HC Deb 15 March 1979 vol 964 cc903-16

1.51 a.m.

Mr. Norman Tebbit (Chingford)

fancy that this section of the debate will be somewhat like the Bible and Shakespeare—not that the prose will be quite to the same standard, I fear, but it will be full of quotations.

I was interested to see today that the noble Lord, Lord Beswick has spoken about the Treasury memorandum which has led to re-energising the debate over British Aerospace's programme of civil air transport development. The rules of order prevent me from commenting on the Hawker Siddeley 146 programme. since the hook upon which this section of the debate is hung is that of the £50 million to be paid to British Aerospace under section 45 of the 1977 Act.

Right at the beginning I should like to re-establish the common ground which I established long ago with the Government when I spoke on behalf of the Opposition in the debate on 23 January last year on the future of the civil aircraft industry in Europe. Some of that common ground was well described by the Minister of State: I repeat, however, that what the Government will be looking for is firm evidence of commercial viability."—[Official Report, 23 January 1978;Vol. 942, c. 1116.] That was his version of what was required of any programme into which British Aerospace entered.

Since then, the long and at times difficult negotiations to which the Minister of State referred in that debate have culminated in the re-entry of British Aerospace into the Airbus consortium from which the Labour Government of 1966 had withdrawn. It was agreed then that not only would the private venture of the old Hawker Siddeley Aircraft Company into the A300 project continue but that the new nationalised Corporation would become a full partner in the A310 programme as well.

Thus, just over a month ago, in the Second Standing Committee on Statutory Instruments, &c., I was able to give the assent of the Opposition to the payment of the £50 million to which this debate refers. The Under-Secretary of State told us then that British Aerospace would need to invest £250 million in the A300 and A310 programmes. He said: British Aerospace estimates that by 1983 it will need to invest a further £250 million at 1978 prices. We believe that this is not an opportunity we can afford to let slip through our fingers. That is why we decided to agree to British Aerospace's request for assistance in order to improve the immediate return on its investment. The Minister was a little unclear how that first £50 million would feature in British Aerospace's books. I understood him to say that it might be grant, wholly or partly loan, or public dividend capital, or a mixture. He added: Hon. Members can be assured that through our providing the money in this way the necessary financial resources for joining Airbus Industrie are thus available to the corporation. At the same time, the Government will be able to maintain, through the setting of appropriate financial targets, the necessary degree of financial discipline over the whole field of British Aerospace's operations. That was fairly clear.

Having quoted the Minister, I think it excusable for me to quote my own words in that debate: We should certainly not want to prevent the orders from being passed, because to do so would be to cripple British Aerospace's programme of entering the Airbus consortium. It is very difficult for us to judge whether the Airbus consortium will be a profitable business for British Aerospace. We simply do not have access to the figures which we would need to make any judgment on that matter…we must to a considerable extent trust in the judgment of the board of British Aerospace, and we have to put some trust in the judgment of the Ministers who have been approached by British Aerospace for financial backing for this project. Later I asked, as had my hon. Friend the Member for Chertsey and Walton (Mr. Pattie), what return the taxpayer could expect upon his investment—I think not an unreasonable request by an investor. Unhappily, we did not receive an answer on that occasion. The Under-Secretary of State half answered the question when he said: These projects have been considered very carefully indeed. I remind hon. Gentlemen that we have already said that the financial objective for 1978 for British Aerospace was to make a 20 per cent. return on net assets. We have announced in Parliament that that is the kind of stringent financial discipline that we propose to apply to projects into which British Aerospace may venture. Therefore, the hon. Gentleman was not actually saying that there was to be a 20 per cent. return on this venture. But he was saying that 20 per cent. was the kind of"stringent financial discipline"that he proposed to apply to projects into which British Aerospace would venture.

A little later he said: British Aerospace is satisfied that the prospective return on its investment is adequate. That has been considered very carefully indeed. Were we to conclude from that that the Minister meant that the return on this project was expected to be 20 per cent.? It is possible that one could do so.

Subsequently, in a series of exchanges, I asked the Minister to say whether he meant just that, that the investment in the A300 and A310 programmes would give a 20 per cent. return. At this time of night I shall not quote extensively from a sterile exchange. It is sufficient to say that in the final exchanges the Minister said: I recognise that the hon. Gentleman "— he was referring to me— is trying to draw me. He will obviously realise that the final level and the form of the objectives of British Aerospace have yet to be set out. I said: So it is not to be 20 per cent.", and the Minister replied: I am not detracting from that at all. I am simply saying that that is the kind of return which has been set."—[Official Report, Second Standing Committee on Statutory Instruments, &c, 7 February 1979; c. 16–32.] So at the end the hon. Gentleman was, if anything, backing off from what he had said earlier.

