Government Trading Funds Bill

New Schedule – in the House of Commons at 12:00 am on 19th June 1973.

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10.30 a.m.

Photo of Mr John Nott Mr John Nott , St Ives

I beg to move, That the Chairman do now report to the House that the Committee recommend that the Government Trading Funds Bill ought to be read a Second time. This is a modest Bill. It provides for a change in the method of financing a restricted range of Government activities. But I hope that, for all its modesty, it will make a useful contribution to the task of improving the efficiency of Government administration, without reducing parliamentary control.

There are two antecedents to the proposals in the Bill. The first is the Fulton concept of "accountable management" which means the holding of individual units responsible for their performance. The Fulton Committee argued that the relevant parts of Departments should be reorganised so that responsibility and authority were defined and allocated more clearly, and so that the output of the organisation could be measured against cost and other criteria. It remarked that this must involve an addition to the traditional accounting methods of Departments.

The other antecedent to the Bill is the Government's statement on the machinery of government in the White Paper "The Reorganisation of Central Government" (Cmnd. 4506). Like our predecessors, we considered that the development of "accountable units of management" performing the executive tasks of government would both be conducive to more efficient government and be more satisfying for the public servants whose task it was to operate them.

The Bill is concerned, therefore, with a particular group of services or organisations which the Government think ought to be developed in the form of accountable units of management. They are all carrying out trading activities. But they are trading activities which are so directly involved with the main process of government that we consider that they ought to remain the direct responsibility of Ministers and not be hived-off as statutorily distinct bodies.

I need hardly remind the Committee of the principles underlying the present system of financing these services, namely, the parliamentary system of Supply. Over the greater part of the Government's expenditure this system is simple, appropriate and effective and we certainly do not wish to propose any general change in it.

But there have been two respects in which the Supply system does not match the characteristics of a trading activity. The Appropriation Accounts by themselves do not provide an adequate basis for assessing the performance of a trading organisation, and a system of management control suitable for a trading operation is not readily reconcilable with the cash system inherent in Votes.

The first criticism has been recognised for many years. The Appropriation Accounts in particular do not provide an adequate basis for assessing the performance of a trading activity, because they do not show how it has managed its capital assets. To meet this, trading accounts were introduced—in one case in the last century. These trading accounts, have, in general, served their initial purpose of giving Parliament better information about the results of these trading activities. In some cases there are improvements in the form of the trading accounts which would make them more effective for that purpose, and work on this is in hand.

However, while one purpose of accounts is to show how an organisation has performed, another ought to be to allow, and indeed encourage, management to improve its performance. The main criticism of the trading accounts in their present form is that they have not done this. They have not generally provided a very effective spur to management in commercial terms. Trading accounts have had little or no effect on management in those cases where they have merely been compiled from the traditional Vote accounts after the end of the year.

In these circumstances they have been little more than an interesting analytical exercise coming too late to have much influence on decisions. They have had more effect on management in those cases, notably the Royal Ordnance Factories, where there has been a comprehensive system of management accounts, with regular reporting during the year, and where the trading accounts have been derived from them. Work is already in hand in all the other organisations named in the Bill in order to develop their system of management accounts, and to derive future trading accounts from them. So this deficiency is at least being made good.

But the improvement of management accounts and trading accounts will not overcome a more fundamental difficulty. A system of control exclusively related to cash flows cuts across the desirable pattern of management control in a trading situation involving the use of substantial capital assets. The control should be directed to the effectiveness with which the organisation meets the needs of its users, and to the return which it is obtaining on the capital assets which it is employing.

Because the parliamentary authority for expenditure, and so the statutory constraint on the manager, still relates to those gross and net cash inputs, funded from their Department's Votes, managers have, very properly, had to pay attention to a cash control relating to that limited part of their total expenditure, and they have tended to give this too great priority compared with achieving maximum effectiveness as shown in their management accounts. Experience has been that, even when the problem has been recognised and there has been an understanding that a liberal view should be taken for requests for Supplementary Estimates, middle and lower management has sometimes tended to avoid taking an action which might lead to a Supplementary Estimate, although it made good economic sense in terms of the purpose of the organisation.

The Mallabar Committee on Government Industrial Establishments particularly investigated this point when it visited the Royal ordnance factories. It was forced to conclude that while the Vow accounting system does not prevent the ROFs from being efficient…it does not contribute to the achievement of efficiency. It was this which led that committee to recommend the adoption of a trading fund for the Royal ordance factories and subsequently for the Royal dockyards.

The Bill is intended to bring the method of financing for these trading activities into line with the desirable method of managing organisations which have significant capital assets. At this stage we ask ourselves what should be the essential elements of a Bill to deal with the problem I have described.

The first point is that an organisation operating a funded service should have standing authority to apply its receipts to meet its outgoings, and would no longer have to rely on votes for its own expenditure. Secondly, it would pay, and be paid for, all the goods and services which it receives and provided.

Thirdly, it would have an initial capital debt to the National Loans Fund which, taken with any element of public dividend capital, would be equal to the net current value of the assets and liabilities transferred to it. The trading fund would have from its earnings to service that debt and pay dividends on any public dividend capital. Fourthly, it would be able to borrow from the National Loans Fund, within limits, to meet any need to increase its capital and also to meet its short-term financing requirements. It would also be able to carry over cash balances from one year to the next and to invest any cash temporarily surplus to its requirements. It would be able, if Ministers so decided, to plough back some or all of its revenue surplus into the business.

