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Baroness Rawlings moved Amendment No. 3:

Page 8, line 6, at end insert--
("(7) No securities shall be issued to any third parties unless--
(a) the proposed balance sheet of the Corporation, as at the date of issue of the said securities, has been laid before Parliament; and
(b) a motion in favour of the issue of such securities has been approved by each House.").

The noble Baroness said: The effect of Amendment No. 3 to Clause 16 is that the issue of securities to third parties is conditional upon Parliament having the opportunity to express its view on the proposed balance sheet. In other words, the issue of securities is conditional on the approval of Parliament. The reason for this is simple. At Second Reading, both myself and my noble friend Lord Howell of Guildford stressed the importance of a strong and attractive balance sheet as regards the success of the public/private partnership.

Let me remind the Committee of his words,

"The absolute key is that it should have a strong balance sheet, one that is not undermined when the going gets rough again, as inevitably it will".

I asked a number of questions as to how this is to be achieved. The Minister said:

"Filing will be immediate and the restructuring of the balance sheet will take place as soon as possible".

However, the Minister was not able to give us an idea as to how this would be achieved other than by a schematic, not so simplistic, hypothetical example.

I cannot believe that the DFID and the CDC do not have a pretty clear idea of what they want to achieve at this stage. If they do not, why is that the case? Or, are they bogged down in discussions with the Treasury and the Inland Revenue?

Furthermore, we believe that Parliament must have a say not only in enabling the privatisation to take place, but also in the privatisation itself. It is not acceptable to argue that although it is justifiable to require parliamentary involvement at this point that is not practical because of commercial sensitivity and timing. The preparation for an issue of securities involves the launch of a prospectus and takes up to six months, during which time this parliamentary procedure could easily take place.

At this point I would like to add in relation to Amendment No. 2 that before Clause 16--which is central to the Bill, as it concerns the requirement to issue securities--is built into the Bill, it should be made sufficiently flexible to take into account market conditions and other such factors.

We all agree that the CDC is a healthy organisation. However, we are concerned about the degree of readiness to operate in a manner more akin to that of private enterprise. As the noble Earl, Lord Cairns, said at Second Reading,

"many co-venturers from the private sector have perceived CDC as insufficiently financially motivated to make CDC a welcomed partner".--[Official Report, 7/12/98; col. 728.]

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It is clear that CDC has to undergo a change in corporate culture and practices. It must do so in order to be able to increase returns significantly and to be perceived to be sufficiently financially driven to be an active partner in the private sector.

I understand the Government have already sought professional advice concerning private sector interest in the public/private partnership. Would the Minister not agree that a review of the cost structure and operations of the CDC would be helpful both in reassuring private investors and in helping the CDC effect the corporate culture of transformation? I beg to move.

3.45 p.m.

Lord McIntosh of Haringey: Let me begin again by saying that we have a great deal of sympathy with the intention behind the amendment, which is to ensure that the capital structure before the introduction of private capital should be all above board, if I may put it that way--although, as I shall explain, I do not believe it is entirely appropriate that it should be subject to parliamentary approval. I shall give chapter and verse to show why that has not happened in the past.

First, the noble Baroness picked me up on a word that I used at Second Reading which I acknowledge was not entirely appropriate. I said that we would move to filing "immediately" whereas what we intend, of course, is "as soon as is practicable". Here we are in danger of getting into semantics, but if the Committee will forgive me, it is important, at least in my thinking, that we should get any potential conflict out of the way.

It might seem that a duty to do something immediately has to be complied with more quickly than a duty to do it as soon as practicable, but in the context of laying a statement before Parliament the two expressions come to the same thing. "As soon as is practicable" is an onerous duty. The only circumstances that would justify a delay are those that make it impracticable to lay the statement, not those that merely make it difficult or inconvenient or place a strain on resources. In plain language it means "as soon as you can". The message is very clear: this is not a duty that the Treasury or the Secretary of State or, in practice, their officials can choose to ignore or leave to another day. Since guarantees are not lightly given on the spur of the moment, officials usually have plenty of time to prepare the statement in advance and ensure that it was laid quickly after the guarantee was given.

