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24 Feb 2003 : Column 76—continued
6.51 pm
Mr. Andrew Lansley (South Cambridgeshire): I am glad to have the opportunity to contribute to the debate and to follow the hon. Member for Angus (Mr. Weir). Although it has been a short debate on a short Bill, it has had some substance. I hope that I can add a little more in its latter stages, although I fear that other hon. Members have already had the better of the arguments.
I do not want to take the hon. Member for Angus to task too much, but as he recited the statistics on the decline over time in the amounts that have been spent by way of regional selective assistance, or regionally differentiated Government grants, I felt that it was a case of "never mind the quality, feel the width"—that what mattered was how much was spent, not whether it was spent effectively.
My hon. Friend the Member for Sevenoaks (Mr. Fallon) referred to a change in the shape of regional assistance that took place many years ago. It makes me feel rather old to say so, but I was there at the time, sitting in an office of the part of the Department of Trade and Industry that administered the regional development grant scheme. In late 1981 or early 1982, the cheque to BP was signed BP for Sullum Voe. We handed over £110 million—if my memory serves me right—to pay BP for doing something that we knew it had to do and that it knew it had no choice about doing. My hon. Friend was right to say that that is how the jobs test first arose; I worked on precisely those issues. I am afraid that the whole experience jaundiced me in relation to the continuing efforts by Departments—the
DTI in particular—to seek to influence outcomes by ever more sophisticated mechanisms for intervention. The more sophisticated those mechanisms become, the more complicated become the ways in which markets are distorted as a result.
Adam Price: I am following the hon. Gentleman's argument with interest. We are of course aware of the problems of dead weight in relation to the regional development grant, but does he accept that many companies are deterred from applying for regional selective assistance because of its discretionary nature and the amount of time that they have to take to go through the application process with no guarantee of getting any funds at the end of it?
Mr. Lansley: Yes, but I do not want to go too far down that track because, as I freely confess to the hon. Gentleman and to the House, it is some time since I have been involved in assessing such matters. The last time would have been in 1987 or thereabouts, when I was secretary to, if my memory serves me correctly, the science and technology advisory board, and we were trying to assess additionality. The hon. Gentleman is right that the dead-weight issue was key to that, in that we were trying to assess the additionality of the schemes that were presented to us, which is precisely the mechanism that is applied to regional selective assistance. At least in theory, if a project cannot demonstrate additionality it should not receive support. I was only too painfully aware of the inadequacy of our scrutiny mechanisms for trying to determine what was genuinely additional.
As soon as I left the Department of Trade and Industry for the industry side, I began to talk to business men who were willing to tell me about the ways in which they had, in effect, made assumptions about the availability of Government support. Some companies—no names, no pack drill—had a portfolio of schemes at the margin of their capital investment programme, which, although they did not regard them as having any particular economic justification, they reckoned they could put to the Department of Trade and Industry so that one or two would get through and add to their capital investment programme in such a way that the cost was reduced. In that case, technically speaking, additionality is met. Funding projects the economic viability of which has not satisfied the internal analysis of the companies concerned raises questions about the overall economic value of such projects. The money that funds them is not cost-free—it comes from the pockets of taxpayers and from the business contributions that my hon. Friend the Member for North-West Norfolk (Mr. Bellingham) talked about. The £47 billion of extra taxes that business pays is partly directed to the pockets of the DTI for it to put into projects that are sometimes of dubious economic viability.
It is therefore terribly important to have an underlying rationale for what one is doing as opposed to having some spurious theoretical justification and trusting in the scrutiny mechanisms of the industrial development advisory board, the investment committee, or whatever grand title it will have within the Department of Trade and Industry. People of great weight and merit will consider the issues, but they will not always get it right—too often, they will get it wrong. The question is, "What
are we trying to achieve?" We should not be in the business of simply trying to identify areas that could be the subject of financial assistance, then adding to the capacity of industry by the application of subsidies—there must be a rationale. When my hon. Friend the Member for Sevenoaks talked about underlying theoretical justifications for such assistance, he missed out what I understand to have been—if not in 1982, shortly after 1982—the intellectual justification for such assistance schemes: that we are trying to remedy market failures. As I understand it, that was the basis on which matters proceeded after 1982. One might say that, in individual cases, an assistance scheme can remedy any market imperfection in the sense of saying, "Here is a scheme with economic justification that is not going ahead because there is not sufficient capital available to support it." However, it is not the Government's role to be that specific at the micro level, but to identify systematic market failures and to seek to remedy them. The shape of the Department of Trade and Industry's programme should properly be directed towards the stimulation of competitive intensity and competition. Other Bills—we shall discuss one tomorrow on communications—are designed to stimulate that kind of competitive intensity. The risk of rolling forward section 8 is that competitive intensity will be undermined if the schemes that are supported under it do not clearly address some form of market failure. That brings me to the point that my hon. Friend the Member for Sevenoaks and I have discussed in relation to the small firms loan guarantee scheme. The SFLGS is justified only if a market failure remains in the provision of small-scale finance to unsecured businesses. That varies over time and it should not be assumed that such a failure will continue for ever. The Bill's underlying assumption is that such matters simply roll forward into the future and that we must take the same actions for ever.Evaluation is therefore important. We should evaluate the measure continually to ascertain the justification for continuing a scheme such as the SFLGS. The small business lobby's support for its maintenance—we all support it in principle—is not a justification. With great respect to the small business lobby, of which I was a member, it will always say, "Here's a jolly good scheme for helping our members." Nobody will say, "Get rid of it." However, a scheme is justified by objective evidence, not lobbying. We should not respond to the lobby rather than the evidence.