Fifthly, the Bill provides that a trading fund would have to break even, taking one year with another, and, furthermore, would have to meet specified finan- cial targets. Sixthly, if a Department required a service which would otherwise be loss-making to be maintained, it would have to pay the trading fund a specific subsidy from its Vote.

The standing authority to apply receipts to expenditure removes the inhibitions on management caused by the existing control on cash expenditure on inputs. The fact that all the costs centred in the trading accounts will correspond to actual outgoings, especially the servicing on the capital, should help to focus managements' attention on the trading and management accounts, and on the return which they will be obtaining on the capital employed.

Turning to the Bill itself; I emphasise that it is an enabling Bill. It provides that orders may be made introducing trading funds for each of the six services named in the Bill, and for any other trading service within government. The order introducing a trading fund for a particular service would be subject to affirmative resolution procedure. It would specify the borrowing limits and whether there should be any element of public dividend capital in the initial capital structure. Given this, I would not propose to justify now the arguments for a trading fund in any particular case. Indeed, the Government are not yet committed in some cases, such as the Ordnance Survey, to going over to using a trading fund. But we thought it right to name explicitly in the Bill all those organisations for which the Government at present consider there to be a serious possibility of a trading fund in order that the House may have as good an idea as possible of what is at issue.

We have also included as a matter of contingency a provision in Clause 1(3)(g) for the extension to other trading services, although we have no particular services in mind for this at present. It would seem wrong to exclude at this stage the possibility of extending the trading fund method of finance to other services, which will probably be relatively minor ones, in case further work on their organisation and management suggests that the trading fund would be sensible for them too. In every case, because of the affirmative resolution procedure, the House would have an opportunity to consider the merits.

The timing of introducing trading funds will also vary from place to place as it is dependent on a number of other changes in the organisation and management of the services concerned. In particular, it depends on the development of an adequate system of management accounts and trading accounts in those cases where this has not already been completed.

If Parliament approves the Bill this Session, and subject to completion of the necessary preparatory work, we hope to lay a draft order providing for a trading fund for the Royal ordnance factories from 1st April 1974 at about the turn of the year. Work on some of the other services might take up to a further two or three years.

I do not think that at this stage the Committee would necessarily wish me to go through the Bill clause by clause. If hon. Members have any questions on separate clauses, I shall, if I catch your eye, Captain Elliot, and have the Committee's permission, answer them later.

Before concluding I ought to touch quickly on two maters which may be of particular interest to the Committee, namely, public dividend capital and answerability to Parliament.

Clause 2 provides that the order establishing a fund may provide that part of the initial net assets of the organisation should be matched by public dividend capital rather than by a debt to the National Loans Fund. The Government have noted the recent criticisms of the Select Committee on Nationalised Industries of the way in which public dividend capital has been used in one particular instance in the past. The Government are of course considering the recommendation of the Select Committee that we should review the operation of public dividend capital, and will be replying in due course to the Committee. But we think that in the meantime it would be wrong to exclude the possibility of having an element of such capital for at least some of those services. If members of the Committee have any questions on this matter, I should be happy to answer them.

The second subject is accountability to Parliament. A service transferred to a trading fund is likely, if anything, to be made more accountable rather than less. The answerability of the trading funds to Parliament will be reduced only to the limited extent that they will no longer produce Estimates and Appropriation Accounts. But we should expect that the whole group of measures which go together under the title of "Accountable Management" would offset this.

While the trading fund organisations will no longer be directly financed from Votes, their gross investment programmes will be part of public expenditure, and so it would be open to the Expenditure Committee, or one of its sub-committees, to investigate them if it so wished.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

They will presumably publish reports and accounts annually?

Photo of Mr John Nott Mr John Nott , St Ives

Most certainly.

The accounts of the organisation will continue to be audited by the Comptroller and Auditor General and will therefore be subject to scrutiny not only by the House itself, but by the Public Accounts Committee. We hope that the accounts will become more significant and useful, and the Bill provides for them to be supplemented by additional information about the overall performance of the organisation, probably in the form known in the jargon as "performance indicators". That is something on which we are working.

The trading fund organistion will remain the direct responsibility of Ministers and the staff will remain civil servants. It will be possible, as now, for hon. Members to put down Questions or write to a Minister about the organisation's activities. Following the passage of the Bill, there will first be the orders setting up the particular trading fund and as I have said, this will require an affirmative resolution.

Any subsequent increase in the borrowing limit for a particular organisation will require an order subject to a negative resolution procedure. In due course, if the trading fund system is a success, it will be necessary to introduce new legislation to increase the present borrowing limit of £250 million. This will give the House an opportunity to review the operation of the whole system.

I commend the Bill to the Committee as one which will make a modest but useful step in the direction of improved management and accountability of certain trading funds within government.

10.45 a.m.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

I should like to give the Bill a warm welcome and say only that my hon. Friend moved it too apologetically and claimed that it was modest. He even seemed to be on the defensive about it, whereas to me it is far too small a step and I should like to see much more progress in this direction.

I always find it extraordinary, with half the administration and economy of the country in the hands of the State, that we spend so much time arguing about the efficiency of the private sector, putting in management consultants and generally arguing about how we can improve the performance of the private sector, with no thought or time at all spent on trying to improve the performance of the public sector.

