§ Order for Second Reading read.
§ 3.35 p.m.
§ The President of the Board of Trade (Mr. Roy Mason)
I beg to move, That the Bill be now read a Second time.
My main purpose today is to move the Second Reading of the Export Guarantees and Payments Bill, which will raise the statutory limits on E.C.G.D. guarantees to enable the Department to keep pace with the ever-increasing business offered for insurance, and will also extend the Department's powers to enable it to meet certain forms of foreign competition which cannot be matched under the existing powers.
But I would like, first, to say something about our export performance generally and how we have organised ourselves in the Board of Trade to assist British exporters.
First, a word about the excellent performance in exports we have already achieved. For two years now our exports have been growing vigorously. Last year, the value was 14 per cent. higher than in 1968. By the fourth quarter of last year the rate of our exports was 46 per cent. up in value compared with the summer of 1967 before devaluation; the increase in volume was 28 per cent. This steep rise has been a major factor in the great turn-round we have achieved in the balance of payments over the last two years. Indeed, the increase in exports for 1968–69, both by value and by volume, was the largest since 1951.
There were also a number of very encouraging features about our export performance in 1969. The value of our shipments to Western Europe was up by 19 per cent. with large increases to E.E.C. countries and to our E.F.T.A. partners. There was also a very marked rise in our exports to the sterling area, particularly to the developing countries, and a little later I shall mention the possibilities I saw for myself recently in South East Asia.
Amongst individual countries, there was a remarkable rise, of nearly one-third, in our exports to Japan. We did 35 less well in our sales to North America, which showed only a small increase, but many of our competitors had similar experience in this market.
Many key sectors of British industry were well to the fore in the growth of exports last year. Deliveries of motor vehicles rose by 20 per cent., and there was an increase of 12 per cent. in exports of machinery, 29 per cent. in aircraft and aircraft parts, and 21 per cent. for scientific instruments.
The growth in our exports last year coincided with an exceptionally rapid increase in world trade. However, there was this important difference compared with our experience in the past. On previous occasions of strong growth in world trade, our share has tended to fall sharply. But last year, as far as we can tell at present, we came very close to holding our share of world exports.
I should like to pay tribute to all the exporters in this country whose efforts are reflected in our export achievements last year. They have seen the opportunities provided by devaluation for profitable business in the markets of the world and have gone out to exploit them with vigour and far-sighted enterprise.
Though I have given praise, rightly, for the achievements in 1969, I do not wish to appear complacent. There are signs that in 1970 increases in exports may be more difficult to win. Much will depend on the rate at which world trade grows. Some slowing down from last year's exceptionally fast rate seems inevitable, with the behaviour of the United States economy especially important. On the other hand, primary producers' earnings have been buoyant recently, and this should enable us to achieve a substantial increase in our exports to them this year.
A considerable price advantage from devaluation remains, and I urge exporters to take every advantage of this. We can all be encouraged by the fact that since devaluation our exports have been doing so much better in world markets. We must avoid becoming complacent, but, equally, we have solid grounds for optimism.
I intend that my Department, and, indeed, all the Government services, will play a full part in the effort we still need. To this end, I have implemented a 36 major reorganisation of the Board of Trade export services. My predecessor informed the House on 12th June last that he had invited a review of the structure, staffing and method of working of the Department's export services.
I am grateful to Sir Hector McNeil, the Chairman of Babcock & Wilcox, to Professor Elliott Jaques, of Brunel University, and to Mr. William Nicoll, of the Department, for the thorough and energetic way in which they tackled the task. They took into account all the points made on the promotion of exports in the Sixth Report of the Estimates Committee and the evidence put by the Confederation of British Industry and other bodies. Clearly, it was appropriate that we should review the home side, while Sir Val Duncan had under review the overseas side of the Government's commercial services. I have now received and considered this report.
I am satisfied that export services must remain a part of the Government machine. There have, of course, been suggestions from time to time that we should give the job instead to some outside agency. But the Government are firmly of the view that export policy and promotion cannot realistically be separated from commercial policy and relations with other trading nations. It is the rôle of commercial policy to break down trade barriers and open up opportunities for new trade; it is then the job of the export services to help take advantage of these opportunities. We cannot really divorce one of these tasks from the other.
These are the main features of the export reorganisation which I have now approved: first, a new Second Secretary post has been created to take charge of the revised organisation dealing broadly with industry at home. Under this Second Secretary will be an Export Services Division, consisting of headquarters staff, two offices for Scotland and Wales and seven regional offices. The headquarters staff will consist of three branches, one dealing with general services to industry, a second co-ordinating work at headquarters, including special services with work in the regions, and the third responsible for data handling.
These services until now have been concentrated in what is known as the Export Services Branch, but the work is 37 being strengthened and reorganised to give direct points of contact with individual industries. The data handling branch, for example, will contain an information centre using the most up-to-date equipment, particularly for ensuring that export opportunities reach subscribing firms as rapidly as possible.
In Scotland, Wales and Northern Ireland and in seven regional offices the Board of Trade is making a big effort to improve direct contacts with exporters. Regional export directors have been or are being appointed, and local staff is being strengthened where necessary. The Overseas Projects Group keeps a close watch on the world market for major capital contracts and provides support for British industry's efforts in this field. It is already working effectively and is developing. It will come under the new Second Secretary post.
The other Second Secretary will have responsibility for the overseas part of the Department's work. There is a spread of responsibilities on this side of the Board of Trade's work, and so the staff has been strengthened at senior levels. This will produce an organisation which can work closely with the revised export services. In the centre of the organisation, working to both Second Secretaries, I have created the Export Planning and Development Division. This will determine the priorities. It will also draft programmes for export promotion, review and develop export services and plan trade fairs and similar activities. Details of the organisation will be set out in an article in this week's Board of Trade Journal and in a leaflet I hope to publish shortly for exporters and potential exporters.
I am taking every opportunity to see at first hand some of our important export markets. I have just returned from a tour of a vital area for us—Thailand, the Philippines, Singapore and Malaysia. My purpose was to familiarise myself with the changing patterns of economic development and trade in the four countries. I wanted to find out the reasons for the recent decline in our share of the South-East Asian market and what opportunities existed which we might be missing. Above all, I wanted to discover whether there was any action that the Government might take to remove obstacles which might be preventing British 38 exporters from taking full advantage of these opportunities.
Since my return I have discussed my experiences very fully with the active Asian Committee of the B.N.E.C. and drawn the attention of industry to various specific points. I would only wish to make to the House two points which are fundamental to the Bill.
Everywhere I find the utmost good will for Britain, and British exports, but everywhere I find our competitors—and particularly the Japanese—attacking these markets with real persistence and aggression. In fact, I noticed some disquiet about the level of Japanese penetration which could cause a reaction favourable to our exporters. Credit was a main weapon of competition and some of the practices of our competitors are not likely, in the long run, to be much of a bargain for their customers. But we cannot afford merely to sit and watch.
The Bill before the House is relevant in this context, but of more immediate effect, I am sending a senior official from E.C.G.D. to these important markets. His purpose will be to discuss at first hand some of the credit problems put to me by British and local businessmen. His visits will be all the more important if the Bill receives approval.
I have no intention of letting our competitors beat us—either in South-East Asia or anywhere else—in the matter of Government-assisted credit competition. We shall meet such competition squarely. Unless, of course, we face credit terms which really amount to a give-away, so that it would not be in our national interest to win the business.
§ Mr. John Nott (St. Ives)
Did the Minister come across any examples where people in South-East Asia were suggesting that if only it were easier for British companies to participate in joint ventures with Japanese companies a much better exploitation of Far East markets might come about from direct investment in Japan?
§ Mr. Mason
No, that was not raised with me. But on the point of joint ventures with participating countries, in respect of Singapore and Malaysia, where it would be possible, with British technical know-how and British managerial experience, allied with labour and raw materials from the country concerned, useful joint 39 ventures could develop. This they are particularly interested in, and I came back with that sort of message to our Export Credit Guarantees Department and also to the B.N.E.C. Asia Committee.
§ Mr. Nott
I am sorry to interrupt the Minister again, but in that case he will presumably have recommendations to make to the Board of Trade and to the Chancellor that there should be a more easy attitude on the part of the Treasury towards joint ventures, because at the moment British companies cannot enter into them. They are not allowed to.
