BRITISH OVERSEAS AIRWAYS CORPORATION (GOVERNMENT INVESTMENT) ORDER 1971 (Hansard, 22 March 1971)

§ LORD DENHAM
My Lords, I beg to move that the British Overseas Airways Corporation (Government Investment) Order 1971, a draft of which was laid before this House on 4th March, be approved. I believe that noble Lords will welcome this Order, which concerns B.O.A.C.—whose fine financial performance over the last five years is well-known to this House—and enables the Corporation's capital structure to remain in its present form for a further five years. B.O.A.C.'s capital structure was established in its present form in 1965. Then, under provisions of the Air Corporations Act 1966, the Corporation was allowed an element of non-redeemable capital, which has come to be known as public dividend capital. Like most other nationalised industries, until 1965 the whole of B.O.A.C.'s capital finance had taken the form of loan capital. Whereas loan capital bears a fixed rate of interest and is redeemable, public dividend capital is non-redeemable and is remunerated by variable dividends payable out of net profits and reserves and these more 734 closely reflect each year's trading results. Public dividend capital is, therefore, similar in those respects to equity capital in the commercial world. When public dividend capital was introduced, it was in the nature of an experiment, and Section 4 of the 1966 Act (since consolidated in Section 19 of the Air Corporations Act 1967) provided that the arrangements should expire on March 31, 1971, unless extended by Order permanently or for a further period. The draft Order now before this House extends the relevant provisions until March 31, 1976.
Noble Lords will expect me to give some account of how the experiment has worked with B.O.A.C. and to explain why the Government have decided to extend the arrangements for a further five years. I will try to deal with both points briefly. B.O.A.C. started with £35 million of public dividend capital in April 1965. Since then the Corporation has needed no cash issues because it has been able to finance all its sterling investment from internal resources. However, the £35 million has been increased to £65 million by the conversion to public dividend capital in March, 1968, of £15 million in B.O.A.C.'s reserves and of a further £15 million in March, 1970. On this investment, B.O.A.C. has paid £44¼ million in dividends over the five-year period from April, 1965, to March, 1970. This amount is equivalent to an average rate of almost 19 per cent. on average annual investment, and far exceeds the sum which would have been payable by way of interest on a corresponding amount of loan capital over this period. In the light of this successful experience, the Government have decided to allow the arrangements to continue for a further period, and this accords with the wishes of the Corporation, because public dividend capital puts B.O.A.C.'s capital structure broadly in line with that of its main competitors and so enables B.O.A.C.'s financial performance to be more readily and directly related to theirs.
As noble Lords will be aware, a Civil Aviation Bill was introduced by the Government last week. One of the purposes of the Bill is to set up an Airways Board to take strategic control of and financial responsibility for both B.O.A.C. and B.E.A. The Bill provides for the Airways Board to take over B.O.A.C.'s 735 public dividend capital on vesting date. It follows that the public dividend capital arrangements covered by this Order will expire on the Airways Board's vesting date. The Order, however, prepared under the existing legislation, provides for the extension of the arrangements for the further five-year period that would be appropriate if the structure of the industry remained unchanged, since the new Bill has yet to be considered by Parliament. My Lords, I commend this Order.

