§ 3.4 p.m.
§ The SOLICITOR-GENERAL for SCOTLAND (Lord McCluskey)
My Lords, I beg to move that this Bill be now read a second time. We come today to debate a Bill to raise the statutory limit on the amount of external finance which the British Steel Corporation and its wholly-owned subsidiaries can raise by borrowing. The Bill follows on the Government's White Paper British Steel Corporation: the Road to Viability, published in March 1978.
We need this Bill to carry out the Government's commitment to retain in Britain a substantial bulk steelmaking capacity to underpin our wider industrial strategy. We shall take all the steps that are sensible and appropriate to restore BSC to viability, but we shall do so in an orderly way. By this, I mean we shall avoid unnecessary disruption of the business, we shall pay full regard to the proper interests of customers and suppliers, and we shall reduce to the minimum the social hardships inevitably involved.
When the borrowing limit was increased in July of last year, my right honourable friend the Minister of State for Industry said in another place that the limit then fixed should carry the Corporation through until Spring 1979. At the beginning of April 1978, BSC's borrowings, counting against the limit, were £3,043.5 million; this amount, together with the estimated external financing requirement of £875 million in 1978–79, suggests that my right honourable friend's estimate was about right. As announced in the White Paper, we now need to carry the Corporation through until present uncertainties in the steel market have been overcome sufficiently to determine the precise size and nature of the reconstruction needed to produce a viable, long-term capital structure.
Noble Lords may ask when the capital reconstruction will be undertaken, and I 1442 cannot give them a firm timetable. We must wait until the present uncertainties are resolved, and we can be sure that the market has stabilised and is picking up. The extended borrowing powers we are discussing today are designed to cover BSC's needs for up to three years. We need only look across the Channel to see what would happen if the reconstruction were attempted prematurely. In France only a year ago a major reconstruction of the finances of the major steel companies took place. However, the continuing world-wide steel recession has undermined this effort and the French Government is now studying further measures that need to be taken. Reconstructions are now being planned in Belgium and Italy.
As explained in the White Paper, we intend to finance BSC by subscription of capital under Section 18(1) of the Iron and Steel Act 1975. The Government have no intention of writing off any of the capital subscribed from the beginning of this financial year. All the new capital subscribed under Section 18 as from 1st April this year will have to be properly remunerated by dividends once the reconstruction has taken place, although we do not expect any remuneration in advance of this, either in respect of advances under Section 18 now taking place or in respect of public dividend capital already on BSC's books. This is a realistic method of interim financing pending the reconstruction that we all recognise will be needed. At the present time, a substantial number of overseas steel companies are receiving finance in one form or another to tide them over the current crisis. Some companies in Europe and the USA are able to keep going only because their steel operations are subsidised by their other activities to an extent which is not open to BSC.
Given the depressed state of the steel market world-wide, your Lordships may wonder when the lean years will be over. I cannot predict that with any certainty. The pattern of trade in steel has been changing, and will continue to change to the disadvantage of traditional suppliers. The EEC's share of world steel production has fallen from 23 per cent. in 1969 to less than 19 per cent. in 1977, and the United States' share has come down from 22 per cent. to below 17 per cent. Increases 1443 in capacity in the developing countries and in Eastern Europe as well as Japan are resulting in severe over-capacity world-wide and intense import pressures. In the face of this, British Steel will be concentrating its efforts on improving quality and productivity.
To this end, apart from the completion of schemes already under way, investment will be directed to replacement, the balancing of primary and finishing facilities, quality improvement, cost reduction schemes and small schemes costing under £2 million. The major schemes at Ravens-craig and South Teesside will be completed at a total cost now estimated at nearly £1,000 million. These, together with the 11 meter blastfurnace at Llanwern, itself costing £100 million, will radically overhaul the Corporation's bulk iron and steel-making capabilities, more than covering likely demand until the mid-1980s.