When the right hon. Member for Bristol, South-East (Mr. Benn) wants to take the 25 leading private companies into public ownership, it occurs to me that he might achieve greater efficiency if he were to take 25 leading trading organisations from the public sector back into private ownership. There is no doubt in my mind that the efficiency of our public sector is abysmal, not only in industry, but in the administration of many services performed by the State. That thinking and legislation should be starting, designed to improve the performance of the public sector, is a development that I welcome strongly.

What I should like to see is the splitting-up of the public sector into its component functions. The first thing to do is to analyse what are the various services provided. My hon. Friend is right to choose the six services mentioned in the Bill, because they are readily identifiable and readily separable from the mass of the public administration. But there is no reason why we should not carry this process a great deal further and separate out a large number of activities that could be established with trading funds and made to perform as separate organisations.

Secondly, we must have more disclosure. I am delighted to hear that there is to be disclosure in the private sector, but certainly there must be a great more disclosure in the public sector. Until the various functions of the services are separated out it is impossible, but when that has been done, each must be required to put down on paper its financial results and general progress in administering its service.

Thirdly—and this is the first point where increased efficiency comes into the argument—we must have motivation within the public sector units to increase the efficiency of the service provided. It seems to be impossible to achieve the proper motivation for efficiency until the units have, first, been identified and, secondly, increased disclosure.

The basic requirement of managing a service is that it should employ the capital in the business in the proper fashion. That cannot be done unless the trading fund organisation has a capital structure and complete financial autonomy. The secret of success in a free enterprise economy is that organisations that need more capital borrow it to employ it profitably, and organisations that need less capital lend it to others which can employ it more profitably. I should like to see the public sector go that far so that it takes, borrows and lends capital surplus to its requirements in order to ensure the proper use of the State's capital.

Whether public dividend capital is relevant to this I sometimes doubt. Certainly, I should not like to come to a firm conclusion, but in our experience, limited though it is hitherto, it has so often been the case that public dividend capital is used as an excuse for a nationalised industry not to pay interest on its capital, probably not through its own fault, but because the Government have been leaning on the prices of its products. I am not so sure whether it is relevant in the new direction which the Government are taking by the Bill, but if my hon. Friend can build into his new structures the free movement of capital among various parts of the public sector, he will be achieving a major contribution to increasing efficiency.

It is regrettable, however, that the Bill does not include freedom for the trading fund organisations to pay the going wage or salary rate. I believe that the employees should continue to be civil servants and that if it is necessary to hire a manager or a plumber, a skilled welder or a clerk, the organisation should be free to pay the going rate and to make such pension and fringe benefits arrangements as suit that service, not be dictated to by the general level of Civil Service agreements. As I say, I am sad that it does not include freedom for the organisations to borrow and lend capital with that quickness and skill which is the essential feature of a successful organisation.

The third feature—I regret its absence from the Bill—is that there is no attempt yet to motivate those who will manage these fixed services so that they are on the side of increasing the efficiency of their organisations. If one runs a large block of State trading or State service, the basic motivation deep in the mind of the person who runs it is the hope that he may one day have a bigger organisation. That is empire building and it is this desire to see one's corner grow and expand which is probably the main psychological motivation of those who are in charge.

It should, of course, be the other way round. The motivation should be to reduce the numbers of people employed and the amount of materials and capital consumed in order to provide the cheapest possible service, thereby leaving a greater amount available for those who have done the management. There is about to be published a book by an American professor which advocates three degrees of motivation for public sector organisations such as those mentioned in the Bill.

The first degree would no doubt be unacceptable to the Committee. It is that the managers of a State service should be allowed to keep a proportion of the difference between the selling price of their product and what it has cost them to produce it. This would probably greatly reduce costs in all State services, but I think it would be politically unacceptable at present. I do not know why the idea that somebody could actually make money out of reducing costs, particularly in the public service, is, for some reason, repugnant, but it seems perfectly obvious that if the costs of naval dockyards could be cut by 10 per cent., it would not be amiss if 1 per cent. of that 10 per cent. went to the managers who had achieved that remarkable result.

If that is unacceptable, the second suggestion is that those who operate public service profitably should be enabled to undertake activities in other public services. For instance, if the manager of the Royal Dockyards succeeds in reducing his costs, he should be allowed to go into the employment exchange business, or the management of State pensions, so that he may demonstrate that by his skill and efforts he was able to reduce costs not only in his own field, but in others. That would satisfy his desire for empire building and at the same time would have the effect of reducing costs throughout the public service.

The third suggestion is that it might be possible to base the rewards of the managers of a State service not on finance but on terms of status. The man who got his costs down 10 per cent.—the man who runs the Royal Mint might get his costs down by 10 per cent.—would be given a Bentley, but the man who did not succeed in reducing his costs would have only a Mini-Minor. The quality of the carpet on office floors, the pictures on the walls, are all things which motivate civil servants, and it would seem to me perfectly right and proper, if we are not prepared to go as far as financial rewards for the successful, to give amenities rewards instead.

The Government are the main customer of all of the six services mentioned and there is no market price for the repair of ships or the Royal Ordnance Factories or the minting of coins, so it is not so easy to determine the price which the Government should be charged for the product of the six organisations.

