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Export Guaranteesamendment Bill

Volume 888: debated on Wednesday 12 March 1975

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As amended ( in the Standing Committee), considered.

New Clause 1


Government Amendments Nos. 3, 4 and 11 and the proposed amendment to Amendment No. 11, in line 3, at end add

' but subsequent to 20th February 1975 '.

and Government Amendments Nos. 12 and 13.

On 20th February, my right hon. Friend the Secretary of State announced that, in view of the difficulties facing major capital goods exporters, an amendment would be introduced to the Export Guarantees (Amendment) Bill. This would provide some measure of protection to such exporters by partially covering them against a higher than expected rate of inflation.

Before I refer to the details of the clause, there are one or two general points I should like to make. During the Second Reading and Committee stages of this Bill, many Opposition Members referred to the particular and serious problems facing capital goods exporters and main contractors and to the need for some measure of Government assistance. I believe that the measures which will be introduced as a result of this clause will provide this assistance and that they will be generally welcomed by both sides of industry. I am conscious that some may feel that they do not go far enough, but this is a point to which I shall return.

The decision to introduce this kind of arrangement is not one which the Government have taken lightly. British exporters of major capital goods have been at an increasing disadvantage compared to those who enjoy some measure of protection from their governments against high and unpredictable levels of price changes. As the House knows, successive British Governments have long tried internationally to persuade others to discontinue their practice of indemnifying their exporters against rises in costs. Despite making clear in these representations that we might otherwise have to give British firms some similar support, 1 regret to say that these efforts met with little success. The Government feel, therefore, that the time has come to provide assistance to those United Kingdom exporters facing the most serious problems.

The precise details of the scheme are being drawn up as quickly as possible, and we hope that they will be finalised by the time the legislative process is complete. Discussions are already in progress with industry between Government Departments. However, the broad principles of what we contemplate are clear.

Essentially, the scheme is designed as a temporary measure to meet the abnormal difficulties of cost inflation. We certainly do not see the scheme becoming a permanent feature of ECGD's facilities and services.

The scheme certainly involves assistance to exporters, but with the specific aim of restoring their competitiveness in the major capital goods field. It will thus be confined to this field where the need for help is most serious and pressing. What is more, it is not a blank cheque or an open-ended commitment to pay irrespective of the level of cost inflation. In practice, it will contain positive incentives for exporters to control their cost increases which exporters unavoidably incur. It will also contain a specific incentive to exporters to go for cash contracts which immediately benefit the balance of payments as opposed to credit contracts.

In drawing up the scheme regard must of course be paid to one point I made during my speech opening the Second Reading debate—namely, the difficult, but inescapable, problem of striking a balance between the support and promotion of exports and the cost of doing this. We believe that the guidelines set out by my right hon. Friend the Secretary of State for Trade represent a reasonable balance.

With the need to strike this balance very much in our minds, we have decided to exclude production line goods from the scheme. Restriction of the scheme to major capital goods contracts inevitably raises problems of definition. These will not be easy to solve, but I am now consulting my colleagues and industry with the aim of establishing sensible guidelines as soon as possible.

Let me now turn to the clause. This is widely drawn and there are a number of good reasons for this. Details of how the scheme will operate are still being worked out. I do not apologise for my right hon. Friend announcing the scheme in principle before all the details had been finalised. Evidence was reaching the Government that British firms were beginning to hesitate to sign a number of major capital goods contracts in highly important markets because of the insurmountable problems from unpredictable upsurges in their costs. It was necessary to give them some reassurance rapidly. There was an element of psychological stimulus here which, when we come to look back, may well prove to have been just as important as the precise details of the scheme.

In addition, there is, I think, a real need for the powers to be drawn in such a way as to enable ECGD to be able to react flexibly and quickly to changing situations.

Subsection (1) enables the Secretary of State, acting through ECGD, to make arrangements for making payments to persons carrying on business in the United Kingdom who have entered into export contracts. For the purpose of this Bill the term "export contract" means a contract in respect of which guarantees have been or can be given under Sections 1 or 2 of the 1968 Act. In other words, arrangements may be applied to contracts which ECGD has not in fact guaranteed but would be able to do so. The payments will relate to such increases in the cost of labour, materials or other matters as may be specified by or under the arrangements. These arrangements must be for the purpose of encouraging trade with other countries and can be made only with the consent of the Treasury.

In practice, therefore, the Secretary of State, via ECGD, will have discretion both in terms of the contracts "covered" and on the terms of the arrangements made. This is, I think, desirable for all kinds of reasons, not least to reflect the points that I have just made.

The term "arrangements" follows the use of the same term in Sections 1 and 2 of the 1968 Act and in Section 1 of the 1972 Act in relation to overseas investment insurance. The arrangements will in practice be embodied in a formal agreement in each individual case with the persons concerned after discussions and negotiations with ECGD.

The scheme will apply to major capital goods contracts with an individual value of £2 million or more with manufacturing periods of two years or more. Exporters will have to bear or pass on to buyers at least the first 10 per cent. per annum of increased costs, but the Government will then cover 85 per cent. of eligible

The restriction to 85 per cent. or 90 per annum band above that minimum level. In the case of cash contracts this protection will be increased to 90 per cent. within a 15 per cent. per annum band.

The restriction to 85 per cent, or 90 per cent. within the band provides some incentive to exporters to try to control their costs. The wider band of 15 per cent. for cash contracts, rather than credit contracts at 10 per cent., gives an incentive for the exporter to try for cash payment rather than to offer credit terms. Cash payment produces a quicker return to the balance of payments and the absence of credit also avoids the need to provide fixed rate finance at the special export rate. The fact that the 10 per cent. thres- hold is a minimum means that the band of cover can float. The exporter can take cover from 10 per cent. to 20 per cent., for instance, or he can choose cover from, say, 13 per cent. to 23 per cent. or from 18 per cent. to 28 per cent. He therefore has a further incentive to pass on the maximum possible amount of cost increase to overseas buyers.

Payments under the arrangements will be related to such increases in the cost of labour, materials and other matters as may be specified by or under the arrangements.

10.30 p.m.

The hon. Gentleman is reading what he has to say, and, as always, is reading it carefully. But it is difficult to catch exactly what he says at the speed at which he is reading it. Could he explain in his own words the percentages to which he is referring?

I apologise for perhaps going a little too quickly, but I thought that most hon. Members here had served on the Committee. However, obviously some did not.

I shall read out the percentages again for the benefit of the House. Exporters will have to bear, or pass on to buyers, at least the first 10 per cent. per annum of increased costs. But the Government will cover 85 per cent. of eligible cost increases above that level, within a 10 per cent. band above that minimum level.

The 10 per cent. threshold before the Government start bearing a share of the eligible cost increase is a minimum figure, so the exporter could choose to have 85 per cent. of his eligible cost increases met between, say, 10 per cent. and 20 per cent. or if he took a different view about the course of inflation or his ability to pass on his cost increase to overseas buyers, he could have a band from, say, 15 per cent. to 25 per cent. He would bear or pass on the first 15 per cent. in that case, at his own choice, and 85 per cent. of the difference between 15 per cent. and 25 per cent. of eligible cost increases would be covered by the Government.

This is a rather complicated matter. Does the hon. Gentleman say that the option will be at the beginning of the manufacturing period or at the end? In short, is he saying that the manufacturer may take a different view of the expected rate of inflation from the Government?

The manufacturer may well take a different view of the percentages that will have to be entered into at the time of entering into the arrangements with ECGD—in other words, at the beginning of the manufacturing period.

There appears to be an anomaly, in that in Clause 1(1 )(a) there is a reference to persons who have entered into export contracts. That wording does not appear in the 1968 Act. There seems to be an implication that customers must have entered into export contracts, whereas the 1968 Act and previous Acts relate to people carrying on business. Is there an implication that this is a different formula, or that this type of export credit guarantee can be given only after the contract has been entered into?

The arrangements will be discussed between ECGD and the exporter at the time when the exporter is considering entering into an export contract in an overseas market. He will obviously want to know roughly what sort of support he is likely to be able to receive, and whether any contract he enters into will be eligible under this legislation. It will have to be done at the time when he enters into the contract, because the arrangements must apply for the purpose of furthering trade and exports. If an exporter has entered into a contract already there is no incentive to furtherance of trade in subsidising him, if that is what we are doing as a result of the introduction of this mechanism. It is only if this will make a difference that we shall be furthering trade.

I completely agree that that is what one would logically expect. I am only surprised that the Bill is not worded in that way.

I assure the hon. Gentleman that that is the intention. Perhaps I may return to the point later if there is still doubt about it.

In the individual contract, the escalation cover will relate solely to net increases in the amounts of the specific categories of variable United Kingdom costs which right at the outset have been identified by the exporter and accepted by ECGD. These categories are, essentially, his raw materials, components and labour costs. It will not cover his profits. The maximum rate of cost increases which can be covered under the scheme must be verifiable against some generally accepted independent index or formulae. Where in a particular trade it is the usual practice to base cost escalation clauses in contracts upon some well established and representative market indices, ECGD will normally expect to follow that practice although it would wish to satisfy itself that to do so would conform to the principles of the scheme. In other cases it may be necessary to use the Government's own published indices of movements in materials and wage costs for the industrial sector in question. However, whatever the precise index used in the individual contract, the exporter will not be able to claim more than the rise shown by that index, even though his own costs on that particular contract may actually have risen faster. Furthermore, if his own costs rise by less than the index, his entitlement will be limited to that lesser amount as evidenced by independent certification.

In this connection, I should make it clear that it would not be possible for ECGD to vet each case in fine detail without setting up a small army of inspectors, whose activities could be guaranteed to increase industry's costs still further. However, the Department will have the right to check, which it intends to exercise in a proportion of all cases as well as whenever it considers it necessary in a specific case. There is certainly no question of exporters writing in whatever cost increases they please. Because they will be meeting 15 per cent. of cost increases within the band of cover they will in fact have an incentive to hold their costs below the index level. Settlement will normally be made at the end of the manufacturing period, when it is clear how their costs have actually risen.

I understand the Minister to say that the responsibility for vetting what are the bona fide cost increases lies with the ECGD, but I understood him to say earlier that it is not necessary to have an ECGD credit in order to be able to qualify for this particular piece of export benefit. In the case of an exporter who has not got export credit, who does the vetting?

It would certainly still have to be the ECGD, because the exporter would be entering into a separate arrangement with ECGD. Even if he is not making use of any ECGD facilities in any other respect, he would be making use of them in this respect if he wished to take advantage of this cost escalation scheme. As public expenditure is involved, it is only right and proper that there should be some check, and we believe that the ECGD, with its widespread knowledge and contact with industry, is the most appropriate and the best body to do this.

Subsection (2) provides that the arrangements may contain such terms and conditions as the Secretary of State thinks fit. This follows similar provisions in relation to loans and grants in Clause 1(3). This subsection also empowers the inclusion in the arrangements of provisions requiring payments as consideration for entering into the arrangements. This will enable a premium to be charged for these facilities.

