§ 3.46 p.m.
§ THE MINISTER OF STATE, MINISTRY OF TECHNOLOGY (LORD DELACOURT-SMITH)
My Lords, the purpose of this short Bill is to ensure that the payment of investment grants is confined to ships whose purchase and operation is of benefit to the United Kingdom balance of payments. It therefore empowers the Treasury, who have special responsibility for safeguarding our balance of payments, to prevent the grant being given on a particular ship if in their view this payment would operate to the detriment of the United Kingdom balance of payments.
The introduction of investment grants was announced in the White Paper, Investment Incentives, published in January 1966 and legislative form was given to these proposals by the Industrial Development Act 1966. The White Paper explained the intention to use investment grants to raise the level of investment providing a key to industrial expansion and economic growth. The overriding need—and I quote from paragraph 14 of the White Paper—was:to give priority to those sectors of industry which can make the greatest contribution to strengthening the balance of payments".In this context emphasis was given to machinery or plant used for what was 294 described as carrying on a qualifying industrial process, but there were certain types of assets whose eligibility for grant did not depend on their being used for such a process. Ships, along with computers and hovercraft, were included as assets of this kind.
Our merchant shipping fleet clearly makes a valuable contribution to the balance of payments through the creation of invisible exports and so ships were included in the scheme—in continuation of the preferential treatment which had been accorded to the shipping industry under the preceding system of industrial investment allowances.
My right honourable friend the former Minister of State at the Board of Trade very clearly described the purpose of making investment grants for ships, when in April, 1968, he said in another place:The real purpose of investment grants is to help the shipping companies to have modern first-class ships, and so ensure that the British merchant service leads the world. … This means that we must encourage the shipping companies to have a sensible, commercially profitable programme for the continuous modernisation of their shipping fleets. … They must get the best ships at the best price, delivered on time, with the right credit."— [OFFICIAL REPORT, Commons, Vol. 726, col. 333.]From 1966 until December 31, 1969, actual payments of investment grants on new ships amounted to £110 million. In addition to this a further £209 million —making a total of £319 million—will arise over the next few years in investment grant payments on eligible ships which were under construction or were known to be on order at December 31. This clearly represents a substantial contribution towards investment by the merchant shipping industry.
The investment so far has undoubtedly contributed in general to the benefit of the national economy. In 1966, the year in which investment giants were introduced, the contribution which ships owned and registered in the United Kingdom made to our invisible exports was £138 million. By 1968 this contribution had risen to £295 million. At the end of 1965 the gross tonnage of ships owned and registered in the United Kingdom was 17.8 million tons; by July, 1969, this figure had risen to 19.8 million tons. I am not claiming that we can attribute the shipping industry's growth and increased contribution to invisibles directly 295 or entirely to the payment of investment grant. There are, of course, other factors at work as well. World seaborne trade as a whole has been buoyant. The volume of goods loaded rose by over 13 per cent, between 1965 and 1967. Hardly any tonnage is laid up.
Almost every significant shipbuilding country, including the United Kingdom, now provides cheap fixed interest credit for ship construction. The world merchant fleet has in fact been expanding at a faster rate than our own, and although between 1965 and 1969 the gross tonnage of United Kingdom ships rose in the way I have indicated, our proportion of total world tonnage fell from a 1965 figure of 12.3 per cent, to a 1969 figure of 10.7 per cent. However, the proportion of world tonnage now on order for British owners is higher than this figure, which means that the decline in our proportion of the total world fleet should be arrested. This expansion of the United Kingdom fleet has brought a bonus for the shipbuilding industry. It has helped to maintain the proportion of the world ship market which is available for competition by British shipbuilders. It has therefore been one of the factors which has enabled the United Kingdom shipbuilding industry to improve their order books so substantially in the last eighteen months.
Existing legislation already requires more stringent tests for investment grants in the case of ships than for other types of assets which attract these grants. Under Section 5 of the Industrial Development Act 1966 an applicant for an investment grant in respect of a ship must be resident for tax purposes in Great Britain and be either a citizen of the United Kingdom and Colonies or a company incorporated in Great Britain. In either event, the applicant must be carrying on business in Great Britain and must provide and operate the ship for the purposes of that business; the ship must be registered in the United Kingdom. Furthermore, under Section 8 of the 1966 Act the payment of grant on new ships is invariably subject to conditions which apply for five years—as opposed to three years in the case of other assets. Under these conditions the grant becomes repayable, in part or in whole, if the ship is sold during the five year period. Moreover, if the ship is chartered out to other operators we require the rates charged for any 296 such charters to be submitted for approval. We can and do thus prevent the benefit of grant passing to foreign operators by way of charter rates which are reduced substantially below the general market level. In no circumstances do we allow grant on a ship which is demise chartered to foreign interests.
