§ Mr. Quentin Davies
To ask the Secretary of State for Energy whether he has considered the British Coal Corporation's further response to the report by the Monopolies and Mergers Commission on the corporation's capital investment programme.
§ Mr. Wakeham
In May 1989, at columns455–47, my predecessor informed the House that the British Coal Corporation had provided its initial response to the MMC report on the corporation's investment programme, and that a copy had been placed in the Library of the House. Under the normal arrangements for the follow-up to MMC recommendations arising from section 11 inquiries British Coal has now provided a second response, a copy of which has been placed in the Library. This second response is intended to give an account of the steps taken over the last 12 months to implement the commission's recommendations. It also ensures the continuing relevance of the report by providing a helpful description of the developments in the corporation's business environment since its initial response and setting out fully the organisational changes that British Coal has made in response to those developments.
The commission's report drew attention to the need for British Coal to commit itself to specific, quantified financial objectives—recommendations 1 and 2. In its initial response, the corporation said that it geared its investment programme to the need to fulfil the overall objectives set by the Government. It also pointed out that it would be able to consider what further objectives should be set only when the new coal supply contracts with the generators had been finalised. In informing the House of that initial statement, my predecessor supported the commission's recommendation, but accepted that new medium-term objectives could not sensibly be finalised before the completion of the new coal supply contracts with the electricity supply industry. I share this view, but I have made it clear that following the financial reconstruction provided for in the Coal Industry Act 1990 I expect the corporation at least to break even this financial year and to remain profitable thereafter. We also expect the corporation within the next two years to have made sufficient progress towards self-financing that it can start to reduce the oustanding borrowings remaining after the financial reconstruction. We have therefore told the European Commission that apart from restructuring and social costs it is not our intention to make any financial support available to the corporation in respect of 1990–91 703W and subsequent years under the terms of the current state aids decision. Once the full implications of the coal contracts have been digested I hope to announce firm and precise targets for the corporation.
The MMC report pointed to the major changes in its business environment facing British Coal, and expressed the view (recommendation 3) that the corporation's board will need to ensurethat the systems and organisation are conducive to systematic and rigorous review of future prospects in British Coal's business environment.In his statement last year my predecessor emphasised the importance of a fully articulated and co-ordinated business planning system, and indicated that he expected the corporation to set out in detail its response to this. British Coal has separately told me that in its view the business planning system continues to bewell constructed to meet the requirements of the main planks of British Coal's strategy since the strike(MMC report, paragraph 4.75). It appreciates that business planning in the future, given the privatisation of the electricity supply industry, will need to allow for the prediction of and timely response to significant changes in the commercial environment. It considers that flexible response amid uncertainty will need to go together with setting a firm overall direction towards a state of sustained viability. In particular, greater emphasis will be placed on the cash-generating ability of individual collieries. In future, where a colliery has no hope of achieving a positive cash flow it cannot be regarded as having much chance of surviving. I welcome this general approach, and in particular I would expect the level of sales projected beyond the transitional period ahead to be based on those supply sources able to show a positive cash contribution, not on those units which represent a cash drain on the corporation's finances.
I have indicated that its future business strategy needs to be based on a thorough and co-ordinated examination of all aspects of the corporation's operations. It will be particularly important to ensure that specific loss-making sales of coal are identified and addressed, and that new commitments, particularly in the industrial and domestic sectors, are not taken on, unless realisations generate an adequate return. There also needs to be a firm co-ordination of the marketing and financial strategies.
I have asked British Coal to provide a further response to this MMC recommendation in 12 months' time setting out the detailed steps that have been taken to strengthen its business planning.
The MMC report highlighted the need for British Coal to adapt its organisation and systems in the light of developments and changes in its business environment (recommendation 5). British Coal's response reports the progress made in adapting its management organisation since the MMC report was first published. I therefore welcome the changes the corporation has made to the way its production management is organised. This is important not only in terms of cost savings, but in respect of matching British Coal's management structure to the market and business environment in which it has to operate. The corporation is right to draw attention to this in its response, and also to the changes it has made to its industrial relations and staff departments. This should help it to develop a more integrated approach in the key area of employee relations. The changes in the marketing department, too, are welcome evidence that British Coal is 704W making real and significant efforts to adapt its organisational and management structure to meet the challenge of a new market place. In this context, I welcome the corporation's recent decision to end the arrangement whereby each colliery is attributed with a share of the average proceeds nationally. From the beginning of 1990–91 regional groupings of supplying units will be credited with the average proceeds available to that region for coal of the qualities produced, thereby aiding the identification of the profitability of coal flows on a local basis.
Apart from the specific response on business planning which I have asked for next year, British Coal will, under the normal arrangements for the follow-up to MMC recommendations arising from section 11 inquiries, be reporting to me in two years' time on its implementation of the MMC's recommendations. I shall inform the House when these further responses have been made.