HL Deb 05 February 1974 vol 349 cc719-30

3.4 p.m.

LORD ABERDARE

My Lords, I beg to move that this Bill be now read a second time. While it is totally irrelevant to this Bill, and because I am not used to my present post, I hope that I may be permitted to say how delighted we are to see the noble Baroness, Lady Serota, back in her place on the Front Bench opposite.

My Lords, this Bill has two main purposes. First, it authorises the payment of compensation to certain nationalised industries for the losses which they have incurred during the past and will incur up to the end of the financial year 1974–75, as a result of price restraint. Secondly, it extends and rationalises the overseas borrowing powers of a number of public bodies, and permits them to borrow in sterling from the institutions of the European Communities. This part of the Bill does not confer on any nationalised industry, or other public body, a power which is not already enjoyed by a similar organisation. It is essentially a piece of tidying-up.

The need for compensation arises from our policy of price restraint and its consequences. It has always been our top priority to reduce the rate of inflation. Hence successive stages of policy: the C.B.I. initiative of July, 1971, the standstill of November, 1972, and Stages 2 and 3 which followed the standstill. It was an unavoidable consequence of this policy that the nationalised industries should play their part. Clearly, it would have been unreasonable to expect workers, or managers, in the private sector to accept a policy of restraint if the nationalised industries had been totally exempt from it.

We are, of course, fully aware of the drawbacks. During the 1960s, a great deal of useful work was done in developing economic and financial criteria to govern the operation of the nationalised industries. I think I may say that this development was bipartisan, and to the credit of both Conservative and Labour Administrations. It would be wrong of me to attempt to conceal the fact that price restraint has meant the temporary surrender of some of the gains of the 1960s. The financial targets which were agreed between Government and nationalised industries, for example, have been rendered largely ineffective; and the continued incurring of deficits clearly cannot be good for managerial morale.

These changes are brought out in the recent Report from the House of Commons Select Committee on Nationalised Industries on capital investment procedures. The Government will be studying this Report with great care and replying to it in due course. But I can say that we are only too conscious of the threat that would be posed by any lengthy continuation of deficit financing in the nationalized industries. Indeed, the Select Committee recognised the frankness of Government witnesses in this Report. I would repeat, however, the statement in paragraph 24 of the Consultative Document on the Price and Pay Code for Stage 3 (Cmnd. 5444) that in the longer term it is desirable to enable these industries to restore their profitability.

But despite these drawbacks, the Government were convinced that price restraint was essential in the wider interests of counter-inflation policy. In consequence, several of the industries incurred serious deficits. For the period up to 1972–73, of course, nothing can be done about them: they are over and gone. What we are concerned with in this Bill is whether the industries should be left to carry the consequence of the deficits, or whether the Government should accept responsibility. It is our judgment, from which I hope the House would not dissent, that it is only just that the responsibility should fall on the Government. Indeed, some people have argued that we should go further, and compensate the industries, not only for the deficits which they have incurred, but also for the surpluses which they have forgone.

We have not felt able to accept this argument, for two main reasons. First, there is no way of estimating what the results of the industries would have been in the absence of price restraint, not least because price restraint has reduced their costs as well as their income. Secondly, many firms in the private sector have suffered loss of profit through restraining their prices and they will not receive Government compensation on that account. It would therefore be unfair to expect the tax payer to make good to the nationalised industries whatever loss of profit they may feel they have suffered. So much for compensation in respect of past years which is covered under Clause 1 of this Bill. For the current year and next year, which are dealt with under Clause 2, I should like to describe how the nationalised industries dealt with in this Bill are treated under the Price Code in Stage 3.

First of all, a nationalised industry may increase its prices in line with allowable cost increases. This is the same principle as applies to undertakings in the private sector, and sets, as it were, a lower limit. Secondly, a nationalised industry, if it is in deficit on controlled activities, may increase its prices by such further amount as is necessary to hold its deficit at the same level as in 1972–73. If it is not in deficit, it may increase its prices by whatever amount is necessary to enable it to break even. This sets, in practice, the upper limit on price increases. However, under the Price Code, Ministers have the power to require the Price Commission to cut back a nationalised industry price increase, if they consider that it would have an unacceptable effect on the general level of prices. They cannot, however, require the Commission to reduce it below the level needed to reflect allowable cost increases.

As your Lordships will see, the effect is that under the Price Code any of the nationalised industries dealt with by this Bill may incur a deficit in either 1973–74 or 1974–75. The Government believe that it is right to take power to compensate them, if this should turn out to be so. Much depends on action taken by Ministers and I should like to draw attention to the Statement which my right honourable friend the Chancellor of the Exchequer made in another place on December 17. He pointed out how anomalous it was to be subsidising the price of fuel at a mounting rate when there was a world shortage of energy, and announced that urgent consultations would take place with the coal and electricity industries on their prices.