§ Mr. Mason
But they can do so in the case of Malaysia and Singapore. I admit that it is more difficult in the case of Thailand and the Philippines. I did not want the hon. Gentleman to mislead the House about overseas investment. I have the figures in my head, and if I remember them correctly, in 1966, 1967 and 1968 direct investment abroad amounted to £929 million, which was a 15 per cent. increase over the previous three years.
§ Sir Keith Joseph (Leeds, North-East)
If the Minister is going to produce figures, will he also confirm that the vast bulk of such increase as there was was due not to expenditure from this country, but to the investment of unremitted profits from overseas territories?
§ Mr. Mason
Certainly there was some investment of that kind, but I remember the figures for direct investment, and I thought I should let the House know about them—because it is not true that there is a total restriction on investment. Investment is regulated, but there is no complete restriction.
As I said at the beginning of my speech, the main purpose of the Bill is to raise the statutory limits which are set on E.C.G.D.'s liabilities. It has been the practice of this and preceding Governments to set these limits with the intention that they should stand for a few years. When they are nearly reached, E.C.G.D. asks Parliament for authority to raise them.
The reasons we are asking Parliament for higher limits after only three years are, first, that British exports have rapidly risen since 1967, and that E.C.G.D. is insuring a steadily greater 40 proportion of them year by year. Before the limits were increased in 1967, E.C.G.D. was covering about 30 per cent. of British exports; it is now covering 35 per cent. of a larger trade. Since we expect these trends to continue, we must make provision in the limits.
Like any other insurance institution, the Department charges a premium for its guarantees. If any of the transactions insured lead to losses, these are met out of its income. What is more, as a trading Department its income is sufficient to meet all its administrative expenses, including accommodation and the salaries of the civil servants who staff it. The Exchequer, of course, stands behind the Department, but the Department pays its way taking one year with another.
Over the years the Department has built up small favourable balances—very small in relation to its liabilities—and does not cost the taxpayer a penny. E.C.G.D.'s normal insurance operations are carried out under two Sections of the Export Guarantees Act, 1968, which consolidated all previous legislation. The Bill provides for increases in the limits on business under both Sections.
Section 1 of the Act empowers the Department, with the consent of the Treasury and the advice of the Exports Guarantees Advisory Council, to give guarantees for the purposes of encouraging overseas trade. Business insured under Section 1 is known as the Department's "commercial" business, because the risks can be justified on normal commercial grounds. The Advisory Council consists of eminent bankers, businessmen and others. I am pleased to have this opportunity of thanking the Chairman, Sir Frederic Seebohm, and all the members, for the very valuable work they are doing. They freely give their time and wise counsel and we have every reason to be grateful to them.
The present limit in the liabilities which E.C.G.D. may assume under Section 1 was raised to £2,400 million in 1967. At the end of 1967, actual and contingent Section 1 liabilities stood at £1,571 million; at the end of 1968 they were £1,732 million; and at the end of last year £2,077 million. If the present rate of increase is maintained, and I have no reason to expect any substantial slackening, the limit could be reached by the end 41 of the year. This would mean that E.C.G.D. would then be unable to insure further exports, except to the extent that existing liabilities ran off.
Section 2 of the 1968 Act provides for E.C.G.D., with the consent of the Treasury, to insure export business "in the national interest". This is business which, although it does not require the backing of the commercial advice of the Advisory Council is, nevertheless, regarded by the Government as advantageous on national interest grounds. E.C.G.D. applies its normal underwriting judgment. Section 2 business is not, therefore, unsound business, and Ministers have promised that the powers will not be used to undertake any "unduly hazardous" risks.
Section 2 can also be used with Section 3 to make loans to help buyers to make payments due under export contracts. At present loans by E.C.G.D. under these powers may only be made where the purpose is to provide economic assistance to another country, but, as I will explain shortly, we are proposing, in the Bill, to extend those powers. In the past, these powers were used to provide aid loans to a wide range of developing countries, but when the Ministry of Overseas Development was established, in 1964, responsibility for virtually all types of economic aid, that is, excluding military aid and military technical assistance, was transferred to that Department. E.C.G.D.'s powers to make loans have not since been used except to administer past loans.
The limit on E.C.G.D.'s liabilities under Section 2 was raised to £1,500 million in 1967. At the end of 1967, actual and contingent Section 2 liabilities stood at £991 million; at the end of 1968 they were £1,233 million, and at the end of last year £1,383 million. Those figures have risen particularly rapidly in the last six months, and if that rate continues the limit could be reached before the middle of this year. Provision for an increase must, therefore, be made if E.C.G.D. is to be able to continue to insure business "in the national interest" under this Section.
Projections into the future based on the rise in E.C.G.D.'s liabilities over the past year or so could prove over-optimistic; but the recent strong growth in exports and the increasing proportion of 42 export business being covered by the Department certainly give us reason for being optimistic. We have, therefore, provided in the Bill for an increase of £1,600 million in the Section 1 limit, from £2,400 million to £4,000 million, and an increase of £1,000 million in the Section 2 limit from £1,500 million to £2,500 million. These limits should accommodate the expected increase in business over the next three to five years.
I now turn to the new powers proposed in the Bill to allow E.C.G.D. to match foreign credit competition. One of the facts of life in the post-war world over the last 10 to 15 years, and particularly for major capital projects, has been the pressure to sell on terms of credit very favourable to the buyer. With a continuing balance of payments problem it has sometimes been difficult for us to compete fully with the terms offered by other countries. We have not wanted to lead the credit race, but have, in general, sought to match terms which foreign competitors were able to offer with official support—unless those terms were outrageous.
Some countries have made their offers particularly attractive by mixing commercial money with Government money on long terms, and possibly at concessionary rates of interest, sometimes described as aid. We have not liked this development and would have much preferred that it did not happen. But, as other countries show no sign of abandoning their practices, we have decided that we must be able to act likewise in suitable cases. By this, I mean where we consider it highly desirable in the national interest to compete for a particular piece of business and can see no other way of doing so.
In the Bill, therefore, we propose to extend E.C.G.D.'s powers in two ways. First, to widen its powers to make loans, and, secondly, to introduce a new power to make payments to reduce the cost of interest.
As I mentioned earlier, under Section 2 of the Act, E.C.G.D. already has power to make loans to help buyers to make payments due under export contracts, but only where the purpose is to provide economic assistance to another country. This power, in conjunction with the power to acquire securities—in Section 3 of the 1968 Act—was used for many years as 43 the normal way in which Her Majesty's Government gave tied aid to developing countries.
Since the Ministry of Overseas Development took over responsibility for aid, no new loans have been made using E.C.G.D.'s powers; they have remained in the Act to enable the Department to continue to make advances under agreements previously entered into. It is now proposed to extend these powers under Clause 2 of the Bill to make loans in this way where the purpose is not the provision of economic assistance, but the encouragement of trade.
§ Mr. Mason
Under Clause 2 of the Bill, where we are now to allow E.C.G.D. to make loans for the encouragement of trade; which is an extension of the power, as distinct from what was previously a provision for economic assistance.
A typical use of the new power would be for E.C.G.D. to make a loan to a foreign buyer in conjunction with a normal commercial export contract for a major project. I have in mind here big projects of the kind that our Overseas Projects Group are concentrating on. The loan would not be for the whole amount due under the export contract, but for a proportion of it, sufficient perhaps to enable the buyer to make the payments due by delivery and possibly some of the early credit instalments. The balance of the contract would be financed in the ordinary way and the buyer would pay the supplier on commercial credit terms. He would repay the E.C.G.D. loan over a longer period.
The effect of these arrangements would be that the buyer would not have to find any of his own money until the goods had been delivered, or, possibly, some time after. This would match similar arrangements which some countries have been making for some time on major projects and which we have not previously been able to match. We have thus lost business to them so we are now moving to restore the balance. Any money required for this purpose will have to be voted by Parliament in the normal way.
44 An important element in the winning of an export contract may be the cost of interest. The United Kingdom rate of interest for long-term export finance is, in general, competitive with other countries' export rates. But there are times when other countries charge lower rates for particular pieces of business, again by mixing commercial and Government money.
When the contract is being financed entirely from commercial sources, some means may have to be found to reduce the cost of interest to the buyer where foreign competition makes this necessary. Clause 3 of the Bill will enable this to be done in one of two ways.
One way would be for the contract to provide for the normal export credit rate of interest to be paid and for E.C.G.D. to make payments to the buyer sufficient to reduce the effective rate to the lower rate which it has been decided to charge. The other way would be for the contract to provide for a lower rate of interest and for E.C.G.D. to make a payment to the United Kingdom lending bank equivalent to the difference between that rate and the export credit rate which the bank would normally charge.
