HL Deb 22 July 1999 vol 604 cc1195-202

5A Line 20, at end of paragraph 2(2) insert ("provided that the special shareholder is satisfied that the investment policy and statement of business principles have been adhered to").

Baroness Rawlings

My Lords, I beg to move Amendment No. 5A as an amendment to Commons Amendment No. 5. I should also like to discuss, in speaking to Commons Amendment No. 5, my Amendment No. 5B.

I wish to thank the Minister for his helpful explanation of the complex and crucial amendment that Commons Amendment No. 5 is, and for his co-operation at this stage and throughout the passage of the Bill. The main effect of the amendment, at least, is clear: as long as the Government hold the golden share, CDC is exempt from corporation tax, capital gains tax and income tax, but not from other taxes such as VAT and stamp duty, and from PAYE obligations.

I have laboured sufficiently the reasons why a tax-efficient status is essential to the CDC PPP, and I shall not detain the House on the matter further. However, I should still like to ask the Minister one question.

Although helpful to CDC, this tax arrangement is also very unusual, in that the exemption is given to an individual company rather than a category of entities. Is there a danger that this exemption represents the thin edge of the wedge? Is it not sufficient to say that CDC is unique? I am sure that other companies will attempt to argue that they are unique. If I am allowed to strike a provocative note, the National Lottery, for instance, is unique, serves good causes and would save substantial sums of money were it to be tax exempt. Will the noble Lord, the Minister, give assurances that the CDC exemption will not be treated as a precedent? I should be grateful if the noble Lord could answer my questions afterwards.

Amendment No. 5A would make tax exemption conditional on the Secretary of State's being satisfied that the CDC had followed its investment policy and the statement of business principles. The intention of the amendment is not to wreck the tax arrangement, but to entrench the CDC development purpose more securely. In another place the shadow Secretary of State argued forcefully that the development purpose was not satisfactorily entrenched. Furthermore, he argued convincingly that the investment policy and the statement of business principles do not embody the development purpose adequately. As they stand, nothing would prevent CDC from investing, albeit in the prescribed countries and geographical areas, in high-performance, high-yield companies, rather than in labour-intensive ones benefiting the poorer groups in those countries. CDC would be under pressure to follow this course in order to achieve higher returns which would attract private sector investors.

In the future CDC will be unlikely to invest in hardwood forest plantations, as it did in the Câte d'Ivoire, or in setting up an avocado pear farm which will not produce any fruit in the initial seven years and will therefore earn no money, as Mr Bowen Wells clearly explained in another place. Over the last two years we can already detect the beginning of this trend in the composition of the CDC portfolio. Whereas the share of agribusiness is decreasing significantly, that of manufacture and commerce is increasing.

That trend will be particularly strong and its effects detrimental to the poor in large and diverse countries like India. There, CDC has invested in the first private sector Internet access provider. That will no doubt contribute to the development of the communications infrastructure that business needs to be efficient. However, what will it do for the rural population of Rajasthan, who do not even have electricity? When will the benefit of that investment reach them? It will never do so because they live in a different economy. Instead, that particularly poor region, which is well known for its stone and marble quarries, would probably benefit from investments in companies cutting and polishing stone, like Jaswal Granite, a South Indian company of which CDC owns 9 per cent. I believe that we shall see less and less of such investment in the future. How is that potential investment vacuum to be filled?

The Government argue that the focus of their development policies is poverty. They maintain also that CDC is one of their policy instruments. Therefore, CDC should have the same focus. However, that focus cannot be achieved by an investment policy and a statement of business principles enjoining CDC to look across countries alone. If the development focus is to be maintained, the assessment policy must encourage the poorer groups within particular countries. Will the Minister give assurances that the Government will undertake a review of the investment policy? In short, we are asking the Government to get the investment policy right and then incorporate it into the Bill.

The effect of Amendment No. 5B is to lengthen from seven to 10 years the transition period after the Government relinquish the golden share. This is a probing amendment. Aspects of the CDC's tax arrangement are particularly unusual and complex and we feel that the arrangement has not been sufficiently scrutinised in another place. What is the fundamental reason for the amendment? Once the exempt period expires, what do the Government envisage that CDC would do to maintain the effect of its unique tax status? The helpful briefing notes provided by the department suggest that provision exists to ensure that CDC, would have the option to restructure and possibly go offshore without liability to UK tax". But the Secretary of State finds that to be politically unacceptable. Has government policy changed? If that is the case, is the position that existing investments will remain in CDC onshore but the latter would be treated for tax purposes as though it were offshore while new investments would be made by a pew CDC entity offshore and therefore outside the UK's tax net? Will existing investments remain onshore until they are realised or until those assets are transferred offshore? In what respect does that arrangement differ from granting CDC a grace period after expiry as the exempt period in which to transfer assets? Would that complicated arrangement be necessary if CDC were allowed to go offshore as a PPP? Would the residence status during the transition period amount to state aid under EU competition law? I should be grateful if the noble Lord could clarify those points.

