issued shares. The losses were sustained in 1980, 1982, 1984 and 1985 and the cumulative total of such losses after taxation was £192,055.

2.2 Legal Character

2.2.1The authorised share capital of Arramara is £100,000 divided into shares of £1 each. At the end of 1991 the issued share capital was £77,000 - of which the Minister for the Marine held £39,000 and Kelco the balance of £38,000.

2.2.2State investment of £5,100 in the company was initially authorised by section 2(1) of the Alginate Industries (Ireland) Limited (Acquisition of Shares) Act, 1949 (No 22 of 1949). Section 2 of the Alginates Industries (Ireland) Limited (Acquisition of Shares) Act, 1954 (No 29 of 1954) amended the original Act and increased the limit on investment by the State in the company to £43,000.

2.2.3The company is obliged each year to submit audited annual accounts and a report on its work to the Minister for the Marine in accordance with section 6 of the Alginate Industries (Ireland) Limited, (Acquisition of Shares) Act, 1949 (No 22 of 1949) and the Gaeltacht (Transfer of Departmental Administration and Ministerial Function) Order 1956 (SI No. 257 of 1956) and the Arramara Teoranta Order 1987 (No 93 of 1987).

2.2.4The Articles of Association of the company provide that as long as the Minister holds a majority of the shares, he shall have the right to nominate three of the five directors and that Kelco shall have the right to nominate two directors as long as it holds the remaining shares. The Board of Arramara meets eight or nine times a year. Since Arramara is not a company to which the Workers Participation (State Enterprises) Act, 1977 (No 6 of 1977) applies, as it is not on the list of designated bodies contained in the Schedule of the Act, there are no worker directors on the Board.

2.2.5The company has a general manager who effectively operates as chief executive. In addition the full-time management team comprises an accountant, two factory managers and three weed managers. Below management level, staff consists of office staff and factory staff. The company secretary is an officer on the staff of the Department of the Marine who works part-time for the company.

2.3 Joint Committee

2.3.1Arramara last appeared before the Joint Committee in June 1979 and the Joint Committee issued a report of its findings in January 1980. The Joint Committee expressed satisfaction with “the evidence of Arramara’s continuing expansion and profitability over the past thirty years and by the fact that it has met its objective of providing employment in Gaeltacht areas, while continuing to achieve a good financial performance.”¹

2.3.2The Joint Committee decided in July 1992 to carry out a review of the reports, accounts and overall operational results of Arramara for the period since the company last appeared before the Joint Committee to date.

2.4 Acknowledgements

2.4.1The Joint Committee decided to appoint Chapman Flood and Company, Chartered Accountants, as consultants and are grateful for the assistance of Mr Peter O’Neill and Mr Daniel McCartney in preparing this report.

2.4.2The Joint Committee had two oral hearings where it heard submissions from the directors and management of Arramara and submissions from Mr Myles Staunton of Clew Bay Seaweeds Limited. The Joint Committee would like to thank them for their attendance at and contributions to those hearings.

2.4.3A delegation from the Joint Committee visited the Arramara plant at Kilkieran, Co Galway, on the 15th March 1994. The Joint Committee would like to express its gratitude to directors, management and staff of Arramara for their hospitality during the visit. The Joint Committee would also like to thank Arramara for the ongoing assistance it received from the company in preparing its report and for the statistical and financial information supplied by Arramara.

3. Seaweeds and Alginates

3.1Seaweeds

3.1.1Seaweed has been used for many centuries as a source of food. It has also had widespread usage in the agricultural sector both as a fertiliser and as an animal feeding stuff. In the seventeenth century it was discovered that the ash of burned seaweed contained soda. As the Industrial Revolution gained momentum and in order to meet the demand for soda from the pottery, glass and soap industries, a considerable industry developed along the coasts of Western Europe involving the collection, drying and burning of seaweed to produce kelp. However, the kelp industry declined in the early nineteenth century when other sources of soda became available. The discovery of the presence of iodine in kelp has helped to keep the industry alive.

3.1.2Seaweeds belong to the group of plants known as algae. They are classified in turn into a number of groups, two of which are red algae and brown algae. Carrageen, which is widely used in milk products, is produced from red algae. A number of brown seaweed species are suitable for the commercial extraction of alginates. In chemical terms, alginates are salts and esters of alginic acid, a carbohydrate which is an essential structural material present in brown seaweed. Appendix I shows the main world locations where the several types of seaweeds are found.

