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British Railways (Subsidiary Businesses)

Volume 984: debated on Friday 9 May 1980

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Motion made, and Question proposed, That this House do now adjourn.—[ Mr. Newton.]

2.37 pm

I am pleased to have this opportunity of introducing a short debate on the future of British Rail subsidiaries. The origins of the debate go back to the statement by the Minister of Transport in the course of oral questions on 20 February, to the effect that he was asking the chairman of British Rail to consider forming a holding company to enable British Rail's three major subsidiaries to be taken into the private sector.

I think that the Parliamentary Secretary will admit that that was a novel announcement for which there had been no preparation. I have again carefully gone through the Conservative manifesto, and I can find no hint whatever—not even between the lines—that the Conservative Party put before the electorate at the general election the proposal that the three major subsidiaries of British Rail should be hived off to the private sector. With perhaps extreme conscientiousness, I have even been through " The Right Track " again, and, even in what we might regard as the seminal work for the Government's transport policy, one can find not the slightest indication that the Conservative Party, when in opposition, had it in mind to hive off those bodies, or that it gave any warning at the time when it sought its mandate that it had this matter in contemplation.

One might also add that the news came as a fresh announcement to the British Railways Board itself, because only three weeks before the Minister made that statement, the deputy chairman of British Rail issued a press statement in which he explicitly said:
" British Rail is not in the hiving-off game."
Only seven days after the Minister made his statement—I emphasise " after the statement "—the deputy chairman wrote a letter to The Guardian, in which he stated:
" Contrary to the impression given by your Planning Correspondent, British Rail has no plans to sell any of its hotels or ferry services as the preliminary to setting up a holding company offering shares for sale to the public."
We have an announcement made to the House with no preparation beforehand to the public, to Parliament or, for that matter, to the board, which plainly was not consulted about the announcement and has been resisting the announcement since it was made.

I can understand why the members of the board wish to oppose this proposal. After all, they had spent the previous nine months patiently and with much effort putting together a package by which they could attract private sector capital into their subsidiaries. In view of the way that they have been treated some of us may now doubt the wisdom of that strategy on their part. But they came forward with a proposal to involve private sector capital in their operations to finance further expansion of those businesses. Had the Minister genuinely been seeking a way of involving private capital in a mixed operation with the public sector in British Rail he had found a method of doing it.

The first question to which I ask the Parliamentary Secretary to address himself when he replies is: why did the Government reject those proposals? Why were they not good enough for the Government? Why was it neceessary for the Government to go further and to urge that the three subsidiaries be put in a new holding company wholly in the private sector?

One can but suspect that, had the British Railways Board succeeded in attracting investment to its subsidiaries, it would have been incompatible with the Government's commitment to rolling back the public sector, because it might—perish the thought—have enabled British Rail to expand the work of its subsidiaries and the State's competition with the private sector.

I invite the House to contemplate the holding company proposed by the Government. It will contain three separate subsidiaries. In order of turnover they are Sealink (UK) Ltd, British Transport Hotels Ltd and the British Rail Property Board. At present, these are three distinctive management organisations with three separate profit centres. The Government are proposing to runnel them all together into one holding company. Whoever ends up holding that company will find that he is running an extensive shipping business and the largest mail order wine club in Britain. He will be providing a national laundry service and will simultaneously be managing a large number of lucrative city centre office properties. In his spare time, he will also be serving meals on trains.

It is impossible to see what conceivable rationale there could be for such a ragbag of diverse and diffuse functions. It cannot seriously be intended that it should stay that way. No sane manager would attempt to organise, as a corporate identity, any one company holding such a diverse range of functions and profits.

One is left with the suspicion that the proposed holding company is nothing more than a vehicle to enable the Government to hive off from British Rail its three lucrative subsidiaries and to let the asset strippers in so that they can take the most profitable chunks and absorb them into their own private sector companies.