At that stage I more or less made up my mind that we should have to wait till after a general election to get our hands on the figures and see how the Airbus venture fitted into the 20 per cent. target.

I can well understand that on a long-term programme the Minister may have a range of investment returns, perhaps from a worst case of as little as 10 per cent. to a hoped-for 25 per cent., and he was reluctant to commit himself. The House may therefore understand my shock and disappointment when I read in The Guardian that Sir Douglas Wass and the Treasury saw—again, I quote from the Treasury memorandum—that participation in the proposed A310 airbus jet will involve a negative cash flow of £300 million by 1983 "— that is no particular surprise— and a loss at today's prices which could be£110 million. A loss of £110 million, and no mention in the Treasury memorandum of any prospect of profit at all!

That came on top of a series of unnerving accounts from well-informed people who had told me of the anxieties of the German Government over the scale of their prospective losses in their share of the same project. Indeed, as the Minister knows, the German Government are tending to subcontract out part of their work on the Airbus to other countries to mitigate the loss which is falling, apparently, upon the German taxpayer.

All of us here—I think that I speak for everyone in the House, not just for those present tonight—badly want British Aerospace to be a success. I want it. The Minister wants it. We all want it. But the matter to be cleared up tonight is whether it is heading for a 20 per cent. positive return on the Airbus investment, as the Minister has implied, or a possible £110 million loss, with no prospect of profit, as the Treasury fears.

I do not believe that the Treasury invented the figures in Sir Douglas Wass's letter to his colleague Sir Peter Carey at the Department of Industry. I do not believe that the Treasury goes about inventing figures like that. If the Treasury just invented the figures, I fear to think of the doubts which will be cast upon future Treasury figures produced by Ministers at the Dispatch Box.

Obviously, the Government do not believe that. Clearly, the Prime Minister still has confidence in Sir Douglas Wass, or he would have been fired. The Treasury figures came from somewhere other than the back of an old empty cigarette box. The conclusion must be that the Treasury obtained its figures from the Department of Industry and from British Aerospace.

The question which that poses is simple but important. How could the Minister assure the House that the return was expected to be 20 per cent., yet the Treasury concluded that it was expecting a loss of up to £110 million, looking at the same figures from the same source, since there was no source for the figures save British Aerospace and the Department of Industry?

Is this difference a difference between the Department of Industry view and the Treasury view over sales prospects, over possible development costs, over production costs, or over currency level forecasts? Any of those could be an explanation for a wide divergence of view, but we are entitled to know which it is.

We have been encouraged and delighted about the orders which have been gained recently for the A300 and the A310. We wish both aircraft well. Tonight I am not speaking officially for the Opposition, but for myself. I want to see British Aerospace raise the remainder of the cash to go ahead with a profitable programme. I doubt whether any of my colleagues thinks differently.

The Minister can get away with a series of evasions tonight because there is no vote—and he knows it. He also knows that we shall come back to this issue if he does that. Within eight months, at the most, we shall be on that side of the House, going over the books and examining the estimates supplied by British Aerospace. We shall try to work out how the Treasury and the Minister came to such different estimates of the profitability of this project.

I hope we shall conclude that the Treasury took an unduly pessimistic view, but it would help us to give support to British Aerospace if the Minister could explain how such a divergent view arose in two different Departments which must have used the same basic statistics. Those figures could have come from only one source.

2.7 a.m.

The Under-Secretary of State for Industry (Mr. Les Huckfield)

The hon. Member for Chingford (Mr. Tebbit) has tried to put his case reasonably and co- herently but it will be considerably longer than eight months before he has a chance to look at the books from this side of the House.

The subject has the merit of being topical. Stories have circulated about a document, allegedly prepared by Treasury officials, which appeared in The Guardian. I welcome the opportunity to comment on that and to put into perspective some of the arguments which the hon. Member has made tonight.

We must remind ourselves of a few basic facts, unpalatable though they may be to the hon. Member. Before the aerospace industry was taken into public ownership, it was gradually withdrawing from the market for civil aircraft. We can have little doubt about that because no new major civil airliner project had been launched since the early 1960s. The Trident programme was coming to an end.

