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Westminster Hall

Volume 404: debated on Tuesday 6 May 2003

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Westminsterhall

Tuesday 6 May 2003

[MR. FRANK COOK in the Chair]

Steel Industry

Motion made, and Question proposed, That the sitting be now adjourned.— [Jim Fitzpatrick.]

9.30 am

I welcome the opportunity to open the debate. I asked for the debate a week ago today, on the day that the Corus Group held its annual general meeting at which it endorsed a new chair, Mr. Leng, and a new chief executive, Mr. Philippe Varin, and announced a restructuring and recovery plan that sheds hundreds more steel jobs around the country. Corus is the successor to British Steel. It covers the core steelmaking business in this country, which in turn serves our manufacturing capacity, and is the basis of our industrial reputation in this country and abroad.

A partnership approach with government at national and regional level is not an option to undertake as the mood of the chairman and the chief executive takes them; it is what the Government must demand. The bombshell announcement last Tuesday was so poor that the families of workers at Stocksbridge in my constituency woke to hear on the radio—as I did—that their jobs were to go and the works were to be closed ask the Government to intervene to demand a say and to ensure that every aspect of the package put forward by Corus last week is subjected to close and independent scrutiny. The implications for the UK's industrial reputation are such that the Government have a duty to intervene. The issue is not just about Corus, its management or the individuals and factors at the top of the organisation; it touches on almost every aspect of the economy.

The Government should work to ensure that external international factors, such as tariffs, the dumping of cheap products, and fluctuating exchange rates, are not a threat to the industry. That is partly why, with the support of my colleagues who are present—I am grateful for their attendance—and that of the trade unions and the UK Steel Association, an all-party steel group was established a couple of years ago to give the industry a more high-profile parliamentary focus and to enable it to work more closely with the Government. We have worked well over US steel tariffs. We have a role—we have worked on that—to press in Europe for measures against dumping and the influx of cheap products.

The all-party group also recognises that, for the steel industry, fluctuating exchange rates in Europe have been detrimental to investment planning, which they have left uncertain, and have sometimes left us at a disadvantage with European competitors. The stability which membership of the euro—at the right exchange rate—would bring is unquestioned. It is interesting that, since the group was formed two years ago, the former chair of the Corus Group has not once made any attempt to make contact with me, as chair, or with parliamentary colleagues.

I ask the Government to maintain and extend investment in research and development in the industry in conjunction with higher education and regional bodies, and to build on new moves in metal skills training which are essential to create the flexibility that the industry needs to grasp new opportunities in the market. Although the leadership and structure of this crucial industry has been muddled and has failed, steelmaking in the regions has continued and will continue. There are new markets and capacity for a competitive and versatile steel business. New developments demand flexibility, skills, expertise and, of course, a competitive environment, investment and high productivity. We have taken those measures in the UK and have a competitive industry, which excels in world markets.

I agree wholeheartedly with the trade unions that those characteristics and skills exist across the country in both management and the work force. The leadership has let down not only them but all of us in the country. I know that other hon. Members will focus on their particular areas, but I want to concentrate on south Yorkshire, which is the home of engineering steel production. We know that the production method involves an electric arc furnace and uses scrap metal as its primary source. I suspect that it is the only heavy industry in the country that has a totally recyclable product, and it is therefore environmentally important.

We also know that Sheffield's industry goes back to the days of crucible steelmaking in which people found new functions for a brittle, hard metal substance by using its flexibility and durability, which gave our manufacturing industry the edge across the world in the past century. In recent years, that expertise has been developed under the Labour Government. In south Yorkshire, there is a partnership, in which Corus is involved, between the aerospace industry, the Boeing company, the Government and the region. It has led to the development of the Advanced Manufacturing Research Centre, and the Minister was welcomed in south Yorkshire when he opened it.

Those links with the aerospace industry are fundamental to a package of new initiatives, which are linked with higher and further education in the region, building on the links between engineering steel and new industries. For example, the Welding Institute has relocated to Sheffield from Cambridge and the head office of Castings is in the area. The production of new medical instruments is centred on our Medipark, where 140 companies are located. The energy, wind technology and diesel technology industries all need new specialist products made from engineering steel produced in south Yorkshire.

The debate concerns not only the steel industry but all the products that flow from it. The value-added end of production in the steel industry has led the industry into new profitable markets, and a small town in my constituency called Stocksbridge lies at the top of the value-added chain. It has about 15,000 inhabitants and is the home of special engineering steel. An early pioneer, Samuel Fox, founded the town's works, which he made profitable because he knew how to make steel bend. He introduced steel into women's corsets and crinolines and the works went on to be the main producer of the high-tensile steel used in umbrellas. Now, Stocksbridge produces the unique, strong, high-tensile steel used in landing gear on aeroplanes. Every time we land and wonder why the aeroplane does not crash as its weight bounces along the runway, we can be thankful for the expertise of people in a small town in my constituency, which produces that grade of metal. Stocksbridge is a small town and almost everybody in it knows somebody who has worked in the steelworks. There is a pride in the product, which runs through not only the work force but the whole town.

Production comes from a re-melt facility, which takes the core engineering steel and re-melts it through a finishing and processing plant. The ingots made and melted at Stocksbridge are used to develop the product, which is unique in the United Kingdom. The plant is a world leader for quality and competitiveness and accounts for 80 per cent. of the total UK export of special engineering steel. Profit from one chunk or billet of aerospace steel is more than 10 times the profit from one chunk or billet of engineering steel. For years, that has provided the icing on the cake in terms of profits and has carried engineering steel through the ups and downs of the market.

So it is no wonder that the closure of the Stocksbridge plant last Tuesday morning was greeted with shock and bewilderment. For people in Stocksbridge, the decision is simply wrong. However, historical roots do not themselves make a business case. I must acknowledge, and thank Corus for, the detailed briefing that it gave us last Friday. Corus Engineering Steels proposes, first, to restructure in Rotherham so that steel making and the melting facilities are all on one site; and, secondly, to invest in a new ingot furnace in Rotherham, closing the melt shop and hot rolling mill at Stocksbridge so that all the primary material for the re-melt facility will come from Rotherham, while special steel processing remains at Stocksbridge. That was not what came across at 7 o'clock last Tuesday morning; it has emerged since.

I recognise that the presentation from Corus Engineering Steels focused not only on cuts but on investment to the tune of £250 million, but it left so many questions unanswered that I have to conclude that the plan is a fix—a crisis response to Corus's serious financing problem, rather than a thought-through industrial strategy. The motivation and drive behind last Tuesday's decision is, in my view, crucial to the plan's potential and viability. Is the aim simply to take out costs to meet a short-term financing crisis, or is this a real strategy for the future?

If the restructuring is profitable and right for south Yorkshire now, why has it not been put forward before? It is crucial for south Yorkshire that the plan should in no way threaten the viability of the profitable core of the business—the aerospace and reprocessing sectors, the added—value product and the output at Stocksbridge. That is like a jewel at the centre of a Russian doll. On the survival and profitability of that plant rests the health of not only steel but UK manufacturing, as I have explained, and the bulk of our exports.

Is the Corus plan playing to its strengths? Where is the vision to expand secondary special steel reprocessing to move into new markets? Should a company locate its strongest product in the derelict and devastated atmosphere of a wider plant that has closed down and been mothballed? If the ingot production of special steels at Stocksbridge needs upgrading, why not upgrade it with a new furnace at that site? We would have more confidence in the proposals if Corus had worked through them with us at Government or regional level and with the local community during the past weeks and months, as the region has received its bids and developed its strategy for European objective 1 funding.

What efforts has Corus made during those months to win backing for its investment at Corus board level? How does its plan fit into the overall package put to the board last Tuesday? We were told that the financing of the proposals had to be in place by September—before the refinancing deal for the core Corus UK business is due. The whole plan is susceptible to the slightest flaw in the investment programme. Will Corus aerospace customers, even now, be looking to new markets as they see uncertain and failing management putting together a rushed business plan in a mood of financial crisis?

I acknowledge unashamedly that behind my efforts to secure this debate is my concern for the jobs and the workers in my constituency and my awareness of their contribution to life there, but the issue is wider than that. I am sure that the Government are eager to help. Indeed, I believe that they well understand the importance of the industry, its place in export markets and its links with other key sectors such as the motor and aerospace industries. I appreciate the Government's support on steel tariffs and the resources that have already been put into the Advanced Manufacturing Research Centre.

However, in recent years Corus kept the Government's support at arm's length. It is now apparent that there never has been a strategic plan upon which to consult. This debate takes place at the start of a week in which the Government will urge us to endorse plans to bring the flexibility and risk-taking of the private sector into our major public services. In return, the Government must show that they are prepared to intervene in a major way when failures in the private sector, however they are caused, put our national interest and economy at risk.

It was clear by the end of the last Parliament that the steel industry's planning was seriously awry. Falling share prices had led to knee-jerk closures during the previous 10 years. One third of the industry's capacity has been lost. For Parliament, the decision last Tuesday was not only about the future viability of one company, Corus, but about a future vision for the British economy. The workers and the town of Stocksbridge epitomise 100 years of skills and in-depth expertise. It is the task of the Government to play to such strengths and to build for the future. We will not be forgiven if we allow a mistaken decision made in the context of one company's financial crisis to threaten the future prospects of steelworkers and manufacturing nationwide.

9.47 am

Corus's announcement on 29 April meant that its steelmaking will be concentrated in Port Talbot and Scunthorpe when enhancement works have been completed there in about two years, and that Teesside's slab and bloom will no longer be required. Teesside has been an integrated though depleted steel plant since the close of the coil plate mill in the last round of cuts. Secondary steel making will continue at Teesside—it makes structural sections—but its sections mill will get raw steel from Scunthorpe. It will not even be allowed to supply its own mill.

Teesside will have to sell all its annual output of a minimum of 3 million tonnes of slab and bloom on the stiffly competitive world market, so it will have to corner some 10 per cent. of the world market of about 30 million tonnes. That will have to be done from a standing start, because it has exported only some 120,000 tonnes so far this year. Furthermore, Corus says that the new enterprise must also be cash-positive.

It has long been understood that the future of British manufacturing is in sophisticated processes with high added value. As we cannot compete with the rest of the world on cost, the commodity end of any production is doomed to fail. The production of bloom and slab is the most commoditised part of the steel industry. Teesside was able to finish both long and flat products until 2001 and can still finish long product, which is where the profit is, but such production will be totally removed from Teesside.

Can Teesside's integrated steelworks survive as a merchant mill for slab and bloom? Corus have made it clear that the works will close if it cannot. Redcar steelworks directly employs 2,900 people, and 13,000 other jobs in Teesside depend on it. In April, unemployment in the Tees valley stood at 5.1 per cent., almost twice the national average, and that was with a steelworks. Twenty-five years ago, 30,000 people worked at the steelworks. Job cuts during those years were as much the result of improved processes as of the decline of the industry.

The steelworks in Teesside integrated with Llanwern, and since 2001 has sent its raw steel there for turning into hot-rolled strip. The unions tell me that Teesside steelworks in combination with Llanwern is making a profit. In that integrated form, it will make a considerable profit for Corus during the next two years as the predicted upturn in steel demand in western Europe and the UK emerges. It is easy for outsiders to see Teesside and its possible closure as another branch of an old industry in inevitable decline from competition in labour costs. However, through the integrated process, Teesside is currently competitive.

Problems and decline since 1999 in Teesside and UK steel generally have not been due to the inevitable decline of an old industry. They are due to the ineptitude of Corus. The merger with Hoogovens was intended to give British steel scale in the global market, but it was a catastrophe. Since it happened, there have been 11,000 job losses in the UK, and 1,150 more outside of Teeside were announced last week. Five plants have been closed or partially closed, including the coil plate mill. Corus's share of the UK market has slipped markedly.

Corus was going to buy Katowice steelworks, but it did not. Corus was going to merge with CSN, a Brazilian company, but it did not. Corus was going to sell its aluminium business to Pechiney and raise cash to pay off its debts, but it could not. It was not in debt to start with; it was cash rich. It would not be in such significant debt if it had not paid a £700 million merger dividend to its shareholders and paid off no fewer than four chief executives since 1999. All were handsomely paid off, but all were hopeless failures.

A massive further fault with Corus's management is that they are not just uncommunicative, but secretive. In 2001, during the last round of cuts, they did not talk to the unions, MPs, the Secretary of State, nor to the Prime Minister, although I am told that they had the chance to do so. The then Secretary of State, to whom I spoke on the day before the announcement, asked where at Teesside the announcement was going to be made, to work out which bit of the works was likely to be axed. That shows how far out of Corus's confidence the then Secretary of State was. Consequently, no one in Teesside trusts Corus.

In 2001, the coil plate mill was closed, and the slab had to be sent to Llanwern to be finished. No one thought that that would be profitable because of the extra logistical costs. It is a very odd rationalisation and a bizarre way of maximising profitability to send slab at a freight cost of about £10 a tonne to be processed 200-odd miles away.

Unsurprisingly, Teesside people thought that they were being set up to fail. We thought that Corus would turn us into the weakest link, and the only word we would ever hear directly from the company would be "goodbye". "No", said Corus, as always speaking after the decision had been taken, "we have drawn a line in the sand. There will be no more rationalisation." I was told this Friday by Corus management that they have forecasts until 2012, so they spoke with authority when they drew their line in the sand.

Teesside made the odd amalgamation with Llanwern work. It shaved time, refined the process, met every productivity target and sent slab to Llanwern at a profit. Corus said that a line had been drawn in the sand and that there would be no more cuts, but to make sure of that, Teesside made a profit. The fantastic steelworkers of Teesside performed a miracle, so why are they now being cut loose, set adrift and told to find their own way? It seems obvious now that the union was right in 2001: Corus was making Teesside the weakest link, and now it is saying its deferred goodbye. Few in Redcar think that the new business venture can succeed; even fewer think that Corus thinks that it can.

This time, too, the company did not consult its work force or anyone else in Teesside before dealing the death blow to the mainstay industry of the whole sub-region. What it did this time was worse. It announced restructuring and then left it a month, while everyone in every steel community worried that it would be their plant that would go. The imposition of information and consultation requirements on companies such as Corus is long overdue.

The 2001 cuts at Redcar coincided almost to the day with Marks and Spencer's attempt to close its Paris store. The contrast between Marks and Spencer's patent inability to do that and the ease with which Corus cut 600 jobs in my constituency was educational. An obligation must be placed on such companies. Private enterprise, for its own sectional interest, cannot go on alone with no consultation, making decisions that can economically cripple an entire sub-region without opening up its thinking processes to anyone. Corus cuts itself off from better ideas, from stakeholders such as the union, the regional development agency and the sub-regional partnership, which has a broader view of the aims of industry and can assist towards better decision making.

Consultation and information directives will be introduced in 2005, but we need information in Teesside now. It is not wholly impossible for Teesside to survive as a merchant mill; it is supremely well located for the import of raw material and the export of steel. Teesport can handle the largest bulk carriers, offering massive cost advantages to sea-borne transport. The plant is self-sufficient in coke. It has a flexible work force and a lean cost base that might become leaner, but we need information.

Teesside has no sales force. What sales resources will be allocated? Corus has no current market in slab and bloom. How is Teesside to promote its exports? How can the port handle 3 million tonnes, given that 1.8 million tonnes now travel by rail to Llanwern, the present capacity of which is 1 million or 1. 5 million tonnes? Teesside is self-sufficient in coke, but is the whole company self-sufficient in coke? If not, who receives priority? Does Teesside?

I call on the Government to use all their leverage to obtain such information from Corus quickly. I echo the words of my hon. Friend the Member for Sheffield, Hillsborough (Helen Jackson). We want to know whether this is a real challenge or just a proposal that people at Teesside work for the next two years for Corus only to be turned loose having spent their time earning their own redundancy pay. If it is a real challenge, the steelworkers of Teesside will take it on, and the Government should provide Teesside steel with advice and support, and give all the financial and investment assistance that they sustainably and lawfully can.

The steelworkers of Teesside work miracles with Llanwern. They are highly skilled; they can become Corus's most flexible friends. They are adaptable, tough and strong. They are hard working. Are the steelworkers being duped? That is the question today. I call on the Government to do everything that they can to give my constituents an answer.

9.57 am

I thank my hon. Friend the Member for Sheffield, Hillsborough (Helen Jackson) for obtaining this debate. No one has done more than she has to champion the interests of the United Kingdom steel industry in Parliament. She champions her constituents, too, extremely impressively. I wish to place on the record my appreciation that the debate is being held and for her ongoing work. Members of the all-party steel group in the House of Commons regard ourselves as friends of the steel industry, but it has not always been easy to work with Corus. It is sad that we should now be debating the issue in this atmosphere.

As both my hon. Friend and my hon. and learned Friend the Member for Redcar (Vera Baird) have explained, the past several years have been a pretty miserable time in the history of the steel industry. Repeated restructuring has led to repeated false dawns. Each attempt that the board of Corus has made to re- establish the British steel industry as a major player on the global stage has crumbled. The latest episodes have seen the failure of the merger with CSN and the difficulties with Pechiney. All that we have heard has been a melancholy long withdrawing roar from the British steel industry, although I must say that there is a striking contrast between the unhappy performance and experience of the Corus board and the impressive achievements at regional and local levels.

At Llanwern, in my constituency in south-east Wales, there has been a most impressive and successful partnership between local management and the work force. I congratulate the Llanwern trade union liaison committee and Dr. Mark Carr, who is in charge of Corus Strip Products UK in south Wales, for what they have achieved together. Year on year, there has been impressive improvement in productivity. Notwithstanding the pressures and difficulties, and the buffeting that the work force has taken from the errors of the board, morale has been remarkably high.

However, in the latest announcement last week, 142 of my constituents at Llanwern were told that they must lose their jobs. They are 142 skilled, productive, loyal and committed people, who, through the years of stress and strain, have given absolutely everything to the company. They and their families have suffered yet another body blow because the management of the business at the highest levels have not been able to produce a viable strategy. Such damage to the livelihoods of individual workers, their families and their communities is also great in Stocksbridge, Tipton and Redcar. The anxieties and the exposure of the community in Redcar have already been described by my hon. and learned Friend the Member for Redcar.

What have we to look forward to? We appear to have a strategy that confines itself to defending the home turf; of downsizing to match foreseeable United Kingdom demand. There are difficulties with that, as it is all too clear that UK demand is in long-term decline. The demand in the UK for flat-rolled steel has fallen from 6 million tonnes in 1998 to 4.8 million tonnes now, and I fear that that decline is structural, not cyclical. Are we looking forward to a process of continuing attrition and erosion? Can we say that we have seen the end of salami-slicing, or amputations?

We must maintain Corus's capacity so that it can get back on to the front foot and attack global markets to resume exporting when global market conditions permit. Although it is necessary and sensible to ensure that the core domestic base is sound, viable and able to generate cash at the bottom of the downturn—the company has explained that that is what it seeks to do—we must allow ourselves the margin to do more. The alternative is simply to retreat. I do not think that the market will be static, so it is not a viable option for Corus simply to adopt a static position. The recent strategy is not heroic; it may be sensible in that we must get the domestic base right, but we need a springboard for future growth and ambition.

In the near term, it is crucial that Corus achieves its refinancing. The new banking facilities for working capital must be agreed, as must the new long-term debt to enable investment in new capacity. I welcome the board's intention to invest up to £250 million in improving capacity throughout the UK.

Llanwern has had a happy and successful partnership with Redcar, and we have been pleased to be partners to our friends and colleagues there. Of course, we welcome the decision to invest further at Port Talbot. From the narrow perspective of my constituents at Llanwern, it will be satisfactory to achieve a symbiosis with Port Talbot that ensures that we can buy competitively priced product from Port Talbot that can be finished at Llanwern, and that the total product of Corus Strip Products UK is competitive on that basis.

