INDUSTRIAL REORGANISATION CORPORATION BILL (Hansard, 1 December 1966)

THE PARLIAMENTARY UNDER-SECRETARY OF STATE FOR THE ROYAL NAVY (LORD WINTER-BOTTOM)

My Lords, in this country, where the Industrial Revolution started, we have perhaps a heavier burden of industrial history to carry than any of our competitors abroad. Our pattern of towns, communications, and the location of our basic industries, was determined by factors which were dominant one or two centuries ago but which have less validity to-day. And this is also true of industrial undertakings. Some old, good and respected undertakings are what they are, not because of rational decisions made on the basis of long-term economic forecasts, but simply as the result of a series of historical accidents.

For example, the company in which I started my working life was founded by my grandfather in the middle of the last century to make artificial leather. designed to replace real leather used in the book-binding industry. It prospered, won a monopoly in one item of industrial textiles, then made even more money which had to be invested in other industries because there was little room left in the original field of growth. Our most profitable subsidiary was Obtained in settlement of a debt—completely by accident—and when I left the successor organisation to take up my present appointment, the company which started making artificial leather in Salford in the middle of the 19th century was involved in the technical textile, the drawing office, the plywood, the industrialised building, the aluminium tube, the copper insulating and the surgical equipment industries. It is, in fact, a large historical accident, and, I would venture to say, typical of a number of the older British companies.

815 The need to rationalise and modernise the inherited pattern of British industry is an idea which is generally accepted. We have to compete at home and abroad with the industries of our competitors, which have often been founded with the most modern plant after a detailed study of our successes and mistakes, and which may be larger than their opposite numbers in the United Kingdom. Competitive pressures have forced units of British industry to merge; this trend has been assisted by the great financial institutions of which this country can rightly be proud. And manufacturing industry itself has acted as a catalyst; for example, Imperial Chemical Industries, considering, in my opinion rightly, that the cotton textile industry must be rationalised, backed the English Sewing Cotton Company with many millions of its money to achieve this end.

Since so much is being done by existing institutions, your Lordships may per haps ask why should the State intervene, and enter the merchant banking business. The answer to this question is given in paragraphs 4 and 5 of the White Paper (Cmnd. 2889), outlining the Government's proposals for the Reorganisation Corporation, and with your Lordships' permission I shall read these clauses to you: Paragraph 4: There is no evidence that we can rely on market forces alone to pro duce the necessary structural changes at the pace required. Some of the industries most in need of rationalisation have an in-built tendency to stay as they are. Either there are a few large firms which are tempted to live and let live; or there are a number of small ones, none of which alone is strong enough to achieve the scale of operations needed for international competition. More over. some mergers simply lead to a concentration of ownership without securing a more effective deployment of the assets of the merged companies and result in loosely-knit groups of comparatively small production units ranging over a wide variety of manufacturing activities. Paragraph 5: Although there is now a large number of institutions which can provide specialist services to meet the financial and other needs of industry, there is no organisation whose special function is to search for opportunities to promote rationalisation schemes which could yield substantial benefits to the national economy. Merchant banks and issuing houses carry through a great many mergers every year, but they can in general only act at their clients' request".— and that is the key point. 816 Desirable regroupings fail to take place through lack of initiative and sponsorship, or because, when opportunities arise, there is no one ready to grasp them. The Government consider that this gap in the institutional framework needs to be filled and they propose to set up a new statutory body for the purpose, to be called the Industrial Reorganisation Corporation. The necessary legislation will be introduced as soon as possible. This White Paper was published at the end of January, and had it not been for the General Election the Bill would have been brought forward earlier. The Government are now anxious that it should receive the Royal Assent as soon as possible, so that the Corporation can get ahead with its urgent task of promoting the rationalisation of British industry.

There was some discussion of the White Paper during the debate in your Lordships' House on 9th February on the Economic Situation. At that stage noble Lords opposite showed no great enthusiasm for the Government's proposals. By now, their attitude may have changed, for, after an initial period of hesitation and doubt, the City and industry generally seem to have accepted that the Corporation will play a very useful part in strengthening the private sector of the British economy. The correctness of this statement is surely confirmed when we look at the impressive list of the names of those gentlemen who have consented to serve on the Board of the Corporation. Very few people now dispute that structural changes are needed in many sectors of industry if we are to continue to compete effectively in international trade.

The Bill is relatively short and straightforward. A number of its provisions are common form in legislation establishing public corporations. Clause 1 establishes the Corporation as a statutory body and provides for the appointment of its chairman and members. The then First Secretary announced in January that Sir Frank Kearton had agreed to become the Corporation's first chairman; and in May he was able to report that Mr. Ronald Grierson would be the deputy chairman and managing director and that nine other distinguished men with a wide knowledge of industrial affairs had accepted invitations to serve as members. Sir Frank Kearton and his colleagues have already begun preparatory work and are planning the Corporation's initial programme. The 817 Corporation cannot, of course, move into top gear until the Bill becomes law; but the groundwork for rationalisation schemes in one or two key sectors of the economy can be prepared in the next few months, so that there will be as little delay as possible before the Corporation becomes fully effective.

