§ Order for Second Reading read.
§ 5.23 p.m.
The Minister of Agriculture, Fisheries and Food (Mr. D. Heathcoat Amory)
I beg to move, That the Bill be now read a Second Time.
This short and not wildly exciting Bill has two objects. First, it validates two issues of debenture stock made by the Agricultural Mortgage Corporation in 1951 and 1952 which have recently been found to be technically invalid owing to an out-of-date reference in the Corporation's Memorandum of Association.
This is a technicality, but it is important that it should be corrected as soon as possible in order to remove any doubt about the status of the particular issues which, like all the Corporation's debenture stocks, are authorised trustee securities.
The second object of the Bill is to increase the maximum amount of the loans which I am authorised to make to the Corporation for the purposes of its guarantee fund. The House is no doubt aware that the Agricultural Mortgage Corporation is an important source of long-term credit for the agricultural industry and that its operations are financed by the issue of debenture stocks on the market. I shall refer to the history of the Corporation only as far as is necessary to explain the purpose of the Corporation's guarantee fund, which is mentioned in Clauses 1 and 2 of the Bill.
The Corporation was established under Part I of the Agricultural Credits Act, 1928. It was designed to fill what was then a gap in the commercial credit organisation by providing facilities for long-term loans on mortgages of agricultural property at relatively favourable interest rates and on terms which gave the borrower an assurance that so long as he met his repayment obligations the loan would not be called in and that the rate of interest on his loan would not be increased.
At the request of the Government of which my right hon. Friend the Member for Woodford (Sir W. Churchill) was Chancellor of the Exchequer, the banks 260 agreed to provide what one might call the motive power for the new Corporation by contributing its initial share capital of £650,000, which was later increased to £750,000—an investment on which the shareholders have had a very meagre return to date, I am afraid.
The Government also made a contribution to the success of the Corporation's operations. The 1928 Act provided that the Minister of Agriculture should make contributions of £10,000 a year Towards the administrative expenses of the Corporation during the first ten years of its life. It also provided for advances by the Minister for the establishment of a guarantee fund. These advances were not to exceed the paid-up share capital of the Corporation, or £750,000, whichever was less, but they were to be free of interest for sixty years.
The object of the guarantee fund was not to guarantee the Corporation's debenture stock, but to provide the Corporation with strong reserves against the risk of bad debts, and with an income from interest which would enable it to make loans according to the intention of the Act on terms described asmost favourable to the borrowers.It was clearly important for the Corporation's credit and its general financial standing to ensure that its borrowings, which furnished the funds for its mortgage loans, should not be out of proportion to its total resources. So there was a proviso dealing with this point included in Clause 3 of the Corporation's Memorandum of Association which set out the objects for which the Corporation was established.
This proviso stipulates that the amount of the debenture stock which could be issued by the Corporation should be restricted so that the amount on loan from the Minister under the Agricultural Credits Act, 1928, that is to say, the guarantee fund, when added to the amount of the paid-up share capital and to any amount standing to reserve, should never be less than 10 per cent. of the aggregate amount of the debenture stock issued by the Corporation and for the time being outstanding. That is to say, the total debenture stock could be up to ten times the amount of the guarantee fund, the share capital and any reserve, added together.
261 The point I wish to emphasise here, because it is essential to an understanding of Clause 1, is that this formula refers specifically to the amount on loan from the Minister under the provisions of the Agricultural Credits Act, 1928. It is from that that the trouble stems.
In 1944, the Government decided that steps must be taken to enable agriculture to meet the prospective post-war commitment for long and medium-term loans for agricultural improvement. In order to increase the Corporation's borrowing powers the Agriculture (Miscellaneous Provisions) Act, 1944, provided for an increase in the total advances made to the Corporation's guarantee fund from £750,000—which I have mentioned—to a total of £2,500,000. In the next few years the volume of business of the Corporation steadily increased, and issues of debenture stocks amounting to £8½ million were made between 1948 and 1950. In March, 1951, the Government of the day made a further advance to the Corporation's guarantee fund to enable it to make a further issue of debenture stocks in 1951–52.
The point which I wish to emphasise here is that until this further advance was made, the guarantee fund stood at £650,000—that is, within the limit of £750,000 originally prescribed. The further advance of £250,000 made in March, 1951, brought the total to £900,000 That was fully in accordance with the Act of 1944 and both the Corporation and the Ministry believed that it had the intended effect of increasing the Corporation's borrowing powers. I have no doubt whatever that the right hon. Gentleman the Member for Don Valley (Mr. T. Williams) thought so too, and I think it is very natural that he should have done so.
Taking account of this further advance really provided a limit for the debenture stock issues of over £21½ million, and against that authorised amount the actual amount outstanding at that time was £18¼ million, so that there was adequate margin for the additional issue of £3¼ million which was made in September, 1951. That is what everyone thought was the situation in 1951, and again in 1952 when a further issue of debenture stocks of £5million was made after the 262 guarantee fund had been increased by a further £900,000.
