Nationalised Industries (Accounting Practice)

– in the House of Commons at 12:00 am on 1st August 1978.

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9.42 a.m.

Photo of Mr Michael Neubert Mr Michael Neubert , Romford

In April of last year the price of gas was increased by 10 per cent., against the wishes of the British Gas Corporation, and certainly against the wishes of British gas users. In order that that should come about it was also necessary for the price code to be waived by the intervention of the Secretary of State in a way that, until that time, had had no precedent.

The reason for that unusual decision was a significant straw in the wind, because the purpose of gas being increased in price in this way was to improve the industry's own self-financing ratio and enable it to pay its debts faster, but, more importantly, to reduce the Government's excessive borrowing requirement as a condition of continued International Monetary Fund support. So we had for the first time an increase in the price of a nationalised industry's services being sanctioned within the provisions of the then price code to reduce the Government's own borrowing requirements.

That being so, it was no surprise that when, in July 1977, Professor Carter of Lancaster University came to review the operations of the Post Office, he included in his report, which was published last year, para. 13.25 where he said: With the Government anxious for the Business to achieve a high self-financing ratio to reduce the PSBR and with the Telecommunications Business itself anxious to achieve a high self-financing ratio in order to be more independent of Government intervention there is every reason to fear that the public will be overcharged. It is that concern which leads me to raise the subject of the profits of public monopolies in the debate this morning.

It is quite clear that we have to be a little more sophisticated in our attitude to nationalised industries than we have been in the past. Previously, it was the practice to regard them as deficient, as often making a loss, being a drag on the national economy and something we had to accept on sufferance. It may be that there is an easy political point to be made, that now that some nationalised industries are making profits it is no time for those who were deploring their losses to be complaining. But that would be facile, because one has to make a distinction between those nationalised industries operating in a declining market, such as British Steel and British Rail, and those industries which have a substantial, if not exclusive, monopoly in central growth sectors, particularly energy and communications.

As an illustration of a trend which is developing, and which was pre-notified by that unnecessary increase in the price of gas and Professor Carter's warning I intend to cite the industries providing gas and electricity and the Post Office providing postal and telecommunication services. Again, it was within the auspices of the Price Commission that a warning came of the new practice. In a report on the South of Scotland Electricity Board, the Price Commission revealed: Nationalised industries are overcharging consumers by hundreds of thousands of pounds every year". The Commission criticised the accounting methods used in the public sector, described these methods as "irrelevant" and as having led that particular small board in Scotland to overcharge by 4 per cent. The Commission went on to say that this calculation is not exclusive to the SSEB and the commission's comments therefore could well be relevant to other nationalised industries. According to the Commission's calculations the South of Scotland Electricity Board, was "overproviding" in the current year by nearly £18 million. Quite rightly, the figures used to achieve that figure are described by the Commission as "arbitrary."

Unfortunately, although the Price Commission might be thought to be in existence solely to restrain excessive and unwarranted price increases, it reveals in this case that it was unable to recommend any restriction on the price increase sought because of the present rules. As a result, the consumer was not protected by this device. That was a relatively small instance of the new Government practice in relation to nationalised industries.

We now come to the more spectacular annual results which have just been declared by other industries in public ownership. First, British Gas has had a tremendously successful year by any standards. It is important to realise that this is not necessarily a surprise, because if one accepts that an industry has a monopoly and that it is able to provide a service which is in increasing demand it can only be gross ineptitude or, alternatively, deliberate policy which brings about its failing to make an adequate profit on its operations.

In the year to 31st March last, British Gas made a profit for the record of £180 million. I say particularly "for the record", because as a result of adjustment to the accounts by the accounting practices adopted, this conceals the fact—I say "conceal" in the sense that it will not be immediately apparent, although I am not suggesting that the figures are not available in the published documents for those who understand them—that the profit without current cost accounting would have been £564 million. That begins to put some estimate on the success which British Gas has had in exploiting its monopoly position.

Using those same techniques, in the year 1976–77 the profits were scaled down from £362 million to £32 million. This can be justified on grounds of inflation, but it is the arbitrary nature of this practice to which I am drawing attention this morning, because if such a practice were to emerge in private industry and it were to be so blatant in the charge it made in the reported results there would no doubt be considerable indignation and concern. Because it is a public industry, there should be equal concern about what is being done.