Can the new leadership do better than its predecessor? It badly needs to. It has had an inauspicious start, and I refer to Philippe Varin's terms of employment, which represent an extraordinary insensitivity on the part of the board. I have with me the press notice of 23 April that explains that Mr. Varin is to be handsomely rewarded. His annual salary will be €1 million a year. He will also receive a pension allowance of 30 per cent. of that, and a further payment of €800,000 to compensate him for the loss of his options in Pechiney.

One might say that that is handsome but not exceptional or exceptionable. However, other features of the contract make me feel queasy. If Philippe Varin is given notice in his first year of service, he will receive two years' pay. No matter how badly he does in that period, he will be quite extravagantly awarded. He is also guaranteed a 20 per cent. bonus in his first year, regardless of his performance or that of the business.

Philippe Varin has agreed to buy 1.1 million Corus shares, and the board has agreed that the shareholders should purchase another 1.1 million shares for him. I am in favour of top management owning shares in their business, but I am concerned about the share option arrangements. I shall not detail them; suffice it to say that there is a big share-options package.

I should like to quote from an article in The Times by Graham Sarjeant on 26 April. Graham Sarjeant is an experienced observer of the business and financial scene, and is a sagacious commentator. He certainly has the interests of capitalism at heart. He held up Philippe Varin's contract of employment with tongs, as it were, as an example of the kind of contract that brings business into disrepute. He makes some serious and important points. He says:
"chief executives' pay should be fully aligned with the interests of shareholders. But that is only the case when directors live off dividends from their shareholdings … Directors usually make more money if the cash that should have been used to pay dividends is instead used to buy back stock just before share options mature. That is one of the key reasons why share buybacks proliferated in the good but corrupt times while dividends lagged behind profits, helping to make the fall in UK share prices one of the worst in the world."
He concludes:
"Deals such as this guarantee that boardroom pay deals will continue to create headlines, continue to make investors unhappy with boards and continue to provide ammunition for those who really do not trust business anyway … Jim Leng, deputy chairman of Corus, is due to take over the chair in five weeks' time. He has discredited himself before he starts."
This is, of course, part of a wider problem. There have been rows about top executive pay in recent weeks involving British Gas, Shell, GlaxoSmithKline, Reuters and Cable & Wireless, as well as Corus. My right hon. Friend the Secretary of State for Trade and Industry is quite right to address the problem.

I do not blame Mr. Varin. With such a package being offered to him, it is not surprising that he is taking it. I have nothing against him personally, and I hope that he succeeds. I also hope that Graham Sarjeant's judgment on the reputation and standing of Mr. Leng proves wrong, because it is desperately important for Corus and all who sail with her that the board and top management establish a good reputation and perform well. The package was not only tasteless but foolish, and was against the interests of Corus and British business. Meanwhile, we shall wait and see, and do all that we can to assist the board in holding steadily to a workable strategy.

I now come to the supportive role of the Government. Their task is to pursue policies that do not frustrate competitiveness, and to support the group, as far as that is possible. Such support means exercising continued vigilance in the matter of dumping. I am pleased that the United Kingdom supported the European Commission in taking anti-dumping measures against Slovakia and Turkey, and is encouraging the Commission to intensify anti-dumping measures against Bulgaria and South Africa. I notice that the UK objected to taking anti-dumping measures against Egypt on the basis that the damage that had been done so far, and that which was foreseeable, was not sufficiently severe. However, I was interested and personally pleased—Corus was certainly pleased—to see that the Commission disagreed with the UK.

Similarly, we must maintain all efforts against protectionism. I have nothing but praise and appreciation for the part that the Government have played in mounting a vigorous response to the section 201 protectionist measures introduced by the Bush Administration. The Government have been working with the Commission, the all-party steel group and the British-American Parliamentary Group. We have between us done something to alleviate the position, and the result is a significant reduction in the quantity of steel subject to restrictions and tariffs that is exported by Corus to the US. Nevertheless, the relevant quantity is some 600 kilotonnes—that is major damage. There is no shred of an excuse for what the US Administration have done.

On the issue of section 201 and the steel tariffs, is it not correct that the World Trade Organisation has found against the US Government partly because of the pressure? Is it not the right time to press the US Government to accept the WTO's decision, rather than move in and appeal against it?

I absolutely agree with my hon. Friend. If the US has a rational, shrewd perception of its own interests in the wider context of international affairs, it will not want to be seen to be flouting international law and agreements. I am not entirely optimistic, because policy on such matters is effectively made by Mr. Karl Rove, who is advising the President on his re-election campaign for 2004 and who has targeted with pinpoint precision certain constituencies and swing districts in which steelmaking interests and jobs are at stake. I fear that that set of considerations will weigh more heavily with the Administration than the factors to which my hon. Friend has rightly drawn attention.

The Government should continue the drive to eliminate uncompetitive excess capacity across the globe. One of the anxieties around US protectionism is that certain US plants, which would not have been regarded as competitive in global terms, are coming out of chapter 11 and back into full production. That cannot be right. We must pursue the Organisation for Economic Co-operation and Development process to remove excess and uncompetitive capacity rationally, reasonably and on a phased timetable. The British steel industry has already made a massive contribution to that process and others must follow suit.

I hope too that the Government will be vigilant and energetic on state aids that may persist in countries in central and eastern Europe that are looking forward to entering the EU. Time being short, I will not detain the House with excess detail. I will only say that in Slovakia the new owner of the largest steel company has been given a favourable tax break and that only light output restrictions are required. I am advised by Corus that in the Czech Republic only relatively light capacity reductions are being offered in exchange for financial restructuring subsidies and that the Polish Government have made several restructuring proposals, each based on a totally unrealistic marketing plan, with negligible capacity reductions in exchange for considerable quantities of state aid. We all welcome the enlargement of the EU, but that should not be at the price of enabling countries that are low-cost producers to enter a free trade area and get around the rules constraining the longer-standing member states and their steel industries. Such matters are international responsibilities for the Government.

At home, we need to ensure that we have infrastructure in our industrial areas—particularly rail infrastructure—that is properly serviceable and has reasonable charges for access.

Will the Minister say whether the iron and steel employees re-adaptation benefit scheme—ISERBS—or an equivalent scheme will be available in this round of restructuring to people who have lost their jobs and need assistance in retraining and preparing themselves to take a different place in the labour market?

Corus has been lobbying for a long shopping list of tax changes. I have only limited sympathy with its complaints about taxes that are supposed to induce better environmental behaviour, such as the renewables obligation, the landfill tax and the aggregates levy, but I hope that the Government will heed what it says, and that they will not gratuitously impose any more taxation on our manufacturing industry than is truly justifiable in a wider context. I draw particular attention to the climate change levy. I am getting frustrated at being brushed off by the Treasury with bland, vacuous and patronising letters that fail to address our manufacturing industries' legitimate concerns about the levy or to respond to the point that Corus makes that a business that is trading internationally in intensely competitive markets already has plenty of incentive to reduce its costs and that the more that it pays in tax the less it has available to invest in energy-efficient technology. That is a serious point that deserves a serious response.

The euro is the final issue on which the Government have to take a major decision. Corus has complained too much about the exchange rate: in recent years, it has had to cope with problems to do with a relatively strong pound, but its campaign to persuade the Government to enter the euro is misplaced, and it is something of an alibi to distract attention from the deficiencies of strategy in the business, which we have talked about.

It cannot be sensible for our steel industry to be dumped into the industrial black hole that is the eurozone. There is a world of difference between legitimately seeking policies that may cause the pound to fall somewhat in value against other currencies—difficult though it is to know what those policies could be—and proposing that we go into a permanently fixed exchange rate system with a single interest rate, which will certainly not be pitched at a level to suit us. The result of doing so would be that the stresses would have to be carried on pay and jobs, as they were during the period of the gold standard. The best prospect for the British steel industry is for it to be a well-run business in an economy that is well-run by our own elected Government.

10.17 am

Mr. Deputy Speaker, I know that if it were not your job to chair this debate you would be taking part, as you are a Teesside Member of Parliament and you have championed the cause of steelworkers in the past.

I congratulate my hon. Friend the Member for Sheffield, Hillsborough (Helen Jackson) on securing this important debate, and I strongly praise her tenacity in sticking up for those of her constituents who are about to lose their jobs in Stockbridge. However, as a Teesside Member of Parliament, I naturally wish to focus on what I consider to be a threat to the continued future of Corus on Teesside, and to comment on the links between that and our economy.

This is an important issue that is close to my heart. For 14 years, I worked at what was then British Steel, in research and development at the Teesside technology centre, and I played a role in many of the plants that are under threat, including the Redcar blast furnace and coke ovens and the Lackenby works. I have made many strong friendships among the people who work on the plant and in the iron and steel-making complex. However, like my hon. and learned Friend the Member for Redcar (Vera Baird), I want to focus on Teesside as a whole.

Corus has made it clear that it no longer sees its Teesside works as a supplier of steel slab, the most basic commodity in the industry, to its finishing works elsewhere in the UK, and it wants slab production to be concentrated on Port Talbot and Scunthorpe. It argues that Teesside can find a new role and gain new opportunities by supplying steel slab to overseas markets. What concerns the people of Teesside is how deeply the plan has been thought through.

The Teesside complex manufactures some 3 million tonnes of steel per annum and almost all of it goes to Corus operations elsewhere in the UK. A small amount is traded on the international commodity markets. The international market for slab is cyclical; across the globe there are a number of established suppliers of bulk steel, many of which seek to cement long-term arrangements with customers. At present, global demand varies between about 20 million tonnes per year at the bottom end of the cycle and some 30 million tonnes at the upper end. If the Corus board wants its Teesside operation to enter that market at its present production levels, the product will have to displace some 10 per cent. of the existing market, much of which is made up of traditional, low-cost producers from countries such as Brazil, Russia and China, so the board is advocating a tough approach.

To be successful Corus requires severe cost-cutting on a scale that has perhaps never been equaled in the United Kingdom steel industry. It will almost certainly require investment by Corus management locally and nationally to build up a dedicated and skilled local, national and international sales force—a point made by my hon. Friend the Member for Sheffield, Hillsborough. Such an approach means that an urgent examination is needed of whether it is possible for Corus to enter a strategic partnership either with another steel producer or with a core customer and consumer. I feel strongly that it may also have to consider whether the plant could simply be sold.

These are uncharted and deep waters. The people of Teesside are prepared to accept great challenges if they have to, and this could be Teesside's greatest ever challenge. It is possible that the strategy will succeed, but it requires firm, decisive action by the Corus board and decisive action by its new chairman and chief executive; the foundation of that action must be put in place very soon. Entering new markets or building up strategic alliances or joint ventures takes time. Corus says that capital investment is needed to allow Port Talbot and Scunthorpe to take up the tonnage required by the exit of Teesside from the internal markets, which will take about two years to design and construct, and, given the complexities of the due diligence procedures for entering into a strategic alliance or joint venture, almost all that time will be needed for any agreement to be reached.

I simply ask the new Corus management to be open and honest with their Teesside work force and the wider Teesside community—a point that has been made by my hon. Friends. If the management believe that the plans are properly constructed and thought through, and realistic, they must be prepared to share them with all the local stakeholders. There is a mood of co-operation on Teesside but that co-operation must be won. Any suspicion that the Corus board is merely trying to defer inevitable closure for two or three years and effectively to push the redundancy costs off balance sheet for the time being to reassure institutional investors and bond holders, or that the cash needed to invest in the modernisation of Teesside processes and the building up of a sales force is simply not at hand will mean that co-operation will not be won. A massive wave of anger against the board—I emphasise the board—which has been visibly failing for many years, will sweep across Teesside unless it changes its approach.

Everyone knows what the cost of closure will be for my constituency and for other Teesside constituencies. In 2001, the time of the last major threat to steelmaking on Teesside, a baseline economic analysis was prepared by the most affected local authority, Redcar and Cleveland borough council, and the regional development agency, One NorthEast. The figures from that survey are still relevant today. The loss of jobs will have a direct and dramatic impact, not only on the 4,500 staff directly employed by Corus but on the many thousands of others working for contractors on the site. According to the generally accepted multiplier, a further 1.7 jobs will be affected for every direct job lost. Some 7,000 jobs could be lost in the Teesside area, including those in services, local docks, freight forwarding and logistics, specialist engineering services, contract engineering maintenance and areas such as IT and telecommunications. Job losses on that scale will hit the GDP of the entire Tees valley.

The model used in the survey suggested that each redundancy would incur a loss of some £28,000 per head, leading to a total GDP loss of some £230 million in Teesside alone. That would have an impact on house prices and on investment in economic activity such as retailing. At the stroke of a pen, the work done in righting the economy since the slump of the mid-1980s and early 1990s, which incurred so much pain and suffering, would be undone.

Teesside deserves better. It certainly deserves better than the old-fashioned failed management style of Sir Brian Moffatt and his approach to running Corus. It deserves a new, innovative approach from the new chairman and chief executive. They have promised to consult, which I welcome. I think that all people on Teesside welcome that. They have said that they want to talk to local workers and managers, who will be able to tell them of the potential of the Teesside works and what the creativity, innovation and enterprise of the whole work force could promise for Corus's future.

As I said earlier, however, Corus has to be honest and open with Teesside. My hon. Friends have made that point over and over again. It has to be honest with local stakeholders and, of course, with our Government. That point has been made in relationship to the run-up to the cuts made by Corus two years ago. We can assist Corus with its strategy for Teesside if it can convince us that it is intellectually coherent, based on proper detailed analysis and able to be delivered.

Over the weekend, I spoke to many managers and middle managers. The views that I have given to the House today are shared by many. Given the difficult times that Corus and all of us are facing, Corus needs to know that until it demonstrates that openness, it is, for the people of Teesside, on parole.

10.28 am

I congratulate the hon. Member for Sheffield, Hillsborough (Helen Jackson) and her colleagues, the hon. and learned Member for Redcar (Vera Baird), the right hon. Member for Newport, East (Alan Howarth) and the hon. Member for Middlesbrough, South and Cleveland, East (Dr. Kumar) on setting out the critical problem facing the industry. All four communicated the very real sense of pride that MPs representing steelmaking communities have and their willingness to fight for those communities.

At the outset, however, I ask whether this is the best way of advancing discussion of the subject in Parliament. I understand that the Secretary of State had meetings with the management on Friday—that was reported. Although it will be useful to hear from the Minister, I wonder whether the matter is sufficiently serious for the Secretary of State to give a statement on it to the whole of Parliament. Perhaps the Minister can tell us whether that will be possible.

The key data quickly demonstrate how serious the problem is. Back in 1997, the British steel industry under Corus produced 18.5 million tonnes of steel. Once the restructuring plans are completed, that figure will be down to 10.5 million tonnes, which means that production will almost have halved within six years.

There is the fairly optimistic hope that the Redcar plant—its problems were described by the hon. and learned Member for Redcar a few moments ago—can sell 3 million tonnes of steel in the world markets. I am not in any sense an expert on the steel industry, but I understand that the plant's production costs are between $180 and $200 a tonne for standard commodity product, while its competitors in Brazil, China and Taiwan have production costs of about $100 a tonne. In an open, competitive market, it is difficult to see how that plant can survive without miraculous changes.

Those comments concern output, but the position on employment is even more extreme. I remember 30 years ago when the steel industry directly employed 250,000 people, regardless of indirect employment. That figure was down to 22,000 in 1999, and, after the successive waves of closures in the past few years, the figure is down to 11,000. We are dealing with an enormous contraction, the positive side of which—one should not forget this—is that there have been phenomenal increases in productivity. The work force have co-operated over the years in endless waves of productivity improvements and have given their all to try to save the industry through productivity gain, which has simply not been enough.

Finance is the other key indicator, and the figures are stark. In 2001, the operating loss was £385 million and last year it was £293 million, which is clearly unsustainable on any measure. The share price has also collapsed from 126p to 26p, and it is worth recording that that is not unprecedented. The British steel industry has an entry in the "Guinness Book of Records" for the worst ever financial performance, which occurred in 1980–81 when it made a loss of £1 billion on a turnover of £3 billion. Conditions were similar to today in the early 1980s because the currency was heavily overvalued and there was a recession in manufacturing industry. Those figures point to the extreme difficulties in getting the industry to run competitively.

In analysing where we are, the key question—all Members who have spoken have touched on different aspects of this—is whether the fundamental problem is one of business environment or one of management failure. Both issues are clearly involved because any industry could probably survive one or the other, but it is difficult to see how any industry could survive both. Although I certainly do not want to make excuses for management, it is clear that it has been operating in an enormously difficult business environment; in particular it has suffered from problems associated with the exchange rate. The right hon. Member for Newport, East tended to de-emphasise that point, which is very important.

I do not want to reopen the argument about the euro, but since the mid-1990s, the effective exchange rate under which the industry has been operating has appreciated by about 30 per cent. That would be a problem for any industry, but for an industry such as bulk steel, which competes predominantly on price, it is crippling.

When the merger went ahead between Hoogovens and British Steel, British Steel was making a profit of £1 billion and was very successful in world terms. Systematic management decisions have played a big part in creating today's situation.

The hon. Gentleman is right that there have been management failures, which I shall briefly summarise in a few minutes. Whatever those failures have been, however, it is difficult to see how any firm could export a basic commodity for many years against that kind of exchange rate disadvantage.

The problem is not only that the British steel industry is exporting a commodity in the face of an extremely hard exchange rate. About 80 per cent. of its product goes to Europe, where it directly competes with euro-denominated products. Additionally, most of its other competitors are in the far east, where currencies have depreciated heavily against sterling. The exchange rate has been a major handicap, which one should not underestimate, and it has created an awful business environment. The irony is that this rather desperate phase of events is occurring precisely when there is some hope that the exchange rate is beginning to return to sensible levels at which the industry could possibly compete in the medium and long terms.

The hon. and learned Member for Redcar has clearly set out the management failures. One was the enormous £700 million dividend payout, which could arguably have been more usefully reinvested. There was a failure to carry through the deal with a Brazilian company. I am not sure how much that would have helped because if it had been successful, a lot of production would have been relocated to Brazil. Nevertheless, that was an objective and it failed.

There was a failure to understand the difficulties of disposing of the aluminium interests in Europe. Last but not least is the psychologically important point of the sheer insensitivity—I think that was the word that the right hon. Member for Newport, East used—of senior management in approaching their position.

We are dealing with an industry in great difficulty. Workers face constant retrenchment, yet the company's first preoccupation always seemed to be its own pocket, and the demoralising cynicism that that generates is difficult to underestimate. Mr. Peddar received a £650 million payout, plus a £2.3 million pension. The chairman who has just retired has a £300,000 per annum pension. I do not begrudge top management being paid well, but those people presided over a failed company, and it is the issue of payment for failure that is crucial. In the debate that we will have immediately after this, the hon. Member for Tunbridge Wells (Mr. Norman) will put forward some ideas on how to deal with the problem. It is difficult to underestimate the effects on the industry of that sheer short-sighted, selfish insensitivity of management.

I want to know what the Government can do, and perhaps the Minister will bring us up to date on what they intend to do. There has been speculation in the press this weekend that the Government are considering, or have at least been approached about a proactive form of intervention, even involving underwriting of refinancing. The industry has been arguing for renationalisation. I would have thought that improbable and certainly unwise, but perhaps the Minister will clarify whether the Government are willing in any circumstances to consider direct involvement through guarantees of financial support.

How far are the Government getting into discussions with the industry about strategy? There are all sorts of options opening up. The industry can continue under its present owners and with the present strategy. Other possibilities have been considered. The Mittal Group is known to be nosing around the industry. There are fears that its involvement would involve asset stripping and an even worse outcome than we have at the moment. Have the Government had any discussions with that group? Would they entertain the idea? What are the other strategic options and how far have the Government considered them?

