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Scottish Development Agency

Volume 955: debated on Thursday 3 August 1978

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asked the Secretary of State for Scotland whether he has determined financial duties for the Scottish Development Agency; and if he will make a statement.

The Scottish Development Agency has been informed of my determination of its financial duties in the following terms:

1. I am directed by the Secretary of State for Scotland to say that, in accordance with Section 12 of the Scottish Development Agency Act 1975 and paragraph 21 of the Scottish Development Agency Industrial Investment Guidelines, he has determined, after consultation with the Agency and with the approval of the Treasury, financial duties in relation to the Agency's functions as an investor of public funds and in the promotion of industrial efficiency. Those financial duties take the form of a requirement on the Agency to publish rates of return on capital employed and the setting of a target rate of return.
2. In calculating rates of return on capital employed, any capital invested by the Agency from grant-in-aid or made under the terms of Section 5 of the Scottish Development Agency Act 1975, and any return attributable to any such capital, is to be disregarded. The Secretary of State may, with the approval of the Treasury, determine from time to time that any other investment or class of investment should also be so disregarded.
3. The Agency is to publish, in its annual accounts, a rate of return based on its consolidated profit and loss account for its investment function which is to be the ratio expressed as a percentage, of the consolidated profit (including investment income and share of profits or losses of associated companies) before interest, taxation, minority interests and extraordinary items, to the capital employed: and the capital employed is to be the time-adjusted aggregate of public dividend capital, reserves, loans from Her Majesty's Government, other loans, deferred taxation, minority interests, overdrafts and short-term borrowings less bank balances and deposits. The calculations are to he made on historical cost accounting principles.
4. The Agency is also to publish, in its annual report to the Secretary of State, a weighted average rate of return for all companies in which the Agency holds investments. The purpose of this rate of return is primarily to serve as a measure of the Agency's effectiveness, in promoting industial efficiency in the companies in which it invests. The weighted average rate of return is defined as the ratio of attributable net income for a particular financial year to Agency capital employed in that year. Attributable net income is that proportion of the net income of each invested company equal to the proportion of that company's total capital employed which has been supplied by the Agency; and net income is defined as the total profits and losses of all companies in which the Agency has invested which are not excluded by the operation of paragraph 2, for that part of the relevant financial year during which the Agency holds investments in them. The total profits and losses should include all and only those that are properly, and in accordance with best accounting practice, reflected in the profit and loss account and are to he taken before interest, tax, minority interests and extraordinary items. Agency capital employed is defined as the total investment made by the Agency in the relevant companies including a share of reserves; and total capital employed by a company is to include all share or loan capital invested by the Agency or other investors, reserves, deferred tax, minority interests, overdrafts, short-term borrowings, bank balances and deposits, all adjusted for the part of the year during which they are held and calculated as appropriate on historic cost accounting principles.
5. The Agency is to use its best endeavours to achieve by 1981–82 a minimum weighted average rate of return (as defined in paragraph 4) or 15–20 per cent., and to make steady progress towards that figure in the years up to 1981–82, this target taking into account the rate of return expected to be secured on capital employed in manufacturing industry and the Agency's wider purposes which require it to take a longer-term view of investments than could a purely commercial enterprise. The target rate, and the date by which it is intended it should be achieved, may be varied subsequently by the Secretary of State with the approval of the Treasury and after consultation with the Agency.