The hon. Member for Twickenham (Dr. Cable) and I had an exchange about the SFLGS. We may have done the Department a disservice when we emphasised the importance of the evaluation of the scheme being in the public domain. The hon. Gentleman wondered whether the evaluation had been undertaken. I do not know how recently the scheme was evaluated, but the results should be made public—and, indeed, I find that the figures for the defaults are in the public domain.
Figure 6.2 in the Department's annual report covers the information and tells us that approximately between £34 million and £40 million in respective years has been lost through the value of demands against the guarantee. If £250 million-worth of loan guarantees are being offered in a year, one in six—perhaps slightly more—loans default. I have no basis on which to judge whether the figure is correct. For the reasons that I outlined earlier, if all loans succeed, one is probably
taking insufficient risk whereas if too many default, one is probably taking excessive risk. I have no means of judging where the balance should be struck; serious academic work is necessary to get that right.I have tried to show the importance of objectively understanding the market failure that we are trying to resolve. When one compares receipts by way of interest for the SFLGS with defaults, it is apparent that the scheme costs money. It is not like bank lending. Clearly, there is a level of lending to specific small firms that banks and financial institutions would not undertake on the same basis. The receipts suggest premiums of 2 per cent. or 3 per cent. rather than the 0.5 per cent. or 1 per cent. premiums that currently have to be charged.
The scheme means a substantial benefit to business in the context of a proper market failure. It prompts the question whether businesses that are that risky should be willing to pay so great a premium to justify the level of borrowing. Perhaps that point is too detailed to consider now. It is certainly too late in our proceedings for hon. Members other than the Minister to respond to it, so I shall simply leave it hanging.
It is important to bear in mind the purpose of section 8. It should not be used to engage in the politically driven restructuring of companies or industries, but should be narrowly confined to operations that are necessary to fulfil some significant social need, such as the employee redundancy support for the coal industry. We have argued about the Post Office reinvention programme, which would be more properly titled the Post Office closures programme. We have debated its extent and nature elsewhere, but there is no doubt about the likely reduction in the number of post offices in urban areas and financial assistance may be required for that.
The debate shows how things have moved on. If we go back 15 years, when I prepared the budget for the Department of Trade and Industry, we would calculate the Post Office's negative external financing limit and its contribution to the Department's finances and associated nationalised industries. Nowadays we consider ways in which the Department can find mechanisms for recovering money and paying it through section 8 assistance to the Post Office. That is a worrying change, and a large part of the justification in the next couple of years for the additional financing availability.
Earlier today, the Secretary of State tabled a written statement, to which she referred in the Chamber, on the affairs of British Energy after the agreement with shareholders that was concluded a week ago. I am not clear whether the continuation of the loan to British Energy will be achieved legally by statutory cover under section 8. Clearly, it relates directly to the reorganisation of an undertaking in an industry and therefore appears to have the appropriate statutory cover. That has not been necessary until now, because the loan has been from the contingency fund and is to be repaid before the end of the financial year. It is therefore not necessary for section 8 to cover it. However, a longer-term loan is different. Perhaps the Bill is necessary to deal with the affairs of British Energy, provide loans to it or meet its
liabilities. I would be interested to learn whether that constitutes one of the undisclosed reasons for the further limit.Let us consider regional development agencies. The Minister spoke earlier about the availability of section 8 assistance to the Welsh Assembly through the block grant. That does not require the Treasury's consent. We have created a mechanism whereby, despite the cumulative total that is allowed for expenditure under section 8, the Treasury does not have fingertip control over precise amounts. In so far as it is confined to the Welsh Assembly, perhaps the amounts are not large and it does not have a great impact on the overall totals. However, I am not sure whether the Government have substantially changed their mind about the greater freedoms to regional development agencies or assemblies.
If we already have a single pot for RDAs, which effectively control the budgets for some purposes, including the Small Business Service, I presume that part of section 8 assistance can be spent through RDAs. To what extent are section 8 powers available to RDAs? To what extent can RDAs transfer money from budgets that were previously under a statutory provision different from section 8? There may be much greater variations in the amounts being spent on section 8 through action by RDAs without the Treasury's consent. I do not believe that they are required to have the Treasury's consent to move money between different budgets in their single pot.
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