I come now to the substantive aspect of the amendment. We are told that the period of seven years was chosen because it fits the average length of CDC's investments. Unfortunately, in practice, there are no averages. Is Inland Revenue trying to fit CDC's investments into a procrustean bed? How will the existing longer term investments, or those which are particular difficult to transfer, be treated after seven years? Is seven years not an arbitrary period of time?

We understand that that period of seven years was the outcome of negotiations. The Inland Revenue was looking for a figure of zero years but CDC was looking for a period of 12 to 15 years to accommodate its longer term investments. On these Benches, we believe that the transition period should be longer.

Moved, That Amendment No. 5A, as an amendment to Commons Amendment No. 5, be agreed to.— (Baroness Rawlings.)

Lord Redesdale

My Lords, we wish to speak to these amendments because it was not possible to do so at the last stage of the Bill. However, the Minister gave a comprehensive statement and he has already answered many of the questions which I wished to asked. Therefore, I shall not take up the time of the House.

On these Benches, we are glad that the CDC will not be going offshore as that goes against the fundamental principles of the nature of the CDC. I admit the idea that the CDC could somehow avoid PAYE would gladden the hearts of those working for it but I do not believe that it would receive a great deal of support from the Treasury.

The Minister set out quite clearly how he believes the CDC will operate and under what development criteria it will be bound. As the noble Baroness pointed out, there is a danger that the CDC will move away from investments in some of the poorer areas of the world. That would he extremely unfortunate.

However, as the Minister has set out his views quite clearly for Hansard, which are now on the record. Therefore. I do not believe that we need to press for a strengthening of the statement of business principles or the investment policy.

Many of the issues which we have raised are in relation to the unlikely event that the Secretary of State cashes in the golden share. I believe and hope that that will never be the case, even under a change of government. The amendments provide a belt-and-braces approach which was spoken to at great length in another place. But the assurances which the Minister has given this evening have helped to ease some of our fears.

Viscount Eccles

My Lords, I am grateful to the Minister for saying that CDC can have a wholly-owned subsidiary overseas even if it cannot be overseas itself. In its history, it has had a number of wholly-owned subsidiaries overseas.

I believe that I am finding some sort of a middle position here. As I see it, this Bill is an enabling Bill. I want to say briefly why that is so. A welcome aspect of the matter is the transformation of CDC from being a statutory corporation to being a plc, although one must shed a tear for what is almost the last of the statutory corporations.

The reason for this being a welcome measure is that the Act of 1948, which was implemented in 1947, has been tinkered with in respect of the way in which CDC could invest. It has never been radically altered and, of course, the world and its economy has moved on. The provisions of those original CDC Acts are extremely restrictive as to the way in which CDC can invest. Under the Companies Act, as a plc, it will he able to invest in a much more modern and effective way, even in the 70 per cent of the poorest countries and the 50 per cent which are in sub-Saharan Africa and Asia.

Many of the questions which the Minister has been asked arise from the fact that, as my noble friend Lady Rawlings said, the CDC is a sui generis. It is not like anything else and never has been quite like anything else. It has had to pick up gleams of opportunity and common sense from other organisations. It has picked up a lot of good tips from 3i, the IFC, from its European comparators, finance institutions and even from companies such as Unilever. Of course, its present chief executive comes from Shell and there is no doubt plenty of overseas experience from which it has benefited.

In essence, CDC is self-taught. It did not leant its trade from anywhere else. I am confident that, with the provisions in this enabling Bill, CDC will find a way through the next few years. I hope that it has another 50 years ahead of it. Its path as a plc is bound to be tortuous, as its chairman, the noble Earl, Lord Cairns, said in the House at Second Reading when he did not minimise the difficulties of operating effectively as a plc.

I believe that these amendments are relevant in that we need CDC to settle down to a consistent policy as a plc and to have plenty of time in which to do that in order to demonstrate its effectiveness. The Government have been ingenious, but they have also been experimental. The public/private partnership has yet to be proven. I believe it is doubly difficult to prove it in the case of CDC.

Immediately, there is the problem of restructuring the balance sheet. Perhaps the Minister can tell us how that is progressing because, without that, no further progress can be made. Can he also tell us when a prospectus will be issued for the intended 75 per cent external shareholders? I should certainly have had nightmares if I had had to write such a prospectus. In my opinion, by virtue of the fact that CDC is so generous, it will not immediately be attractive to any class of conventional investor as they do not like to have to think out things de novo.

I am pleased that CDC will be converted from a statutory corporation into a plc, although the same results could have been achieved by amending the existing Acts. I am much more doubtful about whether the public/private partnership experiment, ingenious as it is, will succeed. Anything that gives CDC an opportunity of proving continuity of purpose and policy and of having longer in which to do it is welcome.

7.30 p.m.