Shortly before the Minister's announcement to the House, I was intrigued to see the city editor of the Daily Express speculate as follows:
" the attraction of picking up hotels on choice sites "—
he was referring to the city centre hotels of British Transport Hotels—
" would be just the opportunity hoteliers like Sir Charles Forte and Mr. Maxwell Joseph could not refuse ".
I should not be surprised if already a substantial number of property firms were looking at the considerable profits made by the British Rail Property Board over recent years. Last year it actually knocked up a profit of 77·6 per cent. There would be no difficulty in finding a property firm which was willing to take over that slice of the State industry. No doubt the hon. Member for Dorking (Mr. Wickenden) has already cast his eye over what might happen to Sealink ferries and will be able to find it a safe resting place within his own conglomerate which operates European Ferries.

There will be nice bits of profit for each of these companies in taking away from the holding company vehicle those parts that provide the profits. The problem is that such a development would desperately complicate the attempts of the British Railways Board to run a real business. I shall demonstrate how difficult the job would become.

At present, British Transport Hotels does not simply manage hotels; it also runs station catering and provides all forms of refreshment that are served on all trains. In addition, it handles the laundry for the entire British Rail function. That is done at three major laundries throughout Britain, one of which is situated in my constituency, at Slateford in Edinburgh. Those laundries do not simply handle the laundry for British Transport Hotels. They even handle the linen that is required for sleeping cars on British Rail trains. Together, those functions account for well over half the turnover of British Transport Hotels, and they are intimately related to the operation of the railway business.

At present British Transport Hotels does not show a profit, but there is no reason why it should. It is providing a service to people using the British Rail business. The price of the ticket is calculated to meet the cost of the operation. The cost of the charge for those services is calculated to make them pay their way but not to make a profit, because they are provided to give an incentive to people to use the British Rail buisiness.

It is doubtful whether any private sector firm would be interested in providing that kind of service on a cost basis. The consequence can be only one of two things. Either the services would be cut or withdrawn, or, alternatively, they would become more expensive to the travelling passenger.

It is worth recalling that British Rail catering is far better developed than the catering in any other railway business in Europe. More meals are served on the British Rail network than on the whole of the network in the rest of Europe. It is possible that British Rail has been too ambitious in its attempt to provide that catering service, but it will be impossible for it to provide that service if the Government's proposal goes ahead. It will lose British Transport Hotels, which at present provides the bedrock on which it rests that service.

I turn now to Sealink. Sealink was originally formed because the ferries carry trains. About 34 per cent. of all the business of Sealink comes from railway-generated business. It is also a public sector firm and as such has a purchasing policy to buy British. The Parliamentary Secretary will be aware that all ferries purchased by Sealink are British ships, and are almost entirely purchased from Harland and Wolff—a struggling shipyard situated in an area of acute unemployment, where the loss of Sealink orders will have a serious industrial impact, particularly if they go to the lion. Member for Dorking who has found it impossible to place any of his orders for ships with a British firm.

I warn the Parliamentary-Secretary that Sealink is not simply a British concern. It is a consortium of four separate national firms. It is organised by the Dutch, Belgian, French and British railways. They trade under the same livery and the same name, and they have a common fare structure and an agreement as to how the profits are divided among them. The chances are that a person travelling to France will be travelling on a French, rather than a British boat. All the companies participating in the consortium are public sector companies. The Government are proposing to inject into that consortium a single private sector firm. That will greatly complicate the financial and accountancy arrangements which are at present run by all four companies on the conventions that apply to public accountancy and public sector financing. I know the Government have doubts about Europe, but I warn them that this suggestion would be regarded as highly un-European by some of the partners in Sealink, who will find themselves dealing with a private sector firm whose main interest will be to maximise profit.

Finally, I turn to the British Rail Property Board. I shall not detain the House long with references to this board because it is self-evident that all the properties it holds are on British Rail premises. The great bulk of them relate to sites which contain premises still in operation. Even those parts which are not required for operational purposes are now being sold off rapidly by the property board and are providing a very healthy income to the main business. In the last 15 years British Rail has generated 226 million from the sale of land assets which it no longer requires for operating purposes. That has been a major source of income which has enabled it to finance investment in other parts of the business to help the travelling public.

