§ 1.22 p.m.
§ THE EARL OF KINNOULL rose to ask Her Majesty's Government what developments have taken place in the case of Rolls-Royce since February, 1971. The noble Earl said: My Lords, any noble Lord who has followed the somewhat chequered career of this Unstarred Question on Rolls-Royce would, I hope, forgive me for having the temerity and the audacity to raise it at this moment. I must I feel apologise to my noble friend, who I am glad to see is here, and to other noble Lords present, for doing so. I know that my noble friend Lord Drumalbyn will be overflowing with good will and I hope he will be able to find, perhaps buried deep in his brief, a number of valuable treasures of information and cheerful news which will send us away stimulated in thought and happy that this short debate has been of value.
§ The purpose of raising this subject on Rolls-Royce is principally to seek from my noble friend a progress report on the Rolls-Royce (1971) Company since its formation in February, 1971. I hope that he will be able to give us an up-to-date picture on the progress that the company is making on its many, various and valuable engine developments. I hope he will also be able to give some indication on its financial state since its last published report dating back to December, 1971; and that he will be able to give us some thoughts on how the Government see the future of the company in the context of the British aerospace 1248 industry, the European industry, and its potential scope in the world markets.
§ There is a second purpose in putting down this Question to-day, and one which I know my noble friend Lord Orr-Ewing would have intended to raise if he had been able to be here. It is to draw the attention of my noble friend Lord Drumalbyn, and of my noble friend Lord Carrington, to the continuing unhappy plight of the unsecured creditors of the old company; and to ask my noble friend to consider whether there are not special circumstances in this unhappy situation, which could justify the Government in speeding up this long protracted process, and whether there is not some action which could pierce the thick web of legal complications which seem, so far successfully, to have suffocated any real progress on this matter.
§ To turn to the progress report on engine developments, may I first seek some information on the financial results of the company? We know from the first financial report. published last July, which as I have said covered up to last December, 12 months ago, that there was a most encouraging start of a profit of over £6 million. That result was undoubtedly a very great credit to both management and staff, and will no doubt have been watched most carefully abroad. The performance of the company has clearly succeeded so far to meet its original objectives. These objectives of course were to safeguard the national interest; to safeguard the supply of engines to many foreign air forces and to many foreign airlines; and of course to safeguard the collaborative development programmes. But, above all, it has I believe gone a long way to restore the damaging loss of confidence abroad that was naturally suffered by the stunning shock of the collapse of the old company.
§ Anyone who has been up to Derby in recent months, as has been my pleasure, could not fail to be impressed with the general feeling of confidence in the air. The company has clearly come through a very tough two-year reorganisation where considerable streamlining has taken place at all levels of the company. The result has been that no less than £35 million a year has been cut in expenditure, on the one hand, and there has been expanding turnover and productivity, on the other. This productivity has now 1249 reached the fantastic record of some £3,000 per annum per employee. I believe that both the management and all those involved in the company are to be very warmly congratulated on the success. It would be helpful if my noble friend, when he comes to reply, could indicate when we may expect the next financial results, which, as I have said, I am sure will be closely watched by those interested abroad.
§ That leads me on to the directors of the company and, of course, the recently announced changes. Whatever the reasons that lay behind the resignation of Mr. Ian Morrow as managing director, it should I believe be put on record that both he and the noble Lord, Lord Cole, who both came to Rolls-Royce in a moment of crisis and who both readily accepted the heavy responsibilities of that challenge, have steered Rolls-Royce through a very difficult period with great skill and fortitude. One naturally wishes those who are to succeed them, Sir Kenneth Keith and Kenneth Wilkinson, every success. I am sure that the appointment of Kenneth Wilkinson particularly, with his considerable technical knowledge and experience and success with B.E.A., will be welcome in the company.
