Ordnance Factories and Military Services Bill

HL Deb 22 June 1984 vol 453 cc570-97

12.24 p.m.

The Parliamentary Under-Secretary of State for the Armed Forces (Lord Trefgarne)

My Lords, I rise to move that this Bill be now read a second time.

The purpose of the Bill is to enable the Royal Ordnance Factories, which are at present an integral part of the Ministry of Defence, to become an independent commercial organisation established as a Companies Act company, initially wholly owned by the Government. Under its terms the Secretary of State for Defence can transfer Government assets—largely those which are at present in the ROF Trading Fund—to the company, taking complementary action to extinguish the trading fund. The non-industrial and industrial staff currently paid by the fund or who are engaged in work closely connected with its operations, will transfer with the assets to become company employees.

Since the Second World War the Royal Ordnance Factories organisation has moved progressively towards more commercial disciplines and accountability. The ROF Trading Fund was the first such fund to be established under the Government Trading Fund Act 1973. It was set up in 1974 and the ROFs have operated since then with considerable success—winning the Queen's Award for exports in 1976, 1978 and again this year. Yes, the ROFs have done well, but the Government believe that under our proposals they could do even better. They are at present obliged to operate within the constraints of the Civil Service, and this inhibits the ability of management to conduct their trading activities in a fully effective way. The next logical step is to complete the transition begun by the Trading Fund and to make the organisation a fully fledged commercial one which will be better able to build on the strengths that already exist.

Our proposals follow studies made by my noble friend Lord Strathcona when Minister of State in the Ministry of Defence, and one made earlier, by the Mallabar Committee in 1971, as the result of which the present ROF Trading Fund was established. The Mallabar Committee, looking at the issues more than a decade ago, did not believe that hiving off the ROFs would be feasible because of the close links between the ROFs and MOD as suppliers of munitions. It remains the case that the majority of ROF business is done with MOD, but in recent years the ROFs have dramatically increased their overseas sales. In these outside markets, particularly, the constraints imposed by the current organisational structure are operating against the best commercial practice. MOD can continue to secure its requirements with a privatised organisation, but privatisation will also open up the field to the ROFs to expand in other directions. This would not be possible if it remained part of Government.

The Government also attach very considerable importance to securing an increase in competition, with all the benefits that that will secure for us in the way of products and their pricing. As the Statement on the Defence Estimates 1984, which we have recently debated, explains, it is central to our strategy to promote more extensive and effective competition in the supply of defence equipment. Competition is vital for the achievement of the best value for money, the most efficient use of industrial resources and the stimulation of innovation and new ideas.

The Government accordingly made clear in the previous Parliament, and again during the general election last June, our intention to change the status of the Royal Ordnance Factories, thereby enabling the subsequent introduction of private capital.

We plan accordingly to incorporate the ROFs as a public limited company with the structure of a holding company with four wholly-owned subsidiary companies acting as operating divisions. To the four subsidiary companies—which will cover small arms, ammunition, weapons and fighting vehicles, and explosives—will be assigned the 11 factories and the two agency factories presently in the ROF Trading Fund. To the explosives company will also go parts of the Propellants, Explosives and Rocket Motor Establishment (PERME) which are an integral part of the Ministry at present, and also the agency factory managed by IMI at Sumerfield.

Thus, the manufacturing operation which the ROFs essentially were while managed as a Trading Fund will be transformed into one which will have its own research and development capacity, based upon the PERME capability; and the ROFs will then be on all fours with their major competitors in the defence industry. While the company is building up its R and D capability from this base, it will be able to sub-contract, back to MOD, R and D work on land systems. The ROFs already have—as a result of a transfer of responsibilities from the Defence Sales Organisation in April of last year—their own sales and marketing organisation. The Government are determined to establish an ROF Company which—as a free-standing enterprise—is capable of carrying through new products from concept to production.

It is our intention that the directors of the company should be fully responsible for the management of the enterprise and that the Government should not interfere in the business operation. But while the company is under Government control the relationship between the Government as shareholder and the chairman of the board will be determined by a memorandum of understanding which we would hope to publish. This MOU, on the basis of the annual submission to the department of the company's corporate plan and the regular provision of company accounts and other information, will enable the Secretary of State to discuss the company's forward plans with its board in relation both to his responsibilities to Parliament and to our desire that, in the wholly-owned phase and beyond, the ROFs should maintain, and increase, their profitability. In addition, we shall be taking powers in the articles of association of the company to ensure that the company, once privatised, should not fall under foreign control.

The Government—that is the Ministry of Defence—have of course a particular interest in the ROFs as the major customer for their products. The continuity of supply to the services of a wide range of equipment, and particularly that, perhaps, such as ammunition, where the ROFs are a major supplier, is vital. It is equally vital that the ROFs should go on meeting the necessary quality audit and safety standards. My honourable friend the Minister of State for Defence Procurement has made clear in another place that what has been known as the preferred source policy—under which the ROFs had first claim, non-competitively, for the production of various MOD needs—would cease on vesting day. In the future we shall secure our requirements from the company in the way we secure them from all other defence suppliers: by competition where we can, and with arrangements agreed in a specific contract. We have no reason to suppose that our needs cannot be met totally satisfactorily in this way.

The Bill is concerned with the incorporation of the ROFs as Companies Act companies and with the transfer of public assets to them. For an initial period these companies will continue to be owned by the Crown. But I should say a few words about our proposals to introduce private capital thereafter. We are at an early point in the process of turning an integral part of a Government department into a fully-fledged independent commercial operation, and the Bill is only a first step. It will enable us to create a framework for the ROFs which will allow for the introduction of private capital into the venture. The first step is to set up the companies and to transfer to them the property and assets which will constitute their trading capital. Thereafter they will be trading on a commercial basis.

We cannot decide now the exact means, whether by flotation of shares in the whole organisation, by direct sale of parts or of subsidiary companies, or by entering into joint ventures. My right honourable friend the Secretary of State has, however, made it clear that the Government's preferred course, if feasible, would be a Stock Exchange flotation of shares in the whole enterprise. We see no reason why such a flotation should be long delayed.

Crucial to the success of the ROFs in the past, and crucial in the future, is, or course, the workforce. It is the dedication of this workforce—their skill and expertise, their energy and enthusiasm—which have enabled the British Army, and the services as a whole, to rely with such confidence, both in peace and in war, on a timely and effective supply of munitions.

The individuals who make up that workforce—in many cases carrying on a family tradition—are rightly proud of their record of service to the Crown, and of the essential contribution they have made to the commercial success of particular factories and of the ROF enterprise as a whole. That contribution will continue to be crucial in the future. The Government believe that it is appropriate for the manufacturing operation which they perform to be outside government, rather than inside it, and also that the prospects for future employment in the ROFs are healthier if the public service constraints are removed from the enterprise. But that does not mean that we do not understand the regrets and anxieties that employees have about the loss of their Civil Service status which the changes will unavoidably involve. Indeed, the unions expressed their anxieties to me very clearly when I visited the Royal Small Arms Factory at Enfield recently. My ministerial colleagues in the Ministry of Defence, led by my right honourable friend the Secretary of State, have therefore devoted very particular attention to all the practical aspects of the transfer of personnel; and there have been intensive discussions with the trades unions, which continue, on all the issues arising.

The personnel provisions are contained in Clause 4 and Schedule 2 to the Bill. Employees of the trading fund and in the other concerns which are being transferred to the company will go across under the terms of the Transfer of Undertakings (Protection of Employment) Regulations 1981, which means that they will do so on terms and conditions of employment which will mirror very closely those they enjoy at present. There will be no change as a result of transfer in such things as employees' pay, leave or in retirement policy. In addition, the current rights of trades unions, whether Civil Service or otherwise, to negotiate on behalf of their members will be transferred unchanged.