§ LORD BESWICK
My Lords, we are grateful to the noble Lord for explaining this Order so clearly. I rather suspect that the explanation which he has given clarifies a situation which is a little more complicated than he indicated. However, we are grateful to the noble Lord, and we shall of course approve the Order. The noble Lord referred to the background of this holding of public dividend capital, but I am not sure that he gave us all the facts. It belongs, I think, to that unhappy period when B.O.A.C. were less than enthusiastic about British aircraft. If I recall aright, this arrangement was made when they wished to cancel the VC 10 on the ground that it was an uneconomic aircraft. In the event, as noble Lords will know, B.O.A.C. were wrong about that aircraft. It proved to be one of the most attractive aircraft that B.O.A.C. have ever operated, and its passenger appeal was such that it was indeed financially successful. I am glad to think that the success of that aircraft is, in part, responsible for the sound financial picture which the noble Lord was able to paint.
But there was in this period a writing off of certain of B.O.A.C.'s financial liabilities. I do not believe the noble Lord indicated what that figure was. Can he tell me what proportion of the amount eventually appeared as public dividend capital, and what proportion has been written off entirely? I wonder whether the noble Lord can give me a little more information about the success of this technique in public or Government in- 736 vestment. To what extent has it proved to be something of an incentive to the Corporation? To what extent has it been proven superior to the ordinary loan capital that we see in other public corporations? As the noble Lord said, it was by way of an experiment. Are we to be given any more details as to how the experiment has worked out? Will there be something in the nature of a considered statement? I doubt whether a White Paper would be justified, but this was quite an important departure from previous practice, and I think it would be useful to have a little more information about it.
There are three other questions of which I have not given the noble Lord any prior notice and I do not expect an answer to them this evening, but possibly he will be good enough to consider them and, if he sees fit, write to me about them. Has there been any agreement with the Corporation about the return to be paid on this capital during the current year and over the next financial year? If there has been an agreement, to what extent does that agreement take into account the possible surrender of any of the B.O.A.C. routes to any other organisation? Finally, there was some talk at one time of making a similar arrangement of public dividend capital in relation to the B.E.A. financial structure. Has any more thought been given to that, and are we likely to hear anything more about it?

§ LORD DENHAM
My Lords, I am happy to accept very gratefully the suggestion by the noble Lord, Lord Beswick, of writing to him about the last two questions that he has put to me. If I may answer the question of which the noble Lord was kind enough to give me notice, the position about the capital structure of B.O.A.C. is as follows. In March, 1965, the total capital borrowings of B.O.A.C. were £176 million. Of this sum they were relieved of liability for £110 million, leaving residual borrowings of £66 million. Of the £110 million, £82½ million was written off, leaving a reserve of £30 million. Of the £66 million residual borrowings, £31 million became loan capital and £35 million became public dividend capital.
The noble Lord asked whether the experiment in public dividend capital 737 had been successful. I think the main answer is to be seen in the results over this time. B.O.A.C. have paid dividends totalling £44,250,000 over the past five years from April, 1965, to March, 1970. This represents an average of almost 19 per cent. on average public dividend capital invested, and far exceeds the sum which would have been payable in interest on loan capital. That is from the Government's point of view. B.O.A.C. were most anxious for this experiment, to begin with, because they felt it would give them a certain amount of parity with their main competitors in world airlines, in that it gave them flexibility. They could vary their dividend to reflect the peaks and troughs in earnings, instead of being obliged to pay fixed interest the whole time. This was why they wanted it. So far as they are concerned, this has proved a great success, and so Her Majesty's Government have recommended its carrying on.

§ LORD BESWICK
My Lords, I am grateful to the noble Lord. I am sure he will understand me when I say that it does not follow that the fact that the financial results have been good is necessarily a consequence of this particular form of capital holding. I wonder why it was thought that this P.D.C., by its very nature, had contributed to the success. I do not ask for an answer now, but possibly the noble Lord will think about that. Could he also look into the figure of £86 million which was written off entirely—

§ LORD DENHAM
£82½ million.

§ LORD BESWICK
—the £82½ million which was written off entirely? The Corporation claim that they have returned, by way of interest on the public dividend capital, an amount equal to the amount that was written off. Can this be justified on the basis of the figures which the noble Lord gives?

§ LORD DENHAM
My Lords, when I write to the noble Lord on the other points I will, if I may, give him that answer, too.

§ LORD FERRIER
My Lords, before my noble friend sits down I wonder if it would be agreeable to him if the noble Lord puts the questions about which my noble friend is going to write in the form of a Question for a Written 738 Answer, so that the replies can go on the Record.

§ LORD BESWICK
My Lords, I have no objection to that, but it would be a rather wordy Question and Answer.

§ LORD DENHAM
My Lords, perhaps the happiest solution would be if I sent my noble friend a copy of the letter that I will send to the noble Lord, Lord Beswick.

§ LORD FERRIER
My Lords, I am much obliged.