§ Having said that, there are two thoughts that strike one when one examines the present list of distinguished directors of the company. The first is that only two out of the eight are executive directors, which for a company of Rolls-Royce's character seems a little out of balance. The second is that the present directors, with all their undoubted and valuable experience, combine to give an average age (I have calculated this, and I may be wrong here) of 62 years: again, I would suggest, a rather curious imbalance, and one hard to find a parallel for among other British engineering companies. I make these points as no criticism at all of the present members of the board—this matter has been raised, of course, in another place—but I hope the Government will keep under review the question of blending the board in future with both the golden wisdom of age and the youthful vigour of some of the younger men within the company, whose voice at board level over the future policy of the company would, I am sure, be most helpful.1250
§ Turning to the progress on the various major engine developments, I am sorry that my noble friend Lord Kings Norton could not be here to-day, because I know he would have added his considerable experience and knowledge to our discussion. I know he would have expressed his personal confidence in the future of the RB.211, on its technical achievement as the new generation of quieter engines and on its lead over any other civil engine flying to-day. One notes with very real delight the progress of TriStar and the news of recent orders: from B.E.A. there is a substantial order; from Japan a very welcome order and of course an additional order from the American airline, Delta. I understand that this brings the current tally of orders to 184.
§ I believe that to-day there are 13 Tri-Stars flying in service, and I understand that so far the reliability of the engines has been particularly encouraging and the back up given by Rolls-Royce is first class. This all points to the beginnings of a highly successful future and a vindication of the long-term policy of the original Rolls-Royce company. Markets are now established throughout the world, and, together with a touch of luck and a substantial development effort, we appear to have in the RB.211 one of the greatest commercial assets of the next decade. There are those in the aero-engine business who say that to lead in quietness is to succeed commercially. But the essence is to lead, and I hope that later my noble friend will be able to reassure us that adequate support will continue in the future for the R. and D. programme of the RB.211.
§ Turning now to Concorde and the Olympus engine, I think it would be helpful if my noble friend could bring us up to date on the state of development it has now reached and how close it has come to meeting its specification on range, smoke and noise. Perhaps he could say whether any discussions are taking place with America on the possible development of an engine for Concorde II. I might also ask my noble friend about the largest collaborative military projects we are at present engaged in, the M.R.C.A. and whether, also, he could give us a little information on the RB.199 1251 engine and how it stands up to its costings within the planned budgetary forecast. Again, I should like to ask my noble friend about the Harrier: another project in which many people feel we have a most vital and valuable lead. Also, it would be helpful if my noble friend could say whether any progress is being made on the joint study with the Americans on the development of the Pegasus 15 engine.
§ As to the future of the Rolls-Royce (1971) Company, on the development front I believe that to-day there are encouraging signs for the next decade: signs that include a rapidly increasing export to America, Europe and the rest of the world. Indeed, if my noble friend has the current figures for the proportion of the present production going abroad I am sure they would make interesting reading. The signs, which are most encouraging and which every banker must look for in this business, are the rapid build-up in the value of spares. I understand that during the lifetime of every engine sold, spares equal to a further three engines will be required. I am advised that the current annual figure for spares is running at £85 million a year, and clearly this must rise steeply as the RB.211 programme gets under way. All this augurs well for the company, and what with the existing world markets achieved and with China now a welcome new customer I hope my noble friend will be able to confirm that the Government see the future picture of Rolls-Royce as an encouraging one.
§ Finally I wish to turn briefly to the present sad plight of the unsecured creditors of the old company. I would say at the outset that one fully accepts that whatever company, whether large or small, is put into the hands of a receiver, certain painful procedures need to be followed in which many innocent shareholders get hurt. In the case of the Rolls-Royce company there were. I believe, a number of circumstances which made that a situation without parallel in any ordinary bankruptcy case. In the first place, the Government stepped in immediately a receiver was appointed and announced that they would be acquiring the aero-engine business in its entirety from the old company. Everyone welcomed that action by the Government, 1252 and I think they won a great deal of credit for it. In the second place, the Government sought definitely and received willingly the goodwill, cooperation and support of all the countless number of suppliers to Rolls-Royce, without whom the company would come to a grinding halt. In doing this, the Government even made special arrangements with the leading banks to allow overdraft facilities for any temporarily embarrassed suppliers, although of course those suppliers naturally had to pay for the privilege.
