Clause 14. — (General Financial Duties of the Corporation.)

Bill Presented – in the House of Commons at 12:00 am on 23rd January 1967.

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Photo of Mr John Peyton Mr John Peyton , Yeovil 12:00 am, 23rd January 1967

I beg to move, Amendment No. 71, in page 15, line 24, at the end to insert: 'and an amount to be agreed annually with the Minister which shall be a special contribution towards replacement costs'. As I think it would be a convenience to the House, and as a contribution to rapid progress, perhaps my next Amendment, No. 72, in Clause 16, page 16, line 40, at end insert, (d) such an amount as may be agreed by the Minister as representing the difference between the value of the securities vested in the Corporation by section 7 of this Act and the total value of the net assets taken over by the Corporation. could be taken with this, because the arguments are the same in both cases.

Photo of Sir Eric Fletcher Sir Eric Fletcher , Islington East

If the House is agreeable. I think it would be convenient.

Photo of Mr John Peyton Mr John Peyton , Yeovil

The first Amendment is to make an arrangement that the Corporation shall be obliged to increase its earnings to an extent which would enable it to make a special contribution towards the replacement costs, and Amendment No. 72 is to add to the Corporation's commencing capital debt an amount equal to the difference between the value of the shares or the price which is being paid for the shares and the total net value of the assets at vesting date. Both these Amendments have the common purpose of ensuring that the Corporation does really discharge not only in theory but in fact the full measure of the duty laid upon nationalised industries by the White Paper on financial obligation, and with that Paper the Chief Secretary, I know, is very familiar. I think both these Amendments deserve the serious consideration of the Government.

I will not go into all the arguments about whether or not the compensation is adequate. At the moment, that is not the point I seek to make. What I am concerned with, though, is that here the Corporation is acquiring cheap the assets of the scheduled companies, and that, in order that its financial indebtedness should represent the true facts, the financial indebtedness should be increased by the difference, as I have said, between the value of the compensation stock and the net assets. It may be that the Government will not be inclined to accept both Amendments. I should be very happy if they would accept one or the other.

Mr. Edward M. Taylor:

I should like just to say a few words in support of my hon. Friend's case. I think that if the figures are investigated they show what a clear difference these Amendments would make. Let us take first of all the question of assets. My hon. Friend has referred to two points, first of all, replacement, and secondly, assets.

Let us take first the simple question of assets. I asked a Question in July last year of the Minister of Power about the value of the assets of the companies which would come within the framework of this Bill. I was given the answer on 19th July that the book value of the assets after depreciation, as shown in the latest reports of the companies, came to over £1,300 million, which is more than double the compensation. That was book value, and we may assume that replacement value would be substantially higher. Thus, the Government will be considering the financial obligations for the new Steel Corporation in terms of compensation which are certainly only half of even the book values of these companies and a much smaller proportion of the replacement value.

1.45 a.m.

My second question concerns replacement value, which we will never know. One thing which would give us an interesting light on what it might be is that in the last ten years, the scheduled companies have spent over £1,100 million on capital investment. This would give us an idea of what the replacement value would be. To that extent, the Government are approaching their financial obligations solely in compensation terms which are wildly out of touch with either the asset value or the replacement value.

I appreciate that, looking to the future, it may not be possible for the Government to hope even that the new Corporation will be able to face its financial obligations in the simple question of the compensation price. The steel industry is going through difficulties and these undoubtedly will continue. The Government should, however, abandon any pretence that they are measuring up to financial responsibilities in relation to the real assets of the Corporation, because certainly these are substantially more than they are—at least double—the compensation.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

Amendment No. 71 proposes that there should be an additional provision of the amount to be agreed annually with the Minister which shall be a special contribution towards replacement costs". As the hon. Member for Yeovil (Mr. Peyton) was good enough to say, I am indeed familiar with the 1961 White Paper, which sets out targets, and it will in due course be for the Minister and the Government to fix targets in respect of the use of the capital involved here.

It is proposed that there shall be an additional special contribution based on a theory which, I regret, I cannot fully accept. I have considerable sympathy, however, with what the hon. Member said about financial targets. There are two aspects of this. One is providing for the correct amount of depreciation in order to ascertain the profits and the other is to make such provision out of the profits as may be necessary to have liquid resources available to replace assets if they are to be replaced.

As to the provision of depreciation, therefore, confusion would be caused if one were to depart from the normal principle of providing depreciation on an historical cost basis. That is the recommendation of the Institute of Chartered Accountants, to which I naturally pay regard. It is my own view of the matter. I imagine that it would be the view of this matter of most practising accountants. Therefore, the Government would not recommend that we could accept the Amendment, which would not so provide.