What are the various practical forms of help that the Government could give? They were summarised very well in the speech of the hon. Member for Sheffield, Hillsborough, and I do not need to go over them in detail, but clearly the Government can help, as they have helped with earlier difficult situations in the steel industry and the car industry. They helped to retrain workers who had been laid off and provided retraining and restructuring operations working with the regional development agency. As the hon. Lady said, there are a lot of useful things that the Government can do, such as helping with skills training and research and development, without resorting to the classic bail-out. Perhaps the Minister could summarise those in his reply.

To return to the point that I made at the outset, I suggest that the situation is sufficiently serious that it merits a statement by the Secretary of State to the House as a whole.

10.38 am

I congratulate the hon. Member for Sheffield, Hillsborough (Helen Jackson) on securing the debate, and also on the work that she has done with the all-party steelgroup. I would like to declare my interests that are in the Register of Members' Interests.

I thought that the hon. Lady made a very interesting and moving speech. I was particularly interested to hear about some of the important work that has gone on. She mentioned the Advanced Manufacturing Research Centre, the links with aerospace, and the way in which so much effort has gone into building links between the steel industry and new specialisms, particularly wind farms and other value-added areas of production.

I had a look at Corus's press release on Stocksbridge. There is some confusion; it says that the aerospace steels and all finishing of engineering billets will remain at the Stocksbridge site, but there will be a closure of steel making and hot rolling at Stocksbridge. Corus said that that would happen in due course, but I gather from the hon. Lady that that has already taken place.

No, even Corus cannot close a melt shop overnight. The closure of the melt shop is scheduled for 2005, which is why it is so important that there be independent consideration of whether that is the best course of action.

I am grateful to the hon. Lady for putting me right because I was slightly confused by what she said; she has made things absolutely clear now. There certainly has been confusion on the part of Corus. I agree with her that the proposals have not been properly worked through in any way, shape or form.

I was staggered when I saw from the Corus press release that it is expecting Teesside basically to stand on its own feet. Corus is not going to close the Teesside works, but it will no longer take any of the steel output, so, as the hon. and learned Member for Redcar (Vera Baird) pointed out, Teesside will have to secure 10 per cent. of the world market pretty well from a standing start. That will have huge implications for the nearly 3,000 people employed directly and the many others employed indirectly. I was interested when she said that Teesside, combined with Llanwern, is making a profit at the moment and is competitive. I take on board her point about the need for Corus to re-evaluate that part of the package.

We need to focus on the Government's relationship with Corus. In February 2001, the then Secretary of State made a statement pointing out that:
"Corus has failed to discuss its plans with the Government. Relevant information has not been disclosed; the company has resisted any meaningful dialogue and has refused to discuss in detail its plans for the industry … Corus could adopt a different approach. If it were to do so, it would have the support of the Government."—[Official Report, 1 February 2001; Vol. 362, c. 457–8.]
What have the Government done since then to build a meaningful dialogue with Corus? I know that it takes two to make such initiatives work, but have the Government put in place any firm proposals in the past two years to build the relationship and the dialogue? I am talking, for example, about considering the banking covenants that Corus has.

As the Liberal Democrat spokesman, the hon. Member for Twickenham (Dr. Cable), pointed out, there certainly is substantial scope for the Government to sit down with Corus and work out exactly what the long-term strategy will be. After all, the Government have made a great deal of their strategy for manufacturing, for aerospace and for the car industry; what about a strategy for steel, as well? The right hon. Member for Newport, East (Alan Howarth) was quite right to refer to the way in which senior management at Corus have been at fault in not building bridges with the Government. If effort had been put into that, when the management really needed a proper dialogue with the Government, the Government would have been available and ready to help.

I take on board the point about the package for Philippe Varin. If one considers the attitude of the Corus management over the past few weeks, one can see that they have, as the right hon. Gentleman pointed out, been on the back foot. They have shown little sign of any inspiration or a "can do" attitude. They seem to be floundering to some extent. As one commentator pointed out:
"Corus has the knack of turning a crisis into a drama."
It chose to hold its annual meeting last Tuesday at the TUC headquarters. As that commentator pointed out, that is
"a bit like the IRA holding its Christmas lunch at the local Orange lodge."
Perhaps it is a bit unfair to compare Corus to the IRA, but I can see what the commentator was getting at.

I agree with the right hon. Gentleman that Philippe Varin's package should have been linked entirely to the future performance of the shares. When there has been much debate about corporate governance and rewards for failed directors in this country, it is quite extraordinary that Philippe Varin should be on a guaranteed 20 per cent. bonus and a two-year contract, and compensated for the loss of his Pechiney options. There is no question but that his package should have been linked to any uplift in Corus shares. If he delivers in any shape or form, it will be reflected in the share price, to which the package should be tied. Corus should have had the courage to say very clearly that he would not be employed if he was not prepared to accept a package based on such terms. As has been pointed out, he will be a success. He is a highly able individual. However, the company was in a strong position, in that many potential candidates with experience of the industry in this country were available to take the job, so he was not unique in that respect.

I was interested in the right hon. Gentleman's comments on the very impressive achievements at local level and the extent to which morale has been built up at the Llanwern plant. He spoke about the 142 skilled people who are to go as a result of the most recent announcement. I should have thought that that would hardly make a dent in Corus' substantial losses, but it will cause a disproportionate amount of damage to morale in the plant and will undermine much of the good work that has been done. The right hon. Gentleman made that point particularly well.

As the right hon. Gentleman also pointed out, it would be wrong of Corus to consolidate within the UK ring-fenced environment. The Opposition entirely agree. At some stage, Corus must get back on the front foot. It must accept the possibility of world demand increasing substantially and keep open the option to exploit that and move forward.

That point was also made by the hon. Member for Middlesbrough, South and Cleveland, East (Dr. Kumar). I was particularly impressed by his comments about the knock-on effect of the loss of a substantial number of jobs in his constituency and that of the hon. and learned Member for Redcar. It may not sound a vast number, but the knock-on effects on services, subcontractors and other industries will be devastating. That point is often missed by commentators, and it is unfortunate that that particular saga has been ignored by so much of the media.

The Minister should tell us exactly why the Government will not make a statement on this very important issue. I believe that some of the confusion among Members is based on a lack of information—there have been conflicting reports in the press. The Government made a statement in February 2001, but I would like the Secretary of State or at least the Minister to make a statement this week. I am sure that that will be possible if he has a word with the Speaker.

Will the Minister tell us exactly what value the Government can add? We discussed only recently the Industrial Development Act 1982 and the Industrial Development (Financial Assistance) Bill. What scope is there under legislation for industry-specific assistance within EU rules? We had an important debate about the ceilings being lifted substantially. There is now much more money available for industry-specific schemes, and there may be an imaginative way of using some of it. Will the Minister also comment on whether a new iron and steel employees re-adaptation benefits scheme will be introduced?

I hope that the Minister will comment on the points that have been made about the climate change levy, the extra taxes that have been put on industry and, above all, the need for the Government to show the industry and the business world that they fully understand the issue, that they will work with Corus in the future and that there will no longer be a lack of proper communication between them and Corus. I would like him to tell us exactly how the relationship with Corus will be rebuilt and what the Government can do about this extremely serious situation, which affects the lives of many people, not just in the constituencies of the four hon. Members who have spoken today but in many others as well.

10.49 am

I congratulate my hon. Friend the Member for Sheffield, Hillsborough (Helen Jackson) on securing the debate. It is consistent with the enormous work that she has done for the steel industry for many years, not least the formation of the all-party steel group. This is a particularly apposite moment to discuss the steel industry, because it is a time of great concern for the industry and those whose livelihood depends on it. I listened carefully to the expressions of concern about the future of the industry, its employees and the communities in which they live.

In the time left, I hope to hone in on the contributions made, but first I want to stress that the Government share the concerns that have been raised. We care deeply about the industry. We want a successful and profitable steel industry that will underpin UK manufacturing and feed into the many supply chains that rely on primary steel production. It is disappointing that, just over two years after we last debated the issue in this Chamber, the steel industry is again experiencing problems, and that steel workers continue to face an uncertain future. Corus accounts for more than 90 per cent. of the UK's steel production. Last week's announcement that it must undertake further restructuring will come as a bitter blow to many, especially as it follows the job losses that the company announced in 2001, which we hoped would lead to a more stable and successful future.

Steel remains an increasingly difficult market in which to operate. We all accept that. The industry has for some years been beset by global overcapacity and weak prices. It is estimated that there is 15 per cent. overcapacity in Europe. Although EU demand has remained static, global production has been boosted by the rapid development of capacity in the emerging economies of Asia—especially China—and south America, where low labour and raw material costs, exploitation of economies of scale and the latest technology have given the producers a competitive advantage.

Although it is true that UK workers are among the most productive in the world in terms of tonnes of steel made per person, we continue to experience problems, and more cost is being taken out—witness last week's announcement. However, all the major European steel manufacturers are having a difficult time in a tough global market. It is important that, in today's debate, we concentrate on what we can do to assist.

My hon. Friend the Member for Sheffield, Hillsborough mentioned a series of measures that we could take. Of the four that she highlighted, we can certainly assist with three, and I shall mention what we can do in relation to research and development, training, education, skills and spreading best practice. It is important to mention that the decision to restructure was a commercial choice for the company, and that the strategy and financing of Corus is a matter for its management, the shareholders and the banks. I am sure that there will be independent assessments and scrutiny of the package. However, we must be very clear about what the Government can and cannot do in such situations.

My hon. Friend also gave us a fascinating history of Stocksbridge that took us from corsets to landing gear—from underwear to undercarriage, one could say. I stress that Stocksbridge will continue to finish high-added-value steel for the aerospace market. I realise how important that is.

My hon. Friend asked some fair questions about the strategy of Corus—questions that she and her colleagues will be asking in coming weeks or months of the new management team. The chief executive took up his role last Thursday, and the new chairman comes into post on 1 June. Hon. Members will not be surprised to hear that these are also the questions that the Government have asked in our meetings with Corus, and in particular during the meeting between my right hon. Friend the Secretary of State and Corus's management last Friday.

I understand that the job losses will be spread over the next two to three years. However, whenever they occur, the Government will do all that they can to help those affected. It is important to find the positive aspects. I shall come to the contributions of my hon. and learned Friend the Member for Redcar (Vera Baird) and my right hon. Friend the Member for Newport, East (Alan Howarth) shortly, but first let me stress that Corus will remain a major UK manufacturing company and steel producer, employing well over 20,000 people. We must welcome the investment decisions in the announcement, which will strengthen UK sites. We hope that that will lead to a more sustainable future.

The company will have new leadership, and we hope that the appointment of a new top management team represents a fresh start for Corus—relationships have not always been as excellent as they should have been. My ministerial colleagues and I will be encouraging that team to work in "partnership", which was the word used by my hon. Friend the Member for Sheffield, Hillsborough. With its tremendous work force and its constructive trade unions—the hon. Member for Twickenham (Dr. Cable) talked about 250,000 workers 30 years ago—the increase in productivity has been amazing and spectacular. Productivity is one area of UK manufacturing where no one can accuse the work force of lagging behind. We hope that the company will work in partnership with its work force and the unions to optimise the company's assets in the UK and to put it on a much sounder footing. We also hope that it will work more closely with government.

What can the Government do to help the steel industry? My hon. and learned Friend the Member for Redcar mentioned information and consultation, and said that the directive will be introduced by 2005. We are keen to ensure that workers in this country are informed and consulted, and although the directive does not come into force until 2005, many companies should start thinking ahead to where they will be, and begin preparing by introducing best practice ahead of the directive.

My hon. and learned Friend the Member for Redcar was also positive about the plan for Redcar, given the right circumstances. My hon. Friend the Member for Middlesbrough, South and Cleveland, East (Dr. Kumar) made the same point. The Government think that the plant can survive as a self-contained site supplying the global market. With 2,900 people employed there, it is important that it does. It is right to say however, that the plant requires the right climate and atmosphere of co-operation with all those involved, not least the trade unions.

For the most part, business success is down to business. The Government have a role in creating the best environment that they can in this country in which business can flourish. Various hon. Members asked specifically what assistance we can give. For example, there is ISERBS. ISERBS was part of a European Coal and Steel Community treaty, which expired in June. Obviously, we could not use the same method as we have used previously, but we will consider any ways in which we can assist the workers who involved.

I am conscious of areas such as south Yorkshire which have implemented a European objective 1 development programme. Does the Minister agree that regional and national government should also be able to use those programmes in these circumstances?

I agree. My hon. Friend will know that, other than possibly the coal industry, no industry is more bound by state aid rules than the steel industry. However, where we can assist, we intend to do so. We shall certainly place much emphasis on important regional partnerships; that work has already started. We shall also continue the work of the metals industry competitiveness enterprise, NAMTEC—the National Metals Technology Centre. Last year, I launched the advanced metals technology initiative, which is important and must be built on. It is a partnership with the Engineering Employers Federation, and its important work will be developed further.

For the steel industry, domestic demand for goods containing steel is being increasingly met by lower cost imports. In turn, that has reduced home market demand for primary steel. Nevertheless, opportunities are available to steel companies to take advantage of the engineering works that are going to take place in this country. There is increased Government expenditure on hospitals and schools, and on roads and railways, including bridges and other civil engineering works. This will provide significant opportunities for the steel industry.

Steel prices are rising from their trough. The exchange rate is moving in the right direction. The Port Talbot blast furnace is back on line, and there is cause for some optimism—

Order. In calling time on this 90-minute Adjournment debate, I wish to tell hon. Members that although holding the office of Deputy Speaker in Westminster Hall is an honour that is much-prized among senior members of the Chairmen's Panel, the satisfaction that is gained from the exercise of its responsibilities can occasionally be tempered by the frustration and exasperation that is caused by the need to reserve expressions of opinion on the topics under discussion. The stricture to confine comment from the Chair to matters of order, procedure and discipline can be infuriating, and never more so than today.

We must now turn our attention to the next topic—the Higgs review of the role and effectiveness of non-executive directors.

Non-Executive Directors

11 am

First, I draw the attention of the House to my declared Member's interests, and to the facts that I have 16 years' experience as the finance director, chief executive and chairman of a FTSE 100 company and have served on a number of other boards in the United Kingdom. Fortunately, the Higgs report is blind to the role of Members serving on boards, but I do not doubt that if it had anything to say about that, it would be looking for an explanation.

The Higgs report has a distinguished ancestry that stems back to the Cadbury, Greenbury and Hampel reports. It is an important contribution to the tradition of voluntary and combined code compliance in corporate governance in the United Kingdom. As it represents a substantial change and a dimensional move forward in the nature of corporate governance, it is important that it attracts critical scrutiny before it is implemented. The report will have an important impact on a substantial part of the wealth-creating part of the economy. It will determine not only the way in which leading public companies are governed, but will set a tone and establish a style, and will determine the attractiveness of careers in public companies as non-executive directors.

It is important that the Higgs report receives critical analysis not only among company chairmen, the Financial Reporting Council, the Confederation of British Industry and so forth, but in Parliament. To date, the report has received no discussion in Parliament, except for a statement by the Secretary of State of which it was part of the subject. That may come as something of a relief to the business world, but it is not right that a shift of such magnitude, which will affect the future wealth-creating part of the economy, should not receive critical examination in the House. Therefore, I am delighted that we have this chance to give it that examination.

When the Higgs report was produced, the reaction to it was muted. Most people saw it as a response to the corporate difficulties of the past few years, including the well-known corporate failures. The Government seemed to be enthusiastic about the report's output: the Secretary of State warmly welcomed it, and appeared to recommend that it should be implemented in full and without substantive exception. She said that it would be referred to the FRC, which would consult on the precise wording. From the Government side, at no point has there been any questioning of the recommendations, even though they go down to detail that represents prescription in corporate governance that we have not seen hitherto. The Confederation of British Industry recommended that the report be read from cover to cover. In fact, it recommended that company chairmen should read it throughout and then read it again. Some may feel that that would be a soporific exercise. Nevertheless, the report makes quite good reading and there is no doubt that, in its recommendations and the nature of the arguments it advances, it is a distinguished report that merits the careful scrutiny of all non-executive directors.

In the weeks since the report was produced, growing reservations and arguments have emerged on points of substance and detail. Those must be taken into account.

We should give the Government and others pause to think again. There is a well-known and well-publicised CBI poll of FTSE 100 company chairman. These people are major practitioners; they know what they are doing and many of them have served on more than one company board.

The results of that poll are disturbing. About 82 per cent. of respondents agreed with the statement that the Higgs report undermines the role of the chairman, as the report has certain things to say about the role of the senior non-executive director. That amounts to substantial disagreement. About 56 per cent. disagreed strongly with the proposal that non-executive directors should meet once a year in the absence of the chairman. That would create a potential schism in the board and cut across the principle of the unitary board. About 87 per cent. disagreed, either strongly or otherwise, with the recommendation that the nominations committee should be chaired by an independent non-executive director. That substantial disagreement is far greater than when the Cadbury or Greenbury reports were introduced, although it applies to only one recommendation, not the entire report. About 50 per cent. disagreed with the idea that the chief executive officer should be disallowed from becoming the chairman of the same company. Such substantial and authoritative concerns merit serious consideration.

Digby Jones, the director general of the CBI, has referred to the damaging "unintended consequences" of the Higgs report. We should bear it in mind that such people are generally supportive of the thrust of Higgs's argument. No one believes that the central ideas set out in the Higgs report do not amount to good ideas on corporate governance. The question is should such things be incorporated in the combined code? The Association of British Insurers, the Institute of Directors and various company chairmen have made public their serious reservations.

To date, the Secretary of State has been dismissive of such concerns, but I hope that this debate will provide the Minister with a chance to give us a more reflective view on the Government's thinking. I hope, too, that she will find time to respond specifically to the issues that have been raised, and that she will not merely discuss the general background of the Higgs report. I introduce the arguments not in a spirit of partisanship, but because the report has made a valuable contribution and deserves to be heeded. There are substantial problems in corporate governance in the UK that must be dealt with.

Ministers have said that there were many reservations in the corporate community when the Cadbury report was introduced. That is fair—it was a groundbreaking move forward. About 40 per cent. of companies were non-compliant with the report, whereas 10 per cent. are non-compliant today. That reflects the fact that the report is accepted as part of the corporate governance tradition and that it has worked. There is, however, greater concern about specific issues in the Higgs report, than with the generality. We should not, therefore, simply rest on the idea that business people and directors always make a fuss, that things will settle down, and that we can then move forward. We are dealing with the stewardship and leadership of wealth-creating Britain, which is far more important. That should not be tinkered with unless there is an overwhelming argument.

Caution should be our watchword. We must not play with the way in which boards work because it seems a good idea. We must become involved only if there is a compelling and overwhelming reason to do so.

I endorse my hon. Friend's statement that caution should be our watchword. However, what would he say to those critics who suggest that caution goes hand in hand with complacency?

My hon. Friend makes a good point. There are no grounds for complacency. Profound issues, such as the way in which we lead, compensate and manage large companies in Britain, need to be addressed, but the question is, does the Higgs report deals with matters about which we should not be complacent? There is no question whether we should be holding this debate. I do not dispute that Derek Higgs, whom I have known for many years, has produced a distinguished report. We must give it our urgent attention, but we should be careful about implementing prescriptive changes that will have an impact on the way in which corporate governance works, and which may not result in a better outcome.

I shall cover the central issues that surround the report, after which I shall deal with three or four of the specific questions that have been raised. I shall deal first with my hon. Friend's point on whether it deals with the central issues of corporate governance, in so far as there have been corporate difficulties that should have been remedied in the past two years—for example, in respect of Marconi, Cable and Wireless or Abbey National. We all know those celebrated examples. Would the Higgs report have made a difference, or should we turn our attention to other matters? Has the Higgs report missed the point? I am not questioning whether Derek Higgs has missed the point, but did his brief do so?

