ANNUAL DETERMINATION OF RATE OF RETURN ON NET ASSETS (Hansard, 12 July 1976)

§ Mr. Nelson
I beg to move, That the clause be read a Second time.
I hope that this clause will be considered sympathetically because it deals with the important matter of the future prosperity of British steel.
The current target of BSC of 8 per cent. of net assets for the four years 1972–1977 as has become increasingly obvious, cannot be matched by the performance of the corporation. The question of a proper target for the corporation, or any other public sector industry, has never received proper discussion in this House at a time when the level of public funds to those industries has increased substantially. The matter is worthy of greater consideration and attention than some Labour Members seem to be affording it on this occasion.
Section 14(4) of the Iron and Steel Act 1975 provides that The Secretary of State may from time to time determine — the rate of return on net assets of the BSC. That in no way pre-empts what is proposed in the new clause. We feel that as there is no requirement that the Secretary of State shall determine an adequate rate of return, or a rate of return at all, this should be instituted in the legislation affecting the financing of the corporation.
Section 14 of the Act is defective in a number of major ways. First, there is no requirement that the Secretary of State shall set a target for the corporation—a corporation which has utilised over 1,000 million of taxpayers' money. The proper machinery should exist requiring a target to be set so that we should be able to see whether that target is a proper one each year, measured by the performance of the corporation.
The present target is meaningless. The pre-tax profit of the corporation has varied considerably in the last four years, and so has the return as a percentage of net asset value. In the years 1973–74 and 1974–75 the BSC made a pre-tax profit of £56 million and £89 million respectively. In both years it had net assets of £756 million and £879 million, thus producing a return in both years of 7 per cent. of net assets employed and 10 per cent. But in the latest year under con- 286 sideration, for which the Secretary of State has produced and published figures, the loss for the corporation amounted to £245 million. That resulted in eradicating a surplus achieved in recent years and in writing down the net assets of the corporation. Although the public dividend capital was increased, producing net assets of £947 million, it was not sufficient to avert a return on net assets employed of minus 25 per cent. That is the factual performance of the British Steel Corporation over the past three years compared with the 8 per cent. target which was set about four years ago and which has been reflected in an actual performance of an average of minus 2.6 per cent.
I appreciate that the figures are dry, but they are important because they involve substantial amounts of money and we have a proper remit both to scrutinise the efficiency with which the corporation tries to carry out the targets set for it and its ability over a period of time—three or four years now—to measure up to that prospect. We now have the prospect for the year ahead of a nil return for the corporation. We hope that it will break even this year, but it will by no means measure up to the 8 per cent. set for it.
There is no fixed period under the 1975 Act for achieving a target, and there is no indication whether the target is to be an average target over a number of years or a target for each year within a period of an investment programme or a period of accounting under consideration. There are no means by which Parliament must be made aware of the target, and therefore there is no ability on the part of Parliament to assess the corporation's results. In our view it may be even more meaningless as the debt-equity ratio of the corporation has increased to the current level in recent years and the losses incurred by the corporation have written down the total assets and therefore made the target, which is a percentage of net assets, increasingly meaningless. I feel, and I hope that this view will be shared by hon. Members on both sides of the House, that an adequate target can be both set for and required to be implemented by the British Steel Corporation.
During the Second Reading debate the Minister in answer to the hon. Member 287 for Motherwell and Wishaw (Dr. Bray) said: Of course we have to approach these matters responsibly and to have appropriate financial targets."—[Official Report, 26th April 1976; Vol. 910, c. 108.] On 29th January of this year in answer to a Question the same Minister said that the four-year target of 8 per cent. that was set in 1972 was still operative. I recognise the problem that the Minister has had and the lack of financial information that was mentioned in an earlier debate, but we feel that this figure has become increasingly meaningless, and we find those two statements incompatible. We feel that not only should a meaningful target be set for the corporation but that it should be instituted on a regular basis and be a requirement for future Governments.
Without the discipline of an annual rate of return the affairs of the corporation will drift into policies of hunch and blind faith. The Financial Times last week reported that the cost of the investment programme of the corporation had risen from about £3,000 million estimated in the 1973 White Paper to between £5,000 million and £7,000 million—a fantastic increase which tops the estimate of the Secretary of State during the Second Reading debate and compares dismally with the original targets set in the 1973 White Paper.
It is almost certain that the corporation will fail to achieve the target that has been set for it, and also that it will fail to achieve its target of 40,000 job redundancies by the end of 1977. What chance is there of the corporation achieving any target against that background of performance?
We nevertheless feel strongly that it is an important financial discipline to impose on the corporation that such a requirement be given legislative effect and that consideration be given to machinery for trying to work out on a budgetary basis year by year what an appropriate return should be. That is why, in the words of New Clause 5, we have set the requirement that the Secretary of State shall consult the corporation and, indeed, that annually he will determine that rate.
The Government have concluded an agreement with the trade unions on wage restraint for the forthcoming year. They 288 have set and raised their expectations of growth in the GDP in the current year, yet they have no meaningful target for the performance of the BSC, which consumes 8 per cent. of the public sector borrowing requirement and the public debt for the following years. This corporation employs 213,000 people, and we are seeking to double its borrowing powers to £4,000 million, yet no meaningful target exists, and there is no requirement in legislation that such a target should be met on a regular basis.
Sir Charles Villiers, who described his appointment to the chairmanship of the BSC as 'a dream come true", certainly could not make that remark about the corporation's performance target. When describing his style of management, he said that, after careful monitoring, he believed in very heavy penalties for failure.
Yet we, as the trustees for the public purse, have no adequate powers of monitoring, of providing penalties or indeed, of knowing what amounts to failure or success in the performance of the BSC. This is a problem with which we have grappled for some time, but we have sought, on a piecemeal basis, to try to obtain a critical opinion of the performance of the corporation, and the criteria set for it.
We believe that the public sectors of British industry are embarking on massive investment programmes in steel, coal, oil, gas and communications, and the new generation of capital plant will draw on public finance to an unprecedented level. In these circumstances, the time has come to discard the inadequate monitoring, budgeting and financial objectives of yesterday, and to introduce a tighter and more positive encouragement to these corporations to fulfil their potential.
As a means to this end, I recommend the new clause to the House.