§ Thirdly, the Government committed itself—and rightly so—both in Parliament and under heads of agreement with the receiver to pay a fair price for any assets it acquired. I believe it would be fair to state that in February, 1971, despite the £100 million-odd owing to suppliers and sub-contractors from the old company, there was an enormous amount of goodwill among those affected, both for the Government and the action they had taken and for the new company. There was tremendous goodwill to see that as little damage as possible was caused to the progress of the Rolls-Royce engine business. I doubt whether anyone then, least of all the Government, would have forecast that after two years no agreement would have been reached on a fair price for the assets and that only 15 per cent. of what was owed to the unsecured creditors would have been released.
§ My noble friend will have seen in recent Press reports, on television, and from the receiver's own reported meetings, that the once goodwill of the suppliers to Rolls-Royce has in many cases turned to bitterness—bitterness not only brought on by a total incomprehension of why the Government's new company and the receiver are still so far apart in their negotiations, but also a feeling of bitterness because the goods and equipment supplied to the old company before February, 1971, which had not been paid for, have been used to the benefit of the new company without any reimbursement to the suppliers, save for 15 per cent. in the pound. And all the time, not only does inflation reduce the value of the ultimate payment but of course interest is accuring. What has gone wrong with the affair? While accepting that it is a matter of considerable complexity, there appear 1253 to be two reasons. The first is that the original spirit of goodwill to sort out the tangled issues as quickly and as smoothly as possible seems to have died an early death, leaving a spirit of tough negotiation in its place. Whatever the reason for that—and one attaches no blame to either side—the losers have been the creditors and the goodwill of the Government.
§ The second reason, which has shown itself clearly from the receiver's latest report, is one which I believe causes even more aggravation than the first. It is that having decided last March to have a fair price settled by arbitration and to hold the arbitration in September, it is now apparent that between the two leading counsel on either side it has been agreed that it is not convenient to hold the arbitration until next May—15 months later. I personally find this delay wholly objectionable and one which I believe the Government should take steps to investigate. Indeed, it would seem that with the apparent shortage of leading counsel, should either counsel be struck down with a touch of gout in May the arbitration could well be delayed for a further three months. I hope my noble friend will be able to indicate that the Government accept that the present whole, slow, agonising process must be speeded up. My Lords, I apologise again for detaining the House on this subject to-day but I am hopeful that those interested will be rewarded with the content of my noble friend's speech when he replies to this short debate.
§ 1.40 p.m.
§ LORD BESWICK
My Lords, we listened with great interest to what the noble Earl, Lord Kinnoull, had to say and I offer my admiration to him for the enthusiastic, informed and constructive way in which he takes part in our discussions on aerospace matters. I shall take up no more than five minutes of your Lordships' time because I have only a few points to add to the long list of interesting ones which the noble Earl made. Indeed, I wish to refer this afternoon only to the need for this new publicly owned organisation to be enabled to settle down and to prove itself. Although I doubted at the time—and still have doubts—whether it was proper to put the old company into liquidation, I have no doubt that the experience has had some incidental therapeutic benefits. There is 1254 no doubt that there was a certain quickening of effort and a valuable recognition that, after all, there was no Divine right vested in the revered double-barrelled name Rolls-Royce.