3.1.3The two main types of seaweed located off the shores of Ireland are ascophyllum nodosum (rock weed) and laminaria hyperborea (sea rods).

3.1.4Many families on the west coast of Ireland supplement their income by gathering rock weed and sea rods. The rock weed is harvested throughout the year and is generally cut by hand, when it is exposed at low tide, roped or gathered in nets and towed ashore at high tide. The sea rods are gathered from about October to March.

3.2 Alginates

3.2.1The drying and milling of seaweed under carefully controlled factory conditions represents the initial processing stage in the production of alginates. Alginates belong to the class of products known as hydrocolloids. The latter are products which form viscous or jelly-like substances in water and are thus used as thickeners, stabilisers, gelling and film-forming and extrusion agents.

3.2.2Depending upon the alginate required, blends of some or all of the main types of seaweed are used in the manufacturing process. Alginic esters stabilise water-in-oil emulsions (e.g. in salad dressings) and act as foam stabilisers. In short, alginates have a wide variety of applications, ranging from use in food production to use in the pharmaceutical industry. Appendix II sets out some of the more important uses of alginates.

3.2.3For many purposes alginates are in direct competition with other hydrocolloids - suchas guar, locust bean gum, pectin, carageenan, modified starch, cmc, and agar. The factors which determine whether an alginate, a natural gum or other form of hydrocolloid is used vary from application to application. It would appear that, as between alginates and their substitutes, there is considerable competition and a high degree of substitutability.

3.2.4The market for alginates has continued to expand in recent years. The largest user of weed in the production of alginates are Kelco (UK and USA) with Pronova of Norway the second largest. Pronova is about half the production size of Kelco. It is understood that neither the Norwegian nor Canadian producers import dry weeds and that the French producers only import a tiny fraction of their requirements. The only other significant user of dry weed are the Japanese algin producers who currently import most of their requirements from Northern Chile.

4. The Role of Arramara Teoranta

4.1Operating Environment

4.1.1In the early years of its existence, Arramara’s activities consisted solely of harvesting, drying and milling sea rods. In the early 1960s, as the harvest of sea rods began to decline, the company embarked on the harvesting and processing of rock weed, the product of which - ASCO meal or dry weed - was initially sold as animal feed but trials indicated that it was eminently suitable for alginate production and the entire output was switched to that outlet.

4.1.2Arramara at present has two factories - one at Kilkieran, Co Galway, and one at Meenmore, Co Donegal - where the initial processing of seaweed involved in the production of alginates is carried out and the resultant intermediate product is exported to Scotland for further processing. The location of the production facilities reflects the principal locations of seaweed suitable for alginate production, which in Ireland is the west coast from north Clare to north Donegal (see Appendix III for a map of seaweed locations in Ireland and Britain).

4.1.3Traditionally, almost all of the company’s production of dry weed has been sold to Kelco. However, the company has continued to explore other potential markets for its products based on non-alginate uses of seaweed. Non-alginate based sales are currently about 10% of total production with the principal markets being soil conditioning/composting. The company sees these markets as a means of increasing its overall levels of output with the consequent downstream benefits for the gatherers of seaweed.

4.1.4The Joint Committee noted that the sales to Kelco are governed by a purchasing agreement entered into by the two parties in 1990. This took effect from 1 January 1990 and was for a three year period with options for Kelco to extend the agreement for subsequent two year periods up to 31 December 1998. These options must be exercised no later than twelve months prior to the termination of the current period of agreement. In December 1991 Kelco exercised its option to extend the life of the agreement to December 1994. In December 1993 Kelco exercised its option to extend the agreement to 31 December 1996.

4.1.5The agreement incorporates the normal features of purchasing agreements such as duration, pricing, volumes, product specification and payment. However, it also incorporates a statement of “overriding philosophy”. This “overriding philosophy” provides a framework for interpreting the agreement. It allows any specific term of the agreement which may be in conflict with the “overriding philosophy” to be superceded. This “overriding philosophy” recognises Kelco’s commitment to the ideal of maintaining the viability of Arramara and Arramara’s commitment to cost control and quality improvement.

4.1.6In addition, the agreement incorporates provisions regarding “profit objectives and safeguards” with the basic aim that prices and volumes should be agreed consistent with the profit objectives as laid down by the agreement.