The effect of the two methods is the same: the United Kingdom lending bank will have received the normal export credit rate, whereas the money has cost the buyer only the reduced rate agreed upon. E.C.G.D. will have made up the difference. As with the loans under Clause 2, this power will be used only to match foreign competition on similarly favourable terms, and any money required for this purpose will have to be voted by Parliament.
I should stress that these are enabling powers and that we have, at present, no specific cases in mind in which we intend to use them. It would, therefore, be misleading were I to attempt to estimate what the annual Vote for these purposes is likely to be. The powers will, however, be used sparingly and only where there is a clear national interest in doing so.
The House will also notice that now that E.C.G.D. finances its loan operations from moneys provided by Parliament, and accounts for them accordingly, the Acquisition of Guaranteed Securities' Fund is no longer necessary. Clause 4 of the Bill, therefore, proposes that it 45 should be wound up. The change will not affect the substance of E.C.G.D.'s operations or the Department's accountability or use of public money in any way.
My speech has inevitably been of a somewhat technical nature, but these are really vital matters which are of great concern to us all and I thought that the House would like a full explanation of the raising of the limits and the new powers that we are giving to E.C.G.D. In brief, however, the changes I have made in the Board of Trade and the proposals in the Bill are all designed to support the very fine efforts which our exporters have been making and which are reflected in the excellent trade figures.
We have the finest credit insurance system in the world and we intend to keep it that way. This is really the cutting edge of the Government's export promotion effort and it is fully backed by the commercial representation overseas reporting to the Board of Trade, while at home we will shortly have in operation a computerised export information service.
In total, therefore, we will have a more powerful E.C.G.D. service, a reorganised and much more effective Export Division of the Board of Trade, and an establishment of regional export cells manned by officers who will have closer contact with industry, backed very soon with a computerised operation which will be receiving trade opportunities and economic intelligence from all our overseas posts and feeding our exporters with the information they specifically require.
With exports still running strong, and no hint of a let up, this is a fresh launching pad for future efforts and should augur well for Britain's future.
§ 4.2 p.m.
§ Sir Keith Joseph (Leeds, North-East)
We note that the Government back benches are virtually empty and that only one Minister, the right hon. Gentleman who has just spoken, occupies the Government Front Bench. We hope that this does not mean that the Government will be in difficulty in answering the many questions which we are bound to ask about the Bill. The Minister read his speech. We hope that he will be able to answer, either by reading from something 46 else or by improvising, some of the important points that my hon. Friends and are bound to make.
I wish at the outset to join with the right hon. Gentleman in taking pride in what is, we believe, the finest export credit organisation in the world. In the light of the figures which the right hon. Gentleman gave, it obviously makes sense for the Government to introduce a Bill designed to raise the limits within which E.C.G.D.'s operation works, and to that extent we welcome the Measure in general.
We also welcome the annual evidence that E.C.G.D. is constantly improving its methods. The fact that virtually each year it is able to produce improvements shows that there is always, in this highly competitive world, more to be done; and we congratulate E.C.G.D. for the way in which it has constantly been improving its services. My hon. Friends and I are aware that even in a perfect world there would be much to be done, but that will be practicable only when a Government with a different complexion produce a different economic and financial climate.
Before coming to the strategy of the Measure, there are a number of questions needing to be answered about its details. The Minister got into water that was, I suspect, deep for him—it is certainly deep for me—when he described the purposes of Clauses 2 and 3. We recognise that E.C.G.D. has been moving with understandable delicacy from its old practices of concentrating on supplier credit towards more buyer credit in recent years, and Clauses 2 and 3 strengthen its capacity to provide buyer credit.
The Minister explained that the buyer credit proposed would not principally be of the tied-aid variety, which is now looked after by other methods under a different Ministry. He spoke of buyer credit principally in connection with project credit. Would the right hon. Gentleman explain to what extent the proposals in Clauses 2 and 3 will finance, or make possible the financing of, what I believe is technically called "shopping-basket buyers' credit"? I refer to cases where a big buyer abroad wants to buy a range of, say, machine tools, transportation or communications equipment, but does not want to make his final decision on particular items before fixing his credit. In 47 such a case he obtains buyer's credit on a shopping-basket basis, as it were, to be identified when he has done his shopping in this country.
To what extent will Clauses 2 and 3 service that purpose and what growth has there been, or is taking place, in buyers' credit lines? A recent E.C.G.D. report stated that in the last year for which the Department reported there were five buyers' credit lines already agreed and 12 more under negotiation. Under what powers would those buyers' credits be arranged, what has happened to the 12 that were under negotiation and what new credit lines within Clauses 2 and 3 that are now subject to the passing of the Bill are under discussion? We appreciate that they cannot be formally committed, but preliminary discussions may have taken place.
I come to the more technical questions raised by Clause 3, and we understand that, for the first time, we are to go in for a subsidised rate of interest. In other words, we are to have a rate of interest which is below even the fixed scale of interest which the banks supply for their medium and long-term export finances, that fixed rate of interest by the banks being well below the national, let alone the international, rate of interest.
Neither the Minister, nor the Financial Memorandum to it give an indication of the scales of magnitude. If this new power is so important, the Minister must have some idea of the scales of magnitude. The subsidised interest rates of which countries are we particularly anxious to compete with? We admire E.C.G.D.'s tight-rope act, when the Department matches but does not out-bid foreign offers, and we realise what a delicate balancing act this must be, but it will be difficult to identify the degree to which we must subsidise the rate of interest. For this reason, the Minister should give some idea of the scales of magnitude.
The Bill raises a number of big issues. The Minister spoke for 25 minutes and spent about 10 minutes of that time not discussing the Bill but on a general survey of British balance of payments performance and the tactics of his Department. As usual with Ministerial speeches, it was a one-sided presentation.
48 We acknowledge with gratification the enormous increase in exports in financial terms and the substantial increase in exports in real terms that has occurred during the last two years. The Minister was gracious to acknowledge that much of that had been due to a world trading boom. Indeed, it would be impossible to deny that that provided a climate, without which we could not possibly have achieved what has been achieved.
Perhaps the right hon. Gentleman could not have been expected to have brought out the other main contributory factors to the export leap and dramatic transformation in our balance of payments acccount—the fact that Britain has benefited in its balance of payments operations from three overlapping and simultaneous phenomena—first, devaluation; secondly, the world trading boom; and, thirdly, stagnation in the home market. Stagnation in the home market has reduced the growth of imports and freed resources for exports.
There are a number of other factors which the Government have brought into play to improve the balance of payments. They should be described in a fuller picture in the light of what the Minister rather distortedly described. We are, after all, still suffering from multiple exchange rates. We have import deposits which are, in effect, a partial further—I hope, temporary—devaluation. We have window dressing by nationalised and local authority borrowers borrowing in overseas markets: increasing our debt overseas to window dress the capital account. We have such stagnation at home—oddly enough coexisting with such inflation at home—that stocks have fallen sharply as a proportion of gross national product.
In normal circumstances we on this side would welcome a fall in stocks—it would be a sign of better turn round of work in progress—but when they have fallen because of credit squeeze, high interest rates and general stagnation the probability is that stocks will rise again as consumption rises at home, and thus begin to erode the balance of payments improvement which we all welcome. So I have tried to set the balance right in the very one-sided picture which the right hon. Gentleman for ten minutes gave the House.
49 I want to turn to another factor of the right hon. Gentleman's remarks, because it ties up closely with the strategic issues raised by the Bill. He rather dismissed any thought that overseas investment is being restricted. He said, "Oh, there are regulations, but there is virtually no restriction", and he produced a single figure by, I suspect, aggregating three years' net increase of overseas investment outwards.
There are a number of points to be made there. First, overseas investment inwards to this country is not restricted. Foreign investment, whose intrusion here in most cases we—and, I think, the Government—very much welcome, is rising fast, so that our outward flow of dividends, profits and interest is increasing without restraint, but, simultaneously, the Government's restrictions are restraining our overseas investment outwards. So the interest, profits and dividends which should be counterbalancing inwards the flow of interest, profits and dividends outwards are not being fertilised by new production and investment.
The President of the Board of Trade should study, as I am sure he has, tables 19 to 25 in his own 1969 "Pink Book". He will find there that such increase in overseas investment as is still going on—and there is a substantial amount, we are always delighted to see, going on—is almost entirely financed by unremitted profits from overseas companies. If the Minister looks at the table that shows what has happened to unremitted profits, he will see that those unremitted profits have leapt, partly due to devaluation, but partly, also, because once the Government restrain capital moving outwards from the country, no doubt the companies abroad do their very best to have more unremitted profits overseas.
