Rover Group (Hansard, 29 March 1988)

§ Lord Young of Graffham
My Lords, with the leave of the House I shall now make a Statement on the Rover Group plc.
I informed the House on 1st March that British Aerospace had declared a serious interest in acquiring the government shareholding in Rover Group and that negotiations were being put in hand. British Aerospace asked that the negotiations should be on an exclusive basis. We agreed to this provided that the further studies it wished to carry out on Rover Group and the negotiations between British Aerospace and the Government were concluded by the end of April.
I promised to return and report the outcome of these discussions to the House at the earliest opportunity. I can do this today because British Aerospace has completed its investigations satisfactorily earlier than anticipated. The negotiations have therefore been concluded and agreement reached. The rules of the Stock Exchange require that in these circumstances an announcement is made without delay.
Today we have entered into a conditional contract with British Aerospace for the sale of the Government's shareholding in Rover Group. Before entering into the contract with British Aerospace we considered a number of confidential expressions of interest but none amounted to a specific offer. The board of Rover Group believes that this is the best possible outcome for the group. British Aerospace is strongly committed to the further development and growth of Rover Group, working with the existing Rover Group management who have made so much progress in improving the performance of the businesses.
Honda told me that it welcomed the continuity of Rover Group's management team which would be assured by British Aerospace's ownership of the company. I therefore hope that the important operational partnership between Rover Group and Honda can continue to develop satisfactorily. Without constraining British Aerospace's day-to-day management of the business, we have agreed important conditions on the agreement. British Aerospace has undertaken not to relinquish control of either Austin Rover or Land Rover within five years. This undertaking is supported by legal arrangements designed to ensure that it is not to its financial advantage so to do.
I shall now turn to the main financial terms of the agreement. During the negotiations it has been impressed on me by the board of British Aerospace that Rover Group operates in a highly competitive industry and that, notwithstanding the recovery in 1987, its current and prospective levels of profitability are insufficient to meet the interest burden on the debt built up through many years of accumulated losses.
The Government have been equally concerned that the merger of these two major British manufacturing groups should only move forward on a firm financial footing. Since 1975 when the Government became the majority owner of British Leyland the banks have 599 been content to advance large sums on the strength of the Government's involvement.
In order that the company is in a fit state to return to the private sector it is appropriate that we should deal with this accumulated indebtedness, which no company without similar backing could be expected to maintain. Of course we would have had to undertake this exercise whatever route had been adopted for Rover Group's privatisation. The Government have therefore agreed that they will make a cash injection of £800 million into Rover Group for this purpose.
Following agreement on these steps to strengthen the Rover Group balance sheet we have been able to conclude an agreement to sell the government shareholding in Rover Group for £150 million. We have also agreed with British Aerospace and Rover Group arrangements whereby £1.1 billion of Rover Group's trading tax losses will be effectively eliminated, leaving only £500 million of these losses to be claimed against Rover Group profits in the future.
British Aerospace has also agreed that other currently available tax relief within Rover Group will only be applicable within that group
I turn now to the elimination of the Varley-Marshall-Joseph parliamentary assurances relating to Rover Group's bank debts, trade creditors and other obligations. These currently total approximately £1.6 billion. While Rover Group has been in public ownership the Government have given assurances that the obligations of the group will be met. No new obligations incurred by the Rover Group after the date of completion will benefit from the assurances. Obligations incurred between now and the completion date will cease to benefit from the assurances on completion.
The negotiations with British Aerospace have concerned only the Government's shareholding in Rover Group. British Aerospace has said that following completion of its acquisition of the Government's shares, it will make separate proposals to Rover Group's minority shareholders in due course to acquire their shares.
British Aerospace has made clear that these proposals will be fair and reasonable and will be made after consultation with the Rover Group board and its advisers. The agreement is of course subject to the approval of the British Aerospace shareholders and the completion of the normal EC procedures. I also expect to receive the advice of the Director General of Fair Trading.
I should like to explain what progress there has been on the EC implications of these plans. On 14th March we notified to the EC Commission that we proposed to deal with the necessary restructuring of Rover Group's finances. I met Commissioner Sutherland on 23rd March to explain the Government's objectives and proposals. I had a further meeting with Commissioner Sutherland yesterday.
The Commission has met today and has decided to open a formal state aid procedure. I am confident that the Commission will expedite its investigation.
600 The agreement should bring to a successful conclusion the privatisation initiative which began in earnest with the flotation of Jaguar in 1984. This process accelerated when Graham Day took office in May 1986. He has returned 18 Rover Group businesses to private ownership. These include the trucks and bus activities, Unipart, Istel and Jaguar Rover Australia, which are all trading profitably under their new owners.
In the hands of British Aerospace, Rover Group would have the best available chance of developing its independent role in the vehicle industry. We cannot afford to underestimate the contribution to the economy of the largest UK passenger vehicle producer with a turnover of £3 billion, exports of £1 billion, direct employment of 43,000 and indirect employment of two or three times that number in the component supply sector, as well as over 50,000 jobs in Rover Group's distribution networks.
This will strengthen Rover Group's ability to compete at home and abroad and thus benefit all those who work with and for it, as well as the economy as a whole. I commend it to the House.
My Lords, that concludes the Statement.

