§ 1.59 p.m.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)I begin by expressing my thanks to Mr. Speaker for being good enough to select my subject for one of the Adjournment debates. May I also thank my hon. Friend the Minister for his presence? The bush telegraph has indicated to me that it is at some inconvenience to himself. I appreciate his presence and I will endeavour to put before him a problem which he will be able to resolve, I am sure, if not immediately, certainly at leisure.
I am referring to the provision of what was originally called Exchequer dividend capital and is now known as public dividend capital as a means of financing nationalised industries. In 1967 the Select Committee on Nationalised Industries, under the distinguished chairmanship of the hon. Member for Poplar (Mr. Mikardo), embarked on a great inquiry into ministerial control of the nationalised industries which was subsequently published as Commons Paper No. 371 in July, 1968. This is a sort of bible for what had gone on in the nationalised industries until then. The interesting thing is that at that time the issue of Exchequer dividend capital had just been made to BOAC. This was discussed in evidence and the Committee did not find it possible to make up its mind in view of the limited nature of the evidence at its disposal.
I say this because the Treasury put in a memorandum dated February, 1967 and I understand that this memorandum affects Treasury thinking to this day. I have reason to suppose this because a Treasury witness quoted that memorandum to the Select Committee as recently as June of this year. What does the memorandum say? It says:
…BOAC has now been provided with a new capital structure. Part of this takes the normal form of loans from the Consolidated Fund; but about half is Exchequer Dividend Capital on which BOAC will pay 1776 a variable return, like a dividend, to the Exchequer. This will vary from year to year according to the conditions. … The Treasury consider that EDC"—now known as public dividend capital—is only suitable for those nationalised industries which are fully viable but which are especially subject to fluctuating returns as a result of their trading conditions, the nature of their assets, etc. It would not be suitable for nationalised industries which have difficulty in breaking even taking one year with another because it would become little more than an interest-free, non-repayable, advance. If the experiment with BOAC proves successful, EDC may be extended in the future to certain other industries.That was the view of February, 1967, and is, I think, the Treasury view today. But times have changed. The present position is that not only BOAC but the British Steel Corporation enjoys public dividend capital, and further than that, the new British Airways Board which will incorporate BOAC is also to be in receipt of a substantial sum under this heading.When BOAC was questioned by the Select Committee on this issue of public dividend capital there was the impression created from the replies—I do not want to waste time by going into these in depth, but I refer particularly to questions 654 and 641—that this was very much in its mind as a way of improving staff morale and also particularly—this was brought out in question 641—as a way of measuring its relative performance with other airlines. All of this was highly intelligible.
How far is this appropriate to the British Steel Corporation? The position of that Corporation is very different. At present the Corporation has a public dividend capital of £500 million, having been reduced from £700 million in the last Act, and a long-term indebtedness of £551 million. In the reply an hour ago which caused a certain amount of discussion, the Minister said that there would be an anticipated loss of £70 million in 1972–73 and to meet this he would deal with it in the same way as last year's loss, that is by a reduction in the public dividend capital, that is in the Corporation's indebtedness to the Treasury. He was also to grant a £150 million reduction in the indebtedness to the National Loans Fund in respect of these assets which it had taken over and which had proved to be over-valued at that time.
1777 I cannot quarrel with that in any way, but it seems that in view of this the likelihood of the cyclical nature of the steel industry's profit has yet to be shown. The Chairman of the Corporation said:
When the Government imposed price control by halving the Corporation's proposed increase in April 1971 at a time of steep inflation it was known that a substantial loss was inevitable.The loss was £68 million, and I am not animadverting to that because we know it has been a difficult time for the steel industry not only in this country but throughout Europe. In this connection I can quote the experience of the Italian Steel Corporation known as Finsider in which the Italian Government have a 51 per cent. interest. It, too, failed to make a profit in 1971–72. This is, therefore, no reflection on the British Steel Corporation, but it calls in question the Treasury's idea that this is a cyclical industry, because my strong suspicion is that the British Steel Corporation will be vulnerable in two directions.First, we have seen how vulnerable it is to Government pressure through anti-inflationary activity when its necessary price rises are restricted. Secondly, we cannot help but be conscious of the fact that if the Corporation begins to show a profit the social pressures upon it to delay the closure of uneconomic works will become irresistible. It is not in the book, but it is my firm impression that the Corporation will show a profit at its own risk, at the risk of increased public pressure on social grounds. I find it unlikely that the Corporation will be enjoying the cyclical upswing as much as it suffers from the cyclical downswing.
