§ (1) The Board of Trade may by order made by statutory instrument direct that as from such date, not being earlier than 1st April 1972, as may be specified in the order, the following provisions of the Air Corporations Act 1967, that is to say—
- (a) section 14 (which provides for the investment of public dividend capital in B.O.A.C.); and
- (b) section 17 (which imposes on B.O.A.C. a financial duty related to the said section 14),
§ (2) On the date on which an order under this section comes into force—
- (a) section 20 of the said Act of 1967 (which lays down the existing financial duty of B.E.A.); and
- (b) section 21 of that Act (which enables the Board to give directions as to the application of any revenue surplus of B.E.A.),
§ (3) In the application of section 14 of the said Act of 1967 to the British European Airways Corporation by virtue of an order under this section—
- (a) subsection (1) shall have effect as if the reference therein to section 16 of that Act were a reference to section 22 of that Act; and
- (b) subsection (3)(a) shall have effect as if the reference therein to the financial year ending on 31st March 1966 were a reference to the financial year in which the order comes into force.
§ (4) No Order shall be made under this section—
- (a) except after consultation with the Corporation and with the approval of the Treasury; and
- (b) unless a draft of it has been laid before, and approved by a resolution of, the
1090 Commons House of Parliament.—[Mr. William Rodgers.]
§ Brought up, and read the First time.
§ 10.10 p.m.
§ Mr. Speaker
I have not posted my list of selections, as is my wont. I thought tonight that it would be a work of supererogation. I have selected the three Government Amendments on the Notice Paper, all of which will be taken together.
§ The Minister of State, Board of Trade (Mr. William Rodgers)
I beg to move, That the Clause be read a Second time.
This Clause arises from what was a 'technical hitch in Committee. More votes were cast against than for what was then Clause 2 due to a temporary shortage of hon. Members on the Government side. The hon. Member for Woking (Mr. Onslow) saw a gap in our defences through which he marched his troops. I have no complaint about that. But I think that he was a little surprised at both the opportunity and the result. He and his hon. Friends will not be all that surprised if we seek to restore the Clause, which constitutes one third of the Bill.
We had a very useful discussion in Committee, when the reasons for this provision were properly probed. The hon. Gentleman then approached it in a tentative and constructive fashion and, I think, was interested mainly in its timing.
I will not be tempted now to repeat what I said in Committee to give a picture of the issue as we see it, though it did not then turn out to be as persuasive as I intended. Instead, I will try to sketch in the background to the provision and show why we attach importance to it. The House will forgive me if I cover part of the ground already covered in Committee, some of which will be familiar.
In common with most of the nationalised industries, B.E.A.'s main source of capital finance is the National Loans Fund, by way of redeemable fixed-interest bearing advances from the Board of Trade, with Treasury approval. In consequence, interest is payable on the whole of the Corporation's capital. Since 1965–66, when public dividend capital was introduced on an experimental basis for B.O.A.C., B.E.A. has urged for an 1091 element of this new form of capital finance.
All the time, the House is moving to a better understanding of its relations with the nationalised industries, in order to ensure essential Parliamentary control of the major policy decisions while allowing a great deal of discretion to the managements to enable them to run their concerns on the best commercial criteria.
B.O.A.C. was chosen for the experiment because, following the 1965 reconstruction, its financial prospects were good. B.O.A.C. was keen to have p.d.c. because it would give the Corporation the same sort of capital structure as its main international competitors, most of whom have a proportion of equity. A flexible capital structure is appropriate to meet the fluctuating conditions of international airline operations which are intensely competitive and where earnings are subject to considerable peaks and troughs. Furthermore, because of the periodic re-equipment of world airlines with expensive aircraft—the principal reason for the Bill—there is a tendency for a cyclical movement in earnings in relation to capital.
So far, this experiment is working well. Over the four years 1965–66 to 1968–69, B.O.A.C. has paid, by way of interest on loan capital plus dividend on p.d.c., more than the interest payable on its total pre-reconstruction capital.