The hon. Member knows better than I, because of his interests in the industry, that only because of the support of the Labour Government were the HS146 and the BAC 1–11 kept alive. It is true that Hawker Siddeley as a private company had a stake in making the wings for the Airbus A300—but only as subcontractor. It did not have any rights in the management of the programme.

Since nationalisation, British Aerospace has launched or joined two new projects—the BAC 146 and the Airbus A310. This truly reflects the determination of British Aerospace—which the Government back—to maintain a presence in the civil aircraft market. I wish that we had had the same determination expressed a little more often from the Opposition Benches.

I am sure that the decision of British Aerospace is right. I am sure, also, that the Government's action in backing that decison was right. It is right for British Aerospace and for the whole of the aerospace industry. I include in that the engine and equipment manufacturers, who, the hon. Gentleman knows better than I do, would be considerably weakened if there were no strong civil air-frame industry. To take any other view would be to take a further step towards the de-industrialisation of the country.

What we are talking about is the largest aerospace company in Europe. It now has a wider product range than any other aerospace company in the Western world. A good deal of that arises solely because of nationalisation. Its products include military aircraft, guided weapons and civil aircraft. I say firmly to the hon. Member that in all of those areas British Aerospace has competitive products to offer. For evidence of that we have only to look at the substantial increase which has taken place in the order book since nationalisation. We want to develop a coherent strategy. We do not want British Aerospace to become a specialist military manufacturer. We can see the difficulties in that when it is necessary to depend on orders from places such as Iran.

We want British Aerospace to draw strength for its business from all three areas that I have mentioned—military and civil aircraft and guided weapons. We believe that this means that British Aerospace needs to maintain a substantial capability for the design and manufacture of civil aircraft. We want to keep our design and manufacturing teams together because we believe that they are winning teams.

Tory Members have pressed us hard on numerous occasions—the hon. Gentleman has done so from the Opposition Front Bench—to take decisions. We have been urged to take a decision this way or that. The hon. Gentleman even—at one stage last year—led a team of his hon. Friends to my right hon. Friend the Prime Minister to urge the Government to support the British Aerospace industry. He and his colleagues have urged the Government to take a longer-term view. He is on record as saying that we would have to give support to a British aerospace industry in future.

Mr. Tebbit

Purely as a matter of fact, I have never led a deputation of my colleagues to the Prime Minister on this matter.

Mr. Huckfield

The hon. Gentleman may not have been in the lead. It is very modest of him to say so—

Mr. Tebbit

Nor have I been led.

Mr. Huckfield

I am sure that if the hon. Gentleman asks his colleagues he will find that those deputations took place and made that very point.

It ill-behoves the hon. Gentleman to attempt to berate—even in the reasonable manner that he adopted—the Government for trying to spend money on supporting civil aircraft projects when, time and again, the Opposition have urged the Government to support the British aerospace industry and to support one project or another. That is the kind of pressure that they have maintained. That is the nature of the parliamentary questions which they have been tabling. The hon. Gentleman knows as well as I do that we had many debates on the choices facing British Aerospace last year. All the while we were urged to take decisions. We were urged to look to the long-term future of our aerospace and aircraft manufacturing capability.

The hon. Gentleman knows that the choice came down to roughly two options. British Aerospace could either have become a risk-bearing subcontractor to Boeing, or it could have joined Airbus Industrie. It rejected the link with Boeing on strictly commercial grounds. The hon. Gentleman laid great stress on commercial viability. In the view of the Corporation, with which the Government concurred, what Boeing was offering would not have maintained its long-term design capability. It would have used only a limited range of skills. It would have required the Corporation to match wide fluctuations in production volume over one of Boeing's programmes. It would not have had the ability, which Boeing possesses, of switching resources between programmes. Above all, we always said that we wanted to preserve as much as possible of our own design and manufacturing capability.

It was for reasons like that—again, we came under considerable pressure from the other side of the House to take these kinds of decisions—that British Aerospace decided that the more attractive option was to join Airbus Industrie as a full member. In doing so, it became a full member of what seems certain to be one of the major forces in the civil aircraft market during the 1980s and the 1990s and, we hope, beyond. The hon. Gentleman referred to the fact that Airbus Industrie has already shown that it is a powerful force. Sales and options for the A300 airbus will soon touch the 200 mark. With the entry of British Aerospace, Airbus Industrie will now become even stronger. British Aerospace will be contributing to the growth of a powerful European civil aircraft industry. In the longer term that will enable Europe to collaborate or compete with American manufacturers on a basis of equality. That basis of equality is an important point, as I am sure the hon. Gentleman recognises.