Does the code enable good boards to become better? It is easy to think of ways in which to deal with the problem of weak boards, but if the code makes good boards less effective, not much has been achieved. The point is that a good code enhances the whole, and does not deal only with the problems of the weakest companies. Is the spirit of the combined code preserved? Most people consider that the voluntary nature of the combined code—the fact that companies have been able to conform broadly, unless there are good reasons not to do so—has been successful in the United Kingdom. Will the Higgs report change the entire way in which such matters are viewed?

It is my judgment that part of the problem was that the Government gave Derek Higgs a narrow brief. He was asked to deal with non-executive directors. The difficulty is that some of the real problems in corporate governance are not to do with non-executive directors. There is a presumption in the report that a few non-executive directors could have stopped the difficulties that have occurred. Let us consider some major corporate failures. Cable and Wireless, and Marconi, had distinguished boards of NEDs. They were made up of a high-calibre people. I know that, in most instances, the decisions that were made were subject to detailed scrutiny by the NEDs, who agreed with them. We should not rest on the idea that different non-executive committees will solve the problem. They will not.

There are other more fundamental problems. In the long term, the success of large companies in Britain depends on the quality of management and its long-term commitment to such companies. One of the greatest problems is our failure to attract people to management and to build up a long-term culture of commitment to business. Most executive directors are still incentivised on a far too short-term basis. Furthermore, Higgs was blind about pay, because it was not part of his brief. The Minister and I discussed conversation failure, a matter raised by the hon. Member for Twickenham (Dr. Cable). It will not be touched on in debate. It will soon be the subject of a consultation paper, and it goes to the heart of the present difficulties and the question marks that hang over our corporate culture.

In my judgment, the quality of management and the ability to attract good non-executive directors in long-term conversation are important issues that sit outside the Higgs report. To some extent, the report is what one gets when one applies a Rolls-Royce mind to the wrong problem. I am not saying that non-executives are not worthy of scrutiny. However, there are much broader issues to be discussed. My view is that the Government, in responding to recent corporate failure, saw the Higgs report as a fig leaf. They decided to get Derek Higgs—a terrific and experienced guy—to give them a nice report, and thought that that would solve the problem. Unfortunately, they defined the brief rather too narrowly. It is probably fair to say that Derek Higgs had quite a job to come up with the number of constructive recommendations that he has.

Will the Higgs report apply to all boards and improve the generality of boards rather than merely address the problems of a few? Here, I do not think that it will work. The net effect of the report will be to reduce, not improve, the quality of non-executive directors. The way in which Higgs-compliant boards will work post-Higgs is to have more committees, more training, more procedure and a more divided board. I do not think that that will attract NEDs. I can tell the Minister that from my experience—I talk to many company chairmen, directors and business people—such people will no longer wish to be NEDs of FTSE 100 companies. They will think that it is just not worth it. What attracts NEDs is the idea that they can participate in business decisions and work closely with good management. They do not want to sit on lots of little committees. They do not want to sit on a divided board with other non-executives. They do not, unfortunately, particularly want to spend their time with institutional shareholders who, equally, do not want to spend their time with them.

In net terms, the job will be made less attractive. It is not a question of pay. People who become non-executive directors for pay are the wrong people to have on a board. The people whom one wants are already paid substantial sums, or have made substantial money, in business and will do the job because they are really interested in the board and the people with whom they will work.

The proposals will reduce the chemistry of the unitary board. Boards that work well have great chemistry. That is important because it is always possible for executive directors to conceal from non-executive directors what is going on. A business can have the best non-executives in the world, who have much time and training, but if the executive does not want to tell them something, they will not know it. Boards work where the executives and non-executives are a team. The flow of information is then free and the informal contact great. Often the most valuable points are those made at the margins of a board meeting or over a sandwich lunch afterwards. That is when the information really flows. Unless that structure is created and enhanced, the effectiveness of boards is reduced. The Higgs report, with its committees, separate meetings and senior independent directors, is starting to erode that process.

Boards that work well have a long-term commitment to the company. Let us think about how Marks and Spencer and Tesco were created, or how Morrisons, which does so well today, and other great companies came into being. That happened because people, including the boards, had a long-term career commitment to those companies. Yet the Higgs report is on the margins of encouraging more short-termism. For example, it discourages the idea that non-executives should serve for more than six years.

Will the Higgs report improve the generality of boards? I think not. Not in any fundamental single way, but in aggregate, the effect of the report will be to dilute the way in which most effective boards in Britain have worked historically. It will cut across the quality of non-executives, the chemistry of the unitary board and the long-term commitment to companies.

How will the report affect the spirit of the combined code? I think it important for the Minister to recognise that that code does not work like regulation or law. It works because there is a majority consensus in the institution investing community and among directors. Generally, it is a pretty good thing and reasonable in its requirements. The difficulty with the report is that it takes that code into a further dimension in prescription and detail, and in the way in which it works. There is a real risk that, as a result, many companies will not comply with it. We will then be looking not at 10 per cent. of companies, in terms of the Cadbury report, but at 25, 30 or 40 per cent. Once that happens, the norm becomes to explain, not to comply. The power and influence of the code are then substantially diluted.

The point is that the code should contain minimum requirements to allow boards maximum flexibility. In this instance, it has gone beyond minimum requirements to, at the very least, covering good practice and, more than that, becoming a code of aspiration. Derek Higgs has said how a board should ideally work and not what is absolutely required, which was not envisaged when the combined code was introduced.

Is it not the case that in this area, above all others, one size of regulation does not fit all? It is important that we get a clear steer from everybody involved, including the Government, that some small companies would be wrong fully to comply with every aspect of the code. It would not be in the interests of their shareholders if they were to do so, because it would impose an excessive burden on them and cost their shareholders more. An explanation should be just as valid a way of dealing with the code as full compliance.

I agree 100 per cent. with my hon. Friend, who makes the important point that the code will affect small companies as well as large. The costs of compliance have been estimated at well over £200 million by leading accountancy firms, and that is the cost only in terms of non-executive directors and not the cost to the performance and effectiveness of the British economy. Ministers and Derek Higgs have said that companies do not have to comply because they can explain, but the combined code rests on the idea that it works if most people in normal circumstances comply with it. If explanation is the norm, all we will get is longer annual reports—my goodness, they are long enough already and hardly anybody reads them.

The combined code is pretty powerful. If people who are not conforming to it were to come to an annual general meeting, questions would be raised and institutional shareholders would pay attention. If, however, explanations proliferate, the code will become lax and will not work. Even worse, if the Higgs recommendations were to work, we would end up with a grey uniformity on company boards, which in many instances would be costly and bureaucratic, and fewer people would want to serve as non-executive directors, which would not help. I do not want to overstate the case, but we need to be mindful of what the combined code is meant to be and what compliance should look like.

I want to address four specific issues raised by company chairmen and business as areas of substantial concern. I reiterate that most business people and I are not opposed to the thrust of the Higgs report, which is outstanding. How some recommendations are enshrined in the combined code, however, requires careful debate. Like many semi-regulatory proposals, those in the report are accurate and it is difficult to argue against any of the individual paragraphs. However, the report's aggregate effect will be to change how boards work. More than that, it is regulatory in tone in the sense that it focuses on the means not the ends. In other words, good governance is the end and Derek Higgs is interested in prescribing exactly how it is achieved.

I want to start with the role of chairman. Strong chairmen who play an active role in a business and who are close to what is happening have led most successful British companies. They are often not the classic Cadbury-style, so-called non-executive chairmen who sit back and review the activities of executives; they are people who exercise leadership. They have often risen through a company or have worked in the same industry, and sometimes they are mavericks. They are people who expect to control, to run and to lead their boards. We want to encourage them. They should, of course, be restrained by checks and balances, but we need to make sure that the combined code enshrines the idea that we want strong leadership. In the Higgs report, the role of the chairman is substantially undermined in principle, and that may be only the beginning of the process. It is undermined first by the formalisation of the idea that there is a senior, independent director. Clearly, the assumption is that the chairman is somehow not sufficiently independent, and so there should be someone who is.

The idea of an independent director is interesting. I do not think that any director should be independent in the broad sense: I would want that director to be a partisan of the company. I would want anyone who serves on my board to fight for the business, not against it. I know that this is a question of language, but I find it difficult to accept that one director should be singled out as being different in some way from the others.

In many companies, there is, informally, a senior non-executive director. That naturally evolves. He or she is often asked to undertake tasks by the chairman. There is nothing wrong with that. The question is, should that post be designated formally so that outsiders can see who the person is? If we were to do that, we would almost inevitably start to break up the unitary board and undermine the authority of the chairman. It is almost inevitable, too, that those in the company, including executives and outside shareholders, will see that independent senior director as a court of appeal, a way of going round the chairman. That would be a damaging part of the process. Ironically, often the informally appointed senior non-executive director would be one of the longest-serving, but one of the recommendations in the Higgs report is that we should no longer have very long-serving non-executive directors.

The report goes on to recommend that the senior independent director should visit the shareholders once a year to elicit their views away from the chairman, presumably because the chairman might misreport. There have been occasions on which chairmen have been blind to the issues raised by shareholders. There may even have been occasions on which they have misreported them, although it is perfectly easy for shareholders to make their views known through other means. In my experience, when institutional shareholders pick up the cudgels and ring up the chief executive or chairman, he stands to attention by his desk. Chairmen are absolutely focused on what shareholders have to say. The problem is not lack of access to boards, but lack of activism on the part of the shareholders. If we can get shareholders to punch their weight, we have solved half the problem.

I should also point out the practical difficulties. Research shows that most institutional shareholders do not particularly want to see the independent senior director. That is not very interesting for them unless there is a particular burning issue to talk about. Otherwise, it is a rather boring discussion. Shareholders would rather see the chief executive and talk about how the business is going or meet the chairman. Meeting the independent senior director—some charming and doubtless distinguished fellow who wants to elicit any complaints and have a cup of tea—is not a good use of the shareholders' time or his.

The companies that I served have many large institutional shareholder bodies scattered throughout the world. This senior independent director will presumably have to make himself available to people in Chicago, San Francisco, New York, Geneva, Zurich, London and Edinburgh. He will have to have a great deal of spare time and a high boredom threshold. I do not think that the recommendation is extremely practical. I just do not think that it will be carried out; it will be honoured in form, but not in substance.

To come back to my central point, we need to get institutional shareholders to intervene directly with the chairman, and not to go round him. The idea of the divided and rather political board that would result is unacceptable, as it would be in other walks of life. I dare say that it would be unacceptable in ministerial teams if there were some senior independent Minister to whom we could complain instead of the Secretary of State. That would be nonsense.

Another issue is the idea that the chairman should not chair the nominations committee. One of the central roles of the chairman is to build a quality board, and to bring good people to it. Often that requires investment in personal capital. I know that chairmen get criticised for inviting people with whom they have had connections to serve on boards. However, I can say that persuading people to serve on a public company board is not that easy, and it is getting more difficult. Often, chairmen invest personal capital by persuading people of distinction to come and serve, and it does not stack up that they have to say to a distinguished industrialist, "We'd really like you to come and serve on our board, but I can't make the decision as I don't chair the nominations committee, which meets independently." That undermines the appetite of the chairman to build a strong board, and is a safety net for the worst.

We are trying to provide against chairmen recruiting their friends, neighbours and relatives in a way that is too close knit to allow the process to work. I do not think that that is a prevalent problem, and where it is, it is usually conspicuously obvious and can be dealt with through other means. It cuts across the idea that the unitary board undermines the authority of the chairman.

On the question of chief executive succession, the Higgs report recommends that chief executives should not become chairmen of the company in which they have served. Many people will have reservations about that, not as a general raising of an eyebrow or asking whether the right person will be chosen, but because it is part of a combined code of prescription. In the United States, 73 per cent. of Standard and Poor's companies have a combined chairman and chief executive. There is a different form of corporate governance. I make that point not because I am recommending that form, but because it demonstrates that in a successful economy there are different ways of cutting a board, and we should allow for that.

In the United Kingdom, 23 per cent. of chairmen of public companies were the chief executives in that company. We are saying that it is preferable that the chairmen in nearly a quarter of UK public companies should not be chairmen, which is a fundamental recommendation. If implemented, it would bring about a substantial change in the nature of leadership of British public companies. It would mean that distinguished chairmen would not be able to hold their posts in many companies, such as Ken Morrison, to take an extreme example, but there are many others.

When it comes to succession and someone reaches the age when they want to change role and diversify their career, we are saying that we will discard that person, with immense investment in experience, talent and knowledge of the company, and that those qualities will be lost to the company. That is a questionable idea. I accept the argument advanced in the Higgs report that there are chief executives who are not right to become chairmen because they cannot adapt to that different role. Equally, however, there are chief executives who can become chairmen. We can leave that to companies without any overriding guidance. It is undesirable to create a negative aura around chief executives who go on to be chairmen.

There is another inadvertent side effect. If one tells a chief executive that he cannot become a chairman, he will carry on as chief executive for far too long. We will provide a roadblock in succession. Instead of people gradually moving on through the company, and young blood coming through, people will stay on because otherwise they will have to leave the company that they love, and have worked for passionately for the past 10 or 20 years. As a result, we will slow up the process of development of talent. I am confident that the effect of the recommendation will be to increase the average age of leadership in British companies.

I should say that I became chairman of a company of which I had been chief executive, and I did so with the wholehearted support of the shareholders. If I had not been able to do that, Allan Leighton, who is now chairman of the Royal Mail, would not have been able to succeed me as chief executive. I do not think that that would have been in anyone's interests—myself, Allan Leighton, the shareholders, the company, or the people who worked in that company.

I shall move on to the question whether someone should serve as the chairman of more than one leading public company. The recommendation in the Higgs report is that chairmen should be rationed to one role only; in other words, one could be a chairman of Barclays or Lloyds bank, but that would be it. That is an unusual idea. Apart from anything else, it applies only to the role of chairman, not to other roles in life. For example, people could be a Member or have various other occupations that would preclude their effectiveness as a chairman and limit their time, but the report is blind to that.

It seems that we have confused the means and the ends. The idea is perfectly good, in that someone who is the chairman of a company must have sufficient time to devote to their duties. More than that—this is the important point—the role of the chairman is to be on tap, to be available in an emergency, to step into the breach. Therefore, it is important that chairmen have not only time but spare capacity available. In the event of a crisis in the company in which the chief executive has to go, the chairman must be able to step in.

The principle that the chairman must have time available and must be able to demonstrate his commitment should be enshrined in the code, but to say that chairmen cannot serve in more than one company is overly prescriptive. It will put the ends before the means and will lead to the loss of talent in British industry. We are not flush with great chairmen in this country, and distinguished people such as Lord Stevenson, Sir Victor Blank and others do an outstanding job in more than one company.

We should not kid ourselves by thinking that late in life many chairmen will spend all their time in the garden instead of acting as chairmen of companies. They want to do other things—they are not all geriatrics. In fact, there are very few who do not have the energy, drive and talent to make a major contribution to British industry and commerce. They should be encouraged to do so, not discouraged.

Finally, on the specifics, the Higgs report proposes limiting the term of office for non-executive directors to six years. Again, that is comply and explain. However, as I said earlier, explaining should not be the norm. The issue is not whether we have too many long-term non-executive directors, but short-termism, lack of experience and the rapid rotation of, particularly, the executive content on boards. With one exception in which practically everyone left, almost every public company board on which I have served included non-executive directors who had served more than six years. They were often the most valuable people because they knew the history of the company and the mistakes that had been made.

Once again, as is so often the case with regulation of this sort, we are getting the ends and means confused. We should be trying to achieve a board with a balance of experience, energy and refreshing new insight. We should be trying also to enshrine a guideline in the code that all boards should have a mix of new and long-serving directors. To turn that round and say to directors that after six years they will be under pressure to resign, and will have to explain themselves in the annual report and at the annual general meeting, is overly prescriptive and a confusion of what we are really trying to achieve. Many of the recommendations can be enshrined in the code in a constructive form, but they must be substantially less prescriptive and detailed.

Derek Higgs has produced an outstanding report. It is a major contribution that merits serious consideration and debate. I agree with the CBI that all 100 pages should be read at least once or, for those with a great appetite, perhaps twice. It should be compulsory reading for all new non-executive directors, as it is Management 101 in corporate governance, and it is very good on how boards should aspire to work. However, that is wholly different from saying that it should be incorporated in the combined code with only minor refinements to the wording, as the Secretary of State recommended.

Boards are made up of people, several different forms of leadership and many different forms of chemistry. What matters is how that chemistry works and the quality of people who are attracted on to the board, enabling the leadership—chairmen or chief executives—to be effective, and enhancing that leadership with proper scrutiny and questioning. That does not lend itself to a highly prescriptive format. There are many different ways of running an effective board, and the combined code should allow for those different ways. However, the Higgs report is in danger of adopting a "conventional is best" view. The code must be an aspiration to best practice, and not a required minimum. Similarly, the options to comply or explain should not change so that the explain option becomes the norm. If that happens, the authority of the combined code will start to erode.

Boards that work well are not divided but united. People work together, there is absolute openness and there is no need to meet behind closed doors. Such boards attract diverse and talented people, and others aspire to serve on them. They not merely attract people who are interested in procedure and governance, but practising business men who are fascinated by business. The charter is in danger of eroding the system of corporate governance. It will deter people from becoming non-executive directors. It will add cost, and reduce the substantive effectiveness of British management. I shall leave hon. Members with a quote from the CBI that sums things up:
"One-size-fits-all will not be good for British Business or wealth creation. This is the challenge for the DTI and the Financial Reporting Council but one to which they must rise if Higgs is to work in practice."

11.41 am

The Chamber has been treated to one of those rare experiences of listening to an hon. Member who knows what he is talking about. It is difficult to think of much to add to what he has said, and I congratulate my hon. Friend the Member for Tunbridge Wells (Mr. Norman) on addressing an important subject from his background of enormous experience. He has clearly given the subject a great deal of thought. I shall not trawl over the same ground because he has made his points adequately. However, I shall mention a couple of other points.

First, I draw hon. Members' attention to my entry in the Register of Members' Interests. I am a non-executive director of several companies, one of which is public. I am happy to say that only one of them is public because, if I were now invited to join the board of a major FTSE 100 company for £25,000 a year, I would seriously hesitate. It is not an attractive task as it is, and this report is likely to make the job less attractive. The Minister would do well to bear that in mind.

Let us consider what has happened to those who were directors of Equitable Life. The decisions that they took were no doubt taken on professional advice, but they turned out to be disastrous. Some businesses go wrong; some go right. Unfortunately, that one went badly wrong, and its non-executive directors are now being sued for billions of pounds. They will be ruined if those lawsuits are a success. There is no fee that a non-executive director could earn that makes that risk worth while. We should therefore be very careful about making the role of a non-executive director of a major public company even less attractive than it is at the moment.

I want to emphasise a point that my hon. Friend made much more effectively than I could: directors must be a team. It is a terrible mistake to set up two classes of directors, one of which is the in-house police force—the security cops who constantly keep a check on the executives. That will not work. The executive will not tell them things and it will make its decisions outside the board meetings at executive committee meetings. The non-executives will therefore find it difficult to perform their task. Unless there is openness between members and an identity of purpose, which is for the good of the business, and unless the board operates as a team, it will not work.

There is one circumstance in which non-executives always find themselves set up with a difficult role. Dealing with executive remuneration is a difficult task, and it is one of the issues that should be on the Higgs agenda, but it is not. The public are concerned about executive remuneration and corporate failures. We have seen Marconi here and Enron in the United States. Some failures have been the result of fraud and some are the result of bad business decisions. However, the problems will not be solved by tinkering with the role of non-executive directors.