If we turn to the British Airways Board and the £200 million of public dividend capital which the Minister for Aerospace announced a month or so ago, we cannot but link this with the undertaking by BOAC, now part of the board to purchase Concorde. Lord Boyd-Carpenter, whom we all knew so well here as the right hon. Member for Kingston, would, as a business man, be saying to the Government, "You want me to buy Concorde. Well I think you should at least give me my money free of interest until such time as this proves to be a revenue-earning asset."
Reverting to the question of the British Steel Corporation, it seems that, in view of these almost annual reductions in 1778 capital, there must come a time when a profit is earned. I do not think it will be a true profit, but some profit will be earned and it will be wanted for depreciation, which is, in many respects, overdue. Equally, the profitability of the British Airways Board will depend on what subsidy or other form of assistance it can get in connection with its Concorde purchases. The Treasury is unwilling to concede these points. Its witness said:
It is Treasury policy not to make loans in circumstances where one knows one is in fact making a grant".That is all very well, but I wonder whether it is a realistic statement.When the Select Committee on Nationalised Industries was reporting—and here I refer to Commons Paper No. 371, page 165—it made a request for a grant of equity capital—by that I mean public dividend capital. It said:
In the Board's view there is a case for a substantial element of the debt to the Government of Nationalised Industries engaged in trading being treated as equity capital. This is particularly so in the case of a business like the railways where costs change only slowly and profitability can vary very substantially from year to year …It can say that again!I should have thought that there was a case for British Railways being allowed a grant of public dividend capital. We have just had a short discussion on the proposed third London airport at Maplin. A railway link to it will be essential. This is just the sort of investment which the railways should make and, in my opinion, it would be justified in asking for a grant of public dividend capital for this important extension which would not, in the first instance, be revenue-earning. I should have thought, too, that the British Airports Authority might well ask for public dividend capital in connection with the third London airport. The Authority has always paid its way. It is not on the cards for it to finance the costs of the Maplin development out of the revenues of the airports it controls at present. The same argument could be applied to the Gas Corporation in respect of North Sea gas.
The nationalised industries, so far from being the fiasco which the Minister for Transport Industries described, are performing an essential public service and they should have encouragement from the 1779 Government and from the country and they should have help in taking risks. That applies particular to British Railways in connection with the new trains which they seek to introduce. Those, too, could be suitably financed by public dividend capital.
I am emboldened to raise these matters because it is time that Treasury thinking on this subject was overhauled. There is a fresh wind blowing through Whitehall, particularly through Great George Street. We are lucky enough to have a reforming Chancellor of the Exchequer. A paper was published in April this year on the borrowing by the nationalised industries which was a great deal more liberal than anything about which we have heard. There was a statement in c 314–15 of the Written Answers in HANSARD for 7th August about the introduction of trading funds for areas of what was called "quasi-commercial activity in government". I should have thought that the extended use of public dividend capital would have fitted very well into this framework.
It is time that we had a fresh look at this matter, and I am sure that my right hon. Friend the Chancellor and his colleagues are the people to do it. I commend my views to them.
§ 2.16 p.m.
§ Mr. John Golding (Newcastle-under-Lyme)I am very pleased that the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) has raised this question. There is need for urgent consideration of the subject of nationalised industry finance.
Over the last two years, if not previously, we have had a most unusual situation. We have had political intervention to keep down pay levels and the levels of charges. At the same time—and this has been inconsistent with keeping down prices—we have had an insistence on the maintenance of target rates of return set by the Treasury. There has also been insistence that the nationalised industries either finance themselves from internal resources or borrow from the Government at high rates of interest. Therefore, we have had this ambivalence on the part of the Government towards the nationalised industries—high interest charges, on the one hand, and interfer- 1780 ence, on the other, together with the setting of targets which are unrealisable because of Government intervention.
The Government's intervention has made it difficult in two ways for the nationalised industries to achieve their targets. If we insist that price levels are kept artificially low, it is obvious that it will be impossible to achieve commercial targets. The Government must realise that if prices are set at an artificially low level, and if there is an element of subsidisation for private industry, they cannot expect industries such as coal, electricity, gas and the Post Office to reach the targets set for them in other circumstances.
A few words must be said about the Government's interference in pay questions. It has led, certainly in the coal mining industry, the railways and the postal service, to a considerable loss of revenue. Industrial disputes in those industries have been fought by the Government, and they have been fought far more bitterly than private employers would have fought them because private employers would have realised, long before the Government realised, the commercial damage which was being done and the damage being done to morale in those industries. One has been faced with a situation where the finances of nationalised industries have been damaged very much indeed by the way in which the Government have followed their pay policy.