Superannuation arrangements are specifically excluded from the regulations, and staff who are transferred from the Civil Service cannot remain in the PCSPS. A new company scheme is therefore being devised which will provide for transferees comparable benefits to those of the Civil Service scheme, including the continuation of index-linking. There will be a separate scheme for new entrants to the company after vesting day. The proposed schemes will be governed by trust deeds. Transferring employees may elect either to leave their accrued pensions entitlement in the principal Civil Service scheme or to transfer those entitlements to the new company scheme. In respect of those who elect to transfer, the Government will make transfer payments into the company scheme to enable that scheme to pay those accrued pensions when the time comes. I appreciate that the unions are not yet fully satisfied that the company scheme will in all circumstances match the Civil Service scheme. But discussions continue and will, I hope, result finally in an outcome acceptable to all parties. It is the Government's intention that there should be no detriment in this respect.

One other crucial personnel issue is that of redundancy compensation. On this, I would emphasise that compensation levels for transferring employees will match those currently provided for in the Civil Service pension scheme. On this issue, too, we are in continuing discussion with the unions.

Turning to the other provisions in the Bill, I would point out that what we are discussing is essentially an enabling measure. Clause 1 enables the Secretary of State to make schemes transferring to a company or companies set up for this purpose under the Companies Act property, rights and liabilities which are at present being used for, or attributable to, the operation of the ROFs. The Secretary of State will receive in return for the assets transferred to the company securities in the form of shares and debentures of an equivalent value.

Clauses 2 and 3 supplement the provisions of Clause 1 by defining the ambit of the property, rights and liabilities that may be transferred initially, and by laying down some general rules regarding the operation of schemes and the publication of their contents. In this last connection, your Lordships will observe that the Secretary of State is bound to lay schemes before Parliament within one month of their being made. That is in Clause 3(9). Clause 4 brings in Schedule 2, which contains the provisions relating to the transfer of employment which I have already mentioned.

These four clauses are the heart of the Bill. Clauses 5 to 10 deal with incidentals.

Clause 11, with Schedule 3, deals with the important matter of ROF security and gives effect to the Government's intention that the factories and establishments being transferred to the new company should continue to be guarded by MOD police, with their existing powers and responsibilities, until we are satisfied that it would be safe, from the point of view of the physical security of the weapons and other material held on the various sites, to withdraw them.

There are other minor and consequential provisions in Clauses 12 to 14 and 16 to 17. Clause 15 deals with International Military Services Limited, and has an entirely separate purpose from that of the rest of the Bill. International Military Services Limited is already constituted as a private limited company under the Companies Acts, and has the same legal status as any private sector company. The purpose of the clause is to provide statutory authority for the contingent financial liability incurred by the Secretary of State for Defence when he assumed ministerial responsibility for the company and became sole owner of its shares. At the time a ministerial undertaking was given that legislation giving authority for the exercise of the continuing functions of the Secretary of State in respect of the company would be introduced as soon as an opportunity occurred. The clause, as I have said, is concerned with a contingent liability. There has been no recourse to public funds so far. The recent trading performance of IMS has been impressive, with substantially increased turnover and reserves.

Before leaving the detail of the Bill, it may be appropriate for me to tell your Lordships that I have it in mind, in the light of very recent consideration, to bring forward an amendment at Committee stage. This will be in the form of an additional clause to the Bill, the effect of which would be to dis-apply to the ROFs after vesting day the provisions of the Building Restrictions (War-Time Contraventions) Act 1946. I will, of course, explain the background more fully when we come to Committee.

The Bill is a short one and is indeed a limited enabling measure. But the change of status for the Royal Ordance factories which it will make possible is an important step forward in their evolution. It will give them full freedom to control their own commercial future. This will be best for the company, it will provide the best long-term guarantee of employment for the workforce, and it will suit the Ministry best as a customer. I therefore commend the Bill to your Lordships, and I beg to move that it should now be read a second time.

Moved, That the Bill be now read a second time.—(Lord Trefgarne.]

12.43 p.m.

Lord Graham of Edmonton

My Lords, however the Minister describes the Bill, it is part of a programme to "flog off' the assets of the nation. The Government have never hidden from the public their distaste of the public sector. Regardless of the needs of the nation, and whether or not that segment of the public sector is profitable, but especially if it is profitable and has a record which will appeal to the City and to investors, it is a prime target for privatisation. The crime of which the Royal Ordnance factories stand condemned in the eyes of this Government—a Government which know the cost of everything and the value of nothing—is that they have served the nation well, that they are successful and profitable, and that there is a market for their shares. There must be something sick in the mind of a Government when they jeopardise the security of a nation in the pursuit of such dogma.

The Minister in another place could not have been more clear—nor indeed the Minister in this debate—as to the purpose and intent of the Bill. At the Second Reading in another place the Minister said: The purpose of the Bill is to enable the Royal Ordnance factories, which are at present an integral part of the Ministry of Defence, to become an independent commercial organisation established under the Companies Acts".—[official Report, Commons, 16,1/84; col. 26.] I would remind the House that that same step was the first taken when the Government privatised the National Freight Corporation, Amersham International, British Shipbuilders in 1983 and the iron and steel companies in 1982. The Minister has said—and these words have been repeated by the Minister here today: The Bill is only a first step. The next step is to set up the companies and to transfer to them the properties and assets which will constitute the trading capital". But as to how the privatisation of those public assets will be achieved, nothing yet is clear.

Ministers have been very coy as to how the public purse will benefit from privatisation, if at all. At a meeting with the trades unions involved on March 6th, the Secretary of State said: If there is a gain for the public purse, that would be purely coincidental". The mind boggles! Here is a situation where the national interest is being best served by a policy of, "Leave well alone". But, no! In December it was announced that the sale of the 11 factories may raise £300 million but that the MOD would be paying about £250 million into the new pension fund.

Noble Lords should note that on that basis there is a once-and-for-all gain of a paltry £50 million—less than last year's profits—for the sale of a crucial national asset. And who is likely to buy these factories? Why, of course, their competitors, including some foreign companies. Privatisation will reduce, and not increase, competition. Is that what this competition-mad Government really want? Many of my former constituents work at the Royal Small Arms Factory at Enfield. I am glad to know of the visit to Enfield by the Minister. A loyal, skilled workforce has given to the nation a perpetual stream of high-quality defence weapons. I remind your Lordships' House of their world-famous Lee-Enfield rifle.

At Enfield, as in other factories, they have been stunned by these proposals. They just cannot believe that this Government can be so stupid. They feel betrayed. They are fearful for their future. They tell me that if what is in store for them is the reward for good service, what is the price of failure? Let us remind ourselves in this debate of the record of the Royal Ordnance factories over the past ten years, since the trading fund set up following the Mallabar Report—a trading profit of some £270 million in those ten years; £68 million last year; a forecast £50 million this year. Furthermore, as the Minister has said, three times in those ten years have the ROFs received The Queen's Award for Export. My noble friend Lord Stoddart will pay even closer attention to the profit record of the ROFs over the past ten years.

The current project of the factories include the Challenger tank, Swingfire, Rapier, Sea Dart. Sea Skua, Sea Wolf, Sea Eagle, Sidewinder, JP233, SP70, Stingray and Spearfish torpedoes—plus, plus, et cetera. The factories and their predecessors have served the nation well for 400 years: through the Napoleonic wars, through two world wars and through the Falklands conflict, and now, in time of peace, with the development of the most up-to-date equipment to meet an increasingly sophisticated threat. They are experts. The world appreciates this, but in our view this Government by this action, do not. As the Minister knows—and as was stressed time and again by the Minister's friends in another place before, alas!, they voted for this Bill—the record of service to the national interest by the Royal Ordnance factories, their employees and the management (and I repeat, "and the management") has been not only good but outstanding.

Universally across the whole spectrum of affected parties—and I include the taxpayer—there has been incredulity that such a devoted record should be rewarded by a kick in the teeth. It is no use the Minister dressing up the proposals with the cloak of smooth parliamentary jargon—"fully fledged independent companies", "legal and organisational framework", "trading on a commercial basis", "a flotation of shares". Such smooth talk fails to turn this shabby, disreputable Bill into anything other than what it is: a Bill designed ultimately, but not initially, to "flog off" another part of the nation's assets to the highest bidder.