Those consultations are in hand, and I cannot go further as yet. I can, however, say that whatever proposals may result from these consultations will be within the Price Code so far as electricity is concerned—as your Lordships will know, the coal industry is largely exempt from the provisions of the Price Code. The Statement by the Chancellor of the Exchequer was made after the Bill had been presented to Parliament. When it was introduced, the Bill proposed a limit on compensation for 1973–74 and 1974–75 together of £400 million, which could be increased by Order to £500 million. We re-examined the figures in the light of the Chancellor's statement, but concluded that because of the very great uncertainties in the current economic situation the provision should not be changed. Even at this stage of the financial year I should not like to predict what the outturn in 1973–74 will be: but it is clear that increases in the price of oil, and the effects of the dispute in the coal industry, will lead to substantial deficits.

To summarise this part of the Bill, the compensation which it provides is partly a recognition of past events which cannot be changed, and partly the inevitable consequence of the continuing need for price restraint. The Government are well aware of the dangers of continued price restraint, so forcefully described in the recent Report of the Select Committee on Nationalised Industries; and our long-term aim remains to restore the profitability of the nationalised industries.

The second part of the Bill is contained in Clause 4, where we are seeking to extend and rationalise the borrowing powers of the industries and bodies mentioned in Schedules 2 and 3. The powers that would be granted by this part of the Bill do not represent a new policy. Every one of the powers has precedent in other legislation. Nationalised industries first began to acquire foreign currency borrowing powers in the 1960s under the Labour Administration. The Air Corporations were the first in 1967 and others followed as opportunities for legislation arose. This Bill merely completes the process so that all the nationalised industries and public corporations will be in a position to take advantage of such opportunities. The Bill does three things: first, it gives powers to borrow foreign currencies to those industries which do not have them at present, mainly the transport industries. Secondly, it brings the existing powers of the electricity authorities and of the Covent Garden Market Authority into line with the rest. Previously they could borrow foreign currency only by the issue of stock or other securities. Under Schedule 2 this restriction is removed.

Thirdly, the Bill extends the borrowing powers of the industries to enable them to borrow sterling from the European Coal and Steel Community and the European Investment Bank. This power was granted to the National Coal Board in the Coal Industry Act 1973. For many years it has been the policy of successive Governments to centralise the long-term sterling borrowing of public bodies, so that the main source has been the National Loans Fund. In this way, maximum flexibility is preserved in the management of the gilt-edged market. The reasons for pursuing this policy continue to apply to sterling borrowing on the domestic market, but they do not apply to such borrowing from the European Investment Bank and the Community. These European institutions customarily lend a basket of currencies including the borrower's own, and it therefore seems to the Government entirely right that United Kingdom public sector borrowers should be in a position to take full advantage of these facilities.

The new powers which the Bill seeks do not in any way increase the aggregate amount which the bodies concerned can borrow. There will not necessarily be any consequential rise in foreign currency borrowing by nationalised industries; the amount borrowed depends partly on the scale and terms of the funds available. In addition, as is customary, the exercise of these powers is subject to the consent of the appropriate Minister and the approval of the Treasury. This enables us to ensure that orderly arrangements for borrowing are established and that it does not take place in a manner prejudicial to the wider national interest. These new powers do not enable the industries to increase their capital expenditure. This is determined in the course of the review of the industries' corporate planning and investment programmes and is settled in the normal annual review of public expenditure.

I am sure that your Lordships will agree that all public sector borrowers should be equally in a position to avail themselves of the opportunities which exist. In particular all should be able to enjoy the benefits of membership of the Community. Community loans often bear attractive rates; for instance, the Steel Corporation's £14.7 million loan from the European Investment Bank for the Teesside complex carried a rate of 8½ per cent. It would have been an even more attractive loan if part had been in sterling. It is our policy to encourage public sector corporations and some local authorities to borrow abroad. The foreign currency proceeds help to finance our deficit on the balance of payments. The inflow of funds last year was sufficient to finance some three-quarters of the current account deficit estimated for the year as a whole.

When interest rates abroad are competitive with sterling—and we need in any event to finance a payments gap—this policy seems to make sense. Moreover, this country normally exports more structural capital than it imports—largely in respect of export credits, aid and other forms of overseas investment. Overseas borrowing by the public sector (as well as the private sector) can surely help to offset these outflows.

Since this Bill was introduced, our external position has changed radically and the huge increases in oil prices have added an entirely new dimension to our external financing problems. This new situation gives further emphasis to the importance of this borrowing programme. I can assure your Lordships that neither the interest payments nor the repayment of the principal are of an order which need cause concern so long as the balance of payments develops as we expect, and as our policies are designed to achieve. My Lords, I beg to move.