Most of the reasons in support of public dividend capital for B.O.A.C. apply with equal force to B.E.A. But not at present—and I emphasise this—the most important one, which is commercial viability to the extent necessary to remunerate adequately its capital in the long-term. That is why the Government have undertaken to look into the possibility in 1971–72 of introducing p.d.c. for B.E.A. if it should then be clear that a second tranche of aid will not be needed.
In Committee, I was pressed on this point by the hon. Member for Woking. The phrase that he used was "mutual exclusion". He asked whether it was the case that there would be no p.d.c. if a second tranche was required? I said then that I could not commit the Government to what view they would take, but our present thinking was that these were alternatives—there would be no question of p.d.c. becoming available if the second 1092 tranche was required. This is the element of the incentive which we regard as important and as a virtue in introducing p.d.c.
In Committee, reference was made to the attitude both of the Treasury and of the Select Committee on p.d.c. We were regaled with extracts from the Report of the Select Committee. I should like to rest this evening on what I said on 17th June, at c. 84, namely, that it was fair to say that the Treasury had moved some distance since the time the Select Committee took evidence, but that this was not the principal reason for doing now something which two years ago was thought to be inappropriate.
I made the point, drawing on the Select Committee's Report, that it had said that it would be inappropriate to see public dividend capital as a means of reconstructing the financial position of B.E.A. and that it would be wrong to use it for this purpose. I said that we agreed with this view, so that we must not look on public dividend capital as part of the reconstruction. This is available when the reconstruction is complete and, in our belief, that it would be available only if the second tranche is not taken up.
While it is true that p.d.c. will not of itself make any difference in economic terms to B.E.A.'s performance—it will not enable the Corporation to get more traffic or reduce its direct operating costs—there are good reasons for retaining the possibility of p.d.c. as a feature of the financial settlement with B.E.A.
First—and this is almost the key—the prospect provides an incentive to B.E.A. to manage without the second tranche of aid. B.E.A. is keen to have p.d.c. as a spur to efficiency and morale within the Corporation. We should not regard this as less important in a public Corporation than in a company in the private sector.
Secondly—and this is related to B.O.A.C. experience—in view of the fluctuating fortunes of the airline operating business, B.E.A. has an eye on the inevitable lean years when a failure to meet fixed interest obligations on total capital would be reflected as a loss in its accounts.
There is, of course, the swings and roundabouts element in public dividend capital. A sufficient proportion of p.d.c. 1093 would enable it in those years to show a profit, however modest, and to waive or pay a minimal dividend on p.d.c. For this reason, the long-term viability is an essential prerequisite of p.d.c. B.E.A. would be expected to pay dividends greater over a period of years than fixed interest payable on the equivalent in loan capital.
I put it to the House that this is a necessary and very desirable part of the Bill. Necessary, not because it is part of a reconstruction, but because it provides an incentive for the greater efficiency that we wish to see, and because it moves B.E.A. over to a basis which, in the case of B.O.A.C., has already proved to be worth while.
§ Mr. Eric Lubbock (Orpington)
I am rather surprised that the Minister of State could have made that speech without any reference to the type of equipment which B.E.A. may be purchasing, or may have to purchase, to remain competitive in the next few years, because this strikes me as the key to B.E.A.'s future prosperity and the prospects of avoiding the second tranche, as the Minister calls it, in 1971.
We know that a critical decision is facing B.E.A. at the moment, whether to purchase the European Airbus, or the B.A.C. 311, or tthe Lockheed Tristar. These are the three choices available, because I dismiss the DC10 as unthinkable, as it has no British component in it. This is a major investment decision which has long-term implications for the financing of B.E.A. and whether we decide to carry on with our present financing structure of the Corporation or whether we replace it with p.d.c.
I wish that the Minister had gone into this in a little more detail and examined the pros and cons of this important choice before the Corporation, although, naturally, I should not have expected him to prejudge the decision which is before the board. I think that the House would have been grateful if he could at least have outlined the factors which have to be taken into account by B.E.A. in arriving at what could be a momentous choice for it in the air traffic market of the 'seventies.