Lord Birdwood

In the closing minutes of the CDC's process of transition and in speaking to the amendment, I want to say that I have been lucky enough over the years to count CDC employees among the circle of my closest friends. I make a plea that the culture that has always pertained in CDC is not destroyed by the transition process. The men and women of CDC collectively have always put the welfare of the nations in which they work before their own welfare and before the concept of profit. When an organisation changes so profoundly its cultural foundations, as is the prospect today, those influences become fragile to those who work in it. I hope that the Minister can reassure me that that fragile culture can be reinforced by the process, rather than destroyed.

Lord McIntosh of Haringey

I am grateful to all noble Lords who have taken part in this short debate. When the noble Viscount, Lord Eccles, first intervened I neglected to welcome him to our deliberations. He was not in the House when we considered the matter before. The only hesitation I have in expressing my pleasure in seeing him here today is remembering the sad death of his father.

I anticipated a number of the questions which have been posed, but I shall respond to the additional points raised. The noble Baroness seems to think that this is the thin edge of the wedge and that because we have made special provisions for CDC, it will be easier for other people—she named the National Lottery—to take advantage of the same procedures. The fact that it has been so difficult, that it has required primary legislation, and months of negotiation and consideration during the passage of that primary legislation, in my view makes it clear that this is not a precedent that is likely to be followed. If anyone attempted to follow it in regard to the National Lottery, it would be over my dead body. I believe it would be over the dead body of the Chancellor of the Exchequer as well. We have taken care to get the procedures right because we recognise CDC's unique quality and the marvellous work that it has done over a period of more than 50 years.

The noble Baroness commented on the investment policy and the development purpose—

Lord Redesdale

My Lords, I am sorry to interrupt, but I am reminded that a number of years ago—I believe in 1994—when we debated the National Lottery, the Minister, when speaking from the Opposition Front Bench, opposed the 12½ per cent tax on the National Lottery. I put that forward for information.

Lord McIntosh of Haringey

I had nothing to do with the National Lottery. There are those of us who think that in the next negotiations for the National Lottery we should consider the possibility of a not-for-profit National Lottery. We said that at the time. That will be possible in the consideration of the re-awarding of the contract. That is not the same as a tax exemption, and it certainly is not the same as going off-shore, as appeared to be suggested.

The amendment concerns where we enshrine the investment policy and the development purpose of CDC. I hope that I made it clear in my opening speech that it is well entrenched in the memorandum and articles of the CDC and in the procedures that make it clear that it cannot be changed without the agreement of the Secretary of State and without the agreement of Parliament. I believe that that is the right place for that entrenchment, rather than in the provisions on tax exemption, which is where Amendment No. 5A would place it.

The concerns of the noble Baroness go much wider than how the investment policy is protected. She queries the investment policy and says that her honourable friends in the Commons suggest that we are already departing from what ought to be the investment policy and development purpose of the CDC. She gave some examples.

It is difficult to judge individual investment decisions in that way as the work of CDC in any country is complementary to other investment activities, whether venture capital activities or the investment activities of the state itself. It is difficult to say in Pakistan, Uganda or anywhere else what the role of CDC may be because it will vary from country to country. If your Lordships will forgive me, I do not want to open up the question of the adequacy of the purposes of CDC. They were fully debated when the Bill went through the House. Those issues are not raised by the Commons amendment before us or the amendment to it.

On Amendment No. 5B, which concerns the exempt period, I do not believe that CDC wanted a longer period than that which is provided. As I said in my opening speech, my understanding is that it is content that that will meet its needs. If we have an average investment cycle of seven years, the investments will be falling in over that seven-year period and all but perhaps a tiny number of them will have fallen in by the time the seven-year period is reached.

However, I acknowledge—indeed, I welcome—what the noble Lord, Lord Redesdale, said. We are talking here about an exit strategy which we had to include— an exit strategy has to be included in any change of this kind—but one which we do not intend to use. We do not intend to dispose of the golden share, but we have to be sure that if there were some seismic change in policy in the future (to use the Prime Minister's phrase) it would be possible to make changes without further primary legislation. That is what we have done. It appears to us, and it appears to CDC, that seven years is the right period.

The noble Viscount, Lord Eccles, asked about the restructuring of the balance sheet. It is the important next step. We aim to have it in place for inclusion in the 1999 report, which will be produced for April 2000. It will take the results of 1999 into account after the abnormal results of 1998. As for the timing of the prospectus and the sale, it is far too early to say. That will depend on market conditions and the CDC track record. We have always made it clear that we expect that to be a considerable way off.

The noble Lord, Lord Birdwood, asked about the culture of CDC and whether that will be preserved. I very much hope so. I believe that we have set in place a process and a framework which will enable those who have valiantly served CDC over the years to continue to serve and to achieve even better results than they have in the past.

Baroness Rawlings

My Lords, I beg leave to withdraw Amendment No. 5A.

Amendment No. 5A, as an amendment to Commons Amendment No. 5, by leave, withdrawn.

[Amendment No. 5B not moved.]

On Question, Motion agreed to.