Moved, That the Bill be now read 2a.—(Lord Aberdare.)

LORD ROBBINS

My Lords, with the leave of the House I should like to ask the noble Lord to answer a question which for me is an occasion of much perplexity. It relates to the first half of his remarks, namely, on compensation payments. The Bill refers to moneys provided by Parliament. I wonder whether the noble Lord could explain the ultimate source of such finance. Is it real taxation? Is it borrowing provided out of savings which would have taken place if there had been no inflation, or is it inflationary borrowing?

LORD ABERDARE

My Lords, perhaps if, with leave, I make a few remarks at the end of the debate I will try to deal with that point.

3.21 p.m.

LORD DIAMOND

My Lords, may I first of all thank the noble Lord for the kindly remarks he made about my noble friend Lady Scrota. I can assure him that the pleasure he felt is felt as much on this side of the House. We are delighted to see her back.

My Lords, this Bill comes to us exactly as it came before the other place; in other words, it reaches us unamended. In fact I see that there were only four Divisions in the whole Committee stage in the other place. In half of those Divisions the only person to vote against the Government was a Government supporter, so it does not look as though this Bill is going to give us a great deal of trouble or require a great deal of detailed examination. We are grateful to the noble Lord, Lord Aberdare, for the explanation he has given us and, of course, we are bound to accept both major purposes of the Bill. With inflation raging at its current rate, subsidies for essential services are essential, and with the deficit on balance of payments at its present astronomic figure, borrowing abroad, which as he explained may help reserves temporarily, is inevitable. So, my Lords, the Bill follows logically from the Government's gross ineptitude, and we are forced to accept it, but without any enthusiasm.

There are two aspects of the Bill about which I am not very happy, and one about which I am positively unhappy. The first point about which we are not very happy is the question of compensation, which has already been referred to. The noble Lord says, quite rightly, that the Government are basing their compensation on losses or deficits. It is revenue which is affected in the first place when prices are arbitrarily kept down, and one would have expected therefore that more attention would have been paid to the possibility of compensating on that basis. The argument has been put forward that that is a difficult concept, but so is the concept of deficit financing—financing on the basis of deficit as opposed to revenue. It is certainly not true that only one of them presents difficulties. As the noble Lord has pointed out, the argument that it is necessary to treat the nationalised industries in the same way as private industry does not bear examination, because nationalised industries are treated differently, in fact less favourably, under the Prices Code. Moreover, Ministers have the power and have in fact intervened in order to affect that even more. So I hope the Government will give further consideration to the question of the basis of compensation.

The other matter about which we are not very happy is the question of price restraint. The noble Lord referred to this but did not say what the Government were proposing to do about it. Price restraint, as we all know, means distortion of demand, and with an industry like the electricity industry which is one of the major industries to be affected by the Bill we are now considering, where investment is planned for something like seven years or more ahead, they can get considerable distortion in their investment plans. Therefore the artificial restraint of prices cannot be accepted as a long-term policy. I repeat that we are disappointed that the Government have so far had so little to say about it. It seems that the Government are completely lost and have no policy to deal with the important problems of the nationalised industries that have arisen as a result of Government policy.

There is one matter about which I should have thought all your Lordships are positively unhappy, and that is the failure of the Government to replace the financial targets, to which the noble Lord referred, with any other device or method of encouraging and measuring efficiency. It is not as if anybody is unaware of this difficulty. On the Second Reading of this Bill in the other place on November 21, Mr. Patrick Jenkin, the then Chief Secretary, said—and I quote from col. 1351 of the OFFICIAL REPORT: Exactly how Clause 2(5) will be carried into effect and how far it will be possible to build in some form of incentive to the industries to contain their costs and to maximise productivity is a matter which we are still exploring with them and on which we shall be anxious to hear the views of right hon. and hon. Members. He went on to say that the Bill was drafted sufficiently widely to accommodate any acceptable method. But he did not say anything more than that or give any indication of what was in the Government's mind. He went on a little later to say (col. 1352): The boards"— that is the boards of the nationalised industries— have made abundantly clear to the Government the demoralising effect which continuing deficit finance on this scale is having on their organisations, and Ministers in their turn have made it clear to the boards that they share these anxieties. and he went on to refer to the dangers of open-ended deficit financing.

Although this matter, is obviously so urgent and one of fundamental importance to the efficiency of the nationalised industries which form such a large part of our economy, we see no advance when we get to the Report stage in the other place. On January 21 the Treasury Minister, Mr. Nott, in replying to the debate said (col. 1368 of the OFFICIAL REPORT of that date): What Ministers have genuinely been seeking to do on this Bill is to draw in all the suggestions we can find from all sources as to how we can return to long-term targets and how we can devise a new incentive system. That is a very charming way of saying that the Government do not know what to do. But the Government must know what to do if they want to continue in power and want to continue having any kind of control over such a large part of our economic production.