Success with the Thrybergh bar mill and other developments in the Sheffield area is to be reinforced with continuous billet casting at Templeborough. Now that satisfactory commitments on manning have been given, the Corporation hopes to make an early start on the installation of continuous casting facilities at Port Talbot, subject to the financial evaluation of this project. This will make an important contribution to improving quality and retaining competitiveness in strip products, which is BSC's largest business area. Schemes under £2 million which are likely to cost over £350 million in the next two years, will play a particularly important part in cost reduction, in removing bottlenecks and in improving efficiency. The full responsibility within BSC for these schemes is now at divisional level, which means that the management of what is becoming a very important part of the investment programme has been decentralised.
The Corporation has provided a good deal of detailed information on investment plans in its booklet entitled Prospects for Steel, which was made available to those noble Lords with a particular interest in steel. The Corporation has gone to considerable lengths in this informative booklet to meet the needs of Parliament and I think we should be grateful to it for this. Sir Charles Villiers made another innovation this year by inviting noble Lords and those particularly 1444 concerned in another place with legislation on the iron and steel industry, to a special meeting to discuss BSC's annual report and accounts for 1977–78. That was done on publication day, 4th July.
The booklet Prospects for Steel stresses the need for capacity to move more into line with demand. Forecast levels of production up to 1982–83, ranging between 22.2 million and 16.1 million liquid tonnes, compared with a current effective manned capacity of about 22 million tonnes, plus another 5½ million coming on stream over the next few years, make it clear that there will be ample capability to meet any likely demand. Certainly new starts on building further capacity cannot now be justified. Neither BSC nor the country can afford to maintain surplus capacity in excess of reasonable expectations of future levels of demand, even in an upturn. It costs roughly £60 million a year to maintain 1 million tonnes of surplus capacity.
The Government's present view is that further rationalisation will be necessary in future, but the Government believe that this should be considered on a step-by-step approach which will retain flexibility to adapt to unexpected changes in the situation. The Government have agreed that the Corporation should seek to negotiate terms for the early closure of the high cost plants with the TUC steel committee and with the local work force concerned. Such consultations are not easy to carry through and require both the determination and goodwill of those concerned. The Government have made it clear to the Corporation that the negotiating procedures must be closely followed—there are no short cuts. But the British Steel Corporation must shed excess capacity in order to survive, and pressure to keep one works open can only increase the necessity of shutting another.
Your Lordships will be very much aware of the penalty which closures inflict on men who have developed their skills and shaped their lives to steel and who are situated in areas of high unemployment—unemployment which will be made worse by the steel closures. It is the aim of this Government to ensure that everything possible is done to provide alternative employment in the areas affected by steel-making closures. As such closures take 1445 place, we will bring forward measures designed to alleviate the local effects on employment, as we have now done in the cases of Hartlepool, Cardiff and Ebbw Vale. The temporary loss of rate income by local authorities seriously affected by closures will be taken into account. This will be compensated for by the extra resources element when the lower rateable value figures are used in the rate support grant calculations. There has been a certain amount of criticism of the level of redundancy payments offered to steel workers faced with losing their jobs. These settlements are in the Corporation's financial interest and reflect the very special problems of the steel closure areas.
Changes to the Corporation's fixed assets by the closure of obsolete plant and by re-equipment are only part of the picture. The Government are determined to see BSC restored to lasting viability, for which the achievement of competitive cost levels through improved performance is absolutely vital. We have declared our full, sustained and public support for BSC in its efforts, including the steps needed to achieve improved productivity through reduction in manning levels, more modern working practices and better use of raw materials and energy. The Corporation has set out in Prospects for Steel the actions it is taking in these areas. We place the greatest importance on progress through negotiated productivity agreements, which must bring an adequate return to the Corporation as well as to the workers concerned, and the sustained smooth operation of plant without interruption for either technical or industrial relations reasons. We expect total commitment by everyone in the Corporation workforce and management, to the objective of restored viability and its achievement.
We want the Corporation to be an efficient and fully competitive producer, but it has to be able to secure the revenues to sustain its operations. Customers need steel at competitive prices, but these prices must be realistic. It is in this context that we have been actively supporting the measures being taken by the EEC Commission to deal with the problems of large volumes of low-priced imports through agreements with supplying countries, and by setting minimum price levels within the Community for 1446 major categories of steel products covered by the Treaty of Paris. We are also encouraging the Commission to take full account of users' interests and to deal with any special problems with which particular groups of users are faced.