I wish particularly to congratulate the Government on going so far as to force themselves to determine the price for the work done by these six organisations to pay to them because it will not be easy for them to do so, but having done so the Government will be able to assess whether it will be worth while to have coin minted in Cardiff or elsewhere. That would give them the ability to compare the costs of minting by various competing, minters. That is a major step forward, because it not only gives the trading fund organisation a yardstick by which to judge its efficiency, but it gives the Government a yardstick by which to judge whether they are purchasing services in the cheapest market.

I cannot see why, if we are able to go this far with these six organisations, we should not go as far as treating all those Government organisations which actually sell to the public in the market in exactly the same way. For instance, the Patent Office and Companies House are typical examples of where a trading fund could be set up, and where it could be even easier than for the six items mentioned in the Bill because they already operate commercially with the public. If we are to enter this sphere where the Government are the main customer, let us extend it to the employment exchanges, payment of social security benefits and other government activities where there is room for increased efficiency and motivation of those who manage the service.

I greatly welcome the Bill, but it is far too modest; it does not go nearly far enough. I hope that my hon. Friend will agree that we have a major task before us to revolutionise the standard of administration and management in the public service. Having settled for having 50 per cent. of our gross national product in public hands, we now have an obligation to increase the efficiency with which that 50 per cent. of our economy is managed.

10.59 a.m.

Photo of Mr Peter Trew Mr Peter Trew , Dartford

Like my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) I welcome the placing of some of these State activities on a commercial basis. I certainly think that there might be scope for extending the practice.

I listened with great interest to what my hon. Friend said about financial incentives. He mentioned the Royal Dockyards. If I have read my naval history correctly, I remember that in the days of sail the ship's purser was allowed to make a profit on the catering. I am not sure that that always led to the highest standard of catering. However, as a principle I would not quarrel with what my hon. Friend has suggested, although I would steer clear of status symbols such as carpets, the size and shape of desks and whether the tea is served on a tray or trolley, because in private industry these things are often the source of much heartache. I agree that the motivation of those who manage these industries is important and a factor which should be considered.

I have four brief technical questions to put to my hon. Friend arising out of the Bill. First, I should like to know who lays down the financial targets where the requirement goes beyond breaking even. Clause 4 places on the Minister the responsibility for managing these activities. If he is responsible for managing the activities, it is not necessarily right that he should fix the financial target. I should therefore be interested to know who it is who fixes these targets.

Secondly—and this may have been answered elsewhere—what are the limits to the activities of these various undertakings and the extent to which they can diversify and embark on related activities? I think particularly of Her Majesty's Stationery Office, which is in publishing and clearly could expand widely. Presumably there are some guidelines to lay down where it can operate, and I should be interested to know of them.

Related to that, does my hon. Friend envisage that there might be circumstances when one of these undertakings might find itself in competition with private enterprise? For instance, I can envisage that the Royal Ordnance Factory might be tendering in competition with a private manufacturerer for the supply of defence equipment to the Government. In such cases it would be important to ensure that tenders were on a strictly comparable basis. It is possible for Government Departments and local authorities to allocate their overheads in a way that enables them to put in favourable tenders and that puts them at an unfair advantage compared with private enterprise.

Related to that question of accounting practice, who will carry out the audit of these companies? Who will ensure, for instance, that they use the correct and prudent procedures for depreciating their plant and equipment?

11.3 a.m.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

Owing to the vagaries of one of our nationalised industries it was only yesterday afternoon that I realised I was on this Committee, so I have not considered the Bill in any detail.

We accept that any way in which we can arrange for the more efficient use of our resources is welcome. But I am now slightly sceptical about the magical effects of certain aids brought to the service of people in management. My main interest and experience has been in that other facet of public service, local government. In the last decade we have sought to make local government more efficient. We have had bigger and better computers and I am sure that they have made a notable contribution, although sometimes when I see the staffs manning the computers and the miles of paper consumed by these devices I begin to wonder. They make things possible that would not be possible by the use of the quill pen.

I have no doubt that our management services divisions, which help us to manage our personnel and to organise administration more efficiently, have made an equally massive contribution to the efficiency of local government. But when one sees the large staffs involved in performing this service which exist to assist us in becoming more efficient in the use of our resources, one appreciates that there is no easy, clear-cut path to the objectives we all share.

I should like to make one or two points, although I do not regard myself in any sense as a specialist in this field. I hope that in introducing the various services listed in Clause 3(1) their image will not be destroyed. I do not want to appear sentimental and old-world, but the image of the Royal Mint, the Ordnance Survey and Her Majesty's Stationery Office are things on which as British people we should pride ourselves.

I once served on a Select Committee inquiring into the Royal Mint, and journeying round various establishments one felt there was something slightly Dickensian about certain aspects of the organisation. On the other hand, it is remarkably efficient. It has a reputation for quality and—I am sure this will appeal to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley)—it has a massive export trade.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

Of a very tangible kind.

The HMSO is also a most attractive organisation, performing a valuable service. In the last decade it has improved the service to the British people in terms of publication and sale of Government institutions.

The idea that we should drag these organisations screaming into the twentieth century, in terms of their commercial methods, should be viewed with a certain amount of caution, although I concede that something should be done.