The nationalised industries (there is no need for me to go over the figures) are of vast importance. It is their prices which have been kept down. It is to provide finance for them that we are considering this Bill. It is their borrowing which we are considering. It is they who have to borrow for their capital investment programmes which are affected by the distortion of the demand resulting from the restraint of prices. It is therefore the Government's responsibility to come forward with ideas If the Government want to canvass ideas, one very obvious method of devising an alternative to a target which has been destroyed by the Government's own policy is to separate revenue and expenditure; to deal with revenue on the basis of amount or volume produced, whatever the production is concerned with, for example, units of electricity; to have a target for that on the basis of production; and to have an expenditure target based on cost, based on the cost of each unit produced, a productivity target. There is nothing difficult about establishing that, and establishing it quickly. It would serve reasonably well, though not as well as the financial target in natural, normal trading circumstances.

Here we are dealing with a very important problem. The Government are bringing forward a Bill which has been through the other place; Ministers are well aware of the dangers, yet nothing whatever has been brought forward in order to deal with the problem. That is my complaint. We hope very much that before we complete the Committee stage of the Bill, the Government will have brought forward their ideas and will be able to assure us, by reference to the Bill, that they are ideas which are capable of being carried out under the powers of the Bill; otherwise, of course, we shall need to alter those powers as we proceed through the Committee stage. My Lords, those are the major problems we have on this Bill. We shall not oppose the Bill. We hope we shall not take too long in dealing with it at the Committee stage.

3.32 p.m.

LORD ABERDARE

My Lords, if I may attempt to answer some of the points that were made by the noble Lord, Lord Diamond, I am very grateful to him for saying that he accepted the main purposes of the Bill and that he would co-operate in its passage through this House. So far as the basis of compensation is concerned, we were up against great difficulties. We did not think it right that the nationalised industries should be compensated on the same basis as the Prices Code allowed in the private sector. There are two difficulties. The first is that the provisions of the Prices Code which related especially to the private sector do not fit the circumstances of the nationalised industries very well. This is because the relevant parts of the Code were intended to encourage investment while maintaining strict controls over profit margins in the private sector. In the case of the nationalised industries the Government have more direct methods available for maintaining the level of investment.

The second difficulty is, quite simply, that the nationalised industries are not the same as private companies. Other differences apart, the Government are regarded as directly responsible for the price increases of the nationalised industries and not so in other cases. This means that the Government face a particularly difficult task in balancing the need to restrain prices on the one hand and the danger of slipping into a régime of permanent subsidies and of excessive public expenditure on the other. The balance which we reached is set out in the Prices Code.

My Lords, so far as the policy of price restraint and our future fuel pricing policy is concerned, I fully understand the anxiety to know what Government decisions are to be taken on fuel prices. But there are difficulties. Immediately after my right honourable friend the Chancellor of the Exchequer made his Statement on December 17, discussions were opened with the nationalised fuel industries about the issues involved. They are extremely complex and they are, unfortunately, compounded by the present industrial difficulties. But I can repeat what the Chief Secretary to the Treasury said in another place, and I can promise that a Statement will be made at the earliest possible moment once these talks have been concluded.

LORD DIAMOND

If I may interrupt the noble Lord for just a moment, is it not the case—I cannot refer to it immediately—that on Second Reading there was, if not a promise, a strong hope expressed that this Statement would be made before the Bill completed its passage in the other place? Since that has not taken place could the noble Lord undertake to see that the Statement is made before the Bill completes its passage through this House?

LORD ABERDARE

Well, my Lords, I will do my best. I am afraid I cannot promise anything in present circumstances which, as the noble Lord knows, change from day to day and make life very difficult.

My Lords, finally the noble Lord referred to some form of device for measuring the efficiency of nationalised industry which might apply to the reckoning-out of the deficit of 1974–75. I am afraid that so far this has defeated us. We have tried hard to find some formula which would give targets to nationalised industries. I am very grateful to the noble Lord for outlining one such proposal of his own which I will certainly see is considered. But we have discussed this matter with the industries to try to find a financial objective or some kind of incentive arrangements, unfortunately so far without success.

In reply to the noble Lord, Lord Robbins, I can only say that "monies provided by Parliament" means voted expenditure. Whether this is found by taxation or by borrowing depends on the judgment of the Chancellor at the time of his Budget concerning the volume of taxation necessary in the circumstances of the time. My Lords, the noble Lord will not expect me, I am sure, to anticipate my right honourable friend's Budget.

On Question, Bill read 2a and committed to a Committee of the Whole House.