§ Lord Williams of Elvel
My Lords, the House will be grateful to the noble Lord for making this Statement. The British Aerospace shareholders will no doubt think that Christmas has come rather early this year. On our side we believe that this constitutes an abandonment of the Government's fiduciary duty to the taxpayer.
Rover has a net worth of £770 million, which is being sold for £150 million, but the Government are producing a cash injection of £800 million. In other words net assets of £770 million are being sold, or rather the Government are paying British Aerospace £650 million to take the group off their hands. In addition the Government are giving a tax holiday to Rover Group under British Aerospace ownership up to £500 million, because, as the noble Lord rightly said, those losses can be used to set off against tax in future profits of the Rover business.
There will be no tax revenue to the Government from the future Rover business under whatever ownership it may be until those accumulated tax losses have been worked off. Will the noble Lord answer the following questions? On what terms will the £800 million cash injection be made? Why could it not be made to the existing Rover Group without a sale to British Aerospace?
What assurances are there for the workforce? We hear that there are assurances to the management but what assurances are there to the workforce? What belief can we have after the large losses that according to the press British Aerospace is going to announce, or may indeed have announced, that this will be a group which has financial viability and that we shall not see the same repetition of collapse that we have seen under previous Conservative Governments such as the collapse of Rolls-Royce?
What happened to the Rover corporate plan? Just at the point when Mr. Day said that Rover Group was turning a corner, that it was making profits and that it had a bright future, it is sent to the knacker's yard. We believe that this is an act of desperation.
601 The Government have no faith in Rover's future. We have and we wish that the Government would abort the deal straight away.

§ Baroness Seear
My Lords, we on these Benches also wish to thank the Secretary of State for making the Statement in the House this afternoon. We have also frequently been critical of the Government for selling the family silver. We are even more critical of them for giving away the family silver, even if on this occasion it is somewhat tarnished.
There can be no question but that this step will incur a very heavy loss indeed for the taxpayer, as the noble Lord, Lord Williams of Elvel, has already made clear. The Government believe in the free market. They tell us in this Statement in a rather curious paragraph that they have considered a number of "confidential expressions of interest". We should like to know more about those. I suppose we shall be told that they are confidential and that therefore we cannot know about them.
But was it really not possible at least to attempt to make a better deal than handing Rover over at such enormous loss to British Aerospace? If the Government believe in their own policies of getting the best possible deal that they can in any transaction, it seems extraordinary that this should have been confined to a deal with British Aerospace and that nobody else effectively has come in. Indeed nobody else was able to come in because British Aerospace made the condition, or rather was offered the condition, of a deal provided it settled at the end of April. That seems the most extraordinary way to do business if there is something to be sold.
So we are deeply concerned about this. We are also somewhat concerned about the outcome of the formal investigation that is going on with the EC. Surely this is a very heavy subsidy to industry? What will the EC be likely to say about that as regards its competition policy?