Yes, my Lords, we shall be told that there are safeguards for the national interest and special terms to attract employee and management participation: but Ministers have been quite unable to refute the charge that the present inviolate and absolute adhesion of all that is encompassed within our ordnance factories absolutely to the national interest will remain so under any new management. In another place Mrs. Ann Winterton, the Member of Parliament for Congleton, as reported in col. 69 on 16th January last, said: Privatisation will not increase competition for the ROFs but may well do exactly the opposite with parts of the existing set-up being sold to the private sector and possibly bought by those competing in the same sphere". Mrs. Winterton went on to say: How do we know—I share the anxieties of many honourable Members who have expressed concern in the debate—who will buy into the companies or into whose hands they may fall? It will be extremely difficult to control the destination of privately produced bullets, shells and rockets. Sir Ian Gilmour, at column 43 of the Official Report for the same day, said: While listening to my honourable Friend the Minister's interesting speech, I thought that at one time he was speaking as though he were buying the Royal Ordnance Factories, rather than selling them … The facts are against the Bill and few people who have had anything to do with the ROFs would support it. We do not need to search very far for a central reason why this Government are acting as they are over a once public and publically-owned service. In the grand total of public and civil servants there stands a total of approximately 20,000 ROF employees. Not for the first time in the past five years have we seen civil servants disappear. It is simple, you privatise. Hospitals? You contract out, Schools? You contract out, Parks? You contract out. Housing? You contract out. Even if the work miraculously continues, those who continue to perform the function are no longer on the public payroll but on that of the private contractor.

Every departmental head, as the Minister knows, has been given by the Cabinet a target to aim at—not to aim at; to achieve, or else. Regardless of national imperatives, the over-riding consideration is to reduce the size of the Civil Service. Even when it endangers the security of the realm, as in this instance, it must be done. In my view, it is a squalid exercise but not out of keeping with this Government's view of national priorities. The very base on which our national defence has rested—a firm partnership between our ordnance factories and what I call the defence industries—is undergoing a revolution as a result of this Bill, and no-one, including the Minister, can tell the House to where ultimately that will lead.

At no stage has Parliament, the taxpayer and employees and their families been given a convincing reason for this Bill. Jargon words have been used and yet no-one has told us why the Bill is necessary—why it is necessary to sell off profitable and productive factories. Not a word about manifesto commitments here. The Government justify their rate capping and the abolition of democratic institutions on the grounds that they had a mandate. Where is the mandate for this? Sir Ian Gilmour had it about right when he said at column 43 of the debate: Presumably it was not included because the Government did not quite know what they intended to do about the matter". Here we have factories which have provided the armed forces with weapons and ammunition of the highest quality at a reasonable price for a very long time, made by a dedicated and loyal workforce.

Who will benefit from this exercise? Not the country, not our defences; but the taxpayer, not the employees. We all know who will benefit—those who manage money; those who lend money; those who advise on the use of money; those who write prospectuses; those who sell shares; those who buy shares; those who deal in the sale of arms. The honourable Member for Kingston upon Hull, North, Mr. Kevin McNamara, told the other place on 21st May (at column 767 of Hansard) that, seven firms of primary underwriters and financial advisers, three firms of legal advisers and six firms of stockbrokers", received no less than £22,694,000 when other public assets were sold to private companies and individuals. All those people and their ilk will be grateful to this Government for giving them the chance to pick up a slice of the action. The Government know who will benefit and why.

In Committee the Minister will expect us to subject his plans to a severe scrutiny as far as pensions and redundancy terms for employees are concerned. The unions representing their members tell us that, despite the most categoric assurances given over the period, they still remain apprehensive—even distrustful—of the value of ministerial statements. After five months of debate in another place there is still no agreement on pensions, no agreement on pensions rights, on categories of pensions, on comparability of pensions, on index linking of pensions, redundancy terms, or compensation for the loss of Civil Service status.

I agree that the Minister today has made some helpful noises. References have been made to "no detriment" for these matters in the future. We will—with no disrespect to Ministers—consider it essential to have these matters written into the face of the Bill or signified to us that the employees are satisfied that their interests are fully secured.

The House will be aware that the Government were wise enough to draw back from their original plan with regard to the security of ordnance factories of moving them somewhat substantially out of the hands of the Ministry of Defence police and putting them into the hands of private security firms—in my view, just about the daftest proposal in this Bill. But the Minister will know that there are many unanswered questions in the minds of the Defence Police Federation. For instance—and I appreciate that it may not be possible to give direct answers at this stage—will the Minister confirm his statement that any in-house security organisation will be organised and trained by joint agreement between the MDP and the new private ordnance factory company management, and that this arrangement will be of long standing? Will the Minister reaffirm his intention to retain the MoD police at those ordnance factories where the incidence of national defence potential and national security needs are paramount to national safety? Can the Minister describe the formula to be used in ascertaining which ordnance factories shall have the requirement for MDP and those which will require a lesser police and security force? Answers to those questions and many others, which my noble friend Lord Stoddart intends to raise, must be given to us, if not here then when we reach Committee.

The scene changes; the scenario remains the same; but the players with widely differing backgrounds can play a crucial part here in your Lordships' House over the next period. Here in your Lordship's House we have the benefit of a unique range of service to this country from devoted men and women unrivalled certainly to a far higher degree than in another place—valuable as the experience in another place undoubtedly is. The Benches in your Lordship's House accommodate those who know from their professional lives that our ordnance factories have met, are meeting, and are capable of continuing to meet every demand made of them by this or any future Government. Every rank, from Field Marshall to Captain; from Admiral of the Fleet to Lieutenant Commander; from Wing Commander to Squadron Commander; all of these have graced the Benches of your Lordships' House recently, and I very much hope will make their views felt on this Bill at the Committee stage.

We also have in this House Members of the Security Commission, those who have served as high civil servants in sensitive departments, members of the Diplomatic Corps and in the higher echelons of our trade union movement. I find it difficult to believe that, regardless of party or party whips, many of those with that kind of experience could stand idly by, let alone support, this senseless butchery of a once proud and valued public service. If they put their country before party, they will support our efforts at Committee stage to stop this Government committing a national blunder of monumental proportions.

In conclusion, we will in Committee seek to gain support for improvements aimed at removing from this Bill some of its terrible provisions, and to insert some safeguards vital for the welfare of ROF employees. Above all else, we will seek to ensure that the sovereignty of Parliament over the Executive, especially in the spheres of defence and security, is emphatically restored.

12.58 p.m.

Lord Diamond

My Lords, we on these Benches believe strongly in the mixed economy. We have a high regard for the achievements in the private sector and we have a high regard for the achievements in the public sector. We are perfectly prepared therefore to examine on its merits any proposed transfer from public to private or from private to public. That is what I propose to do, as shortly as may be possible, but I propose to have regard mainly to the principles of what the Bill deals with, not to the methods by which the Bill proposes to achieve those ends. As to the means, perhaps we could leave those to the Committee stage, but I must make it absolutely clear that there will be many amendments from these Benches at that stage in an endeavour to improve the Bill.

It is always extremely pleasant to be able to begin a speech by drawing attention to the common ground that exists between the two main parties and in all sections of Parliament on a particular measure. It is for that reason that I delight in refreshing your Lordships' memory of the common ground that exists with regard to the ordnance factories. I would much prefer to quote the comments of the Minister in this House, but of course I should have to rely on memory. Therefore, I am compelled to quote the comments of his right honourable colleague in another place.