I see no reason whatsoever why that income should go to a private sector firm and disappear into private pockets through dividends rather than return to the travelling public through investment in better rolling stock and in better service to the public. After all, the public paid for these assets when they were originally purchased in 1948.

Before I conclude, I should like to restate the important questions to which I think we are entitled to answers and to which I hope the Parliamentary Secretary will address himself. These questions are as follows. First, why have the Government rejected the proposals by the Board for a partnership with private sector capital and, instead, indulged in their own dotty scheme for a holding company? Secondly, what is the logic of this mad conglomerate which will bring together such diverse and diffuse functions, and do the Government seriously expect that such a diverse holding company could long survive? Thirdly, will the British Rail Board be allowed to retain a controlling interest in that holding company, and, if so, will that controlling interest be a majority controlling interest or a minority controlling interest? If not, how do the Government propose to reconcile the present operational requirement of British Rail to have contact with these subsidiaries with the proposal to pass control of them over into the private sector?

Fourthly, how will British Rail be compensated for this sale? I presume that the Government will not propose denationalisation without compensation. That would, after all, be nothing short of confiscation. What proposal, then, will the Government be making for compensating British Rail for the loss of what, clearly, are highly profitable and potentionally very lucrative assets indeed, particularly in the form of the British Rail Property Board?

Fifthly, will that compensation be set against the external finance limits of British Rail? If so, as the Parliamentary Secretary will appreciate, that will have the effect that there will not be a single extra penny available to British Rail to finance further expansion or development of its services.

In conclusion, there is one other question that the House has to ask, even if the Government will be very reluctant, this time, to answer it. If the answer to these previous questions turns out to be unsatisfactory to the board, if the board continues to object to the proposals put forward as not making any kind of commercial sense, will the Government seriously contemplate using their majority to push through the House a proposal against the consent and without the cooperation of the board? If that were the case, I believe that it would be a shameful and unfair way to treat a major nationalised industry that has made major strides over recent years to provide a more efficient and more cost-effective service to the travelling public.

2.54 pm

The hon. Member for Edinburgh, Central (Mr. Cook) is to be congratulated on giving the House an opportunity to acquire more information about the Government's intentions towards some of the British Rail subsidiary businesses. He is correct when he reminds us that the Government are firmly committed to the involvement of private capital in subsidiaries of British Rail. This debate provides a brief opportunity to explain more fully the Government's objectives and the reasons why we are seeking to denationalise some of the subsidiary businesses.

Underlying the Government's thinking on the British Railways Board's subsidiaries is our general policy of reducing the size of the public sector. This has found expression elsewhere in transport in our proposals for the National Freight Corporation, which are in the present Transport Bill. My right hon. Friend the Minister has already announced that he wishes soon to introduce private capital into the British Transport Docks Board.

We also see private capital as the solution to some of the problems of certain of the board's non-rail subsidiaries, but I accept that the problems are slightly different in this case as compared with the NFC and the Docks Board, because here we are dealing with subsidiaries that are part of a much larger group—subsidiaries that undoubtedly have a close and in some ways continuing link between themselves and with the railway as a whole.

The hon. Gentleman was right in identifying the subsidiaries that we have in mind. The most likely candidates seem to be Sealink (UK) Ltd, including both the shipping and the harbour side of the business; British Transport Hotels; and part of the board's property management and development activities. All these have connections with the railway, but each at present has, as the hon. Gentleman said, a significant independent existence as a separate profit centre within the board, and all of them are comparable to private sector businesses in their own sphere. It is right that collectively they are somewhat of a ragbag of activities, which is why a holding company is the preferred approach. But it is astonishing to find that British Rail, under its wide umbrella, at present retains this ragbag of activities.