The step-by-step approach which the Corporation has adopted for dealing with its problems means that it must first of all concentrate on the policies to be followed and actions to be taken during the financial year 1978–79. The Corporation has projected, on certain stated assumptions, a loss of about £400 million for the year. Since Prospects for Steel was issued, Sir Charles Villiers has said:Nothing has got better and one or two assumptions connected with the market look to have got worse".Nevertheless, management action is needed in close consultation with the TUC steel committee and local workforces to improve on the projected loss in every possible way. It is unacceptable for a nationalised industry to make losses of this magnitude, even though conditions are difficult and international competition is intense. The Government will be carefully monitoring the Corporation's performance and results as they come in. We expect a substantial improvement over the year resulting from action by management and unions. We believe such progress to be desirable if a rate of break-even is to be achieved by March 1980.
To turn more closely to the Bill, the immediate £750 million increase in the borrowing limit which is provided for in this Bill is required principally to finance a capital investment programme now proposed at £500 million for 1979–80 and—based on some recovery in steel demand—a substantial increase in working capital estimated at about £300 million in the same year. If a further increase is required later on, this will fall to be considered in another place under the terms of the Bill. The actual borrowings of the Corporation will be regulated by the annual system of cash limits and Section 18 advances will be made out of voted money. The great bulk of BSC's financial requirements will be met from this source. The Corporation will continue to make partly guaranteed and partly unguaranteed short-term borrowings for working capital purposes, which are subject to a current overall limit of 1447 £325 million. My Lords, in conclusion, the Bill is essential to provide a firm financial basis for the British Steel Corporation in the face of the exceptional uncertainties of the world market. We are determined to secure the future of the Corporation, and, to this end, I move that the Bill be now read a second time.
§ Moved, That the Bill be now read 2a.—(Lord McCluskey.)
§ 3.20 p.m.
My Lords, first, may I thank the noble and learned Lord for the kind way in which he explained these new loans provided for in the Iron and Steel (Amendment) Bill. I can assure him and others of your Lordships that I do not feel the slightest bit happy at having to agree to it or in knowing that the steel industry is in such a terrible state at the moment. But I will try my best to sound happy even if I am not. Of course, if any of your Lordships have seen what is written in the Bill your minds must be quite boggled with the enormous amount of money that is now having to be put up to save the steel industry as a whole. The fact remains that, unless we do it now, the whole of industry, not just the iron and steel industry, could possibly collapse, because all our industry bases its materials and its workings on the steel industry. So we are really virtually committed before we start.
I was interested to read in the Explanatory Memorandum to the Bill that:Borrowings by the Corporation against the statutory limit at 1st April 1978 are estimated to be £3,070 million and it is expected that the increased limits … will cover the Corporation's financing needs for about another three years".And yet I have been listening to the noble and learned Lord with a great many doubts in his mind as to what the future really holds. I wonder, therefore, whether the Government have really done their sums right. I wonder whether three years is a safe period to deal with even in the Memorandum, and whether we should be looking much further ahead. I will try to show some of the problems, and your Lordships might well think that three years is definitely not the timing.
Before I go any further, I think it is justifiable to pay a tribute to the Iron and Steel Corporation, even though it has had difficulties. We have employed some 1448 of the finest craftsmen in the world in the iron and steel industry, and many of those men have gone abroad and taught other nations how to produce iron and steel and run foundries. Therefore, the industry have been extremely lucky with manpower. Equally they have always been able to produce a high quality steel, which up to the present has always been in great demand throughout the world. And, thirdly, they have always been a proud industry. The industry employs something like 168,000 people, and during this debate we might well ponder in our minds that some of these people might be in trouble during the reorganisation of the steel industry.
Last year—that is, to 1st April 1978—the industry made a loss of over £400 million. The annual report stated certain reasons why and how some of this deficit was incurred. I should like to describe a few of them now. The first reason stated in the report—this is one of the many problems—is the growing world surplus of steel capacity, leading to highly competitive conditions and a continuing high level of imports into the domestic market; second, an extremely low level of operation during the year, with high losses because of under-utilisation of capacity; third, continuation of a high cost base with too much old and overmanned plant; fourth, weaker selling prices arising from low demand, and yet steadily rising costs as a result of inflation; fifth, an interest charge of no less than £197 million, much of it for plant still under construction; sixth, some costly industrial disputes. My Lords, those are what the report explains as the deficiencies and problems.