We on this bench are in favour of p.d.c. I made a speech in 1962 advocating that p.d.c. should be applied 1094 to the Airways Corporations and saying that it would be some incentive to them in comparison with the fixed interest capital that had always been the practice in those years. At that time the right hon. Member for Brighton, Pavilion (Mr. Amery) who was then the Minister of Aviation, dismissed the idea as being totally impracticable, but now we have seen it work extremely well with B.O.A.C., and I hope very much that B.E.A. will in the end have its financial structure reorganised on the same lines.
I think that if our Corporations are to compete on equal terms with the major airlines of the world, and, in particular, with those of the United States, they must have a capital structure which is defined on the same kind of criteria, that is to say, they must have an element of what I then called equity capital, which has now been christened by the Government p.d.c.—it does not matter what it is called; it is a question of semantics—so that one can examine their accounts and their trading practices on the same basis.
Frequently, when people have looked at, for instance, B.O.A.C. in comparison with Pan-American or T.W.A. there have been misunderstandings because they have looked at the profit which has been made by the Corporations after deduction of the fixed interest charges on their capital, whereas in the case of Pan-American or T.W.A. they have looked at the profit made before the remuneration of the dividends which are paid to their shareholders. This can lead to a misleading comparison between our Corporations and private enterprise airlines, which are not to the advantage of the Corporations, and show them up in a poor light. For this reason alone, and for the improvement in morale which it would secure for those who work in the Corporations, I hope that it will not be too long before B.E.A. enjoys the reorganisation of its capital along the lines that B.O.A.C. has already accomplished.
In talking to the workers of B.O.A.C. and people at all levels in the Corporation I find that it has had a marked effect in improving their competitive spirit, and I think that if we could manage to accomplish the same thing for B.E.A. it would make it in fact, as well as in name, the foremost airline in Europe.
§ Mr. Nicholas Ridley (Cirencester and Tewkesbury)
The Committee upstairs, of which I was not a member, arrived at a wise decision in rejecting the Clause and I hope very much that it will stay out of the Bill. I see no reason to upset the deliberations of the Committee in its wisdom, because in this instance it seems to have come to a proper conclusion.
I do not think that public dividend capital is meaningful or particularly good for morale. It tends to be a hoodwinking trick to persuade people that the Corporation is a commercial, viable, thrusting, competitive enterprise when it is nothing but a nationalised industry.
The reason why p.d.c. has been advanced as a good idea has been largely presentational—the point made by the hon. Member for Orpington (Mr. Lubbock) that it was good for people's morale that they were earning a return on equity rather than on fixed-interest stocks.
We have yet to see what the return on the capital will be. Until we know what rate of return on p.d.c. B.E.A. will be able to pay, it is difficult to assess how good this will be for morale It is only right that the Government should indicate what they expect and what sort of rate of return on the equity capital they would want if p.d.c. were introduced. This is where we get into trouble, because it brings into charge corporation tax.
To quote a hypothetical example, if B.E.A. were in a position to pay a 10 per cent. dividend on its public dividend capital. it would first have to pay corporation tax on its profits. As corporation tax is currently at 45 per cent., it would have to pay 4.5 per cent. of that dividend in ignominious tax before it could begin to pay a dividend. That would leave only 5.5 per cent. to be paid in dividend. Thus, when we come to the presentational point and the question of morale, even though the corporation might have earned and be able to pay 10 per cent., it would be able to declare only 5.5 per cent. It must be bad for morale, when one has earned 10 per cent., to be able to pay only 5.5 per cent.
I know that both B.E.A. and B.O.A.C. have such substantial tax losses that they will not have to pay corporation tax for quite a long time, but that is not a point 1096 to raise morale. It does not make one feel very big to read at the foot of the accounts that there is no liability for corporation tax because tax losses from previous years are so great that no liability arises. That, therefore, is not very good for morale, either. The presentational point is a bogus one.