If I had more time I would turn some of the hon. Gentleman's arguments back upon him and question whether most members of the public could appreciate the reasons for the largest mail-order wine business in the country being in the Government's ownership, under the umbrella of the British Railways Board. As the hon. Gentleman accurately said, that is the present position.

There is one other subsidiary that is operating in a way very similar to that of a private company—British Rail Hovercraft Ltd—but the considerations there are somewhat different, largely because of the unhappy financial record of hovercraft in this country. It plainly is not eligible for the same treatment.

The Government's desire to see private capital involved in the British Rail subsidiaries that I have identified is not merely the application of a doctrinaire political policy. I hope that the hon. Gentleman agrees that Conservative and Socialist politicians are never more boring than when they are involved in an arid debate based on instinctive reactions to the idea of nationalisation or denationalisation, and to the idea " Public sector good; Private sector bad ", or vice versa.

We believe that in this case there are genuine benefits to be gained both by the public and by the subsidiaries and those who work in them, from involving private capital in the businesses. One of the matters that I must emphasise, because it arose in several of the hon. Gentleman's questions, is that in terms of involving private capital in the businesses there is no difference of opinion between my right hon. Friend and the chairman of the board. My right hon. Friend and Sir Peter Parker are in complete agreement about the desirability of involving private capital in these businesses.

Let me explain why I see considerable benefits for the businesses if private capital is involved, and the disadvantages that they have suffered from being in the public sector for so long. Some of them have been handicapped by statutory controls over the scope of their activities—controls that are perfectly proper for a nationalised railway but are not appropriate for businesses required to behave in a commercial manner. They have suffered from the need to compete for limited investment funds with the railways as a whole. They have also, until comparatively recently, had a low priority in management attention, because the board has historically tended to concentrate, for perfectly understandable reasons, on the problems of the railway itself.

It is difficult to operate a business in a commercial environment if one is in the public sector. I have never been able to see the advantages to a business of the kind that we are talking about of being in the public sector, where, for instance, all investment counts as public sector investment and is subject to restrictions that have to be imposed under all Governments by the Treasury with an eye to the public sector borrowing requirement.

If we look at the subsidiaries, we can see the effect of the restrictions that necessarily follow from being in the public sector. Sealink is one of the largest operators of short-sea ferry services in the world, and is a highly successful business—the most successful in the entire British Rail group. In recent years it has started ordering new ships to modernise its fleet, but there is a large backlog because of lack of investment in the early 1970s. The average age of Sealink's fleet is still significantly greater than the average ages of those of its main competitors. Whilst it is in the public sector, the company cannot be certain that it will receive the investment that it needs in the future, because its claims for shipping investment have to compete against the investment needs of the railway as a whole, and all those investment needs are subject to the restraints imposed on public sector investments of all kinds.

British Transport Hotels is one of the largest hotel businesses in the country, operating 29 hotels. But the business has a poor financial record compared with other major hotel companies. The past decade has seen enormous opportunities for expansion in the hotel industry in this country, opportunities that many private groups have taken advantage of, but British Transport Hotels has not grown.

The number of hotels that the company operates has contracted. Although the business has links with the railways, from which it derives a significant part of its turnover—we have to respect those links—the company has, in practice, been overshadowed by the railways within the group's activities and its growth has been stunted. It has not had access to the investment necessary to expand, or even to modernise its hotels, to the extent necessary to enable is to compete effectively.

The board has an extensive property portfolio. Over the last year it has accelerated significantly and impressively. I pay tribute to the rate at which the board is realising land for industrial development and making the best use of it. The board has exploited this property in order to provide revenue for the railways, and it is right that it should continue to do so.

However, there is a large estate which the board itself classifies as non-operational and which is not necessary for the running of the railway. In 1979 that property produced an operating surplus of over £7 million. The board's property division has made a good deal of progress in developing its estate, but it cannot behave as if it were a commercial property company. Again, it is restricted by statutory powers and it has simply not had access to the capital that would be necessary not only to dispose of the estate but to develop it to its full potential. There is no way in which it will get those opportunities so long as it remains in the public sector.