Clause 2 of the Bill sets out the Corporation's functions and describes its powers. A distinction has been made between schemes for promoting or assisting the reorganisation or development of any industry or section of an industry (which are covered by Clause 2(1)(a)), and schemes for establishing or developing an individual industrial enterprise (which are dealt with in Clause 2(1)(b)). The Corporation will have complete freedom to carry out schemes of the first sort—that is, rationalisation schemes involving several firms—subject only to any directions of a general character which it may be given under subsection (4). But it will not be able to carry out schemes affecting only one company unless it has been specifically requested to do so by the Secretary of State.

§ LORD WINTERBOTTOM

Perhaps it would take a better form in the debate if my noble friend on winding up answered that particular question. I think the point is a valid one, but my noble friend will give the answer.

Circumstances will almost certainly arise in which the Reconstruction Corporation will need to give its backing to a single company if it is to achieve the objectives for which it is being set up. For example, the White Paper said that the Corporation might need to provide capital for new projects or expansions of special importance to the economy". The Government believe that the Corporation should be able to support desirable projects of that kind, but they recognise that Parliament may wish to keep a closer watch over this part of the Corporation's activities than over its main function of promoting rationalisation. This distinction has therefore been made in the Bill, so that the Secretary 818 of State will be directly accountable to Parliament for any requests he makes to the Corporation.

Subsection (2) of Clause 2 confers on the Corporation the usual general power to act in ways which will enable it to discharge its functions, and also gives a number of specific examples of the Corporation's likely fields of activity. It will obviously need to acquire, hold and dispose of securities, both fixed-interest stock and equities. For example, after studying the situation in a particular sector of industry, the Corporation may decide that there is one existing company which has the managerial talent and other resources necessary to form the nucleus for are organisation scheme. But this company may not have sufficient financial reserves to make cash offers for other companies in the same field, nor a high enough market rating to enable it to bring about mergers by means of share-exchange arrangements. The Corporation will therefore have to give it financial backing so that the reorganization scheme may be carried through. This financial support might well take the form of a fixed-interest loan, carrying with it the option to convert into an equity holding in the new grouping which would be created if the scheme was successfully completed.

The Corporation's power to take up equities has created some controversy and it has been claimed that the Corporation will be able to use this power to bring about nationalisation "by the backdoor". This is not the case. The Corporation will have no compulsory powers and will have no more right than any existing company or institution to compel shareholders to accept any proposals it may make to them. But it is not unusual for merchant banks and other institutions which assist with the development of companies or the formation of new groupings to be given an opportunity to take a stake in the equity, and it is expected that the same will hold true in the case of the Corporation.

At this point may I interject a personal observation? Surely, my Lords, the time has come when we should banish emotion from our thinking when we consider the proposals of any Government to intervene in our economic and industrial affairs. In our complex society it is a necessity; on both sides of the Iron 819 Curtain we have to learn to live with the mixed economy. One of the truest things said recently on this subject was said by a Conservative Peer, the noble Lord, Lord Melchett. When asked why he, as a Conservative, was willing to preside over the nationalised steel industry he replied: The Capitalist label is a little outdated, don't you think? The country now has a modern mixed economy. If one can help in any way in the national interest, then one must do so. This attitude, I am certain, serves this country far better than does the inverted Marxist thinking of Mr. Enoch Powell, with his determination to continue the class war and his bitter attacks on those distinguished individuals whose sense of duty has compelled them to serve the society in which they live.

Clauses 3 to 7 contain this Bill's financial provisions. The White Paper said that if the Corporation was to operate on an effective scale, it would need to have large financial resources at its disposal; and proposed that in the first instance the Corporation should have the right to draw up to £150 million from the Exchequer. This proposal would be given effect by Clause 7 of the Bill. The ceiling of £150 million imposed by the clause is an absolute one—there is no provision for raising it by order. During the last few months there have been some conflicting opinions expressed about the figure of £150 million. Some people have said that the Corporation will be able to make a significant impact on our structural problems without drawing on its funds at all rapidly; others have argued, on the contrary, that £150 million will be needed within a year or two. It is very difficult, I think your Lordships would agree, to make firm forecasts, but the Government expect the financial pro vision being made in the Bill to be sufficient to enable the Corporation to operate successfully for several years. By that time, it will probably have become to some extent self-financing, as the in vestments it will have made in its early years achieve full profitability. The White Paper made it clear that the Corporation will not act as a general holding company, and the faster it turns over its capital the greater will be its capacity to promote rationalisation. On the other hand, it is not the intention that the 820 Corporation should be forced to dispose of its profitable investments at the earliest possible moment, when for good commercial and industrial reasons it might wish to retain them. If experience shows that the Corporation needs funds in excess of the present limit of £150 million, amending legislation would be introduced.

