HL Deb 12 January 1999 vol 596 cc1-16GC

Tuesday, 12th January 1999.

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Lord Ampthill) in the Chair.]

The Deputy Chairman of Committees (Lord Ampthill)

Before I put the Question that the Title be postponed, it may be helpful to remind your Lordships of the procedure for today's Committee stage. Except in one important respect, our proceedings will be exactly as in a normal Committee of the Whole House. We shall go through the Bill clause by clause; noble Lords will speak standing; all noble Lords are free to attend and participate; and the proceedings will be recorded in Hansard. The one difference is that the House has agreed that there shall be no Divisions in this Grand Committee. Any issue on which agreement cannot be reached should be considered again at the Report stage when, if necessary, a Division may be called. Unless, therefore, an amendment is likely to be agreed to, it should be withdrawn.

I should explain what will happen if there is a Division in the Chamber while we are sitting. This Committee will adjourn as soon as the Division bells are rung and will resume after 10 minutes.

Title postponed.

Clause 1 [Initial steps by Secretary of State]:

The Lord Redesdale moved Amendment No. 1:

Page 1, line 6, after ("day") insert ("not later than four years after the day on which this Act is passed").

The noble Lord said: I start with a simple probing amendment. The timescale of four years which I chose seemed applicable. I realise that the sale of the CDC will not take place; indeed I do not believe that the CDC will look for potential investors until the back end of the year 2000. After that the Secretary of State will have to choose a time for the sale to take place which is most advantageous to the CDC.

However, there is nothing in the Bill that places a limit on when the sale should take place. Therefore there is the danger that the CDC could be left in limbo for a period of time once this Act comes into force before the Secretary of State has proposed the date and time of the sale. The purpose of this amendment is to obtain some assurance from the Minister. I realise that we would not undertake this Bill if the sale was not to take place as soon as was advantageous. However, I should like some indication of the likely timescale of such a sale. I beg to move.

Baroness Amos

I agree with the noble Lord, Lord Redesdale, that it is important that we proceed with the transformation as soon as is practicable after the enactment of the Bill. I should like to reassure him that there is no danger that the CDC will be left in limbo. It is intended to proceed with the transformation as soon as is practicable after the Bill has been enacted. We shall need to undertake a number of administrative steps before transformation can be effected, some of which are quite simple. The only reason not to proceed quickly would be if some unforeseen major difficulty arose which would not make it appropriate so to do. In that case it would not be helpful to have an enforced time limit. As the noble Lord said, we would not proceed with this Bill if we wanted a delay. In view of my comments I hope the noble Lord will feel able to withdraw his amendment.

Lord Redesdale

I thank the noble Baroness for that reply. That was the assurance I sought. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 agreed to.

Clauses 2 to 15 agreed to.

Baroness Rawlings moved Amendment No. 2:

Before Clause 16, insert the following new clause—

REVIEW OF CORPORATION'S OVERHEADS, ETC

(" . No securities in the Corporation shall be issued until the Secretary of State has commissioned from a leading firm of consultants a comprehensive review of the Corporation's overheads, working practices and main office records of efficiency measures to maximise private sector investment potential.").

The noble Baroness said: I would like to thank the Minister for the opportunity to discuss this Bill in greater detail and also to thank him for his clarifications during the Second Reading.

First, we need to clear up a misunderstanding. During the Second Reading debate, the Minister felt that I did not understand the difference between part privatisation and public/private partnership. He explained, too, that the difference between the two lies in the destination of the proceeds. That is highly innovative semantics, which I cannot accept.

The Oxford English Dictionary, under the heading "privatisation", refers only to the source of money, namely, the private sector, and not its destination. The label "partnership" appears to suggest that the public and the private sectors are on an equal footing. In this case, this is not true, as the public partner has powers to veto changes on crucial areas, such as the investment policy, the business principles, the right to appoint directors and their number. This verges on the "control freak" attitude which is characteristic of much of new Labour's approach towards private partners. I appreciate that the rationale attached to the golden share is to entrench the development focus of the CDC, but it may well dampen private sector interest.

We are not here, however, to make an issue of labels dreamt up by spin doctors. As stated during the Second Reading, we welcome the Bill, and we want to make sure that the operation will be successful. The intention behind our amendment is to air the issues more fully and to suggest a mechanism which will ensure the successful launch of the CDC in the private sector. I beg to move.