A flat-rate premium will be payable. It will be calculated by reference to the manufacturing period of the individual contract. At the end of the day, the net cost of operating the scheme will turn on how much industry's costs do in fact escalate over the next few years, the form of cover taken by exporters and, above all, on the success of the scheme in encouraging additional exports. However, it would be quite wrong to pretend that the scheme can in any sense be operated on a self-balancing insurance basis. It would, for example, be not only difficult but counter-productive and therefore most unwise to try to balance expenditure by making exporters pay ECGD if their costs proved to be lower than expected. In financial terms, therefore, this is essentially a one-way scheme. For this reason, it will be accounted for quite separately from ECGD's other operations. Payments under it will not, therefore, affect ECGD's reserves or the premiums which the users of its other facilities have to pay.

Subsection (3) contains the normal financial provisions. Expenses incurred in connection with the arrangements are to be defrayed out of moneys provided by Parliament while sums received, for example, premiums, are to be paid into the Consolidated Fund. This provides Parliament with control over the moneys since such moneys will have to be voted.

Subsection (4) provides that no arrangements shall be made after the expiry of two years from the date when the Bill becomes law.

The hon. Member is raising so many points that they could be embodied in a completely separate Bill. He is saying that this is not an insurance scheme at all. If so, why did the Secretary of State for Trade say in his statement :

"A Government amendment will accordingly be introduced to the Export Guarantees (Amendment) Bill to give the Export Credits Guarantee Department the necessary powers partially to insure exporters against a higher than expected rate of inflation."—[Official Report, 20th Feb. 1975 ; Vol. 886, c. 1566.]
The Minister has just said that it is not an insurance scheme at all. Further, he is saying that a premium will be charged. There must be some Government expectation as to what the rate of inflation will be over 10 per cent.

An insurance scheme involves some sort of spread of risk. There is no spread of risk in present and foreseeable circumstances. In other words, if inflation went down to a minus level, there might be a spread of risk and if the scheme were self-balancing in that way, with exporters paying if the rate of inflation was below zero—a negative rate —the Government would benefit. We cannot operate the scheme on that basis because it is obviously not within the bounds of practical possibility. The hon. Gentleman's second point was on premiums—

I still do not understand why the Secretary of State referred to it as insurance. It is not insurance. My second point was simply that the Minister says that there is to be a premium. That must, presumably, be related to some estimate by ECGD or the Government of the risk involved, which in turn involves some assumption about the rate of inflation. What rate of inflation is being assumed?

Dealing with the hon. Gentleman's first point, my right hon. Friend was using the word "insure" in a different way from that in which the hon. Gentleman uses it in referring to an insurance scheme. Someone can be insured against the possibility of something happening, which is what the scheme does. We are ensuring that exporters will not have to meet all the extra costs as a result of an excessive or particularly high rate of inflation over the next few years. My right hon. Friend was correct to use the word "insure ". It is not an insurance scheme in the actuarial sense of the term—which I think was the way in which the hon. Gentleman was using it—whereby there is a balance of risk as between the party who is being insured and the insurer, with the insured paying an annual premium against some risk, such as burglary or the loss of his car. Here the risks are all one-way.

The lion. Gentleman's second point concerned the premium. That will not be related to an assessment of the payout under the scheme. It will have to be related partly to the exporter's liability and partly to the costs of operating the scheme. We want to ensure that the ECGD is not out of pocket on its administration. It may be necessary to take on a few extra staff to deal with the checking that may be involved from time to time. Therefore, the premium will basically relate, not to the scheme as an insurance scheme, but to ECGD administration costs.

I have said that the flat-rate premium will be calculated by reference to the manufacturing period and that the scheme cannot be self-balancing. I have pointed out that the scheme could come to an end after two years, and we make it clear in subsection (4) that that is our intention. Subsection (5) enables the Secretary of State to extend this period by not more than one year at a time by order. This arrangement will, of course, enable Parliament to debate any extension of the scheme which might be proposed at the end of the initial two-year period and subsequently.

The other amendments are minor and consequential, with the exception of the new Government amendment providing that these arrangements may be made in respect of contracts signed on or after 20th February.

An essential feature of the scheme is to get it off the ground at the earliest possible date. It was, therefore, highly desirable for ECGD to give exporters as from 20th February, the date of my right hon. Friend's statement, some undertaking that—subject of course, to the obtaining of the necessary legislative powers—cover would be available in respect of contracts signed after 20th February but prior to the passing of the legislation. This new amendment will enable ECGD to undertake, before the Bill becomes law, that it will enter into cost escalation arrangements if and when it becomes law. This will cut out delay in assisting exporters, and therefore avoid the risk that valuable export orders might be lost pending the Bill's enactment. Exporters can accordingly make their export contracts in the knowledge that, subject to the passage of the legislation and to their compliance with the requirements of the scheme, they will in due course receive cost escalation protection from ECGD.

With this aim in mind, ECGD began receiving applications immediately after my right hon. Friend's statement: but the tailoring of the scheme to each individual case will take a little while to work through. For example, the applicant has first to furnish a fair amount of detail about the cost components of the tender. Any commitment by ECGD to disburse funds must of course be conditional upon the passing of the legislation now before us ; but, subject to that, detailed negotiations can usefully proceed meanwhile.

Like the schemes operated by the French and the Italians, the arrangements will not be available for exports to other EEC markets.

We regard the scheme as an important development. It is designed to reduce an unpredictable risk and in a way which will share the costs and benefits between exporters, buyers and the scheme. It represents a positive response to representations made by industry.

10.45 p.m.

The Under Secretary of State for Trade, with his usual panache, took us with almost breathtaking speed through a very complicated new clause. Indeed the provision is so complicated and such a departure from traditional ECGD practice that, as my hon. Friend the Member for Worthing (Mr. Higgins) said, it justifies a Bill to itself.

The Minister made two specific comments that caused me some concern. He said that the precise details of the new cover were being drawn up at present, yet, as he also said, the possibility of providing a cost escalation cover has been mooted for a long time. I should have thought it better for the cover to have been drawn up more precisely within the ECGD Department before the details or the bare bones of the scheme were publicly announced, otherwise there is a danger of confusion in people's minds, with exporters queueing at the gates of the ECGD without the ECGD knowing fully whether those exporters will qualify. In this case a little less haste and more precision would have been advisable.

The Minister in describing the cost escalation cover said that the risks were all one way. I do not think that is so. I understand that the premium is to be 1 per cent. and as the cover is for a tranche of 10 per cent. inflation per annum, it is a one-in-ten shot as to whether one will make on the policy or lose on it. But this is far from being an insurance cover as such. It will end up as being a subsidy to British exporters with major contracts. It is far better we should recognise it and call it that.

Against that background, I give a general welcome to the scheme. It is a new departure for ECGD and it is right that it should be treated carefully. In the past, as the Minister said, ECGD has run its books as a mutual insurance operation. Effectively, the underwriting operations paid for themselves, taking one year with another. To use the popular jargon, they washed their face. They have done so with increasing success in past years. In the financial year 1973–74 the credit insurance scheme produced a net transfer to revenue account of £24 million. This was by far the highest figure that ECGD had ever achieved. I understand that the figure may well be increased in the present financial year, due particularly to the cash flow from buyer credit. It would be right for this addition to the revenue account of ECGD to be used to reduce the premiums paid by the ordinary exporter in this country, so that the benefit of the underwriting success of ECGD—let us treat it as such—should be used to bring down the cost of insuring for the whole range of exporters from this country. This would have the effect of increasing the attractiveness of ECGD and seeing that a higher percentage of British exports follow through the Department than is the case at present.

I was very pleased to hear the Under-Secretary say categorically that the cost of this new cost escalation cover would not fall on the shoulders of the average exporter and that it would be treated as a separate item, or, to put it the other way round, the revenue surplus of ECGD would not be all used to subsidise the cost of this new scheme. I think that is most important, because if the underwriting profits of ECGD—those that ECGD achieves through good underwriting throughout the world—were absorbed in the cost of the new scheme, that would be detrimental to the general run of exporters and would have a bad effect on the management of ECGD which prides itself on obtaining an overall profit while at the same time trying to bring premiums down.

I should like to ask a few specific questions which I hope the Under-Secretary will answer at the end of this debate on the new clause. I hope he will be able to tell us—and this takes up a point raised by my hon. Friend the Member for Worthing (Mr. Higgins)—based on the average inflation rate in the last two years, what he expects the likely annual cost of this scheme to be. I realise that the Secretary of State for Trade, in introducing this new scheme on 20th February, refused to do this. He said it was impossible. But at that time I think he was casting forward.

I am sure that on an extrapolation of inflation rates over the last two years, some estimate of cost must be available. I think it should be declared because it has been the custom in the past with ECGD that whenever it has got involved in a new form of expenditure an estimate has been given. For example, when the refinancing scheme started there was an estimate of total sums involved likely to reach £350 million.

Then on the question of control, it seems to me that this will need very careful control indeed. It is a new departure for ECGD. It will involve ECGD in monitoring the costs of major British exporters. Is ECGD properly staffed to handle this? How many new staff will it require? I should have thought, at a rough guess, that it could lead to a doubling of ECGD staff if they are to become involved in a careful analysis of the costs that a number of exporters will claim under this cover.

The Under-Secretary referred to using Government indices for wages and raw materials and an independent certification of costs that exporting companies will claim. But, obviously, this will call for a great deal of checking, and I should like to be assured that the question of cost and the number of staff involved has been thoroughly thought through by the Department.

I turn now to our amendments to the new clause. In tabling Amendment (a), we sought to bring into the category of those who could claim relief under the cost escalation clause such companies as plant designers, engineering consultants and those specifically involved in exporting not their goods but their skills and technology. The Secretary of State for Trade, when introducing the scheme, spoke of its particular importance in such markets as the Middle East, and it is in just such markets that designers and consultants are involved, exporting traditional skills and new technologies from this country. I noted that the Under-Secretary said that production line goods were excluded. I know that some of my hon. Friends will wish to speak about that, and I shall not anticipate their remarks.

Amendment (b), in my name only, suggests that increases in interest costs should be excluded. I had two specific purposes in view here. First, I had it in mind that progress escalation payments should be made to the manufacturer during the course of the four or five-year contract. Plainly, if his claim for money due because of inflation was met by payments made in that way, there would be no interest accruing, and that would serve the purpose of my amendment. I understood the Under-Secretary to say that such progress payments would not in fact be made, and that payment would be made only at the end of the contractual period.

I said that they would not normally be made. But, of course, there may be exceptional circumstances in which there is a very long gap between entry into the contract and actual delivery and final payment at the other end, and in such circumstances we may have to look at it again. In normal circumstances. however, what I said applies.

I am grateful for that assurance. In my view, the net should be widened somewhat, because there must be cases in which, for cash flow reasons, unless they can count on getting these payments during the course of the contract, exporters will be put off entering into a contract or tendering for it at all.

My second purpose in Amendment (b) concerned the question of the interest rate on money that the exporter would pay in the United Kingdom during the period of the contract. Someone bidding for a major overseas contract inevitably takes a view of what his United Kingdom cost of money will be. That view may be right or wrong. It is arguable that, because Government policies have the greatest effect on the cost of money—just as they do under this Government on wage rates—a case can be made that an increase in the cost of money in the United Kingdom should be covered under the cost escalation policy.

On balance, however, I think that that would be wrong, because one has to take a view when bidding for a contract. If one's view is wrong, one may then argue with the ECGD that it should help effectively to bail one out, whereas, in fact, it has been a matter of judgment at the time of bidding for the contract. I feel that the exporter's judgment on the question of the interest rate applicable in the United Kingdom should stand. I would appreciate hearing the Under-Secretary's thoughts on that point.