Perhaps I should say that it is immaterial for the purposes of grant whether the applicant has the new ship built from scratch or takes over one which is already under construction or is complete, although there may in different cases be differences in the timing of the owner's payments for the ship and hence in his grant claim. At the same time, investment in a ship may, from the balance of payments point of view, have effects which are quite different from those of investment in, for example, a chemical plant sited in Great Britain. Such a plant contributes substantially to the economy of the country by the provision of employment, by the direct contribution which the exports of its products make to the balance of payments, by import savings and in a variety of ways. In the case of a ship, on the other hand, the company claiming grant, although it must satisfy the conditions I have already recited, may succeed in its claim without regard to the nationality of ownership of the company or to the implications for the balance of payments of the capital expenditure upon the ship, its financing or its proposed operation. This fact has made it possible—and in some cases made it particularly attractive—for shipping trans-actions which would otherwise have had nothing to do with Great Britain to be routed through British-registered companies in order to obtain the benefit of the investment grant, thus sometimes involving the United Kingdom in a balance of payments loss without compensating benefit.
To put the matter in another way, the ship may have been built abroad and be manned with a largely non-resident crew. It may be owned by a company under the control of non-resident interests to whom after payment of tax the profits are remittable. Thus it will be clear to noble Lords that there are ways in which the construction or conversion of a ship may be of little or even no benefit to the balance of payments of this country. Thus there was a difficulty inherent in the Industrial Development Act, 297 in that foreign shipping operators could establish new British subsidiaries to own ships which would not otherwise have formed part of the British fleet but which could attract investment grants in circumstances where they made little contribution to the national economy. The Government watched this situation closely and found that there was a real prospect of this taking place.
Accordingly, in January, 1968, my right honourable friend the then President of the Board of Trade announced the introduction of a special scrutiny of the balance-of-payments consequences of certain classes of transaction involving the purchase of an eligible ship by newly-formed nonresident controlled British shipping companies—that is to say, those which had been incorporated, activated as ship-owners, or taken over by non-residents since the beginning of 1963. This scrutiny was operated principally through the existing exchange control machinery Under the scrutiny procedure the Treasury had to be satisfied that the transaction taken as a whole would not be detrimental to the balance of payments in the short term. Since the transactions concerned required exchange control consent under the 1947 Exchange Control Act, those which failed the test could be dealt with by the refusal of such consent under that Act. A total of 22 cases were considered by the Bank of England and the Treasury under the exchange control arrangements, and of these 22 cases, four were refused. The deterrent effect of the scrutiny was, of course, much greater, since it was known that: no company whose transactions would be subject to scrutiny would be able to get an investment grant on a ship where the short-term effect on the balance of payments would be harmful.
In the light of experience gained in administering this scrutiny, we have kept a close watch on investment grants for ships generally. We have stopped an outflow of funds associated with companies which might have been specially formed to take advantage of the support given to the shipping industry in the form of investment grant. It still remains the case that some part of this support has been going to encourage the building of ships whose net effect on the balance of payments may be a negative one. The Government have therefore decided that it would be right to recast 298 the scrutiny which I have described and extend it to many more of the transactions involving the purchase or the conversion of an eligible ship. The present Bill provides for such an extended scrutiny to be applied by the Treasury to the purchases of eligible ships by all eligible claimants—with, however, one very important exception to which I shall come in a moment. It is necessary to apply the new tests in this comprehensive fashion to ensure complete coverage and to enable all cases to be handled on a consistent basis. The new scrutiny will therefore have a wider coverage than the earlier limited scrutiny undertaken by the Treasury and the Bank of England. It will apply to any case in which application is made for investment grant on a ship where the shipowner was not under a binding obligation to buy or convert the ship before November 10, 1969.
The special exemption to the new scrutiny is the one provided in Clause l(2)(a) of the Bill. Subsection (2) provides that the new arrangements will not be applied to ships wholly or mainly constructed or converted in the EFTA countries—which of course includes the United Kingdom and the Irish Republic. To qualify for exemption under this subsection a ship must be wholly or mainly constructed or converted in the exempted area. This means in practice that more than half of the total cost of a ship, whether of construction or cost of conversion must be derived from work carried out in these exempted countries. This includes work on component parts and the work of construction or assembly or fitting up.
The reason for excluding ships constructed in EFTA and Irish shipyards is that our obligations under the EFTA and Anglo-Irish Free Trade Area Conventions require it. If less than half of the total cost is derived from work carried out in these countries, such ships do not qualify for exemption and will be subject to the new scrutiny. Noble Lords may feel that this exemption leaves it open to foreign interests to form new companies which will buy their ships from EFTA yards and escape the balance of payments tests upon these ships. The Government recognise this possibility, but I would emphasise that the Treasury still have the exchange control powers under which they operated the previous scrutiny of newly formed non-resident 299 controlled companies and that they propose to use them in such cases as are appropriate.
The Bill is a short one and the provision of its clauses can be briefly summarised in the light of the general explanation which I have given. Clause 1 gives the Treasury power to direct the Minister of Technology not to make an investment grant in cases where in the Treasury's opinion to do so would be harmful for the balance of payments. The balance of payments, of course, is one of the major interests of the Treasury, and they are the people to evaluate what is good or bad for it. This clause does not specify the precise nature of the tests which the Treasury will apply. These have been described in some detail in a memorandum published when the Bill was introduced in another place, and copies of this memorandum are available in the Printed Paper Office.