Lord Young of Graf ham
My Lords, I am grateful to the noble Lord, Lord Williams, although I confess that I found it rather difficult to follow him. He started by saying that Father Christmas had come to British Aerospace and concluded by saying that the deal would undermine its whole future. I believe that this is a well-balanced deal.
The noble Lord drew attention to what the net worth of the Rover Group may or may not be. I am sure that it is a matter of public record that over the past five years the performance of the Rover Group has been an aggregate loss of £1.1 billion. That is an unfortunate record and one which I have no doubt will be improved under new management. The results of last year were a vast improvement on the previous year. However, those results showed a considerable loss after interest and tax.
The noble Lord asked what assurances we will give to the workforce. The assurances which may be given by anyone to the workforce are precisely those which can be given to the management. They last for as long as the products produced are those which customers want. There are no assurances beyond that. Indeed, the whole sorry history of Rover from 1976 onwards is demonstrated by that.
602 The noble Lord also asked what the terms of the grant of £800 million are. The terms are such as to ensure that we are not giving the Rover Group a £500 million tax holiday. We are asking it to extinguish some £1.1 billion of existing tax losses which it will not be claiming. In other words, the tax losses are being reduced from £1.6 million to £500 million. Due to the sorry past record, the losses were that heavy. By that one act, the taxpayer will be saved some £400 million in tax revenue in the future. It also ensures that should the company endeavour to dispose of any of the businesses over the first five years, the net proceeds of the sale will be repayable to the Government.
I am grateful to the noble Baroness, Lady Seear, for her comments. She says that the agreement is a heavy loss to the taxpayer. It is in fact doing no more than recognising the existing position. It is an unfortunate but perhaps happy accident of the past that the Varley Marshall undertakings were such that the banks carried on giving credit to the Rover Group, secure in the knowledge that ultimately the Government would meet the bill. What we are doing today is meeting that bill, which was incurred over the last few years. We are putting right the overdrafts which exist. We have to do that in order to put the firm back into the private sector. Perhaps that is not a heavy toll for the taxpayer. However, it was a toll which was incurred over past years.
The noble Baroness asked why we dealt with confidential expressions of interest. Can Members of your Lordships' House have forgotten that just two years ago there was an expression of interest by the Ford Motor Company and that six weeks later the Rover Group had lost over 2 per cent., of its market share in the United Kingdom, reducing its share of the market from 18 per cent. to 16 per cent.? It never recovered from that loss. Today its market share is 15.8 per cent. The lost annual sales were £250 million.
British Aerospace was the first company which said that it was anxious to acquire the Rover Group. In looking at the approaches that were made, I have to take into account the future of not only the 43,000 people working in the Rover Group but also the 51,000 people who work in the distributors' network. That was the reason that I told the House that we were going through a period of exclusivity. I also said—it was repeated by my noble and learned friend the Chancellor of the Duchy—that if anyone made an offer we would consider the offer before finally accepting the British Aerospace offer. No such offer ever came.
We are today starting the procedure in Brussels. It may well be that the agreement will have an effect on competiton policy. However, I believe that it is simply a recognition of reality, because the losses have long existed, as have the debts. In any event, they would have had to be paid off one day. I hope that as the months go by we shall negotiate successfully through the tortuous and difficult procedure involved. However, I should like to discuss that with Commissioner Sutherland. I hope one day to return to your Lordships' House and say that we have been successful.

§ Lord Williams of Elvel
My Lords, I have one question of fact. Will the noble Lord reply to my 603 question as regards the terms under which the cash injection will be made? I understand that there will be a £1.1 billion write-off in accounting terms of tax losses. Will the cash injection be repayable in any form or will it be in the form of simple grant?

§ Lord Young of Graffham
My Lords, it is both. It is in the form of a simple grant by way of a security which is repayable only if businesses are disposed of during the period and/or tax losses over and above £500 million are claimed. If so, it is repayable to the extent of the benefit achieved by the company.

§ Lord Boyd-Carpenter
My Lords, my noble friend has given details of the number of jobs involved directly which will continue as a result of this operation. However, can he tell the House how many jobs in component manufacturers are also involved and will continue?

§ Lord Young of Graffham
My Lords, the estimates I have indicate that there are something between 90,000 and 120,000 jobs involved in the component supply industry for the Rover Group.