I was disappointed with the pocket calculator approach which the hon. Gentleman adopted to these projects. He knows that a wide variety of assessments have to be made before reaching a decision. To adopt the narrow basis of approach, as he has tried to do, belies his considerable experience in these matters.

The hon. Gentleman referred to the Treasury document. I do not want to go into that. I say only that I deplore the way that it has been treated by the Opposition. Even the hon. Gentleman—I shall be quoting remarks he has made—knows that the financial success of an aerospace project depends upon a number of factors such as sales, costs, prices and exchange rates. Over the long life of an aerospace project, these can vary considerably.

There is a range of possibilities. The hon. Gentleman referred to this. In the case of Airbus Industrie, British Aerospace knew that there were uncertainties, but its carefully considered commercial judgment was that the risks of going ahead were less than the benefits to be gained. This was its recommendation to us. The Government, in turn, made a careful and thorough assessment of the project, of which the Treasury assessment was part. We decided to accept the commercial judgment of British Aerospace.

It was strange to hear the hon. Gentleman talk about ranges of possibilities and then urge me to give more details. It was particularly strange in view of what he said last night in the House about Rolls-Royce. Referring to Sir Kenneth Keith, the chairman of Rolls-Royce, he said: He goes so far as to attach figures in relation to the profitability of Rolls-Royce and, therefore, of the National Enterprise Board for each cent of movement in the sterling-dollar parity. We have never been given those figures by Ministers. They must be available. I could quote them, but I do not think it is appropriate to do so since Rolls-Royce Ltd. may not want those figures to be widely broadcast although I suspect that the figures are broadly known to most people in the business."—[Official Report,14 March 1979; Vol. 964, c. 529.] If what the hon. Gentleman said last night is appropriate for Rolls-Royce, for the reasons that he gave, I would have thought that the mode of consistency and the need to maintain some kind of continuity requires him to advance the same argument in the cause of British Aerospace.

If one were to look only at the risks involved in a project, one would not undertake many projects. In the world of civil aircraft, there are few guaranteed profit-makers. If there were, someone would probably be making them already. Both the hon. Gentleman and myself are familiar with the Boeing 747 project. We have flown in the aircraft many times. Even that project, which is in service with airlines all over the world, is still not making a profit for Boeing. It has been manufactured in Seattle since the 1960s.

The truth is that British Aerospace and Ministers had to consider this range of possibilities, knowing that many of the factors involved were not certainties. However, I reaffirm that British Aerospace decided that the risks were worth taking on commercial and industrial grounds.

The hon. Gentleman referred to the £50 million assistance under the Aircraft and Shipbuilding Industries Act. My answer is the one that I gave him when we discussed some of these matters in the Statutory Instruments Committee. I said to him then, and I say now, that Airbus Industrie is still engaged in breaking into the civil aircraft market and in pushing up its rate of production of aircraft. Consequently, British Aerospace's membership of Airbus Industrie will involve it in losses in the early stages. We have never tried to conceal that.

The returns will come in only slowly at the beginning. I am sure the hon. Gentleman will recognise that as a short-term investment membership of Airbus Industrie has never been seen as a money spinner. However, the board of British Aerospace is deterined that its industry shall be profitable and that it shall pay a proper rate of return on its capital. That determination is buttressed by the requirements of the Aircraft and Shipbuilding Industries Act, namely, that British Aerospace's financial objective should produce an adequate rate of return on capital.

British Aerospace is currently a highly profitable concern, with a rate of return of about 20 per cent. on net assets. That rate of return will decline over the next few years. That is not because profits will fall, but because the capital employed in the business will increase greatly as work on the new civil programme builds up.

British Aerospace will fund a substantial proportion of its capital expenditure from its own cash flow. Money from external sources will be provided on strictly commercial terms. Loans from the national loans fund will carry the appropriate rate of interest. Public dividend capital will be expected to pay a rate of dividend no less than the interest that would have been paid had the money been advanced as loans. British Aerospace does not want, and the Government would not be prepared to give it, public money as some sort of free handout.

That is the background to the Government's decision to give British Aerospace £50 million assistance under section 45. I freely concede to the hon. Gentleman that in the absence of that assistance membership of Airbus Industrie would have imposed a strain in the short run on British Aerospace's finances. The hon. Gentleman has been going wrong in believing that it is sensible to treat a major strategic decision—we consider the decision to join Airbus Industrie as a full member as such—in isolation and in using only pocket calculator figures, as he has been doing tonight. I say to the hon. Gentleman again that we do not build aircraft with pocket calculators.