I shall pick up on a point that my hon. Friend made in passing, as it is the reason for my involvement in today's debate. The problems of excessive corporate remuneration and the rewards of failure or major corporate failures, such as Marconi, will not be solved by somehow changing the role of non-executive directors. Doing that might lead to better corporate governance, but not necessarily to better management. That is what the debate is really about. We want the companies that employ so many people in this country, provide so many of the goods and services that we all buy and are responsible for much of the productivity gain and wealth creation in Britain to be better managed. That will not be done by creating a class of non-executive directors who sit there, riding shotgun for the people trying to do their job.

The issues of performance and executive pay come back to shareholders and to shareholder responsibility. The absentee landlordism that was rife in Britain for large parts of our history—certainly in the 18th and 19th centuries—and that led to enormous economic and social problems is what we now have with shareholders. Most shares are owned by collective investment schemes of one sort of another, such as unit trusts or pension funds. We are, through our pension schemes or savings, the beneficial owners of those, but the direct owners who run them on our behalf behave like the worst absentee landlord. They think that they can simply buy or sell shares on the basis of whether they like their performance or want to take the profit. They take no responsibility for the management and performance of the company. That issue should be addressed. I do not pretend to have a solution, but while shareholders think that they can subcontract that responsibility to a couple of guys on £25,000 a year who turn up at monthly board meetings, we will not get the results that people want.

Some big shareholders simply cannot sell the stock of a company, although they might pick one company that they do not like, and I guess that the smart ones sold out of Marconi before it went badly wrong. However, major institutional shareholders cannot simply claim that they do not own BT, the major drugs companies such as GlaxoSmithKline or the big supermarkets. In fact, they own large chunks of those companies. They cannot divorce themselves from the responsibility of management. I urge the Minister to examine ways in which the Government might try to get companies to behave like the owners of those businesses and take responsibility for executive pay levels. Hardly any of the institutional shareholders bother to turn up at annual general meetings, but give the chairman their proxy. We have seen a couple of shareholder revolts over executive pay recently, and I say good luck to them. Let us keep it up—it is a very healthy sign. However, 30 per cent. voted against the Barclays chief executive's pay deal, and it has just gone through as though that had not happened. When one of those deals is defeated, we will then see shareholder power.

Why is the matter being left to ginger groups such as the Pensions and Investment Research Consultancy? Why are the mainstream institutional shareholders not taking on that role? Is there a job here for a combination of the Government, the Financial Services Authority and the Bank of England—for the usual informal network that twists people's arms—or does the problem require legislation in the form of withdrawing tax privileges if shareholders do not exercise their votes? Unfortunately, the Government have taken away so many tax privileges from pension funds that that might not work, but some privileges still remain. Perhaps institutional shareholders should not be able to enjoy them unless they vote at meetings rather than simply giving their proxy to the chairman. I hope that we can return to examine the question of shareholder power and how it is exercised. Many shareholders behave like absentee landlords.

It is worth picking up on a couple of points. I do not see how a company can have a chairman and a senior non-executive director except in the unique circumstance in which the chairman is, in effect, the chief executive as well. Even then, I see some difficulties. I do not know whether my hon. Friend would acknowledge that that is a special case. Companies should be left to be managed and organised in the way in which their shareholders want them to be. Some companies have a history of what the Americans would call theory X management. General Motors was a good example of that, constantly renewing its own executive team from inside. It had a strong corporate culture. Other companies are led spectacularly by the strength, vision and commitment of one individual.

One cannot say into which category particular companies should fit. They ought to be allowed to develop in the way that is right for them. In some cases, that will mean a strong executive chairman; in others, an outsider who is already, effectively, the chairman of a board who can certainly perform the role of communicating with shareholders. I would be reluctant for yet another division to be introduced in the non-executive directors. It is bad enough that, for much of the time, they are forced into being box-checkers and taking on a list of corporate governance points that they feel obliged to make sure, in a rather self-defensive way, are complied with—and that is particularly so on audit committees. I would not want to introduce a division between the non-executives so that there would be not only two classes of directors, but two classes of non-executive directors. That would be a mistake.

The idea that the big corporate scandals or the huge unhappiness over executive pay will be avoided by tinkering with the roles of non-executive directors or non-executive chairmen is a fallacy. Such problems will be addressed only if shareholders demand that directors do not have more than one-year service contracts and do not give chief executives large golden hello payments, and if, as my hon. Friend suggested on another occasion, shareholders insist that it is written into contracts that the quality of a person's performance can be taken into account in assessing what their compensation for leaving office should be. Unless shareholders are prepared to use their power and exercise their responsibilities, we will not solve the problems. It would be a mistake to think that we will.

Order. I remind hon. Members that it is the convention for the first of the three wind-up speeches to start 30 minutes before the conclusion of the debate. I ask the two hon. Members who are seeking to catch my eye to bear that in mind when making their contributions and accepting or responding to interventions.

11.51 am

May I join in with the praise of my hon. Friend the Member for Tunbridge Wells (Mr. Norman) for his tour de force on all the issues? I entirely endorse what my hon. Friend the Member for Stratford-on-Avon (Mr. Maples) said about the importance of shareholder responsibility, an issue that I will touch on in my brief comments.

There is little doubt that, as ever, the devil is in the detail. Superficially, I agree that the intentions behind the proposals were good. Those intentions lie behind Derek Higgs's long-awaited review. However, there has been relatively little recognition of the already substantial strides that UK plc has taken in areas such as remuneration and corporate governance, but I appreciate that the review was quite narrowly defined. There is no room for complacency given the number of scandals on both sides of the Atlantic. Clearly, one considers Enron and WorldCom in relation to a whole range of corporate governance issues and concerns have been voiced in relation to the role of non-executive directors of those companies. We should not feel that somehow the regime is so entirely different in this country that such scandals could not happen on these shores.

I entirely agree that it is surely for shareholders, both institutional and personal, to take on a great deal more responsibility. My grave concern is that legislation is rarely the answer. I appreciate that Higgs may or may not lead to legislation. There may just be a report and a code that comes into practice. However, there has been a worrying trend—particularly in the last year or so—in the Government's relationship with business; they are considering more regulation and legislation. Let us consider the Higgs report and the concerns that have been addressed by the Secretary of State in relation to remuneration. It cannot be a coincidence that most Sunday newspapers in recent weeks have talked about new, stricter and more draconian powers being brought to bear.

No one in this House should seek to undermine the profitability of our companies, which are, after all, our life blood when it comes to ensuring that we have not only a successful economy, but job opportunities and the public services that all of us wish to improve. I am concerned that, ever more burdens—this is another example—will lead to yet more bureaucracy and regulation, especially in what promise to be somewhat more difficult times.

I understand that compliance will not be mandatory. My hon. Friend the Member for Tunbridge Wells rightly pointed out that, in relation to the Cadbury report, there was 40 per cent. non-compliance initially and that now simply one tenth of companies do not comply with the code. The reality is that there will probably be more regulation, and that will come at a cost. The onus will be on a company to provide a clear and plausible explanation in its annual report if it does not comply. The real concern is that there will be a new definition of independence that will lead to a great loss of talent from the boardroom. It has already been pointed out that too many skilled and potentially able non-executive directors will stay away from a new regime. Such a corporate backlash is, in my view, understandable.

The focus on the enhanced position of senior independent directors may be highly divisive. We have to examine the practical reality that the role of the senior independent director will potentially become key when results are announced. A high-profile company, which may have had well publicised difficulties, needs a strong relationship between the chairman and the chief executive officer to ride through the ebbs and flows of business. It is essential that such businesses have united boards. It is likely that that sense of unity will be undermined by the new, all-powerful, non-executive director role that is clearly envisaged by the Higgs commission. I am concerned that that role will become a hotline to shareholders and will undermine the position of existing executive directors. It will not undermine what might be described as the cosy relationship in the boardroom, but it might undermine a company's profitability.

I could speak for far longer on this topic, but I know that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) wants to say a few words. I congratulate my hon. Friend the Member for Tunbridge Wells on introducing such an excellent debate. We look forward to hearing the Minister's views.

11.56 am

First, I draw attention to my declaration of interests. Secondly, I congratulate my hon. Friend the Member for Tunbridge Wells (Mr. Norman) on securing the debate.

In a non-party-political context, it is sad that there are no Labour Members in the Chamber apart from the Minister and her Parliamentary Private Secretary because the issue is important. It is perhaps a comment on the Government's large majority that there is a lack of interest in important matters such as securing the success of this country and ensuring that companies are run correctly.

The Higgs report aims to make non-executive directors discharge their responsibilities in a more professional way and to ensure that they are appointed properly. It has been said, however, that that will not guarantee good company performance. Like Marconi and Cable and Wireless, Equitable Life had one of the best quality non-executive boards, which in no way protected it against disaster.

Although my hon. Friend the Member for Stratford-on-Avon (Mr. Maples) made a good point about absentee landlords, it is slightly unrealistic to expect the international investment management industry to take on that role. Many equity positions in British businesses will be owned or managed by fund managers in New York or Hong Kong whose jobs do not involve ownership. There is a need for professional non-executives to play a greater role in protecting the interests of shareholders.

Some of the key points in the Higgs report seem to be greatly mistaken. First, on the principle of a board effectively being controlled by its non-executive directors, my fear is that that will lead to people going through the motions at formal board meetings while key decisions are taken outside the boardroom behind closed doors. If we want to go in that direction, it would be better to go the whole hog by adopting the German two-tier board approach. If anything, the principle will cause decreased, rather than increased, transparency in decision taking.

Secondly, it is crazy not to accept that senior executives aged about 60 are often the most appropriate chairmen of businesses. HSBC, Tesco, Unilever and Sainsbury's are examples of dominant British companies that have tended to follow that tradition and clearly intend to continue to do so. My hon. Friend the Member for Tunbridge Wells rightly made the point that there is a risk that chief executive officers may stay on too long. There is also the risk that other companies may poach people who cannot become chairmen and who retire as CEOs because such people might bring confidential information with them. The proposal is therefore unsatisfactory and, as has been said, is also inappropriate for small and medium-sized businesses. There is the risk that there will be a mere going through of the motions, and it is not a model that will suit most small businesses. With regard to whether it is intended to be a rule or just guidelines, the problem is that the listing authority is likely to treat it as a requirement, and to require a major justification for businesses that do not fall into line with these prescriptions.

There is a mistaken view—almost an assumption that executive management is not to be trusted. In my 30 years in the investment management industry and in participating in companies I have observed that successful businesses tend to have strong and effective executive leadership. My hon. Friend the Member for Tunbridge Wells pointed that out. Non-executive directors will—of their nature, and increasingly—be looking firstly to protect their own rears against the risk of being sued. They will not be looking to take bold executive decisions to lead companies forward and to create benefit for shareholders. Therefore, if we end up with businesses that are controlled by NEDs, that will be bad news for entrepreneurship in Britain.

I say yes to more professional non-executive directors. They have an important role, which they have not always played professionally enough, in looking out for the interests of shareholders. However, some of the key proposals in the Higgs report are contrary to that objective.

12.1 pm

I draw attention to my declaration of an unpaid directorship.

I agree with the hon. Member for Stratford-on-Avon (Mr. Maples): it was a privilege to listen to the comments of the hon. Member for Tunbridge Wells (Mr. Norman). He has not only a vast amount of experience, but he has turned round a major failing company. He made a success of it, and he enjoys great respect for that reason.

The problems about corporate governance that we are concerned with are old problems. There is an eloquent passage in Adam Smith's "The Wealth of Nations" that describes the conflict of interests between the people who own wealth and the people who manage it for them. That problem has recurred in different forms over the ages. When I was a teenager, I was introduced to American books by J.K. Galbraith and others, which talked about the death of shareholder capitalism. The issue has ebbed and flowed over the years. Although the particular set of problems that we are concerned with are immediate, they have a long lineage.

There are three immediate reasons why we have been concerned with reforms of corporate governance, which in part come from the other side of the Atlantic. One of them is the excesses of the 1980s—the conflict of interests between chief executives and chairmen, the Maxwell problem and the megalomania problem in companies. That triggered the Cadbury report and successive such episodes. Secondly, there are the more recent worries about companies such as Enron and WorldCom—about how interesting devices such as stock options, which were designed to incentivise managers to be more sensitive to their shareholders' concerns, had the opposite effect by encouraging them to manipulate share prices, and about the need for a new round of corporate governance reform. Thirdly, there is growing concern about executive remuneration and abuses thereof. I know that the hon. Member for Tunbridge Wells also has views on that, although the Higgs report does not directly touch on it.

The hon. Member for Tunbridge Wells praised the Higgs report and its spirit while criticising the over-prescriptive way in which it had been implemented. He drew that distinction. It is therefore worth while to reflect on two of the main themes that came out of the report, which I think that all of us—or, at least, most of us—can endorse. The first theme was a stress on the importance of independence on boards. That is independence that acts as a source of scrutiny of management on behalf of shareholders. Although the Higgs report is concerned that there may be significant non-compliance, one of the points that has emerged from recent research is how little real independence there currently is. Recent studies of perks suggest that, in terms of the Higgs report, only 20 per cent. of boards could be described as independent—in other words, with a majority of independent non-executive directors—so we are starting from a low base. One of the report's main contributions was to suggest increasing that figure. Whether it should be as high as 95 per cent. or 80 per cent. is secondary, but the importance of independence was the key factor.

The second point—it was an important contribution to the report, and was briefly touched upon by the hon. Member for Arundel and South Downs (Mr. Flight)—was that non-executive directors should be better trained, more professional and more specialised. The recruitment process should be improved, so that we do not have incestuous magic circles of non-executive directors recruiting each other, but can move the system of independent non-executive directors on to a more professional footing. That depends not on the code, but on the implementation of Professor Laura Tyson's report. Indeed, that may be one of the genuinely positive things that comes out of the Higgs report that does not require prescriptive procedures.

Finally, I turn to the criticisms that are set out in the report, which fell into several categories. The first set suggested that incorporation of the combined code would do harm. It is important to stress that we are not talking about regulation, at least, not regulation in the normal sense. We are talking about voluntary self-regulation, and comply and explain is not regulation. The Government could have gone down the regulatory route, but they did not. We are not talking about that damaging sort of regulation, but the Higgs report was right to say that damage could occur in two ways.

The first, which has not been emphasised, is the role of smaller companies outside the FTSE, where a tick-box culture might do harm. One can imagine institutional investors looking down a list of companies and finding that a significant number of boxes have not been ticked. They will not know much about the companies concerned and simply will not invest in them, thus making life difficult for companies to raise capital outside the major capital markets. That is a potential problem. Equally, I can see the force of what the Higgs report said about affecting the chemistry of boards. We have to take that advice on such matters.

The second set of criticisms is quite different. One of the problems is that it does not deal with the real problems, such as abuse of remuneration. I am not sure that that is a criticism of the report; we clearly need other things to follow.

The third criticism, which the hon. Member for Stratford-on-Avon raised, and which is also important, is to remind ourselves of the reason for independents. Their essential function is to represent shareholders, but what if shareholders do not want to be involved? One of the problems that we are already encountering is that the various shareholders' meetings on executive pay are dominated by institutional shareholders. Many of them are fund managers, and many of them suffer from the same forms of payment for failure as the companies that they are supposed to be scrutinising and criticising. There is a deep problem in creating an environment of shareholder activism and responsibility, which the Higgs report does not address but which non-executive independent directors are supposed to be aware of.

I conclude by saying that the Higgs report was a useful advance; it was positive and responded to a real need. I do not see enormous harm coming from implementation, which will be based essentially on voluntary self-regulation. However, important technical criticisms need to be taken on board, and the hon. Member for Tunbridge Wells referred to them eloquently and authoritatively.

12.9 pm

First, I declare the interests that are listed in the Register of Members' Interests. I also sat on the board of four public limited companies when not a Member.

I congratulate my hon. Friend the Member for Tunbridge Wells (Mr. Norman) on securing this debate. If not the best speech, his was certainly one of the best that I have heard in Westminster Hall. My hon. Friend's superb knowledge and talent were much in play. He explained clearly how we should move forward. He was right to say that the Higgs report could have a great impact on wealth creation in this country. There is a need for an extremely critical analysis. As my hon. Friend said, not enough discussion has taken place in Parliament. I understand that Her Majesty's Government initially welcomed the Higgs report. Referral to the Financial Reporting Council has been mentioned as well as the fact that all recommendations should go forward, without queries.

My hon. Friend was interesting when he referred to the view of business leaders. The Confederation of British Industry's survey showed that 80 per cent. of FTSE chairmen considered that the Higgs report will undermine the role of chairmen. He was also right to say that it was most important that a combined code was not undermined. As he said, the combined code works because nearly everyone complies with it. If 20, 30 or 35 per cent. of companies did not do so, the code would be discredited. The Government could then be tempted to consider other ways forward, such as legislation, and that would be a disaster.

I was impressed by what my hon. Friend said about the need to have a good constant supply of non-executive directors who do not want to become box-ticking apparatchiks, but believe in the company that they serve. The chemistry of a good board is difficult to make into a code, a recommendation or to put in writing. A good board is the result of strong leadership. It happens with certain companies and everyone knows exactly which companies they are.

I was also impressed by what my hon. Friend said about the role of chairmen and the need for the combined code to enshrine strong leadership, not to undermine it. I have certainly taken on board what he said about the role of senior non-executive directors being tabulated and defined clearly. As he said, the person who emerges does indeed from time to time set up links between major shareholders and will embark on other initiatives, with the support and concurrence of the chairman, other members of the board and the executive directors.

My hon. Friend made a good analogy when he said what would happen in a ministerial team if a special adviser or someone else was reporting the entire time behind the back of the Secretary of State and undertaking particular tasks. It is important for the ultimate appetite of chairmen to build strong boards. To remove even part of that role from chairmen would be a grave error.

As for succession, my hon. Friend referred to chief executive officers who could not move forward to the role of chairman. That does not happen often, but does from time to time in certain special companies. For example, Lord King of Wartnaby could still be chief executive of British Airways plc, if he had not gone forward to the chairmanship. What about Lord Hanson and what was then the Hanson Trust? It is now called Hanson plc. He could still be chief executive officer. There would be a roadblock. My hon. Friend could still be chief executive of Asda Group plc. It would have been a huge loss to the House if he had remained in that position and not gone forward to its chairmanship. There are many other examples. My hon. Friend the Member for Stratford-on-Avon (Mr. Maples) rightly said that the key to solving many of the problems lies with shareholders taking more interest and not just acting as absentee landlords. That is especially pertinent to the debate about pay packages. There has been much discussion recently in the press about the pay package of Philippe Varin, the new chairman of Corus, Jean-Pierre Garnier, the chairman of GlaxoSmithKline, and Eric Daniels of Lloyds TSB. Surely the shareholders could have got a grip of things. I have no difficulty with the idea of chairmen and chief executives having generous packages, but surely that should be linked to the performance of the shares of that company.

In the case of Philippe Varin and Corus, we had a company on its knees that might have been able to renegotiate its banking covenants, but whose shares were completely brought down. Only four years ago, that company was making profits of more than £1 billion, but it is now making substantial losses. A new chairman came in with a two-year pay package and a guaranteed set of options with various other significant benefits. I find it extraordinary that that whole package is not linked directly to the performance of Corus shares. One can think of many other examples. It is up to the institutional and retail shareholders to empower themselves and take more interest.

As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) said, there is no room for complacency, but he was also concerned about bureaucracy and red tape, which as an Opposition we are very concerned about. I go along with what he said about the importance of attracting more talent and of having a united board. My hon. Friend the Member for Arundel and South Downs (Mr. Flight) made a point about Equitable Life, where there was a quality board in place, but that board, on its 25 or 30 grand a year per head, was not able to solve the problems of that company. The board is now being sued for its efforts, and all its members will be personally liable for a large amount of money that will not be covered by the insurance that the company has in place.