I should perhaps say that in subsequent discussions with the Chamber of Shipping—and I should like to take this opportunity to pay a warm tribute to their co-operation in this whole exercise—a number of details of the proposed tests have been refined or elaborated. In spite of this, the memorandum gives a good general summary not only of the reasons for the introduction of the Bill but of the sort of test which will be applied. The changes that have been made are of an administrative and detailed character and not in policy or in the nature of the balance-of-payments test. To assist ship-owners the Treasury and the Ministry of Technology are ready to answer any advance inquiries on the likely result of the test in any particular case, if the shipowner will provide the necessary information.
Clause 2 of the Bill is clear and straightforward; it empowers the Parliament of Northern Ireland—where the Ministry of Commerce have power to pay investment grants on ships similar to the Ministry of Technology power under the 1966 Industrial Development Act— to make laws for the purpose of applying a balance of payments test. I understand that it is in fact the intention of the Northern Ireland Government to introduce legislation similar to this Bill, and to apply under it a balance of payments test of a similar kind.
300 These then are the arrangements which are being adopted with effect from November 10, 1969, to supplement the existing provisions under the 1966 Industrial Development Act. We now have, after all, a good deal of experience of operating investment grants, and this new provision is a logical development from the safeguards already provided in Section 5 of the 1966 Act and extended by the special scrutiny started early in 1968.
The House will, I am sure, agree that this is a useful measure which will ensure that in all cases vessels which are assisted by a Government grant will bring a clear benefit to this country's balance of payments. Having said that, I think it is important that we should be careful not to exaggerate the extent of the problem with which the Bill is designed to deal. So far as the Ministry of Technology's information goes, the total figure of investment grant already paid on new ships, and outstanding on ships for which contracts have already been placed, stood at December 31, 1969, at the total figure of £319 million. It is estimated that this figure represents the grants paid or known to be payable over something like eight years from 1966. Precisely what period it will cover of course depends on how quickly the ships are built and the grants claimed.
Of this £319 million, companies which were non-resident controlled stood to receive £97 million; but of this £97 million some £34 million relates to ships built in the United Kingdom. That leaves only £64 million—one-fifth of the total of the investment grants—paid, or to be paid, on ships built elsewhere for companies which are non-resident controlled. Now of this £64 million—to get again a perspective of the position—over £55 million relates to tankers built, or under construction, for the oil companies, whose important position in our economy is well known to all. Out of the £64 million, again no less than £12 million relates to ships built either in other EFTA countries or in the Irish Republic.
I would stress that from our knowledge of the orders placed for ships which are eligible for investment grants, a high proportion of these orders are being placed in British yards. Many factors are at work contributing to this. I have quoted a figure of £64 million in 301 total grants payable to non-resident controlled shipping companies upon foreign built ships. To get this into perspective, I should say that in the last three months from September to December, 1964, this figure has risen by only £3 million— from £61 million to £64 million. But during the same period the grand total of all investment grants on ships rose by £34 million from £285 million to £319 million, and of this increase one half represents orders placed in British yards by resident controlled British companies.
The balance of payments scrutiny will, when the Bill is enacted, apply to new orders placed from November 10, and it may well have been a factor operating on the recent trend of orders by eligible shipowners. I do not want to draw any specific conclusions, but merely to make one general comment. For a long time now orders by British controlled companies have increased at a much faster rate than others and therefore it is plain that there is no evidence of widespread abuse of the system of investment grants for ships such as has been suggested in some recent Press articles. The evidence if anything points in the other direction. But while the dimensions of the problem with which this Bill seeks to deal should not be exaggerated, the Government believe it right to seek legislative provision to put the scrutiny of the situation on the more comprehensive basis which I have described. I ask the House to give the Bill a Second Reading.
§ Moved, That the Bill be now read 2a.— (Lord Delacourt-Smith.)
§ 4.10 p.m.
§ LORD NUGENT OF GUILDFORD
My Lords, may I thank the noble Lord, Lord Delacourt-Smith, for explaining the purposes of this Bill so clearly and authoritatively. May I also welcome the figures he gave us, which explain the progress made by our merchant shipping fleet, and especially the increase in the size of the order book which is an indication of the future. I share with him a wish to see our merchant shipping fleet prospering and continuing to earn the very large amount of foreign exchange that it does. I recognise with him that it has unhappily become the practice throughout the world for all Governments to subsidise their shipping fleets in one way or another, so that help on a big scale is necessary if 302 we are to make it possible for our fleet to compete successfully with the others.
So persuasive was the noble Lord that I hardly like to be critical, but I am afraid that I am nevertheless going to be critical on one or two points, as he will no doubt expect. Despite the charming way in which the noble Lord put it to us, this Bill is designed to slop a leak. There has been a leakage of public funds, which have been going for the wrong purpose, and however carefully and persuasively the noble Lord wraps it up, that is bound to be a matter of great anxiety. It was referred to by the Estimates Committee a year ago and it was referred to again in the Report published last month—I shall have a reference to make to that a little later in my speech. As to the purpose of the Bill, however, which is that of preventing the wastage of our hard-pressed taxpayers' money, I of course entirely welcome it, though there are some features of the antecedents of the Bill on which I wish to comment.