Turning to the Post Office, which was for so many years a Cinderella operation, again highly successful results are being reported. The total profits for the year just concluded are reported at £367·7 million, an increase of £76·4 million on the previous year. It will be remembered that the Price Commission felt it necessary last year, under the provisions of the previous price code, to require the Post Office to refund £100 million or so of its profits to its consumers. This took place in the autumn of last year, when there was a flat £7 rebate. That, again, was an arbitrary form of refund, but, as I shall contend, it was an arbitrary profit being refunded at that time.

Now that the price code provisions have been relaxed and industries are able to make greater profits, the Post Office—a publicly owned industry—is one of the first to take advantage of that. Its profits, successful as they are and large in scale as they are, are as nothing by comparison with what they would have been if these new accounting practices had not been introduced into this publicly owned industry. The profit of the Post Office of £368 million before supplementary depreciation would have been £718 million. Again, that is an astonishing change in practice between what otherwise might have been reported as the profits and what is being presented today as the profits after allowance in this way for inflation.

I am not arguing that profits should not be adjusted for inflation. I am saying that public industries are being allowed to depreciate in ways which are both arbitrary and different one from another to achieve results which might not be acceptable given the present failure to achieve any agreed standard of accounting.

The Government's attitude seems to he somewhat ambiguous. When they published their White Paper on the nationalised industries at the beginning of April of this year, I tabled a Question to the Secretary of State for Prices and Consumer Protection asking him in what way financial targets for return on capital in nationalised industries differ from similar targets in private industry; what special reasons necessitated his exchange of correspondence … with the Chairman of the Price Commission on this subject; and whether the written undertakings secured from the latter will discriminate to the advantage of the State industries contrary to the provisions of the Price Commission Act 1977. The answer was long and involved. In the course of it the Minister said: The White Paper … makes it clear that the targets will reflect the need for the industries to earn the returns consistent with the opportunity cost of capital, and will encourage the industries to act commercially but not to abuse their monopoly power. By contrast with normal practice in private industry, these targets will not therefore be set to maximise profits."—[Official Report, 17th April 1978; Vol. 948, c. 49.] I emphasise the words these targets will not therefore be set to maximise profits. Yet the letter to the chairman of the Price Commission from the Secretary of State for Prices and Consumer Protection specifically added that he would be grateful if the chairman would consult him if there were any likelihood that the Commission would be suggesting that a particular financial target was set too high. The chairman of the Price Commission gave that undertaking. In other words, the implication is that there is a danger of publicly owned industries being set too high a financial target beyond that which could be justified for private industry in the terms of the Price Commission's remit. I have no doubt that the chairman of the Price Commission felt obliged to consult the Secretary of State before publishing his report on the South of Scotland Electricity Board. The Commission reported that the profits were by its standards excessive, although, as I have explained, it could do nothing about that.

There is the danger to the British taxpayer that if public industries are able to maximise their profits as I have suggested, and to conceal the extent to which they are doing so by arbitrary jumps in accounting adjustments, they will not achieve the minimisation of costs that should be a prevailing and priority consideration in any running of a public industry.

That is the setting against which the issue is raised. In summary, there are four factors to be considered. First, there are the profits, diminished substantially by depreciation provisions. If that had been done in private industry—for example, by a multinational corporation—there would have been an outcry, especially from the Left. However, the silence on these matters is ringing in the eardrums.

As a sop to the undoubted sense of injustice that will be aroused by these large profits after years of either modest profits or even losses, all the industries that I have cited have made some concession to the public by announcing that prices will be held or kept to a reasonable level.

I quote from the leaders of the industries concerned so as to give the flavour of the declarations. On 18th July the chairman of the Electricity Council, Sir Francis Tombs, said: It is with particular pleasure that I am able to let you know some of the details of a new tariff that we intend to introduce from October 1st this year. After years of being forced to announce price increases we can now anounce a price reduction. Cheers from the public, no doubt.