11.0 p.m.

Our Amendment ( c) has already been dealt with by the Under-Secretary. He said that the sums involved in the new cost escalation cover would be separately

treated and identified in the accounts of the ECGD, and that is absolutely right. I hope that he will therefore accept our amendment.

Our Amendment ( d) follows very much from the tabling of the new clause. We are seeking to limit the number of annual orders by which this scheme can be extended to five, and that is in line with the Under-Secretary's comments when he said that this was a new scheme. We shall all have to wait to see how it works, and therefore it is appropriate that the number of extensions should be limited to five. It seemed an appropriate number because the Under-Secretary said on Second Reading that the limits in the Bill would be adequate for approximately the next five years. It seems correct to tic in the number of annual orders to the same period.

Our final amendment refers again to the Government's new clause. We accept that contracts signed after 20th February but before the Bill becomes law should qualify for the new cover and that the increases in costs experienced by exporters within that time should fall within the scope of the scheme. We believe it is important that it should be limited to increases in costs which take place after 20th February, however.

Government Amendment No. 11 is loosely and poorly worded and it would be better if this were made clearer and more precise by the addition of the words

" subsequent to 20th February 1975 ".

Under that proposal increases before that date cannot be compensated for under the cost escalation cover. These are serious and valid points and I am sure the Government will consider them with care.

I share the reservations which the Under-Secretary seemed to be expressing about the need to introduce the new clause. It is not insurance in any of the normally understood uses of that word and it is, as he said, essentially loss making. That applies, however, on the assumption which he expressed that a mere 10 per cent. inflation is, I think he said "outside the bounds of possibility ". Some of the electorate were led to believe that a rate of inflation of less than 10 per cent.—I believe 8·.4 per cent. was the figure given—might have been possible. That now seems to be outside the bounds of possibility. I do not disagree, but it is interesting that the Government should now take that view and make provision accordingly in the new clause.

That approach was confirmed because it was openly stated that the risks were to be all one way. I have these reservations about the new clause, but I also accept that other countries, particularly the French are making these sort of provisions. I accept that as the Government and their predecessors have been unable to persuade the French not to do this kind of thing we must introduce a similar scheme ourselves.

My main reason for intervening is to query the use of the words "capital expenditure ". The Under-Secretary of State used them this evening and the Secretary of State used them in February. I appreciate that the clause is essentially permissive in the way in which it is drawn. It is not confined to capital expenditure. It is not really confined in any other way. Nevertheless, the Under-Secretary of State has made it clear, as did his right hon. Friend, that the help given under the clause will be restricted as to amount—namely, £2 million—on an individual contract and to a minimum length of time—namely, two years. I accept those restrictions, but why the further restriction on capital goods?

I raise that point because of a constituency interest. I received a letter this morning from the managing director of the Guided Weapons Division of the British Aircraft Corporation. The corporation has a considerable factory in my constituency as well as elsewhere. Since the Secretary of State's announcement the corporation has been discussing with the Department, and through its trade association, the sort of contracts which will qualify. It finds that what are, in the managing director's phrase, loosely described as capital items are to be the only items that will qualify. That loose description is the phrase used by the Under-Secretary of State this evening. They are not, as I understand it, the only goods that qualify under the French scheme, for example. I do not have detailed information about the Italian scheme.

However, there is a real difficulty. I shall read a short extract from the letter that I received from the managing director of the Guided Weapons Division. It reads:
" In these respects a £50 million contract to supply a quantity of Rapier Fire Units and missiles to an overseas customer is no different from a 150 million contract to supply a nuclear power station, which would be regarded, I understand, as a `capital contract' and thus qualifying."
Earlier the letter reads:
"Unfortunately, we find in discussions between Trade Associations and officials, that it is the intention to restrict this facility to what are loosely described as ' capital items'
… In the letter it is pointed out that contracts involving "production runs" are not provided for in that context. The £50 million contract for Rapier fire units and missiles obviously involves a certain element of production runs although it is a very large contract. The letter continues:
" Our competitors in France manufacturing guided weapons do have available to them schemes having some similarity to the British scheme."
He argues—and there is a lot of strength in his argument—that large contracts even in the nature of revenue items should receive the same assistance as capital items. It seems that to do otherwise implies that there is something more desirable in capital exports than exports of revenue type goods. I do not see that there is an essential difference. I do not think that an essential difference should be incorporated in the regulations—I know that it is not proposed to incorporate it in the clause—adopted under the clause by the ECGD and by the Department of Trade. It is proposed that only capital items should benefit. That seems to me to be a mistake.

I welcomed the introduction of the scheme in principle so I am not in the best position to express strong reservations about it, but I will refer to three.

One of the possible dangers of introducing such a scheme is that it will trigger off retaliatory action internationally, and that has possibly already happened. Does the Under-Secretary of State think it coincidental that within seven days of the announcement of the scheme in the House the Exim Bank announced, on 27th February, a further improvement of its scheme, and that the Press release specifically referred to the need to meet competition? By taking action which is overtly of a subsidy nature there is a danger of triggering off retaliatory action which could be counterproductive and endanger British exporters.

I warmly support my hon. Friend the Member for Mid-Sussex (Mr. Renton) in drawing attention to the absence of any estimate of the cost of the scheme over the next two years. It is essential that the Minister should give the House some indication of the cost, because the commitment is open-ended. It depends on estimates of likely rates of inflation and the extent of the take-up of the scheme. We may be talking about a very substantial sum, and it is incumbent on the Minister to say what is the Government's thinking on the public expenditure implications of the proposal.

If the proposal had been introduced when the Bill was initially drafted the public expenditure implication would have had to appear in the explanatory memorandum. The Government should not be able to avoid their obligations to tell the House what will be the cost merely because the scheme has been introduced on Report.

I also express concern about the parliamentary accountability aspects of the scheme. I understand that the legal position is that a highly generalised power is being given to the Secretary of State to enter into arrangements with individual companies which will effectively increase their profitability on individual contracts. Under the new clause the Secretary of State has complete freedom to regard as allowable costs—
" such increases in the cost of labour, materials or other matters as may be specified by or under the arrangements."
Those arrangements are entered into solely between the Secretary of State and individual companies. Legally, Parliament will give the Secretary of State the ability to make almost any cost allowable as to between 100 per cent. and 85 per cent. for reimbursement. In financial terms we are offering something which is more generous than tax allowability.

When one contrasts the position under the Finance Acts, where income tax and corporation tax are concerned, which define in detail what is allowable and not allowable for tax purposes, with this highly generalised statement which financially has an even more beneficial effect than tax allowability, one cannot help but notice the inconsistency. If the clause is passed without greater definition, we shall be failing in our obligation to make this public expenditure properly accountable to Parliament.

I welcome the changes embodied in the clause, but I deplore the way in which the House first learned of them. I do not wish to comment on the practice of Ministers in successive Governments making announcements to the Press, but what happened here was a leak which occurred while the Committee was sitting. It was unfortunate that members of the Committee had to read about the proposals in the columns of the national Press.

11.15 p.m.

My hon Friend the Member for Ton-bridge and Malling (Mr. Stanley) has referred to the dangers of retalitatory action, and it is right and proper that he should, but I have always found it rather tedious that it seems that the French are always able to give beneficial and advantageous terms to their exporters but that the danger of retalitatory action is always used as a reason why we must never jump in and follow. Obviously there is a risk which must be carefully balanced.

These proposals in themselves are not going to usher in a golden age for British exports because the key word in exports is reliability and that means reliability in delivery and in performance. If we do not have those twin reliabilities, we never get to the stage when we are in the final negotiations and finance is the critical element.

I have no doubt that there are many situations where it is essential to have the same room for manoeuvre which is available to our foreign competitors. I therefore welcome these provisions to counter cost escalation and also the provision for performance bonds with certain limits, but my biggest welcome is for the attitude which this clause reveals: it seems to be recognizing the hard fact of exporting life, that there are no prizes for the runner up. One either gets the contract or one does not.

It seems also to represent a move in the direction of getting business for this country and away from a particular sort of commercial purism which is only too ready to ignore employment considerations for British industry, import substitution considerations and considerations relating to what is often referred to as an expansion from a commercial bridgehead. To make such an extension. it is useful to have the commercial bridgehead there in the first place.

Finally, I should like to follow up the point made by my hon. Friend the Member for Gloucestershire, South (Mr. Cope) when he referred to the Guided Weapons Division of the British Aircraft Corporation. I should like to refer to the manufacture of aircraft and to ask, in the words of the Under-Secretary, about production-line goods because aircraft are made on a production line. They are extremely expensive items and I would have thought quite essentially the sort of thing we should be exporting. It is initially a low-cost item which has added value put on it by British skill and technology and ends up as a high-cost export item.

It is a production-line creation. Are aircraft to be specifically excluded from these provisions because of the way they happen to be built? I should like the Under-Secretary to answer that question.

I had not intended to contribute to this debate and I rise with some trepidation because I was not a member of the Standing Committee and I am sad to admit that I was also not present during Second Reading.

At a cursory glance I am very concerned to see the figures of £12,200 million and £3 billion in the Bill. There is no excuse then for a Member of Parliament not listening, commenting and trying to contribute to the debate.

This immense sum is a potential liability to the hard-pressed taxpayers, and not least to those in the worthy constituency of Chichester, but I recognise that the benefits of the Bill will accrue to many of the industries, particularly the light industries in the Chichester district, increasing exports to the Continent, and that they will benefit considerably from this sort of provision.

I should like also to sound a grave note of caution, that there has been a great deal of talk about the provisions of this new clause providing a counter to cost increase. It provides no such thing. What they provide for is to pay for the cost increases, and the biggest question is whether it is a proper expenditure to pass on these cost increases to the taxpayer, through whatever system.

I recognise that the question which must then be asked is whether the benefit through such encouragement of potential exports outweighs the liability which accrues to our taxpayers as a whole. The probable answer in this case is that it does, but I believe that such provisions and guarantees should be subjected to the most stringent restraint in terms of overall liability.

I endorse the comments of my hon. Friend the Member for Tonbridge and Mailing (Mr. Stanley) in seeking clarification of the total amount payable under this provision. Secondly, we have heard a good deal of discussion, perhaps semantic discussion, about the difference between subsidy and insurance.

I accept the Under-Secretary's explanation of the disparity in the statements made on this previously, but it would be better if administrative and other costs were included in the potential liability under this clause. In other words, the cover granted should perhaps be that much less than it would otherwise be, the difference between the amount suggested and the amount to which it could be reduced being that which is currently payable under the clause in terms of a premium. This would seem much neater, and it would get over what is a disguised subsidy. I believe that it should be clear for people to understand exactly what it is, and that it should also be quantified in terms of a subsidy and not in terms of an insurance.

I seek some greater clarification oil Amendment No. 11. I endorse what has been said to the extent that this seems an open-ended commitment to provide that the clause shall be applicable to cost increases before 20th February of this year. This seems to be like insuring a house once it has burned down. It is quite different to guarantee cover for potential or likely cost increases where a risk is undertaken. But this amendment implies that cost increases which have occurred already and are quantified will be allowed to be covered by the provisions of the clause. This is a complete departure from the intention of the clause and will enable unfair competition on quite a relevant scale.