As the noble Lord has explained, the leak has occurred in respect of investment grants paid by Her Majesty's Government in respect of ships built in foreign yards—that is to say, in countries like Japan, Germany and so on—for foreign shipping companies who have a brass plate in this country, or perhaps a shipping office in London. Of course, many foreign-owned companies—what are called ''non-resident companies"— with a shipping office in this country are highly reputable, and have made most valuable contributions to the economy of this country over many years. But the point of this Bill is to deal with those who have been using these grants to buy ships the operation of which has not in any way been beneficial to this country.
Thinking back to the days when I was in the Government in another place, I can well imagine what some honourable Members would have said to me from the other side had they had reason to believe that good British taxpayers' money was going to pay for ships to be built in foreign yards and to be operated by foreign operators without much benefit to this country. However, I recognise the complexities of the situation, and that this matter, with certain safeguards, could be all right for this country. The remedy in the Bill is to subject such applicants 303 for a grant to a test, and the test to be applied is set out in a Memorandum a copy of which is in the Printed Paper Office. The purpose of the test, which is perfectly clear, is to show whether the operations of a ship are going to benefit our balance of payments. I think the noble Lord told us that this test has to be applied over the first five years of the life of the ship, but it seems to me quite a formidable obligation for our civil servants in Whitehall to have to keep track for five years of the operations of a ship plying for trade all over the world. Perhaps the noble Lord will say a further word about that matter when he replies to the debate, and tell us how it will be done and how many people will be involved in doing it.
The noble Lord gave us a great many figures to show how small the leakage is. I rather fancied that it is not as large as some newspapers have led us to think, since they have rather blown this matter up as if it were a major scandal. I accept the noble Lord's statement that it is not of those dimensions. I was interested to see the official answer given to the Estimates Committee in their Inquiry at the end of last year. They reckoned that this Bill will save about £5 million per annum in due course. That is not a major matter but, as the noble Lord said, it is not insignificant; so it must be very welcome to us all to know that that is what this Bill will do.
There are two points about which I was not clear from the noble Lord's explanation. First, if the Government knew about this leakage a couple of years ago, why did they delay for two years before bringing in this Bill? I think the noble Lord ought to answer that question when he replies to the debate. Secondly, the noble Lord told us that the Government took administrative action a year ago for the Treasury to apply the exchange control mechanism. I think we ought to be told what was defective about that arrangement which necessitated the introduction of this Bill now. The noble Lord made the observation that the Bill goes wider, but it was not clear to me how it does so, and it would help us to know.
Speaking about the Treasury, I should like to refer to a small constitutional 304 point which was mentioned in another place and was not satisfactorily answered. In my experience, this Bill is drafted in a unique way. It gives the Treasury power to direct the Minister of Technology not to make a grant. Now the common form of Money Bills, as noble Lords will know, is that the Minister "may with the consent of the Treasury" —those are the hallowed words—make certain payments or grants. But Clause 1(1) reads as though, if the Minister of Technology wants to make a grant, the Treasury can step in and tell him not to do so. This is an innovation to me and I should like to know why it is in this Bill.
I can well remember some years ago in another place when Mr. Aneurin Bevan was in Opposition, that he attacked me because in some Bill that I was dealing with the magic words, "with the consent of the Treasury "were included. Mr. Aneurin Bevan held forth at great length that that was a monstrous interference with the will of Parliament. He made a tremendous speech and it was a formidable task for me, as a junior Minister, to try to answer it. I wonder what he would have said if he had seen this Bill, with the Treasury taking power to direct a Minister. I think he would have burst into flames. I am not going to do that, but I ask the noble Lord to improve on the earlier answer given in another place as to why the Treasury is taking powers specifically to direct the Minister of Technology. I shall be quite content with a simple explanation.
With the background of this leakage in grants for building ships, I think it is also fair to make this point. It is this Government's policy to abolish investment allowances, which were simple and automatic tax allowances, and to substitute instead the system of discretionary investment grants. The total Estimate for all investment grants for this year was £460 million, to which has been added the enormous Supplementary Estimate of another £100 million, making a grand total of £560 million. That is an enormous sum, my Lords. I should be out of order if I wished to discuss this matter further here, but as the noble Lord made the point that the purpose of these grants was to promote investment in industry, the modernisation of industry and growth in the most useful sectors, I think I may say that the figures I have show that in 305 the past five years, under this Government, total industrial investment has increased by 23 per cent., compared with a growth in the previous five years, before these discretionary investment grants were introduced, of 28 per cent. So one has this vast machinery for taxing the community to produce this enormous sum and then for distributing it again in discretionary grants, and at the end of it all the rate of growth of the economy as a whole is less than it was before.