Similarly, British Gas, in its summarised report of its year's activity, had to say: The year's best news for customers was the announcement by British Gas that gas tariffs would stay unchanged at least until April 1979, so long as there is no major increase in the rate of inflation. This has helped to keep down the cost of living. The new chairman of the Post Office, Sir William Barlow, after his reported profit of £368 million, and was able to say: Prices are to be held down until at least the end of the year, and a further provision has been made to hold telephone charges to 5 per cent. below inflation rate for the next five years. Sir William said: This will mean that despite the pressure of inflation, postal prices will not have risen for 18 months and telecommunications prices for over three years. In the face of that seemingly welcome news it may be thought churlish and carping of me to object. All the statements beg the question what the prices were when they were last increased. As I have indicated, British Gas had its prices increased by 10 per cent. last April without its wishing it, so it already has a surplus over its original budgeted prices to cope with inflation over the past year. I am sure that it will be agreed by everybody that the Post Office substantially and excessively increased its telecommunications prices in October 1975 so that it is able to coast along at present prices for a little longer. That is because it went so far over the mark in 1975, causing an increase in the retail price index and an unnecessary rise in the cost of living at a time when it was too high anyway.

To add to the summary of events, the Electricity Council, as opposed to the smaller Scottish board, was able to depreciate its reported profits from £293 million before the supplementary depreciation to £133 million. The Electricity Council has increased its prices substantially in recent years and, largely as a result of Government policy, is dependent on coal as the source of generation of its energy. That is a matter about which the captive consumer can only be concerned and alarmed.

There is then the question of the audit fees paid by the British taxpayer. All these nationalised industries' accounts are audited by firms of great distinction—luminaries of the profession—but each has felt able to support reports by its industry. For the Electricity Council it is Deloitte Haskins and Sells; for British Gas it is Price Waterhouse & Co., and for the Post Office it is Touche & Ross & Co; and Coopers and Lybrand. All have felt able to support the accounts presented. Yet, although these industries have in common the fact that they are in public ownership, they all use different methods of accounting adjustment and depreciation to achieve the final result.

The fourth factor in summary, which is the most important of all, is service. I give only one illustration. It seems ironic that, at the very time when the Post Office was on the point of announcing its £368 million profit for the year, its staff should be rejecting a publicly expressed request for the reinstatement of Sunday collections and the introduction of cheap rate Christmas cards. If the public is to be met with service in response to the price that it is paying and its help in achieving these profits, surely service should play a large part in what is provided. But that seems not to be so in this instance and in others.

My conclusion is that there is a danger of there being double standards for private and public industries. Certainly double standards are being observed for private and public monopolies. We are told that a new standard of accounting will not be in force until at least 1980. Until that time, I contend that these practices within public industries are both arbitrary and, to a large extent, unjusti- fied. What is more, they conceal an expansion of Government expenditure at the expense of the captive consumer. The more that publicly owned industries are able to generate their own resources—they already have considerable cash flows—the more they will be able to avoid coming to the Government for money. That will enable the Government in turn to use their own resources, by way of taxes and borrowing, for other purposes.

The growing reserves which are being built up will mean increasing independence for these publicly owned industries. For example, British Gas has increased its reserves from 15 per cent. to 25 per cent. and the Post Office has reserves amounting to about 40 per cent. of its capital. The profits being put to reserves will make these industries increasingly independent. It follows that they will also bring about an increasing lack of accountability both to this House and to the public.

My warning is that the user of nationalised industry supplies and services is in danger of being taken to the cleaners. The sooner the public realises that, the better it will be.

10.4 a.m.

Photo of Mr Michael Marshall Mr Michael Marshall , Arundel

I think that my hon. Friend the Member for Romford (Mr. Neubert) has performed a signal service by raising this subject. He has put forward a very powerful argument which deserves close study and attention not only in the House but far wider.

The question of the profitability of nationalised industries was raised in the House only last week. The Prime Minister, as reported at column 1794 of the Official Report in answer to a question of mine, conceded that we were getting to a situation where the whole concept of profitability and of accounting, and particularly the policy on depreciation, was leading to total confusion of the true profit pictures in the various nationalised industries.

My hon. Friend referred particularly to the impact of profits on prices to the consumer. I support his conclusions. He has taken a signal interest in these matters. I repeat, his words will repay much further study.