Lord McIntosh of Haringey

I am grateful to the noble Baroness for the support she has expressed again in principle for the Bill and most of its provisions.

Let me start by referring to her point about privatisation and public/private partnership. I am perfectly prepared to accept the dictionary definition in relation to the source rather than the destination of the proceeds, although it is a hugely important political point that we want to make, and perhaps I chose the wrong occasion to make it. Any proceeds from the private sector will go into the development budget rather than into the Treasury pot.

Even in semantic terms, I do not agree with the noble Baroness that partnership requires that the partners should be on an equal footing. There can be minority and majority partnerships, and this is indeed what is proposed in this Bill. It is proposed, in primary legislation, that the participation of Government in the ultimate partnership shall be not less than 25 per cent, which is deliberately a significant element and justified by the word "partnership". In that context, I am a little surprised that the noble Baroness has proposed in Amendment No. 6 that the participation of Government should be capable of being reduced to 5 per cent rather than 25 per cent. I suspect that the noble Baroness's preference for part privatisation is wish rather than reality, because that is the direction in which the noble Baroness's later amendment would move us.

On the specific issue of Amendment No. 2, we entirely agree with the noble Baroness that every attention should be paid to the need for value for money. However, we have difficulty with the wording of the noble Baroness's amendment, but in the context of the Moses Room I need not make too much of that. What is a leading firm of consultants? What are they consultants in? Are they management consultants, accountancy consultants, financial consultants, dare I even say marketing consultants? What do the words "leading" and "comprehensive" mean? There are many relatively trivial difficulties with which I need not detain the Committee. However, we recognise the importance of questions of efficiency and value for money, and we shall have regard to these issues in preparing for the public/private partnership. We expect to "benchmark" the CDC against similar organisations, which means, of course, that if it were appropriate to use outside consultants we would not hesitate to do so. Despite being a little aggressive in my opening remarks, as was the noble Baroness, I generally express support for the thinking behind her amendment. However, I ask her in the circumstances to withdraw it.

Baroness Rawlings

I thank the Minister. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 16 [Requirement to issue securities]:

Baroness Rawlings moved Amendment No. 3:

Page 8, line 6, at end insert—

("(7) No securities shall be issued to any third parties unless—

  1. (a) the proposed balance sheet of the Corporation, as at the date of issue of the said securities, has been laid before Parliament; and
  2. (b) a motion in favour of the issue of such securities has been approved by each House.").

The noble Baroness said: The effect of Amendment No. 3 to Clause 16 is that the issue of securities to third parties is conditional upon Parliament having the opportunity to express its view on the proposed balance sheet. In other words, the issue of securities is conditional on the approval of Parliament. The reason for this is simple. At Second Reading, both myself and my noble friend Lord Howell of Guildford stressed the importance of a strong and attractive balance sheet as regards the success of the public/private partnership.

Let me remind the Committee of his words, The absolute key is that it should have a strong balance sheet, one that is not undermined when the going gets rough again, as inevitably it will".

I asked a number of questions as to how this is to be achieved. The Minister said: Filing will be immediate and the restructuring of the balance sheet will take place as soon as possible".

However, the Minister was not able to give us an idea as to how this would be achieved other than by a schematic, not so simplistic, hypothetical example.

I cannot believe that the DFID and the CDC do not have a pretty clear idea of what they want to achieve at this stage. If they do not, why is that the case? Or, are they bogged down in discussions with the Treasury and the Inland Revenue?

Furthermore, we believe that Parliament must have a say not only in enabling the privatisation to take place, but also in the privatisation itself. It is not acceptable to argue that although it is justifiable to require parliamentary involvement at this point that is not practical because of commercial sensitivity and timing. The preparation for an issue of securities involves the launch of a prospectus and takes up to six months, during which time this parliamentary procedure could easily take place.

At this point I would like to add in relation to Amendment No. 2 that before Clause 16—which is central to the Bill, as it concerns the requirement to issue securities—is built into the Bill, it should be made sufficiently flexible to take into account market conditions and other such factors.

We all agree that the CDC is a healthy organisation. However, we are concerned about the degree of readiness to operate in a manner more akin to that of private enterprise. As the noble Earl, Lord Cairns, said at Second Reading, many co-venturers from the private sector have perceived CDC as insufficiently financially motivated to make CDC a welcomed partner".—[Official Report, 7/12/98; col. 728.]