The point that can fairly be made here is, as it seems to me, the inherent impossibility, in the distribution of such an enormous sum of money—£560 million— when it is on a discretionary basis, of ensuring that it all goes to the right places. We know that there are thousands of civil servants engaged in this work, and one knows that they are doing their best; but I would suggest that the sheer size of the Supplementary Estimate, which requires an extra £100 million, gives some indication of how tenuous is the control in Whitehall over this vast field of public spending. I would make the comment that, inevitably, the "smart boys" in this country and elsewhere, seeing such an enormous cake there which they might get a slice of, are forever trying to think up new ways of getting a slice, and it is extremely difficult for the civil servants ever to catch up with them.
There is a further weakness in the Bill which the noble Lord will not be surprised to hear about—it was referred to in the other House—and that is that the British Crown Colonies, notably Hong Kong and Gibraltar, are not put on the same basis as Great Britain with regard to these grants. The Bill as drafted, as the noble Lord has told us, permits grants to be paid on ships being built in shipyards in EFTA countries, which of course include Great Britain, and in Eire, without this new stringent balance-of-payments test, but not in British Colonies. British Crown Colonies are going to be subjected to the test just the same as any foreign country. In another place on the Committee stage there was an unusually wise Committee which amended the Bill and put the British Crown Colonies on the same basis as Great Britain. There are quite considerable shipyards in Hong Kong; they earn large sums of money, running into many millions of pounds a year, for this 306 country; and therefore it seems only reasonable that they should be put on the same basis as shipyards here. But, unfortunately, wisdom did not prevail on the Report stage in another place. That decision was then reversed, and so the Bill as it comes to us now still discriminates against the Crown Colonies.
My Lords, there is nothing we can do about it, unfortunately, because it is a Money Bill. Therefore it is futile for me to try to amend the Bill; and I can do no more than comment on it. But it seems unfortunate that the form of the Bill discriminates against British Crown Colonies and that they are not put on as good a basis, even, as shipyards in EFTA countries, like Norway, who are competitors of course of ours. The British Crown Colonies have to go through the test, whereas the EFTA countries do not. I know that the Government's explanation is that to include our Crown Colonies would put us in breach of the GATT, and that to exclude the EFTA countries would put us in breach of our EFTA Convention. There are, unfortunately, precedents for it, but I am the last person to encourage them to do it again. Therefore I realise that we have to accept this unhappy little piece of discrimination; but it seems to me that this anomaly, which it undoubtedly is — I am sure the noble Lord, Lord Delacourt-Smith, regrets as much as I do that the Bill discriminates against the Crown Colonies—really is a direct consequence of the structure of discretionary investment grants. Because the grant system operates in this way, it is inevitable that we get an anomaly of this kind. I think that is a great pity.
Noble Lords will have gathered that this little Bill has some unattractive features, although its objective is entirely commendable and is one which we welcome. Its objective is to control an abuse of the scheme, a scheme which helps our shipping substantially; and control of the abuse will save the taxpayers money. In that spirit I am happy to welcome it and to advise my noble friends to give it a Second Reading.
§ 4.27 p.m.
My Lords, I must first declare an interest in that I am a director of shipping companies and am also the immediate past president of the 307 Chamber of Shipping which, as the noble Lord, Lord Delacourt-Smith, told us, has been discussing with the Treasury and the Ministry of Technology the way in which the balance-of-payments test will be administered. I do not propose, for my part, to enter into any wider argument about the investment grant system as a whole. Nor do I intend to compare the relative advantages for the shipping industry of investment grants and investment allowances. These are matters of immense significance; but the Bill we are considering this afternoon relates to present circumstances and not to what might be done at some future date. It is none the less important.
As I have said before in this House, the British shipping industry is justly and enormously proud of its contribution to the country's balance of payments. What has irked it until recently has been that the true facts have not been clearly and sufficiently appreciated. The latest version of the Pink Book produced by the Central Statistical Office goes a long way to correct past misunderstandings. In 1968 the net—and I emphasise "net "—contribution of the industry was £262 million, the largest single contribution by any industry to invisible earnings.
Because of this importance of shipping to the balance of payments; because of the international character of shipping operations, and because, also, of the vast sums of money at stake, I can well understand that Her Majesty's Government wish to satisfy themselves that applications for investment grant towards a new or converted ship should bring a net gain to the balance of payments. We as an industry do not quarrel, therefore, with this as a matter of principle. Indeed, we are glad to see from the way in which the test will be done that the Treasury have focused their attention on the flows of costs and benefits across the exchanges. These are what really count in calculating the value of an investment to the balance of payments.
The Chamber of Shipping has approached this general problem on much the same lines. It means, for example, that the more of the capital cost that can be raised abroad the better for the balance of payments. It means, too, that in this context freights earned in the carriage of imports count just as much as 308 those earned in the carriage of exports or in the cross-trades. It means, finally, that profitability in the balance-of-payments sense is not the same thing as profitability in the sense of a profit-and-loss account. In the case of shipping, these can be widely different; though, clearly, the larger the accounting profit the larger the benefit to the balance of payments.