I declare two interests. I am a member of the Select Committee on Nationalised Industries and it has been part of my interests in recent months to look at the reports and accounts of the nationalised industries. This is an ever-growing list. The Energy Sub-Committee now looks at coal, gas, electricity, oil, shipbuilding and steel. It is becoming a year-round activity and the comparability of accounting as reported to the House is an important matter.

My second interest is as parliamentary adviser to the Institute of Cost and Management Accountants. The Financial Secretary will be aware of the Institute's work because it has been helpful to successive Governments and has been especially concerned in the present debate on current cost accounting where it has shown a much more down-to-earth attitude in trying to put across the notion of effective operating data as opposed to the sometimes more sterile viewpoint expressed in historic accounting. The work of Mr. Hyde in the sub-committtees that operate within the accounting standards committee has been notable in this respect and is relevant to our debate.

I want to refer to two aspects that come out from the work of the Select Committee on Nationalised Industries and from the advice tendered to the House and the Government by the Institute of Cost and Management Accountants. The first is the real nature of profit. We all welcome a move to profitability in nationalised industries and we want to see a profit that represents a reasonable return on the taxpayers' money and on the massive debts that many nationalised industries have built up previously. Many debts, such as those of the National Coal Board, have been written off in the past. We shall need to see sustained, but fair, profits before we can say that nationalised industries are paying their way in a reasonable balance between their social obligations and their commercial obligations.

We have now reached a situation where, for a variety of reasons, some fortuitous, there is a degree of competition, certainly in the nationalised energy industries, which are the sector that I know best. When we have this competition between electricity, gas, coal and so on, we should have comparability in pricing policy and a relationship between each industry's profits.

My hon. Friend the Member for Rom-ford was right to point to the objectionable features of artificially forcing up British Gas's prices. The British Gas profit is inflated by the extent to which prices were put up by more than the corporation wished. It has meant that consumers have had to pay more for gas, and hon. Members must often have been reminded by their constituents that many householders have no option with fuel because they live in houses on great estates where the form of energy is already provided. If they have gas fitted, it is wrong not only that the profitability of the British Gas Corporation has been artificially inflated but that the cost to the consumer has been increased by Government dictat.

There are various ways in which the profits of nationalised industries can be overstated in the reports and accounts, but they can also be affected by the way the level of debt has been dealt with. For example, the British National Oil Corporation has found it possible, by the fortuitous circumstances of the nature of its product, to sell forward oil by setting up a charitable company in the Wilmington, Delaware, called Britoil. Its job is to sell forward the output of BNOC. In doing so, it has substantially written off BNOC's National Loan Fund debt to the Government.

The Financial Secretary must receive criticisms about the rates of interest charged by the NLF and the lack of flexibility of nationalised industries in borrowing money from other sources. Here is a way in which the BNOC has effectively managed to get right round that. It has written off most of its debt by selling its product forward. But in doing so—and this is the burden of the charge, again, today—it has given us another example of a nationalised industry which is not only presenting, as I would argue, a figure that needs the most careful scrutiny in assessing the Corporation's true financial worth and situation, but also it has managed to avoid any real accountability to this place. It is true, though, in fairness to the chairman of the BNOC, that the noble Lord, Lord Kearton, did suggest that he would be willing to answer to a Select Committee of this House on the matter at any time.

However, there is now a whole variety of ways in which profit figures and indebtedness can be altered upwards or downwards quite substantially with apparently no major Government monitoring and relatively no opportunity for real debate in this House.

That brings me to the third matter which is of great importance. That is that it is a scandal that the Government's White Paper on the nationalised industries, Cmnd. 7131, published in March 1978, has not been debated before now. It will be within the memory of all hon. Members that it followed a very long period—over two years, I think—in which we had the NEDO report and submissions to Select Committees and all parts of the House from the nationalised industries. There are many matters which require urgent debate by the House.

In fairness to the Government, I am bound to say that there were one or two useful aspects of the White Paper, and particularly the fact that the Government accepted the recommendation of the NEDO that there should be performance indicators which would amplify the success or otherwise of nationalised industries in a wider context than that of the normal historic accounting. For example, in paragraph 78 of the White Paper the Government refer to the fact that in future they will ask nationalised industries to select a number of key performance indicators, which would include, for example, valid international comparisons, and matters such as labour productivity, standards of service and matters where there could be some apparent comparability between one industry and another. In addition, the Government said, rightly, that there should also be an opportunity to show other performance indicators special and peculiar to their industry.