The Select Committee, of which I was a member, had in mind not only the question of capital reconstruction and that there was no wish to use p.d.c. as a means of glossing over the difficulties of the past. It also had in mind the feeling that p.d.c. was not a very good vehicle for expressing the enterprise and competitiveness of the Corporation.
The tax point is important. Hitherto, nationalised industries have not been expected to pay tax, nor have they been in receipt of investment grants and other general subsidies of that sort. It makes sense that where one has a wholly-owned Government industry, it should not have to pay tax and receive subsidies from the State; that would be simply taking money out of one pocket and putting it into another. It is not a meaningful operation and it does not get us much further. I do not think, therefore, that public dividend capital will serve us well.
The Minister said that the industry was so cyclical—its fortunes go up and down, profits are good and then they are bad—that it was wholly appropriate to have a form of capital which enabled the Corporation to reflect this.
That is not what investment and the rate of interest is about. The way in which correct investments are made and assessed as to their correctness is simply whether the projected investment is likely to earn the rate of return which is the cost of the money. The reason people are prepared to put £100 million into an oil refinery or a new fleet of aircraft is that they assume that the investment will earn whatever is the going rate for money. Unless we set the Corporation a target to earn and tell it, "On your capital you must earn so much", it may well start taking wrong investment decisions.
It is not the outcome of the investment which matters, but what we expect to be the rate of return on the investment which we are to make. I believe that one of 1097 the effects of introducing p.d.c. into the nationalised industry is that it will be more inclined to build up a fleet of aircraft—or a chain of steel mills, or of coal mines; in this case we are talking about aircraft—because it thinks it a good thing to have those aircraft because it wants to dominate the air network of the world, and not because it will earn any given percentage rate of return on the money which is invested.
This is a motivation point. The approach which the Government have developed previously of setting down rates of expected discounted cash flow return upon new investment is much more promising than this approach because on each occasion the test is, "Will the investment in this fleet of aircraft provide the right return to justify our having made the investment?" If we move to p.d.c. we shall have a situation in which we make the investment and then, after a number of years, justify it as best we can by paying whatever dividend is available. That is a wrong approach and will bring the wrong thinking to the Corporation's investment decisions. For that reason I oppose it.
The situation depends to such an extent on Clause 1 that I must make brief and passing reference to it. The Corporation is being compensated for having bought an aircraft which it does not think economic.
§ Mr. Ridley
Mr. Speaker, I am making the passing reference which the Minister made, because the question is whether we shall need a second tranche; and whether it gets public dividend capital depends on whether it takes up the second tranche provided in Clause 1. I make the point only briefly—that the outcome of the profitability of the new aircraft which the Corporation is being subsidised to buy will make an enormous difference to whether it services public dividend capital well or badly.
In the case of the VCIO, which was forced on B.O.A.C., the Corporation demanded a subsidy of £30 million, and yet the margin of return from using the VC10 has never been disclosed to the House. Some people believe that the Corporation made as much as £50 million more than it expected by using the 1098 aircraft. That is the upper limit of the possibilities. It may be that it made no more than it projected. But if there is a possibility of making that kind of extra profit the capital compensation received is virtually chicken-feed compared with the scale of the money involved. It is my contention that we do not know whether B.E.A. will need the £25 million or the £371 million, or any sum greater or less than that, with any degree of accuracy.
We are putting public dividend capital into the Corporation without the slightest idea of the true uneconomic cost of the Trident and Super 111s which we are asking it to buy. Thus, this whole operation seems to be highly inconclusive and pointless, because we have the wrong doctrine in subsidising an airline and then expecting it to make a particular return on public dividend capital without working out whether we have given it too much or too little subsidy.
As I said on Second Reading, we should subsidise the makers of the aircraft—that is, the aircraft itself—so that they will make an aircraft which will be saleable, rather than subsidise the Corporation so that it may buy it. After all, the commercialism of these airlines is a figment of the imagination. There seems to be no point in giving a State airline investment grants, which the Government are not giving it, or making it pay corporation tax, which the Government are asking it to pay under this provision, or giving it public dividend capital, and then trying to pretend that one is bolstering the morale of those who work in it by giving them the feeling that they are in a highly competitive situation in which they may go bankrupt or make a mint of money as a result of their successful operations.