As has already been mentioned, at col. 26 on 16th January the Minister of State for Defence Procurement made it clear at the start of his speech in another place that the present organisation—that is, of the ordnance factories—and its antecedents have served the country well for nearly 400 years. He went on to say that, the ROFs are staffed by a loyal and dedicated work force numbering just under 18,500. Their efforts have made the organisation a success not only in terms of the quality of its products, which are second to none in the world"— a no doubt much deserved and very high tribute— but in its trading performance". He finally reminded us that the trading fund was set up in 1974, and has operated since then with great success, winning the Queen's Award for Exports in 1976 and 1978". The Minister has been good enough to advise us of a further award this year. The Minister of State in another place said: the ROFs have consistently returned a trading profit". We also know that the ROFs are highly competitive and that 40 per cent. of their products are now exported. I would remind the House that the trading fund, which is a very important part of this organisation, was authorised by the Conservative Government in 1973 and implemented by the Labour Government in 1974. Again there is bipartisan support for the present system.

If I may summarise the common ground, we have, in the ROFs as at presently constituted, a proven, integrated organisation, a loyal dedicated workforce, products second to none in the world, high exports in competition with the world's private sector manufacturers and consistently good trading results. Any superficial observer might conclude, when all are agreed that, from every important standpoint, everything is fine, that one might leave well alone. But your Lordships will naturally want to know, however well it has been done, whether it could be done even better. We have the best evidence that is available, the Mallabar Report.

That inquiry reported—I am referring to col. 39 of Hansard of another place of 16th January—that it found that the degree of identification (that is, of the workforce) with the armed forces was apparent in all the factories and that this identification provided a strong motivation towards the manufacture of a high quality, reliable and safe product". It also found that the factories were well managed and controlled. It went on to consider an alternative proposal: We were initially attracted to the idea of hiving the ROFs off from the MOD". Your Lordships will remember that instead of the horrid word "privatisation" Parliament used to refer to "hiving off' to describe the process of transfer from the public sector to the private sector. We were initially attracted to the idea of hiving the ROFs off from the MOD, on the lines suggested by the Fulton Committee, but as we came to understand the nature of the ROFs' task— a very important qualification because I am hoping that, as everybody comes to understand the nature of the ROFs' task, they will reach a similar conclusion— and the underlying reasons for the financial and organisational relationships between them and the MOD, we gradually came to accept that hiving off was not feasible for this Organisation. Indeed we were inclined to believe that had we been asked to advise on setting up an organisation …we would probably have recommended something very like the present arrangement". So we are still in the same position. All the arguments that one is able to find, or that I have found so far, lead to the same conclusion: that things that are well should be left well alone.

But if your Lordships, as I expect is the case, are not, and indeed should not be, satisfied without considering all possible gains and losses, let me go shortly through the remaining ones. First, there is competition. If this were to increase competition, there would be some argument but, alas! it is quite the other way, as we all know. The noble Lord the Minister referred to the possibility of foreign shareholders. The noble Lord did not say and could not say that he could prevent existing private sector competitors from buying heavily on the share market in shares in these companies. There is no method of doing so. The net result—I speak as one who spent 30 years in active work as financial director of a private sector munitions supply company—is that the private sector will be very interested indeed in acquiring these shares. The inevitable result is that competition will be reduced.

The next argument is the cash argument which can be dealt with very quickly and which has already been mentioned. That argument is neither here nor there, for there will be a cash receipt for the surrender of future profits amounting to about £300 million and a cash payment for the avoidance of future pension payments amounting to about £250 million. The net figure of £50 million, which might well be less if all the assets are not sold off profitably, will not weigh with any one of us and certainly will not weigh with the Chancellor. It would be an insult to him to suggest that it would.

Finally, I come to the most important question of all, which I have deliberately left to the end; that is, the vital question of maintaining secure facilities for supplying our forces with the means of defending our country. To that question there are clear answers available from the point of view of both the recipient—that is to say, the forces—and the supplier. No one is better equipped to look at it from the point of view of the forces than the man who was Secretary of State for Defence at the time of the Mallabar inquiry report. He said on 16th January, as reported in the Hansard of another place—but, of course, I do not quote his exact words—that the structure of the ROFs would be damaged by the proposed transfer. That is the view of the man who was the Minister most responsible at that time.

His reasons were given in his speech. He asked how, for example, where you had a private sector manufacturer, that manufacturer would judge priorities between orders for our forces and orders for the forces of other countries? Who, he asked, would accept those orders at present not tendered for by any private contractors because they are unprofitable, and carried out by the ROFs because they are compelled to do so? Who would tender in the future? Who, he asked, would be able to keep excess capacity for emergencies?

I can give him the answer. No private manufacturer could keep such resources available for emergency. No private manufacturer would be allowed by the Government's accountants to include in his costings the very great cost of providing such idle emergency capacity. If you need to build up in a great hurry in an emergency your supplies of armaments and munitions of one kind or another, you will not have your own resources available for that purpose, resources which you can control and, indeed, have done from time to time when an emergency has arisen. So I refer again to the need for manufacturers in both sectors; to deny the forces the special facilities of ROFs as at present constituted would be damaging and could indeed be dangerous. We are told by the Minister in the other place that during the Falklands war the ROFs served this country well. My Lords, I need say no more.

1.14 p.m.

Lord Strathcona and Mount Royal

My Lords, my noble friend Lady Vickers has asked me to change places with her, so I find myself in the happy position of following the noble Lord, Lord Diamond, who referred extensively to the Mallabar report of 1971. But I have to tell him, if he is not already aware, that the working party which I had the privilege of chairing, and which worked hard for six months, came to a somewhat different conclusion 10 years later, but perhaps the passage of time had something to do with that. On that working party there were three distinguished figures from industry and commerce.

The other point which I should like to make at the outset is that, speaking for myself, I did not approach the task of examining the role of the Royal Ordnance factories with a burning desire to privatise. Incidentally, I would rather not have used that word, because I deplore the word as the noble Lord, Lord Diamond, does. My interest and that of the working party—and they say so—was to look at the interests of the Royal Ordnance factories, and the people who work in them, and the national interest, and I hope to show that we made a convincing case for saying that there would be advantages in change.

If I have a criticism of where we are now, it is that it has taken so long. Possibly, the labour turnover and the lack of job security in the job of Minister of State for Defence may have something to do with the fact that the process has taken rather longer than one might have hoped. I shall try to stick to some of the principles and some of the reasons for which we recommended change.

Let me say also at the beginning that I fully recognise that nobody likes change. It is particularly true of the trade unions that they are conservative with a small "c", and there is nothing wrong with that. I also think it is true—and it has been said frequently—that any organisation which has confidence in itself ought to have the courage occasionally to go in for some self-examination, to try to discover whether it could do things better. It has also been said several times this afternoon already that the Royal Ordnance factories are successful. They have an excellent profit record since the trading fund was introduced. I may add that I have great admiration from personal knowledge of the managing director and many of the trade union officials who work in the Royal Ordnance factories. But I believe that this success has been achieved in spite of various constraints, to which I shall refer in a moment, and that those constraints would gradually show themselves to be more severe as we advanced into an increasingly competitive environment in the years ahead.

When we were working on this report, I told the members of the trade unions that I sincerely believed that the removal of those constraints would be in the best interests of the workforce and that is still my belief today. In passing, obviously, you cannot expect the trade unions, when they are Civil Service trade unions, to be very happy about contemplating the possibility that 18,000 members or potential members are going to be removed from the ambit of the Civil Service, but that is a purely organisational matter which can clearly be managed. But when we find the trade unions opposing this Bill, I slightly find myself thinking of the famous remark of Mandy Rice-Davies, who said: They would say that wouldn't they? But, again, I am not attempting in any way to belittle their contribution.

I was glad that the Minister again today attempted to reassure us on the question of the preservation of pension rights, which clearly is fundamental. Whatever we may think with the benefit of hindsight about index-linked pensions, the plain fact is that the workforce enjoyed that privilege and clearly, if you wish to make a change, it would be wrong for that to be detrimental to their future. It reminds one of the old Welsh adage, "If I was going there, I wouldn't start from here". The fact is that one is starting with index-linked pensions and I am glad that my noble friend once again asserted the Government's intention to ensure that there is no detriment: but I have no doubt that we shall have a further argument about that point in Committee.