4.1.7The effect of these clauses is to ensure that Arramara will continue to operate as a viable entity for the mutual benefit of both parties, with Arramara striving to produce a quality product at a competitive cost and Kelco getting a satisfactory quantity and quality of product at a reasonable cost.

4.1.8The agreement formalised the nature of the trading relationship between both parties that has historically existed. The Joint Committee noted the unique nature of the agreement which, in essence, sets out the terms of a joint venture between a state-sponsored company and a private commercial enterprise enabling both to fulfil their respective statutory obligations and commercial requirements. It was also noted that the relationship between Kelco and Arramara has played a key role in ensuring the continued survival of Arramara and, as a consequence, in the continued contribution that company has made to the economy and employment of the western seaboard. The Joint Committee is also of the opinion that this relationship would continue to operate for the mutual benefit of both parties provided the company expands its production facilities to meet the conflicting demands arising from commitments to supply Kelco and from diversification of the customer base (see also Paragraph 6.11).

4.1.9The Joint Committee, while it recognised the benefits to be derived from such an agreement, did express concern that over dependence on one customer may give rise to future trading difficulties should that party decide to take its custom elsewhere, which Kelco are free to do after the term of the current agreement lapses. The Joint Committee noted that considerable efforts have been made to reduce the over dependence of Arramara on Kelco by seeking alternative outlets for its products. The Joint Committee welcomes these moves to diversify the customer base (as set out in Paragraph 4.1.3).

4.1.10At present, Arramara is the only operator processing seaweed full-time in Ireland, but this may change in the future. Irish Marine Products Limited, based in Co Clare, is operating on an intermittent basis and sells principally to the non-alginate markets, while Clew Bay Seaweeds Limited, based in Co Mayo, ceased operations in the mid 1980s. It is understood that Clew Bay Seaweeds Limited has recently concluded a partnership agreement with Pronova, a Norwegian based producer of alginates, which is hoped will result in the recommencement of operations.

4.1.11The Joint Committee believes that Arramara’s commitment to quality and cost control has enabled it to continue operating and expanding over the past decade, despite difficult trading conditions.

4.2 Employment

4.2.1As indicated above, Arramara currently employs 25 full time staff at its two factories. At one stage in the mid 1970s over 60 people were employed but economic and trading pressures in the early to mid-1980s, leading to unprecedented trading losses, necessitated a reorganisation of the company. Employment levels have remained constant since the mid 1980s.

4.2.2In addition to direct employment, one of the Government’s original objectives when investing in the company in 1949 was to provide a steady market and income for seaweed gatherers along the western seaboard. The payments for seaweed have grown by approximately 275% since 1981, representing a real increase in excess of 100%. The tonnage being harvested has more than doubled over the same period. This has resulted in the company maintaining the payment per tonne in real terms, while doubling its demand, in the period 1981 to 1991. The company estimates that some 450 people are regularly involved in cutting and supplying rock weed and that a further 120 people collect sea rods.

4.2.3The company further estimates that between wages and salaries, payments to seaweedgatherers and other locally incurred overheads, it is contributing in excess of £1 million to the local communities each year, a figure which has more than trebled since 1981 and in real terms has risen by in excess of 90%. Appendix IV illustrates the movement in this figure for the period 1981 - 1991.

4.3 Future Developments

4.3.1As a result of the advances achieved in quality and cost control, the company experienced strong growth in production/sales volumes. As a consequence, Arramara believes that with continued expansion there will be a need for additional production facilities to meet demand, not only from Kelco but to meet targets being set in other markets for its products, particularly new and diversified markets. The Joint Committee recognises the need to expand the company’s production facilities and believes that such expansion is consistent with the company’s efforts to diversify the customer base. (see also Paragraph 4.1.8)

4.3.2In 1990 the company acquired a site in Mayo on which it was proposed that a third production facility would be built. Underlying this proposal is the intention that ultimately 80% of Newport production will be sold to customers other than Kelco.

4.3.3Prior to acquiring the site, Arramara had discussions with Clew Bay Seaweeds Limited with a view to reaching some form of agreement with regard to the latter’s production facilities in Mayo. No agreement was reached.

4.3.4Arramara, with the support of its shareholders, the Minister for the Marine and Kelco, made a submission to the Industrial Development Authority (IDA) with a view to receiving financial backing for the proposed project. Such assistance was not forthcoming. In July 1993 Arramara submitted a revised proposal to the IDA in relation to the company’s plans for the Mayo site.