It is clear that CDC has to undergo a change in corporate culture and practices. It must do so in order to be able to increase returns significantly and to be perceived to be sufficiently financially driven to be an active partner in the private sector.

I understand the Government have already sought professional advice concerning private sector interest in the public/private partnership. Would the Minister not agree that a review of the cost structure and operations of the CDC would be helpful both in reassuring private investors and in helping the CDC effect the corporate culture of transformation? I beg to move.

3.45 p.m.

Lord McIntosh of Haringey

Let me begin again by saying that we have a great deal of sympathy with the intention behind the amendment, which is to ensure that the capital structure before the introduction of private capital should be all above board, if I may put it that way—although, as I shall explain, I do not believe it is entirely appropriate that it should be subject to parliamentary approval. I shall give chapter and verse to show why that has not happened in the past.

First, the noble Baroness picked me up on a word that I used at Second Reading which I acknowledge was not entirely appropriate. I said that we would move to filing "immediately" whereas what we intend, of course, is "as soon as is practicable". Here we are in danger of getting into semantics, but if the Committee will forgive me, it is important, at least in my thinking, that we should get any potential conflict out of the way.

It might seem that a duty to do something immediately has to be complied with more quickly than a duty to do it as soon as practicable, but in the context of laying a statement before Parliament the two expressions come to the same thing. "As soon as is practicable" is an onerous duty. The only circumstances that would justify a delay are those that make it impracticable to lay the statement, not those that merely make it difficult or inconvenient or place a strain on resources. In plain language it means "as soon as you can". The message is very clear: this is not a duty that the Treasury or the Secretary of State or, in practice, their officials can choose to ignore or leave to another day. Since guarantees are not lightly given on the spur of the moment, officials usually have plenty of time to prepare the statement in advance and ensure that it was laid quickly after the guarantee was given.

"As soon as practicable" is a well-defined, legally precise phrase imposing a legal obligation as soon as it is feasible, having regard to all the relevant knowledge, circumstances and resources. On the other hand, "immediately" gives a full sense of needing to be complied with sooner. That is why I apologise for the use of the word "immediate", on which the noble Baroness picked me up in her speech.

She also thought that I was insufficiently precise about the process of financial restructuring in the example that I gave. I am sorry about that. Let me try to be a little more helpful to her. As she will recognise, the balance sheet needs to be restructured to reflect the format of a Companies Act company and establish a suitable financial structure for CDC to move forward. The format of a Companies Act company essentially recognises the ownership of the company by its shareholders and draws a distinction between the two principal funding sources available to the company to support its operations, debt and equity. CDC's current balance sheet merely reflects the historical funding that it has received from the Government in the form of loans.

CDC currently does not have any share capital. Once it is restructured, CDC will be in a legal form which will provide a vehicle for the introduction of private sector capital through the sale of shares and the function of debt. This in turn will establish a more appropriate financial structure for CDC and provide a cost of capital over and above which CDC must generate a required return.

The restructuring will be achieved by initially converting a proportion of CDC's historic loans from the Government into share capital which will be owned by the Government and held by the Secretary of State as nominee. The conversion will be achieved by the waiver of existing loans made by the Government in return for the issue by CDC of new share capital. All the share capital initially issued by CDC will be owned by the Government.

The new balance sheet will also contain loans from the Government on commercial terms. The amount of these will be set to balance the need for capital efficiency with an appropriate degree of risk and to allow the business to grow in the future. Post the partnership CDC will be able to raise the funds it requires to support its ongoing operations by borrowing from the private sector on commercial terms.

The Bill allows the Secretary of State to waive loans made to CDC while CDC remains wholly owned by the Government. Since the Government will initially own all the share capital in CDC, there will be no loss in value through the waiver of these loans, simply the substitution of share capital for the existing loans. When the Government subsequently sell part of their shareholding they will effectively receive value for the financial support they have provided to date.

I hope that that gives a little more detail about the cost structure about which the noble Baroness asked.

Lord Redesdale

We have talked about the changing of loans into share capital. Do the Government have any indication of what percentage of the share capital the Government will be taking with this transference of loans in the future CDC?