The one area where the constraints of being in government are evident is in the financial sector. The trading fund is subject to Treasury control. They cannot buy and sell shares, and it is very difficult for Royal Ordnance factories to set up joint companies for major development projects, which any of us who work in the defence industry know is increasingly the way in which projects are handled today.

Furthermore, there are technical questions, such as the factories' lack of access to the Exchange Credits Guarantee Department and the fact that the factories' borrowings are aggregated for the public sector borrowing requirement. For me the difficulty was illustrated on an occasion I remember extremely well when the board of Royal Ordnance factories was meeting at one of the factories in Manchester. The sales director said, "Tomorrow, I am leaving for the Middle East to negotiate a contract in the order of 150 million. Can you please tell me what price I am to quote for this piece of equipment?". The board was not able to give the sales director an answer, and it took six months before Treasury agreement was forthcoming. That is a fairly difficult environment for a commercial organisation to work under.

As to the question of being within the Civil Service, I yield to no one in my admiration for the Civil Service as an administrative arm. Certainly, when one encounters it as a Minister one is amazed at the competence and helpfulness. But I believe that, as my noble friend Lord Trefgarne said, there are public service constraints which make the Civil Service structure quite unsuited for an industrial organisation such as the Royal Ordnance factories. Their very attitude and their moves are quite different.

Specifically, there is the bad situation where the criterion by which one judges the numbers required to operate a business is not the measure of how many people one can have, but the fact that the Government wish to reduce the size of the Civil Service. I believe this is something that is very widely accepted—but not by everybody. One has the absurd situation where, if Royal Ordnance factories were successful in obtaining a major contract which involved taking on more staff, it would appear to be a disaster because such action would be contrary to the Government's policy of reducing the number of civil servants. What a ridiculous state of affairs!

If one examines the question of communications and industrial relations, would any industrialist tolerate a situation where the industrial relations were not even the responsibility of the Ministry to whom he reports, but were the responsibility of another Ministry? The lines of communications are really grotesque for dealing with negotiations about pay and conditions in an industrial situation.

Finally, there were organisational problems. I was pleased to hear the Minister reminding us that these have been addressed and that they are on their way to being put right. One cannot contemplate an industrial organisation that does not have its own marketing department and which has a very limited research and development capability—certainly not if it is to be in the forefront of the defence business. I am sure that it was right to give the Royal Ordnance factories their own marketing department and for them to take over some of the research and development capability which existed elsewhere within the Ministry of Defence.

The lifeblood of any industrial organisation must be communications with its customers and its sensitivity to customers' requirements. If it does not have its own marketing organisation, its lines of communication will be tenuous and difficult. As my noble friend said, steps have been taken already to put that matter right. It has to be admitted that that in itself is not an argument for becoming a Companies Act company, though I believe that those requirements are most easily met within the ambit of a Companies Act company.

Another issue to which I should like to refer is the preferred source policy. I completely disagree with the conclusions of the noble Lord, Lord Diamond: in particular, those in respect of the question of excess capacity. What troubles me is that there can be hidden costs, which are borne by somebody. One of the advantages of separating the Royal Ordnance factories more rigidly from the Ministry of Defence is that there will be less danger of fudging and hiding costs of that kind. I have to disagree with the noble Lord on a purely practical issue. If one wants to maintain excess capacity—whether it be in the shipbuilding industry, the armaments industry, the aircraft industry, or any other industry—it is perfectly possible to do so. An industrialist would maintain excess capacity for you, but you would have to pay for it, and so you would have to identify the costs of what you were doing. That seems to me to be desirable in purely managerial terms.

I believe also that the elimination of the preferred source policy will lead to more competitive bidding for the Ministry of Defence. There is one practical illustration we should bear in mind when we are tempted to talk about how satisfactory is the present set-up. I do not think anyone would deny that the German battle tank industry is a fairly successful one, and that industry is not in government hands. I would even suggest that it is more successful than our main battle tank business.

I have tried to give some of the reasons why I believe that Royal Ordnance factories, which are already a successful organisation, give every indication that they will become an even more successful undertaking if they are removed from the constraints of being within government.

I believe that those constraints would become more severe with the passage of time and that opportunities would be opened up by moving the factories into the private sector, which is suggested as being the ultimate objective in this Bill.

There is nothing sacrosanct about the present grouping of Royal Ordnance factories. Again, in managerial terms, the notion of putting them into four operating units strikes me as being a sound one. I am sure that the arrangements proposed are not necessarily perfect and that there will be plenty of opportunity to suggest improvements. But what I would urge everyone—in particular the trade unions and also the Opposition, who were certainly speaking this morning with a trade union voice—to consider is this. Here one has what I believe is the opening up of a new opportunity for the workforce in the Royal Ordnance factories, for the business of the Royal Ordnance factories and, ultimately, for the good of the country. I urge them to accept that this can be turned to their benefit and to concentrate on getting any detailed alterations which they consider necessary; but. please, please, do try to understand that they are not being flogged off. A new door to opportunity is being opened to them, if only they will walk through it.

Lord Diamond

My Lords, I am grateful to the noble Lord for giving way. I did not interrupt him earlier because he did not interrupt me at all; I thank him for that courtesy. The whole House pays high regard to any noble Lord who has sat in his position and considered all these matters carefully. I regret that I have not yet read his report but, of course, will do so. May I ask him about that report? His speech so far has concentrated on the restrictions which will grow, on the difficulties which will be removed and on all sorts of things for the future. If he will forgive me for saying so, what he said amounts to little more than a declaration of faith. My question is: did he and his colleagues find evidence of the difficulties and restrictions stated in the report which have prevented the Royal Ordnance factories from doing as well as they might have done?

Lord Strathcona and Mount Royal

My Lords, the short answer to that is "yes". In a very general way I have attempted to summarise some of the constraints. They specifically mentioned a whole list of impediments that the Royal Ordnance factories were experiencing at that time, some of which, as I said, have already been improved. The working party report was quite clear that the Royal Ordnance factories did experience certain disadvantages as compared with their competitors in private industry and they listed them in some detail.

Lord Diamond

My Lords, are there any specific examples?

Lord Strathcona and Mount Royal

My Lords, I do not think there are examples of specific pieces of weaponry and specific competitors, but there are a couple of pages of the various constraints which they identify and I am sure illustrations would be readily forthcoming if the noble Lord was to talk to someone who is still in touch with the situation and has much greater knowledge of it than I have now.

1.33 p.m.

Lord Taylor of Blackburn

My Lords, I usually stick to my own subjects in this House but I venture to change my course on this subject because it is a matter on which I feel very strongly. I do so because I know a little about the Royal Ordnance factories, especially the factory in Blackburn and the work that it has done over many years.

As an educationist and one who has been able to visit the factory quite often to see the training carried out in it, especially of apprentices, I can state that it is second to none. The standard of training is first class. The results of that training have been extended throughout the factory and, because of that, it has been able to give first-class products to those people who use them. The same applies to the industrial relations within the factory. Again, it has been an example for other employers within Lancashire to follow. Apart from an odd day's dispute, I do not think that there has been more than that for many years, although I stand to be corrected. As far as I know there have been very few disputes within the factory.

The people employed there have been a regular force. Turnover has been negligible. That has been a good thing. Those who have left the service there and gone into other industry have taken with them great skill and great benefit to the industry they have joined, thereby helping the whole community and commerce. Again, the relationship between the Royal Ordnance factories and the educational establishments, the training schools, colleges and universities in Lancashire has been helped a great deal because of this two-way exchange.

I am not qualified to discuss or to speak about the financial aspects. I can only speak as one who has lived very close to this operation and seen how it has worked. I shall reserve my thoughts and comments until we get down to the next stage where I feel we can probably go more into detail.

I want to say how satisfied many of us are who have been associated with the Royal Ordnance factories. I am sure that from reading and listening to the comments made from all sides in the other place it is apparent that there is a good organisation. I admit that even a good organisation can be imroved, but even taking that into account it is far better to keep the factories as they are and reconsidering some of their practices.