4.3.5The proposal envisages IDA grant aid of 33.33% of the estimated cost of the project, a further 28.45% being provided by the shareholders in proportion to their shareholdings and the balance, 38.22%, provided by way of bank borrowings, leasing facilities and the company’s own resources.

4.3.6Arramara estimated that twelve full time jobs could be created in the factory, in addition to those people who would be involved in gathering seaweed for the factory. The Joint Committee noted Arramara’s estimate that twelve full time jobs can be created and recognises the benefit that these jobs and the part-time jobs of seaweed gatherers will bring to the community.

4.3.7The IDA has now considered the company’s proposal and has expressed concerns regarding the quantum of seaweed that would be available to meet the needs of the new factory. In particular, in view of Clew Bay Seaweeds Limited’s plans to recommence operations in the near future without the aid of IDA grants, the IDA was concerned that sufficient seaweed may not be available to meet the demands of two factories operating in the Newport area. The IDA does not propose to grant aid the project at the current time and has suggested that Arramara undertake a study to quantify the levels of seaweed stock available in the Mayo area.

4.3.8Arramara continues to be committed to the further development of the company and, in particular, the provision of a third production facility. The company is proceeding with proposals to initiate a survey of existing seaweed resources and is meeting with the National Marine Institute to discuss the issue. The company is also reappraising its options regarding funding the proposed development, but believes no formal decision can be made until the result of the survey is known. The Joint Committee welcomes the commitment of Arramara to the future development of the company and notes that the need for additional facilities will become more pressing as the company continues to develop other non-algin related markets for its products. The Joint Committee urges the Department of the Marine to support the company’s proposal for developing a third production facility and to assist the project financially. In particular, given the employment potential of the project, the Joint Committee believes that this reinforces the need to support the proposal as a matter of urgency.

5. Financial Performance

5.1 Turnover

5.1.1The trading performance for the period 1981 to 1991 can be considered in two halves, 1981 to 1986, and 1986 to 1991, broadly reflecting the pre and post reorganisational periods of the company’s trading. In fact, if the turnover of £1 million for 1981 is compared with the 1991 turnover of £1.66 million, this would indicate a decline of 8% in real terms.

5.1.2However, if the 1986 turnover figure of £1.05 million is compared with the 1991 level of £1.66 million, this reflects an increase of 35% in real terms. Appendix V shows the level of turnover for the period 1981 to 1991 and Appendix VI sets out production tonnes for the same period.

5.1.3The period 1981 to 1986 saw turnover fluctuating in the range of £0.8 million to £1 million. This was against a backdrop of continued difficult international trading conditions. In addition, difficulties in obtaining adequate levels of supply of seaweed in the Donegal area for the Meenmore plant were experienced during this period. These difficulties arose primarily due to the location of the factory and the availability of alternative sources of employment in the locality, in particular the fishing industry. However, the company feels that it has overcome these problems and now has a reliable core of seaweed gatherers to ensure adequate levels of supply.

5.1.4The key cost driver in using seaweed to produce alginates is the algin content per tonne of milled/dried seaweed. In this regard the algin content of Irish seaweed is significantly lower than the other principal seaweed producing areas of Tasmania and Chile thus reducing the price that Irish seaweed can command relative to its principal competitors, although Arramara does benefit from its relative proximity to the Kelco plants in Scotland and the resultant transport cost advantages.

5.1.5Against this background the company embarked on a reorganisation programme in 1984 to reduce costs and improve quality to ensure that on a weed cost per tonne of algin basis Irish seaweed remained competitive. The company reorganised production methods, invested heavily in fixed assets and sought technical assistance to ensure a continuity of quality in production.

5.1.6The aim of this reorganisation was to ensure that Arramara remained a key supplier to Kelco, the largest user of milled/dried seaweed in the world.

5.1.7The benefits of the reorganisation began to accrue from 1986. The Joint Committee was pleased to note that in the period to 1991, as highlighted above, turnover grew in real terms by 35% and production volumes by almost two-thirds.

5.2 Production Costs

5.2.1Appendix VII sets out the production volumes and costs for the period 1981 to 1991. Considerable reductions have been achieved in the per tonne cost of production. In real terms the 1991 per tonne cost is 53% of the 1981 level. The Joint Committee noted that this commitment to cost reduction has dramatically improved the productivity of the company, which coupled with the commitment to improve quality, are the primary reasons why Arramara has remained in business even though it faced very difficult trading conditions in the early to mid 1980s.