But my main concern and worry is that whenever the hon. Member for Cirencester and Tewkesbury speaks of the nationalised industries he always damns them with very faint praise. It reminds me of a discussion I heard once in America concerning the writer, Nabokov. Someone denied saying that Nabokov was a third-rate author. He screamed, "I never said that Nabokov was a third-rate author; I said he was a second-rate author." I think that the hon. Member has the same sort of attitude to the nationalised industries. He cannot concede that they are efficient in any way.

My misgiving about this development is in part linked with what the hon. Member said. The problem is that once one enters a more commercial field—and we are not transforming these departments into public corporations—and once the accepted management accounting commercial yardstick is applied they should be allowed the sort of freedom that this Government, and to some extent the last Government, never gave them. The hon. Member said that Governments have a tendency to lean on them. I wondered whether we are to have a repetition of what has happened often in the past, when Governments have leaned so heavily on the pricing policies of the nationalised industries that they have not had a chance—

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

The Government are leaning on the pricing policies of private industry, too.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

That raises a very important point. The Young Conservatives' bible, the Economist has on a number of occasions, and particularly in its penultimate issue, heavily criticised the Government for being far too lenient with industry and far too tough in other respects. Those of us who have to meet constituents from time to time notice that there is a subtle discrimination, even in the present context, between the way in which the Government are preventing nationalised industries from increasing their prices, and their attitude towards, say, the manufacturers of fish-fingers where an increase of 20 per cent. is quite acceptable to the Price Commission.

If the Government's policy is to be the same towards these hybrid institutions, is there any sense in trying to apply all these commercial criteria? When we are testing their performance in respect of profits, margins, surpluses, and so on, this is totally unrealistic because we do not allow them to charge the prices they wish to charge.

I have misgivings. All this introduction of public dividend capital to give the enterprise an air of commercialism so that they will take the rough ride into the market place, is rather bogus. I agree to some extent with the hon. Member who made the point that unless we have a flexible pricing policy, allowing the industries to charge the prices they believe to be realistic, all that will happen is that the public dividend capital will be much cheaper than fixed interest capital because no interest will be paid. The British Steel Corporation is enjoying something of a bonanza in this particular respect at present.

Perhaps the phrase "break-even" gives the key to the Government's policy in respect of what will happen to these industries, as has happened to the nationalised industries. They will not suddenly be expected to be imbued with a commercial spirit and to adopt aggressive marketing policies which will substantially increase their profits. They will be trampled down in exactly the same way as nationalised industries are now. The real target they have to aim at is not profitability but this somewhat austere phrase "break-even". Whenever I see the phrase "break-even", I think that we are adopting a policy in which we are seeking the worst of both worlds and in the last resort probably getting it.

11.14 a.m.

Photo of Mr Edwin Wainwright Mr Edwin Wainwright , Dearne Valley

I should have liked to have slightly longer notice of being asked to serve on the Committee. I was informed only at the weekend and I thought it rather uncharming.

I cannot understand why the Government always give the impression that every system of nationalisation is a failure and therefore we must do something to improve its management and techniques. They do not seem able to prevent themselves from criticising the nationalised industries. I am not certain that the Bill will give the tremendous fillip to the six organisations referred to in it. We are not changing personnel. The same teams are to run the activities. Therefore, we should consider the team running the system at present.

When one compares the productivity of other nations with that of this country, one realises that there is something wrong in private enterprise as well as in the public and nationalised industries. To improve management we have to do more than we are doing at present, and I am not sure that the Bill will do that. It has too much of the dead hand of the Treasury upon it.

My hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) spoke about the efficiency of some of the nationalised industries. For instance, if throughout private industry there were the same efficiency as in the coal mining industry undoubtedly this nation would be in a better financial position than it is. However, unfortunately, when coal was in short supply and demand exceeded supply, the Government of the day prevented the National Coal Board from increasing the price of coal, which private enterprise would have done had it been in charge. It is estimated that even that industry was run short of capital of £2,000 million because of the stranglehold that the Government had upon it. I know the answer which is given to that, namely, that if the board had increased the price of coal it would have been priced out of the market sooner. Nevertheless, in spite of its tremendous capital investment, and in spite of its upsurge of productivity, the NCB has always been looked down on by the nation.

Every nationalised industry we have talked about has been controlled by the Government—Labour as well as Conservative Governments. The only time the Government wish to denationalise an industry is when they talk about hiving-off the more profitable sectors of it. We have to look at the industries independently and not compare them with private enterprise which is often done because they are at a disadvantage. I agree there could be greater efficiency among management than we have at present. But would it give impetus to the organisations we are discussing?

I had to smile when the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) talked about 1 per cent. going to management. Some very small private companies run efficiently and magnificently in what is termed de luxe accommodation. But it is not always there that one can encourage efficiency because one can say, "There's a nice office up the road. I will put you in if you can make your organisation more efficient." We should be very careful when we start talking about office equipment.

In passing, let me say that probably the inflow of personnel into the Civil Service has come from a certain section of the community, yet they are supposed to introduce business ideas to the nation. There are likely to be many people who could develop ideas and make an organisation more efficient, but because they have come from a certain section of the community they have not been allowed to do so. I agree that the Civil Service has widened its ambit of recruitment but it must widen it more in future.

