Ispat debacle exposes flaws in State aid

You could almost feel sorry for the Tβnaiste, currently hard at work leading a trade delegation to Australia. Having got used on such occasions to fielding questions from envious counterparts on how Irish industrial policy contributed to economic success, she is probably now being quizzed on how the Government will handle the downturn.

No doubt the Australians will be impressed by the speed with which the Tβnaiste has moved to establish taskforces in the towns worst hit by factory closures. The setting up of these high powered talking shops may provoke admiration in the antipodes but they have been greeted with some derision at home, where they seem to indicate that the Department of Enterprise and Employment's thinking is still stuck in the mid-1990s.

Before jumping to this conclusion it is worth studying the Department's role in the recent closure of Irish Ispat, formerly Irish Steel, in Cork. It appears - from documents released under the Freedom of Information act and other sources - that the Government had a couple of chances earlier this year to throw the ailing company a lifeline and declined. Such a course of action would have been unthinkable five years ago given that some 400 jobs were at stake.

The Government's first chance to give Irish Ispat a "dig out" came earlier in the year when the steel company sold some land to the Port of Cork. The price paid for the land would have been considerably higher if the Department of Marine and Natural Resources had transferred the freehold to Irish Ispat as the company requested. Although Irish Ispat got in the region of £3.5 million (€4.45 million) for its interest in the leasehold, it would have got something in the region of twice that if the Department of Marine and Natural Resouces had acceded to its request.

Ispat also went looking for help from the Department of Enterprise and Employment. Under the terms of the 1996 sale of Irish Steel to Ispat the company lodged £4.6 million in an escrow account as security that they would meet various commitments. The most significant of these commitments was to keep employment above 300 staff but there were a number of others including the repayment of a £10 million loan from ACC Bank that was guaranteed by the Government.

The money in the account was to be used to repay the loan when it fell due in 2003, with the balance being met by the company. Irish Ispat furnished the Government with a letter of credit - renewed every year - that would cover the balance of the money owned to ACC.

The company approached the Department of Enterprise and Employment earlier this year to see if it could have access to the money in the account, on the basis that they had met the commitments given in 1996. The Department was not forthcoming, saying that its calculations were that only a small proportion of the money in the account was free of any lien, but indicated that there was a possibility of some money being released next year.

Next year will not come for Irish Ispat and it is arguable whether the inflexibility of the two Government departments would have made much difference. The cash - had Ispat got it - was not earmarked for any particular purpose and would have presumably been used as working capital to keep the company going in the hope that market conditions would improve. Both Departments had a ready made excuses for not facilitating Irish Ispat. Their actions could have been interpreted as state aid to a steel producer, which is not permitted by the European Commission. Although this is correct, it is also true that the Irish civil service has shown considerable imagination in the past when faced with such problems.

There are alternative schools of thought about what happened next. One is that the Government thought Irish Ispat was bluffing and exaggerating the difficulties at the Cork plant in order to squeeze some cash out of the two Departments. If that was the case then the Government must have got a nasty surprise when it called Irish Ispat's bluff.

The alternative version of events is that the Government decided that instead of propping up Irish Ispat it was time to bite the bullet. The company might have limped along for another year and if the market has turned it could returned to profitability.

The odds, however, were stacked against it. As a small player on the periphery of a very competitive market Irish Ispat would always struggle and as long as it struggled it would be a thorn in the Government's side. Regardless of EU rules on state aid, the expectation was that the State would step in, as it has many times in the past, to save the company. There was also growing concern about the environmental problems at the plant and its safety record. All in all, Irish Ispat was a headache for the Government.

We don't know what went through the minds of the Department of Enterprise and Employment mandarins, but it would be comforting to think that the latter version of events is correct. It would indicate a refreshingly brave approach to policy at the Department and bode well for its ability to tackle the problems coming down the tracks.

Letting Irish Ispat go under probably seemed to be the right course of action at the start of the year, when few could have foreseen the extent of the trouble looming for the high technology sector. At the time it would have been reasonable to assume that the workers at the plant, many of whom were skilled, would find jobs elsewhere. In addition the site would be taken over - and cleaned up - by the Department of the Defence which operates the neighbouring Haulbowline naval base.

It does not seem like quite such a good idea now.

jmcmanus@irish-times.ie