My hon. Friend made the point about key decisions being driven by the board as a whole, which is important. Decisions should not be moved out of the board context. If the process becomes too prescriptive, many decisions will be taken by executive directors that are outside the confines of the board. One can see an analogy with Cabinet government, particularly in this Government where most decisions are taken by the Prime Minister and a few advisers outside the Cabinet.

As an Opposition, we do not have any difficulty in supporting some recommendations set out in the Higgs report. We certainly have no difficulty in supporting the separation of roles of chairman and chief executive officer, although it is interesting that Derek Higgs is on the board of British Land, where the CEO and the chairman are the same person. We do not support the recommendation that the chairman should not chair the nominations appointments committee. The reasons for that are clear and were well expressed by my hon. Friend the Member for Tunbridge Wells.

We do not support the recommendation that chief executive officers should not be promoted to the chairmanship. That is rare, but such a move would stifle wealth creation in certain circumstances, and could well stifle the performance of one or two key companies in this country. We are against the recommendation that a chairman can take only one such chairmanship. It is a question of time and performance, which can be judged. It would be wrong to be over-prescriptive.

We are cautious about the position of a senior independent director because often such a person does emerge. However, I do not think that the process needs to be carefully tabulated and prescribed. That position could undermine the entire ethos and principle of a unitary board and drive a wedge between the non-executive directors and the executive directors. We are cautious, and surprised that Derek Higgs recommended that half the board should be independent. If, for example, one other director is connected to the company, albeit as a non-executive, there could well be a majority of non-executive directors. Boards could become too big and unwieldy, and there would be an unacceptable cost to small companies.

I know from my experience on the boards of two companies, before I came to the House, that the costs that those companies face in complying with existing corporate governance are difficult enough, without adding more. The Government have said that they want more companies to move on to the off-exchange market and the alternative investment market, and they want corporations to move from AIM on to the main listing, but they will have to consider carefully how those regulations will impinge on smaller companies.

As an Opposition, we are concerned about the short-termism in some of the Higgs report, particularly where it is said that there should not be, as a rule, more than two three-year terms, nine years being the exception. Prescribing particular limits is a mistake. The report comes close to proposing a maximum period of service, which would certainly be a mistake. We want to see more non-executive directors come forward, but as it stands, the report will have the law of unintended consequences, as the CBI has pointed out, and fewer people will come forward. People do not want to become box-ticking apparatchiks, putting their career and reputation on the line.

We wish Professor Laura Tyson well, but what we really want is for the Government to promote more debate and to examine carefully some of the points made this morning and in the press. We also want the Financial Reporting Council to pull out the best parts of the Higgs report, so that we can then move forward with a better combined code.

12.20 pm

The Parliamentary Under-Secretary of State for Trade and Industry
(Miss Melanie Johnson)

First, I convey to the hon. Member for Tunbridge Wells (Mr. Norman) my enthusiasm for his initiation of the debate. As he and others recognised in their contributions, the issue is highly topical and very important. The Government have placed a high priority on it recently. As other Members have commented, the hon. Gentleman has a great deal of first-hand knowledge, which was obvious from his contribution. I listened carefully to his points.

By way of background, I remind hon. Members of the setting in which these issues of corporate governance have been raised. The subject of this debate is central, but the Government have undertaken many other measures such as the co-ordinating group for auditing and accounting. The Higgs report is just one of a number of measures aimed at maintaining the UK's position as a leader in corporate governance. Recent discussions with authorities in the US and elsewhere in Europe have made it clear that we are still doing the work that is necessary to maintain that position. Other work was done by Sir Robert Smith, producing guidance for audit committees, and there has been a review of the regulation of the accountancy profession and reports from the group that I chaired with my hon. Friend the Financial Secretary to the Treasury, covering such issues as auditor independence and rotation. The Government have recently put in much work on such issues in response to the concerns that we all have as a result of the Enron, WorldCom and other situations.

The review by Derek Higgs of the role and effectiveness of non-executive directors has played an important part in that package of post-Enron initiatives and has served well its central purpose of examining how UK productivity through corporate enterprise could be improved. The hon. Member for Tunbridge Wells mentioned the importance of that in terms of wealth creation and the wider economic agenda. The review was not aimed at taking a swipe at companies or their chairmen, as some would now have us believe, but was about enhancing the effectiveness of non-executive directors in maintaining the best regarded framework of corporate governance in the world and providing a badge for UK business through improvements to the best practice doctrine, rather than a rules-based approach.

I do not think that the hon. Gentleman, his hon. Friends or the hon. Member for Twickenham (Dr. Cable) would disagree with any of that. I do not think that much has been said, in terms of the major, overall objectives, on which any of us would disagree. In a statement to the House on 29 January, my right hon. Friend the Secretary of State for Trade and Industry strongly welcomed the Higgs report and emphasised its importance. She highlighted Derek Higgs's conclusions that at least half the board and the chairman at the time of appointment should be independent, that all members of audit and remuneration committees should be independent and that the separate roles of chairman and chief executive should be reinforced. She stressed how crucial she thought it was that appointments be made on merit, not, as is the case for more than half of appointments at present, through personal contacts and friendships. However, she also said—I repeat this in light of contributions made by Opposition Members—that that was not a regulatory approach.

The way to raise corporate governance standards is to use the existing successful approach of the combined code guidance and the principle of comply or explain. That means that if a company, such as a small listed company of the sort that the hon. Member for North-West Norfolk (Mr. Bellingham) mentioned, considers that particular provisions are not relevant or manageable, it can, as now, simply explain why it is not complying. Its shareholders and the market will judge whether that explanation is reasonable. I will go into more detail on comply and explain later.

Since the publication of the Higgs report, there has been plenty of media coverage of its implications, and some concerns that have been raised were mentioned again today. We are well aware of the responses to the selective questions asked by the Confederation of British Industry, and of course we note the concerns. However, the institutional investor community is generally supportive of the report, and many in business support the majority of the report's findings. That agrees with the view I expressed that the majority of those who contributed to the debate have also, broadly speaking, supported the report. Indeed, the hon. Member for Tunbridge Wells said something to the effect that its central ideas are good, but that substantive issues need to be addressed. We share that view.

On making good boards better, the Higgs report mandate was to improve company performance and productivity—I thought that the hon. Member for Tunbridge Wells was rather unkind to suggest that the report was a narrowly drawn exercise—in particular, through the progressive strengthening of quality in the role of non-executive directors. However, it was to do so in a wider setting. The approach is based on best practice and builds on the Cadbury and Hampel reports as well as the best practice developed by leading companies, which raises the gain for some but does not diminish the effectiveness of many.

In response to the hon. Member for Stratford-on-Avon (Mr. Maples), I point out that the report is an attempt to solve problems using a much wider package. It is not as narrowly focused as he suggests. My right hon. Friend the Secretary of State made it clear to Parliament, and confirmed in her Mansion house speech and her address to the Association of British Insurers, that the Government welcome the Higgs report. It marks an important contribution to corporate governance and to restoring investor confidence.

Of course, I am aware of the main concerns that have been raised, as well as of the broad support for the report, but I regard it as inappropriate for the Government to comment on individual proposed changes to the combined code. The hon. Member for Tunbridge Wells is smiling, but I do not think that it will come as an enormous surprise to him that the changes to the combined code are the responsibility of the Financial Reporting Council, not the Government. As the hon. Gentleman knows, the FRC is studying the responses to its consultation. The debate is timely because it can contribute to the FRC's considerations. I will say a little more about some overarching issues, but I should also remark that if the Government were to comment in detail at this stage, we would be criticised by the hon. Gentleman and his hon. Friends.

The new combined code will operate under the comply-or-explain approach, which, as Derek Higgs observes in his report, has served UK corporate governance well. I recognise that the hon. Gentleman accepts its success. The question is, will the report's recommendations change the whole approach? The hon. Gentleman is arguing strongly that there will, effectively, be a compliance target. I disagree strongly. We are still resting, as we have been doing, on the strength of comply or explain, which was established by the Cadbury report more than 10 years ago. That is an integral part of how corporate governance operates in this country. Listed companies are required to report on whether and how they apply the detailed provisions in the combined codes principles, and if not, why not. That approach confers responsibilities on companies to examine their adherence to the code and to give adequate explanations when they do not, and on their shareholders to give proper consideration to such explanations to avoid—

Dementia Services (South Derbyshire)

12.30 pm

The purpose of this debate is to highlight how an important new service and change to an existing service can be handled effectively, and some of the pitfalls that can occur when that does not happen.

On the background, the illness of dementia is reasonably well known, so I shall not describe either the distressing way in which its onset can have a huge impact on the lifestyle of the individual and the carers who know that person well, or the need for special help to deal with the facets of an illness that can have a range of different effects on the individual's personality and in relation to the built facility in which that person is accommodated. Some people with the symptoms of dementia need extremely specialised care and support, and some built environments are not suitable for them.

Having given that brief introduction, I am proud to describe some of the past history of south Derbyshire, where an attempt has already been made to establish innovative ways of supporting people with dementia. Joint NHS and county council provision was tested at the Oaklands residential home some years back and was visited by the Minister of State, Department of Health, my right hon. Friend the Member for Barrow and Furness (Mr. Hutton), when he came to my constituency about three years ago. That provision set high standards in examining how one could respond to the residential requirements of people with dementia, and in offering outreach services, whereby people came in and spent some time in the centre being supported and working with their carers with an appropriate package of assistance to make their lives better.

Sadly, that experiment was terminated when it was decided that the built environment at Oaklands—it is a 1960s or 1970s building near the centre of Swadlincote with a large amount of glass and many corridors—was unsuitable for some people with dementia as it might contain hazards that could produce harm. I understand why the decision was taken to stop the scheme, but I have been looking forward to the provision of a new, coherent range of dementia services in south Derbyshire for the future.

If one considers the strategic context in which the matter has been approached, one can see that there has been a good deal of sensible thinking. However, some of the conclusions reached, as well as the means of communicating the conclusions, have left a lot to be desired. Let us consider the role of Derbyshire county council, which owns the Oaklands residential home, and its approach to its building stock for elderly people's residential care. The strategic document, which supported the local improvement finance trust LIFT—bid from the partnership group that has sponsored a range of health improvements in my area, says in its section on Derbyshire county council that, within the LIFT projects, particular interest would be attached to the
"refurbishment or replacement of a number of County Council residential homes for older people. The intention is to modernise the service so that the facilities meet the National Care Standards Commission requirements."
I applaud that. We recognise that the timetable for meeting those requirements is not immediate. Nevertheless, it is right that that should be our goal.

The document continues:
"The strategic direction of the service is to support more older people in their own homes."
Derbyshire county council has a proud record of doing just that. It has placed considerable emphasis on supporting older people in their homes, rather than on moving them into residential care. The document adds:
"This means that there will be a move away from the provision of predominantly long term care. The service will increasingly focus on shorter term intermediate care support or more specialist longer term care such as for older people with mental ill health."
I probably agree with the priority implied in that paragraph, but the difficulty is that Derbyshire county council owns a substantial stock of residential homes that are occupied by a large number of older people. The bald statement that there will be a move away from standard residential care for older people towards more specialist care implies dramatic changes in the living conditions of many older people, and that can cause them and their carers distress. The document sets the strategic context of the proposal. In essence, Derbyshire county council wants to reduce substantially, or to eliminate, its residential care for older people unless they have particular needs that require support from other agencies.

Derbyshire county council, Derbyshire Dales and South Derbyshire primary care trust and the Derbyshire Mental Health Services NHS trust have co-operated to produce a proposal for a dementia resource centre at Oaklands in Swadlincote. One of the reasons for the selection of that site is Oaklands' history of provision of specific services for dementia, to which I referred at the start of my speech. It does not currently provide such services, but its history indicates that the site may have been suitable for some people with dementia and could provide the support that they need.

Another reason for the selection of the site is, to put it bluntly, that the county council owns it. As I said when I quoted from its strategic statement in support of the LIFT proposal, it is seeking to find ways of moving away from standard residential care for older people. It believes that Oaklands does not have a particular problem in meeting National Care Standards Commission requirements, but that a minority of the rooms do not currently comply with them. It has not estimated how much it might cost to meet those requirements at some stage: as I said, that is not yet an urgent priority. Nevertheless, the crux of the matter is that the county council owns the site and the building. There is, therefore, some freedom to proceed with the proposal.

The proposal is for a mixed provision of mental health services beds for those with acute dementia requirements and a smaller number of beds for social services specialist cases. In both instances, the provision is aimed at those with some form of dementia, whether acute or with lesser expressions of the illness. In many ways, I applaud such a proposal, as my area needs such provision. Some people in my area have said that it is not a priority, but I believe that it is, so I am delighted that a proposal is coming before the decision-making bodies involved in the LIFT project.

However, one difficulty is that the selection of Oaklands had an immediate impact on the well-being of the residents, many of whom have been there for a considerable time. It caused significant distress, which was not helped by the clumsy way in which the proposal was communicated locally. Perhaps understandably, it was felt that a briefing to staff would be sensible, and that was done just before Christmas. However, that was naive, because the local newspaper was then told of the proposal by a member of staff who thought that their job might be threatened or that the story was of local interest. The proposal was then communicated informally through the newspaper to residents and carers just before Christmas, causing considerable distress and concern.

There was a great deal of confusion about the exact proposal: what was its time scale, how quickly would one expect the building to be demolished, would there be any possibility of retaining residential accommodation on site or would it be a wholesale demolition and so on? Poor communication added considerably to the distress of all concerned. That distress has gone beyond the community of those immediately involved with Oaklands. The local vicar, the Rev. Horsfall, whose church is next door, expressed his concern about the project, and I know that some local county councillors who have been contacted about how the council has addressed it have also expressed concern.

The first question is: is it the right site to choose? I would argue that two issues should be confronted. First, is it the easiest way to proceed for such a project? It is clear that gaining occupancy of the site and removing those who are currently resident—we must be blunt about it—will be both distressing and difficult. It will take some months, and possibly years, to achieve that outcome sensitively, which is how I expect Derbyshire county council to work. Secondly, are there alternatives? It has been drawn to my attention that one residential home in the private sector in south Derbyshire—Cedar Court at Bretby—already provides dementia beds. It is happy to co-operate with the county council and the NHS in developing a more specialist role in that field, but it has found it incredibly difficult to get the decision makers to discuss that in an organised fashion. I am not saying that that proposal is right, but I would expect it at least to be given proper reflection by the county council, the primary care trust and those on the mental health services trust who would be involved in delivering the service.

What appears to have happened instead is a fairly lengthy and inconclusive correspondence, which may have been guided by some issues that are not atypical in the nursing home and residential sector, including concerns about existing arrangements at that home and whether nursing cover has been adequate. All Members know that residential homes sometimes find it difficult to recruit nurses on a continuing basis, and Cedar Court at Bretby has had that difficulty. Nevertheless, I would expect it to be possible to discuss how a facility could be provided there as an alternative strategy to that identified in the LIFT project.

LIFT is a sensible way of funding a range of primary care services in my constituency, and in those of other hon. Members, but I am far from clear about it. That may be an innate difficulty with how the mechanism delivers such projects. The financial implications of the project's delivery are unclear, because they depend substantially on the private sector partner and its input. It is, therefore, difficult to evaluate the project in the way one would do normally.

An estimated capital cost of £2.7 million has been set aside in the LIFT proposal. However, of equal importance, if not more so, are the revenue consequences of the bid and how it will be distributed between the county council—the ongoing manager of services—and the mental health services trust. The project requires rather sharper evaluation than it has received; it must be benchmarked against other means of delivering a laudable goal. I do not want to give the impression that I do not wish such a project to proceed in my constituency. However, the detailed means by which the county council and the NHS intend that the project should proceed require further consideration before authorisation is given.

12.46 pm

I congratulate my hon. Friend the hon. Member for South Derbyshire (Mr. Todd) on securing this important debate and thank him for the considered, thoughtful way in which he made his representations. Also, I acknowledge his support for changes and improvements to services for older people with dementia in his constituency. He raised some important issues.

I share my hon. Friend's concern for his constituents who live and work at the Oaklands residential home, and I understand the impact of the proposed changes on individuals, especially when they are elderly or in poor health. Such changes can cause immense distress. The closure of that residential home for older people is a matter for Derbyshire county council. My hon. Friend says that he has had close discussions with the council about that, and I am sure that they will continue as the process moves towards formal consultation. This is only the pre-consultation stage and a range of ideas is being considered. Nevertheless, if there were a proposal to close the home, there should also be a period of formal consultation. I am sure that my hon. Friend will retain close contact with the process.

There are those in the area who wish that the home could remain. I understand, however, that that cannot happen without significant investment to bring it up to the national requirements set by the National Care Standards Commission. I appreciate that the time scale is lengthy, but the home would need to achieve significant changes, if not some demolition and rebuilding, to meet those standards. We must consider things in that context.

Will my hon. Friend set matters out in more detail? There is, as she said, a long timetable for compliance. It would be helpful if she told us how long that could take, or if there is any uncertainty about it.

Clearly, the original time scale pertaining to the physical requirements of existing properties has been put back, and it now runs beyond 2007. I could supply my hon. Friend with a more detailed timetable, if that would assist him. In any event, it is correct that authorities should plan ahead, consider the context of existing buildings, be aware of requirements that will come their way in due course and make contingency plans and decisions accordingly.

I would expect any relocation of individuals to be dealt with sensitively and the wishes of individuals and their families to be respected. I know that my hon. Friend has concerns about how the matter has been handled. Local social services representatives have already had discussions with the individuals, their carers and relatives. It is important in such circumstances to outline the available options, and I would expect the families to be offered a variety. Derbyshire county council generally has a good record in such matters, and its service that provides care for older people scored well in the recent comprehensive performance assessment of local authorities. I urge the council to handle the matter sensitively.

I understand that long-stay admissions to the residential home have been stopped to try to ensure that a range of options is developed. With the proposed closure likely to be at least 12 months away, if it goes ahead, there should be plenty of time for suitable arrangements to be made that meet the needs of individual patients and their families. I also expect that appropriate arrangements will be put in place for the staff at the centre. Again, that is a matter for the county council to resolve.

About 30 people reside at Oaklands, so we are discussing a significant task. I share the Minister's view that the county council has a good track record on delivering service for elderly people and on consulting, but the concern with this project is that the elderly will be railroaded out.

Elderly people should not in any circumstances be subject to any pre-emptive decision making that would, in my hon. Friend's terms, railroad them out. Clearly, the issue is difficult. It is a matter for negotiation not only with the patients, but with their carers and families, to ensure that any alternative options meet needs that are, in some cases, complex. Decisions should not be taken unless proper options have been developed. I urge the local authority to make every effort it can in that respect.

As part of the NHS review of services in Derbyshire for older people with mental health care needs, it is proposed that services, particularly for those with dementia, should be developed from locally accessible resource centres. I acknowledge my hon. Friend's support for that general policy thrust. Such centres do not exist. Indeed, the joint mental health strategy for older people's services identified a need for significant investment in community mental health service provision. Many people have to go to Derby or other centres for services. The move is to bring those services out of the centre and put them closer to people's homes. The strategy has been jointly prepared by the primary care trust, social services and Derbyshire mental health services trust, so there is good joined-up strategy development.