1.36 p.m.

Baroness Vickers

My Lords, my reason for joining in this debate is that during the last war I was working in the Ministry of Supply and one of my jobs was to go round these factories, both day and night, to see the work, particularly among the women and young girls who were probably working in industry for the first time in their lives. They did a magnificent job. They were always keen and they worked hard, and although in some cases they had to be kept in for security reasons, they never grumbled. At one of them, the largest that I visited, it was fortunate for them that a GI camp came into the district so restrictions were lifted and they were able to have a better time.

In view of the fact that the Royal Ordnance factories have played such an excellent part for over 300 years, why has the Minister thought it necessary to take action now? I realise that there was a loss of profit in 1980–81 owing to cancellation of orders from Iran, but I understand that new markets have been opened and in 1982–83 sales in real terms were higher than in any previous year. Eleven ROF and two PERME establishments are to be sold. Are they to be sold en bloc? What will happen if purchasers do not want all of them? Will they be sold separately, or will some not be sold at all and have to remain in Government hands? What is to happen?

Will the employees be able to buy shares on the Stock Exchange, or however they are to be sold—under Clause 7—so that they can take part in the future of the organisations? It has been reported recently that, in real terms, profits have gone up and that there was a profit of £68 million for the last year. I understand that there are outstanding contracts with leading missile producers for rocket motors. There are good prospects for a more substantial mortar system and ammunition. I am informed that great efforts are being made to open new markets and there have been some notable successes recently. This was in the face of very severe international competition. Therefore, why is it now time to change these factories over to private enterprise?

How much is still owed to the National Loan Fund? Why, for example, if there are to be profits, should those profits not go to the Government and to the taxpayer instead of to the public market? Will the Government control overseas sales? I think that we are all rather nervous that a foreign firm might get in and take over one of the factories, as has been mentioned before. It has also been mentioned that pensions are being transferred. Will they be made completely safe before the Act comes into being?

The noble Lord who spoke first mentioned the Queen's awards. I think that the ROFs have done extemely well in winning those. I am against selling arms in any case, but that is not what we are discussing today. I thought that I should mention that as one of the reasons why I am speaking.

Finally, I understand that the Secretary of State, with the consent of the Treasury, will be able to make certain changes. Why does he have to get the consent of the Treasury and not of Parliament? I very much hope that the noble Lord the Minister, when he comes to reply, will answer those few points.

1.41 p.m.

Lord Stoddart of Swindon

My Lords, I do not think that I have ever heard, or had experience of, a debate in which such praise has been heaped on an organisation that is later to be virtually decapitated. Today we have heard the noble Lord the Minister describe the ROFs as factories and organisations which have done well. He described the work force as loyal and devoted and said that we are rightly proud of their expertise and record. The noble Lord, Lord Diamond, quoted at length from the comments of Ministers in another place, where again the praise heaped on the ROFs, their record, and the work force was lavish indeed. We have heard from the noble Baroness, who has had great experience of them, how devoted and loyal the people working in them have been over a very long period of time. She rightly asked the question: why are we doing this now? That is the question which the House is entitled to ask, and which she has put so well. It is a question that we shall expect to be answered by the Minister when he winds up, and, indeed, during the later stages of this Bill.

In his opening remarks the noble Lord the Minister said that the Government will ensure that the ROFs do not fall under foreign control. How will they ensure that? Again, I think that this House, and Parliament as a whole, are entitled to a full and unequivocal answer to that question. The very defences of our nation are at stake. I hope that the noble Lord will answer that question today. If he does not, we shall certainly expect an answer at a later stage.

We have heard a great deal about the success of the ROFs, including their financial success. In his opening speech my noble friend Lord Graham not only joined in high praise of them, but detailed their finances and achievements in virtually every field of armaments. He also pointed to their financial success. I want to discuss that a little more. When I read the Defence Estimates, I saw on page 19 the details of the success of the ROFs. What do we find by looking at those accounts? First, total ROF sales have risen from £263.2 million in 1977–78 to £448.5 million in 1982–83, which is a rise of £185 million. We also find that sales in the United Kingdom have gone up by £133 million and sales to overseas customers have also gone up considerably.

If we look at the profit record over the eight years, we find, again, that the Government and the Treasury have benefited considerably from the profits that the ROFs have made. In total they have made £176.6 million over those eight years. That is no mean sum by any standards. Indeed, in the debate on the Defence Estimates on Monday of this week in another place, the Secretary of State announced that he was going to equip a fifth tank regiment. The cost of providing tanks for a new tank regiment is roughly £93 million. The ROF factories and the people working in them have given the Government sufficient profits over the past eight years to equip not one new tank regiment. but two regiments. That is a real measure of the success of the ROF factories over this period.

Have the ROFs done that by employing more and more people? The answer is, most certainly not. They have reduced the number employed from 23,200 in 1977–78 to 18,900 in 1982–83. Have they improved their value added? The answer is that they most certainly have. In 1977–78 the value added per employee amounted to £6,400 and in 1982–83 the value added per employee had increased to £13,300, which is an increase of £6,900. That is quite good going by whatever standards the Government wish to employ.

Have the ROFs met their financial objectives? The financial objective set for them for the period 1st April 1979 to 31st March 1984 was 5 per cent. per annum on average net assets employed. That objective was not only achieved over the eight years, but exceeded many times over. In 1975–76, for example, their return on net assets employed was 16.4 per cent. In 1976–77 it was 39.4 per cent. In 1982–83 it was 49.8 per cent.—10 times the financial objective set by Her Majesty's Government, and a Conservative Government at that. The average rate of return over the eight years has been 23.6 per cent. What a success story that is!

In the face of this brilliant success story, it is the height of absurdity to propose their privatisation. Common sense and the financial interests of the taxpayer are being sacrificed to blind and stupid Tory dogma, and indeed it is being done in spite against a publicly-owned industry and its employees. If the Government deny the charge that I make against them of putting dogma before the public interest, perhaps the noble Minister in his reply can tell us what benefit there is in this Bill for the public, for those employed in ROFs and for the proper defence of our country. How can it be that the forgoing of profits of £62 million per year, which is the present rate of profits, for a measly £50 million once-and-for-all net payment, which invested at 10 per cent. would bring to the Exchequer only £5 million per annum, benefits the public in general? How can it be? How can the Minister justify that kind of business proposition?

Henry VIII, in whose reign I believe the factories were first started, was a bit of a despard but by God! he had a good business head on his shoulders and if he was reigning at the moment then the noble Lord opposite, if he did not have his head chopped off on the block, would find himself in the Tower for daring to deprive his Majesty's Exchequer of this sum of money every year.

Of course the fact of the matter is that there is no financial benefit. It is plain that the public will lose £57 million per year and the Government's city friends will gain a corresponding amount. In this debate so far the Government have not had many friends. The noble Lord, Lord Strathcona, to whom we listen with great respect because of his experience and knowledge, inclined to support the Government. Nevertheless, even he had his doubts. No doubt that was because of the experience he gained when he examined the ROFs through his committee; but I think he will agree that one of the conclusions that was reached—and he made some passing remarks about Mandy Rice-Davies and the trade unions, and that they would say they did not want privatisation wouldn't they? But I remind him that his own committee agreed that any proposed change should be broadly acceptable to the ROF workforce.

The workforce do not accept this. They do not agree with this change. They think the change is bad for them and bad for the nation. So if the noble Lord follows the recommendation in his own report, then I believe he will be supporting the Opposition when this Bill comes to Committee.

What is more is that his own committee, in their first recommendation, which was labelled "a.", recommended that the present trading fund organisation should be improved "by removing some of the impediments which we identified". There were two other possibilities but that was the one that they put first. When the noble Lord reflects on this Bill, I hope that he will return to his own committee's report and accept that option "a." is the right one to have.