5.2.2Appendix VIII illustrates the movement in actual and real costs per tonne for the period 1981 to 1991.

5.2.3As regards individual cost elements, weed cost, power costs and overheads have all, in real terms, remained broadly the same and labour costs have risen by 18% in real terms. Twice during the period the company changed the type of fuel it used for the drying process, giving rise to considerable monetary savings and a real cost of fuel per tonne in 1991 of only 24% of the 1981 level. In 1983 the company switched from oil to turf/brickeens and in 1988 to coal.

5.2.4The other factor instrumental in reducing the per tonne cost of production has been the doubling of product volume being processed by the company. The increased throughput, both a bi-product and catalyst of cost reduction, effectively reduces the relative impact that fixed type costs have on each unit of production and thus reduces the overall average cost of production, enabling the company to achieve maximum economies of scale and to price competitively.

5.2.5Arramara has continually upgraded its production facilities, having invested in excess of £0.5 million on plant and machinery, and a further £70,000 on land and buildings during the period. This has enhanced not only the productive capacity of the plant but also facilitated efficiencies in production giving rise to reduced costs of production and improved quality.

5.3 Profitability

5.3.1Appendix IX sets out summary profit and loss accounts for the period 1981 to 1991. The profit before tax figure has been broadly similar for the years 1981 to 1991 and has grown considerably from the figures being reported in the mid 1980s. In 1981, the company made an extraordinary gain of £49,000. Prior to 1981 a provision was created and charged against profits in respect of a liability expected to become due and payable. However, in 1981 it became clear that the liability was no longer due and the company reinstated the profits previously written off. The extraordinary loss of £24,000 in 1982 is a write down in respect of the carrying value of fixed assets scrapped. The £26,000 extraordinary item reported in 1988 refers to the costs incurred in converting the drying process from turf/brickeen powered to coal powered. The extraordinary loss of £30,000 in 1990 relates to the costs of the proposed project to open a third production unit.

5.3.2Appendix X sets out profitability ratios for the period 1981 to 1991. These ratios seek to measure the overall profitability both in terms of the level of activity and the level of investment in the operations. The returns as reported should be viewed in the light of:

■the continued difficult trading in the world alginate market;

■Arramara’s role as a commercial state-sponsored company with an explicit social responsibility for the seaweed-gathering industry on the west coast;

and

■the role of Kelco as principal customer and 49% shareholder.

5.3.3The rate of profitability as measured against turnover has grown from 0.8% in 1987 to 2.3% in 1991 and should be viewed against a backdrop of unprecedented losses in 1980, 1982, 1984 and 1985. As previously noted, the company focused its energies on restructuring the organisation in the mid 1980s and consolidated its position based on the benefits achieved in cost and quality control. The Joint Committee noted that the improvements in the relative levels of profitability must be regarded as a success.

5.3.4In addition, the Joint Committee recognised that Arramara’s social responsibility to the weed gathering community has a bearing on its overall level of profitability and cannot be discounted.

5.3.5The principal method a company has of determining its profitability is to increase the gross margin. This can be achieved by either raising the selling price or reducing the production costs. Given the competitiveness of the marketplace and Arramara’s consequent role as a price taker, the company’s ability to influence profitability through selling prices is limited. Thus for Arramara to improve overall profitability it must focus on its production costs. As noted in the section above on production costs, considerable progress has been made in this regard.

5.3.6However, the Joint Committee is satisfied that this has not been achieved at the expense of the weed gatherers. Seaweed represents the single largest cost in the production process and therefore would afford the best opportunity of cost savings and consequent improved profitability.

5.3.7During the period 1981 to 1991 the company has succeeded in maintaining the price paid in real terms to seaweed gatherers, while at the same time doubling its production throughout and consequent demand for seaweed. The fact that Arramara has not pursued a course of seeking to reduce its production costs by reducing the cost of seaweed can only have had a detrimental impact on its ability to report improved rates of return.

5.3.8The Joint Committee recognised that in choosing this course of action, the company has sought to remain true to the original objectives set out by the Minister in 1949 when investing in Arramara:

a)to provide employment at the company’s factories

b)to provide a steady income along the western seaboard.