These are very complicated matters that I for one do not begin to understand in depth, but the Minister's assurance that overseas investment is not restrained was far too simple. I am sure that he will be reading the industrial Policy Group's "The Case for Overseas Direct Investment", which came out a few days ago. There is a very powerful trading case on balance of payments grounds for relaxing as soon as we can the restrictions on overseas investment—and I do not talk here of portfolio investment, but of non-portfolio investment 50 because, in the tough trading world, if one country denies itself the trading opportunities that in many cases have to be taken only by overseas investment, that country will soon begin to lose its world market and its world opportunities.
The reason this is so important for the Bill is that the funds being devoted by the country by way of export guarantees to improving our exports are of precisely the same nature as the funds which the Government are denying to overseas investors. They have the same effect on the balance of payments. Since the Government came into office they have been intellectually persuaded—and I am sure that they are absolutely sincere—that overseas investment is wrong and that export credits are right.
As I understand—and I am sure that if I am wrong the President of the Board of Trade will correct, or, if not he, then the hon. Lady the Parliamentary Secretary—and we are all glad now to see a second Minister on the Treasury Bench—these have precisely the same effect over a period the one as the other. In each case, whether it is export credits or overseas investment, this country is out of its money for a given number of years. In the first case, export credits, we earn interest and, perhaps, instalments as the credit is paid off over the period for which it is made, and that is the end of the matter. The most that can happen is that the country will be paid back its debt. I hope that the right hon. Gentleman is taking in this argument.
In the second case, however, if precisely the same national resources were used for overseas investment on a larger time scale than the supercriterion—that is, the criterion of the 18 months and the three years now imposed for the total return of overseas investment—if it was allowed for the same time and to the same extent as money devoted to the national economy by export credits—not only would we get, if all was well—and generally it is well—interest on that money flowing back to this country, but some exports and a flow of profits for generations to come. It needs a very skilled mathematician to tell which is the better over a period, but if the investment is well made there is no doubt which over the long term is better—overseas investment is overwhelmingly the better.
51 In the light of this argument, we want to ask the Government why they are still so tough in their restraint of overseas investment and why they still make no apology for using more national resources for export credits. This is not a polemical argument, but a use of national resources argument. It is not as though export credits were being restrained, or that the Minister or his right hon. Friend the Chancellor of the Exchequer was explaining having to devote another £50 million over the exchanges to export credits. No one seems to mention it, but if I were to ask the Minister to tell us how much export credits were tied up for what time and what were our bad debt experiences on them, I doubt whether he would have a figure readily to hand.
Certainly, as a student from outside, I find it difficult to get the total picture but as far as I can see from the Board of Trade Journal for September, 1969, there has been an increase in total net credit extended during each of the last four years. We know from the Bank of England Survey, and the Bank of England Bulletin of December, 1969, that the Bank itself is worried about the rise in the volume of export credits and the stretching of export credit terms, both of which cost us, across the exchanges more money.
We know from the Board of Trade Journal that the volume of credit extended for over a year has increased by no less than 20 per cent. in the last two years. Admittedly, as a proportion of total exports the credit for each year is still puny—the rise to 20 per cent. to which I have referred involves only a rise from 5.4 per cent. to 6.6 per cent.—but, because of the magnitudes of the underlying figures, these are quite large sums of money.
The question to the Minister is: why approve of them—at best, you only get your original price paid back, plus interest—when overseas investment, which could have such much bigger benefits for the economy, is still frowned on? I hope that we shall be given an answer. Why is one evil and the other good? We know that the Bank of England itself is worried. Will the Minister tell us to what extent he expects the scale and the length of time of export credits to continue being stretched, the way that we fear?
52 I turn to the other big question. The Minister allowed himself from time to time to speak of E.C.G.D. money being used for exports. Such money is, of course, used from that source from time to time and there may now be money generated through E.C.G.D. for Clause 3 operations. But, surely, what the President of the Board of Trade was referring to was bank money guaranteed by that Department. That much is agreed between us.
The second big question to the Government is: what do they intend to do about the dependence of this country on the willingness of the banks, their shareholders and depositors to subsidise British exports? The country owes them a great debt since voluntarily—and it was the Conservative Government that persuaded them to do it—they co-operate at their own cost in supporting our exports. I must be careful what I say, because I can see that a Conservative Government might again want to ask them to continue this patriotic practice.
This is a complicated arrangement. One reads in the Bank of England article about all sorts of devices which are arranged to cushion the implications for the bank of their use of this money at a time of liquidity ceilings and pressure on reserve ratios. The fact is that banks finance the middle and long-term exports. What are the figures involved? I note that bank finances under firm guarantees leapt up by no fewer than 67 per cent. between the years 1968 and 1969. The fixed-rate longer term transactions financed by banks increased by £70 to £274 million. My studies probably may not be good enough to give me the total picture. Therefore, may we be told how much money is involved? I do not wish to give the wrong impression. We should be grateful to the banks, the shareholders and depositors, since it is they who are losing. Are the Government sitting supine on this problem, or are they doing anything about it? Through the Berne Union, E.C.G.D. is playing its part in trying to restrain the export credit race. That is fine and we wish them well.
Another race that is going on is the race of subsidised exports by banks, often by the central banks—though this does not happen often in this country—in credit arrangements. We on this side of 53 the House have noticed that recently the Common Market countries have banned cheap export credits. I do not know how effective the ban is, but are the Government initiating any attempt to get other countries to cut short, curtail and even reduce the degree to which export credit is subsidised through central banks or taxpayers or, as in our case, bank shareholders' and depositors' money? We should feel far happier if, parallel to the Bill, we had some assurance that the Government were trying to do something on that front.
That matter is far less urgent than the first big issues we have raised. To some extent export credits are all to the good, but in regard to overseas investment the situation is bad. We hope that when the Minister replies we shall have an answer both to the detailed questions and to the big issues, as well as on the other points that will be raised in the debate.
§ 4.26 p.m.
§ Mr. John Nott (St. Ives)
I welcome those parts of the Bill that extend the amount of credit which E.C.G.D. can give to the British exporter. Indeed, the current achievement of British industry in increasing exports in spite of all the restrictions which are placed upon them is something of which the country should be proud.
The figures of the rise in exports embrace, I believe, a fundamental change which is taking place in British industry at the present time. Although our exports are going up fast following devaluation, more importantly over the last few years there has come about in industry, to a large extent because a new generation of management has now arrived, a change in attitude towards exports and indeed towards management. This change has been needed for very many years.
One of the interesting things regarding the quality of management, which is very much related to the export question, is that in the United States the older generation of management which took over after the war is still very much in command. If this country can develop a new type of manager at a time when the United States industry is still being run by those who took over American industry after the war, we have great prospects over the next few years if only the Government will get off industry's back and allow it to go out after busi- 54 ness overseas with a much greater degree of freedom than it has at present.
I also wish to emphasise the high quality of service provided by E.C.G.D. For a quasi-governmental Department, it is remarkably flexible and, on the whole, takes a very sound attitude to commercial risks. The fairly rapid decision-making that can be obtained by British exporters from E.C.G.D. is welcome indeed. I know of many American corporations which would very much prefer to deal with E.C.G.D. than with the Export-Import Bank, which is the equivalent in the United States.
Although there is always room for improvement in the provision of credit facilities, the fact remains that we have a first rate system of credit insurance in this country. I hope that the basic way in which it now operates will continue without a trend which I see beginning in the Bill, towards Government financing of British exports. I believe that the Export-Import Bank now finances approximately 20 per cent. of American exports, whereas up to now the Government here have financed only 2 per cent. Yet I personally do not know of any sound export contract in this country which has failed to obtain finance from the private sector.
I take the point made by the President of the Board of Trade about what he believes to be the need to lengthen credit and to reduce interest rates by means of subsidy. Could the right hon. Gentleman say which specific countries have a lower fixed rate of interest than 5½ per cent.? I san see that perhaps Japan, or France in regard to certain industries may have slightly lower interest rates on a fluctuating basis. However, I know of no country with a lower fixed rate than 5½ per cent.
I must support my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) in saying that the developments in the Bill which have been described by the Minister must be regarded with some suspicion. In a situation in which we depend on exports probably more than any other country in the world, I cannot see what advantage will be gained by entering into and provoking a credit race in terms of subsidised interest rates and a further lengthening of terms. It must be in our interests more than those of any other country 55 to act in the other direction and to try through the Berne Agreement and G.A.T.T., if that is relevant here, to bring other countries more into line with present world interest rates.