I hope that I have made it clear, however, to the hon. Member for Yeovil that although the method of providing depreciation prior to arriving at the profit should wisely be the existing method of providing depreciation based on the historic cost, nevertheless in achieving its financial target the Corporation would naturally have to have regard, as the 1961 White Paper of the hon. Member's Government sets out—and I accept these principles—to the profit made after providing not only for depreciation on the basis of historic cost, but also for free finance, which is earmarked by the process of making reserves out of profits, which is necessary to replace plant where it is to be replaced.

I do not want to delay the House, but it is not a valid assumption that plant is always replaced, or that it is always replaced at additional cost. It is often not replaced at all, and where it is replaced it is very frequently replaced at the same cost because improvements in design, in efficiency, and in manufacture have enabled the same productive capacity to be produced at lower cost. The effect of inflation is balanced by a reduction in cost arising from new design, and so on, and frequently an additional cost of replacement is not a replacement, but is due to the improvement element in the new machine or whatever it may be. One must not assume always that this is a problem which faces one on every occasion.

I think that I have explained the position sufficiently to satisfy the hon. Member for Yeovil (Mr. Peyton). Although we could not accept the Amendment, for the reasons which I have given, we would, nevertheless, wish to have regard to the necessity for providing the appropriate amount of finance in meeting the target set out, which would be calculated following the White Paper of 1961.

I turn now to the second Amendment. I find it difficult to express any sincere sympathy with the point of view put forward. I entirely disagree with the point of view put forward either for the purpose of arguing against the Clause, or for the purpose of showing that the amount of compensation is inadequate. In response to the allegations which have been made, perhaps I might point out that the Amendment would have the effect of reducing the compensation by about £150 million.

Photo of Mr Michael Foot Mr Michael Foot , Ebbw Vale

That is a very good reason for accepting it.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

If we were to accept the hon. Gentleman's view that the profits should be calculated not after providing for the depreciation which the steel companies have provided, but after providing also for the cost of replacements, a much greater figure, it has been calculated that the profits of these steel companies would not have been at the rate of 11 per cent., as they have been on average, but at the rate of 7 per cent., and as compensation is calculated on the basis of the percentage of profit, we would get a figure of seven-elevenths of the proposed compensation, which would mean reducing the compensation by about £150 million.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

The right hon. Gentleman cannot be allowed to get away with that specious argument. The plain fact of the matter is that the difference between the assets value of the nine quoted companies which the Government are taking over, and the compensation which the Government are paying for them, is no less than £376 million, which represents the shortfall in compensation which ought to be paid by the Government, and which the Government are not paying. This is why it was quite rightly described as barefaced robbery.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The hon. Gentleman need not have got so excited and risen to intervene. He has merely repeated what his hon. Friend said. He has added nothing new to the debate, and he has made it necessary for me to repeat what I said because he has not understood the point. What the hon. Gentleman's hon. Friend is proposing—and it is on the Notice Paper with six names supporting it, all Members of the Opposition—is that the correct way of calculating the profit is after providing for depreciation on the basis of replacement costs. If we provide for that, as the Financial Times showed recently in an erudite article, the profits of the steel companies over recent years would have fallen from 11 per cent. to 7 per cent. The compensation figure, which is based on market prices —and market prices follow profits— would, if that method of calculating depreciation had been adopted, have been approximately £150 million less. If what the hon. Member was seeking to do was to produce an Amendment related to the Clause as an excuse for trying to demonstrate that the compensation is under-assessed, he chose a boomerang but assuming that that was not the case, and that it was an Amendment drafted, as appears to be the case, to calculate the interest and the debt which the Corporation takes over, the Amendment adds nothing at all, and gives rise to no need for an alteration in the figures.

The hon. Member wants to insert the difference between the value of the securities vested in the Corporation and the total value of the net assets, but the value of the securities vested in the Corporation is the total value of the net assets. That is what "value" means—it means what people are prepared to pay and not what people have paid in years gone by. "Value" does not mean book costs less certain kinds of depreciation, but what one can get in the market place, and the market place in this connection is the Stock Exchange. That is where market price has been fixed.

Photo of Mr John Peyton Mr John Peyton , Yeovil

As I explained to the right hon. Gentleman—and he should have accepted my assurance about this—I was not seeking to raise the question of adequate compensation. I was seeking to make sure that the Corporation and the publicly-owned companies earned sufficient in the future so as not to be in any way dependent upon the Exchequer.