Lord Diamond

My Lords, is the noble Lord going to leave the question of the Strathcona Report? If so, before he does that may I ask him whether he is able to confirm, as was alleged in the debate in the other place, that the Strathcona Report included the following comments. The first was that it gave as its verdict that the organisation had demonstrated its management strengths. The second was that since the introduction of the new arrangements in purely financial terms the Royal ordnance factory organisation has also been very successful. The third one, was that benefits accrue to both sides from the present relationship between the Royal ordnance factories and the rest of the Ministry of Defence. Can the noble Lord say whether or not these quotations are correct, and whether therefore the speech we heard was a fair sample of the report?

Lord Stoddart of Swindon

My Lords, yes, I can confirm that what the noble Lord said is correct. Those items were indeed in the report. I am not prepared to comment further on the noble Lord, Lord Strathcona's speech, but I hope he will now re-read his own report before the Committee stage and I am quite sure he will be very helpful when we come to discuss the matter further on Committee.

I should now like to turn to the need for a public presence in armament manufacture. Government spokesmen in defence of this Bill say, "What is all the fuss about? ROFs constitute only 4 per cent. of the total arms industry in Britain." They have some sort of point; but the conclusions I draw are quite different from those of the Government. The figure of 4 per cent. is far too small and the public presence in arms supply ought to be far greater. The Bill before us today ought not to be a Bill designed to obliterate the public presence in the arms industry—because, my Lords, that is the eventual outcome of this Bill, make no mistake about it—it should be a Bill to extend the state presence in the arms industry, and I am sorry that the Bill is not designed to do that.

There are many reasons why there should be a large and significant state ownership and involvement in arms manufacture; but there are three outstanding reasons. First it is the paramount duty of government—and we on this side of the House believe that, just as much as the noble Lords opposite believe it—to ensure the defence of the realm. To do so they need to have a direct involvement in the sure supply, the quantity and quality of equipment. Such a duty should not and cannot be left entirely to private firms whose paramount need and duty is to maximise profits.

The second reason is because in time of war or emergency the Government will need to act quickly and decisively to increase arms and equipment supply and the more expertise and presence they have in the arms industry the better and more effective will be their influence. The third reason is that a significant state presence enables a test of price and efficiency to be made against private British arms manufacturers —and foreign ones for that matter—who are increasingly tending towards monopoly. That is why we need a significant presence in the arms industry. That is why this Bill is a bad one.

Before I finish, I want to say a few words about security. In his opening remarks I had hoped the noble Lord was going to say that for all time security for ROFs would remain with MoD police. He did not say that. What he said was that there was a possibility of privatisation. Many people are very concerned at that possibility. They are concerned that the security at Royal Ordnance factories would be put out to tender to individual security firms. In spite of the schedule added to the Bill at Report stage in another place, and which appears as Schedule III in this Bill, it remains a possibility that privatisation of security will be introduced at some future point in time.

There are very telling reasons why security at ordnance factories should not be handed over to private security firms. First of all, there will be an acknowledged lack of training available to private employees. Secondly, there will be a lack of powers and difficulties relating to the obtaining and the use of arms in certain circumstances. There will be the ease of infiltration of private security firms by potential terrorists. We have seen some examples of this recorded in our newspapers lately. There is an appalling record of some security firms. There is the possibility that individuals might not be properly vetted by private security firms. There is the possibility that relations between the police and private firms would not he as good and as effective as those hitherto prevailing between the police and MoD.

Finally, there is the inability of a private security firm to create a rapid deployment force to deal with any emergency at any particular base. I find it particularly surprising that Her Majesty's Government should tinker and meddle with security at ROFs, especially bearing in mind the superb record of the Ministry of Defence police over such a long period of time. They have kept ROF establishments safe with great efficiency and effectiveness and there is every reason why they should continue to do so on a permanent basis irrespective of the ownership status of ROFs.

Lord Strathcona and Mount Royal

My Lords, I resisted the provocation earlier. The noble Lord said that the ROFs account for 4 per cent. of the supply to the Ministry of Defence. What is his comment on the 96 per cent.? How is their security being managed? Is he suggesting that the Ministry of Defence police, an admirable body, should take over the security of the whole of the armaments industry of the country? Otherwise what is the difference between one armaments factory and another?

Lord Stoddart of Swindon

As a matter of fact, my Lords, I would feel much safer if they did, but I have no knowledge of their particular arrangements at present. What I do know is that, so far as these factories are concerned, they have been policed very efficiently. With the growing incidence of terrorism, I believe that the state should be very involved in the safety of establishments like this. Indeed, I was going on to say that I find it strange and worrying that the Prime Minister was a signatory to the London economic summit declaration on international terrorism at the same time as this Bill was before the House. What did the declaration say? The Heads of State at the London economic summit said that they were disturbed to note the ease with which terrorists move across international boundaries and gain access to weapons, explosives, training and finance. This is what the economic summit said, and our Prime Minister was a signatory to that particular passage in that particular communiqué. They recommended scrutiny by each country of gaps in its national legislation that might be exploited by terrorists. Yet here we have a Bill before us that proposes to hand over the policing of ROF establishments to private organisations. I hope that, in the light of the declaration of the economic summit, this will be reviewed.

Perhaps the Minister will answer some questions on security. Will the Minister make provision by amending the new schedule dealing with special constables in relation to Section 3 of the Special Constables Act 1923 to ensure that any such special constables nominated shall be members of the MOD police? Secondly, will the Minister comment on the type of training required by the in-house guards and whether there is an intention to train in the use of arms any in-house guards who may be nominated as special constables? If it is the intention to arm any such nominated special constables, who will be responsible for the control, issue and authority to use arms? Will the Minister consider recommending to the ordnance factories' management the possibility of contracting for Ministry of Defence police as is intended for private security firms? Is it the intention of the Government to allow in-house security guards or ordnance factory management to have some limited access to the police and national intelligence information required in anti-insurgent or political incidents? Will the Minister report on the reaction of chief officers of police in the districts where it was or is proposed to withdraw MOD police on vesting day?

Finally, I want to make it clear that, although, in accordance with the conventions of this House, we shall not seek to divide on Second Reading today, the Opposition nevertheless consider this Bill to be a bad and unnecessary one, produced out of sheer blind dogma. It is a Bill that will damage Britain's defences, will rob the taxpayer, will endanger the future of a profitable and successful publicly owned industry of 300 or 400 years' standing and will damage the future jobs and conditions of the work force and undermine their security and confidence. We shall seek at Committee stage to make substantial amendments to protect the rights of Parliament, to secure the future pay conditions and job security of the workforce and to prevent the break up and sale to private organisations of ROFs and PERME establishments. That is our view. I hope that the Minister will be able to answer the questions that have been asked during the debate. I give him notice of a good fight at Committee Stage.

2.6 p.m.

Lord Trefgarne

My Lords, during our debate today your Lordships have rightly referred to the long and distinguished history of the ROFs, the quality of their products, and the loyalty, integrity and dedication of the ROF work force. We are all on common ground in paying such a tribute to the ROFs' past. But the best practical tribute is to look to the future and to seek the best way forward. Defence procurement strategy is necessarily evolving as economic circumstances change. A review of the structure and role of this vital part of the defence industry is both timely and necessary if we are to get the best value for money in defence.

The proposals that enactment of this Bill would enable us to put into effect will remove the current constraints on the operations of the ROFs as part of the Ministry of Defence and will give them better and brighter prospects for expansion and improved efficiency in the private sector. The ROFs have a small but significant share of the defence procurement budget. We fully expect them to use that business as a launching pad for further expansion in both domestic and world markets. The Government recognise that this change of status has created some anxiety among the work force, particularly as they are moving from being civil servants to being employees of a commercial company. My ministerial colleagues have been at great pains during the proceedings on the Bill in another place to set the record straight about the future terms and conditions of employment of the work force.

The Government have taken very seriously their responsibilities towards these employees. We have taken all the steps we can to ensure that their terms of employment will be no worse than those they enjoy currently. Of course, there will be some changes in the details of their terms of employment, but these are not changes of substance, save for the fact that, as part of the manufacturing operation, as essentially they are at present, they will be working in a rather different environment for a commercial organisation.