I should like the Minister to explain the provision in Clause 2(4): …limits in force in respect of all trading funds shall not exceed £250 million at any one time. Why is it £250 million and not £500 million? Will the Minister say a few words about that when he replies? In Clause 4(6) we see signs of the power of the Treasury. How can a business organisation be run efficiently and commercially when over it is the dead hand of the Treasury? Clause 4(6) states: The Treasury shall appoint an accounting officer for the fund, with responsibility for keping its accounts and proper records in relation thereto… —not just for the accounts, but to have a tremendous influence on the running of the organisation's finances, and to make certain that, although the capital invest- ment is a bit too high, no matter how much investment means to the efficiency of that organisation and to the ideas of the personnel responsible, someone will say, "No, you must not do that; the cost is too high". Therefore, the ideas of the personnel responsible are stultified by the dead hand of the Treasury.

The clause goes on to provide that the annual statement of accounts shall be in a form approved by the Treasury and contain such additional information with respect to financial results in the previous year as the Treasury may require to be provided for the information of Parliament;". That is the usual phrase and I have often seen it in Bills, but why does it say just "additional information"? Will there be some attempt to restrict information? When a phrase like that appears, I am worried that it means something different from what it says. The additional information might be restrictive information. I hope that the Minister will be able to convince me that I am putting a wrong interpretation on that.

There is another point on which I should like the Minister to comment. In his statement he mentioned the organisation investing its cash, and I think he meant its surplus cash. I thought he was referring to the reinvestment of capital, but as he went on I was left with the impression that there was the possibility of a restriction being placed on surplus funds. With the Treasury's hand upon the organisation and saying that its pricing is too high and that it is making too much profit, the organisation will be lucky to have funds to invest.

But if organisations are to invest, what kind of investments will they make? Will it be in equity shares? Will they loan to the Government with a cheap rate of interest? Or will they be allowed to make the best of a monetary surplus? I think the Minister should be more forthcoming on this issue.

I hope that this Bill will eventually improve the efficiency of the six organisations named in it. If it does, it will receive the blessing of the Opposition. But I think that when the public accountability takes place we shall find that the Bill needs amending to ensure efficiency in these organisations. Unless we make certain that personnel are better trained in management, we cannot expect the success which we ought to be having in any kind of nationalised industry. When Members of the Government talk of management personnel in the nationalised industries, I wish they would look more to private enterprise. It is there that 80 per cent. of the wealth of the nation is produced and it is there that management is lacking. When the Government criticise management in the nationalised industries I hope they also think about current failures in private enterprise.

11.26 a.m.

Photo of Mr Peter Rees Mr Peter Rees , Dover

I do not wish to enlarge the scope of the debate, but I have been moved by certain observations of the hon. Member for Dearne Valley (Mr. Wainwright) to intervene briefly. As in his consituency, so in mine, nationalised industry is a significant employer of labour. I and other Conservative hon. Members criticise the nationalised industries not in any hostile spirit, but because we are in a sense responsible for them; we are the shareholders of those industries. If we do not criticise them, who will? Who is to provide the jury by which their performance is to be tested?

Photo of Mr Edwin Wainwright Mr Edwin Wainwright , Dearne Valley

We have the British Press.

Photo of Mr Peter Rees Mr Peter Rees , Dover

I think that it is our primary responsibility, and the lesson we can draw from the performance of the nationalised industries, which we can apply in relation to this Bill, is that we have not evolved satisfactory methods of control and accounting. It is as much a political failure as an industrial failure. We have set up nationalised industries and, unfortunately, we have not learnt to control them.

I welcome the Bill because it is a modest innovation which will enable us to assess and control various industrial and commercial functions of government. It is not sufficient for us to say that we have a general responsibility to Government, and that we have our debates. The outstanding lesson is that politicians are not very successful when they attempt to run industrial enterprises; and certainly they are not very successful in judging their performance in any critical and impartial spirit. On that basis I welcome the Bill as a modest innovation.

In the future we shall be interested to see the capital structure evolve for the quasi-industrial and quasi-political attitudes. We shall want to see the gearing and what their distribution policy will be, how they will evaluate their assets, and what kind of pricing policy will evolve.

As I said, I welcome the Bill as a modest innovation on which I hope we shall be able to build in the future and, like my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), if it turns out to be a success I hope we shall be able to extend the principles to other aspects of government.

11.29 a.m.

Photo of Mr Jack Dunnett Mr Jack Dunnett , Nottingham Central

I should like briefly to pursue with the Minister the matter of accountability to Parliament. I appreciate that these funds come within the purview of the Estimates Committee, although it is rather long-range control. Is there no Minister responsible to whom a Question may be put? The proposed funds are not likely to be the subject of Questions, but it could arise.

Is there to be no automatic annual opportunity to raise the operation of these funds in Parliament, once constituted?

Photo of Mr John Nott Mr John Nott , St Ives

With the permission of the Committee, I shall endeavour to answer some of the questions that have been put to me. But first I should like to thank my hon. Friends the Members for Cirencester and Tewkesbury (Mr. Ridley) and Dartford (Mr. Trew) and my hon. and learned Friend the Member for Dover (Mr. Peter Rees) for their warm welcome for this modest Bill. In the course of my remarks, naturally I shall endeavour to allay some of the fears expressed by the hon. Members for Dearne Valley (Mr. Edwin Wainwright) and Stoke-on-Trent, Central (Mr. Cant).