For all those reasons, therefore, as well as because of the benefit which would come to the public and the taxpayer, we believe that it is right to pursue the objective of taking those businesses out of the public sector and giving them the character of private sector companies. We are firmly committed to doing that and we axe at the moment considering how it can be achieved and the timetable for achieving it, which we hope will be reasonably brisk.

My right hon. Friend said that his objectives are to achieve a fundamental change in the status of these businesses, so as to free them from public sector restraints and enable them to seek risk capital in the private sector market. It is in the interests of the work force, the management and the taxpayer that that should be done.

I would distinguish this from the occasional suggestion that parts of British Rail should be hived off—to use a phrase which is unpopular with those who represent railwaymen in particular. I distinguish what we are doing in involving private sector capital in these businesses and giving them the character of private sector companies from hiving off the railway's activities. I would describe hiving off as the sale of an individual attractive hotel or of a particular part of an activity. What we propose to do is keep these businesses intact, while recognising their continuing links with the railways. Those links will be recognised in our proposals for taking them, as thriving busineses, into the private sector, where we believe that their prosperity will improve.

I am sorry. I normally give way, but if I do so now, I shall not have time to give what I think will be interesting news in response to questions.

I was about to turn to the method by which we intend to proceed and the discussions that are going on between the Government and the board—which have not reached any finality. At the Minister's request, the board began developing its ideas for involving private sector capital last summer. It is not correct to say that we have not consulted the board throughout. The chairman suggested to the Minister a range of initiatives tailored to meet the needs of the individual businesses, involving in one case the flotation of a complete business, and in others a variety of joint ventures with private sector partners.

The board recognises, however, that there are alternatives to its initial suggestions. One that is particularly interesting to the Government is the possibility of establishing a holding company for the subsidiaries, in which the board could retain a significant stake. This idea offers the opportunity for comprehensive change, while recognising the links which must continue with the railway.

The advantage of the holding company idea, as opposed to partnership projects or involvement of private sector capital in aspects of the present businesses is, as I have said, that the holding company would take on the character of a private sector company. The effect on all the businesses of that company would be that it would not be subject to the public sector constraints that at the moment damage the businesses—including the cash limits within which they must operate. Whatever conclusion we reach on methods, it will have to involve that element of taking the businesses into the private sector, outside the cash limits and the other restraints that there have to be on public expenditure.

The Minister and the chairman have therefore agreed that the various options for involving private capital should be examined to explore the relative advantages and disadvantages of different methods and to establish what issues and problems would need to be overcome in order to implement the chosen policy. That examination is still in progress, and we hope that it will soon come to a conclusion and clarify the methods that we propose to pursue.

I accept that there are considerable implications for the board and the remainder of its business in what we propose. For the reasons that I have given, there will continue to be a British Rail interest in the holding company, or whatever other vehicle is chosen to take these businesses out of the public sector.

I take the hon. Member's point, which I am sure will be referred to again, on the question whether the interest retained by British Rail would be a minority or a majority, or a commanding interest. I hope that we do not get too bogged down in that difficulty. Apart from anything else, in order to be the commanding shareholder in a business, one does not have to hold 51 per cent. of the equity or anything like it. However, we have reached no firm conclusion on that at the moment. We are prepared to begin by accepting that there must be a continuing British Rail interest in whatever company is created.

The implications for British Rail of disposing of the proceeds of any denationalisation are also being actively considered. I accept that there must be important discussions about the effect on the board's external financial limit and its investment ceiling, as well as on the overall level of its borrowings—all of which we fully recognise will be affected once the change is put into practice, but we are determined to make these changes and enable these businesses to act commercially in the private sector.

We believe that the work force and the management of these businesses have everything to gain once the Government have taken their objectives to a conclusion. Later this year we hope to place before Parliament formal proposals to make the legislative changes to enable us to put this policy into practice.

Question put and agreed to.

Adjourned accordingly at six minutes past Three o'clock.