But having had that therapeutic experience, it is now essential to have a degree of stability and confidence for the immense potential of the organisation to be realised. One obvious element of uncertainty is this settlement of the Receiver. I realise that the Government cannot be held responsible for the Official Receiver, but is there any understanding about the time still to be taken? The noble Earl voiced the concern felt by many people about the unsecured creditors, but the concern is not only for them. Apart from any remaining hopes of optimistic shareholders, the fact that this has not been settled has other consequences. In one particular case at any rate it had some effect on the costing of the product and there is throughout an irritating uncertainty which should be removed as quickly as possible. I support what the noble Earl said in this "espect and I ask the noble Lord who is to reply whether anything can be done to quicken the decisions. Incidentally, I heard the other day a figure of the cost, which I was told was mounting, of the activities of the Official Receiver. I hesitate to say the figure named to me but if the truth is anything near the amount, that is being talked about, then it is very alarming indeed and I imagine that the longer the affair goes on the more expensive the process will be. That is an additional reason for trying to get some resolution.
The noble Earl paid a well-merited tribute to the contributions made by the noble Lord, Lord Cole, and Mr. Morrow. It was an enormous task which they undertook and the country as well as the company must be grateful to them. I should like to think that one side-effect of the recent changes is that we shall now have the opportunity of seeing more of the noble Lord, Lord Cole, in this House. Mr. Morrow's advice and experience will still be available to Rolls-Royce but I add my welcome, and I am sure the welcome of the whole House, to the new chairman and managing director. It is sometimes said that one failing of the old company was that it did not understand sufficiently the psychology or 1255 needs of the customer. At any rate, with this new team from B.E.A. we can be assured that in Sir Kenneth Keith and Kenneth Wilkinson the customer's outlook will be thoroughly understood. We expect from them what the company now needs, and that is leadership. I hope and expect that it will be forthcoming from this new team.
The noble Earl, Lord Kinnoull, spoke of the composition of the Board and I shall not add to his remarks about that. More important than the composition at that level is the proposed executive organisation below the level of the Board. Here again there has been uncertainty. Here again there was need for engineering leadership. Here again I hope that with the new appointments we shall get the progress that the company needs and which the country expects. I look forward to hearing what the noble Lord, Lord Drumalbyn, has to say in reply to the interesting questions put by the noble Earl.
§ 1.47 p.m.
§ THE MINISTER WITHOUT PORTFOLIO (LORD DRUMALBYN)
My Lords, my noble friend Lord Kinnoull need not apologise in any way for having raised this matter to-day. Indeed, I personally and the House generally should be grateful to him for the fortitude and indulgence he has shown in meeting the convenience of the House by having twice postponed his Unstarred Question. Obviously it has been very much worth while having this debate and I can only tell my noble friend that the third time has been lucky for him. I hope he will feel that he has also been lucky in the reply that he will get from me.
My noble friend asked me to give some sort of progress report on Rolls-Royce (1971) Ltd. and I think the two broad divisions of his speech were designed to inquire into what is happening to the creditors of Rolls-Royce. A word first about the affairs of the old Rolls-Royce company. In October last year, the shareholders accepted the advice of their Board to put the company into voluntary liquidation. The joint liquidators have been working since then at realising the company's assets and determining the size of its liabilities. Noble Lords may have seen their recent report to shareholders 1256 and creditors, dated November 23, and the Press report of their meeting on Monday of this week; they said then that they hoped to be able to make a second distribution of at least 30p in the pound in March. The first distribution of 15p, Lo which my noble friend referred, was made in September.
One step in the realisation of the assets of the old company had already been taken by the Receiver and Manager in selling the aero-engine assets to Rolls-Royce (1971) Ltd. The sale was agreed on the basis that the price should be a fair price; namely, what a willing buyer might reasonably have been expected to pay a Receiver and Manager at March 31, 1971. It was also agreed at the same time that if the parties could not agree on this price, it should be determined by an independent expert. Agreement was not reached and the expert was appointed. Noble Lords will know that the joint liquidators last month informed the creditors and shareholders that it had been found necessary to postpone the hearing before the expert till May of next year because the commitments of leading counsel of the two parties did not permit an earlier date.