In the case of the Post Office, in 1969 to 1970 interest charges were £110.8 million. By 1971–72 they had become £1612 million. This is a very big drain on the finances of the Post Office, but it is not very well known that a substantial amount of the revenue of the Post Office is going to the Treasury in terms of interest charges. When one considers the postal service, it is an absurdity at a time when the Post Office is having to ask for the writing off of possibly a £180 million loss by April, 1972, that interest charges are being increased by £4 million to £23 million, £21 million of which is going directly to the Exchequer. I think it would be a very good thing indeed, particularly from the point of view of staff morale, if it were possible for the nationalised industries not to ask that accumulated losses be wiped off but for a rather more sound political policy to 1781 be followed by the Government, and also public dividend capital.
§ 2.21 p.m.
§ The Chief Secretary to the Treasury (Mr. Patrick Jenkin)I very much welcome the opportunity to respond to the speech of my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) who raised the very important question of public dividend capital in the public sector. I will refer to some of his points in the course of what I have to say, and also to the point raised by the hon. Member for Newcastle-under-Lyme (Mr. Golding). My hon. Friend the Member for Walsall, South is the very distinguished Chairman of the Select Committee on Nationalised Industries. I understand that that Committee has been studying the British Steel Corporation and the provision of public dividend capital more generally.
I am very glad to have the chance of stating the Government's attitude to this very important element in the financing of nationalised industries. Before I come to the particular questions which have been asked in this short debate, it would perhaps be helpful if I gave a very brief account of the history and the rationale of the PDC concept as we see it.
My hon. Friend reminded the House that PDC was first used in the case of the British Overseas Airways Corporation and was introduced in the Air Corporations Bill by the previous Government in November, 1965. It was, in fact, the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins), who was then Minister of Aviation, who explained that PDC, which at that time—I think my hon. Friend is quite right—was called Exchequer dividend capital, was to deal with the problem which confronted those nationalised industries which, although basically profitable, nevertheless had to endure fluctuating results because of the cyclical nature of their business or for other similar reasons. If one were to finance those industries solely by the provision of loan capital, that would be a heavy burden on the industries which would have to pay fixed interest charges, and in a downswing period they would land themselves with deficits. This would be undesirable because they would have to borrow to 1782 pay the interest, and that would be very bad for managerial morale.
The right hon. Member for Birmingham, Stechford therefore explained that BOAC was specially suitable for PDC financing, and he gave four reasons—first, the fact that the airline business is of its nature fluctuating; secondly, that the main competitors of BOAC had themselves a substantial proportion of equity capital; thirdly, that it was an industry with few domestic social obligations; and fourthly, that it was operating in an atmosphere of strong international competition.
My right hon. Friend the present Home Secretary, speaking from that Dispatch Box as Opposition spokesman on aviation, welcomed the proposal which was made as
a sensible and valuable arrangement for BOAC, an experiment which … we may well find to be applicable to other Government finance corporations".He went on:I hope that this is an experiment which will prove successful and will be carried through."—[OFFICIAL REPORT, 22nd November, 1965; Vol 721, c. 51.]Experience has shown that the BOAC experiment has indeed been reasonably successful. As the House knows—and my hon. Friend reminded us—the Corporation, in common with other airlines, has been going through a bad patch during the last year or two. Nevertheless, it is a fact that dividends on its PDC compare favourably with what the interest would have been if, instead of PDC, the capital had been in the form of National Loan Fund loans. In fact, up to 1970–71 it would have been true even if there had not been a reconstruction of the Corporation's capital in 1965. BOAC's PDC has been taken over by the British Airways Board and, as my hon. Friend indicated, more is to be issued. I shall come to that in a moment.I turn to the British Steel Corporation, which is so far the only other nationalised industry to have had Public Dividend Capital. Under the Iron and Steel Act, 1969, some £700 million of the Corporation's commencing capital debt of £834 million was converted to PDC. At the time, the Corporation argued that this was desirable, firstly because in comparison with equivalent manufacturing enterprises, both in this country and 1783 abroad, this would be appropriate; and secondly, because the steel industry fell squarely within the description of industries which are basically profitable but which undergo cyclical fluctuations. The Government agreed with this argument, and Parliament accepted it. This was the classic argument for public dividend capital. Accordingly, the 1969 legislation made provision.
What I would say to my hon. Friend is that it in no way detracts from the validity of the argument that, in the case of the British Steel Corporation, the results, for reasons which I think are well known, have been much worse than expected and that, in consequence of the capital reconstruction made this year, part of the public dividend capital was written off.