I am very glad to see that the Chairman of the Sub-Committee, on which I have the privilege to serve, of the Select Committee on Nationalised Industries is with us this morning. I think that he will bear out what I am saying on this general question of the way in which these key performance indicators could help the work not only of that Sub-Committee of that Select Committee but of this House as a whole.

Earlier in the White Paper the Government also tried to make another helpful response to the NEDO when they looked at the question of the measurement of results in monitoring in general. That came in paragraphs 48 to 51. In paragraph 48 it was recommended, for example, that the annual report and accounts should include a statement of financial and other criteria and achievement against them. That was, for example, coming back to the age-old question whether there should be a 5 per cent. target return.

Here again we have a whole area in which Government thinking appears to have sunk into limbo. The White Paper requires the most urgent debate. It really is a situation in which the public at large do not know what to think. They do not know what to make of the profit figures. They see prices being jacked up in the case of the British Gas Corporation. They see debts being reduced by ways which apparently are not comparable between one industry and another. They certainly see, as my hon. Friend has said, many opportunities here for operating, in accountancy terms, in ways which would be regarded as unthinkable by Labour Members when talking about private industry.

Therefore, the question that remains in one's mind is what further accountability, both professionally and in parliamentary terms, this House should seek to exercise. For example, the suggestion of audit committees, which the British Steel Corporation intends to adopt, is one that has value. In effect, it stems from ideas put forward in this place.

These are all matters about which the public are right to be worried. If we are not clear as to what are the true profits and debts of our nationalised industries, our consumers will be increasingly resentful towards what they regard as ways of financing the Government through the back door. My final thought is that if we do not address ourselves seriously to this question we are failing to reflect adequately on the question of monopoly, whether public or private. Both have question marks beside them. I oppose public and private monopoly and I welcome the increasing competition in parts of nationalised industries. 'Where there is no competition it behoves this House to bring the most rigorous scrutiny to such industries. We are clearly failing to do that, and the Government are clearly failing to come forward with constructive proposals.

10.16 a.m.

Photo of Mr Robert Sheldon Mr Robert Sheldon The Financial Secretary to the Treasury

The hon. Member for Arundel (Mr. Marshall) mentioned that the figures need scrutiny, and that is always true. Any set of accounts whether in the public or private sector needs both scrutiny and interpretation. The hon. Member for Romford (Mr. Neubert) addressed himself to interpretation of nationalised industries' accounts. He was critical of accounting methods. Anyone who has had recent experience with the problems of industry, private and public, will know full well that most people are critical of the accounting methods used by the private and public industries to deal with inflation. We set up the Sandilands committee in order to achieve some agreed resolution of these problems. No one is satisfied with the present state of private and nationalised industry accounts.

We must ask ourselves, therefore, while we await a solution that will commend itself to the accountancy profession as well as to those who have responsibility in these matters, how we interpret the accounts in the meantime. The motive for the debate is based on the large profits in the gas industry and the prices it is charging. The hon. Member for Rom-ford suggested that the public were being overcharged. He accepted that it was easy to make the political point that there were certain industries such as the railways and steel where losses arise because of the running down of those industries. He said that it was easy to make profits in the growth industries such as energy and communications.

I am grateful to the hon. Member for understanding that these matters are complex and that it is not sufficient to denounce the poor profitability of those industries that have the burdens that he described without understanding the nature of those industries. He spoke of the arbitrary effect of inflation. Of course it is arbitrary. If it were not we could have come up with a much simpler solution than that suggested by Sandi-lands, which at present is being looked at by Morpeth, and without the intervening temporary solution of Hyde.

Since we are in this interim position it is right that I should say something about the problems and targets that we set. The current temporary uncertainty about the way the nationalised industries should present their accounts at a time of inflation is not a simple matter. In future, however, it should not have any real effect on their profits.

