§ Mr. D. N. Campbell-Savours (Workington)Last week The Observer led with the story, "Tornado Rip-Off". the article purported to investigate Britain's biggest ever arms deal and the middlemen who fixed it. I have to admit that the article was well written and I tender no criticism of the journalist who wrote it, except to say that I am sure that he will find that the elusive Mr. Charles Langley resides at Lonrho headquarters.
The article alleged that the British armaments industry, backed by the Government, is fuelling the middle east arms race. In referring to arms orders potentially worth as much as £150 billion and while attacking the basis for the deals, the newspaper stated:
behind the cheers for this most profitable defence deal in our history lie moral and financial problems.The newspaper questioned what it called huge commission payments, the morality of selling vast quantities of sophisticated weapons to middle east and Third-world countries, the role of the Export Credits Guarantee Department in providing finance for the purchases and the risk to the taxpayer of default in the payment in the event of a change in regime. The bulk of the orders go to British Aerospace. It stands accused in The Observer—I shall repeat a comment in the French newspaper L'Express—of being willing to pay exceptional commercial expenses.The Observer failed to spell out clearly the origin of the story it published and the reason why it was published. Unfortunately, the newspaper is owned by Mr. Tiny Rowland and the article was a Rowland plant. Mr. Rowland is not only a newspaper proprietor but an arms dealer. He has a direct interest in the fortunes of the Dassault company in France, the country's principal military aircraft manufacturer. It was Tiny Rowland who negotiated, directly and through a labyrinth of middlemen, a series of deals primarily in Africa but also in the middle east, involving the sale of luxury jets, jet trainers, fighter bombers including Mirage 2000 and F1 aircraft.Tiny Rowland regards British Aerospace as a keen competitor. On a number of occasions he has set out to frustrate attempts by British Aerospace to sell aircraft. The most recent example of that involved the £150 million deal to sell Hawk ground attack aircraft to Kenya. In this case, he was pushing the rival Dassault Mirage aircraft.
Dassault was also a direct competitor with British Aerospace over the deals outlined in The Observer last week. According to the newspaper's report, when the company heard of British Aerospace's success in landing the Saudi deal, a Dassault spokesman said:
What has happened is unexpected, incomprehensible and catastrophic. The decision to acquire Mirage 2000 had already been taken on technical grounds. This brutal change is of a political nature.Of course, there is a great deal more at stake for Mr. Rowland than mere profit. He is a man obsessed. He loathes the chairman of British Aerospace, Professor Roland Smith, because he forced him off the board of the House of Fraser during Rowland's argument with the Al-Fayeds. He equally loathes the right hon. Member for Chingford (Mr. Tebbit) for acting as an unpaid adviser to the professor and because of his failure to intervene during the Harrods takeover. The problem is that his obsessions are increasingly spilling over into the columns of The 1324 Observer, doing immense damage to a great national newspaper. For some years, he has used the newspaper to run his personal vendetta against the Al-Fayeds and he is now, with last weekend's article, launching a new campaign to undermine British Aerospace's sales efforts in various parts of the world by using the columns of his newspaper to foster his commercial interests.In doing so, this man is undoubtedly compromising journalists. He has, in effect, become a gladiatorial, proprietorial tyrant who is manipulating his newspaper in a way that puts him on a par with the worst aspects of Murdoch control of Fleet street journals. This must stop, and he must be stopped. He is destroying The Observer. Its circulation has fallen dramatically from 900,000 in June 1989, when he took it over, to just over 700,000 last month. Meanwhile, its rival, the Sunday Times, has held its readership steady at 1,350,000 with marginal movement.
This man is undermining British industry, and in particular British Aerospace, with accusations that equally apply to himself with relation to his arms dealings. The time has surely come for him to divest himself of control of this newspaper. An excellent team of journalists at The Observer are increasingly the subject of criticism inside and outside the House of Commons, and surely see themselves as professionally undermined as they are forced to act on occasions as Lonrho hacks. furthering the dirty work of an obsessive Fleet street mogul and international arms dealer.
I wish to turn to a different aspect of British Aerospace's activities in balancing my contribution to the debate—its acquisition of Royal Ordnance and the Rover Group from the Government, a huge rip-off at the taxpayers' cost and, in my view, the rip-off of the century. In April 1987, as hon. Members have good cause to remember, British Aerospace paid the Government £190,000,000 for Royal Ordnance. Ironically, in pursuit of market ideology, the Government acting totally unlike any sensible private vendor; desperate to get rid of a public asset at any cost, they placed a ludicrous time limit on the date by which a sale had to be achieved.