Indeed, all concerned continued to think that everything was fully in order until about six months ago, when the Corporation was considering making a further issue of debenture stock. It was noticed only then that the formula in the Memorandum of Association which prescribed the limit of the borrowing powers referred to the guarantee fund as the amount on loan from the Minister under the provisions of the Agricultural Credits Act, 1928. The Corporation immediately took legal advice and its fears were confirmed.
Because the Memorandum of Association had not been amended on this point the Corporation was only entitled to take into account in calculating the amount of its borrowing powers the original £750,000 of the guarantee fund which was authorised under the 1928 Act. On this basis it had exceeded the limits of its borrowing powers by making in 1951 and 1952 the issues of debenture stock, despite the passing of the 1944 Act and the increase in the guarantee fund made under that Act.
The House realises, I am sure, that this is a sheer technicality, and that all that happened was that the Corporation's Memorandum of Association had not been kept up to date and in line with the increase in the Corporation's financial resources. From the financial point of view the Corporation's debentures are fully covered and soundly based. The guarantee funds stands at present at £2,050,000, as a result of a further advance of £250,000 made under the 1944 Act, in March, 1953.
But for this flaw in the Memorandum of Association, the Corporation would be fully in a position today to make a further issue of nearly £8 million on the basis of its existing share capital, reserves,, and the total of the guarantee fund as it stands. But until this flaw in the Memorandum of Association is corrected, the Corporation is debarred from making, any further debenture stock issue whatever.
That is a serious matter in view of the continuing demand for loans from the Corporation, and it is also important to see that those two stock issues in 1951 and 1952 are made as legally valid as 263 they are financially sound. That is why the Bill is necessary, and Clause 1 corrects the situation. It removes the offending words in the Memorandum of Association,…under the provisions of the Agricultural Credits Act, 1928and specifically validates the debenture stock issues made in 1951 and 1952.
There is a good reason why I have come to the House with the Bill, irrespective of the need to amend the Corporation's Memorandum of Association, and I should like to refer to Clause 2, which provides for an increase in the maximum amount of the Corporation's guarantee fund from £2½ million to £3¼ million. As I said earlier, the Corporation's business has steadily expanded and is continuing to do so. At present it has mortgage loans outstanding of about £27 million, and in the financial year which is shortly to end it will have issued, I think, about £3½ million or £4 million worth of new loans.
There is, therefore, need to provide for the Corporation continuing to be able to lend for several years ahead at an annual rate of about £4 million net. Increasing the maximum amount on the guarantee fund, as is proposed under the Bill, to £3¼ million will put the Corporation in a position where it will be able to make new debenture issues of £7½ million on that account, and that, when added to the scope it already has under its present powers, would mean that the Corporation would be in a position to issue a total of up to £20 million of new debenture issues. That should see the Corporation through until 1960 which will, in any case, be a convenient time to review the position.
I say that because under the 1944 Act the Government make a contribution to the Corporation to relieve it of the loss which it incurs on lending funds which it raised at a high rate of interest in 1929 and 1930, before the general fall in interest rates that took place in 1932. Those contributions have to end in 1959, and in that year also the Corporation will be able if it wishes, to repay the debenture stocks which it raised in 1929 and 1930. In any case, therefore, in 1960 we shall have to take stock of the position, and we shall then be in a better position to assess the Corporation's future needs. I 264 think that it is always unwise to legislate for further ahead than one can reasonably foresee, but if we cover the position until 1960 I think we shall have met all likely contingencies.
The Corporation has a record, since it was put back on its feet again, as it were, in 1944, of which it may well be proud. I trust that the House will give a speedy passage to this little Bill to enable the Corporation to continue the good work which it is doing, which is based on the sound foundations which have already been laid down.
§ 5.30 p.m.
§ Mr. Thomas Williams (Don Valley)
We readily agree with the right hon. Gentleman that the object of the Bill is two-fold, and I think I can at the outset say that perhaps the retrospective part of the Bill is the more important part. I had something to do with the introduction into and negotiation through this House of the 1944 Act. I am not sure that I did not even venture some observations on the 1928 Act when it was introduced.
As the right hon. Gentleman said, this is a very small Measure and we shall take no exception to it. On the assumption—and I emphasise "assumption"—that the extra £750,000 guarantee is now provided and debentures equal to ten times that amount are subscribed, it would be a useful contribution to the capital investment so urgently required in agriculture. However, I hang on to my word "assumption" and shall refer to it again later.
I said this was a useful contribution. If our farms are really to be modernised as they should be, and if the campaign for efficiency is to continue, then, even on the largest assumption one can make, that £750,000 plus £7½ million or £8¼ million would be a mere drop in the ocean compared with the sum of money required properly to modernise our many farms. I have quite recently seen estimates running into hundreds of millions, assuming the job is to be done properly and perfectly over the next five or ten years, but I doubt if land owners, owner-occupiers or tenants will think in terms of hundreds of millions of pounds of capital expenditure at this moment, while there is so little certainty in the agricultural industry. Probably that is the view 265 of the Government. Hence their limitation of a further advance of only £750,000, for they must in the nature of things, to make this a success as a credit institution, rely upon the average investor, or all the investors, to supply ten times the amount of money for debentures that the Government are advancing under Clause 2.