§ Mr. Lubbock
The hon. Gentleman has several times said that the introduce of p.d.c. will not have an effect on the morale of the workers in the Corporation. Has he discussed this matter with the personnel and directors of B.O.A.C. and, if so, what replies has he received?
§ Mr. Ridley
I have discussed it with people in B.O.A.C., including the directors. I would not like, however, to bring them into the debate.
I am wondering if we, the representatives of the taxpayers, should lend this money on the terms stated. I do not 1099 believe that we will get value for money by this exercise.
§ Mr. Ridley
The hon. Gentleman is entitled to disagree with me. I have no doubt that B.E.A. is in favour of this step. After all, everyone is in favour of receiving something to his advantage. I am arguing that this is not to the advantage of the taxpayer, who will have to find the money which is represented by this P.D.C.
We should not be giving the impression that a nationalised airline is like a private airline, which is liable to go bankrupt or make a lot of money and which is operating in a commercially competitive environment. It would be better to leave it on a fixed interest basis, and then we would all know where we were and exactly how much it was costing us over the years.
The Committee was wise to reject the Clause. I hope that the Government will not press the matter tonight, since if this provision were left out we would have a better Bill.
§ Mr. F. V. Corfield (Gloucestershire, South)
Far from regarding this discussion as having resulted from a technical hitch in Committee upstairs, I am grateful to my hon. Friends who took part in the Committee's proceedings, and particularly to my hon. Friend the Member for Woking (Mr. Onslow), for forcing the Government to remove the Clause and so giving us an opportunity to discuss this important concept on the Floor of the House.
The more I consider this question of public dividend capital—we have too many initials; I dislike calling it "p.d.c."—the more I feel like Alice, finding it "curiouser and curiouser". The matter needs close examination—this is no reflection on the assiduity of my hon. Friends in Committee—before we can accept that it is what it purports to be.
I understand that the basic idea is to introduce an element of challenge to management by giving an appearance of similarity to private enterprise. I gather that the size and regularity of the dividend is supposed to be an overt and public test of the success or otherwise of the Corporation. The Minister described 1100 it as a spur to efficiency and morale. In Committee, the Minister also described the prospect of this concept, this public dividend capital, as an incentive.
I am very much in favour of incentives whether they be to management or to staff. I am also very much in favour of any valid yardstick by which the efficiency or inefficiency, the success or lack of success of a nationalised corporation can be judged or, if need be, compared with that of private enterprise.
The clear essential of any such yardstick is that it should be really valid in the sense that it reflects what it purports to reflect, and that there is no danger, as I believe there is here, of conveying an entirely false impression either of efficiency or of inefficiency, of success or lack of success. I just do not believe that the public dividend capital meets this requirement, or is anything like analogous to the equity holding in a private company, as it is made out to be, and as the hon. Member for Orpington (Mr. Lubbock) believes it to be.
The great majority of the shareholders and potential shareholders of a joint stock company—and I prefer that term to "public company", because it is less confusing when we are talking about public corporations—however ignorant they may themselves be of financial matters, invest on the advice of stock- brokers or merchant bankers, or operate through unit trusts, which are generally managed by people with a highly specialised form of expertise.
The size and regularity of dividends in the private sector is only one of the factors in which these gentlemen are interested, and which they take into account in assessing the merits of a particular shareholding—let alone in comparing one share with another. They will also want to know the extent to which the dividend is covered by the earnings, and the company's growth prospects and, more important, the state of the reserves in relation to both current assets and liabilities and the need for future capital investment.
In the air transport industry there is, as we know, an impending demand for very heavy capital investment, owing to the imminence of the new generation of aircraft coming into service. That the air transport industry is capital-hungry, even if not capital-intensive, in the 1101 ordinary jargon, arises from the fact that it is a very fast growing industry which, in itself, produces a constant demand for additional equipment; and from the fact that advanced technology so rapidly renders aircraft obsolescent and so rapidly increases the price of their successors.
