Government Trading Funds Bill

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

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Photo of Mr John Nott Mr John Nott , St Ives 12:00 am, 19th June 1973

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