I have been asked if there is any way in which the Government could expedite this matter. I am afraid there is not. I am very well aware that many of the creditors of Rolls-Royce, Limited, are being caused considerable difficulty by the long wait which they are having. The joint liquidators have made it clear that the creditors may expect at least 56p in the pound in total even if no further payment is made for the assets sold to Rolls-Royce (1971) Ltd. beyond the £30 million already paid in March, 1971. But this is not something for which Her Majesty's Government have any responsibility. The arrangements for settling the price to be paid for the assets sold to Rolls-Royce (1971) Ltd., were agreed by the parties to the transaction. The way in which the expert carries out the difficult task which he has undertaken is entirely for him; his decisions are binding on both sides and there is no appeal. In these circumstances one can only hope that the proceedings will recommence again in May and that the unfortunate malady to which my noble friend has referred will not afflict either of the counsel at that time.
1257 My Lords, the aero-engine assets are of course only one part of the old company. The liquidators have also to realise the other assets, such as the motorcar business, and it is only when all the assets have been realised and all the liabilities determined that the creditors and the shareholders can be finally told where they stand.
I turn now to Rolls-Royce (1971) Ltd. I have dealt only briefly with the affairs of the old company because, as I explained, they are the responsibility of the joint liquidators. The noble Lord, Lord Beswick, expressed concern about what might be the total of the expenses of the liquidators. When one realises the enormous number of creditors involved and the enormous number of debtors to Rolls-Royce—all these things have to be considered, and in many cases investigated—it is hardly to be wondered at if the expenses are heavy. But I should not have thought they are likely to be heavy in relation to the total amounts involved which are so very considerable.
§ LORD BESWICK
My Lords, would the noble Lord say whether it is likely that they will run into seven figures?
§ LORD DRUMALBYN
I am afraid that I am not in a position to give that information. All I can say is that one would hardly expect this operation, considering the enormous sums involved—which run over £100 million either way—to be particularly modest. As the House knows, the Government decided that the new company (which it owned) should be run by its own board on a commercial basis. In the early months following the collapse, the board's main problem was to maintain continuity and to re-establish confidence both within the company and outside it with its suppliers, sub-contractors, customers and foreign collaborators. I am most grateful to my noble friend for what he has said about the degree of success of the board in re-establishing confidence so far. It is very much to their credit that they have been able to do so in so short a time. The company did remarkably well in coming through the very difficult and trying period so successfully. During this time they had to undertake the renegotiation of the RB.211 contract and the related negotiations with the 1258 American Government. In doing so they have laid the foundations for its future and it is a measure of their success in dealing simultaneously with so many problems that, as shown in the accounts for the first eight months of its operation, the company was achieving turnover, on an annual basis, of a record level of £300 million. I refer only to turnover because, as the accounts make clear, adjustments to other figures will be needed in the light of the price eventually fixed for the assets.
My noble friend asked me when we would be likely to get the next accounts for the year ended December 31, 1972. Since the financial year has not yet been concluded, my noble friend will not expect me to be able to predict what the results will be, or when the accounts will be published. The uncertainties which applied to the first results also apply. I can say that I have no reason to expect them to be less satisfactory than last year, and I know that the company intend to see that they are published sooner after the end of the financial year than they were last year.
My noble friend has also asked about the progress that has been made with the RB. 211 engine. I can say without hesitation that progress is extremely heartening. The 100th engine was recently dispatched. Seventeen Lockhead TriStar airliners incorporating the engine have now been delivered. The quietness of its engines has made a very favourable impression wherever the TriStar has appeared and this no doubt has been an important factor in Lockheed's success recently in obtaining further orders for the aircraft around the world in the face of very tough competition. The order placed in August by the British Airways Board has been followed since by orders and options in Japan, Germany and the United States of America, so that the total of orders and options announced for the aircraft now stands at 184.
Further development work so far continues on schedule and we expect that the work which is being financed by Her Majesty's Government will be completed satisfactorily within the published cost estimate of £170 million—£125 million on development plus £45 million on production loss. That, of course, takes account of the extra £50 million paid by Lockheed and spread over the 550 committed 1259 engines. The Government announced in August, 1972, that they had agreed to provide additional launching aid to Rolls-Royce to increase the power of the RB. 211 from the present 42,000 lb. thrust to 45,000 lbs. This more powerful engine—the RB. 211–24—will be needed for an extended-range version of the TriStar which Lockheed expect to lanch next year. We hope that in due course the RB. 211 engine will be used in other aircraft.