I want to sound a note of general caution. In the past few weeks in a variety of different spheres—in fisheries, in agriculture and, especially in my constituency, in horticulture—there have been increasing calls for subsidies of one kind or another. We also hear increased calls for import controls. We have heard raised this evening the question of retaliation. This is very dangerous talk. We must guard against the possibility of starting some sort of subsidy war which will help none of us. I say no more about that. I am sure that it is a subject on which there will be a great deal of comment. But it is relevant to some of the technical provisions contained in the clause.

I want to mention three points. First, I must pursue the boring technical drafting point on the new clause.

Section 1 of the Export Guarantees Act 1968 provides that
" the Board of Trade may with the consent of the Treasury make arrangements for giving such guarantees to, or for the benefit of, persons carrying on business in the United Kingdom."
Section 2 provides that
" the Board of Trade may with the consent of the Treasury make arrangements for giving such guarantees to, or for the benefit of, persons carrying on business in the United Kingdom ".
In both instances there is an assumption that people are carrying on business and that the export credit guarantee is to be given for the purpose of enabling them to carry on such business.

The new clause begins with the words:
" For the purpose of encouraging trade with other countries, the Secretary of State may with the consent of the Treasury make arrangements for making payments to persons carrying on business in the United Kingdom.who have entered into export contracts ".
The use of the past tense, which was not used in the previous Act, must be explained. I am sure that the Under-Secretary agrees that the purpose of the new clause is to enable people to enter into export contracts. However, that is not what the Bill states. If the Bill does not make that clear, there is a grave danger that this House may pass into law something which will mislead generations of businessmen.

Secondly, this may seem a sad day for British trade because we are beating our ploughshares into swords, our pruning hooks into spears and clearing the decks for action for a credit war. We must ask for an assurance that every step is being taken internationally to reduce credit subsidy and that the Government are in touch with other Governments to ensure that appropriate steps are taken, perhaps through the setting up of an international conference, to see that we are not triggering off a credit war. This is a critically important matter. The new clause might, as has been said, appropriately form a new Bill. If we are asked to incorporate the new clause into the Bill, which has been given consideration in Committee and elsewhere, we must have that form of assurance.

Thirdly, it would be inappropriate for this discussion to pass without attention being drawn to the great crime of our time—inflation. The new clause is like feeding aspirin to a dodo unless we can find a way to tackle inflation. To make a cheap, but important, political point, inflation must be tackled. It is not good enough to use inflation as a weapon, as accuse the Government of using it. It is not good enough to allow inflation to redistribute assets, wealth and incomes. The real problem to be tackled is inflation. The new clause merely provides a palliative to deal with one aspect of inflation—that concerned in international trade. We want a Government who are prepared to tackle inflation.

I could not agree more strongly with what my hon. Friend the Member for Gosport (Mr. Viggers) said about the need to control inflation. Indeed, when the Secretary of State for Trade made his statement on 20th February I pointed out that compensation for the effects of inflation on exports is a poor substitute for beating inflation.

It is important to stress that many people in industry in this country would like the same degree of protection against inflation as that that the Government propose to give to those in other countries under the provisions of the new clause.

I should like to take up the point made by the Under-Secretary of State about insurance. It seems quite fantastic for the Secretary of State for Trade to come to this House and, in the statement to which I have referred, clearly state that it was a scheme for insuring things—an insurance scheme—and for the Under-Secretary tonight to say that it is not an insurance scheme at all. This is what we have from two Ministers who have prime responsibility for the insurance industry and are proposing to introduce legislation to deal with insurance companies which get into difficulties. It seems clear that the Secretary of State for Trade has not the remotest idea what is and what is not insurance.

I should like to take up a number of important points that have been made by my hon. Friends and to emphasise that we expect clear answers to them from the Minister. Although we are debating this important measure late at night, it is important that we get clear replies.

11.30 p.m.

My hon. Friend the Member for Gosport compared the wording of the new clause with that of previous legislation. The Minister said that there was no intention that the effect should be different, but the Government's intention is in no way relevant to what the courts may decide to be the meaning of the words. I should like a clear answer on this subject. The Government's hope may turn out to be a disappointed hope if the wording is not correct.

We have before us this evening a Bill as amended by Standing Committee D, but the new clause does not have an explanatory and financial memorandum, as when a Bill comes to the House for Second Reading. Yet it is clear that the consequences of the new clause will significantly change the financial effects of the Bill. It may be a convention of the House that hon. Members are expected to know what has happened between Second Reading and the next stage when the Bill is considered on the Floor of the House, but that does not apply in this case and the House should be given the Minister's best estimate of the likely cost of the new clause. Estimates may be difficult to make, but they are important in this context.

My hon. Friend the Member for Mid-Sussex (Mr. Renton) suggested that the new clause might involve a doubling of the staff of the ECGD. This new clause could well have formed a Bill on its own, and it is essential that we have a clear statement of the Minister's expectation of the increase in the number of staff in the ECGD and his own Department if the House agrees to the new clause.

The hon. Gentleman implies that there might be a vote on the new clause. I hope that he will think seriously about what he has just said. I could, but will not, quote the representations that we have had from British industry throughout the country asking for a step such as this. It is most ungenerous of the hon. Gentleman and politically unwise to suggest in the form of a threat that action will be taken this evening to stop the clause from going through.

The hon. Member must not be so sensitive. Whether my hon. Friends decide to vote on the clause is a matter for them.

The point that I am making is that we expect to have proper answers when Government expenditure of this kind is being considered. Whether or not there have been representations and discussions, the Minister must not assume that that exonerates him from giving the House sufficient information to make a decision in these matters.

I make it absolutely clear that we expect an answer on this subject.

Neither the Bill nor the new clause imposes a limit on the size of the contract charge covered by these arrangements, but our understanding from the Secretary of State's statement is that the limit will be £2 million and that contracts of less than that figure will not be covered. My hon. Friend the Member for Gloucestershire, South (Mr. Cope) stressed the importance of this measure to his constituents and my hon. Friend the Member for Gosport emphasised that there were many people in the export business throughout the country who would like the protection offered by the new clause. That we accept, but we are not clear why the Government feel that there should be a cut-off point of £2 million. Why are exports of a production line type not to be covered? I mentioned that in the Second Reading debate. I do not feel that the Minister has spelled this out in sufficient detail, and many of my hon. Friends are concerned about the point.

I now turn to a different aspect of the matter. We have agreed throughout with the Minister that the degree of support for exports must be related to the cost. It is also true that the cost must be related to the return to the economy. I think that that is common ground between the Under-Secretary and myself and, I imagine, the whole House. It has been made clear by the Secretary of State for Trade and the Prime Minister himself that one of the main purposes of the clause is to facilitate exports to Iran and, following the Prime Minister's visit, to the Soviet Union.

Now that all the hullabaloo about the Prime Minister's visit has died down we are still unclear what the value of the export credit terms will be. Cmnd. 5924 is a lengthy document, which gives some indication of the situation and refers in particular to the credit terms, saying that they shall be the most favourable terms possible. We must consider whether the terms are not so favourable that the gain to the British economy is debatable. I shall be grateful if the Minister will clarify precisely what the terms are. They are not clear from the Cmnd. Paper.

I understand that the rate of interest, as with other exports, is to be 7·25 per cent. I believe that that is the figure that has been mentioned. In addition, exports to the Soviet Union are to be protected against cost escalation. We also understand—it has been mentioned in an article in the Financial Times, and it was referred to in an after-dinner speech by the Prime Minister a short time ago —that there are to be certain provisions with regard to exchange rates.

If an export is made to the Soviet Union under the new clause, what will be the position if the sterling exchange rate declines in terms of the Soviet Union or some other currency? Will the Soviet Union be protected against that as well? That will be to its advantage in those circumstances.

Taking all those three components together, it seems to me that the advantage we are offering to countries to which we export is likely more than to offset the profit margin. It is not just a question of turnover. It generates employment, but so does making things and giving them away. It is the profit margin that is important.

Certainly, jobs. But it is no good having jobs if we are going to give our resources to other people for nothing.

The clause has been related by the Secretary of State and the Prime Minister to the question of exports, following the visit of the Prime Minister to the Soviet Union between 13th and 17th February. Under the new clause and under the preferential interest rate agreements—and also in terms of the exchange rate—those who are investing in the Soviet Union or elsewhere are in an advantageous position as compared with people investing in this country, in terms of real assets. People investing in this country do not get the benefit of low interest rates, or protection against inflation.

The document to which I have referred, reporting the Prime Minister's visit, refers to a two-way exchange of goods as listed in Annex I. For instance, there will be the
"Supply of equipment for projects of the oil refining and petrochemical industries."
That is in the United Kingdom. In the Soviet Union there will be the
"Supply of equipment for enterprises in the chemical, oil refining and petrochemical industries …."
May we have a statement from the Minister explaining whether the credit terms given to people in this country will be the same as, or more or less favourable than. those which we propose to give to the Soviet Union under the clause?

I turn to the main point which has been made on the insurance scheme. It now appears that it is not an insurance scheme at all. Clearly, what the Government propose is simply to make a charge for the costs which are likely to be incurred as a result of the scheme being operated by the ECGD. I understand that no insurance premium in any sense is to be charged. The hon. Gentleman said that those taking advantage of the arrangements which the Government propose would simply incur the costs of operating the scheme.

Fundamentally, the scheme is simply a palliative. It is important if we are to remain competitve. It is also important that we should continue to avoid a credit war, and that we should continue the negotiations so far unsuccessfully carried out by the Government to prevent a further increase in credit term competition. If it happens, there will be transfers of assets from this country and others which may well work out, net, to our disadvantage.

Overall, this is not something which can be ignored in the present situation, in which the Government apparently propose to cover inflation over a 10 per cent. rate, when the present rate is about 20 per cent. What is the Government's expectation? Is the Minister seriously saying that it is thought that the rate of inflation will be 10 per cent. over the next year? That appears to be what the Government are saying, because the clause purports to cover risks of a rate of inflation over that expected and the floor is put at 10 per cent.

I have not kept an exact count of the number of questions put to me, but I shall do my best to reply to them all.

In the staffing of the ECGD, we must strike a balance between inserting into industry an army of ECGD inspectors and vetters and the need for proper control over public expenditure. We intend to get the balance right, and to keep our increases in staff and costs to a minimum, consonant with our need to ensure that public expenditure is safeguarded.

The hon. Member for Mid-Sussex (Mr. Renton) asked about the surplus in our accounts, and the effect it might have on the premium. The surplus shown in the accounts represents to a considerable extent premiums received and held by ECGD against risks which will continue under medium-term and long-term credit for a number of years, so the surplus is not a ground for reducing premiums in the short term or for reducing current premiums.

The cost to public funds will depend on the form of cover taken by the exporter, rates of inflation and the level of our exports. In a direct sense, the eventual cost of the scheme will be related to its success in meeting its major objective of enabling United Kingdom exporters to obtain contracts abroad that they would not otherwise have obtained. Therefore, it is difficult to make a realistic estimate of the likely cost. No payments will be made until the end of the manufacturing period, and as the minimum qualifying manufacturing period is two years no payments will be made from public funds until the financial year 1977–78. In the meantime, we shall be acquiring premiums which will more than cover ECGD's costs in running the scheme.