Lord McIntosh of Haringey

That is a matter which will not be decided only by the Government. It will be decided by the Government together with the potential private partners. It is, therefore, really too early to make an estimate. Clearly, the higher gearing from private capital that can be obtained in the form of equity, the more money there will be available for investment in emerging economies, which is the ultimate objective of the whole exercise. However, one cannot anticipate the level or the percentage at which that figure will come out.

Turning now to the wording of the amendment of the noble Baroness, she is asking that the proposed balance sheet should be laid before Parliament and approved under the affirmative resolution procedure. I suggest that it is impossible to draw up a balance sheet on the date of issue of securities, as suggested in the amendment, because transactions affecting the balance sheet will take place throughout the day. Requiring parliamentary approval for the issue of securities is not practicable in terms of the timetable. These are things that happen virtually all at one time. The amendment would undermine the ability of the Government to negotiate a deal.

In any case, although the issue of securities may be part of the capital structure, it is not the whole part. There could be, for example, a waiving of debt at a different time. Financial restructuring will balance the need for capital efficiency with an appropriate degree of risk. What we are doing here is not new; provisions of this kind have been included in other legislation dealing with statutory corporations being turned into plcs without further parliamentary scrutiny. In any event, I emphasise to the noble Baroness that there will be a prospectus, or some other similar sales document. There would have to be one, although that does not need to be on the face of the Bill. The objectives could not be achieved without a prospectus and that would include the relevant balance sheet information.

I suggest to the noble Baroness that it would be unprecedented for Parliament to be involved in approval either of the prospectus or of the balance sheet, as is proposed in this amendment.

Baroness Rawlings

I thank the Minister for his very clear explanation. This is an extremely complex subject, one which I should like to leave at the moment and return to at Report or Third Reading. At this stage, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 16 agreed to.

Clause 17 [Acquisition of securities]:

Baroness Rawlings moved Amendment No. 4:

Page 8, line 11, at end insert— ("( ) The Secretary of State shall seek to attract private sector investment in the Corporation by the issuing of securities at market value not less than two years after the day on which this Act is passed.").

The noble Baroness said: The effect of this amendment is to ensure that the sale of CDC shares is not rushed and that the proceeds from it are maximised. At Second Reading, the Minister may have misunderstood me. I did not ask him when precisely the flotation would take place. Of course, as the Minister said: timing depends on a number of factors, including market perceptions of pre-emerging markets and of CDC's track record and forecast performance".—[Official Report, 7/12/98; col. 723.]

My concern was fuelled by the analysis of the figures presented in the DFID press release of 14th July 1998. It appears that the Government intend to sell the CDC in two tranches: the first some time in the year 2000–2001 and the second some time in the following year. Eighteen months, or less, from now seems a very short time to turn around CDC in order to improve its returns and forecast performance sufficiently to be attractive to the private sector.

The Minister will no doubt point out that this process had already started at the end of 1997, when the Prime Minister announced that the CDC would be transformed into a public/private partnership. If this period is included, CDC would still have fewer than three years to turn itself around. We would like to give it more time to do so, without postponing indefinitely the injections of private capital. In order to do so, we would like to set a time antequam it is not possible to proceed with the sale, unless the Minister persuades us that our concerns are unfounded.

The amendment also seeks to prevent the Government from selling off CDC too cheaply. Having accused the Conservative Government of selling off the utilities too cheaply, the Labour Government, so sensitive to the ethical question, would scarcely wish to commit the same sin. However, in view of the difficulty of improving returns significantly and quickly, they may be tempted to resort to an elementary commercial trick: decrease price to increase demand. That would be a shame; in particular, if it is true that the proceeds of the sale would be ploughed back into the development through DFID. What assurances can the Minister give us that the sale will take place at the right price? I beg to move.

Baroness Amos

The effect of the amendment would be that it would not be possible to offer shares in CDC to potential private-sector participants until two years after passage of the Bill.

The noble Baroness has expressed concerns about the proceeds from the sale not being maximised. Perhaps I may reassure the noble Baroness that the timing of the sale will depend on a number of factors. In particular, we want to ensure that there is an opportunity to maximise the potential from the sale, particularly given that the proceeds would be used for development, as the noble Baroness rightly stated.

There is clearly a need for CDC to build a track record of successful equity investment in preparation for sale. Our intention is to create a long-term partnership in which government will have a significant stake; it is not to exit CDC.