I wonder whether we cannot add one or two more to the difficulties that the industry has had to bear. I wonder whether the Government should not have stepped in sooner. There has been the difficulty the industry has had with all the leaks that have come about, the Press reports. Those in themselves demoralise those who are trying to run the industry. Of course, the Government have found themselves falling between the two stools of ordering the industry immediately to reorganise itself, or leaving it and going for the Election without creating any problems within the industry or within the unions. They have partly gone one way—that is, making the industry reorganise itself—but not, I believe, fast 1449 enough. I would also say that not only would this present Government, when in power, be faced with the problem of the steel industry; any other Government would also have to act in the same conditions. A collapse of the steel industry, as I said just now, would certainly bring chaos to the whole of industry throughout this country. So any Government would have responsibility for keeping the industry going. The Government must act and act now to make sure of continuing progress for the future of the steel industry.
After losing £450 million last year it is claimed in the report that next year will see the Corporation breaking even. I am not at all certain about that; I am extremely doubtful. Time is almost running out. I see the Minister hoping for the best, that things will improve. I almost see him at the table with cherry stones on the plate in front of him, saying, "This year, next year, some time, never". I can see the problems he has there. Nevertheless, he has moved slightly forward in trying to get the steel industry to reorganise itself. In spite of that loss we still have construction schemes going ahead. There are two major schemes of £1,000 million each: one at Ravenscraig and the other at South Teesside. I believe the Minister in the other place, when debating this Bill, mentioned yet another plant that will have to be reorganised. I cannot mention it because I believe he withdrew, but there is doubt about that other plant.
Notwithstanding the cost of all these constructions and reorganisations that are bound to come about, we are faced with yet another problem, which is competition from the outside world. In past years we have been selling steel plants and expertise to other countries in the Third World—for example, to the smaller countries of Korea and Thailand. Now they can produce cheaper steel than we can simply because they have cheaper labour. Therefore, the Steel Corporation of the United Kingdom is faced with vast competition. It says in the Bill that these loans might help the Corporation's needs for finance over the next three years, but I still doubt whether three years is anywhere near the mark.
My remarks have been somewhat depressing, but I said at the outset that 1450 I was not happy and that I could not find any optimism. However, there must be something that we can do. I think that the Government must ensure that the Steel Corporation reorganises itself now and not just when it is given the money. It must go ahead and deal with the situation as soon as possible. I am aware that that will hurt some people and that the reorganisation of plant will probably mean a loss of jobs. That is the agony of the situation. I made reference just now to the over-manning of plant which must keep the costs up. Therefore, someone who is affected will, unfortunately, either have to go into a new factory or be rehabilitated somewhere in a different industry.
If these loans are used correctly and the Government and the Steel Corporation get down to the reorganisation, I believe that in a few years' time we shall probably witness—I certainly hope that I shall do so because I do not like to sound depressing as regards such an important industry—a new light coming through the tunnel; that the industry will begin to make its way with progress and profitability; that those who are employed in it will be happy, and that it will go from strength to strength.
§ Lord ROCHESTER
My Lords, before the noble and learned Lord replies to the debate I should like, with the leave of the House, to ask him one question which arises out of what he was saying regarding redundancy payments. Are the Government satisfied that the level of redundancy payments now being made in the steel industry will not prove excessively high in relation to similar payments that can be made in industries that are not subsidised by the taxpayer?
§ 3.32 p.m.
§ Lord McCLUSKEY
My Lords, in replying to what has been said I should first like to thank the noble Viscount, Lord Long, for his generosity in acknowledging publicly the necessity for the Bill. That comes from him with good grace because I know that in another place the Bill was, of course, more severely criticised at this particular stage. However, now that it has arrived here I think that it is very fair of the noble Viscount to acknowledge its necessity and, indeed, to acknowledge that any Government, whatever its political 1451 complexion, would have to act upon the same conditions and face the same kind of problems and, at least in the short term, would have to approach the problem in very much the same way.