The Government failed to consider the development value of land holdings by relying on an out-of-date, totally inadequate valuation which put the price of 380 acres of prime development land in Greater London at only £3.5 million. Subsequently, Warburg Securities valued the same land at £517 million, identifying a £500 million gift to British Aerospace's private shareholders at a direct cost to the taxpayer.
Understandably, the Public Accounts Committee, a Committee of which I am a member, concluded in October last year:
We are concerned that BAe, owners of RO, could make a substantial gain on the sale or redevelopment of these sites without benefits accruing to the taxpayer.Meanwhile, the Ministry of Defence insisted,We got a pretty good price for Royal Ordnance.That was only half the story. We then found out that this asset, picked up on the cheap, managed miraculously to turn in a profit of £56 million last year. What had originally been acquired for reasons of speculative asset development had somehow and mysteriously been transformed into a honey pot of new trading profitability —a nice slab of trading profit to bolster British Aerospace's uninspiring trading performance.Not content with one back-door subsidy to British Aerospace, the Government repeated the exercise with the Rover Group sale, producing an even more spectacular 1325 "success". Lord Young was certainly not exaggerating when at the time he called it the deal of the century. Having failed in the summer of 1986 to split up and sell off Britain's last volume car manufacturer to multinational competition, the Government became desperate for a purchaser—preferably, given the recent public outcry, a British one. Of course, there was no suitable purchaser on the horizon, so to whom could the Government turn? Who owed them a favour? Why, of course, British Aerospace.
In keeping with his eccentric understanding of market discipline, Lord Young announced an auction with a difference: there was to be one bidder; the auctioneer would pay the commission; and the bidder would be paid to take the goods away. He asked £150 million for the job lot, approximately the value of the cars the Rover Group held in stock, but to sweeten the pill—just in case the removal truck broke down on its way from the auction —the Government would write off the company's debts and provide a gift of £800 million. Fortunately, the European Community, the only sane body of people around these days, moved in and forced the Government to reduce the handout to £547 million. Thank the Lord for the blessed bureaucrats from Brussels. Even so, British Aerospace was effectively given £379 million to take the Rover Group away.
Days after British Aerospace had agreed to the purchase, despite the assurances from Mr. Graham Day that the takeover would not lead to redundancies, it was announced that the Cowley, south and Llanelli plants were to close and that 3,400 people would have to lose their jobs. Promptly tackled on that squalid about-turn, Mr. Day cheekily responded that those redundancies were not the result of the merger, but of other trading considerations, including over-capacity. Only a fool could possibly swallow that explanation.
A few days ago, we all read with great interest reports that Rover made £65.7 million last year—£10 million per month, as the headlines said. The question is whether it was known that Rover Group would make such profits when it was taken over. Was that taken into account in the sale price? Was it known that, with projected profits of £100 million for Rover in the coming year, British Aerospace would recover the whole acquisition cost of their interest in Rover in little more than 18 months? That does not even take into account the asset value of the group.
Under cover of the Rover profits and the Saudi deal, British Aerospace announced that the Rover group had somehow been revalued at £829 million. That did not take into account the redevelopment land in the south. The empty site at Cowley alone had been valued by Warburg at £40 million. As was to be expected, we now hear rumours of a sale. What of its 40 per cent. share in Leyland-Daf, picked up at about the same time as the Rover group takeover? It is estimated that, when it is floated in the summer, it will net £160 million—more than British Aerospace paid for the whole of the Rover group.
In reality, Rover's performance since the takeover has been disappointing. With United Kingdom car sales at record levels, Rover has a reduced market share and looks as if it is about to lose more as its competitors bring out new models ahead of it this year. The jury is still out on whether Rover will remain in the volume car market. We 1326 now have to see whether those profits will go back into research and development or into the pockets of private shareholders.
How has the parent company, British Aerospace, been performing? As The Times put it:
Without these two purchases, BAe would not be looking too clever.The world's aircraft producers are working flat out, but the commercial aircraft division of British Aerospace made a loss of £49 million last year—£41 million on Airbus alone. What the real figure will be, must be anybody's guess. The weapons and electronics division is having difficulties despite every effort within the work force. Yet on paper, as a result of Government handouts, British Aerospace looks in good condition.Shareholders' funds have doubled to £2.1 billion and net assets have doubled. Property holdings are up from £91 million to £234 million before any Royal Ordnance or Rover Group land development potential has been realised. Most importantly for some, no doubt, dividends are up 10 per cent. The private shareholders will make a killing at the taxpayers' expense as, inevitably, British Aerospace further diversifies into speculative property development on the back of land gifted from the taxpayer in complex dealings over privatisation.