A decision on the timing of the sale will be taken in the light of what is best for development. These interests would not be served by going to the market too early. Market conditions are one factor and if those were right, say, 20 months after enactment and if CDC was ready, we would not want to miss the opportunity. A two-year time limit would then be an unnecessary restriction.

I should like to reassure the noble Baroness that what we are seeking to do is to maximise proceeds from the sale when the market conditions are right, but we do not want to restrict the potential for doing that by putting a time limit on it.

In the light of that reassurance, I ask the noble Baroness to withdraw her amendment.

Baroness Rawlings

I thank the noble Baroness for explaining the matter so clearly. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Rawlings moved Amendment No. 5:

Page 8, line 13, at end insert— ("(3) No securities in the Corporation shall be issued until a memorandum setting out how the proceeds of any such issue shall be treated by the Treasury has been laid before Parliament and a motion to approve it has been agreed to by resolution of each House.").

The noble Baroness said: This amendment to Clause 17 is designed to ensure that the destination of the proceeds of the sale is clear before the sale takes place. We strongly believe that the ethically-minded investor in particular would want to know where the money raised from the sale of shares is to go. We feel that Parliament and the ethical investor have a right to know.

The Minister will remind the Committee that the Prime Minister said to the Open Business Forum of the Commonwealth Heads of Government on 27th October 1997: I can also promise that all the money the Government raises from this sale will be ploughed back into our development programme".

This promise was reiterated in the White Paper, Eliminating World Poverty. Last summer, DFID, on the occasion of the Comprehensive Spending Review stated: The CDC will receive an injection of private capital through the sale of a majority share … It will provide receipts for the Dfid budget".

Finally, at Second Reading, the Minister said: The proceeds from introducing private capital into the CDC will be used for development assistance programmes … and not go straight into the Treasury pot".—(Official Report, 7/12/98; col. 739.]

The accumulation of statements to the effect that the proceeds of the sale will be earmarked for development is encouraging but not entirely reassuring. Will the Minister give assurances that this will be the case for the duration of this Parliament? We want to ensure that the Government do not wriggle out of this promise and that the rights of the potential investors are protected by giving Parliament the opportunity of expressing its opinion on the treatment of the proceeds. I beg to move.

4 p.m.

Lord McIntosh of Haringey

The noble Baroness said that I would remind the Committee of the Prime Minister's statement of 1997, but she has saved me the trouble and I am very grateful to her. It is certainly true that every single statement by Ministers, from the Prime Minister down, from the beginning of this exercise to date and from now on, has confirmed that it is the intention of the Government that the proceeds of any sale should go into the development budget rather than into the general Consolidated Fund. We have already agreed with the Treasury that the proceeds will be used for the development programme. This will be reflected in the public expenditure accounts. As the noble Baroness knows, the Comprehensive Spending Review, which was carried out last year and which resulted in the Statement on the Comprehensive Spending Review, operates for three years ahead. Therefore, it is prudent that the Comprehensive Spending Review should include, as it does, provision for receipts from privatisation towards the end of that three-year period.

As we do not know the date of the final stage of the public/private partnership, clearly there might need to be some moving of these receipts from one year to another. We cannot be any more precise than that. Nevertheless, I can confirm that the Government's income and expenditure plans include the provision that receipts from the public/private partnership will go into the development budget, and only into the development budget. It makes sense for us to have an allocation in advance of the sale in order to plan expenditure and make best use of it, rather than spending receipts in one particular year. I hope that that assurance, which is very firm, that we not only intend that but have already made our plans contingent on that, will reassure the noble Baroness.

If I may make one of my petty little points about drafting, I do not believe that the amendment should be to this clause. Clause 17 is about the acquisition of securities by or on behalf of the Secretary of State. The amendment should really be to Clause 16 which is about the issue of securities. However, that should not inhibit the noble Baroness, if she is not satisfied, from coming back to this in a redrafted form on Report if she so wishes. In the meantime, I hope that she will think it appropriate to withdraw this amendment.

Baroness Rawlings

I thank the noble Lord for his reassurance and take his point. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 17 agreed to.

Clause 18 [Minimum Crown share-holding]:

Baroness Rawlings moved Amendment No. 6:

Page 8, line 15, leave out ("25") and insert ("5").