So far, my Lords, so good. But, equally, as a matter of principle, we must be certain that this new test, which is to be applied only to ships built or converted outside EFTA countries, is not intended in any way to restrict the freedom of British shipping companies to build wherever in the world they can find the best terms, in price, delivery and quality. That freedom is vital to us. For we are an industry with virtually no home market, wholly exposed to the keenest world competition. We must be able to build wherever our competitors can build. Otherwise, we are at a competitive disadvantage which will either hurt us financially or, more likely, lead us to decide not to build.
I believe that the Government have no intention in this Bill of restricting this freedom. But, to be plain, so much nonsense has been talked in another place about confining the investment grant to ships built in this country that I feel I must make the voice of the shipping industry heard. In fairness, the Government spokesman in the other place said, clearly and rightly, that the intention of the investment grant is to assist in maintaining the British merchant fleet. That will be achieved only if British owners can build wherever they judge the combination of cost, quality, delivery and punctuality will best suit their particular requirements. And so I would ask the noble Lord, Lord Delacourt-Smith, when winding up for the Government, to give a clear statement of principle that this freedom is not to be impaired.
Equally, let me say clearly that the British shipping industry is opposed, as firmly as I believe the Government to be, to abuse of the investment grant system. We have heard a great deal of "brass plate" devices, whereby the investment grant might be effectively siphoned off to foreign companies. We were glad, therefore, to read the firm assurances given by the Government spokesman in another place that this could and would be 309 stopped by the use of exchange control powers. But what I cannot quite understand—and I should be grateful if the noble Lord, Lord Delacourt-Smith, would explain—is why those same powers, allied to the discretionary nature of the investment grant itself, would not suffice outside EFTA just as effectively as within EFTA. In other words, why is the Bill needed at all? Its powers are additional to exchange control powers. Are they a necessary addition or merely administratively convenient? It seems to me that there is a logical fallacy somewhere or other along the line.
Assuming, however, that there is a good and sufficient answer to my question and that the Bill is necessary, I do not quarrel with it as a piece of enabling legislation. I can well understand that to write the test itself into law in some form or other would be to make it much too inflexible. There have been, I know, fruitful discussions between the Treasury, the Ministry of Technology and the Chamber of Shipping aimed at making the test as clear, as simple and yet as comprehensive as possible. It would be wrong not to leave adequate scope for further change in the light of experience.
But there are three particular points that I should like to make. The first is that it seems to me a pity that the Government have refused to extend exemption from the test to ships built or converted in the Crown colonies, notably Hong Kong. The only reason given is that it is undesirable to widen the exemption beyond EFTA. Not very convincing, I am afraid. For in reality the only United Kingdom registered companies likely to want to build in Hong Kong would, I am sure, pass the test easily. Why make them go through such a hoop unnecessarily? Why treat, and be seen to treat, Hong Kong less favourably than EFTA, when there is no justification in practice for doing so? I find it hard to understand.
My second point concerns the scope of the test. The original Treasury Memorandum said:The purpose of the test will be to determine whether the transaction of which the payment of the investment grant forms part, viewed as a whole, is, in the judgment of the Treasury, detrimental to the United Kingdom balance of payments.The crucial words are, "viewed as a whole". For often the operation of a 310 particular ship cannot be considered just by itself. The breakthrough into a new market may mean the employment of a loss-leader. And in shipping there is a growing tendency to operate in larger groupings or consortia. Here, the benefit of a particular ship must be seen as but a part of the benefit of the whole operation. The Government spokesman in another place recognised this to some extent when he said:We will consider the operations of an individual ship in the context of the whole fleet, but it is still at the individual ship that one must look."—[OFFICIAL REPORT, Commons, 20/1/70, col. 289.]I think I can see what he means, but "as through a glass darkly". I would ask the noble Lord, Lord Delacourt-Smith, in replying this afternoon, to be somewhat more specific, for this is an important point. It is only too likely that in any particular case the narrower view will be taken and the application will be turned down, with the result that the balance of payments will lose—which surely is just what the test is intended to prevent.
More generally, the real target of this Bill is the foreign-controlled United Kingdom shipping company, and I have made clear that we as an industry are opposed to the "brass plate" company being helped by the British taxpayer. But there are many foreign-owned companies with a longstanding and beneficial association —beneficial both to them and to our economy—with the United Kingdom. It is highly improbable that they have ever remitted profit back to their parent companies to the maximum degree possible. It is also highly probable that on capital account their remittances to this country have been considerable.
It would be quite wrong to overlook these important factors, although the balance-of-payment test does so, in that it treats the "brass plate" company and the genuine foreign-owned company in much the same way. Prominent in our minds must be the foreign oil companies operating from this country. Their ramifications in our industrial and commercial life are wide and pervading, and applications by them should be treated with full understanding and not in a narrow sense. They are not exempt from the full impact of our tax structure on their operations. It seems invidious to discriminate against them in the context 311 of investment grants, and only in their shipping operations, not their wider activities.