Although I describe it as a modest Bill, nevertheless it contains some important innovations. I believe, and can certainly give my assurance on this to the hon. Member for Stoke-on-Trent, Central, that we should maintain and endeavour to enhance in every way the high reputation for service and quality of the organisations described in the Bill. There is nothing in the clauses that could adversely affect these organisations in the way that he feared.

To take an example to which he referred, the Royal Mint has a worldwide reputation, and it has just been awarded the Queen's Award for Industry for its export achievements in competition with mints throughout the world. When the Royal Mint becomes a trading fund there is nothing contained in that change which would in any way diminish its image—I think that was his term—and reputation for quality, and the service provided by this excellent and famous organisation.

I agree with my hon. Friend the Member for Cirencester and Tewkesbury that we must do all possible to improve the performance of the public sector. The trading funds will be within the responsibility of Ministers, enabling me to answer the hon. Member for Nottingham, Central (Mr. Dunnett) by saying that questions may be put to the Minister responsible for the trading fund concerned. The Royal Ordnance Factories are the responsibility of the Secretary of State for Defence, and questions may be put on matters which come within the responsibility of the Secretary of State for Defence, as they are now.

In every case the adoption of trading fund finance is part of a wider series of management changes in the organisation concerned. It is designed to give the management of the organisation more clearly defined tasks. We want to give the management greater freedom as to how those tasks may be performed, and hold the management more clearly accountable than they are now for the results. The trading fund financing that we introduce in the Bill is a means of facilitating other desirable changes in the public sector, rather than an end in itself. We share the wish of my hon. Friend the Member for Cirencester and Tewkesbury that the public sector should be made as efficient as possible in its operations and this modest measure is, as he appreciates, a move towards that end.

There is a great deal of work going on in the public sector at present with this in mind. When my hon. Friend implied that perhaps not enough was being done, I think he tended to minimise the great amount of work being done here.

My hon. Friend also said that he thought the Bill should go further. It might be of interest to the Committee if I set out the circumstances which might make a particular activity of Government suitable for trading fund status. I might list a few examples where a particular activity of Government would tend to lead us to suggest that it should have a trading fund, which would be where the nature of the service is such that a substitution of trading fund finance for Vote finance, would be more conducive to efficient management; a situation where it is possible to cover the costs either through charges for supplying goods and services, or by charges for meeting particular policy requirements. In other words, we would see this particular trading fund as being able to cover all its costs through its trading activities.

More generally, we would see whether the basis on which the service is to be organised is such that it will be possible to separate clearly the responsibility of its management from those of its customers and whether there exist adequate accounts and other means of assessing the performance of the trading fund to form a reasonable basis on which it could be held accountable. That does not mean, however, that the Government are not looking at other means of dealing with activities in the public sector.

As my hon. Friend knows, in some cases the Government have suggested the complete hiving off of activities. An example of this is the proposed establishment of the Manpower Services Commission under the Employment and Training Bill. In other cases the need has been sufficiently met by establishing executive agencies within government and an example of that is the Property Services Agency of the Department of the Environment. In each case we look at the activities of government and try to decide which organisation would be most conducive to the maintenance of its reputation and activities and to the maximum efficiency with which it might be run.

My hon. Friend also raised two questions, and I think my hon. Friend the Member for Dartford touched on this point about how we would regard public dividend capital. It is an important matter because it has recently been considered by the Select Committee for Nationalised Industries and generally speaking we would keep to the outline set out by my right hon. Friend the Chief Secretary when public dividend capital was debated in the House on the 9th August 1972, when he referred to three criteria to be looked into in deciding whether public dividend capital might be suitable.

The Chief Secretary had in mind first, that the enterprise must be viable and must be required to meet specified financial targets. Secondly, there must be an expectation that dividends will be paid, although not necessarily every year, and that the earnings over a period will at least equal the interest that would have been paid on fixed interest capital. Thirdly, there must be genuine fluctuations in earnings from year to year because of the nature of the commercial business undertaking. In fact, the enforcement of the first rule that the enterprise must be viable and must be required to meet specified financial targets will go a long way to meet the criticism which the Select Committee made of the use of public dividend capital in the case of the British Steel Corporation.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

Some people apparently think that the initials PDC mean "payment deferred constantly".

Photo of Mr John Nott Mr John Nott , St Ives

I understand the criticisms which were made by the Select Committee in the case of the British Steel Corporation. But the Government seek in this enabling Bill to give the possibility of the introduction of public dividend capital in any particular trading fund, and with each one we shall study the circumstance with great care to see whether public dividend capital might be suitable. When an affirmative Resolution to set up a new trading fund came before the House it would have the opportunity to consider the matter in detail with regard to a particular organisation. The Government do not by any means say that every single trading fund should appropriately have public dividend capital; what they say is that there should be an opportunity for it in this enabling Bill.

My hon. Friend also discussed the motivation of management. This is a wide subject and I think it would be rash to range too widely over what it is that motivates managers. It is a subject on which there is much disagreement and there might quite easily be disagreement between the two sides of the Committee.

Within the trading funds there will be a strong motivation to run each trading fund successfully and to some extent the promotion of those concerned with a particular trading fund will be very closely involved with the success which they make of their work. They are members of the Civil Service, and clearly if they make a success of running a trading fund, promotion will be open to them in the Civil Service. There are traditions of public service in the Civil Service which are of long standing, and I believe that this tradition of public service, coupled with promotion, will lead to sufficient motivation for the efficient running of these organisations.