In such an industry, the real test comes, and can only come, when the company has to resort to the market for its additional capital. Here, of course, the nationalised corporation is in a totally different position, as my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) remarked. It does not resort to the market, but to the Treasury, and because it is a nationalised industry it quite clearly cannot be left to get into real financial difficulties. As a result, it is never likely to resort to the Treasury in vain. This means, simply, that nine times out of ten it borrows at especially favourable rates as compared with the private company, and it borrows, also, quite irrespective of its commercial success in the past or of its outlook for the future, let alone of the market's assessment of its efficiency or prospects.
The dividends paid on this public dividend capital may be positively misleading as regards the success or otherwise of the nationalised corporation. It may be particularly misleading as a basis of comparison with privately-owned industry. I do not accept the contention put forward by the hon. Member for Orpington that this automatically will mean a fair comparison between B.O.A.C. and Pan Am. Pan Am also has a certain amount of loan capital and, so far as I know, it has not recently had a large part of that capital written off.
If one takes the example of a privately-owned airline—and let us by all means take Pan Am if that helps—conscious of this impending heavy capital requirement for the financing of new equipment, it will be influenced in its financial judgment by, among other things, the state of the capital market. In some circumstances it may be the right policy to pay a relatively high dividend in the confidence that the major part of the capital required for re-equipment can be successfully raised on the market. But in other circumstances it may be more in the longer-term interests 1102 of the shareholders to pay a much more modest dividend and to attempt to finance a higher proportion of the costs of re-equipment from reserves.
Here, the experience of B.O.A.C. is relevant. My hon. Friend the Member for Cirencester and Tewkesbury drew attention to the fact that one of the reasons given for the introduction of this type of capital in B.O.A.C. was the cyclical nature of the trade. But in most private industries the aim of the directors in such circumstances is to have sufficient reserves to maintain dividends in the troughs rather than to put their investors to the inconvenience of having a wholly unestimatable income.
With regard to the experience of B.O.A.C., I would refer to the Board of Trade's paper "British European Airways: Observations by the President of the Board of Trade and by B.E.A. on the Second Report of the Select Committee on Nationalised Industries" in Command 4000. Paragraph 8, after referring to the question of compensation payable to B.E.A. for being prevented from ordering the aircraft of their choice, ends by saying:The proposed settlement leaves open the possibility of providing B.E.A. with such capital"—that is, public dividend capital—at a later stage, in the light of B.E.A.'s achievements by then, and of experience gained from its experimental introduction from B.O.A.C. …That paper was published in April, 1969, almost contemporaneously with the publication of the Bill. We have yet to be told what experience has been gained from B.O.A.C. which makes it so imperative at present to include provision for this type of capital for B.E.A. It is still unclear to me what the merits of the type of capital are alleged to be as a result of the experiences of B.O.A.C. B.O.A.C. has been in a special position.
I appreciate that the Government feel we legislate fairly frequently on these matters, and there may be something to be said for looking forward and providing for certain of these things to be introduced in the future by the less cumbersome process of orders. That would be valid if it were not for the fact that we have the whole of the Edwards Report to consider and the almost certainty that at least some of its provisions will be 1103 adopted by the Government, and that some time during the next year or so we shall have to have a major civil aviation Bill. The argument about saving legislation time in the House might apply in normal times; it does not apply at the moment.
Returning to the special position of B.O.A.C., it must not be forgotten that the financial reorganisation in 1965 included a substantial write-off of existing Government loan and the conversion of £35 million of the remainder into Exchequer or public dividend capital which has since been raised to £50 million.
Since then, B.O.A.C. has had a number of profitable years, for which we are very pleased, and last year it paid a so-called dividend of 20 per cent. But it is arguable that these high profits have been earned at the expense of the long-term interests of B.O.A.C., of British air transport and of our balance of payments, because they have undoubtedly been accompanied by a falling share of the traffic, particularly on the North Atlantic.