Mr. Tebbit

The Minister is sliding away from the central question that I put to him, namely, whether in the long run the investment of money in the Airbus Industrie project will show a return of 20 per cent., which is the return that he was implying we would get when we discussed these matters in Committee. If he wants to make a case for our being in the civil airliner business regardless of whether we make money, there is such a case to be made. I do not say that we would agree with it, but I recognise that there is that case. However, he has until tonight advanced the case on the basis that we had embarked on a profitable venture. Is it a profitable venture?

Mr. Huckfield

I do not know how many more times I shall have to say it, but British Aerospace must maintain a profitable business, a business that pays its way and generates its capital. That the Corporation is determined to do. Within that constraint it must begin to frame a long-term strategy that does not leave it unduly dependent on a single market or a single type of product. It is the commercial judgment of the British Aerospace board that such a strategy entails maintaining a significant presence in the civil aircraft market. It is considered that the right way of maintaining that presence is as a member of a strong European civil aircraft grouping, making full use of the wide range of skills available in British Aerospace; in other words, by joining Airbus Industrie.

That is the type of consideration that motivated the board of British Aerospace, and that is why the Government are backing the board's judgment. I strongly suspect it was that kind of consideration that led Opposition Members in the Standing Committee on 7 February, including the hon. Member for Chingford, to raise no real objection to the draft order under section 45 empowering the Government to make assistance available to British Aerospace.

It is noticeable that when the hon. Gentleman quoted his own words he omitted a significant sentence. He omitted the following sentence from column 21: at this stage to rule out entry would seem to us to be wrong. He could also have quoted his hon. Friend the Member for Chertsey and Walton (Mr. Pattie), who told the Committee: We all know of the importance of the Airbus project. He could also have quoted his hon. Friend the Member for Stretford (Mr. Churchill), who said: There is no doubt that we all welcome the involvement of British Aerospace in the Airbus Industrie programme."—[Official Report. Second Standing Committee on Statutory Instruments, &c,7 February 1979, c. 19–24.] That was the kind of comment made by Opposition Members in that Committee. That was the praise and support that they gave. Therefore, the hon. Gentleman's comments in this debate were not on all fours with the support that he expressed in that Committee.

It will be noted that I have said nothing in this debate about employment. I took that course deliberately, because I wanted to emphasise two things. The first was that we took the decision to join Airbus Industrie, as did British Aerospace, on commercial and industrial grounds. But that is not to say that there are no employment consequences. British Aerospace expects that, depending on sales, peak employment on the Airbus work will represent about 5,000 jobs at the factories and a smaller number at their United Kingdom suppliers.

The second point I wish to emphasise is that the case for decisions of the sort that we are discussing tonight does not stand or fall only on financial calculations, important as those are. Both British Aerospace and the Government believed, taking account of both the financial and the wider arguments, that it was right to join Airbus Industrie. We announced that decision in August last year. Since then the prospects of the Airbus programme have significantly improved. Substantial new sales have been made, and additional airlines customers have been secured. By their decisions last year British Aerospace and the Government gave a vote of confidence in the future of the British aircraft industry in the civil aircraft market. All the signs are that that confidence will be fully justified.

We in the Department, and the Government in general, have demonstrated that confidence. I wish that the hon. Gentleman in this debate had continued the lack of opposition that we experienced in the Standing Committee to which I referred. If we follow through what the Opposition were saying on this topic last year and the pressure which they exerted to take the decision that we have now taken, it appears that the hon. Gentleman has departed from the line which his party has been practising, and, indeed, preaching.

Mr. Tebbit

I cannot understand why the Minister is unable to see the problem. In Committee the Minister undertook to ensure that not only the whole of British Aerospace would yield a 20 per cent. return on net assets—which one would expect because of the profitable military business—but that there would be a 20 per cent. yield on assets invested in the programmes—each of them. I have not referred to the HS146 because it is outside the scope of this debate, but there was to be a return of 20 per cent. Because the Treasury contradicted that, we question whether the Minister was correct in saying what he did. We welcomed that programme, particularly because the Minister said that it would be profitable and return 20 per cent. Now he has moved away from that.

Mr. Huckfield

The Government have not changed one word, dot or comma of my statement in Committee upstairs. The hon. Member has been in the House for some time, and he knows the ropes. He knows that if there is a time to object to something going through, that time is afforded. He had that time upstairs, but he did not use it. In fact, he complimented us then. It is too late for him to change his mind now.