IRON AND STEEL ACT 1969 (CONTINUANCE OF PROVISIONS) ORDER 1973

HL Deb 22 November 1973 vol 346 cc1276-80

7.8 p.m.

THE MINISTER WITHOUT PORTFOLIO (LORD DRUMALBYN) rose to move, That the Draft Iron and Steel Act 1969 (Continuance of Provisions) Order 1973, laid before the House on November 1, be approved. The noble Lord said: My Lords, this is a very short Order and the Explanatory Note is equally brief. As the Note says, the Order will continue in force permanently the provisions of the Iron and Steel Act 1969 relating to public dividend capital, the notional capitalisation of the reserves as public dividend capital and the financial duties of the Corporation. Without this Order those provisions would expire on March 30 next.

May I as briefly as I can explain the reason why the Government have taken the decisions to which the Order would give effect. Public dividend capital, as noble Lords will recall—in particular the noble Lord. Lord Diamond—was introduced into the capital structure of the Corporation in the 1969 Act. As public dividend capital for the British Steel Corporation was something of an experiment, its life was limited to five years but could be extended under Section 6 by Order subject to Affirmative Resolution either for a further period of time or permanently. Section 5 deals with the Corporation's financial duties and could be similarly extended. By next March, my Lords, we shall be five years older than in 1969 and so will 'the British Steel Corporation and the Act. It is opportune, therefore, that earlier this year the Select Committee on nationalised industries should have published its Report, following a thorough and valuable examination of the reports and accounts of the British Steel Corporation. In its Report the Committee pointed to the difference between public dividend capital and equity capital and stated its view that the inability to pay dividends had stemmed less from the cyclical nature of the industry than from successive Government interference with its profitability and from the Corporation's lack of a reserve. The Committee recommended that the operation of public dividend capital should be reviewed.

My Lords, the Government undertook the review, carefully considered the Committee's Report, and replied to it in the White Paper in August. The review is Command 5399. The review covered public dividend provision. In fact no dividend has so far been paid by British Steel Corporation. Nevertheless, the Government concluded that public dividend capital should not be discarded; that the guiding consideration as regards its use in a nationalised industry should continue to be that the industry concerned is one that is basically profitable but subject to fluctuating returns; and that since the British Steel Corporation fulfils this criterion, and since it now has a financial objective requiring an adequate rate of return on all its capital, public dividend capital should continue for the Corporation.

My Lords, I mentioned the financial objective. Section 5 of the 1969 Act, which is also continued in force by this Order, provides the power to lay down such an objective as a statutory duty. To have a financial objective is particularly important for a nationalised industry with public dividend capital. The objective which the Corporation has been set is to earn over the 4 years, 1973/74 to 1976/77. an average return on net assets of 8 per cent. after charging depreciation but before charging interest, taxation and exceptional costs arising from closures. As the Minister for Industry said when announcing this objective in August, 1972, higher average returns will be expected after this period, when the Corporation will be getting the full benefit from its investment programme. He also recognised that it was unlikely that the objective could be reached in the first year.

My Lords, in the light of all these considerations the Government agree with the British Steel Corporation that the continuation of public dividend capital for the Corporation is justified. The Government intend that a proportion of future advances to the Corporation will be issued sufficient to maintain a reasonable balance in its capital structure between fixed interest bearing loans on the one hand and public dividend capital and reserves on the other.

Section 4 of the 1969 Act would also be continued in force by the Order. This complements the provision for public dividend capital in Section 2, and enables the Secretary of State after consulting the Corporation and with Treasury approval, to direct that sums from the reserve should be converted into public dividend capital. As yet, of course there has been no occasion under the Iron and Steel Act 1969 to use this power, which is complementary to the power under Section 17(4) to give directions relating to the establishment and use of the reserve. Industries are expected to finance some part of this new investment from profits in addition to normal depreciation. As and when the Corporation becomes fully profitable, there may well be an occasion when it would he appropriate to capitalise part of any retained profits as public dividend capital.

My Lords, I have explained why we have concluded that these various provisions of the 1969 Act should remain in force. Section 6(2) provides for them to be continued in force permanently or for a specified period. To extend them for a limited period would prolong the Corporation's uncertainty about its future capital structure by making its public dividend capital—as well as the powers to determine a financial duty—dependent on fresh legislation at the end of the period. It is the very core of the case for public dividend capital that a long term view should be taken. The division is very much in line with the 10-year strategy for modernisation and expansion of the British Steel Industry announced last December. My Lords, the draft Order therefore extends these provisions permanently. I commend it to your Lordships. My Lords, I beg to move.

Moved, That the Draft Iron and Steel Act 1969 (Continuance of Provisions) Order 1973, laid before the House on November I, be approved.—(Lord Drumalbyn.)

7.17 p.m.

LORD DIAMOND

My Lords, we are all grateful to the noble Lord, Lord Drumalbyn, for explaining, if I may say so, very fully, ably and adequately the purpose of this Order. I agree, if I do not embarrass him by saying so, with a good deal of what he has said. I agree in particular that we are both five years older than we were five years ago, and having regard to the amount of work that he has been called upon to do the noble Lord, Lord Drumalbyn, may feel it, but I can assure him that he does not look it.

There will always be two points of view about public dividend capital. There will be those who take the view that this is, as it were, a soft option for management, and might therefore lead to some tendency towards inefficiency. There will be those who take the opposite view that for a nationalised industry to have entirely loan capital puts upon them too harsh a burden in those years when fluctuation of profits means that they are not making profits, and causes, as a result, some diminution in morale. When those concerned with management see the results published, that in turn leads to some falling-off in overall efficiency. Those are the two points of view. But having regard to the fact that the gearing, as I understand it, between loan capital and public dividend capital is going to be very carefully watched and therefore you will have both arguments applying, and having regard to the fact that the targets will, as I understand, be increasingly (what shall I say?) challenging targets—I am referring to the profit targets—I think we can happily accept that the continuation of the provision of public dividend capital is appropriate in the case of the iron and steel industry, which is subject to fluctuating profits.

My Lords, there is one further word I would like to say. Although the hour is late and although the House is not overcrowded, there are no doubt many who will read Hansard—at least the Editor and the printers will, I take it. I wanted to say that it is interesting to note the other aspect of the Order which is to make these arrangements permanent. As the noble Lord said, he had option in the original Bill to bring in an Order either for extending these provisions for a temporary period or extending them permanently. He has wisely chosen the latter.

What I want, therefore, is to remind your Lordships that the 1964 to 1966 Labour Government had not sufficient power or strength, to nationalise steel. It was in the following Labour Government of 1966 to 1970 that the Labour Government nationalised steel against very severe opposition in the other place with the present Chancellor of the Exchequer, Mr. Barber—either in opening or in winding-up, I forget which—muttering the usual threats that when the Conservative Party returned to power, one of the first things they would do of course would be to free steel. That was only in 1967. It is a little more than six years ago, and we are all six years older and we are all six years wiser. To-day the Government are showing, as was made perfectly clear by the Under-Secretary of State in the other place last night, their determination that this shall be a permanent and successful operation. The Under-Secretary of State said: I want the B.S.C. to be one of the most sucessfully operated and producing steel manufacturers in the world, and I hope that this reconstruction will help. That is precisely our view, and therefore we accept the Order.

LORD DRUMALBYN

My Lords, it only remains for me to thank the noble Lord 'or taking the perhaps predictable line on this occasion and supporting the Government on this Order. I would only say to him that what we are doing here is in line with our philosophy; that is, to seek to make a success of everything we do.

On Question, Motion agreed to.

House adjourned at twenty minutes past seven o'clock.