My hon. Friend went on to argue that the British Steel Corporation should not be regarded as being a cyclical business, and he advanced two arguments, the first being that its prices were bound to come under Government pressure. I would remind him that under the rules of the Coal and Steel Community, to which we shall be a subscriber next January, the opportunities for the Government to influence the pricing policy of the Corporation will be very severely curtailed. As for the argument that social pressures would in any event preclude the Corporation from making a profit in a good year in that it would not be allowed closure of uneconomic plant, only time will tell. My hon. Friend's fears may be justified. But I submit that it would be wrong to plan on the footing that the Steel Corporation has to endure losses in its bad years but must not be allowed to make up those losses and earn reasonable profits in the good years. On the whole I believe that, in spite of what he said, the arguments I have been adducing on the general question so far are widely accepted by those who follow these matters.
There are, however, two lines of comment which have been made. One has not been put in this debate, and therefore I shall deal with it very briefly. It is that PDC is a soft option and that it is a way in which the Government can finance nationalised industries in a form which does not require regular servicing. I 1784 would argue that it is certainly not a soft option and should not be allowed to become a soft option. It should not be used to finance industries which cannot service their capital. It would be more honest, and it is the normal practice, to pay grants in those circumstances, and this is the way in which Parliament in the past has felt it right to deal with this problem.
Obvious examples are British Rail—the Minister for Transport Industries on 27th July last announced financial support for the railways to meet the situation following the strike and wage settlement—and the National Coal Board, which is facing similar circumstances. My right hon. Friend the Secretary of State for Trade and Industry made an announcement last March about grant-aiding the National Coal Board. In these and similar cases it would be wrong to finance the losses by PDC. There would be no prospect of profitability. The losses are not due to cyclical fluctuations but to long-term considerations, and there is little or no prospect of dividends in later years.
It is right to point out that PDC can in no sense be an alternative to realistic and demanding financial targets, if the Government continue to set targets for these industries. Only today my hon. Friend the Minister for Industry in a Written Answer announced a new target for the British Steel Corporation. Therefore, in answer to the hon. Member for Newcastle-under-Lyme, I maintain firmly that PDC should not be taken as a soft option, simply as a means of putting interest-free capital into the hands of nationalised industries.
The argument advanced by my hon. Friend, and to some extent by the hon. Member for Newcastle-under-Lyme, was in the contrary direction, that PDC could with advantage be extended much more widely to meet those cases where paying interest on loans would impose a severe burden on the industry. On this view, so the argument goes, the Government are wrong in insisting that only industries with cyclical businesses are suitable for PDC. My hon. Friend suggested the financing of the high-speed rail link to Maplin, the British Airways Board, and the prospecting for North Sea gas by the Gas Council. I see some difficulties in these suggestions. Take, for instance, 1785 British Rail; unless one thought that the enterprise as a whole was basically profitable and that the only reason for its difficulties arose out of the short-term financing of new development, I do not see how it could be a case for PDC. We are awaiting the study on British Rail which we expect to have in the autumn, but British Rail seems to be in a serious long-term financial situation.
The gas industry is a public utility. Although its results differ from year to year, it is not a cyclical industry in the same way as are the airways. The Government certainly do not rule out the extension of PDC to industries other than steel and the British Airways Board. On the lines already indicated a case will always be considered. It is right to proceed cautiously. Our experience so far is limited.
My hon. Friend referred to Concorde and to the statement of 25th May by my hon. Friend the Minister for Aerospace announcing that BOAC is buying five Concordes and that the British Airways Board will have up to £200 million of new PDC over the next few years. My hon. Friend stressed—and I repeat—that this is in no sense a subsidy for operating Concorde. I have already pointed out that the BOAC experience with public dividend capital has been successful and that the dividends it has declared over the years compare favourably with what would have been paid had BOAC been paying loan interest.
My hon. Friend in his announcement of 25th May explained that the grounds for giving more PDC to the British Airways Board were to bring the debt-equity ratio for the Board as a whole to about the level which the Government thought right for BOAC alone. This reflects the fact that the Board as a whole is influenced by the factors which led to the introduction of PDC for British Overseas Airways.
British European Airways has in the past argued that it, too, should have public dividend capital, and the Government are taking the opportunity presented by the formation of the BAB to achieve the right overall ratio for the BAB as a whole. We are confident that the BAB will pay dividends which depend on its overall profitability and prospects for each year.
I hope that my hon. Friend feels that I have answered the questions which he 1786 put to me and that I have made the Government's position clear. As I said, we certainly do not rule out the extension of public dividend capital to industries other than those to which it has already been issued. As I said at the outset, this subject is under consideration by the Select Committee on Nationalised Industries, and my hon. Friend the Member for Walsall, South, as Chairman of that Committee, is perhaps better placed than any of us to know the line of thinking which the Committee is developing. The Government look forward with great interest to reading the results of the Committee's deliberations when they are published, not least those on this interesting and important question of public dividend capital.