Even though tempted by the Chief Secretary I will not deploy the long argument that we had in Committee, and which he has now raised, namely, that this is, if not a rigged market at any rate a manipulated one. It is in no way a free one. The industry has been under a threat for years, and also under price control. The right hon. Gentleman knows that everything he has said is thoroughly unfounded. He can thank his lucky stars that I am not going to go on all night about it.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I say immediately that what the hon. Member for Yeovil (Mr. Peyton) says is quite right. He did not seek to rest this matter on the question of compensation. But the hon. Member for Glasgow, Cathcart (Mr. Edward M. Taylor) went into the point at some length. His whole speech was devoted to the inadequacy of the figure for compensation, and I thought it only fair to reply shortly to that point.

Turning to the point made by the hon. Member for Yeovil, I agree with his fundamental principle that the profit earned should be such that no burden is left on the Exchequer. But he will realise that there would be no such burden if the profit made was sufficient to remunerate the capital employed, and the capital employed is what the Exchequer is putting into it. Therefore, we have no need to increase it arbitrarily, which is presumably what is behind the Amendment. Whether the proposal is as the hon. Member for Cathcart took it, or as the hon. Member for Yeovil intended his Amendment No. 72 to be, namely, a proposal to increase the benefit coming back to the Exchequer, it is not necessary. As a Treasury Minister one is always delighted to have benefits of this kind, but it would not be a fair burden on the Corporation and in those circumstances I am afraid that I could not recommend the House to accept either Amendment.

Amendment negatived.

2.0 a.m.

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

On a point of order. It may be for the assistance of the House if I were to say that it is not the intention of my hon. Friends to move Amendments No. 73, in page 17, line 3, at end insert: The rate of interest and the date from which it shall be payable and other arrangements made under this subsection shall be reported by the Minister to Parliament and must be agreed by an affirmative resolution of the Commons House of Parliament. Amendment No. 139, in page 17, line 34, at end insert: Provided that moneys borrowed under this section may not be applied for the purpose of acquiring interests in, or property or rights of, any company operating wholly or mainly outside Great Britain involving the expenditure of a sum in excess of £50,000 unless an order authorising such acquisition has been approved by the Commons House of Parliament.

Amendment No. 75, in page 17, line 40, leave out paragraph (f).

Amendment No. 151, in page 23, line 40, leave out 'a Government department', or the Amendment in the name of my hon. Friend the Member for Wokingham (Mr. van Straubenzee) to Government Amendment No. 82. This will mean that there are simply Government Amendments No. 82 and No. 93 remaining.

(1A) The Minister may make regulations—
5(a) requiring that there shall be stated in, or in a note on or statement annexed to, the statement referred to in subsection (l)(a) above, such information relating to bodies which, at a time specified in the regulations, are subsidiaries of the Corporation and to assets of the Corporation consisting of shares or stock in or amounts owing (whether on account of a loan or otherwise) from, such bodies as may be so specified;
10(b) requiring that there shall be so stated such information as may be so specified relating to companies (not being at such time as aforesaid subsidiaries of the Corporation) shares or stock in which are, at that time, to such extent as may be so specified, held by the Corporation, and to assets of the Corporation consisting of shares or stock in, or amounts owing (whether on account of a loan or otherwise) from those companies;
15(c) requiring that there shall be so stated, in such form as may be so specified, the information furnished by the Corporation's subsidiaries in compliance with any provision of the enactments for the time being in force relating to companies imposing on a company a requirement to furnish information corresponding to any that may be required to be furnished by the Corporation by virtue of paragraph (b) above;
20(d) determining the circumstances in which, for the purposes of any requirement imposed by virtue of paragraph (a) or (b) above, shares or stock in a company are to be treated as being held by the Corporation;
(e) granting exemption in circumstances so specified from a requirement imposed by virtue of paragraph (a) or paragraph (b) above;
25(f) making such provision supplementary to any requirement imposed by virtue of paragraph (a) or (b) above as the Minister thinks necessary or expedient.

I hope that it will be for the convenience of the House to consider at the same time Government Amendments No. 83, 84, 88 and 91. The purpose of this and the related Amendments is to have regard to the Companies Bill now before Parliament, which imposes certain new obligations upon companies as regards publication of the extent of their interests in other companies. These are broadly the need to publish a list of their subsidiaries, with the size of the holding in each class of shares of the subsidiary, and a list of other companies in which they hold more than 10 per cent. by nominal value of the shares of any class, and also the size of their holding in the shares of that class.

An Amendment was moved in Committee by the hon. Member for Scarborough and Whitby (Mr. Michael Shaw), which was not completely satisfactory, but we are indebted to him and we have tried to accept the spirit of it and, as far as possible, to improve upon it. That Amendment spelt out the requirements now in the Companies Bill and putting.