While the absolute levels of return are relatively modest they do reflect the above points and Arramara’s role as a basic processor of raw materials for onward sale. Given that the returns in the past three years are consistent and a considerable improvement on earlier years and the specific circumstances applying to Arramara, the returns are acceptable.

5.4Balance Sheet

5.4.1Appendix XI sets out summary balance sheets for the period 1981 to 1991. The Joint Committee found that the balance sheet during this period was fundamentally sound, reflecting a tight control of working capital and negligible borrowings (principally leasing commitments).

5.4.2As previously stated, Arramara has invested considerable sums in fixed assets in the period 1981 to 1991: £515,000 on plant and machinery, £70,000 on land and buildings and £238,000 on motor vehicles and fixtures and fittings. The funding for these investments was as follows:

5.4.3The company has relied principally on its own resources to finance the restructuring and resultant growth. The sales to fixed asset ratio is currently 5.22 (see Appendix XII) which the Joint Committee noted represents an acceptable return and is in line with what would be expected by a manufacturing concern.

5.4.4As noted above, the investment in working capital is tightly controlled and at a modest level given the turnover of the company. However, this has to be viewed against the background of the company’s operating cycle.

5.4.5The company places orders for seaweed on a weekly basis with gatherers based on production requirements to meet orders from Kelco. The seaweed gatherers are paid when the seaweed is collected. The seaweed is processed in the course of the week and despatched to Kelco. Arramara are paid by Kelco by return on confirmation of despatch of goods. Thus the operating/cash cycle is a matter of one or two weeks as against general operating cycles in the region of two/three months. Such weekly purchasing should be seen in the context of an overall agreement with Kelco (see Paragraph 4.1.4) to purchase a minimum annual tonnage of ASCO Meal.

5.4.6Liquidity ratios for the period 1981 to 1991 are set out in Appendix XII. These ratios, the current and the quick ratio, seek to measure the company’s ability to meet its debts as they fall due. The Joint Committee found that the figures for both ratios have been declining over the period. This broadly reflects the trend of reducing the overall level of investment in working capital.

5.4.7As regards the absolute rates, a manufacturing type operation would be expected to have a current ratio in the region of 1 to 1.5 and a quick ratio of between 0.7 and 1.0. Given Arramara’s current ratio of 1.3 with a high (in the post reorganisation period) of 1.9 and a quick ratio of 0.8 with a high (post reorganisation) of 1.4, the company’s liquidity ratios are acceptable. In addition, debtors days of 19 days with a high (post reorganisation) of 25 days is excellent as against normal manufacturing industry levels of 45 to 60 plus days. However, this should be viewed against the comments above regarding the operating cycle of the company.

6. Future Developments

6.1The Joint Committee heard that the company’s principal corporate objective is to enhance and maximise the utilisation of commercially exploitable indigenous seaweed crops. In achieving this primary objective, Arramara sees three key sub-objectives:

6.2Arramara reported to the Joint Committee that it is seeking to consolidate and build on the gains in cost and quality control achieved during the past decade. The principal benefit has been to confirm Arramara’s position as a key supplier to Kelco. Against the background of continuing recession in world markets, in particular the textile industry, the break up of the former Soviet Union, a major alginate market, and the dumping of cheap algin by Chinese producers, Arramara has succeeded in maintaining its market share based on cost and quality competitiveness. In furtherance of this objective the company has recently embraced the concept of Total Quality Management.

6.3The company has run several in-house training courses on product and customer service quality and quality management. The courses have been for all staff, management and directors. A considerable amount of support has been received from Kelco which provided group leaders to assist with training and implementation of the programme.

6.4The principal objective of the programme is to increase staff awareness of the importance of quality in all aspects of the company’s business and the responsibility of all members of staff for quality. A central part of the process is to increase worker participation in the operation of the company and increased flows of information on the company’s operation from management to staff. The Joint Committee welcomes the efforts of the company in the ongoing training of staff and recommends that the company continue to undertake the training of staff to enhance skills, productivity and quality improvements.

6.5In addition to consolidating and expanding the company’s core business, ASCO meal for the algin market, Arramara have been actively pursuing alternative non-algin product lines, involving a process of:

(a)market research using Government agencies such as an Bord Tráchtála and in-house market analysis supported by Kelco’s own market intelligence;

(b)research and development using Government agencies such as Eolas and the technical resources of Kelco;

(c)co-operation and consultation with state-sponsored and private companies in related and complementary sectors.

