New Clause 6.—(ARM'S LENGTH TRADING.) (Hansard, 18 January 1967)

§ Mr. Patrick Jenkin
I beg to move, That the Clause be read a Second time.
I say to the hon. Gentleman at the outset that I move this Clause in a spirit of inquiry, and purely to probe the Government's intentions. We have no intention of dividing the House on it.
During the Committee stage we had a very full and interesting debate on the financial objectives of the Corporation on an Amendment moved by the hon. Member for Poplar (Mr. Mikardo), who said a number of interesting things. In particular, he wanted to water down the financial objective which was written into the Bill. He said: One objective which one may have is a certain amount of egalitarian redistribution of income and wealth, which, of course, is much affected by what we do in the financial duties which we lay upon the Corporation."—[OFFICIAL REPORT, Standing Committee D, 1st December, 1966; c. 1582.] That was the hon. Gentleman's objective.
Fortunately, he was given very short shrift indeed by the then Parliamentary Secretary to the Ministry of Power, who, in perhaps one of the most important speeches made during the whole of the Committee stage, reaffirmed conclusively and without any shadow of doubt that it was the Government's intention that the Corporation should be run on strictly commercial lines. The Parliamentary Secretary to the Ministry of Technology said: I say at once that we regard the Iron and Steel Corporation as it will be set up as a commercial enterprise."—[OFFICIAL REPORT, Standing Committee D, 1st December, 1966; c. 1634.] He then talked about the purely commercial environment in which the industry must operate and about clear management objectives, long-term marginal costs, and similar concepts, all of which came as some comfort to the Opposition but which must have been somewhat depressing to the hon. Member for Poplar.
It was a very important speech, and it is our hope that it will be borne out in practice, because it is of crucial importance that a Corporation of this sort—the first major incursion by the State into 604 manufacturing industry—should operate on strictly commercial principles. But we believe that the mere statement of financial objectives is not enough to secure that by itself, and that it needs to be strengthened. The Clause provides one method of strengthening the Government's intention to run the new Corporation in this way.
The broad purpose of the Clause can be summed up in its heading: "Arm's length trading". I cannot do better to summarise the intentions of the Clause than to read again from the document produced at the beginning of last year by the Confederation of British Industry, dealing with the question of arm's length trading. On page 14, dealing with the criteria for competition between nationalised and private enterprise, it says: (1) Trading with other nationalised industries, other public bodies and Government Departments should be conducted at arm's length, otherwise the measurement of costs returns will not be true. (2) Trading with a parent nationalised industry or with authorities within it should be at arm's length, and this should not be so construed as to prevent the taking advantage of economies, if any, resuling from common financial control, common higher management or the provision of common central services. Central services should be fully costed so as to include overheads and charged accordingly. That is exactly what the Clause is designed to achieve.
We recognise that in the form in which the Clause is at present drafted it is too stark and uncompromising and restrictive, and there may well be cases which would justify a divergence from the strict principle laid down in the Clause. For this reason we do not intend to press the matter. For instance, the scrap agreement which the industry has operated would be in clear contravention of the Clause.
But there are two other aspects of the matter. One is the question of the Corporation in iron and steel activities, vis-à-vis the private sector of the industry, and the other is the question of diversifying the interests of the Corporation. Dealing with the private sector, it has been said over and over again by the Government —and referred to again this evening—and I quote from paragraph 37 of the White Paper, that The Government regard it as important that the private sector should have a healthy 605 and efficient life of its own and so make a full contribution to the national economy. The Minister started by discounting the fears that the private sector felt, but in the end he has accepted Amendments and new Clauses intended to protect the private sector.
The concept behind the Clause, of arm's length trading between the Corporation and its own subsidiaries, provides an added safeguard which the private sector would like to see. On the question of diversification, it is essential that the Corporation should deal with other public bodies strictly at arm's length, with a relationship that is strictly commercial. There should be no hidden subsidising and, above all, no cross-subsidisation, because there is no more certain way of blurring management objectives—which the Government desire to obtain in Committee. None of this must arise out of the mere fact that there is common public ownership.
When it takes over Dorman Long the Corporation will own a very substantial part of the constructional engineering industry, representing about 40 per cent. of the total United Kingdom capacity.
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A large part of the works, particularly bridge building, will be constructed for public authorities, many of which are in development areas. It would be easy to suggest that it would be in the public interest for the National Steel Corporation to put up bridges in the development areas at a cheaper price than that for which the corporation would be prepared to do it in a non-development area. It could be argued that this was in the interest of promoting employment. This is exactly the sort of thing that must be avoided, otherwise one very quickly slips into a morass of confused objectives and cross-subsidisation, and therefore a blurring of the results and the figures by which alone the performance of an industry of this sort can be determined.
It goes further. The Clause also refers to purchase. There must be no question of a subsidised energy supply or subsidised transport for the benefit of the steel industry or any of its constituent parts. If the principle of the Clause is accepted by the Government—I am not asking them to accept the Clause in its exact terms—there is no reason why it 606 should not equally extend to other nationalised industries, so that all their trading should be at arm's length. I recognise that there may be exceptions. We have written in the exception of savings which are truly attributable to common ownership. That is a legitimate saving to make. That is done all the time.
But the Clause sets out the attitude which a great many people in industry feel is essential if we are to have the right commercial atmosphere in which the nationalised industries will operate. In this industry in particular, the first major manufacturing industry to be nationalised, it is more essential than ever that it should operate and be seen to operate in a strictly commercial framework, and to ensure that it always trades between its own parts and with other public authorities at arm's length, with no possibility of cross-subsidy or anything of that sort, is one way to make sure that this happens.
I hope that when he replies the Minister will give some indication of the Government's thinking on this matter. The Confederation of British Industry has stated this as one of the most important forms of ensuring fair competition between the public and private sectors. I hope that the Government will be forthcoming on this, although it may not be possible for them to accept this Clause.