On what basis will the surplus be decided? If it is to be more than the costs of running the scheme, how will the Government decide how much more they should charge?

The Government have decided provisionally that the charge shall be 1 per cent. Obviously, in the light of circumstances and experience of this scheme, which as everyone has recognised is completely new, we may have to make adjustments upwards or downwards. But at least we think that 1 per cent, is setting the level as realistically and fairly as possible in the interests of exporters, the ECGD and public expenditure considerations, bearing in mind that we have had no experience of operating such a scheme.

11.45 p.m.

How can the Under-Secretary decide that 1 per cent, is a realistic level at which to set the premium if he has no idea of the likely cost of the scheme? Furthermore, will he say whether the 1 per cent, also applies to the case scheme as well as to the forward schemes?

Yes, the 1 per cent, applies to both schemes. We had to start somewhere, and we have to get some idea of what the cost might be to ECGD. We have obviously to take on some more staff in order to get the costs of particular firms. Much will depend on the use that is made by firms of this scheme. Some may think that it is not worth while ; others may not be eligible, and so on. The guidelines which we are intro- ducing, the ground rules, could well be changed in the light of experience. This again might affect ECGD costs.

The hon. Gentleman seemed to come close to saying, before my hon. Friend the Member for Mid-Sussex (Mr. Renton) intervened, that because no actual cash would have to be paid out for two years, it did not much matter, in the sense that all that one was doing was entering into a commitment for the future and that that did not matter. While that seems to be in accordance with the general Treasury petty-cash accounting which is conventially follows, it does not seem very satisfactory from the point of view of control of public expenditure. Although the amount actually spent in the course of this scheme will depend on the factors which the Under-Secretary mentioned, it will depend primarily on the Treasury, because every arrangement entered into is with the consent of the Treasury. Has the Treasury any top figure in mind at which it will say, "No, that is enough ", or has it no idea of how far it is prepared to go in this matter?

The prime purpose of this is to increase British exports of major capital goods. To the extent that we can do this without public expenditure running away with itself, we shall do so. If it were to be the case that the implications, because of either rising inflation or large numbers of contractors taking advantage of the scheme, were such that we decided to call a halt, obviously we should need to reconsider. But frankly, at this stage we feel that the variables are such over the next couple of years —the rate of inflation and the number of people who may take part in what is, after all, a very new scheme—that until we have seen some of the scheme in operation over the next year or two it is very difficult to make more than a wild guestimate "of the cost. That is why we have the two-year limitation. I hope that the hon. Gentleman takes that point. We have made it two years. We hope that in that time, by international agreement, we shall be able to ensure that other nations come into line in agreement with us, and that we shall get rid of cost escalation schemes altogether and work towards a period of credit peace, which we shall encourage.

I share that hope, but is it the case that the Treasury has no maximum in mind at present?

I think one could say that the figure was entirely a "guestimate ". I do not want to be held to this in a year or two's time, or to have the Government held to it. I repeat that the variables are such that one would need a crystal ball almost to be certain of getting to the right figure. It is extremely difficult to make this kind of estimate. However, if the volume of business which we underwrote in 1974 through ECGD which met the guidelines were to be covered in future years by the scheme, at 1974 prices we estimate that the cost would be £50 million in the first year, 1977–78, and this could well rise thereafter.

Is that an estimate of what the cost might be and not a maximum showing where the Treasury will stop giving consent?


May I now deal with the amendments tabled by the hon. Member for Mid-Sussex. There were five altogether. Amendment (a) refers to design and consultancy services and research and development. It is our intention to allow United Kingdom services to be eligible for cost escalation cover where they are part of a capital goods contract which meets the guidelines. Contracts solely for United Kingdom services to an overseas buyer can also be considered, provided that they satisfy the access criteria and provided that we are satisfied that they are genuine and eligible United Kingdom services.

I do not rule out the possibility of including a limited amount of research and development for the specific purpose of fulfilling a particular contract covered under the scheme, although there are wide areas of research and development costs which would be inappropriate in a scheme of this nature. Genuine and eligible services are all adequately covered by the reference in the clause to "other matters ".

I turn now to amendment (b). I explained in my opening speech the broad areas of costs to which it is our intention that this scheme should apply. I also explained that the powers set out in the Government amendment had deliberately been drawn in a wide way to reflect the fact that the details of the scheme have not yet been fully and finally drawn up and—more important—to enable ECGD to react flexibly to changing circumstances.

There are certain elements of the contract price which we do not intend to include in the scheme, such as profits and foreign costs. We have not, however, thought it necessary to spell out all of these exclusions in the clause in detail. This is true of interest costs. In other words, I am happy to assure the House that it is not our intention that interest costs should be regarded as eligible costs in terms of the cost escalation scheme.

The next amendment I wish to deal with is (c). I have already made the point that the accounts for the cost escalation scheme will be separately treated and identified in our general accounts. These accounts will be published as part of the Appropriation Accounts. Similarly, separate liability figures will be maintained for cost escalation cover. These commitments will be counted against the proposed overall limit for our commitments. Having given the hon. Member that assurance I hope that he will be satisfied.

I come now to Amendment (d). I stressed in my opening statement that this scheme is designed as a temporary measure to meet abnormal difficulties. I stressed that we do not see the scheme as becoming a permanent feature of ECGD's facilities and services. I have frequently confirmed during the passage of this Bill that it is the Government's policies to bring about a credit peace and not to engage in a credit war. We have played, and continue to play, a full part in international negotiations to rationalise export credit.

On the other hand, we cannot ignore what other countries are doing, particularly when we have so far failed to persuade the French to stop their scheme.

I assure the House that it is certainly not the Government's intention that this scheme should be retained for longer than is necessary. The clause as drafted makes this absolutely clear. The powers under which the scheme will be operated are to have a clearly specified two-year time limit. Each year thereafter there will be the opportunity for debate in, and decision by, the House before the powers are renewed. I believe that this gives the House the kind of control which I assume this amendment is seeking. I should have thought that public expenditure factors alone would mean that there would be no real wish on either side to retain the scheme or the powers for any longer than is necessary.

Amendment (a) to Amendment No. 11 concerns the starting date of 20th February. It may be necessary and desirable on an isolated number of occasions for the scheme to be applied to eligible cost increases which have occurred before 20th February in circumstances where the exporter submitted a tender against international competition before that date. If his tender is successful and he is awarded the contract after 20th February, the escalation provisions in the contract will normally run from the date of his tender price. It is normal commercial practice to restrict the validity of such tenders to a period of three months or so. In such circumstances our cost escalation cover would normally run from the date of the tender.

Surely that cannot be right because if the exporter submitted his tender before 20th February he would not know that the cost escalation cover would be available. It cannot therefore be logical to give him the benefit of the cost escalation cover post facto.

I do not think that there is any difference between us. The crucial point in regard to legislation is that the exporter would not have entered into a contract before 20th February. Had he done so before that date, he could not take advantage of the cost escalation scheme. Putting in a tender is not the same thing as entering into an export contract.

Would it be possible to make clear that the provision applies only to cases where there had been a tender before that date? The provision does not state that, but only that there is a contract credit after that date. I accept the logic of the Minister's argument, but it is open to the abuses which I mentioned earlier. It would not be beyond the bounds of possibility to introduce some sort of restraint.

The legislation is drawn fairly widely, and the sort of amendment which the hon. Gentleman has in mind would make matters too specific in one particular detail when we are not making matters specific in other parts of the provision.

I continue with the explanation on Amendment No. 11(a). Where a tender was submitted before 20th February, we shall certainly encourage exporters to seek to renegotiate their base price with overseas buyers. But this will not necessarily succeed in every case.

The effect of the amendment would remove from ECGD the flexibility which it needs to facilitate important contracts where the exporter had tendered before 20th February but was unable to renegotiate his base price. We would expect any such cases to be exceptional, but they may arise. The clause as drafted enables ECGD to accommodate such situations if, on balance, it seems desirable in a particular case.

I turn to the other points which were raised and in particular the difference between capital goods—

Mr. Higgins rose—

I am trying to facilitate matters. Am I to understand that the Minister proposes to accept Amendments (a) and (d) to the new clause? He said that the amendments would be separately identified. I do not see why he cannot accept the "five years" argument. If it were to go for a further five years after the initial two, that would be an appropriate moment to review the whole matter. A mere one-and-a-half-hour debate would not be sufficient.

I do not want to accept the amendments. I am hoping to persuade the House that the amendments are not necessary in view of the wide way in which the new clause is drafted. Let me now deal with the points raised—

The Minister must not be impatient. He must understand that the House of Commons is concerned with legislation. Ministerial assurances do not have the force of law. This is why we believe it is necessary that an amendment should be made. I understand the Minister's point on Amendment (d) but would point out that Amendment (c) seems entirely in line with the assurance which he has given. I may have misunderstood the hon. Gentleman. If it is in line with his assurance, I hope that he will accept that amendment.

12 midnight

I have given a number of assurances which are not in this clause. If they were all to be embodied in this clause, we would inevitably be here all night, and the Bill would never get through because people would be able to raise more and more points. The essence of the clause is that it is widely drafted. Guide lines will be published and, I hope, adhered to by ECGD and the exporters with whom it enters into contracts. Those guide lines may well be changed in the light of experience, but the basic legislation will enable us to change those guide lines from time to time.

With regard to publication in the accounts, I have given an undertaking that this will be separately identified in the accounts.

Is it true that Amendment (c) is precisely in line with the undertaking which the hon. Gentleman has given? We wish to be absolutely clear about that. If that is so, I can see no conceivable reason why he should not accept the amendment.

Amendment (c) is in line with the assurance which I have given. It proposes that after "Parliament" there should be inserted:

" and shall be separately treated and identified in the accounts of the Export Credits Guarantee Department ".
I see no reason why this amendment should in any way be pressed, since I have given an assurance that this will be done. There is no legal point involved here.

May I continue with the distinction between capital goods contracts and production line contracts. We have started with capital goods contracts because we believe this is the area of greatest need. The figure of forecasting future cost movements increases with the length of manufacture, and this is usually related to the size of the contract. We believe that exporters selling goods with a short manufacturing period or off a production line should be forecast more easily and should make satisfactory provision for price movements.

The hon. Member for Tonbridge and Mailing (Mr. Stanley) referred to international credit competition and mentioned the Exim Bank. The Exim Bank case related to interest rates and to a different element in export support. It is not comparable to cost escalation. But I can assure the hon. Gentleman that we are very keen to enter into an international agreement to rationalise export terms. Nevertheless the outlook for these international negotiations is regrettably far from promising.

This has nothing to do with British attitudes or British actions. It is entirely because of the major differences between several other countries on important matters of subsidies concerning the appropriate maximum lengths of credit, the right minimum levels of interest rates, the appropriate limits to place on down payments, local cost financing and so on. If the negotiations break down it will not be because the differences could have been resolved but for our cost escalation scheme. It will be because the other differences which have dominated the situation all through have proved to be irreconcilable. We shall not be in the position of being pilloried by the rest of the world for having introduced our scheme and having nullified international efforts. We are doing our best and we are reacting in the interests of our exporters in introducing this limited scheme of cost escalation.