I come to what I consider to be the most important aspect of the Bill, to which my right hon. Friend the Member for Leeds, North-East referred. I believe that the Minister was wrong in not dealing with it. There is plenty of evidence to show that all over the world direct exports are playing a declining, and not an increasing, rôle in the balance of payments of the main industrial nations. The figures show that exports to subsidiaries and to affiliants of companies have been growing at more than double the rate of direct exports. Those of us with some experience of exporting overseas know from personal experience that the percentage rise in exports from a United Kingdom company to its subsidiaries tends to be far higher than it is with direct exports which it sells through agents.
I support entirely my right hon. Friend's view that, because of the restrictions and bans—and they are bans of a type—on direct investment overseas, there is constantly around the neck of British industry a tedious burden in obtaining permission to invest directly overseas. I give just one example. A company with which I am associated had some difficulty in obtaining permission even to get a few tens of thousands of pounds to set up a sales subsidiary in Japan. It is a medium-sized engineering company in the Midlands. After a great deal of trouble it was allowed to remit abroad a few thousand pounds through the investment dollar market, which cost up to 30 per cent. above prevailing rates of exchange. The rest it was forced to finance in the Eurodollar market at interest rates of about 8 or 9 per cent.
Over the last three years, that subsidiary has had its exports rising at a compound rate of 40 per cent. per annum, and, admittedly starting from a very low base, it is still growing from at a remarkably rapid rate. In every country overseas where we have our own sales subsidiary, such as Germany or France, we have had needless administrative problems in obtaining permission to retain full 56 earnings in that country and build the sales subsidiary into a still more effective and aggressive organisation. There has been a tremendously rapid rate of increase in exports to these sales subsidiaries, far greater than that in direct exports. Therefore, in welcoming the E.C.G.D. proposal, we cannot ignore the much more major factor for the future balance of payments of this country, namely, direct overseas investment, which has been sadly neglected in this country for the last four or five years.
The United States value of overseas production of goods is six times greater than its direct exports. This is a trend to which we shall move in this country. The latest figures which I have available show that 22 per cent. of all exports in 1966—and the figure must be higher now—were between associated companies and subsidiary companies. In 1966, 56 per cent. of the exports of United States-controlled companies in this country went to sister companies abroad. Therefore, this is a crucial area for the future of British exports.
§ Mr. Robert Maclennan (Caithness and Sutherland)
I do not wish to dissent from what the hon. Gentleman has said, but would he not agree that a balance must be struck on the Question of overseas investment? It has some implications, which neither he nor the right hon. Member for Leeds, North-East (Sir K. Joseph) has drawn attention to, for the level of investment in our own domestic industry, which, in turn, has an effect on our exports.
§ Mr. Nott
Ministers and hon. Members opposite must leave it to industrialists to decide where they should place their investments. There is a great feeling of self-confidence among Socialist Ministers that they know where to place an investment better than an industrialist who has specialised in these matters all his working life. I take the point that the feeling is widely shared by hon. members opposite. But I do not share it.
§ Sir K. Joseph
Would the hon. Member for Caithness and Sutherland (Mr. Maclennan) accept that Professor Reddaway's Report, which was, on the whole, against overseas investment, conceded that it did not compete with home investment?
§ Mr. Nott
I take the point about Professor Reddaway's Report. My comment is that this judgment must be left to industrialists. Surely what this country requires is the highest possible return on whatever investment is made. In the end, the industrialist making that investment must judge where he will get the highest return, because it is impossible to devise a system, even in a completely totalitarian State, under which every investment decision is made or checked by central government.
Over the last few years British investment overseas, and our position as a trading nation overseas has been slipping back rather seriously. During the last few years, France, Germany, the Netherlands and Sweden, all countries which have had a much lower holding of direct investment in the United States, have been catching us up extremely quickly in investment in the United States. All our trading competitors are building up direct investments overseas at a time when this country has been cutting back on the rate of increase.
In 1968, about 69 per cent. of our investments overseas came from unremitted profits. At the end of the year, industrialists have to try to decide what dividends they will remit from their overseas subsidiaries. They say, "We will not remit from this country any more than we are forced to remit by the Bank of England because if we do we will never get it back again" except through the premium dollar market.
If there were a system like that operated, for instance, by Shell, whereby the Treasury said, "Let these companies bring in whatever they want", I believe that more would go out in direct overseas investment, but I doubt whether it would have such a great effect on the balance of payments on capital account as many people suspect. In 1968, only £135 million in outside unremitted dividends was invested abroad by direct investment from this country. That is completely inadequate.
The screening process operated by the Bank of England is time-consuming and very restrictive for British companies. Investing overseas requires imaginative thinking, which involves risk taking. Under the present system, there is no doubt that risk taking is discouraged because a company is asked to recoup 58 within a very limited time an amount equivalent to the sum it invests overseas.
I therefore ask the Minister what conceivable advantage there can be in allowing state agencies, which is the trend in this Bill, to invest abroad either through subsidised interest rates or by lengthening credit instead of lifting some of the restrictions on private industry investing abroad.
I raised my final point in a debate on the Export Guarantees Bill when it was in Committee in 1968, and I should like the Minister to comment on it. The Agency for International Development in the United States provides a comprehensive system of investment guarantees. When there is thought to be a specific political risk, a political risk guarantee can be granted to a United States company in making its investments overseas. A British company which decides that it wants to build up a subsidiary in India would be able, through A.I.D., to obtain a political risk guarantee to safeguard its investment in India.
Why do we not consider in this country some kind of political risk guarantee for investment of moneys abroad? We now have a system whereby the Minister is to find money and subsidise interest rates and lengthen credit. Cannot we look at some form of investment guarantee whereby E.C.G.D. would carry out its present type of insurance function by protecting companies against expropriation? Companies could invest by cash materials, patents, or whatever it might be. We are moving into the era of the joint venture and the multi-national companies which locate plants in the cheapest cost production areas. If British companies are to compete with the big multinational American companies, they must be able to enter into joint ventures by investment overseas.
If we are thinking of the underdeveloped countries, it would be an enormous help to have some form of investment guarantee. If such a scheme were promoted, it might be a means of reducing the volume of Government to Government aid and replacing it to some limited extent by private sector to private sector aid. I think that that would be a beneficial trend because, in the end, I believe that private sector to private sector aid leads to more going into the 59 pockets of the people than happens with Government to Government aid which can be, although is not in all cases, squandered on prestige projects.
I welcome the Bill in so far as it increases the amount of money available for export credits. I am highly suspicious about subsidising interest rates. I do not think that our interest rates are all that uncompetitive with those of other countries. I see not advantage to this country in beginning to indulge in a credit race. Our interest rates are highly subsidised now. The Bank of England is providing a refinancing facility and in the last few years allows the clearing banks to regard the export finance which they have provided as part of their cash ratio.
This, in fact, is subsidising interest rates already and now the Minister is extending the system further. If the E.C.G.D. is to advance money, it will be performing the function of a bank. If the E.C.G.D. decides in a particular case that it will help to lower the interest rate to make a company competitive internationally, will that amount of money go to the British banking institution arranging the finance, or be advanced directly to the foreign buyer to reduce his interest rate cost. Who will perform the banking function and assess the commercial risks of advancing the money? I do not think that E.C.G.D. claims to be a banking institution; it assesses insurance risks.
While I welcome the Bill in certain respects, I am rather suspicious of certain of its aspects.
§ 4.45 p.m.
§ Mr. Kenneth Baker (Acton)
Last week, I whiled away a few idle moments looking through the debates on the two previous Export Credits Guarantee Bills. One came up in 1964 under a Conservative Government and the other in 1967 under this Government. Now we have this present Bill.
I found, first, that all the debates were short. Secondly, they were basically non-contentious and, thirdly, the speeches of the Ministers introducing the Bills were almost exactly the same. I suspect that there is someone in the Board of Trade or the E.C.G.D. who drafted all three speeches and what is rather depressing is that the 1973 speech is probably in draft as well.
60 To the extent that the Bill increases the powers of E.C.G.D. to conduct its normal insurance business, I welcome it. E.C.G.D. has done a magnificent job and now covers 34 or 35 per cent. of total British exports of goods.