The noble Baroness said: Amendment No. 6 seeks to reduce the minimum government holding in CDC from 25 per cent to 5 per cent. This is a probing amendment. As we know, Clause 18 is the key clause. The clause sets out the basic structure of the public/private partnership. The Secretary of State holds the golden share, which appears to bestow on the Secretary of State more rights than those retained by the Government in other privatisations.

The Government will also retain at least 25 per cent of the ordinary share capital. What consideration led to setting that percentage? The Government appear to think that the stick of the golden share will become acceptable to private investors because of the carrot represented by the Government's commitment. As the provision is structured, while the Government hold the golden share, they would also shoulder the largest share of risk. Why would this structure entice private sector investment? We very much doubt that it would. I therefore question the figure of 25 per cent. Why not have a figure of 15 per cent., or indeed 5 per cent? The lower the shareholding the Government retain, the higher the proceeds which would go to DFID. Would this not be highly desirable? The Minister will no doubt point out that, at least initially, we are more likely to see a government holding of around 40 per cent. If the Government indicated that they would retain participation higher than 25 per cent., would this not affect negatively private investors' interest? Would not such a holding be a form of double insurance, as my honourable friend Mr. Wells pointed out in another place? Is it really necessary?

Finally, have the Government set targets for divesting from CDC? What figure would they regard as a success? I beg to move.

Lord Redesdale

I take the opposite approach from that taken by the noble Baroness, Lady Rawlings. I believe that 25 per cent. would be a good figure. I ask the Minister whether, without the 25 per cent. holding, the guarantees that have been put in place at the moment would hold true in the face of other investors holding a larger percentage? Would the golden share have any meaning if the Government held less than 25 per cent? Further, what would be the negative outcome to the CDC in its operations abroad if private investors believed that the Government were divesting themselves of these shares and pulling out of something which was so successful?

Lord McIntosh of Haringey

For the first time we have a disagreement on a political issue rather than simply differences as regards having confidence in the Government's intentions or interpretation of the legislation. I profoundly disagree with the noble Baroness as regards the suggestion that it should be possible, without legislation, for the Government to reduce their percentage shareholding below 25 per cent. I gave my reasons for that in part when I responded to the noble Baroness's speech on her Amendment No. 3, which appeared to say the opposite; namely, that we should have continuing assurances that the Government will maintain their firm interest in the Commonwealth Development Corporation after the public/private partnership has been established.

I also disagree with the noble Baroness about the purpose and effect of the golden share. The golden share does not mean that the Government will take the largest share of the risk; the golden share will ensure that the ethical investment policies, which are the fundamental basis of the CDC and will remain so, are enshrined in legislation, and are protected and cannot be changed without the will of Parliament. It is one thing to have a golden share, but it is another to convince investors that we are also willing to put our money where our mouth is. For the Government to put a significant minimum into these investments—which are defined by the memorandum and articles of association of CDC plc—and in order to attract the private investment we want, we think it is necessary both to insist on investment policies and to maintain a substantial economic interest to enable the Government to continue to have a stake in and benefit from CDC's future success. I am grateful to the noble Lord, Lord Redesdale, for what he said in that regard.

In practice the 25 per cent. shareholding is significant, as the noble Baroness well knows. This is the point below which the golden shares can be redeemed by CDC without government agreement. That is in Article 11(F)(ii) of the draft articles of association. The golden share contains rights over a number of important areas such as investment policy and the right to appoint directors. We believe that the market would not respond positively if the Government's retention of such rights were not backed by this substantial interest in CDC through their ordinary shareholding.

Under company law, 25 per cent. is the level above which minority shareholders have the right to block unwanted changes in the articles of association, so it has a legal as well as an economic significance. I urge the noble Baroness to think again about this matter, on which I am sorry to see that we disagree. I believe that the attraction for private shareholders must be based on a real commitment by government—not only the negative commitment of the powers conferred by the golden share, but also the positive commitment of government investment in the new CDC. In those circumstances I urge the noble Baroness to withdraw the amendment.

Baroness Rawlings

I thank the Minister for his explanation, but I am still not convinced. I feel that the golden share will still enable the Secretary of State to dictate policy: for a private investor investing in a company this automatically changes the aspect of the investment. Secondly, I do not feel that the 25 per cent. holding would necessarily give the investor confidence that the Government are taking this seriously. For the moment, I should like to come back to this on Report. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18 agreed to.

Clauses 19 to 26 agreed to.