It seems that Professor Roland Smith, the chairman of British Aerospace, has found, not unnaturally, easier ways of making money than making aeroplanes—land development and acquisitions. Since last January alone, British Aerospace has bought Ballast Nedham Groep NV, a Dutch construction company, for £48 million. It founded BAe Simulation Ltd., bought an option on Reflectone Inc., a United States simulator company, was rumoured to be in the market for GEC Avionics and, as recently as February this year, acquired De Moer, a Dutch civil engineering company, for an undisclosed sum. I am sure that Professor Smith is grateful to the taxpayer.
By next year, Royal Ordnance and Rover Group may have paid for themselves out of profits alone. British Aerospace's shareholders can then continue to enjoy the benefits of at least £1.3 billion—£1,300 million—of gifted capital, even before the full development potential is calculated. The cash cow has not even begun to be milked. The question is whether the profits will be generated by manufacturing activity or property speculation. I do not for one minute suppose that the shareholders of British Aerospace are concerned about where the profits come from, as long as they are there. One can only presume that they are rubbing their hands with glee, as the beneficiaries of the biggest rip-off of taxpayers' assets this century.
§ The Parliamentary Under-Secretary of State for Defence Procurement (Mr. Tim Sainsbury)The hon. Member for Workington (Mr. Campbell-Savours) has covered a wide area in a characteristically robust speech. I think I detect four or five main themes. We started with some extremely interesting observations about an article in The Observer. The hon. Gentleman linked that article to British Aerospace's export achievements, for which I was glad to hear him express his support.
Later in his speech, the hon. Gentleman returned to some other aspects of British Aerospace's activities, including some of its civilian work. In the hon. Gentleman's consideration of the profits achieved by companies under British Aerospace management, it would 1327 not be unreasonable for him to have regard to the quality of the management that is brought to bear on those companies and their performance, and to consider whether better management, which must be in the interests of everyone concerned, including the work force, is not something to be applauded, especially as it can be identified through higher profits. The hon. Gentleman talked also about the purchase by British Aerospace of Royal Ordnance plc and Rover Group.
I suspect that the hon. Gentleman will not be altogether surprised if I draw his attention to the fact that the subject of the debate is the relationship of the Ministry of Defence with British Aerospace. Tempted as I might be to say quite a lot about The Observer and its proprietor—
§ Mr. Brian Sedgemore (Hackney, South and Shoreditch)Go on; have a go.
§ Mr. SainsburyThe hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) tempts me further, but I must resist the temptation to discuss a matter that is not the responsibility of my Department.
§ Mr. Dennis Skinner (Bolsover)The Minister should let himself go for a minute; it is the last day, after all.
§ Mr. SainsburyWe come back, I hope.
I am afraid that the same goes for some aspects of the civilian work of British Aerospace to which the hon. Member for Workington referred—for instance, the dealings with the Airbus consortium and the curious fact that it seems that the more Airbuses are sold the larger are the losses made by the participating companies. One hopes that the company will improve its performance under the restructured management of which we have read. The hon. Member for Workington will not be surprised if I do not say too much on that front.
Again, much to my disappointment, matters relating to Rover Group and its acquisition by British Aerospace are matters not for me but for my noble Friend the Secretary of State for Trade and Industry. I am sure that if the hon. Gentleman addressed his remarks to my right hon. Friend the Chancellor of the Duchy of Lancaster he would be given a robust response.
The hon. Gentleman also referred to the acquisition of Royal Ordnance plc. He made some fairly forceful remarks on the subject, as we have come to expect of him. In his approach, the hon. Gentleman seems to be liable to give as much credence to speculative reports and matters which are not valuations but views expressed by unqualified non-surveyors as he does to professional surveyors on aspects that have been thoroughly researched.
If I understand him correctly, he is saying that the purchase of Royal Ordnance plc. by British Aerospace was some sort of monstrous rip-off. In his view, the property value of the assets of that company was astonishingly high. He quoted a figure of £400 million, and said that it was based on a Warburg valuation. I do not know how familiar he is with the origin of that figure. It was not a valuation at all. It was a bit of pure speculation by some desk operator in a merchant bank, who may have been doing an in-house analysis of the value of British Aerospace, and, lacking any expert knowledge of the situation, looked at a large number of acres of land and put against them a large valuation per acre, assuming that all that land was capable of redevelopment.