But the Bill also takes the powers of E.C.G.D. very much further, as the Minister made clear. Its normal insurance business is basically, for example, that of a British firm selling goods to a Rome firm and getting the guarantee from E.C.G.D. and using it to go to its own British bank which will then lend to the British firm at a highly subsidised 5½ per cent. rate of interest, which has been the rate prevailing since 1962.
I should be grateful if the Minister could let us know whether the Government are to allow banks to raise this rate, because this is the export subsidy which British banking has provided, with very little grudging for the last eight years. Will this continue or not? That is the normal business of E.C.G.D., but the Bill takes it further and moves it from an insurance business to a banking business and there is a great gulf between insurance and banking.
Taking this simple transaction of the British firm selling to Rome, the Minister made clear that in future the Italian buyer in Rome will be able to borrow money from E.C.G.D. at a subsidised rate for an unspecified period of years and there will be a movement of money from London to Rome. This will create a situation in which both the British end and the Italian end will be subsidised on the same transaction. It is the British taxpayer or the British banking system which will have to meet the subsidies eventually.
The Minister was right in saying that these powers used to be exercised by E.C.G.D. before the Ministry of Overseas Development came on the scene. The transactions were then Government to Government transactions. The big difference is that they are now firm to firm transactions. This has been justified quite simply on the grounds that other countries do it that way and, therefore, we should. But before we do so I think that we should pause before we climb on this band-wagon of finding easier and slicker and almost sharper ways of giving cheap credit. We should 61 ask whether we are not getting into a race to which there is no end.
If we do this there is nothing to stop the French Government, the Japanese Government, or the German Government from saying tomorrow that they will subsidise their German, Japanese or French exports by discounting export bills at 1 per cent., and wipe out the benefit of this Bill completely. Then the Minister would have to come back next week and say that he had found an even better way and give bigger subsidies and so it would go on. There would be no end to it, because there is no end to the queue of people waiting for cheap money.
The Government would have been better advised to call an urgent international conference of the main capital exporting countries and say, "Cannot we talk sense about this subject? Here we are engaging in a race to give cheap credit and are all under-cutting each other. It is an expensive business." I ask the Government seriously to consider this.
I do not know whether the Berne Union of International Credit Suppliers still exists, and whether it meets and whether we are still a member, or whether it has been asked for its views on this. I hope that the right hon. Gentleman will consider this.
§ Mr. Mason
I think that the hon. Gentleman is making an informative speech in keeping with what his hon. Friend the Member for St. Ives (Mr. Nott) said before him. We are afraid of the subsidy race and it would be our intention as much as possible to be able to stop any credit race developing.
The Berne Union still meets four times a year. Some countries and major institutions are not members and are not bound by the Berne Union rules, and could, if they wished, and no doubt some do, mix aid with credit and, therefore, we could lose many major overseas capital projects.
All we are asking is to be able to give the E.C.G.D. the power, if necessary, to match and match only. We do not wish to encourage a credit race, but we cannot continue to be unable to match facilities offered when these major projects abroad come up for contract when aid is mixed with credit.
§ Mr. Baker
I take the point of the difficulties in which many British firms 62 find themselves with major projects, but I hope that the powers being taken under the Bill are something of a stopgap to a period of greater sanity in this area, because otherwise there will be no end to the process. We will match it today, but tomorrow someone will outbid us and we will have to match that again.
The right hon. Gentleman said that because the Bill gave enabling powers, he could not say how much was involved. I think that he owes it to us to give some idea of how much is likely to be involved. He must have some sum in mind as that likely to be involved in subsidised interest rates.
Secondly, how would the Bill affect our balance of payments? By giving loans to the firm in Rome, for instance, there will be a transfer of money over the exchanges. It may be very small to begin with, but it may become large over the years.
I have four reservations about the Bill. First, I believe that export subsidisation is contagious. There is no end to the credit race or the queue for cheap money.
Secondly, I wonder whether this is the best use of British capital. The Minister has told us that we are to give exports such a high priority, that we are to subsidise them, and to subsidise them substantially. We are to subsidise them by making loans overseas and by having subsidised interest rates at home. If that is the case, has he in mind any other categories for cheap money, other sources where this capital could be used? There are plenty in the home market and housing is one. Presumably the Government have dismissed that possibility.
My third reservation concerns a major ommision. As my hon. Friend the Member for St. Ives (Mr. Nott) has said, there is no provision for investment insurance, as it is called, insurance against political risks to the investment of British money overseas. It has been argued before in the House, and the case is convincing. I would have thought that the E.C.G.D. and the Board of Trade between them could have come up with some sort of plan for investment insurance. After all, if A.I.D. in America can do it, our own Government Departments should be able to do so. This would be a tremendous advantage to British firms wanting to invest overseas.
63 My fourth reservation is that I object to allowing the Government, or their agency, the E.C.G.D., to do what British industry is discouraged by the Government from doing, namely, investing overseas. I am not here talking about portfolio investment, not about buying shares on Wall Street or in the Australian nickel boom. I am talking about direct overseas investment. I concede at once that there has been an improvement in the figures of direct overseas investment since 1966, but that improvement is attributable entirely to portfolio investment, in effect to the Australian nickel boom. There has not been any real improvement in direct private overseas investment.
As the Industrial Policy Group pamphlet made clear last week, this is regrettable and dangerous. I urge the right hon. Gentleman and the Treasury Ministers to lift restrictions on private overseas development as quickly as possible, and also to remove the penalties which were imposed upon overseas investment by the 1965 tax changes.
With my hon. Friend the Member for St. Ives and my right hon. Friend, I hope that direct overseas investment will no longer be used as a scapegoat. The Government have a mental blockage about direct overseas investment. As my right hon. Friend said, there is a clear choice between exports subsidisation and the stimulation of direct overseas investment, but they are sides of the same coin. The Opposition much prefer less export subsidisation, because of its inherent dangers, and more encouragement of direct overseas investment.
Unless the restrictions are removed and the penalties are mitigated, the country will suffer in three ways. First, other capital markets will develop at the expense of the City of London, and this is already happening. Secondly, the investments which would produce invisible earnings in the 1970s, 1980s and 1990s will not be there. Thirdly, Germany, Japan and America will beat us in securing overseas assets. As my hon. Friend said, the production of American-owned subsidiaries outside America—Rootes, S.T.C. and others all over Europe—now exceeds American exports by six times.
By subsidising exports in a rather old-fashioned way, we are out of step. The 64 Government believe that the rest of the platoon is out of step, but it is the Government who are out of step by going for export subsidisation. The Government should think very hard before pressing on with the Bill. Even if they get their enabling powers, as they probably will, I hope that they will never use them. I hope that the right hon. Gentleman will call an international conference of the major capital exporting countries this year—and that is not too soon—in order to bring a degree of sanity back into this whole arena.
We hope that the Government will think again on their policy towards direct overseas investment and will start to encourage instead of discouraging it.
§ 4.57 p.m.
§ Mr. Nicholas Ridley (Cirencester and Tewkesbury)
All my hon. and right hon. Friends have paid tribute to the way in which the E.C.G.D. has done its work in the past. It is true that it is held in high esteem. What singles it out from any other quasi-Governmental organisations, as my hon. Friend the Member for St. Ives (Mr. Nott) called it, is that it responds to criticism, and when complaints and criticisms about its service arise, they are speedily put right. The Opposition wish that the rest of the Governmental and quasi-Governmental machine were as quick to react as the E.C.G.D.
It is also clear that the E.C.G.D. has got itself firmly into the black. It now has about £65 million worth of reserves which stand ready to meet possible claims at any time. I hope that the right hon. Gentleman will comment on that figure. To use the right hon. Gentleman's words, the Exchequer stands behind the Department and one wonders why it needs to run up a surplus of that size when it has the Exchequer standing behind it. With such a substantial buffer, would it not be possible slightly to reduce cover rates to a slightly more realistic level. I do not claim to be an expert in these matters and perhaps the right hon. Gentleman or the Parliamentary Secretary will comment on them.
My hon. Friends have not been too pleased with what they think Clause 3 may mean. This is the Clause which brings subsidised loans to buyers abroad. I hope that we shall be told how much 65 it is envisaged that this will cost. Both my hon. Friend the Member for St. Ives and my hon. Friend the Member for Acton (Mr. Kenneth Baker) pressed the Government to give some idea of the magnitude of scale.
I do not know what would be the parliamentary procedure for presenting a Vote—nor when we are likely to have it—by which the E.C.G.D. could have this money, but it is clear that Parliament will want to know more about this power before we are happy to leave the matter as the right hon. Gentleman presented it.