§ Mr. Freeson
I start by telling the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) that there is no question of my doing other than repeat the view which has been expressed by my predecessor—that we should operate the steel Corporation and the steel industry on a strictly commercial basis. It is not for me to go into the details this evening on how the industry will be organised. There is to be no Division on the Clause, but in any event we could not accept the Clause as set out because it attempts to lay down to some degree, and in certain respects, the detailed organisation of the industry, which at present is a matter of study by the Organising Committee and will be the subject of a report to my right hon. Friend.
I should spell out the position which we take. Trading between the nationalised steel industry and Government 607 Departments and other public corporations will normally be at arm's length, as the hon. Member put it, and any departure from this might well be contrary to Clause 3 which seeks to avoid undue preference or undue discrimination between customers.
On the question of the relationship between the different component parts of the industry itself, when it comes to be organised in different groups or companies within it, there is much to be said for the view that the diversified activities of the nationalised steel industry should be organised into concerns separate from the iron and steel interests and that trading between the two interests or the various concerns and the Corporation should normally be on an arm's length basis. The Minister has already brought this point to the notice of the Organising Committee, and he will have the advantages of this possibility and the question of arm's length trading very much in mind when he receives the report of the Organising Committee in due course.
As I have indicated, to try to deal with the subject on the lines suggested by the new Clause would be contrary to the general principle of not trying to lay down in the Bill the Corporation's organisation in detail on a statutory basis. That would introduce an element of rigidity which could have serious disadvantages. A number of major steel companies, including those with large diversified interests, have organised their diversified activities into separate companies. Others have kept them with their steel production. Moreover, even where there are separate companies some trade at arm's length from the rest of the group to which they belong and others do not.
It will be necessary when the time comes to take decisions on the organisation of the industry to weigh the various advantages of separation against certain practical disadvantages that can arise. It would not be right at this stage to start spelling these out in a statutory sense. There may, indeed, be circumstances in which it would be in the national interest for trading between different sectors of the Corporation to take place on a basis other than that of arm's length. This is not unknown. One example has been quoted—the scrap metal deal—but there are other situations in which this could 608 arise in other aspects of the country's economy. We must allow for the possibility in the steel industry, but I want to give the general assurance that what was said in Committee is the view of the Government, and will be the normal basis on which the steel industry will operate.

§ Mr. Patrick Jenkin
I should like, with the leave of the House, to thank the Parliamentary Secretary for that forthright reply. He has stated quite clearly that it will be the normal practice for the Corporation to trade at arm's length with other public authorities and with its own diversified interests. That goes a very long way to meeting the objectives of the Clause.
We should like at some time to see this set out, perhaps, in a White Paper, or in some other form in which it could be referred to, so that if there were any cases where private competitors felt that there was something not in accordance with the policy which the hon. Gentleman has stated they would have a clear statement of intention to point to. As it is, they have the debates and what has already been said by the hon. Gentleman and his predecessor in Committee, which goes a long way to meeting the case.
The hon. Gentleman or the Minister might at some stage consider—perhaps after the report under Clause 4 and produced by the Organising Committee has been determined—producing a White Paper setting out in detail the trading methods that it is intended the Corporation should follow. That would go a good deal further to reassure opinion. However, I have indicated that we do not intend to press the new Clause to a Division, so I beg to ask leave to withdraw the Motion.

§ Mr. Marsh
I beg to move, That further consideration of the Bill, as amended, be adjourned.
This is perhaps a surprisingly early stage in the proceedings to move this Motion, but we have made progress this evening, although not so much as I would have liked. We have had a serious discussion and we had an all-night sitting on Tuesday. Any group of men and women who undertake to run the affairs 609 of the country properly ought to be able to run their own affairs by finishing about midnight.