The noble Viscount suggested to me that perhaps the period which was taken into account in the Bill—the period of three years—might be too short. There are a number of points that I should seek to make in reply to that suggestion. In previous years, the British Steel Corporation has provided five-year cash flow forecasts annually on a roll-forward basis as part of its medium term plan. However, with the present uncertainties over steel, little reliability can be attached to forecasts so far ahead, so the Department is not currently looking at such forecasts. If your Lordships look at Prospects for Steel, you will see that there the British Steel Corporation indicated that realistic general indications of the financial outlook could hardly be provided for more than two years ahead—indeed, the Bill looks at such a period. When uncertainties have been sufficiently overcome for the Government to consider the precise size and nature of the reconstruction needed to produce a viable, long term capital structure for the Corporation, we shall have to look at a five year horizon and further ahead if possible. But there is no point in undertaking a reconstruction until we can be reasonably sure that it will be successful—I return to the point of the example of what happened so recently in France.
Indeed, if one goes back to 1973, at that particular time long term strategic plans were drawn up for the British Steel industry and they were very much falsified by events which were, quite naturally, not foreseen at that time. So, at present, one sees a relatively short term ahead and it is unwise, in the Government's view, to attempt to plan for any longer period than that envisaged by the Bill. It is hoped that within that period we can embark upon the necessary reconstruction—I say "necessary" because everyone is agreed that it is necessary.
The noble Viscount criticised the Government. He suggested that they should have stepped in sooner. Of course, the Government have been monitoring very closely and taking a very close interest in the steel industry for a number 1452 of years, and one would acknowledge that not all initiatives have, in fact, been successful. But your Lordships will recall the Beswick Plan and the publication of the White Paper earlier, and this Bill really follows upon that White Paper. Had the Government stepped in earlier the climate would have been no more certain, and it was not necessary to step in in these terms until the present time.
With regard to the leaks which the noble Viscount mentioned, no doubt there have been some leaks, but I do not think that these affect the substantial factors that have an effect upon demand for steel, the capacity to produce it and the long term problems of the industry. He also suggested that the Government ought to step in, as it were, now and that the reorganisation ought to proceed now. I can only revert to what I said when replying earlier to what the noble Viscount said—namely, that, in fact, the Government are endeavouring to face the difficulties in an uncertain climate and it would be wrong to attempt prematurely to reconstruct the industry.
The noble Lord, Lord Rochester, asked me a question about the level of redundancy payments Of course, one does find different levels of redundancy payment in different situations. There are the payments which are made normally under the Acts, and your Lordships have recently considered as regards shipbuilding other schemes for redundancy payment. Indeed, schemes have now been put forward and no doubt your Lordships will consider them in the reasonably near future.
It is very difficult to say that a particular scheme sets a precedent which others may not seek to follow. Plainly, they will attempt to do so. However, what the Government attempt to do and what the nationalised employers attempt to do in this kind of situation is to look particularly at the local conditions; at the earnings of those in the industry; at the prospects for the industry itself in that area; at the prospects for employment in the same area, and tragically it so happens that in, for example, shipbuilding and steel-making the redundancies tend to occur in the very areas where the prospects of re-employment are not good. So, the Government endeavour to look at each case on its merits and so do the nationalised employers.
1453 I do not think that I can go further in answer to the noble Lord, Lord Rochester, than to say that it is to be hoped that, if one faces such large scale redundancies in areas which are already affected by substantial and unduly high unemployment, each case will be considered upon its proper merits.
I should like to return to some words of the noble Viscount, Lord Long, who said that intervention by the Government may hurt some people. Of course, it will inevitably hurt some people. But people are only prepared to be hurt to a certain degree and ultimately, if the Government attempt to ride roughshod over the interests of the workforce—some even with assistance perhaps from national trade union leaders—such attempts will simply not succeed. Accordingly, one must proceed with the assistance, advice and co-operation of the local work force as well as the national trade union leaders. So, it is not a question of hurting people, but of recognising that in this kind of situation people are bound to be hurt. The Government's responsibility, like that of the Corporation, is to endeavour to ensure that that hurt is eased as much as possible. I hope that in the light of that the redundancy payments which have been made here will not be seen to be undue.
§ On Question, Bill read 2a; Committee negatived.