My hon. Friends were right to say that there is no point in indulging in a mad credit race. It must be admitted that the point could come when the terms of credit offered by a foreign competitor which we had to match made it simply not worth while obtaining the business. If, at the extreme end, we were to give money away at no rate of interest, it would be clearly not in our interest to get the business. Indeed, one wonders what change in the value of such business must have taken place since the Government achieved a surplus on the balance of payments. Surely, they are not quite so keen to obtain the last marginal scrapings of export orders when we are in surplus. Indeed, the time could come, as it did in Germany, when we need to penalise exports and to subsidise imports by taxation policy. This, therefore, is an odd time to take power to phase down the rate of interest on marginal export orders.
To turn to the main element of subsidy—that is, the subsidy by getting the banks to provide credit at 5½ per cent.—we would like to hear a little more about the future in this connection. This was a perfectly reasonable thing to do when Bank Rate was at 5½ per cent. or 6 per cent., as it was at the time it was started, but now that it has gone up a good deal higher the burden on the joint stock banks has become a quite substantial sum of money. As far as I can make out, the gross burden, as one might call it, was last year about 4½ per cent. of subsidy on something like £274 million, which works out at about £12½ million. That is not a true figure, however, because of the advantages of the refinancing facilities, to which my hon. Friend the Member 66 for St. Ives referred, which will bring the figure down.
One of the other disadvantages, which my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) did not touch on but which is a very real one to the customers of the banks, is that the £274 million has to come out of their fixed lending ceilings. In terms of availability of credit, therefore, this is not available to other customers to the full extent, although I must admit that the refinancing arrangements to some extent mitigate its effects. This has, therefore, become a fairly major element in the banking system and one which, quite definitely, is a sacrifice on the part of the shareholders and depositors with the banks.
The major understatement of the year is contained in the Bank of England Quarterly Bulletin which said:This rate is low in relation to the current level of interest rates, and there is no doubt that the willingness of the banks to continue to provide finance at 5½ per cent. for the whole term of an eligible credit is of great benefit to exporters.That is the most grudging acknowledgment of the considerable self-sacrifice which is being made that I have heard for a long time.
My hon. Friends were right in suggesting that credit subsidisation is becoming a growing menace. Anything which is a normal commercial credit and any form of guarantee which is commercial and produces, on the whole, a favourable balance is absolutely right, but in place of diminishing tariffs there has been an ever-growing acceleration of credit subsidisation, which is a threat to sane and orderly trading.
The Berne Union exists and we need to pursue this point in international negotiations. The President of the Board of Trade said in an interruption that some countries were not members of the Berne Union. Surely, it would be possible to invite them to join the Berne Union or to call a special conference to discuss these matters. If we are to have not only the fixed 5½ per cent. credit rate, but also specially subsidised individual projects, the whole field opens up as one of considerable importance and one which is becoming a much more serious distortion of world trade than tariffs. The two go hand in hand. As we have driven down 67 tariffs, we have driven up non-tariff barriers to trade.
I saw an article in The Times which said that the Paymaster-Generalis carrying out a major review of the need for credit for home shipbuilding orders.These two fields go closely together. The same lines of credit are made available for exports as for shipbuilding. I hope, therefore, to hear from the Parliamentary Secretary that the Government will redouble their efforts to do something internationally to bring this situation under control.
I should like to give an instance of how this sort of race is doing damage to us in particular. On the River Clyde there are several American-owned oil companies which have been attracted by the high rates of investment grant and will collect 40 per cent. of very large capital expenditure if they build refineries there. I understand that they have been putting out instructions that none of the equipment for building those refineries is to be bought in Britain because the cheap 5½ per cent. credit is not available to them if they order in Britain whereas it will be available to them if they order the equipment from abroad. Therefore, not only are they taking 40 per cent. of our money on their investment, but they are refusing to order here for the reasons of the cheap credit which is offered by other countries. That is clearly an absurd situation.
The fact that the Common Market has turned towards hostility to subsidised credit rates should encourage the Government to do exactly the same thing. I hope, therefore, that the Government will join the Common Market in leading a campaign to have international policing of these arrangements so that everybody is on the same footing.
The other main theme which has run through the debate has been that of overseas investment. We all know that those engaging in direct investment overseas have been penalised. I have heard the Government describe it as removing incentives to overseas investment, but a much more accurate description would be to call it a penalty, not only a fiscal penalty, but a penalty in terms of such matters as selective employment tax and all sorts of other discriminations against 68 that sector which has been responsible for a lot of our private investment.
It is curious that the Labour Party should have these two prejudices: one against the service side of economic life and the other against overseas investment. Those two themes have run through all Labour Party policy since the Government came to office. There is no doubt that they are trying to back the declining form of overseas earning which comes from direct trade and in the process they are attempting to strangle the only forward-looking and expansive element in our overseas trade, which is that which comes from overseas investment.
The comparison is striking. To pass the voluntary programme, overseas investment must produce a return within two to three years, yet here we have E.C.G.D. with power to guarantee cheap credit loans for a period of up to seven years. Then, of course, the rate for the E.C.G.D. guaranteed loans is 5½ per cent., whereas overseas investment may have to be borrowed from banks or finance houses at rates over 10 per cent. We therefore have double the rate of interest and half the period of credit. On balance of payment grounds, the two should be exactly the same.
Professor Reddaway's objection to overseas investment was that in the short term it produced an outflow across the exchanges. The same criticism, such as it is, applies to export credit extended over a long period, because in passing the credits to recipient companies or firms the same amount of money must pass over the exchanges and flow out. Therefore, it has a net short-term adverse flow and a net long-term beneficial flow as interest and repayments begin to come in. However, at the end of the day, as my right hon. Friend said, if we make an overseas investment, it belongs to this country and continues to earn profit for generations to come; if, on the other hand, we simply guarantee an export sale we end the process at the last repayment of principal and there is nothing more to come and we have no continuing profit.
I think the case which has been made from this side of the House is very strong indeed, and we shall want a good deal of convincing by the Parliamentary Secretary that this is the right way of going 69 on from here. It is not as though we are against the extension of E.C.G.D. cover; it is much more as though we are against the retention of the inhibitions on overseas investment just at a time when the President of the Board of Trade spent the first 10 minutes of his speech saying how marvellous the balance of payments was and how the situation had dramatically changed. It is a crazy policy to pursue to the point where we are greatly subsidising the export of goods and at the same time penalising the export of capital which will help to improve the balance of payments for generations which are as yet unborn.
Then there is the point which my hon. Friend the Member for St. Ives raised, and that is, why do we not guarantee overseas investment? The kind of guarantee required is against political risks, war, confiscation, or nationalisation on unfavourable terms. I was tempted to wonder whether we should not have such facilities in this country for our own internal use, but that, perhaps, would not be in order in this debate. Nevertheless, there is a good deal to be said for considering this credit race, and it ties up with all that has been said before.
I hope that the Parliamentary Secretary will respond to the very wise suggestion put by my two hon. Friends and which has great validity. I am glad that there is no proposal for a State import-export bank. I would only say that if the President of the Board of Trade had made any such proposal there would have been strong opposition from this side. I think he is proceeding in the right way in backing the E.C.G.D. and in making sure that sufficient cover is available for British exports.
We welcome this Bill as far as it goes. There will be questions which will need to be probed in Committee, particularly in relation to Clause 3. I think the Government have got a substantial case to answer: they are, in this further Measure, increasing guarantees in the Export Guarantee Department and prejudicing overseas investment in the form of direct exports.
§ 5.12 p.m.
§ The Parliamentary Secretary to the Board of Trade (Mrs. Gwyneth Dunwoody)
I must admit that I have found this debate very interesting. I 70 begin by apologising to the House for a seeming discourtesy in not being here at the beginning, but I was opening an export fair in Blackpool which, I hope, will contribute to the interests of the Bill we are discussing tonight.
I have found the general tone of the debate to be of greater or lesser approval of the activities of E.C.G.D. In spite of one or two peevish remarks I really believe that the House sincerely sees this Bill as a very effective means of action. I shall try to deal with as many of the individual points as I can, but I think it would be wrong for me to go into individual cases.
Let me, first, answer some of the general points and try to fit the Bill into the general context of the Government's economic policy. As my right hon. Friend the Chancellor of the Exchequer explained to the House on 21st January, the message of the White Paper on Public Expenditure is that the Government intend to maintain their policy of relating the growth of public expenditure to the existing growth of the nation's resources. Any growth of public expenditure arising from this Bill will be small and will not conflict with this policy. Any direct public expenditure which is involved will of course have to be fitted into the limits which the Government have determined after an assessment of the priorities involved.