My last point concerns a possible retroactive effect of the Bill. It exempts ships from the test where there was a binding obligation incurred before November 10, 1969. The Government elsewhere have defined a "binding obligation" as something which, if the applicant failed to meet it, could lead to his being sued in the courts. But the fundamental fact is that, in shipping, an undertaking between shipowner and ship builder for the construction of a ship can be entirely binding even if the contract is not signed for some considerable period after the initial undertaking. I can recall more than one case where the contract was ultimately signed when the ship was almost ready for delivery. The distinction between a legally binding and a commercially binding obligation is admittedly a fine one— too fine to incorporate in legislation. But I hope that in satisfying himself that there was a binding obligation the Minister will not study legal niceties too finely but will take fully into account the long standing and basic convention of the industry: in brief, that he will act reasonably, case by case.
My Lords, may I, finally, urge that this new test be administered swiftly as well as fairly? World shipping is a hard and fast-moving market. The completion of a complex and important contract can depend on knowing or not knowing for certain, within as short a time as a day, whether or not there will be an investment grant. The Treasury have assured us that they can, and will, act fast in such cases. But I must emphasise the need. British shipowners must be able to match their rivals in speed, skill and certainty. A ponderously administered test may save the balance of payments a little here and there, but it will almost certainly cost much more in business loss to the generality of British owners. Let us not be "Penny wise, and pound foolish".
§ 4.40 p.m.
§ LORD DELACOURT-SMITH
My Lords, I am grateful to the two noble Lords who have spoken for the general welcome which they have given to the purpose of the Bill and the sympathy 312 which they have expressed for its intention. I hope that I shall be able to reply at any rate to a number of the questions which they have raised in the course of their remarks and to the specific points addressed to me.
With regard to the scope of the Bill and its general effect and the situation with which it is designed to deal, I tried to put this matter into perspective when I moved the Second Reading. I of course agree with what the noble Lord, Lord Nugent of Guildford, said about the long-established foreign-owned companies with subsidiaries in this country. Many of those companies have been here for many years and they play a well-recognised and appreciated part in British commerce and the development of trade. The noble Lord made a reference to the information which would be required about the activities of ships which attracted grant and the necessity over a period of time to see whether in fact the performance was measuring up to the expectations held out when the application for the grant was made and the grant was agreed.
I think it has to be borne in mind that under the provisions of the 1966 Act, as I indicated, the Minister of Technology already has power to require a good deal of information about the future of the ship in respect of which a grant has been applied for. Since this point has been raised, I should like to take the opportunity to say that in so far as any further information has to be procured, the obligation to provide that information will rest on the person who as shipowner has received the grant. It is not the intention of the Government to attach to grants any further condition which would have the effect of providing that a grant is repayable if the information given initially by the applicant about the construction and performance of the ship, its financing and the estimate of earnings, profits and so on should not be borne out in practice, provided that the information and estimates were given in good faith in the first place. The law provides penalties for the giving of deliberately false information, but where information or estimates are given in good faith and the facts turn out to be substantially different and show a detriment in the balance of payments, in our view the remedy would be to stop paying any more grant in that case.
313 I am afraid that at this stage I cannot give the noble Lord any estimate of any additional burden which may fall on the public service as the result of the operation of this change, but I would emphasise that already a considerable amount of information has to be provided and scrutinised and kept under review as the result of the existing arrangements, and I should not think that the burden will be increased substantially.
The noble Lord asked why the Government delayed before taking this action. I think the reason is to be found in the fact that the Government were unwilling to interfere with the existing arrangements until it was quite clear that new arrangements were really necessary. The obvious leak which was stopped early in 1968 has already been referred to. The Government have now decided that it would be desirable, for reasons which I will try to explain a little more fully in a moment, to put this matter on a clearer and more permanent foundation.
In this connection the noble Lord asked why it was that the measure took this form; why in fact there was a form of words which so far as he was aware was unique. Perhaps I may explain or recall that the 1966 Act conferred on the Minister of Technology a discretionary power. The Act in general conveyed a discretionary power but of course we are concerned particularly with Section 5 which deals with ships. The Minister has a discretion to withhold grants in a particular class of case provided that he is willing to consider any individual application for grant made to him in order to decide whether it has any special features which would justify him departing from his general policy and declining to exercise his discretionary power in favour of the applicant in that case. It cannot be in any doubt that the policy of the 1966 Act is to provide financial incentives to investment in certain types of assets for certain purposes, but it is less likely that the considerations relating to the balance of payments are within the policy of the Act; and of course, as the noble Lord may well know, the precise extent of the Minister's discretion under the Act is still under consideration in the courts and a final appeal on this matter is still to be heard. In those circumstances, it appeared that the 314 clearest and best way was to draft the present legislation in the form which it takes and which also, as I said earlier, underlines the fact that the Treasury is the Department which has a particular preoccupation with the balance of payments. Therefore it seemed right to frame the legislation in this way.
Perhaps at this stage I may also mention the point on which Lord Nugent touched and which was also touched on by the noble Lord, Lord Geddes: that is, why there was the necessity for this legislation since there appeared to be some facilities under the Exchange Control Acts for dealing with situations which did not seem to fall within the fundamental national purpose of the making of grants. The arrangements made in 1968 concerned a particular class of case which it was normally possible to handle under the exchange control arrangements and to refuse consent where this was necessary, since the companies concerned were limited to those of recent establishment. It will be recalled that the scrutiny was limited to companies which had come into this field in this way since 1963, but it appeared to the Government that the new arrangements provided for in the present Bill were necessary; that they represented a more significant development in the general administration of investment grants and they provided a clear opportunity for the matter to be put before Parliament and to be considered, discussed and to be clearly covered in legislation. I hope that what I have said will explain to the House why these particular steps have been taken.