The whole question of motivation of management within the public and private sectors is a very large one. We debated it recently on the Finance Bill. I remember it well, and no doubt we might have an opportunity of considering the matter again when the Finance Bill goes downstairs on Report. [HON. MEMBERS: "Hear, hear."] My hon. Friends know to which clauses I am referring.

I come to the questions asked by my hon. Friend the Member for Dartford. His first question was, who would set the financial targets? The target would be agreed between the Minister responsible for the trading fund—in the case of the Royal Ordnance Factories he would be the Secretary of State for Defence—and the Treasury. When the target has been agreed, the Treasury will lay a minute in the House specifying the target for that fund.

That leads me to another question asked by several hon. Members about how the financial targets will work. The process of fixing a financial target will naturally involve making assumptions about the level of prices or charges by the trading fund organisation. In a case where the organisation is a sole supplier to the Government—and most of the organisations are primarily concerned with providing services and goods to the public sector—there will be a direct relationship between the trading fund and Government Departments.

In this case, where we are talking about the fixing of financial targets and prices within the public sector, the principle to be observed will be that the price charged to other Government Departments should reflect the opportunity cost of using the capital. Currently that would mean that the goods sold would be priced in such a way that the organisation would obtain a return of 10 per cent. on the current value of the assets employed.

In the case of those organisations which are in a market situation—the Royal Ordnance Factories, for example, are competing with outside suppliers—the determination of the financial target will plainly be more complex. In a sense it will be related to a pricing and marketing strategy. Clearly the pricing policy of the competitor will be relevant in that case. But in general it will have to be consistent with the proposition that the Government will not invest further capital in a trading fund, as in the public sector generally, unless they can obtain at least a 10 per cent. discounted cash flow rate of return in real terms on that investment. That will be the manner in which the pricing of those trading funds which are in competition with outside organisations will be handled, although the discounted cash flow rate of return varies depending on economic circumstances.

It is intended that the trading funds should earn an adequate return upon their capital assets, and one of the basic reasons for this changeover is that the vote system of finance places all the emphasis on cash flows, whereas a trading fund system will enable us to look at the return on the assets employed.

The second question asked by hon. Friend the Member for Dartford was to what extent would the organisations be able to diversify. The order setting up a trading fund will specify not only the service but the operations on which the Minister can spend money. In other words, it will define the operation with which the trading fund will be concerned. This statement of operation will show what activities may be financed by the trading fund. If we wish to extend the limits it will be necessary to make an amendment to the order which sets out the ambits within which the trading fund will operate.

The question I have answered, namely, about how we shall tend to fix prices where an organisation such as the Royal Ordnance Factories are competing with the private sector.

The fourth and last question asked by my hon. Friend was about the auditing. The accounts will be in a form approved by the Treasury, but the Comptroller and Auditor General will be responsible for auditing the annual accounts of the organisation concerned.

I hope that what I have said allays the fears of the hon. Member for Stoke-on-Trent, Central.

The hon. Member for Dearne Valley asked how we arrived at the figure of £250 million. The borrowing limit for each organisation will be laid down in the initial order setting up that particular trading fund and it will be expressed in terms of the amount by which its total outstanding indebtedness, arising from the initial loan and subsequent drawings, may exceed the amount of the originating debt created by the appropriation of existing assets to the trading fund.

It means that the individual limits applied by order, and the limit of £250 million on the aggregate of such limits—we are referring here to the aggregate of the organisations mentioned in the Bill—relate to the new money which the organisation can borrow from the National Loans Fund and it excludes the debts created by appropriating existing assets which have already been financed out of votes. The provision of £250 million has been drawn up taking account of the known investment plans of the organisations named in the Bill and after making some assumptions about the extent to which it would be possible to finance those investments planned from the receipts of the individual trading funds themselves.

Surplus cash will not be invested in equities. I can allay the hon. Gentleman's fears in that respect. It will be invested within the public sector in Government securities only.

The accounting officer will normally be the manager of the particular trading fund concerned. The accounting officer for the Royal Mint will probably be the present Deputy Master of the Royal Mint. That would be the normal procedure, although it will not be settled until the Royal Mint becomes a trading fund.

I hope that I have covered most of the points that have been raised. If I have not done so, I hope hon. Members will say so. I conclude by repeating that this is a modest Bill which derives from the recommendations of the Fulton Committee. There is nothing very controversial in it because consideration of the proposals now embodied in the Bill was started under the last Administration following publication of the Fulton Committee Report. We have done a great deal of work on the matter since

THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:
Elliot, Captain Walter (Chairman)Parkinson, Mr.
Armstrong, Mr.Reed, Mr.
Cant, Mr.Rees, Mr. Peter
Dunnett, Mr.Ridley, Mr.
Green, Mr.Trew, Mr.
Murton, Mr.Wainwright, Mr. Edwin
Nott, Mr.

coming to office, but there is little difference between the two parties on this matter.

Question put and agreed to.

Resolved,That the Chairman do now report to the House that the Committee recommend that the Government Trading Funds Bill ought to be read a Second time.

Committee rose at ten minutes to Twelve o'clock.