4.15 p.m.

Lord Redesdale moved Amendment No. 7:

After Clause 26, insert the following new clause—

COMMENCEMENT

(" . This Act, other than this section and section 27, shall not come into force until the Secretary of State has—

  1. (a) prepared a report on the liability of the Corporation after registration to corporation tax; and
  2. (b) laid the report before the House of Commons.").

The noble Lord said: It was difficult enough to table this amendment to any part of the Bill so I hope that the Minister will not use the "petty drafting" argument in this case. This is, I believe, the central amendment of the Bill and although I am speaking to Amendment No. 7 which stands in my name, I also support Amendment No. 9 in the name of the noble Baroness, Lady Rawlings.

The purpose of the amendment, which concerns tax, is not political in the sense of "party political", although anything to do with tax obviously has a political implication. However, if the tax situation of the CDC is not dealt with and the CDC is faced with paying corporation tax, that could lead to the failure of the CDC as a successful corporation.

It was suggested that the CDC would have to make a return of around 15 per cent. Although that has not been set down anywhere, I believe that that is the figure that is being discussed. If the CDC is forced to repatriate its profits to this country and is then asked to pay corporation tax, that will eat into its profit margin of 15 per cent quite considerably. What level of return could be obtained if corporation tax were payable? Other companies in this field avoid this pitfall by going offshore. Is it possible for the CDC as regards its future role vis-a-vis government investment to be based offshore? I find that hard to believe. However, if that is not the case, the Government will be forced to make special tax provision for the CDC. I realise that the Treasury is loath to establish a tax precedent for any individual corporation in case other companies see a loophole. However, I believe that the CDC is unique and that an exception should be made to the usual rule.

I realise that this is not a situation that has passed the Government by and that the Government will consider this matter carefully. I hope that the Minister can give us some indication of the Government's thinking on the issue of tax. I hope that he can enlighten us on that matter because if the Bill is to proceed through the Chamber without this matter being resolved the CDC will be flawed. It will not be a success and the laudable aims that are set out in the Bill will not be achieved. I beg to move.

Baroness Rawlings

I fully support the noble Lord, Lord Redesdale, on Amendment No. 7. In speaking to this amendment I should like to speak to Amendment No. 9. As he so rightly said, this is the most important of all the amendments. The effect of Amendments Nos. 7 and 9 is to make the coming into force of the Act conditional upon achieving for CDC an advantageous tax status or permission to go offshore.

Again, this is not a wrecking amendment. The Bill would not be wrecked by the amendment but by the failure to solve the tax issue. The purpose of the amendment is twofold. First, the amendment reflects our conviction that it is imperative for the success of the partnership that the CDC is tax efficient. The Minister agreed with this point at Second Reading. However, we differ on the importance we attribute to such a status.

The Minister seems to believe that the CDC experience and expertise, as well as the Government's shareholding, will be sufficient to provide comfort to private investors especially in the context of growing interest in ethical investment. Like the noble Lord, Lord Redesdale, I suffer from cynicism. I believe that private investors will look primarily at results. Unless the tax status is advantageous it will be difficult significantly to improve the current downward trend of the CDC's returns while maintaining the development focus in the current economic conditions. Indeed the Minister appears to be at odds with the Secretary of State, who in another place said that if we do not solve the problem of the tax treatment it would be so disadvantageous that it would not be viable as a means of attracting private sector funds.

I wholeheartedly agree with the Secretary of State. Because of the importance which we ascribe to the tax issue, we feel that it is prudent to solve it at the outset. If a solution is not found with the Treasury and the Inland Revenue, we fear that it may be impossible to attract sufficient private investors. If this is the case, the project is seriously at risk. In such circumstances, would the Government abandon it?

At Second Reading, I asked a whole range of questions on the issue to which the Minister gave such economical answers that we were really none the wiser. Has the Treasury vetoed the proposals of the Secretary of State to create a new category of organisations as regards tax and investment funds? If that is the case, what other avenues have been explored?

Lord McIntosh of Haringey

I fully recognise the importance of these two amendments. I do not in any way intend to underestimate them, or indeed to criticise the drafting or the motives of those who have tabled them because the amendments have been tabled out of a genuine desire to help to achieve what the Government wish to achieve from this legislation. I am grateful to both the noble Lord and the noble Baroness for the way in which they have proposed these amendments.