§ Mr. Swain
On a point of order, Mr. Speaker. Would you give a ruling on whether a Division can take place on this clause when so few Opposition Members are present?

§ Mr. Speaker
Order. No one has called a Division yet.

§ Mr. Heseltine
Further to that point of order, Mr. Speaker. I was under the impression that the Minister was going 289 to do us the courtesy of replying to the debate. I am sure it would help the House if we knew whether we were to receive the customary reply.

§ Mr. Speaker
I have answered the point of order of the hon. Member for Derbyshire, North-East (Mr. Swaint). I do not know the answer to the point raised by the hon. Member for Henley (Mr. Heseltine). Is the Minister about to reply?

§ Mr. Kaufman
I was interested to hear how the Opposition are proposing to add more "crucial legislation" to the Bill. As I have listened I have wondered more than once why such proposals were not included in the Iron and Steel Act 1972.
The requirement to set a target rate of return for each year, as the hon. Member suggests, would amount to much the same thing as publishing a profit forecast for the year ahead. It would not be likely to stimulate better performance than present practice, which is to set a target for a longer period, taking into account the overall performance to be expected and the fluctuations due to the steel demand cycle. Many management decisions in an organisation the size of the BSC take time to work through and to be reflected in the financial results.
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To give the management reasonable flexibility and so place on it proper responsibility for performance, the target period must be sufficiently long. The restraint of having to secure a specified return on a one-year horizon would almost certainly lead to a style of short-term decision-making which would neither be right for the corporation nor in the wider national interest. The Government already publish a forecast of funds available to the corporation from internal resources a year ahead in the Financial Statement and Budget Report. This does not give quite the same detail as a profit forecast, but is nevertheless an indication of likely performance.
A statutory requirement on the Secretary of State to inform Parliament of financial targets he has set is hardly necessary, since the practice is for such targets to be announced in Parliament. In any case, the corporation makes a practice of stating its target in each annual report. Since 290 the main effect of this new clause would be to place an undesirable short-term constraint on the operations of the BSC management, it should be rejected.

§ Mr. Michael Marshall
It was good to hear the Minister of State on his feet at last. We had been looking forward to it all evening. I am sorry that he has dismissed the new clause. On Second Reading, particularly on the urging of the hon. Member for Motherwell and Wishaw (Dr. Bray), there was clear evidence of a wide interest on both sides of the House in the question of looking at the financial target. The financial target having brought a return in only two years out of the last five, it is increasingly a matter of irrelevance, if not for scorn and derision.
It would have been helpful to have more constructive thinking from the Government and an indication that they were prepared to look seriously at a review of the target. I understand that the Minister, seeking to keep the proceedings short, has had to take a number of short cuts through his speeches, but that is the Government's problem in bringing business forward at this late hour. [Interruption.] If hon. Members wish to intervene, we shall be glad to listen to their speeches. Our own speeches have been sound and well-argued and they will well repay study in Hansard.
There is a serious point at issue here. I hope that the Government will think again. We have not sought simply to talk for the sake of talk. This is a serious question. It will come up again and again. It is bound to come up, for example, when we are looking at the final tranche of borrowing. We shall want to look again at this question when we come to the £3,000 to £4,000 million borrowing level. I urge the Government to think again about this matter because it is an important principle, but for the moment we believe that we have given it a proper airing.