There has been a good deal of well-informed criticism to the effect that B.O.A.C. has been ill advised to place so much stress on the high load factors—for which, incidentally, the popularity of the VC10 is largely responsible—at the expense of losing a share in the market which it may well be vital for us to regain in the near future when the introduction of the 747 so vastly increases the capacity of B.O.A.C. and of its rivals on these routes.
§ Mr. Speaker
Order. The hon. Gentleman must link what he is saying to the question whether we should provide p.d.c. for B.E.A.
§ Mr. Corfield
I understood that the whole object of the exercise, Mr. Speaker, was to copy what was done in B.O.A.C., and the justification was that it had worked well in B.O.A.C. With respect, Sir, I suggest that it is relevant.
It is not self-evident that an airline which, for example, might have decided to pay a lower dividend and retain a higher share of the market, and probably also retain a higher volume of reserves, would, in practice, be regarded as less successful than B.O.A.C., or B.E.A. if it 1104 did the same Indeed, if the two airlines were competing in the market for capital, I have no doubt that B.O.A.C.—or B.E.A.—would be regarded as the less attractive of the two.
It seems to me that that points to the danger of the air Corporations themselves, both management and employees, as well as the general public coming to regard the dividend paid on public dividend capital as implying much more than it does and much more than it can. In that respect, it could be misleading and, far from contributing to morale, it could have the reverse effect.
It is relevant in this connection to refer to what the Edwards Committee had to say on the subject. After dealing with the matter at fair length, it said, in paragraph 483:Even small changes which shift not merely the appearance but also the accountability of publicly-owned industries closer to the commercial pattern are to be welcomed.If I were convinced that, in fact, the invention of public dividend capital—which my hon. Friend the Member for Woking referred to more accurately in Committee as variable interest loan capital—shifted the accountability of publicly-owned corporations closer to the commercial pattern, I should wholeheartedly join in the Edwards Committee's welcome. But I am not so convinced, and my lack of conviction is at least in part due to the complete lack of valid argument put forward by the Edwards Committee in support of its conclusion.
If public dividend capital does have this effect, it must follow that a private equity stake in the Corporation would have that effect to even greater degree. Turning back a page in the Edwards Report, we find that this concept of private equity capital to fulfil all the functions which we are told the public equity capital will have is dismissed by Edwards virtually out of hand. The crux of its argument is found in paragraph 476. It is a long paragraph, and I shall not read it all, but the second sentence reads:There is a genuinely held view that top managers of an undertaking who have profit-orientated shareholders to satisfy will be under greater pressure to be cost-conscious than is the case where an undertaking is responsible to the State.They will not raise any capital if they are not. This is the crux.
1105 The paragraph goes on to say that those who have had experience of running nationalised industries are conscious of the pressures of Select Committees, Ministers and the like. It finishes by saying:All the intervention, interference, efficiency audits, etc., in the world will never be as effective a spur to efficiency as the prospect of losing business to others who serve the customers better either in price or service.
§ Mr. Speaker
Order. We cannot discuss on this new Clause the merit of the nationalised B.O.A.C. or B.E.A. versus private enterprise. The Clause seeks to add a certain method of financing B.E.A., and the hon. Gentleman's remarks must be linked with that.
§ Mr. Corfield
The Minister has argued as the merit of the equity capital largely that it makes part of B.O.A.C.'s capital equivalent with private enterprise. With respect, our argument seems to be valid.
§ Mr. Corfield
With respect, we are discussing the merits of equity holdings.
The paragraph concludes:It is for that reason that … we have favoured as much competition and rivalry as can be economically contrived and regard this as being more important than ownership.It is here that we see a failure to introduce the competition or the rivalry, though I regard that sentence as a complete non sequitur of the argument that precedes it. Whereas extravagant use of resources by a nationalised corporation or anybody else can gain business, it is only the airline that gains business and so conducts its financial affairs that it can raise its own capital on the market that faces any real test of efficiency, which is what we are after.