Clause 7 envisages that there will be four separate elements to the Corporation's finances. These are: loans from the Consolidated Fund, investments of Exchequer dividend capital, guarantees given by the Corporation in respect of loans made to companies by third parties, and temporary borrowing, principally by way of overdraft. The overdraft element is not expected to be a very significant one and in any case Clause 3(2) enables the Secretary of State to put a limit on the total amount which the Corporation may seek to borrow in this way.

The Corporation's liability in respect of guarantees on loans from third parties will also be subject to any limitation the Secretary of State may place on it, under the powers given to him by Clause 2(3). The ability to give guarantees may prove to be very useful to the Corporation, particularly as a means of providing short-term financial assistance to new groupings while more satisfactory permanent arrangements are being worked out. However, any guarantee which the Corporation gives will add to the contingent liability on the Exchequer. It has therefore been thought right that the total value of guarantees should be included within the ceiling of £150 million which Clause 7 imposes on the Corporation's funds.

The major part of the Corporation's financial resources will take the form of Exchequer loans, which are provided for in Clause 4 of the Bill. The Secretary of State, with the approval of the Treasury, will settle the terms and conditions on which such loans are to be made, but the Government's intention is that the rate of interest charged to the Corporation will be no less than the rate which the Government themselves would have to pay at the time in question on market loans of a similar term.

Finally, there are the arrangements for making payments of Exchequer dividend capital to the Corporation, which are set out in Clause 5. By providing the Corporation with part of its funds in the form 821 of Exchequer dividend capital the Government will, in effect, be taking an equity stake in the Corporation. There will not be a fixed return, but dividend payments will be made at a rate which will depend on the profitability of the Corporation's activities. It is not anticipated that the Corporation will earn big profits in its first few years, since rationalisation schemes inevitably take some years to have their full effect. But after this initial period the Government will expect to receive a very satisfactory return on their investment of Exchequer dividend capital.

Under Clause 5, the Secretary of State will be able to recommend to the Corporation in advance the rate of return which he considers it should aim to earn in any future period on its drawings of Exchequer dividend capital. Thus the members and staff of the Corporation will not be in any doubt about the nature of the Corporation's financial objectives—it will have to aim to earn the fixed rate on Exchequer loans and the recommended rate on Exchequer dividend capital. At the same time, it will be possible to vary the recommended rate to take account of changes in the Corporation's financial circumstances. A low rate will probably be appropriate in the early years, which will then he increased as the Corporation's operations realise more profits. By means of this procedure the Government will be able to achieve the right balance between flexibility and control in their financial dealings with the Corporation.

At the end of each accounting year the Corporation will be under an obligation to consider the amount of any dividend it should propose to pay to the Government in respect of its Exchequer dividend capital drawings. But the Government will not be obliged to accept the Corporation's proposal. Subsection 3(b) of Clause 5 enables the Secretary of State, after consultation with the Corporation and with the Treasury's consent, to determine that a larger or smaller dividend should, in fact, be paid. This arrangement follows the precedent set by the Air Corporations Act in revising the financial obligations of the British Over seas Airways Corporation.

822 There is only one further aspect of the Bill to which attention might be drawn: the provisions relating to the Corporation's annual report contained in Clause 9. In the Government's view—and I believe it to be in your Lordships' view, too—the Corporation's annual report will be a very important document, which should be full and informative and provide all the facts necessary to enable the Corporation's performance to he fairly assessed. The Corporation will in some ways be a new and experimental kind of public body, and in some of its activities it may be unable to avoid creating controversy—not controversy necessarily of a political kind, but argument about the commercial and industrial wisdom of particular courses of action. Parliament and the public at large will rightly expect to receive a full and prompt account each year of the Corporation's activities. Clause 9 puts the Corporation under a legal obligation to produce such a report; this obligation goes a good deal further in certain respects than that imposed by the present Companies Act, especially so far as the provision of information about share holdings and the speed of publication are concerned.

My Lords, the Labour Party in the two recent Election campaigns, stressed the need to modernise the British economy at every level and in every sense. We have not been deterred by the economic difficulties that have beset the country, nor shall we be. No one with any sense of history or knowledge of public administration will expect changes overnight, but I am convinced that various acts of this Government, such as the creation of the Ministry of Technology and the Corporation which we are discussing to-day, will help those elements in British industry who recognise the need for change to overcome the inertia which is preventing this country from using to the full the potential which we all know is there. I commend this Industrial Reorganisation Corporation Bill for your Lordships' approval. I beg to move.