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.