6.6Considerable progress has been made in developing these markets from a base of nil in 1988, to 60 tonnes in 1989 and to almost 700 tonnes in 1992. The company reported to the Joint Committee that it expects the tonnage directed to non-algin markets to exceed 1,500 tonnes in 1994. The major growth market has been the soil conditioning/composting market and in particular with regard to golf courses.

6.7The company is also following up opportunities in the liquid extract and animal feed markets. It has also had exploratory talks with Bord na Móna with a view to a joint venture product, which is of the nature of a turf-based seaweed compost.

6.8Arramara has submitted samples to Bord na Móna for analysis as a result of these contacts. The Joint Committee regrets that no formal response has, as yet, been received. The company is currently exploring the possibility of a similar joint venture with a Northern Ireland based peat producer and has submitted samples for analysis and is also awaiting a response.

6.9The Joint Committee wrote to Bord na Móna to enquire as to the potential for Arramara seaweed as an ingredient for Bord na Móna. In its reply, Bord na Móna concluded that there is potential for using seaweed with peat, especially in relation to golf greens. However, research work has to be carried out before the potential can be realised. The Joint Committee regrets that the potential for a joint venture involving a peat/seaweed based compost has not, as yet, been developed.

6.10The total potential market for non-algin weed products is estimated to be in the region of between 1,500 and 2,000 tonnes. However, the overall potential market is still perceived as limited and while seaweed-based products have received considerable media attention this has not translated into high volume markets like the algin-related weed market. The company believes it is well-placed to take advantage of any upsurge in the world economy and resultant increased demand for Irish ASCO meal for algin production.

6.11The combination of the diversification of the customer base in non-algin product markets and the commitments to supply Kelco have resulted in Arramara’s current output reaching the limit of its production capacity. In the circumstances of an expected upsurge in the world economy and resultant increased demand for Irish Asco meal for algin production and emerging demand for non-algin product, the company believes it will have to expand its production facilities. The Joint Committee welcomes the moves to diversify the customer base and agrees that should such expansion continue there will be a need to increase the company’s production capacity. To this end the company has, as already mentioned, purchased a site in Mayo and has reached an advanced stage in planning the project. The company has submitted a proposal to the IDA with a view to securing funding for the project. This is dealt with more fully in Paragraphs 4.3.1 to 4.3.8.

6.12The company reported to the Joint Committee that it continues to believe that its strength lies in being an ASCO meal producer. As reported in the previous report on Arramara by the Joint Committee on State Sponsored Bodies in January 1980, efforts were made in the 1970s to establish an algin production facility. These had to be abandoned due to difficulties connected with the project. Arramara argues that the production of alginates is a completely different business and is in fact a chemical manufacturing process which entails all the features of such an industry, namely technological expertise and extensive capital investment. Arramara does not at present possess the necessary technological and marketing skills or finance to proceed with such a project. The company further reported its belief that its commitment to cost and quality are an integral part of Arramara’s Government-charged objective of providing a ready market to seaweed cutters along the western seaboard.

6.13Conscious of its social objective, the company believes that the continuation of the strategy developed during the 1980s in concentrating on its core activities will enable it to maximise the benefit accruing to the communities on the western seaboard. The company also believes that this could be further enhanced if its plans to develop a third ASCO meal factory come to fruition.

6.14The Joint Committee, as previously outlined, is satisfied with the measures taken during the period since the company last appeared before the Joint Committee, to secure the financial viability of Arramara. In particular, it is felt that credit is due to the non-executive directors of the company for providing the strategic basis from which the operational improvements could be made. However, the Joint Committee believes that Arramara has a limited executive base and that undue reliance is placed on the general manager for the operational well-being of the company.

6.15The Joint Committee recommended that the company actively consider appointing a suitable candidate with a view to supporting the general manager in the day-to-day running of the company and providing the necessary continuity of management when a successor to the general manager is required to be appointed. In particular, the Joint Committee believes that, given the company’s desire, and the Joint Committee’s wish, to see diversification of the customer base, consideration should be given to splitting the operational and marketing functions of the executive management. Such considerations will become more pressing should a third production facility come into operation.

(Signed) LIAM KAVANAGH, T.D.

Chairman of the Joint Committee.

March 1994

¹ Tithe An Oireachtais, First Joint Committee on State-sponsored Bodies - Seventh Report, Arramara Teoranta 1980,