I apologise for asking the hon. Gentleman to give way again, but I am jobbing back slightly. I could not believe that he was talking about the difference between capital and other export orders. I accept that this scheme should apply only to orders over a certain size—say £2 million—and over a certain period—say two years. But I cannot see the difference between an order for a factory in my constituency for £50 million over a number of years, which, because it has a production line element in it, should be rejected by the criteria which are to be used—admittedly not in the Bill but nevertheless they are to be used—when another order perhaps for only £2.1 million should be accepted under this scheme. The hon. Gentleman has adduced no argument for one being accepted and the other being rejected.

One argument against it is the public expenditure implications. The wider one allows exporters to take advantage of the scheme, on a production line basis, the bigger the public expenditure implications. We have to draw the line somewhere. At the same time, I assure the hon. Gentleman that our minds are not closed. We shall look at this matter in the light of experience and the representations we receive.

The major representations which we have received in the past year or so have come from major capital goods exporters with long manufacturing periods who have to bear the burden of unknown rising costs and who therefore need some sort of cost escalation protection or cover.

The basic point is that we have to consider the unit value of the export. If that unit value is set at £2 million, it may well rule out some production line facilities, but it may bring in some others. Perhaps "production line" is something of a shorthand term and not very good for distinguishing things which are worth less than £2 million from those worth more. But it is not the only definition, and, as I say, it may not be a very good one. We are willing to look at the matter in the light of experience, but I ask hon. Members to recognise that the more we widen the scheme the greater will be the public expenditure implications.

The hon. Member for Chertsey and Walton (Mr. Pattie) asked about aircraft. Exports of aircraft are eligible under the scheme, subject to exactly the same criteria as apply to any other contracts.

The hon. Member for Gosport (Mr. Viggers) commented on the wording of the 1968 Act and other matters. Payments by the ECGD under the scheme will not be made unless and until the contracts have been entered into. The negotiations with the ECGD will normally precede the signing of the contract. Indeed, exporters will want to know where they stand before signing contracts.

I think that I have dealt with virtually all the points raised by hon. Members. I am sorry to have gone on at some length, but it is an important new scheme, and it is right that the House should be concerned to probe the matter even at this late stage on Report.

I hope that we may have a reply from the Under-Secretary —we have had none so far—regarding the terms negotiated with Russia. I spent some time on that matter. The Secretary of State for Trade made clear that this transaction—and the one with Iran, too—was related to the new clause, but the Under-Secretary has not covered that question at all. I shall be grateful if he will expand on what we have so far heard from the Prime Minister and others. That would be helpful.

We dealt with the Russian business at some length in Committee, and I do not think that it is directly relevant to the clause now before us, which is for cost escalation cover for exports to virtually any part of the world where the ECGD will provide facilities. Obviously the total costs of the scheme will have to be taken into account, together with the costs of providing export credit generally to all parts of the world, not just to Russia.

We have not revealed the details of the Russian credit agreement because it is not Government practice to do so. We have no intention of doing so in this case, or, for that matter, in the case of Iran. We are, however, working towards international agreement on these things. I should add that in considering trade with the Communist bloc, and with the Soviet Union in particular, we have to take account of what our competitors are doing. Otherwise, we shall find that our exporters are out in the cold. Plainly, exporters to the Soviet Union will be able to take advantage of the cost escalation scheme because many of the contract projects with the Soviet Union are very large projects involving long manufacturing and delivery periods.

Finally, I return to the point which—

Order. The hon. Gentleman had sat down a few minutes ago. I hope that it is "Finally" this time.

I am sorry, Mr. Deputy Speaker, but I am trying to do my duty to the House.

I quite understand that, and I appreciate that it is an important subject, but we have another three important subjects to be dealt with later, and we must have some regard for those hon. Members who are in attendance. [HON. MEMBERS : "No.") Certainly. What the hon. Members says is all very well, but we cannot have this cat-and-mouse business, with the Minister sitting down and then another hon. Member getting up. We shall have to put a limit on it.

On a point of order, Mr. Deputy Speaker. May I say with great respect that I had raised all these points in my original speech and the Minister, no doubt due to an oversight, did not reply to them. It was not therefore unreasonable to ask the Minister before he sat down to deal with them. He is now covering those points. This is not a question of coming back on the matter. We are simply trying to get an answer to the points originally made.

In my opinion the Minister sat down. With the leave of the House he is entitled to speak twice, but there must be a limit at some stage.

Further to the point of order, Mr. Deputy Speaker. May I submit to you that the propriety or otherwise of what is done or said cannot be affected by the amount of business still remaining to be transacted. Either a procedure is in order or it is not, but the fact that other Members are waiting for later items on the agenda cannot affect the matter.

This is an open-ended debate. There is no time limit. The Minister said that he was dealing with his final point and in my opinion he had sat down. I was entitled to put the Question.

I can assure you, Mr. Deputy Speaker that this will by my final point. The Opposition were pressing me strongly on one amendment. I must tell them that the ECGD's existing accounts are not specifically required by its statutes to cover this question and it would be a new departure to attempt to govern these accounts by regulation. Nevertheless I am willing to have this looked at in another place if that will meet the concern expressed by the Opposition.

May I say, Mr. Deputy Speaker, that in view of what the Minister has said we do not wish to press our amendments to the new clause.

Question put and agreed to.

Clause read a Second time and added to the Bill.

New Clause 2


'Before entering into commitments or liabilities under the Export Guarantees Acts (including this Act) in respect of a person who is in receipt of a loan, grant, guarantee or other form of financial assistance under sections 7 or 8 of the Industry Act 1972 or section 3 of the Industry Act 1975, the Secretary of State shall notify Parliament accordingly '.— [Mr. Tim Renton.]

Brought up, and read the First time.

With it it will be convenient to discuss Amendment No. 9, in Clause 4, page 3, line 12, at end insert :

'(c) a return showing the aggregate amount of liabilities entered in respect of persons in receipt of loans, grants, guarantees or other form of financial assistance under, respectively, sections 7 and 8 of the Industry Act 1972 and section 3 of the Industry Act 1975 '.

Despite the late hour I hope that hon. Members will forgive me if in moving the clause I go back a little in time and examine ECGD practice.

It has been the custom for ECGD Section 1 business to be confined to commercial risks and the advisory council has vetted the business that ECGD was prepared to write under that section.

Section 2 business has always been quite different. This is business in the national interest which is not suitable for submission to the advisory council but which in ECGD judgment could be underwritten. In other words, it is a case where ECGD believes that there is a reasonable risk involved, and this category would cover, for example, arms shipments.

If ECGD feels that something is unduly hazardous—and this goes back to the much-quoted words of the Prime Minister when he was President of the Board of Trade—discussion then ensues, and this is clearly a fringe area in which the judgment and even the independence of officials in the ECGD are bound to be matched against the will of Ministers.

If the Minister is ultimately unable to persuade the ECGD officials that the business can be underwritten he may instruct them that they should take on that business. For many years there has been a convention that if this happens the Minister reports such business to the House. This practice has been regularly followed in the past. It happened in the case of the Suez—Mediterranean pipeline project under my right hon. Friend the Member for Knutsford (Mr. Davies).

12.15 a.m.

It was followed earlier by the right hon. Member for Battersea, North (Mr. Jay), when he was President of the Board of Trade, in the case of cover for exports to Saudi Arabia. In both instances they came to the House and made it abundantly plain that they had instructed ECGD to provide the cover. The most recent example was that of the Secretary of State for Trade, who in a Written Answer on 5th March announced:

"I have instructed ECGD to provide facilities to support the export of motor cycles manufactured at Meriden.—[Official Report, 5th March 1975: Vol. 887, c. 445.]

In that way, because the political will of Ministers has always been made abundantly clear by announcing to the House that instruction has been given, what I would call the business integrity of ECGD has been preserved.

Many Ministers have confirmed to the House that that would continue to be the case and that ECGD would not suffer from political pressure. They have said that if it were given instruction that would be reported to the House. The latest person to follow that well-trod path was none other than the Under-Secretary of State himself. On Second Reading, in replying to a comment from my hon.

Friend the Member for Gosport (Mr. Viggers), he said:

"The hon. Member for Gosport also suggested that the Government were using ECGD facilities for their own purposes. I give him a categorical assurance that that is not so.—[Official Report, 10th February 1975; Vol. 886, c. 159.]

In Committee the question of export facilities and bank guarantee facilities for Meriden and NVT was raised by my hon. Friends with an interest in the subject. The Under-Secretary of State replied :

"Any bank guarantee facilities for Meriden or NVT would, I repeat, be considered according to ECGD's existing power and procedures.…—[Official Report, Standing Committee D, 20th February 1975, c. 64.]

Thus we might have thought that we had a clear understanding of ECGD and the absence of the influence of Ministers.

I have cited the case of Meriden. The Secretary of State told the House on 5th March that he had given an instruction, but what about NVT? I am reminded in the case of NVT of a comment made by Sherlock Holmes to Dr. Watson. He asked Watson about the curious incident of the dog in the night-time. Watson replied "The dog did nothing in the night-time ". Sherlock Holmes replied "That was the curious incident ". It is equally curious that we have had no reference to NVT and an application through ECGD for export credit. If NVT needed an export guarantee, why did it not go to the Export Credit Department to get it? If it went to ECGD to get it and it was refused for some reason, why did not the Secretary of State give an instruction to ECGD to issue such cover? He cannot possibly have been worried that NVT did not fall into the category of national interest, because, on the very same day as ECGD cover to Meriden was announced, the Secretary of State for industry came to the House and announced that he was guaranteeing an £8 million export facility to NVT under Section 8 of the Industry Act. As he said to the House on that same evening :

"This is the first time that the Industry Act… has been used to provide a guarantee for exports.

He then said:

"I might add that though there is a connection … between the NVT and Meriden position, this is a motion to permit export finance to be made available for NVT itself.…"

Earlier he had said:

" This is the first time that the Industry Act … has been used to provide a guarantee for exports.…."—[Official Report, 5th March 1975 ; Vol. 887, c. 1672.]

Hon Members may ask why the Industry Act procedure was used uniquely and for the first time rather than the well-established ECGD procedure which I have described. We can only conclude that that must have been because the use of the Industry Act procedure enabled the Secretary of State for Industry to bring pressure to bear on NVT to go along with the solution that he wanted to achieve, a solution based on three factories producing motor cycles rather than two factories both of which belong to NVT and are divorced from Meriden. If a facility had been available to NVT under ECGD procedures—and the way was open for this to be done—NVT would not have had to give in to the political pressures from the Secretary of State for Industry.

This is a curious case, and complicated, but that appears to be the only reasonable interpretation that we can put on the fact that the Secretary of State for Industry came to the House and used Industry Act procedures to get an £8 million facility instead of the Secretary of State for Trade's using an established procedure under ECGD. If that is so it amounts to a gross perversion of the way in which export credits have been handled for many years.

There is no point in having an Export Credits Guarantee Department if, when its established procedure is embarrassing to the Government and does not achieve their ends, they use the provisions of the Industry Act to circumvent the commercial decisions of ECGD and to get round procedures that have been used for many years. That is, quite simply, cooking the books to achieve the Government's political aims. It may enable the Under-Secretary of State to say that ECGD is not subject to political pressure, but it means that Peter is being robbed to pay Paul, apparently to maintain the integrity of the ECGD. I imagine that officials of the Department must find that an intolerable position.