1328 The first weakness of that approach is that the land was in the metropolitan green belt, which immediately raises a presupposition against development. Secondly, it is not irrelevant that planning applications in respect of that land had not been approved and have since been refused. Thirdly, that speculative figure assumed that, even if planning permission were to be obtained, the whole area would be redeveloped and that, therefore, all those acres could have the high figure put on them.
§ Mr. Campbell-SavoursIs the Minister assuring the House that, when, the matters go before the Secretary of State for the Environment on appeal, he will uphold any decision to refuse planning permission? Has the hon. Gentleman been told that?
§ Mr. SainsburyNo. I am sure that the hon. Gentleman is aware that that is not what I am saying. I am commenting on the source of the £400 million. Equally, I will not be tempted to speculate upon the outcome of any planning application. It would be quire improper to do so.
The hon. Gentleman will be aware that, even if planning approval were eventually to be forthcoming, the likelihood of it being for all the acres is nil. It just does not happen. Obviously, a certain amount of the area is required for access and amenity. It is my understanding that the planning applications that had already been put in envisaged substantial parts of the site being made available for public amenity and other uses. Clearly, immediately a far lower number of acres are capable of redevelopment than appears to have been assumed by the person who originated that valuation.
The next point that the hon. Gentleman seems to overlook is that, in obtaining that sort of figure per acre for developable land, great expense would be incurred. The land is low-lying, and there are canals and locks adjoining it. One matter that would have to be attended to before any redevelopment could take place would be new access roads. There may even have to be a new lock on one of the canals. Clearly, there would have to be a great deal of drainage and, in some cases, decontamination works. They are all costly. Much time will go by and much money will be spent before any return is obtained. That would tend also to reduce the net return.
If the hon. Gentleman is basing his supposition on the fact that it was some monstrous rip-off—to use his phraseology—and on the figure in what he called the Warburg valuation, it is not well-founded.
The other main point that the hon. Gentleman overlooks is that, in any case, the sale of Royal Ordnance plc was a highly competitive procedure. Several companies expressed interest. There was a lengthy bidding process. The Government were advised by merchant bankers throughout it, and, at the end of it, two bidders were left. The best price that could be obtained was obtained. As the hon. Gentleman knows, the Comptroller and Auditor General's report acknowledged that the sale to British Aerospace was achieved in a competitive situation. The evidence suggested that the competition was sufficiently widely based to secure the highest price likely in the prevailing commercial climate. I hope that I have reassured the hon. Gentleman somewhat on that aspect of the sale of RO plc.
With regard to The Observer article, I shall confine my remarks to aspects affecting British Aerospace.
§ Mr. Michael Marshall (Arundel)I do not think that I can fully appreciate why my hon. Friend is unable to deal with many of the matters that affect the Department of Trade and Industry. Would the Minister not take this opportunity to express his understanding of the positive case for diversification? Does it not present opportunities for greater job security and a future in defence, as, indeed British Aerospace now has wider interests?
§ Mr. SainsburyIt is clearly in the interests of the work force, shareholders and customers, of which the Ministry of Defence is one, that British Aerospace is a strong and efficient company. Presumably the company sees advantages in the interaction between its various activities. In due course those might benefit the Ministry of Defence as a customer.
I very much agree with the hon. Member for Workington in his criticism of the article in The Observer as being based purely on speculation. As the hon. Gentleman says, some of the article had been printed before in French and American and indeed middle eastern publications. It is human nature, I suppose, that those losing a contract might seek to discredit the arrangements of the winners by spreading rumours based on speculation.
§ Mr. Campbell-SavoursWould the Minister confirm that Tiny Rowland is involved in selling military equipment to Governments in Africa and parts of the middle east?
§ Mr. SainsburyI cannot help the hon. Gentleman there. Mr. Rowland is associated with companies, not the Ministry of Defence. I cannot comment on their activities. Like the hon. Gentleman, I read the press. One has to judge what one reads for speculation or accuracy. But I suspect that we would agree that it is not surprising that the losers of a contract might seek to discredit the arrangements of the winners. I share the hon. Gentleman's concern that this sort of speculation could damage a very important project that means much to British industry.
The figure of £150 billion that was recently quoted as the value of Al Yamamah is fanciful speculation. However, this major project could extend into the next century and bring income and employment to a wide range of companies in this country.
The management and work force of United Kingdom companies have won these orders against intense overseas competition, through improving design and increasing productivity, with impressive labour relations and, perhaps most important of all, competitive pricing. It would be most unfortunate if all their efforts were damaged by ill-informed criticism.