I wonder whether the right hon. Gentleman really believes that, in existing circumstances, this extra money is likely to be obtained except at a very large rate of interest, which will make it quite impossible for the Mortgage Corporation to undertake to do exactly what the 1928 Act was designed to do, which was to provide capital to borrowers at favourable terms. Clause 2 says:The Minister of Agriculture, Fisheries and Food may, for the purpose of increasing the company's guarantee fund make advances…not exceeding three million two hundred and fifty thousand pounds, and on the same conditions as to repayment and as to payment of interest as the last-mentioned advances.That means, in effect, that the provisions of the 1944 Agriculture (Miscellaneous Provisions) Act continue to apply, and that says:for restricting the dividends on the share capital of the Corporation…to three and a half per cent. per annum, and for providing that the dividend for any such year shall not be cumulative so as to be payable in a later year.If my reading of that is correct, in a year when the Government are now converting a very large loan from 2½ per cent. bonds to 4 per cent., and have recently floated a loan for £300 million at 5 per cent., nobody would advance money to the Mortgage Corporation at 3½ per cent., or indeed anything like it.
I am bound to ask the Minister this. Although there is a very big difference between the share capital owner and the debenture holder, since the Government have come to the rescue of the debenture holder on at least two occasions, in 1944 and even later, I can scarcely credit the possibility of large sums of money being made available as debentures, as is the intention of this Bill, which will enable the Mortgage Corporation to carry on with its business and at the same time provide capital on favourable terms to the would-be borrower. If this capital is not available because of the change in the money situation, then all the Corporation would have at its disposal in excess of 266 what it has at the moment would, of course, be the extra Treasury £¾million. I hope the right hon. Gentleman will correct me if I am wrong.
The sum of £750,000 is an addition to the guarantee fund. That guarantee fund cannot be lent by the Mortgage Corporation; it has to be invested and will provide it with an income from interest.
§ Mr. Williams
That was what I wanted to draw out, because the increased guarantee that the Government are now providing can be of real value only if public investors will take up the extra £7½ million that they can take up, thinking in terms of ten times the £750,000 extra guarantee. Unless the public take up large sums in terms of debentures, the Bill, apart from its retrospective element, will not be of very great value as a credit institution for the forthcoming years, even down to 1960.
I notice from the last year's balance sheet of the Agricultural Mortgage Corporation that in May, 1954, it reduced its interest on loans advanced from 5 per cent. down to 4½ per cent.; but since May, 1954, the Bank Rate has popped up between four and five times, and I wonder whether the Minister could say what is the charge to borrowers at present. It would be interesting to know what the charge is, because certainly the borrower will borrow only if he feels that the rate of interest is one which is manageable and which his estate can care for. The object of the 1928 Act was to make loans "on terms most favourable to borrowers." I hope that either the Minister or the Parliamentary Secretary will tell us exactly what is now being charged to would-be borrowers, for only when we know that can we estimate the possibilities of the Agricultural Mortgage Corporation collecting sums large enough to meet the needs of agricultural improvement at this time.
As I see it, the Bill could be a small contribution to the credit needs of agriculture, and we accept it for what it might have been worth. However, as I understand the position in agriculture, I think that it will be a very poor contribution to meet the need of modernising that industry if it is to play the part it ought to be allowed to play, particularly in view of our balance of payments problem. As 267 I say, anything that might be done to help the industry we are ready and willing to support, but, with the best will in the world, I cannot feel that this will be a very big contribution to the credit needs of agriculture.
§ 5.40 p.m.
§ The Joint Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food (Mr. G. R. H. Nugent)
May I briefly reply to the right hon. Gentleman's questions? The current rate of interest charged on loans on mortgage is 5½ per cent. That has been the rate since last summer. I am told that the Agricultural Mortgage Corporation has been doing a considerable volume of business at that rate, and evidently the rate is not a deterrent to current borrowers.
I hope that, with that assurance, the right hon. Gentleman and the House will be willing to give the Bill a Second Reading.
§ Question put and agreed to.
Bill accordingly read a Second time.
Bill committed to a Select Committee of seven Members, four to be nominated by the House and three by the Committee of Selection:
Any Petitions against the Bill presented by being deposited in the Private Bill Office at any time not later than the fifth day after this day in which the Petitioners pray to be heard by themselves, their Counsel or Agents, to stand referred to the Committee, but if no such Petition is presented, or if all such Petitions are withdrawn before the meeting of the Committee, the order for the committal of the Bill to a Select Committee to be discharged and the Bill to be committed to a Committee of the whole House:
Any Petitioner whose Petition stands referred to the Committee, subject to the Rules and Orders of the House and to the prayer of his Petition, to be entitled to be heard by himself, his Counsel or Agents, upon his Petition provided that such Petition is prepared and signed in conformity with the Rules and Orders of the House, and the Member in Charge of the Bill to be entitled to be heard by his Counsel or Agents in favour of the Bill against such Petition.
Power to report from day to day Minutes of Evidence:
Three to be the Quorum.—[Mr. Amory.]