A hub-and-spoke model is proposed, with one-stop primary care centres in Ashbourne and Swadlincote. Such centres would provide a full spectrum of health and social services. The NHS in Derbyshire proposes developing dementia care from four community-based resource centres, including one to serve the Swadlincote area. Social services and the NHS are working together to develop a joint service delivery plan, which will build on their good working relationships. The centres will offer specialist care in a multipurpose resource with sheltered housing and day services close by. They will provide joint social care and NHS community facilities, including provision for in-patient services, a community team and day assessment services. I believe that my hon. Friend would acknowledge that that will be a significant improvement on the services that are available.

There will be less emphasis on long-stay care, which is why the service must be redesigned. Our policy is to provide more care in people's homes and in the community. There will also be a dramatic increase in the number of staff—up to 120 from 24—providing dementia care in the community across southern Derbyshire. That represents a major shift of resources. For the Swadlincote area, the increase will be from three staff to 14. That significant extra help will be redeployed from existing central services.

It is proposed for the moment that the Swadlincote centre should use the site occupied by the Oaklands residential home. The proposal is to demolish the building, which does not meet the required standards, although linking the centre's development to the local improvement finance trust—LIFT—project would be one way to bring it on stream sooner than by simply awaiting capital from the NHS source.

The estimated capital cost of the building is £2.7 million, and the LIFT option is being appraised. If the company accepts, it would fall in the second tranche of the delivery programme. The first is due for invitation to tender and financial close by December. Approval of the second tranche, which the centre would come under, would follow early in the new year, fairly shortly after closure on the first. Any construction on the Oaklands site would therefore be unlikely to commence until mid-2004. That is the time scale we are looking at for the development.

My hon. Friend mentioned the other proposal from Bretby, which involves Cedar Court. I understand that the county council is talking to the organisation to consider the proposals. My hon. Friend is right: one proposal should not be favoured, and all proposals should be properly evaluated to see which is the best way forward. If it is decided that this proposal should not be in the LIFT scheme, other funding arrangements will be considered, including seeking partners for a separate private finance initiative. However, I am encouraged by the fact that the LIFT company is considering putting the proposal in its programme.

My hon. Friend will be interested to know that, as well as the four resource centres across Derbyshire, we are funding the creation of a dementia service development centre for the east midlands. The centre will improve dementia care throughout the region, including his constituency, through a combination of information, education and training. The resource centres will provide the physical base for the services, and the information and education base will be improved. That will concentrate on four key areas: staff training and practice development; data collection and sharing; service development; and research. We are putting £62,000 into that project this year, and similar amounts will be provided in the next two years.

My hon. Friend has a particular interest in services for the group of people that we are discussing, and I hope that he is encouraged that we want not only to redesign the service, but to make it one that people want to work in—an attractive place to work. People will have access to research, training and information, so that they can share the good practice that they develop throughout the region and provide better services.

I understand my hon. Friend's concern that if a proposal is not handled sensitively and properly, distress will be caused to patients, their families, carers and the whole community. Any change or major service redesign is difficult to accommodate, particularly when people have made a residential home their home. That is why I will say clearly to the local authority that it needs to ensure that there is proper, detailed and individual consultation with everyone involved, and that they should be given a variety of options and as much security for the future as possible.

The Government have made the care of older people a top clinical priority. That is why we have the national service framework for older people, why there is such emphasis in standard 7 of the NSF on services for people with dementia and why there is such focus on developing integrated services between the NHS and social services. We are trying to ensure that we create a seamless system of care.

I can reassure my hon. Friend that the planning and priorities framework for the coming year requires that, by 2004, protocols must be in place across all health and social services systems for the proper care and management of older people with mental health problems. Placing that requirement in the planning and priorities framework gives us a performance management lever to ensure that our objective is achieved in communities, and that people who, perhaps for many years, have been neglected become a real priority for both services. I am advised that all trusts in the Trent strategic health authority area, including those in Derbyshire, will have their protocols in place by the April 2004 deadline, and that they take this matter extremely seriously.

Extra investment is going into the service. There will be an extra £1 billion for social services for older people by 2006, including £100 million for additional carers services, which will increase to £185 million, and £70 million to support the training of social care staff. All that extra funding will help to improve services for older people with mental health problems.

The primary care trust and the social services department in my hon. Friend's area collaborated on proposals to redesign and improve services for that group of people. He is absolutely right to raise concerns about whether this is the right site, whether there are alternatives and whether we can proceed as quickly as possible, perhaps through the LIFT company. I urge him to continue his constructive discussions with the local authority and to ensure that the proposed service developments really make an improvement.

Nhs Complaints Procedure

1 pm

I am delighted to have secured this short debate. There is a widespread consensus across the House and in the Government that the NHS complaints procedure is in need of reform and, almost without exception, hon. Members will have had experiences of cases that demonstrate that need. Although the issues are largely generic, it was the death of Mrs. Peggy Scott, the mother of my constituent, Mrs. Christine Hawkins, in Eastbourne general hospital that brought these issues forcefully to my attention and underlies my request for today's debate. I shall refer to the specific complaint in respect of Mrs. Scott's unexpected death but, of course, I do not expect the Minister to be able to respond on a case-specific basis. Instead, I would like to try to draw some general points from Mrs. Hawkins' experience of the complaints process.

Mrs. Hawkins' concern to find out what really happened to her mother was treated as a complaint from the outset. Although it was initially a search for information and the truth, the system insisted on treating it as a complaint. Mrs. Hawkins first came to see me in 2001, some two years after her mother's death, and it was not until last June that the process reached its culmination with the publication of the report by the health service ombudsman on Mrs. Scott's death. For almost all the period that I have been involved with the case, the Government's commitment to reform of the NHS complaints procedure has acted a backdrop to the specifics of this case.

I began applying for this Adjournment debate some time ago, certainly before the publication of the Government's document on NHS reform. It is purely fortuitous that the Health and Social Care (Community Health and Standards) Bill, which will deal with these issues to some extent, will receive its Second Reading tomorrow.

Because things have moved on in the past few months, I hope that I can draw the Minister specifically on how the Government's proposed reforms will address specific issues that are raised by Mrs. Hawkins' complaint about her mother's treatment. In particular I should like to try to penetrate what the Joseph Rowntree Foundation, speaking in the context of local government reorganisation, described as a British "obsession" with institutional change and to understand how the proposed institutional changes will make a practical difference to the way the complaints system works and the attitudes that the various players within it adopt.

Nothing that any complaints system can do will reverse the pain and suffering that Mrs. Scott endured alone in her final hours; no compensation can ever put right the fact that Mrs. Scott's family were not with her when she died, nor were they even aware that her condition was serious. Moreover, it was not with a view to obtaining compensation that Mrs. Hawkins embarked upon the assault course that the current NHS complaints procedure represents. Instead, it was an attempt to establish the truth and, as the facts began to emerge, to try to ensure that appropriate action would be taken to ensure that the errors and failures that were exposed could not be repeated.

At the end of a process that has lasted nearly four years, Mrs. Hawkins remains totally dissatisfied. She is dissatisfied with the conduct of her complaint, the follow-up action, or lack of it, by the trust and the apparent inability of the system to ensure that the shortcomings of the individuals involved in Mrs. Scott's care were properly addressed.

Briefly, because we do not have time to go through the details of Mrs. Scott's treatment, I will outline the salient facts. Mrs. Scott was admitted to Eastbourne general hospital following complaints of abdominal pain and diagnosed as suffering from constipation and a urinary tract infection. She was about to be sent home from the accident and emergency department when Mrs. Hawkins arrived, expressed concern about her condition and insisted on a further examination. As a consequence of that examination, Mrs. Scott was admitted to the hospital and a care plan was drawn up for her, although it is not at all clear that that plan was followed beyond that point.

Throughout Mrs. Scott's stay in the hospital, clinical and nursing notes were maintained in a grossly inadequate fashion. It was impossible to identify the authors of some of the notes—for example, some were recorded on sheets without the patient's name. Despite significant changes in her condition, including a very significant drop in her blood pressure, no entries were recorded in her nursing notes on 30 June—the day before she died—between just after midnight and 8 pm, despite the requirements of the care plan.

Much of the investigation that followed focused on contradictory entries made in Mrs. Scott's records during the evening before she died and the lack of clarity about whether she had been administered the painkiller Tramadol once or twice. The ombudsman eventually concluded that the notes recorded by doctors and nurses of events occurring at different times were in fact notes of the same event. There were serious cases of misrecording.

As Mrs. Scott's condition deteriorated, it was clear that a more senior doctor should have become involved in her diagnosis and treatment, but none did. If the ombudsman's report has correctly deduced what happened, Mrs. Scott was given only one dose of Tramadol at 8 pm in the evening and, when she died some five hours later, she would almost certainly have been in extreme pain. It may well be that, because of Mrs Scott's age, weight and general condition, surgical intervention would ultimately not have been successful, but it is absolutely clear from the reports that it should have been considered and that it was not. Because of shortness of time, I shall not quote from the reports, but it is clear that there was a catalogue of failures by the hospital and the staff involved in recognising and acting upon the obvious deterioration in Mrs. Scott's condition.

Like all hon. Members, I have had to deal with many constituents who have had experience of the NHS complaints system at every level. We also often have the opportunity to see matters from a different perspective from that of the complainant by talking informally to NHS staff and managers. I want to extrapolate the general issues from Mrs. Scott's case.

The focus, as I understand it, of the Government's proposed reform of the complaints system—clause 109 of the Health and Social Care (Community Health and Standards) Bill, which contains a regulation-making power that means that we shall not see the detail for quite some time yet—is on changes to the independent review panel stage of the procedure. That is clearly a welcome reform, because there seems to be universal dissatisfaction among complainants with that stage of the procedure and a clear feeling that the word "independent" is a misnomer.

As I understand it, the intention is that the yet-to-be-created Commission for Healthcare Audit and Inspection should take the lead role in conducting the independent review stage. I have mixed feelings about that proposal. It seems to me that CHAI's intended principal role is to improve standards of clinical governance through audit and support of systems. Its role in the independent review process will facilitate rapid feedback from findings in individual cases to improve the system, which is a good thing.

I am slightly less comfortable about CHAI having a lead role in the resolution of an individual complaint. That proposal seems to sit a little uncomfortably with the broader role envisaged for CHAI. To my mind, that is akin to asking the Audit Commission to manage appeals against local authority housing allocation decisions, and that would involve two separate issues being merged into one. My conclusion is that, if CHAI is to be involved at that stage of the complaint procedure, its involvement will have to be carefully defined to ensure that its principal role of extracting and ensuring the implementation of general lessons from an individual case is not compromised by—and, does not compromise in turn—the other important objective of the complaints procedure, which is to ensure an acceptable outcome from the point of view of the individual complainant.

My real concern, which I want to put to the Minister today, is that the problem lies further back in the process—in the development of a deeply defensive culture among NHS staff and managers. Perhaps inevitably in the context of an ever-more litigious society, that, if anything, seems to be getting stronger. Complaints are seen as wholly negative. There is a sense of closing ranks among staff. Complainants such as Mrs. Hawkins, who are essentially seeking information and reassurance that individual inappropriate behaviour has been identified, are treated from the outset as potential litigants. Apart from being extremely wasteful, the creation of an adversarial atmosphere around the complaints process from the outset creates a danger that, at the very early stages of the process, defensive postures will be struck and defensive statements will be made. They will become entrenched and effectively obstruct a more objective analysis later.

In short, I suggest that often during the local resolution stage of a complaint, which is as far as most complaints ever go, there may be a tendency to try to put the matter to bed, rather than to open it up and explore it more fully. That leads to complainants feeling obstructed by the lack of transparency, to staff often taking up positions that they feel obliged to repeat and reinforce later and to mangers focusing on an explanation that will prevent the complaint progressing to the next level. It requires a great deal of energy to pursue a complaint through the system and there is the suspicion that the focus of the first stage is sometimes on providing an explanation that will deter even the moderately strong from further inquiry. Many complainants find deeply offensive the implication from the outset that they may be seeking compensation. I suggest to the Minister that there needs to be a way of clearly separating complaints that are focused on the pursuit of compensation, or that might reasonably lead to a compensation claim, from those that clearly are not.

Another specific concern underlined by Mrs. Scott's case that I want to raise, is the securing of evidence in the context of the long time scales of the complaints procedure. Many local resolution procedures currently take a very long time. There is clearly a need to set a maximum time scale so that, if matters are to proceed beyond the local resolution stage, that can happen at a time when the incident is still relatively fresh in the memories of those involved. One of the striking and alarming things in Mrs. Scott's case is the lack of proper record keeping, which was compounded by the inability of key members of staff to remember the salient incidents in her treatment—no doubt a function of the pressure under which NHS staff operate. Surely there is a case for the taking of early statements from the clinical staff involved in an unexpected death or other untoward incident.

The other deeply unsatisfactory aspect of Mrs. Scott's case is the inability of any of the bodies involved in the complaints process—the trust itself, the independent review panel or the health ombudsman—to obtain a response from a staff nurse, a key member of staff, despite communicating with him at the address on the register held by what was the United Kingdom Central Council for Nursing, Midwifery and Health Visiting. It appears that the system does not have the ability to enforce co-operation with the complaints process and, with the increased volatility of staff in the NHS and the increasing use of agency staff. That seems to me to be cause for serious concern.

Finally, complainants—Mrs. Hawkins included—find it difficult to understand why the independent review panel is unable to apportion responsibility for an incident even when the conclusions of the report are clear in that respect. The independent review panel is specifically not permitted to make recommendations for, or to instigate, disciplinary action against individuals. That is supposed to be a function of the employing trust in response to the report. In this case, there was no follow-up by the trust in relation to the shortcomings of individual identified members of staff. It is clear that CHAI would have a role in auditing procedural changes arising from a report into a complaint, which is certainly positive. Will the Minister tell us whether it would also have a role in ensuring a proper response by the trust at the level of the individual?

The complainant has little scope to address the situation, as Mrs. Hawkins found out. The professional disciplinary bodies—the General Medical Council and so on—can investigate complaints only when the conduct complained of is sufficiently serious to warrant striking off a member from the register. In other cases, it is for the trust alone to carry out appropriate disciplinary procedures.

I welcome the Government's commitment to reform the NHS complaints procedure. I ask the Minister to address specifically a number of questions that arise from Mrs. Hawkins's case, but which have a much more general applicability. In doing so, perhaps she could confirm to the House how the proposed new system will address those issues. Will she tell us who will be responsible for setting down procedures for documenting events surrounding unexpected deaths or other untoward clinical incidents, including the taking and preserving of statements from the staff involved? Do the Government intend to introduce an obligation on persons registered with professional bodies to co-operate in the NHS complaints procedure? In short, I should like an assurance from the Minister that it will not be possible for a nurse who worked for an NHS trust to leave it and, while remaining registered with the UKCC, simply to ignore communications from the trust, the independent review panel and ultimately the health ombudsman regarding his or her role in an incident that is under investigation.

Will the Minister confirm that CHAI will have responsibility for auditing the process by which NHS trusts respond to its findings, and to those of independent review panels, during the local resolution of complaints? That includes findings relating to individual members of staff and disciplining those individuals. Can she tell the Chamber how she intends to ensure that the complaints process is focused on the complainants' objectives, as well as on the need for the system to learn from mistakes? In particular, how does she intend to end the defensive culture, which is inappropriate for the large majority of cases where, provided the complainant gets a satisfactory response from the process, litigation is not in prospect?

How does the Minister intend to ensure openness in the early stages of investigating a complaint? I should like to know whether the Government will address what is viewed by complainants as a grossly unfair bias in the system whereby the trust under investigation has the opportunity to review and comment on a report by the ombudsman prior to publication, but the complainant, who has been living, eating and drinking the details of the case for four years and is at least as well versed in them as anyone else, is not given such an opportunity. Finally, will the complainant have the ability to initiate the independent review panel process independently of the trust, or will the process still be something that only the trust can initiate?

Mrs. Hawkins has been engaged for the best part of four years in seeking to achieve a satisfactory conclusion to her complaint about the treatment of her mother and the events leading up to her death. The impression that she has is of a system incapable of getting to the truth behind those events and designed to protect those responsible for the serious lapses in Mrs. Scott's care from facing the consequences of their actions. Although Mrs. Hawkins feels that the system has failed her personally, it is her sincere desire that some good should come of her mother's death by exposing the weakness in the system. It is with that intention that she has dedicated herself over such a long period to pursuing this case.

Mrs. Hawkins will welcome, as I do, the fact that the Government are willing to make changes to the NHS complaints system. I hope that the Minister will be able to give me and, through me, Mrs. Hawkins an assurance that she will take on board the lessons from the case—I am happy to give her the full details and copies of all the reports—as she frames and shapes a robust and practical system for dealing with similar complaints in future.

1.18 pm

I congratulate the hon. Member for Runnymede and Weybridge (Mr. Hammond) on securing the debate. As he said, it is particularly prescient in respect of tomorrow's Second Reading and the publication of the document about reforming the complaints procedure.

The hon. Gentleman raised some very important points, and not just in relation to his constituent's case. I am aware of that case, however, and I shall try to deal with some of the related issues. The hon. Gentleman raised points about the operation of the service and, fundamentally, the culture of the service in dealing with complaints. We need to change not just institutions and structures, but attitudes and the way in which complaints are viewed throughout the service. That applies both to individual instances and to trends of complaints, which can tell us things about the service more generally. The service can learn from mistakes. Things will go wrong in any organisation that treats 1 million people every 36 hours, and sometimes they will be extremely distressing for the individuals involved, so it is incumbent on the NHS to learn from such incidents wherever it can.

I shall deal with Mrs. Hawkins's case and then address some of the other points that the hon. Gentleman raised. I am certainly very sorry about the circumstances in which Mrs. Hawkins' mother died. I know that Mrs Hawkins was extremely unhappy with the care that her mother received at the Eastbourne Hospitals NHS trust before her death. Any death is extremely difficult for relatives to deal with. When it happens in hospital, however, and those close to the deceased believe that better care could have been provided, their distress can only increase. I certainly offer my condolences to Mrs. Hawkins and her family. I know that she feels let down by the complaints system, particularly given what happened following her complaint at the independent review stage and the ombudsman report stage, and I am extremely sorry that that is the case.

I understand that at its meeting on 30 April the board of what is now the East Sussex Hospitals NHS trust considered and approved a position paper on the progress and developments that had been made since Mrs. Hawkins's complaint. The paper detailed the ongoing actions that the trust was taking in response to the recommendations of the independent review panel, the ombudsman's subsequent report and the review of nursing at the hospital which Ray Greenwood carried out in response to the incident as long ago as 1999.

I cart update the hon. Gentleman on a few of the things that the hospital has done. Now that its medical assessment unit has opened, more senior medical staff are available on the unit for patient care. That has lead to better patient care and certainly to greater supervision of junior nursing staff, which was a real issue in this case.

The hospital's clinical governance committee has recently approved new policy and practice for minimum observation and monitoring of post-operative patients on wards, as well as guidelines for monitoring patients receiving intermittent opiate analgesia. Again, that means much better monitoring and supervision.

The committee has also approved new policies and procedures on nursing documentation. The standard of documentation was clearly not what it should have been. There are also new guidelines on the care of the dying, the care of the deceased patient and the bereaved, the management of incidents, and nutrition. All those elements were relevant in the case of Mrs. Hawkins' mother. There was also an issue about notes not being dated, timed or having appropriate signatures on them, and there is now a computerised nursing documentation system at the hospital to ensure that those things are done for all notes.

Another issue was what discussions had taken place with the relevant staff to ensure that they took the independent review panel's recommendations on board and learned from what had happened. I understand that a copy of the panel's report has been sent to, and discussed individually with, every member of staff involved in the incidents that occurred in the case of Mrs. Hawkins' mother. With effect from as long ago as 1 April 2001, general managers have been in place in every clinical directorate. They are instructed to ensure that statements are taken from everyone involved and that there is proper documentation.