The noble Lord, Lord Nugent of Guildford—I was not surprised that he did so— touched on the question of the respective merits of investment allowances and investment grants. I am sure that he would not expect me on this occasion to follow him into the whole of that field, but particularly in respect of the shipping industry it would hardly be a profitable thing to do at the present time because there can be little doubt that this is one of the matters to which attention will have been given by the Rochdale Committee. As we know, that Committee has reached the point at which we may expect the publication of its Report within a few weeks, and I should prefer us to wait and see whether we can debate this 315 matter, if it is felt desirable to do so, at a later stage in the light of their examination of this problem.
Both noble Lords who have spoken referred to the question of Hong Kong and of the Crown Colonies in general. The whole purpose of this Bill is to make sure that when an investment grant is made, it will be for the benefit of the United Kingdom balance of payments and, if possible, we should prefer to have no exemptions at all and to submit all applications to a scrutiny which would put this matter beyond doubt. But, as I have indicated, we are bound by our treaty obligations to make certain exemptions—for example, in the case of EFTA countries and the Irish Republic—but we wish to keep them to a minimum. In saying that, let me emphasise that we have very much at heart the interests of Hong Kong and other dependent territories. I think that it might reasonably be inferred, from what was said by my noble friend Lord Geddes, that the British owners who have been in the habit of having ships built or converted in Hong Kong should have little difficulty in passing balance-of-payments tests and in getting investment grants.
My noble friend asked me for an assurance that we have no intention of interfering with the freedom of the United Kingdom owners to order their ships wherever it is most advantageous for them to do so. I can certainly give him that assurance. My noble friend Lord Geddes then discussed the extent to which it was reasonable to take the examination of one individual ship rather than to look in a wider way at the operations of the company acquiring the ship. I think we can all appreciate the concern of my noble friend that where over the whole field of its operations a company is making a good and recognised contribution to the balance of payments, it may feel that it is rather hardly used if it cannot enjoy a grant on any ship built at any location while its competitors can do so.
I would say, first of all, that there is no question of any discrimination between companies so far as the balance-of-payments test is concerned. This is a straightforward, factual test, designed for the purpose its name indicates. It is an impartial test, and if the facts indicate that a particular transaction is 316 unfavourable to the balance of payments, then the decision upon it is bound to follow from those facts, which would stem from the circumstances of the company's ownership, the proposed operations of the ship and so on.
My noble friend quoted what was said in another place about considering the operations of an individual ship in the context of the whole fleet but still having to look at the individual ship, and asked me whether I could be a little more specific than that. I am sorry not to be able to be more forthcoming, but I really do not think that I can be more specific than that. We are considering the operations of a ship in the context of the whole fleet of which it is part but still, at the end of the day, it is to the individual ship, in respect of which an application is being made, that we have to look and on which we have to make a decision.
I suspect that my noble friend may also have had in mind companies— indeed, he mentioned the oil companies —which are not only shipping companies but carry on shipping activities as part of a wider spectrum of business operations. I think my noble friend rather wanted us to turn our attention away from the effects of a particular transaction or application to a more general view of the company's contribution to the balance of payments. This is a very persuasive argument, but I hope that the House will not find it a compelling or conclusive one, because I think that there is some degree of illogicality about it.
Companies which have interests in the field of shipping and also in other fields freely enjoy investment grants where these apply on assets which are provided by other parts of their operations, and they enjoy them because there is reason to suppose that in these areas there is a gain to the United Kingdom economy as well as to the company as a result of investments which we may make. But there cannot be an obligation on the Government to pay out public money in circumstances where there is likely to be injury to the balance of payments. The actions and decisions of the Government in a matter of this sort will have different effects on different companies, because the circumstances of those companies differ and any changes in policy will be to the disadvantage of some and to the relevant advantage of others. But 317 I do not think that on those grounds the Government can be expected to refrain from action which is intended to promote the economy as a whole and its general benefit.
In conclusion my noble friend asked that the Government, in examining applications, should take a sympathetic view and should not be too narrowly tied to the letter of the law. I hope that we shall operate fairly, always reasonably and as swiftly as the circumstances of applications for grants permit, but I think we must of necessity operate within the terms of the law as it has been approved by Parliament. I trust that with these explanations which I have been able to give, your Lordships will be prepared to give this Bill, as has been recommended, an unopposed Second Reading.
My Lords, could my noble friend tell me whether Malta will be affected by this Bill and, if so, how?
§ LORD DELACOURT-SMITH
My Lords, speaking to the best of my information, I think that Malta would not be exempted from this Bill but I will go into the point and confirm or correct this to my noble friend.
§ On Question, Bill read 2a, Committee negatived.