My hon. Friends and I appreciate that the wording of the new clause approaches the matter from the wrong end. Unfortunately, we cannot in a debate on this Bill control the actions of the Secretary of State for Industry. The clause provides that if a person who is in receipt of assistance from public funds under the Industry Act seeks a facility from ECGD as well the Secretary of State will have to notify Parliament.

That will have the effect of preventing the balance sheets of companies being bolstered or corrected by an injection of funds from the Industry Act or the National Enterprise Board and those same companies which have already had one injection of public funds obtaining —without Parliament knowing about it-normal cover from ECGD under Section 1 or Section 2 procedures because their balance sheets, thanks to the injection of Industry Act assistance, will be of sufficient standing to permit OCGD to underwrite the business offered.

It is with that purpose in mind and to correct the serious abuses that we believe may have taken place under Section 2 procedures of ECGD over the past weeks that we have tabled the clause. I trust that the Government will consider it seriously. It will go some way towards rectifying the abuse which I have mentioned.

I cannot understand how or why hon. Members can suggest that this clause with the associated amendment be included in this Bill. The assistance which firms may receive under the Industry Act can take many different forms and be for many different purposes. The assistance may have little or no direct connection with the firms exporting activities. In any case, assistance under the Industry Act has no connection with the Bill before the House and the matters we are discussing. What is the real purpose of this new clause? In practice, it would of course unnecessarily restrict ECGD's ability to provide its facilities to firms within its normal operations while serving no useful purpose whatsoever.

I have on various occasions given the House assurances about the use of ECGD facilities and the risks ECGD will take.

I stand by them and by every word I said in Committee and on Second Reading I imagine that hon. Members are not proposing that the fact that a firm may have received assistance under the Industry Act should in some sense make it ineligible for ECGD facilities or that such firm should in some sense be placed in a special ECGD category. I can assure the House that any assistance firms may have received remains a fact which ECGD will take into account when making its underwriting judgments. The House is well aware of established practice about Ministerial statements when ECGD is instructed to give cover.

There has been no abuse of Section 2 procedure.

On the amendment I would say that the return proposed would serve no useful purpose and that this kind of overall figure would be absolutely meaningless. The hon. Member for Mid-Sussex (Mr. Tim Renton) raised the question of Meriden and NVT. Government facilities for them were subject to prolonged debate in the early hours of 6th March and ECGD facilities for Meriden are in no way concerned with this Bill, as I said in Committee.

The grant of ECGD facilities for Meriden do not in any way conflict with the undertakings I and other Ministers have given about the use of ECGD facilities.

When the Secretary of State made the statement to the House about the instructions he had given to ECGD to give facilities under Section 2, that conformed with traditional practice.

The Government should start to distinguish between a statement and a written answer.

The Secretary for Industry in the debate said that the Secretary of State for Trade had made a statement, but that statement was made on the day the debate took place by way of a written answer which was not generally available to the House. I urge the Under-Secretary not to use "statement" when this was done, surreptitiously if I may say so, by written answer.

12.30 a.m.

There was nothing surreptitious about it. We could not do it until final negotiations were completed between Meriden and NVT, and we announced it on the day so that the House could have access to the information in the debate later.

The fact that it was described as a "statement" was in conformity with past practice. On two occasions in the past, in 1965 and 1971, similar statements about an unusual use of Section 2 facilities were made by way of Written Answer —under the last Labour Government and under the last Conservative Government. There are adequate precedents on both sides for what we did in this case.

I hope that the Opposition will withdraw this ill-considered clause and amendment.

Before considering the hon. Gentleman's final suggestion, we must ask him to deal directly with the matter raised by my hon. Friend the Member for Mid-Sussex (Mr. Renton). My hon. Friend did not refer to the alleged abuse of ECGD facilities in the Meriden context. That is not at issue. What is behind the amendment is the use of export credit facilities for NVT, which is a quite different matter.

Will the hon. Gentleman now tell us frankly—the Secretary of State did not the other night—whether NVT in the last few months has been applying for export credit facilities through the ECGD. If so, what has been the response of the ECGD to those applications?

ECGD facilities for NVT, as distinct from Meriden, are part of the ECGD's normal commercial activities under Section 1 of the 1968 Act. Details of such arrangements are traditionally confidential between the Department and its policy holders. The terms and conditions of the relationship between the ECGD and this policy holder are confidential and commercial, and it would not be proper to divulge what they are in detail.

As for the £8 million, which was not an ECGD operation, that was debated and agreed by the House on 6th March.

The NVT order for export credit was granted under the Industry Act. But the hon. Gentleman has not answered our question. Over the last few months, has NVT been applying for export credits, as we suspect and as many outside this House know that it has been? NVT has been refused export credits by the ECGD over the last few months, and no Minister has yet explained why the ECGD was unable to grant export credits to NVT, which had finished items of production ready for export, yet it was able to grant them to the Meriden co-operative, which had not started production. That is a totally inexplicable anomaly, and the only explanation can be that the Secretary of State for Industry brought political pressure to bear on the ECGD.

That is the reason why we have tabled this amendment. I hope that the hon. Gentleman will now comment directly on the fact that NVT has been refused export credit facilities in the last few months, and acknowledge that it is due to the application of political pressure.

Question put and negatived.

Clause 3


Amendments made :

No. 3, in page 2, line 31, leave out and '.

No. 4, in line 36, at end insert :

' and
(d) the liabilities at any time of the Secretary of State in respect of arrangements made under section (Payments to exporters in respect of cost increases) above,'.—[Mr. Deakins.]

I beg to move Amendment No. 5, in page 2, line 37, leave out £12,200 million ' and insert—

  • ' (i) in pursuance of commercial transactions covered by section 1 of the Export Guarantees Act 1968 or section 1 of this Act, £7,200 million ;
  • (ii) in pursuance of transactions adjudged to be in the national interest and covered by section 2 of the Export Guarantees Act 1968 or section 1 of this Act, £4,700 million ;
  • (iii) in pursuance of liabilities arising under paragraph (d) above, £300 million '.
  • With this, we may consider Amendment No. 6, in line 42, leave out £3,000' and insert

    'in respect of sub-paragraph (i) above not exceeding £1,000 million, in respect of sub-paragraph (ii) above not exceeding £500 million, and in respect of sub-paragraph (iii) not exceeding £100 million'.

    This is a matter which, in essence, we considered in Committee on 18th February. But it raises a very important topic, and we thought it right to return to it on Report. I hope that the Under-Secretary has had time in the intervening period to consult his officials, and I hope also that he will feel able to accept the amendments.

    The Government have two proposals. The first is to amalgamate the two separate limits which existed previously for what, under the old legislation, would be considered Part I and Part II business. In Committee, we explained at length why we thought that distinction and the use of the two separate limits was desirable. We appreciate that the limit on Part I business may be almost reached. But that is a matter which we can cover simply by extending the limit. The Part II limit is not in danger of being reached in the immediate future. Even if it was, there are provisions for increasing it by order as well. That being so, it is surely in our interests that the House should have control over both types of business, which are very different. One is in the normal commercial operation and the other is in the operation of effective political judgment in the national interest. Therefore, it seems that there is an argument for perpetuating the distinction which traditionally has always been made in these matters.

    Regarding the increase of limits by order, we felt that the figure of £3,000 million each time on a one and a half hours debate seemed excessive. We hope that by now the Under-Secretary has come to the conclusion that the figures suggested in the amendment would be more reasonable. We think that it would make for more rapid progress if he would simply say that he accepts both amendments. That would be in the interests of the House and of the way that we control our affairs.

    We have already debated the proposals in Clause 3 at considerable length in Committee. The only new point in this amendment is the proposed limit on cost escalation liabilities.

    I will repeat the reassurances that I gave in Committee, that, in proposing that the limits be combined, which is a worry to some hon. Gentlemen opposite, it is not our intention that Parliamentary control should be lessened or that there should be any change in the way that ECGD operates.

    I stress that separate estimates for Section 1 and Section 2 and for the cost escalation scheme will be submitted, that separate commitment figures will be maintained and published, and that separate accounts will still be rendered to Parliament.

    I assure the hon. Member for Worthing (Mr. Higgins) that I have looked at this matter again arithmetically. Unfortunately, the arithmetic cannot be put down in a way which will satisfy the needs of the Government and of ECGD. The question is not whether the House should debate the limits, but how often and in what form. Our proposal would allow the House to debate them at least three times in the next five years. We regard five years as the time that it would take to get from £12,200 million in commitment limits to £21,200 million. On each order the House could debate ECGD operations under Sections 1 and 2 and the cost escalation scheme.

    A number of hon. Gentlemen are worried about switching between Section 1 and Section 2 business. That matter could be dealt with in a debate, whereas on a separate order on Section 1 or Section 2 it would not be appropriate in the House of Commons under the rules of order to discuss other parts of ECGD's business.

    There is no dispute between the two sides about the necessity to increase the limits. The concern is over how much they should be allowed to increase without new legislation and the size of each tranche. We need high limits because of inflation. We need an amalgamation of the commitment limits to allow flexibility for the future. Economic circumstances are changing. We have seen a big upsurge in the past year or so in Section 1 business. It is possible that in two or three years there could be a switch or an upsurge to Section 2 business. We want to be able to cope without coming back more than once a year to the House of Commons for an order merely to increase the Section 1 limit or the Section 2 limit.

    On the basis of those assurances, which repeat those which I gave at length in Committee, I hope that the hon. Gentleman will withdraw the amendments.

    I did not find that rapidly delivered speech any more convincing than I did the first time round. However, the Under-Secretary has considered the previous point that we mentioned, with which he seemed to be agreeing, and gave an assurance that it would be considered in another place. It may be that in the other place those reading the report of this debate will also find the hon. Gentleman's argument unconvincing and will return to the subject. In the circumstances, I beg to ask leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    I beg to move Amendment No. 7, in page 3, line 2, at end insert :

    ' (4) The denomination in pounds sterling of the limits specified in this section shall not prevent the Export Credits Guarantee Department from assuming liabilities in currencies other than sterling ; but where such non-sterling liabilities are assumed, a sterling liability equal to the sterling equivalent of the non-sterling liability, calculated at the rate of exchange prevailing on the date the liability is assumed, will be deemed to have been incurred for the purpose of calculating the aggregate of the liabilities, sums and amount of principal moneys referred to in subsection (1) above '.
    We began our debates this evening discussing a Government new clause that will undoubtedly boost exports substantially, but at considerable public cost. I am glad to conclude our proceedings on the Bill this evening by proposing an amendment that will also boost exports substantially, but effectively at nil public cost.

    As the House will be aware, for many years we have had a currency, sterling, which has been relatively weak and, on all the prognostications, both domestic and international, it is likely to remain relatively weak. Over the years we have had to pay a considerable penalty for a depreciating currency, the penalty being the increased cost to ourselves of the goods we import.

    That penalty can be offset only in the export market, but if we could denominate our exports in currencies that were strong, preferably currencies that were stronger than our own, we should get back to this country a substantially greater value for our exports than if we denominate those exports in sterling itself.

    Let me give a small illustration. If an exporter entered into an export contract in the second quarter of 1971 and that export contract had been made in deutschemarks rather than sterling, in balance of payments terms it would have produced a benefit to us 49 per cent. greater than if it had been done in sterling, because that is the measure by which deutschemarks have appreciated over sterling during that period. It is a historical if regrettable fact that by and large most of our major export contracts over the last 15 years have been denominated in sterling and we have lost thereby hundreds of millions of pounds in the value of our exports.