The noble Lord, Lord Redesdale, said that this change would not work if the Bill passed through this House in its current form without assurances on taxation. I have to disagree with him on that. It would not work if the Bill passed through Parliament without some taxation provisions, which I fully acknowledge are not available at the moment. I had hoped that by the time we reached Committee stage we would have something definite and final to say about the way in which this problem will be solved, but, as it is, I do not believe that I can do more than read out the current state of play.

The CDC needs to be tax-efficient if it is to be able to achieve its goal of investing in developing countries using private capital raised, within the context of a competitive private investment market dominated by offshore funds. I think that noble Lords opposite will agree with that. In order to compete directly with offshore funds for private capital for investment in its area, CDC would need to provide a similar return. Again, I think that noble Lords would agree with that. A material UK tax charge within CDC would make this less achievable. The Secretary of State for International Development has said publicly—the noble Baroness has reminded us of this—that it is politically unacceptable for CDC to go offshore.

The Department for International Development, the Treasury and the Inland Revenue are working together to produce a tax solution that will encourage investment in the poorest countries through the CDC public/private partnership. Parliament will have the opportunity to scrutinise any proposals. I cannot go any further than that at this time, but I fully acknowledge the sincerity and helpfulness of the approach taken by noble Lords opposite.

Lord Redesdale

Obviously, we were hoping for a more definitive answer at this stage. The Minister has set out his view that the Government will solve this problem, but he has given the impression that the answer may come after the Bill has passed from this House to the other place.

Lord McIntosh of Haringey

I did not intend to give that impression. Clearly, it would be helpful—to me at any rate, if to nobody else—if we were able to resolve these issues before the Bill leaves this House. All I said was that that is not essential for the legislation. The Bill would still be effective even if amendments were introduced in another place.

Lord Redesdale

On that basis, I should like to return to this at a later stage, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Rawlings moved Amendment No. 8:

After Clause 26, insert the following new clause—

COMMENCEMENT (No. 2)

(" . This Act shall not come into force until the investment policy of the Corporation has been approved by resolution of each House of Parliament.").

The noble Baroness said: The effect of this amendment is to make the coming into force of the Act conditional on both Houses approving the investment policy of the CDC. This is not a wrecking amendment. It is designed to ensure that both Houses have a say beyond the setting-up of the purely formal framework, and that the privatisation of the CDC transformation is properly carried through. Parliament should have the opportunity of discussing the fundamental elements of the partnership. The intention is to ensure that the investment policy does not unduly restrict the commercial freedom of CDC and thereby hinder the earning of a satisfactory return for the shareholders. I shall not take up the time of the Committee by reiterating the concerns about the geographical restriction to investment contained in the investment policy. I say only that the investment policy merits a full discussion.

The intention of the amendment is also to ensure that the investment policy is effectively in place before the transformation of the CDC starts. At Second Reading, the Minister said: The investment policy will be put into place before private participation is invited".—[Official Report, 7/12/98; col. 722.]

I hope that he can give assurances to that effect. I beg to move.

Baroness Amos

We fully recognise the need for scrutiny. Drafts of the first investment policy, along with the memorandum and articles of association and the progress report on the statement of business principles, have been placed in the Library of the House. We welcome comments on those documents and shall, of course, give careful consideration to any comments which are received.

However, it is important to say that after consideration of those comments, we do not intend to make any substantial changes to the draft currently available prior to transformation. We shall place the final version in the Library of both Houses.

The mechanism for subsequent amendments to the investment policy after it has been adopted is set out in the articles of association. This allows for any necessary adaptation in the light of changing circumstances. Agreement to any change would be a ministerial decision which would be accountable to Parliament in the normal way.

I remind the Committee that Parliament has not had any role previously in approving the investment policies of the CDC while it has been a statutory corporation. The amendment is therefore unnecessary and I hope that, following my explanation, the noble Baroness will withdraw it.

Baroness Rawlings

I thank the noble Baroness for those reassurances. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 27 [Short title and extent]:

[Amendment No. 9 not moved.]

Clause 27 agreed to.

Schedules 1 to 3 agreed to.

Title agreed to.

Bill reported to the House without amendment.

The Deputy Chairman of Committees

This concludes the Committee's proceedings on the Bill.

The Committee adjourned at twenty-eight minutes past four o'clock.