My hon. Friend the Member for Cirencester and Tewkesbury, although he did not mention it, has carried out, partly on my behalf, an investigation into this matter and has discussed it with the managements of Lufthansa and K.L.M. They have no doubt that a private equity holding assists them, but they emphasise "private".
It is significant that in discussing mixed ownership of subsidiaries the Edwards Committee, at paragraph 480 of its Report, comes to a completely 1106 opposite conclusion to the one I have just quoted. Therefore, I do not think that theirs is a very strong argument. The crux of the problem is, simply this: does the public or Exchequer dividend capital make a sensible or useful contribution to the sound financial administration of a nationalised corporation? As a general proposition I do not believe that it does, I do not even concede that it is a concept that can do no harm, because it introduces an apparent similarity to private industry which on examination proves to be wholly bogus. It can give rise to very misleading impressions and even judgments as to the success or otherwise of the corporation.
It is not even a challenge to management. After all, it is the Government that ultimately decide what proportion of the total earnings goes to reserves or dividend. The Minister said that we were all convinced that it was right to keep the broad policy control in Parliament and Government, while giving the maximum flexibility to management to manage according to the ordinary commercial criteria. But when the Government make the decision as to how much of the profits go to reserves and how much to the so-called dividend it is hardly management of a flexible nature in accordance with commercial criteria.
§ Mr. R. F. H. Dobson (Bristol, North-East)
But would not the Government be advised and have some discussion, with B.E.A. in this case, before making that judgment?
§ 11.0 p.m.
§ Mr. Corfield
I am sure that the hon. Gentleman will agree that Governments at particular times are under all sorts of pressures other than the rights and interests of the airline. It might well be that in certain circumstances they would prefer to have a lot of money to be paid back, even though they had to give a further loan to B.E.A. later to meet capital equipment, and it would be wrong to lay down as an invariable rule that the Government must not take into account other criteria because crises do blow up of which we cannot foresee the form or extent.
If I had less suspicion of this concept, I would still believe that it would be wrong to apply it, or to provide for its future application to B.E.A. in current circumstances. Nationalised industries, 1107 and B.E.A. in particular, are enjoined to achieve a target of 8 per cent. return on capital employed, a much less stringent test than for a private company which seeks to raise capital on the market.
To allow an opportunity of passing the dividend is to undermine, rather than to strengthen the genuineness of the competition and rivalry which the Edwards Committee, rightly in our view, was so anxious to ensure. To encourage a high dividend, on the other hand, runs the risk of grossly misleading the public and employees whose morale this is supposed to help.
It is therefore, not our intention to divide the House, but I again express my gratitude to my hon. Friends for making this debate possible, because it is right to put on record that we do not feel in any way enamoured of this concept, nor do we feel in any way committed in future; and it is more likely to fall to us than to this Government to decide whether to implement this provision.
§ Mr. William Rodgers
The hon. Gentleman the Member for Gloucestershire, South (Mr. Corfield) was schizophrenic in some of his remarks. He spoke of the need for the Corporations to have commercial freedom providing that no one could be deceived into thinking it was like the private sector. That was also the burden of what the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) said. He thought that the real danger was that the shadow would be taken for the reality; that commercialism was a figment of the imagination. In this respect, the critics of public dividend capital have been divided, in one way with justification. Our experience of public dividend capital is new and it is reasonable to say that we must see how we go and make future decisions as they are seen to be required.
The hon. Member for Gloucestershire, South asked how B.O.A.C. was doing. It paid a dividend of 20 per cent. or £10 million for 1967–68 and, for 1968–69 will be paying a dividend of 25 per cent. or £12 million. Over the four years 1965–66 to 1968–69, B.O.A.C. has paid, by way of interest on loan capital plus dividends on p.dc., more than the interest payable on its total pre-reconstruction capital.
1108 The new Clause says thatthe Board of Trade may by order made by statutory instrument direct that as from such date, not being earlier than 1st April, 1972 …and the House knows that we are looking some distance ahead. There are safeguards. I am glad that this Clause is not being pressed to a Division.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.