As I said in my opening remarks, negotiations with the trade unions representing the employees of the ROFs have been in train for some time, and are continuing. For our part, we have approached these negotiations with an open mind and with the aim of securing agreement on the employment framework to be set up in the new company. I trust that these negotiations will help to reassure all employees that they have nothing to fear from our proposals, and much, in terms of long-term job prospects, to gain.

No doubt many of the points that have been raised during the course of the debate this afternoon will be raised again during the Committee stage, and I shall be very willing to answer them then as fully as I can. I do not want to duck from answering them now, but perhaps it would be appropriate if I deal just with some of the more important ones that have been raised.

The noble Lord, Lord Graham, and one or two other noble Lords as well, referred to the possibility of receipts amounting to about £300 million, with possible costs of £250 million with regard to pensions. The pension costs are costs which in any event will have to be met in the long term. They are liabilities which already exist as far as the pension fund is concerned. Indeed, it is open to me to suggest that the cost to the Exchequer of making a payment now, particularly in respect of those who transfer to the new pension scheme, might well be less than some costs that might have to be met in the future, in the long term.

But as for the receipts, the Government have not yet made a decision on how we should put this company into the private sector. I referred to that in my opening remarks. It is not possible yet for me to say whether we shall achieve £300 million or more, but my personal expectation is that if we do proceed along the line of the flotation, as my right honourable friend is hoping, then the receipts may well be at least as much as that, and possibly more.

My noble friend Lord Strathcona referred particularly, from the depth of his own experience in this matter, to the constraints that he and his colleagues saw as applying to the ROFs during the time of the working party that he chaired. I would ask your Lordships to consider again the points that my noble friend made, and particularly to look again at the terms of his report on those points.

My noble friend Lady Vickers asked me about the debts outstanding to the National Loans Fund. At present there are no debts outstanding to the National Loans Fund, so the question of writing off any such debts does not arise. If we do proceed to a flotation arrangement such as I referred to in my opening remarks, there will most certainly be an employee share scheme arranged as part of that flotation. As I said in my opening remarks, although we are not yet in a position to make a final announcement about this we anticipate floating the company in that way when the time comes. They will be shares in the whole enterprise, not in individual factories. My noble friend was wondering about this.

My noble friend also referred to the question of overseas arms sales. Perhaps that is another matter, but I would remind my noble friend that we have a very stringent export licensing system, and the constraints that we impose upon our defence industry in that regard are very well known. I was asked also about the prospect of foreign control. The articles of association of the company, when privatised, will provide that the number of shares, or interests in shares, which can be held by foreigners shall not exceed 15 per cent. of the total issued share capital. The articles will, of course, have legal force under the Companies Acts. Your Lordships may recall that this was a matter of particular concern when the British Aerospace legislation was being enacted, and I think that these provisions will closely mirror those provisions.

The noble Lord, Lord Stoddart, asked me particularly about the security arrangements. In my opening speech I explained the policy underlying the introduction of the new Schedule 3 concerning security arrangements at ROF sites after incorporation of the new company, which we hope will be later this year. To reiterate our position: we have taken powers in the Bill to enable the MOD police to remain at ROF sites for as long as we consider necessary; but in parallel with this, the ROFs will be setting up their own company guard force to take on the responsibility of guarding ROF premises where this is considered appropriate.

A number of detailed questions were put to me about the organisation and training of the new company guard force. I am afraid it is still too early to give full answers to all of these questions. The Ministry of Defence will be liaising very closely with the ROFs on the question of recruiting and training such a guard force with the aim of creating a reliable and efficient system. The new company guard force will not be armed, but I believe that the deterrent value of the access of MOD police to firearms should not be overrated. Security arrangements will have to be cleared with local police authorities and contingency plans will be made for civil police support, where necessary, at each of the sites. As your Lordships know, there are arrangements for the civil police to draw arms should the situation so warrant, and contingency plans will include the possible need to call upon armed police.

As the new company guard force is built up, liaison arrangements with the existing MOD police guarding each site will be worked out. I should emphasise that MOD policemen will remain subject to the ultimate control of the Secretary of State for Defence and that command and control arrangements will reflect this chain of command.

I was asked, too, about the special constables under Clause 3. I can confirm that they will be MOD police. Incidentally, I can confirm that we have made clear that we are not going to use private security firms.

We have had today a wide-ranging and important debate. The Government's proposals for the future of the Royal Ordnance factories for which this Bill gives legislative authority, are positive and forward looking. The proper place for the ROFs as a manufacturing industry is not within the civil service, nor indeed as part of the public sector. Their move to commercial status, coupled with the Government's policy of encouraging competition within industry, will give them a healthy future and we believe will provide a stimulus to innovative enterprise in the defence industry.

I tried in my opening remarks to set in context the provisions which are in the Bill before your Lordships. I think that I should now return to that context, to the Government's determination to achieve greater competition in defence procurement whenever it is sensible and practicable to do so. The Royal Ordnance factories have a sound track record, but we and they want to see an improvement of that record. The record is a sound one indeed. Historical cost profits have totalled £250 million over the life of the trading fund of which £82 million has been paid in dividends and £165 million retained in the business. The dividend paid to the Treasury by the trading fund in the financial year 1982–83 was £25 million. Although the accounts for 1983–84 have not yet been finalised, the promise is that last year was another successful one for the ROFs. Total sales for the year are likely to be nearly £500 million, an improvement of 9 per cent. over the 1982–83 results, with profits forecast to be in the region of £60 million.

The increase in profits over recent years has been helped by a programme of cost reductions, the success of which is illustrated by the size of the total wage bill. This has remained virtually constant over the last two years despite higher production and despite an increase of about 17 per cent. in average earnings during the period. The value added per employee, as my noble friend Lord Ironside pointed out in our debate last week on the Statement on the Defence Estimates, doubled in the last three years.

It is our aim and purpose to help the ROFs once, as a Company Act company, they are freed from bureaucratic restraints, to improve on this record for the benefit of themselves, the Ministry of Defence and, therefore, the three services as a customer, and the country as a whole. The ROFs have a number of substantial customers in different parts of the world and a vigorous export market especially with traditional friends and allies in the Commonwealth and the Middle East. We are now looking beyond these markets most notably to North America, but they will also remain important suppliers to the British Government.

I would remind your Lordships of the major order announced earlier this week, referred to by at least one noble Lord, for another 60 Challenger tanks to equip an additional armoured regiment in BAOR. This large order is a signal of our desire to make major purchases from the ROFs in the future provided that the price and the product are right. It is by being enabled to operate in the market place and becoming fully effective that we can have the best assurance that this company will be successful and it should lead to a bright future for the new company.

Lord Diamond

My Lords, before the noble Lord sits down—and I am grateful to him for giving way—will he turn his mind to the main thrust of the debate? The main thrust of the debate was not whether the ROFs are doing very well indeed and have done very well indeed—and I am grateful to the noble Lord for saying in his winding up speech that they have done even better than he said in his earlier speech; the main thrust of the debate is: who is going to assure the forces of this country, if we are left with no public sector but only with a private sector, that they can get the supplies they need, first, in an emergency through spare capacity being available and, secondly, at any time when no private supplier will supply them because it is uncommercial to attempt to do so—whereas the ROFs are compelled to do so under the present arrangements for the MOD?

Lord Trefgarne

My Lords, it simply is not proven that for the Ministry of Defence or any other armed forces organisation to be able to get their supplies, those supplies have to come from some organisation in the public sector. As several noble Lords have already pointed out, I think that 96 per cent. of Ministry of Defence supplies already come from the private sector. Other armed forces around the world obtain 100 per cent. of their supplies from the private sector.

I do not believe that the ROFs need to be in the public sector to be able to continue the splendid work that they have done. On the contrary, I believe that by removing these constraints from them we shall enable them better to provide for the requirements of the Ministry of Defence, not least from an important base of overseas markets. For that reason, I commend this Bill to your Lordships.

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