In the past prices were rightly determined by accountancy considerations. But the Government's policy, which was set out in the White Paper, is that in those industries with a market position which gives them the opportunity to determine what prices they should charge—as opposed to other industries where the prices are almost completely determined by the market—the key factor is the overall financial target that is set by the Government. That target is a complex amalgam of a number of aims. It is set by reference to such factors as the expected return from the effective management of the assets, by the market prospects of the particular nationalised industry concerned, by the scope that the Government see for improved productivity and efficiency, by the opportunity cost of capital, by PSBR implications, and also by the counter-inflation policy and by social and sectoral objectives.

Altogether, therefore, the pricing decisions—and because of this the profits—mainly reflect economic considerations, to a much wider extent than perhaps the hon. Member for Romford was considering. The role of the accounts is simply to record the effect of these decisions.

We have heard a certain amount of criticism of the level of nationalised industry profits. If I may say so, it has not been clear just what it is that the hon. Gentleman wishes to see. I must say that I felt some sympathy with Sir Derek Ezra who, in a recent letter to The Times, pointed out that an industry was equally liable to abuse if it made big profits, modest profits, or losses. I seem to detect some echo of that criticism, which is rather unfair, in some of the comments that I have heard in recent weeks. He asked what it was that the public expected.

The Government look to a level of real profits which allows the financial targets which I have described to be achieved. We have seen a steady and very welcome improvement in these industries' results over the last four years. Some of them are now making adequate profits, although I do not believe, in the light of what we have seen over the last four years, that any of them can be said to be making excessive profits, especially when we remember the large scale of some of these businesses and the amounts of capital they employ.

I remind the House that it was, after all, the previous Government who, in connection with their counter inflationary policy, kept prices down and incurred very substantial losses indeed for these industries—and there were subsidies as well. I do not think that we are far off seeing profits that are up to our expectations, but we must remember that the profits of these industries generate funds for their substantial investment requirements. So the profits reduce their need to borrow and keep down the burden on the taxpayer.

Photo of Mr Michael Neubert Mr Michael Neubert , Romford

As an illustration of the question, will not the Minister agree that under the present policies of British Gas it is likely to wipe out its debt over three years, which is a scale and a pace which would be quite out of place in private industry and would not be acceptable?

Photo of Mr Robert Sheldon Mr Robert Sheldon The Financial Secretary to the Treasury

Extrapolations of this kind have never been something that I have accepted readily, and I think that the hon. Gentleman, when he comes to think about it, will not accept them so readily either. What we have seen is one year. What we need to see in the future is achievement of our objectives so that the long-term future of the industry may be assumed. I would welcome this, and I assume he also would do so.

The diversity of accounting practices in all industries poses a commercial problem and, of course, this is true of the nationalised industries as well. The confusion is something about which none of us can be happy. There has been a certain amount of critical comment—some of it unfair, I grant, but some of it justified—and it is certainly the case that we are in a transitional period when the business and the accounting worlds have not yet made up their mind about how to reflect the consequences of inflation in their published accounts. When there is no right commercial practice to follow, it is hard to blame the nationalised industries for not producing an agreed and uniform solution. Some have kept, of course, to traditional practices. Some have gone the way of the Hyde report, which allowed for three extra factors. It will be remembered that the Sandilands report suggested the use of 22 factors. The enormous complications of this would be impossible, I believe, for industry in both the public and the private sector. The Hyde route, of course, would be a more limited route of allowing for sales, for depreciation and for gearing. There are problems with that, but they are more readily overcome. Some nationalised industries have gone down that route by issuing supplementary statements, while others have applied different forms of inflation accounting to their main accounts. This has been helpful to the interested observer.

The Government have a clear policy, which was stated in the White Paper to which the hon. Member for Arundel referred. When an inflation accounting standard is eventually approved, it will of course apply equally to the nationalised industries, subject to any adjustment which might be needed to meet their special circumstances. I accept that we cannot live long with the present state of affairs and that if the accounting standard on which the Morpeth group is now working were long delayed, we and the industries concerned would need to consider whether there was not a need for greater consistency, possibly a temporary solution for the treatment of inflation in their accounts.

For the avoidance of doubt, let me reaffirm what my colleagues have said on previous occasions—that the Government whole-heartedly support the concept of current cost accounting in the private and public sectors, and that the present confusion must be seen in perspective as a temporary and short-lived phenomenon which will have to be regularised not only for the public but for the private sector.