    The purpose of the amendment is to make it easier for British exporters to denominate their export contracts in currencies other than sterling. The amendment would not require any immediate change of policy by the ECGD. It does not say that the ECGD will be obliged to underwrite contracts in currencies other than sterling, but simply that it is not precluded from doing so.

    As the Under-Secretary told me in a Written Answer on 23rd January, the ECGD at the moment can cover contracts expressed in foreign currencies. But the stumbling block has been the simple one that in previous export credit legislation ECGD liability limits have been expressed in sterling, and so it has been necessary for the ECGD to confine its liabilities to sterling. There is no barrier at the moment to exporters getting their contracts in foreign currencies, but the ECGD can provide cover only in sterling.

    This creates no difficulties where supplier credit is concerned, as I shall illustrate. The difficulties are solely with buyer credit. With supplier credit it is perfectly possible for the exporter to denominate his export contracts in foreign currency and still obtain cover from the ECGD in sterling. It is possible to have a non-matching currency situation with supplier credit because the supplier will have a contractual repayment schedule expressed in the foreign currency and be able to discount the repayments due to him. The supplier will be able to take a promisory note to the bank, discount it and take cash and cover himself against exchange risk.

    However, with large export orders supplier credit is not an option and the exporter has to use buyer credit, as the House will know. He has to use buyer credit essentially for two reasons. The first is that buyer credit, unlike supplier credit, provides 100 per cent. cover. Supplier credit provides only 90 per cent. cover and the balance of 10 per cent. has to be carried by the supplier as a contingency liability on his balance sheet. Where large sums are concerned this represents a considerable burden on the balance sheet, and therefore most large export contracts use buyer credit arrangements rather than supplier credit.

    In addition, the exporter with a large contract will want to use buyer credit because he will want to take advantage of progress payments. It is possible to get progress payments with buyer credit but not with supplier credit.

    12.45 a.m.

    For those two reasons, all our major exporters, where large export contracts are concerned, use buyer credit arrangements. Why is it not possible to have non-matching currency arrangement where buyer credit is involved? It is because there is no market, in the long term, in forward currencies. The buyer credit repayment schedule will have an average life of seven years, and that will start only when delivery has been taken. The average buyer credit will be outstanding for about 10 years from the date of the signing of the credit arrangement.

    What sort of forward cover is it possible for a bank to obtain? It may obtain only up to five years cover forward in dollars and only up to two years cover forward in deutschemarks. For that basic reason it is not possible for banks to contemplate a long non-matching situation in buyer credit. There is therefore a clear need to provide in the legislation a means whereby it will be possible for the first time for the ECGD to provide cover in currencies other than sterling.

    The only conceivable public cost that could arise would be as a result of a default by an exporter, when the liability that the ECGD had assumed would be called upon. If that liability is expressed in a currency which has appreciated against sterling the ECGD liability will be somewhat greater than if that cover had been provided in sterling. But, as the Parliamentary Secretary will know, the rate of defaults on buyer credits is minimal. I believe it is under 1 per cent. So we are talking about a very remote contingency.

    Against that, there are substantial potential balance of payments gains to be obtained by giving the ECGD this extra flexibility. The first gain is that the exporters themselves, if they are able to denominate their contracts in a strong currency—for example, deutschemarks with progress payments for the export contract one or two years ahead, they will be able to sell the deutschemarks forward and obtain a substantial premium on today's market. Today, an exporter, if offered deutschemarks one year ahead, would be able to get a premium of 6;ths per cent. compared to sterling. If people have deutschemarks to offer two years ahead they will be able to get a premium of 12 per cent. compared to sterling.

    Therefore, the exporter, knowing that the sterling value of a large contract denominated in deutschemarks will be higher, will be able to reduce the contract price and make his own export price that much more competitive.

    The second major balance of payments benefit—and this is the large one—is that y providing a repayment schedule in a currency which will appreciate over sterling the balance of payments worth will he the measure by which that currency appreciates in relation to sterling. It is evident historically that if we had had a large section of our exports denominated in deutschemarks for the last 10 years it would, each year, have put hundreds of million of pounds on the value of our exports. If that trend was thought likely to continue we could do the same over the next 10 years.

    The amendment does not impose any change of policy on the Government or on the ECGD. However unless it is made, ECGD will continue to be locked into offering cover only in sterling, which has the objections to which I have referred. Therefore, I hope that the Under-Secretary will accept the amendment.

    The House will be grateful to my hon. Friend the Member for Tonbridge and Mailing (Mr. Stanley) for his research, for the points he has made and for the lucid way in which he has put the ease for the amendment.

    I hope that the Under-Secretary will take the point that what is at issue is not whether a particular contract may be denominated in sterling or another currency but whether ECGD is in a position to offer cover when the contract may be denominated in another currency.

    I understand that it is not possible for firms commercially to cover forward over the length of time for which such contracts are likely to run, certainly if it takes two years to build the equipment and then perhaps another five before the contract runs out. No doubt the Minister will have carried out research of his own on that matter.

    My hon. Friend seems to be on a good point, and I hope that the Under-Secretary will give a reasoned reply.

    A certain amount of misunderstanding may lie behind the amendment, and therefore it may be useful if I explain the present position in some detail.

    ECGD's limits are expressed in sterling. However, that fact does not mean that ECGD cannot provide cover for contracts which are expressed in or involve payment in foreign exchange. The Department can and does insure such business. What it does not do is to provide cover against exchange risks or exchange rate fluctuations. Neither have approaches from exporters led us to believe that there is any proven need for such cover. As. I have told the House in answer to Questions, where exporters wish this kind of protection there is usually a forward exchange market to meet their needs.

    A point was made about buyer credit. Exporters do not have to use buyer credit for big contracts. Some big contracts are done on a supplier credit basis, for example, because buyers prefer this technique. Problems of foreign exchange cover are not different between buyer credit and supplier credit operations. ECGD can cover buyer credit operations expressed in foreign currency, but, as in supplier credit operations, this does not involve foreign exchange cover.

    Buyers and sellers will have a different point of view on which is the best currency to use for a sale. Buyers will seek to be invoiced and to pay in a currency which they expect to depreciate, and sellers will prefer to use a currency which they expect to appreciate. As i am sure I do not need to stress to Conservative Members the use of sterling as a world trading currency has implications which extend considerably beyond the scope of the Bill.

    The amendment could produce an odd situation which I doubt that Conservative Members wish to see arise. If ECGD were to assume obligations expressed in a foreign currency and were to write into its statutory limits the sterling equivalent of such obligations calculated at the date the liability is assumed, then, in the event of the foreign currency appreciating, ECGD could have incurred obligations which were not included in its limits. In the event of significant amounts of foreign exchange obligations being incurred and of large appreciations in the currencies, the liabilities outside the limits could become large.

    Having said this, I take some of the points which both hon. Members have raised. I have already mentioned the work ECGD is already doing on closing a gap in its cover where exporters invoice in foreign currency and where they have associated foreign exchange obligations. If the House wished, I could go into more detail. As I have said, there is no proven need for cover beyond this but if, perhaps because of changing circumstances, a case were made out for such cover at a future date, then the Department would always be willing to consider it. If hon. Members have points or proposals they wish to make in this context, then I should be very happy to receive these in writing.

    Against the background I have discussed above at some length, I hope that the hon. Member will now be willing to withdraw this amendment.

    The Under-Secretary says that the ECGD would be willing to consider it. Are we to understand from that that it can now do so within the scope of the Bill and existing legislation?

    It would not require additional legislation, as I am informed at the present stage. We are talking about not assuming foreign exchange risks. We certainly do not want to do that. But if the hon. Gentleman would like to write making proposals, we should certainly look at them, because the amendment that he is suggesting to the Bill would not meet the objective that he appears to want to produce and, furthermore, would cause ECGD perhaps to take on risks which would be completely unjustifiable.

    First, if the Under-Secretary has the impression that the amendment is in any way designed to provide insurance against exchange risk, he has completely misunderstood the amendment. 1 hat is not its purpose at all. I am sorry if anything I have said may have given that impression. It is wholly false. The amendment is simply to allow ECGD to assume liabilities in currencies other than sterling.

    The only objection that the hon. Gentleman has made to my argument—I do not know whether he has accepted the force of the argument in terms of the balance of payments benefit—is the possibility that if the ECGD assumed liabilities in a currency other than sterling and that currency appreciated against sterling, by the time the liability fell due the ECGD could have found itself going above its statutory limits. That is a very technical and very minute objection, because we are talking here only about the most remote contingent liability in the buyer credit context. As the hon. Gentleman knows, the rate of default on buyer credits is, I believe, well under 1 per cent. Therefore, the objection to the possibility of ECGD's limit being seriously exceeded because of this remote contingent liability as a result of a slight appreciation of a currency against sterling falls to the ground.

    I welcome what the hon. Gentleman said about the offer to write to him which I certainly propose to do. I believe that by correspondence and possibly meetings we may be able to take this matter further.

    I should like the hon. Gentleman to clarify one point which does not square up with the Answer that he gave to me on 23rd January, because it is directly relevant to the legislation. He said then :
    " ECGD does cover contracts expressed in foreign currencies "—
    that we know—
    " although as the Department's statutory limits are in sterling its maximum potential liability in such cases has to be denominated in sterling." —[Official Report, 23rd January 1975 Vol. 884, c. 48]
    As my hon. Friend the Member for Worthing (Mr. Higgins) has said if that Answer is correct it would require legislation to enable ECGD to assume liabilities in other currencies, in which case, if there were merit in this amendment, we should have to seek to amend this legislation in the other place.

    As a matter of legality, will the hon. Gentleman clarify whether it is possible under the Bill as now drafted for ECGD to assume liabilities in currencies other than sterling? If his answer is "Yes ", there is no immediate need for legislation. If his answer is "No, we should need to consider the Bill further in another place.

    1.0 a.m.

    I have already said that ECGD can accept a situation in which exporters get a foreign buyer to denominate the foreign currency for the purposes of the contract. That will be perfectly acceptable to ECGD. I am not sure whether what the hon. Gentleman is proposing in his major admendment is foreign exchange cover. If it is not there would be no rise in ECGD liabilities and the point I was making would not apply. This is a highly technical and complex subject. I am prepared to meet the hon. Gentleman to discuss it. I do not believe that it is a point that can be pursued on this amendment.

    Amendment negatived.

    Clause 5


    Amendments made : No. 11, in page 3, line 22, at end insert :

    ' (4) Arrangements may be made under section (Payments to exporters in respect of cost increases) above in relation to contracts entered into on or after 20th February 1975 and increases that have occurred before the passing of this Act.'—[Mr. Deakins.]

    No. 12, in page 3, line 24, leave out from 1968 ' to 3(6) ' in line 25 and insert :

    " trade with other countries "and" securities" have the meanings given in sections 1(3) and'.—[Mr. Deakins.]

    No. 13, in page 3, line 33, leave out ' section ' and insert :

    ' sections (Payments to exporters in respect of cost increases) (5) and '.—[Mr. Deakins.]

    Motion made and Question, That the Bill be now read the Third time, put forthwith pursuant to Standing Order No. 56 (Third Reading), and agreed to.

    Bill accordingly read the Third time and passed.