§ Viscount Chandos
My Lords, I should like to thank the Secretary of State for the Statement and his subsequent amplification of it. In principle, I and my colleagues in the SDP repeat our earlier welcome to the proposed acquisition of the Rover Group by British Aerospace.
If a sale is to take place—and the Government have long made clear their intentions—then will the House not agree, as Bill Jordan of the engineering workers' union said on the day of the earlier announcement, that it would be difficult to imagine a more suitable purchaser? Does the Secretary of State agree that the suggestions by the press and financial analysts that there are no synergies or industrial logic in the deal missed the key point that the general commitment by British Aerospace to manufacturing excellence, technological innovation and research and development is what makes it the best placed purchaser of Rover, both to build on its recent success and to strengthen British manufacturing industry as a whole?
Is the Secretary of State not concerned, after the comments of other noble Lords and notwithstanding the desirability of the deal from the point of view of public interest, that British Aerospace has been offered too favourable an agreement to take on the undoubted risks of the acquisition? Has the noble Lord, with his advisers, studied the precedents in the United States, whereby the US Government, in consideration for the financial support—

Noble Lords
Reading!

§ Viscount Chandos
—given to the Chrysler Corporation, took warrants in shares of the company that ensured that in the event of the company's ultimate success, the Government stood to gain some benefit from that success? Does the noble Lord not think that a similar arrangement, which is also used in the United States when the federal authorities 604 rescue failing banks, would have given the UK taxpayer some potential return from the investment over the past 13 years? In addition—

Noble Lords
No!

§ Viscount Chandos
—could this not have presented an opportunity to give a similar interest to the employees of Rover and a consequential incentive after a number of difficult and hard years to maintain a productive and tranquil atmosphere of industrial relations?

§ Lord Young of Graffham
My Lords, I am grateful to the noble Viscount for his support of the arrangement. I assure noble Lords that the policy of the Government has been to achieve the return of the Rover Group to the private sector. We have considered many ways in which that could be accomplished. It seems to us that this is the best way and that the reward of the Government will be the continuation of component suppliers and distributors, as well as a healthy future for Austin Rover Group as an independent British producer of quality cars.

§ Lord Bruce-Gardyne
My Lords, I should like to thank my noble friend for his Statement. However, we are conjoined in the parable about looking gift horses in the mouth. Is it not a fact that British Aerospace is currently losing a king's ransom on every component that it makes for the Airbus project? Is it not apparent that, even on these golden, give away terms, the needs of Austin Rover for capital injections in the future, coupled with the cost of British Aerospace's civil aircraft programme, will leave horrendous burdens on the balance sheet of that business?
Can my noble friend assure us that the commitment that British Aerospace should not be allowed for five years to pass on Rover to another perhaps better endowed purchaser such as Ford or General Motors will not be written in tablets of stone so that at least British Aerospace in due course may be able to make a handsome turn? Failing that, what is the likelihood of the European Commission finding that the deal which he has structured is not acceptable in terms of European competition policy?
Finally, failing all those, has he had a word with our right honourable friend the Secretary of State for Defence about the possible requirements of British Aerospace for very large and profitable defence orders in the future if Austin Rover is to be sustained in the style to which it has become accustomed?

§ Lord Young of Graffham
My Lords, I am grateful to my noble friend. When I left industry and came to this present life of mine I vowed that I would leave behind making judgments on commercial matters. I should like to remind the House that it was the board of British Aerospace which approached the Government first. It is the board of British Aerospace which has investigated the future of Rover. It is the board of British Aerospace which judged it prudent and sensible to proceed with this purchase. My noble friend must have his own opinions, but in this matter it is surely the commercial 605 judgment of British Aerospace that is appropriate. I do not contemplate—nor I suspect does the board—that British Aerospace will run into difficulties in the future. If that were to happen the Government would listen to anyone at that time. If there were a better course and a better way of dealing with Rover, we would have considered it seriously.

§ Lord Peston
My Lords, will the noble Lord answer the question asked by my noble friend Lord Williams of Elvel? In previous privatisations, whether or not one agreed with them, the private sector ended up with the real assets of the business and the Exchequer ended up with some cash. In this one, as the noble Lord has described it, the private sector appears to me at least to end up with the business but the Exchequer is out of pocket to the tune of £650 million. That is exactly what the Minister has said. Will he confirm that that is the case?