My noble friend referred to collaboration with European partners. Here development work is also continuing on civil and military projects, including the Olympus engine, and on that I can only say to my noble friend that the performance of the engines in the Concorde has been most successful. A further substantial step has now been taken with the installation into the aircraft of a new development of the engine which is both quieter and smoke-free. The aircraft using this engine is carrying out taxiing trials and will be flying shortly. He referred also to the RB. 199 for M.R.C.A. All I can tell him about that is that the development programme continues to be satisfactory. There are other developments such as the BS. 360 helicopter engine, which is an Anglo-French venture; the Adour for Jaguar; the M 45H for the VFW. 614.
Also important for the future is the continuing work on quieter engines. The RB.211 has enhanced the company's reputation in this field. Further work is in hand to reduce the noise of the engine still further, to establish the feasibility of making the Spey engines already in service quieter, and to demonstrate the possibilities of an ultra-quiet engine based on the use of a geared variable pitch fan in the M45 engine. Rolls-Royce are also taking a major part in discussions with the other European engine companies to try to establish satisfactory arrangements for even closer collaboration in the future.
The House will know that the noble Lord, Lord Cole, retired from the position of chairman of the company in October. I was very glad that my noble friend paid a tribute to him and to Mr. Morrow, and I would join with the noble Lord, Lord Beswick, in hoping that now that Lord Cole has retired we shall see more of him 1260 in this House and benefit from the value of his enormous experience and wisdom. I should like to take this opportunity of adding to the thanks which the Government have already expressed for the public service which he gave as chairman. Considering what we know about the state and prospects of the old company when he took over as chairman on November 11, 1971, to see the TriStar flying at Farnborough three months ago was a source of very great satisfaction to us all, and above all it must have been so to the noble Lord, Lord Cole, himself and to Mr. Morrow, the deputy chairman, on whom fell a very great burden in the days of the takeover, and the other members of the board, and to all the employees of Rolls-Royce (1971) Limited. The noble Lord, Lord Cole, has accomplished successfully the initial task of establishing the new company, and the Government could hardly refuse his request to allow him to rest from his labours. It was never intended that his appointment should be on a long term basis.
I am very grateful to my noble friend for the good wishes that he has expressed to the noble Lord's successor, Sir Kenneth Keith, and also to Mr. Wilkinson. I do not think I ought to say very much about the development of the organisation. This is a matter for the new general manager and the new chairman, and they will no doubt be looking at the proposals that had been made for reorganisation before they came into their present appointments.
On the question that my noble friend asked about the structure and age of the board, he is quite right in saying that there are only two directors with executive positions, Dr. Stanley Hooker, the technical director, and Sir William Cook, who has responsibilities for research and development. The noble Lord was kind enough to give me advance warning of his question about the average age of the board, but he did not also provide me with his proposed answer; this, I am afraid, is at variance with the answer that I can give him, which may be due to the changes at the top. I can tell him that the answer is 58 years, and I doubt if the month or six weeks' delay in his having his debate has altered that very much. That is the present average age. I hope that those of your Lordships who are rather younger than this 1261 will not take it amiss if I say that the Government do not accept for one moment that the board is too old and ought as a matter of urgency to be rejuvenated.
In conclusion, may I say that I agree entirely with the noble Lord, Lord Beswick, that the great need now is for stability in the management and administration, although I am sure he would agree that mere stability is not enough. The progress that is being made in the development of Rolls-Royce (1971) is really extremely gratifying. They are not resting where they are; they are going forward. At this time of the year I think it would be appropriate to wish them a very happy 1973, and indeed it would be appropriate for me to wish all your Lordships the same, and also a happy Christmas.