Several hon. Members have made the point that they were worried about the beginning of an export credit race. It is our general aim to strengthen still further our balance of payments by improving our exports without leading to or stimulating a credit race. This Bill is consistent with these objects. The higher limits we have are for higher exports, and we shall, of course, continue to do all we can to maximise the direct and immediate returns which we expect from exports.
The new powers which the Bill gives will be used to match any reasonable limits which our competitors are setting and not to outstrip them. I do not, therefore, expect that this will lead to any extension of a credit race and we shall be pleased to join any discussions in O.E.C.D. or elsewhere aimed at bringing about a proper control of credit competition. Our aim is to prevent a further escalation of the credit race. The 71 provisions of the Bill are not inconsistent with the Government's policy of improving credit arrangements and the higher limits will allow for greater exports to be guaranteed.
It is not the Government's policy to apply a ceiling or for it to act in such a way as to restrict—
§ Mr. Kenneth Baker
One the point of-the credit race, the hon. Lady said the Government would be pleased to take part in any negotiations which happen to be going on. Will the Government initiate a series of negotiations or discussions?
§ Mrs. Dunwoody
I had meant to deal with this in rather full detail if the hon. Member will allow me to continue.
The new powers will involve extension of credit. What we intend is to use it for worthwhile business to enable our exporters equally to compete in world markets.
The right hon. Member for Leeds, North-East (Sir K. Joseph) claimed that the effects of export credit as compared with overseas investment were equal from the balance of payments point of view. I am afraid that that is not true, for two reasons. I hope that hon. Gentlemen will accept that there is a difference between prejudice and a clear case for non-involvement occasionally. What the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) has called "prejudice" can very well be a clear assessment of the situation.
Firstly, overseas investment may involve direct drawings on the reserves, whereas export credit usually means only an allocation of productive resources with provision for deferred payments. Secondly, overseas investment does not provide an assured short-term return. We know exactly the returns we shall get for export credits. The Reddaway Report, as the right hon. Gentleman has himself said, showed that in the past direct returns on overseas investment were considerably lower than for export credits. We have not been able to afford long-term investment represented by average overseas investment and the majority of export credit cases involve credit for periods of up to two years.
72 Finally, overseas investment is in practice freely allowed provided it is financed in Eurodollars, that is, if it is not financed from the reserves, and in practice this allows most worthwhile investment to proceed, although I take the point that in individual cases, as that particular one raised by the hon. Member for St. Ives (Mr. Nott) there may be individual difficulties.
The new powers can be used to assist lines of credit. Up to the end of 1969, 14 lines of credit had been negotiated, to a value of £112 million. These were guaranteed under our existing E.C.G.D. powers. The right hon. Member for Leeds, North-East wanted to know the order of magnitude by which we might need to subsidise the rate of interest below the normal United Kingdom rate of 5½ per cent. We are reluctant to commit ourselves to an estimate of the total amount for a very simple reason. It is very difficult to say what we shall have to deal with, what we shall have to match and how successful we shall be in operating under these terms.
On the other point raised by the right hon. Gentleman, the burden of 5½ per cent. money, it is recognised that the grant of money at this rate represents an allocation of resources on favourable terms, and Her Majesty's Government are anxious to ensure with the major credit companies that export credit terms which involve too burdensome problems are not provided generally. The answer is to provide for general collective action based on understandings between the Governments concerned. I hope this will answer the points raised by more than one hon. Gentleman. This we are attempting to achieve by means of general discussions particularly in the O.E.C.D. forum and also through bilateral dialogues. What we have to achieve is a sensible economic policy related to the real cost of providing credit without loss of competitive position. We are actively engaged in discussions over the whole of this area.
The hon. Member for Cirencester and Tewkesbury suggested that the Berne Union would be an existing means of dealing with one of the problems. The difficulty is that, although most countries have some representatives in the Berne Union, they do not represent their 73 Governments and cannot commit their Governments. We take the hon. Gentleman's point, but this needs to be discussed internationally and can hardly be done in a piecemeal fashion. Nevertheless, one has to accept that our membership of the Berne Union provides no more than an opportunity for discussion with individual members, and does not necessarily allow us to reach agreement with the governments concerned.
§ Sir K. Joseph
The Paymaster-General undertook recently to review the possibility of initiating further discussions with O.E.C.D. about credit for shipbuilding. Will the hon. Lady discuss with her right hon. Friend the possibility of broadening the discussions with O.E.C.D., if necessary by taking the intiative, on all these aspects of credit stabilisation—shipbuilding and export credit insurance. Here is an initiative which the United Kingdom could take; will she consider it?
§ Mrs. Dunwoody
This is a very valid point. If I may digress for a moment, I had intended to point out that the Shipbuilding Industry Act, 1967, which has been discussed today, authorised the Ministry of Technology to guarantee loans made by banks towards the purchase of ships by British ship-owners or British yards, and it is true that this money is also advanced at 5½ per cent. The limit on the liability of the Minister of Technology for these guarantees is £400 million, but the limit is now practically reached, and we have to face the question that at some point, if it is totally used up, orders will be lost by British yards, so this may well be the time to initiate joint action along these lines.
The hon. Member for St. Ives, whom I am glad to see back in his place, said that he was suspicious of the Bill and asked why we were so concerned to go below the 5½ per cent. rate, and which countries had lower fixed rates of interest. Other countries' normal fixed rates are in line with our 5½ per cent. rate, and the new powers are not needed to match them, but other countries sometimes agree to credit at exceptionally low rates—the French, for instance, at 3½ or 4 per cent. and the Japanese at 3½ per cent. for part of a credit. This is what we expect to match under the new powers. May I emphasise that we are hoping to use the Bill not necessarily to initiate 74 movements of this kind, but to enable us to offer our exporters equal benefits.
The hon. Member for St. Ives also asked whether, if the E.C.G.D. decided to subsidise rates of interest, the money would be paid to the United Kingdom bank or to the overseas borrower. Under the Bill this can be done in either way, and a commercial assessment will be made by the E.C.G.D., as it is now. The hon. Member will know that this is done in association with the Council, which has detailed experience of this.
The hon. Member for Acton (Mr. Kenneth Baker) made a very interesting speech in which he said, rather unkindly, that Ministers quite frequently sounded alike. This seemed to indicate to me that even Conservatives could be quite bright if they were briefed by the Board of Trade. He asked about the 5½ per cent. export finance. The continuation of the 5½ per cent. rate is negotiated with the banks from time to time. All I can say now is that the present rate is subject to review but is being continued for the time being. All the relevant considerations to which hon. Members have referred will be taken into account during such reviews. He also asked about the Berne Union, and I hope he will accept my explanation on that point.
§ Mr. Ridley
Will the Parliamentary Secretary say whether we shall be told about the rate? She has left it absolutely open. Here is a possible further £1,600 million in guarantees for which the banks have to find the money, and we should know what is happening and when an answer will be given about the rates.
§ Mrs. Dunwoody
The hon. Member may rest assured that the House will be informed at the earliest possible moment after discussions have been held with the banks. It would be wrong for me to say, before we have entered into these discussions with the banks, what action, if any, will be taken after those discussions have been completed. He may rest assured that, when the time comes, he will be speedily informed of the outcome. He also would have asked whether the 5½ per cent. was outside the ceiling of bank spending, and I hope that I have explained that this is so.
What we are endeavouring to do in the Bill, which is a very technical Bill but 75 one which is desperately needed, is to offer to our exporters the chance to compete in world markets. The Board of Trade, in the export services that it provides, offers skilled assistance to our business men in all the markets of the world, but there will be real difficulties if other Governments are able to offer better credit terms, and this is a problem which we will come up against increasingly in the coming years.
We take the point that we are not anxious to get into a wild race along the lines discussed in the House today. Nevertheless, it would be wrong, by restricting the activities of E.C.G.D., for Her Majesty's Government to make it impossible for those of our exporters who are doing so well to gain the orders that they are obtaining by making the credit terms unacceptable. I therefore commend the Bill to the House. As with all the other E.C.G.D. debates this one, although short, has nevertheless been effective, and I hope that by the next time we discuss the whole problem of E.C.G.D. we shall be able to point to an even more successful history of the efficient unit run by this Government through the Board of Trade.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Standing Committee pursuant to Standing Order No. 40 (Committal of Bills).