§ Lord Young of Graffham
Yes, my Lords, I am happy to confirm that the Varley-Marshall assurances of some £1.6 billion will disappear, hopefully within a year; that the stream of losses from Rover which the taxpayer has patiently borne, amounting to £1.1 billion over the past five years, will cease to be a burden on the taxpayer; and that Rover will look forward to a good future. That is the case. It is true that the Government will inject £800 million to pay off the existing debts of the company, liabilities of government which exist today. The Government will receive some £150 million for the shareholding.

Lord Joseph
My Lords, is the Secretary of State aware that, considering the worst and the best that might have happened, his Statement at least gives a new chance to the management, the workforce, the suppliers and the dealers, without future explicit risk to the taxpayer? Will he say whether output of cars per man year has improved since nationalisation? Is there scope for further improvement and, among other possible results, for a larger share of the market?

§ Lord Young of Graffham
My Lords, I am grateful to my noble friend. Since 1979 output per man has doubled in the Rover Group. It is now up to European standards. Its objective is to beat European standards and to compete with the rest of the world. In looking at this proposed sale in the round, I hope that all noble Lords, particularly noble Lords opposite, will listen at least to the views expressed by the workforce, the distributors and all who work in Rover, and be cautious about the ways they judge the outcome of this deal.

§ Lord Mackie of Benshie
My Lords, the Government have agreed that they will make a cash injection of £800 million into the Rover Group to pay off the banks. On the next page of the Statement the noble Lord refers to the elimination of the Varley-Marshall assurances. He said: These currently total approximately £1.6 billion". Does he hope that British Aerospace will be able to pay those off and thereby release the Government? Or will the Government remain liable for the £1.6 billion?

§ Lord Young of Graffham
My Lords, half or so of the £1.6 billion assurances will be paid off when the £800 million which the Government pay discharges the bank debts. The remainder will be paid off in the course of time as trade creditors and other obligations are paid. What will happen—probably after the end of the year—is that the Varley-Marshall-Joseph assurances will have been eliminated and will be part of the normal trading obligations of the Rover Group as a subsidiary of British Aerospace should this matter proceed.

§ Lord Harmar-Nicholls
My Lords, if my noble friend and the Government are satisfied that this is a good deal under all the circumstances for the company and for the workforce, will he give a complete assurance that he will not allow any interpretation by the European Commission to sink it?

§ Lord Young of Graffham
My Lords, the procedure started today. The matter will take some months and I very much hope that we shall reach agreement. It would be foolhardy to say what you anticipate doing on the very day you start.

§ Lord Glenamara
My Lords, perhaps I may ask the noble Lord about a rather different matter. Does he recollect that when Cable and Wireless was privatised legislation was required? That was a publicly owned company. In this case, apparently there is to be no legislation. And there was certainly no electoral mandate. Are the Government quite sure that they have the legal right to sell off the business without parliamentary approval?

§ Lord Young of Graffham
My Lords, Austin Rover was once British Leyland and is a public company. It is still a public company. There are some 60,000 to 80,000 outside shareholders. The last two elections gave us the basis of our mandate for this action.

§ Lord Stoddart of Swindon
My Lords, is there a net benefit or a net detriment to the British taxpayer overall? I do not believe the noble Lord has answered that question in terms in which I, at least, can understand. Perhaps he will do so. My other question relates to the European Commission. If, after it has made an investigation, the Commission decides that this deal is against the rules of competition, what will the Government do then? Will they drop this proposal? If it is declared illegal, will they pursue the proposal irrespective of its legality under European law?

§ Lord Young of Graffham
My Lords, at present the Varley-Marshall assurances total some £1.6 billion for a net cost of £650 million, which, as I said, is the £800 million that we shall be putting into the company less the £150 million that we shall accept as the proceeds of sale of the shares. We shall be extinguishing that £1.6 billion liability. That demonstrates the benefit to government.
As regards the noble Lord's second point, if I have had one principle in my life it is not worrying about hypothetical situations. Preparing for them, yes. Should that situation unfortunately arise, I will then come to your Lordships' House.

§ Lord Molloy
My Lords, can the noble Lord say in which of the two previous manifestoes this subject was referred to so that we can understand whether the Government have a mandate for what is proposed?

§ Lord Young of Graffham
My Lords, I hardly think that the process of privatisation was a closely guarded secret in our manifesto of 1979 or at the time of the two subsequent elections.