"As soon as practicable" is a well-defined, legally precise phrase imposing a legal obligation as soon as it is feasible, having regard to all the relevant knowledge, circumstances and resources. On the other hand, "immediately" gives a full sense of needing to be complied with sooner. That is why I apologise for the use of the word "immediate", on which the noble Baroness picked me up in her speech.

She also thought that I was insufficiently precise about the process of financial restructuring in the example that I gave. I am sorry about that. Let me try to be a little more helpful to her. As she will recognise, the balance sheet needs to be restructured to reflect the format of a Companies Act company and establish a

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suitable financial structure for CDC to move forward. The format of a Companies Act company essentially recognises the ownership of the company by its shareholders and draws a distinction between the two principal funding sources available to the company to support its operations, debt and equity. CDC's current balance sheet merely reflects the historical funding that it has received from the Government in the form of loans.

CDC currently does not have any share capital. Once it is restructured, CDC will be in a legal form which will provide a vehicle for the introduction of private sector capital through the sale of shares and the function of debt. This in turn will establish a more appropriate financial structure for CDC and provide a cost of capital over and above which CDC must generate a required return.

The restructuring will be achieved by initially converting a proportion of CDC's historic loans from the Government into share capital which will be owned by the Government and held by the Secretary of State as nominee. The conversion will be achieved by the waiver of existing loans made by the Government in return for the issue by CDC of new share capital. All the share capital initially issued by CDC will be owned by the Government.

The new balance sheet will also contain loans from the Government on commercial terms. The amount of these will be set to balance the need for capital efficiency with an appropriate degree of risk and to allow the business to grow in the future. Post the partnership CDC will be able to raise the funds it requires to support its ongoing operations by borrowing from the private sector on commercial terms.

The Bill allows the Secretary of State to waive loans made to CDC while CDC remains wholly owned by the Government. Since the Government will initially own all the share capital in CDC, there will be no loss in value through the waiver of these loans, simply the substitution of share capital for the existing loans. When the Government subsequently sell part of their shareholding they will effectively receive value for the financial support they have provided to date.

I hope that that gives a little more detail about the cost structure about which the noble Baroness asked.

Lord Redesdale: We have talked about the changing of loans into share capital. Do the Government have any indication of what percentage of the share capital the Government will be taking with this transference of loans in the future CDC?

Lord McIntosh of Haringey: That is a matter which will not be decided only by the Government. It will be decided by the Government together with the potential private partners. It is, therefore, really too early to make an estimate. Clearly, the higher gearing from private capital that can be obtained in the form of equity, the more money there will be available for investment in emerging economies, which is the ultimate objective of the whole exercise. However, one cannot anticipate the level or the percentage at which that figure will come out.

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Turning now to the wording of the amendment of the noble Baroness, she is asking that the proposed balance sheet should be laid before Parliament and approved under the affirmative resolution procedure. I suggest that it is impossible to draw up a balance sheet on the date of issue of securities, as suggested in the amendment, because transactions affecting the balance sheet will take place throughout the day. Requiring parliamentary approval for the issue of securities is not practicable in terms of the timetable. These are things that happen virtually all at one time. The amendment would undermine the ability of the Government to negotiate a deal.

In any case, although the issue of securities may be part of the capital structure, it is not the whole part. There could be, for example, a waiving of debt at a different time. Financial restructuring will balance the need for capital efficiency with an appropriate degree of risk. What we are doing here is not new; provisions of this kind have been included in other legislation dealing with statutory corporations being turned into plcs without further parliamentary scrutiny. In any event, I emphasise to the noble Baroness that there will be a prospectus, or some other similar sales document. There would have to be one, although that does not need to be on the face of the Bill. The objectives could not be achieved without a prospectus and that would include the relevant balance sheet information.

I suggest to the noble Baroness that it would be unprecedented for Parliament to be involved in approval either of the prospectus or of the balance sheet, as is proposed in this amendment.

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