I believe that the trust is now fully committed to learning the lessons from Mrs. Hawkins' complaint. A new chairman and a new chief executive are in place, and there is a real concentration on the issues that led to that unfortunate incident.

I want to deal now with the general matters that the hon. Gentleman raised and to set out the proposals for changing the complaints procedure. The then Conservative Government introduced the current procedure in April 1996. There was a commitment to evaluation, to see how the procedure was working and what could be improved. We maintained that commitment by undertaking an independent evaluation study. It took two years, so it was very lengthy. A listening exercise was also conducted.

The evaluation process produced several key messages. First, people were unclear about how to pursue complaints and said that the process was often difficult to use. They said that there was frequently a delay in responding and that there was too often a negative attitude to complaints—the defensiveness that the hon. Gentleman described. Many complainants did not feel that they got a fair hearing or that they got support at the appropriate times when they wanted to complain. One of the most powerful messages was that the independent review stage did not have the credibility that it needed; people did not perceive it as truly independent from the service.

Another complaint was that the process did not provide the redress that patients wanted. As the hon. Gentleman said, many people were not looking for financial compensation but for apologies and for an acknowledgement that something had gone wrong. Crucially, they wanted systems to be put in place to ensure that the same things did not happen to other people in future. No systems were in place to use the feedback from complaints to drive improvements in services. The evaluation was clear about what people wanted us to ensure would happen.

We have now identified four key areas in which to move forward. First, we need to change the way in which the NHS and its staff view patients and handle complaints. That is a cultural, not a structural, change. We are working closely on that with the NHS university and the professional bodies to develop a number of training programmes on customer care and communications skills. Those programmes should ensure that everyone in the NHS, at all levels, will be more attuned to what patients want and will view complaints as requiring the provision of a first-class service, as for the rest of the business, rather than automatically seeing complaints as a personal attack and retreating into a defensive mode. The foundation of that change will be to ensure that the education, training and culture are right.

Secondly, we want to ensure that the NHS deals with complaints positively as an integral part of service delivery, and not as something on the outside that happens after the event, somewhere down the track, when things have become increasingly complicated. In that context, the introduction of the patient advice and liaison services, which now exist in 98 per cent. of trusts, will be a real step forward. PALS aim, as far as possible, to resolve complaints on the spot. They can bring people together, and they can get very senior clinicians to explain to patients some of the decisions that have been made. Many complaints arise from a lack of communication, from confusion or obfuscation, or because the clinician and the patient are not talking the same language. PALS can act as a facilitator in bringing people together.

An interesting figure that I saw recently was for the East Kent Hospitals trust, which experienced a 68 per cent. reduction in formal complaints in the six months following January 2002, when the PALS was established. That is an incredible result. I do not pretend that that can be extrapolated across the service, but it shows that PALS can help in such circumstances.

I know that we are running out of time, but I wanted to ask a specific question. The Minister said that all staff involved at the hospital had seen the IRP report and discussed it, but I presume that that did not include the staff nurse who could not be traced. Do the Government propose to place an obligation on professional staff to co-operate with inquiries into incidents in NHS hospitals, as a condition of remaining registered?

I understand the hon. Gentleman's concerns about that. I cannot give him an undertaking on that today, but I will write to him with details of what steps can be taken in that regard. It is an important matter: people should not be able to evade their responsibility by not co-operating.

First, we must get the culture right, and secondly we must get things right at the front end, with local resolution through PALS, and through the introduction of modern matrons. Thirdly, we want radically to reform the independent review element of the complaints procedure. That is why that element will pass across to CHAI. The hon. Gentleman made the important point that the complaints process should be clearly separated from that organisation's inspection functions, but I believe that by bringing those functions together under the same roof we will provide the opportunity for the complaints to inform clinical governance, the inspection process and the agenda for improvement.

We will set out in regulations how those separate functions will be administered. The details of what CHAI will do in relation to the independent review stage have yet to be formulated, but we envisage that it will have a range of options. It will be able to recommend to the organisation what it should do it may conduct a detailed investigation; or it may fast-track an issue through to the ombudsman if it is complicated and needs more serious review. CHAI will examine what needs to be done, by whom and in what time scale, and it will take a proactive approach. That will meet people's requirements for a truly independent part of the system that is outside the NHS, and it will take the matter seriously. If we get right the independent part of the process, that will increase credibility and trust in the system.

Fourthly, we must ensure that we learn from complaints about how to drive up standards. If we consider the pieces of the jigsaw—the new system of organisation of complaints, the statutory requirement for quality, the adverse incident reporting system through the National Patient Safety Agency, the National Institute for Clinical Excellence with its guidelines for treatment, the renewed emphasis on clinical governance and the reform of the system of professional regulation, which the hon. Gentleman raised—we can see that, together, they represent a real drive for quality. I believe that we will be able to achieve the required cultural change to complement the institutional change.

The hon. Gentleman raised important issues about whether CHAI could audit the process of trust responses. Clearly, patients need to know what has happened as a result of the decisions taken, and I will respond to him about that. We need to ensure that people have the opportunity to comment equally and equitably on ombudsman reports. Again, I will respond to the hon. Gentleman on that important point.

We have set out a time scale for the changes that we want to happen. Provided that our primary legislation is passed, we anticipate that the process will start in April 2004.

I also want to mention the independent complaints advocacy service—

Council Housing (Nottingham)

1.30 pm

Local tenants and residents groups asked me to raise their fears about the future of council housing, and I am grateful that Lord Rooker, the Minister for Housing and Planning, has agreed to visit Nottingham. When he does so, he will have the pleasure of meeting the newly elected leader of the city council, Jon Collins. I place on record my congratulations to Jon Collins—he is a very capable person, from whom we expect great things—and my thanks to his predecessor, Brian Parbutt, and his predecessor, Graham Chapman. They were able leaders of the council who shared the concerns of all the people in Nottingham about arm's length management organisations.

I also welcome the Under-Secretary of State, Office of the Deputy Prime Minister, my hon. Friend the hon. Member for Harrow, East (Mr. McNulty). It is the first time that I have had the pleasure of taking part in a debate with him. I do not know whether he will thank me for saying so, but I believe him to be one of the most able of the new generation of Ministers. If he is allowed to, I believe that he will produce creative and inspirational answers to some of the problems that we face. Just as importantly, he was the leader of a council in a previous life and he brings that experience to bear in this debate.

I will step back a little to provide some perspective on the issue. As we know, the dominance of the Government in our political system has often had a suffocating impact on our Parliament, but nowhere are the effects of our monopoly politics more obvious than in the massively imbalanced relationship between central and local government. Central Government command, but local government is often little more than an agent. The only surprise in 30 per cent. of people voting in last week's local elections is that the figure was so high, given the constant atrophy of local government powers.

Arm's length management organisations—ALMOs—are the latest bright idea to be imposed on the localities by central Government. In many ways, the Prime Minister is lucky that the legislation to impose foundation housing on much of the electorate was passed when we were all so optimistic after the 1997 election, unlike the legislation on foundation hospitals and foundation schools, which may have a more difficult passage.

It need not be like this. This country has a proud tradition of municipal housing. Not long ago, Nottingham city council and its tenants celebrated the 75th anniversary of council housing in the city. Alan Allsopp, the assistant director of housing, told me that, over that period, successive municipal administrations of all parties constructed more than 50,000 homes in the city. That is a record of public provision of which generations of local councillors, public servants and the residents of the city have every right to be proud.

In an era in which our political leaders seem to have little faith in the ability of the public sector, politics or even local government to deliver answers and in which only schoolboy economics from No. 10 are given any validity, this massive local government achievement should give us confidence that such an alternative could exist again in the public sector, albeit in a different form. Local authorities tackled the most appalling slum housing in Nottingham, responded to admonishments to build homes fit for heroes and did their best to ensure that decent housing could be offered to the citizens of Nottingham.

Many homes in the eight large council estates in my constituency of Nottingham, North are a part of this legacy. They were built by the city council for its citizens. We can and should be proud of that legacy. The homes are good: they are solid houses with gardens, or attractive bungalows. There is no deck access, and there are no tower blocks. The majority are popular with tenants, and it is no secret that a fair number have been bought by their tenants over the years. Most observers and tenants unfamiliar with the definition of a decent home would say that those properties represent their idea of a good home—a nice house with a reasonable garden in a well laid out estate.

However, as the Government recognised, we were told in the 18 years up to 1997 that we should not be so proud of council housing. The 18 years of Thatcherite thinking sank their roots deep into political thinking—a particularly acute problem for those who had never thought through a clear alternative. I understand that, at the fag end of those years, the civil service proposed the dismembering of council estates. Thankfully, in 1997 a newly elected Government came in. However, after a year's moratorium, they too seemed to propose a dismembering of council estates. Are those traditional values in a modern setting, or civil service values without political control? Hon. Members can take their choice.

There is now an alternative for this Administration or the next to think through. They could free local government, get off its back, let it make its own mistakes and successes, and let the electorate, not Whitehall, hold it to account and decide whether it has been successful. All that depends on democratically establishing independent local government, ending Whitehall control over the last country in the empire, and letting the natives find their own answers. That would be the antithesis of central control. To partner that, local government would need the financial freedom to raise its own revenue and be responsible for its own borrowing. That would require a leap of policy and imagination that no one seems yet to have dared raise with Sir Humphrey.

Nottingham, like many places, was put in a financial straitjacket when it came to carrying out the modernisation works required to keep its homes in the condition that those who built them would have expected them to be in. I have seen the impact of that struggle in my constituency. In its efforts to be a responsible landlord, the city council has had to repair things that should have been replaced. It has had to put off modernising homes that need modernisation. Throughout, however, the city council stuck to the principle that tenants and residents of the estates that it managed deserved not only a decent home but a decent environment in which to live.

Priority was given to that broader philosophy, and it was backed up by resources. The city council's housing service, Housing Direct, sums up that philosophy with its slogan, "Decent homes in a decent neighbourhood". The incoming Labour Government recognise the challenge of the housing modernisation backlog, and that recognition is genuinely and warmly welcomed in Nottingham. Its chosen weapon is the decent homes standard, which has much to recommend it. Its emphasis will ensure that some of the problems of repair and maintenance raised by tenants will be solved.

However, I repeat that the really big issue for tenants is not the age of their kitchen or the number of cupboards specified in the decent homes standard, but the environment in which they live. The outside environment is just as important as the dry statistics on what should be inside the home. The outside environment must be high quality and sustainable. There must be proper walls and fencing, user-friendly layout, trees, road improvements, safe play areas, off-street parking and secure boundaries. It would be perverse if we aggravated the problems of neighbourhood decay that have blighted other cities in the midlands and the north because we have pursued improvement of the internal environment at the expense of the external.

The decay in other cities in the midlands and the north has been fought off, not least by recent council leaders whom I have mentioned—Councillors Brian Parbutt and Graham Chapman foremost among them. They have realised that we must prevent the decay before it starts. We hope that Government policy will not inadvertently reverse the great effort that has gone into making housing in Nottingham such a success in recent years.

The well known slogan in the private housing sector is "location, location, location". We cannot change the location of our social housing, and must therefore ensure that the environment in areas of such housing is modernised and improved to keep pace with accepted standards, and join up our thinking on antisocial behaviour, poor educational attainment and what goes on in the streets.

Nottingham held a successful series of consultations for tenants to listen to residents' views about the future of council homes. Tenants were very clear in their opinions. They wanted to rent their homes from the city council. Many of them saw no reason why the council should not remain their landlord and why money should not be made available to modernise their homes. However, although it is important for Ministers to see that councils separate the management of housing services from their strategic housing functions, few of us have ever come across a tenant who has argued that the service that they expect to receive from their landlord would be better, "If only the council would separate its strategy for housing from the management of my home."

Nevertheless, we are where we are, and the council cannot be blamed for trying to make the best of that. Tenants welcomed the opportunity to learn more about the challenges that the council faced to improve the standard of their homes, and to express their views on the way forward. If councils are denied the ability to invest as they see fit, arm's length management is the only opportunity to fill the investment gap and to meet the decent homes standards by 2010.

Such is the power of central Government that I suppose that we must be grateful for having a choice rather than the imposition of stock transfer, and the commitment to provide a means of increasing investment in social housing—which has recently been reinforced in the Deputy Prime Minister's regional communities plan—is welcome. It provides a realistic prospect that the much-needed renewal, modernisation and maintenance can be got under way. Nottingham's insistence on greater involvement of tenants at the highest levels will ensure a vigorous and renewed focus for discussions between tenants and landlords on priorities and the future of council housing.

The relaxation of the star rating required of local councils to bid for ALMO cash from three stars to a rating of two to three stars will enable those authorities that are striving to improve to take that route. I know from the quality of the local officers and councillors in my city that they will seize that opportunity with both hands, if the Government encourage them.

However, I would appreciate the Minister's comments on a number of issues. I understand that the funding for ALMOs permits only 5 per cent. of funds to be spent on the environment, as the focus is on meeting the targets for decent homes by 2010. Because a greater sum of money is required to ensure the sustainability of certain neighbourhoods and areas, and because that may be supported by the tenants, is any flexibility proposed for that percentage? Good work in retaining good neighbourhoods and environments alongside good stock could be lost if we are not allowed to support environmental works as well as housing improvements.

I am also concerned about the adequacy of the money that is allocated. I will not bid for money in the next round because I know that the Minister would tell me that, at this juncture, that would be premature. However, I will press him with a different question: if local councils cannot have the housing money that they need without being ALMOs, will they be adequately funded if they take that option? I understand that 14 authorities have already submitted an expression of interest for the next round of bidding, which amounts to £1.5 billion. Together with the ALMOs that have already been approved, that is likely to represent a large commitment with regard to the allocations announced in the spending review. Are there any proposals to re-examine the allocation of moneys in the future? If ALMOs are successful, we would hope that those authorities that can become ALMOs can access some of this money.

I turn now to the question of allowing ALMOs to succeed. Many tenants groups in Nottingham have told me that they are anxious that ALMOs are underpowered and that, if they fail, that would be the slippery slope to privatisation. If they fail, one would imagine that privatisation rather than municipalisation would be next on the agenda. Is consideration therefore being given to ensure the continuing role of ALMOs in the social housing sector? That could be done by granting them greater freedom in, for instance, borrowing from their own resources, or through the retention of a greater proportion of right-to-buy capital receipts, the delegation of responsibilities from local authorities, such as the issuing of antisocial behaviour orders, and other things that would put ALMOs on a more level playing field with registered social landlords.

Almost everyone involved in housing wishes that we were not in the current situation. However, we are in it, so I assure the Minister that everyone in Nottingham—from tenants' groups to councillors and officers of the council—is determined to grasp the opportunities that the Government are offering. I hope that the Minister, in answering some of my points, can help us to make ALMOs a success in Nottingham and that, above all, he will reassure those tenants who, even though hon. Members may be familiar with the legislation, are only now becoming aware of the issues. With the effort of people locally, the commitment of professionals and those from the political level in Nottingham, and the good will of the Minister, we can make ALMOs the success that he and I wish them to be.

1.46 pm

The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister
(Mr. Tony McNulty)

I am grateful for an opportunity to explain a key element of the Government's housing policy. This debate is timely and on a subject that is of immediate and profound interest to the constituents of my hon. Friends the Members for Nottingham, North (Mr. Allen) and for Nottingham, East (Mr. Heppell).

Nottingham city council owns just over 34,000 properties. Following a 10 per cent. stock survey between November 2001 and April 2002, the council has assessed that some 47 per cent. of the stock—16,000-odd properties—does not meet the decency standard. I am pleased that my hon. Friend the Member for Nottingham, North and the council are taking such an active interest in overcoming the problem of substandard housing. I join my hon. Friend in congratulating Nottingham city council on setting up the strategic partnership and on much else that it has already done in the city.

I shall not dwell on the matter, but there was much in my hon. Friend's introduction with which I profoundly disagree. We are not talking about foundation housing. If we were and if that was before our legislature today, hon. Members would be as foolish to vote against it as they would be to vote against foundation hospitals tomorrow. Although there is a proud tradition of municipal housing up and down the land, the best that one can say is that since those municipal houses were built, the record of maintenance, refurbishment and turning estates in stable communities has in some areas been less than proud and sustainable. That is partly why we are here today.

There is a range of options on social housing, but we are not dismembering council estates. I do not agree with my hon. Friend that most housing practitioners wish that we were not here. I have gone round much of the housing sector over the last year, and that has certainly not been my experience. Tenants have expressed any number of preferences up and down the country. However, despite the odd setback, such as in Stockport and Birmingham, there is still a considerable record of achievement from those councils that have chosen large-scale voluntary transfer. The tenants' voice has been measured by ballots, and tenants have said precisely that they think that they will get a better service elsewhere.

However, I take the three key points to which my hon. Friend referred. The Government want to play their part in tackling the challenge. From talking to my hon. Friend and my hon. Friend the Member for Nottingham, East, I am keenly aware that chance or luck is not the reason why Nottingham is not in the same position as other midlands and northern towns, in terms of low demand, mass abandonment and other problems. That has taken a lot of work, and I congratulate the city council on it.

Also, as my hon. Friend the Member for Nottingham, North said, my noble Friend Lord Rooker will be visiting the city on 11 June, and has already had a meeting with my hon. Friend to talk about the option of an arm's length management organisation. It might be useful if I very briefly explain something about the background of ALMOs.

ALMOs have created a new movement in social housing. Local authorities are being galvanised and transformed. The ALMO boards have attracted good-quality committee members. I met the new National Federation of Arm's Length Management Organisations just last week. I told it that, rather than—as some detractors would have it—the ALMO model being large-scale voluntary transfer by the back door, it is community empowerment by the back door, and the front door. Where they have been most successful, ALMOs have taken their tenants with them and have put their tenants in a really powerful, empowered, participating position. That is to be commended.

We must always remember that the ownership of the stock remains with the council, and the tenants remain secure council tenants. In the unlikely event of ALMO failure, that remains the case. I do not understand the point that was made about tenants fearing that a failed ALMO marks a step on the road to privatisation. Perhaps we could discuss that point another time.

Currently, there are 25 ALMOs in operation; they are responsible for managing and improving around 360,000 properties, or one in eight of all council homes. Between them, round one and round two ALMOs are seeking to invest an extra £1.8 billion to bring all their stock up to decent home standards. It is a huge investment. In many areas, tenants are already seeing the benefits in terms of physical improvements, and, perhaps more importantly, an improved relationship with their housing managers. I congratulate all round one ALMOs that qualified for additional funding by achieving the necessary rating of at least two stars from the housing inspectorate. I particularly congratulate the three that achieved excellent three-star ratings: Derby, Westminster and Ashfield—the last being about the closest to my hon. Friend's constituency. Some inspections of round two ALMOs are already in progress, with some due later this year. We await the results with interest.

ALMOs have got off to a great start, but we must not become complacent; there is still a lot to do. Many ALMOs have made tremendous progress to achieve their two or three-star housing inspection rating. Now we want them to sustain that success and bring further improvements for tenants.

The bidding process, the need to win the support of tenants and other stakeholders, the opportunity to operate at arm's length and the need to earn at least two stars from inspectors all appear to have triggered some very constructive thinking about the delivery of services. Very often, the process of bidding—or thinking about bidding—galvanises real concerns about tenants, and an involvement of tenants in a way that does not happen when something is simply imposed from on high, or by the council. That catharsis is very welcome.

Last week, I had a very constructive meeting with representatives of the National Federation of Arm's Length Management Organisations, who impressed me with their enthusiasm and ideas for developing the ALMO concept. I have invited them to take more steps forward. I did not then, and I certainly shall not today, give a thumbnail sketch of what I see ALMOs being some five or 10 years down the line. We have learned already that the key to the success of ALMOs is making the process about more than bricks and mortar—about the environment; about regeneration; about a comprehensive concern for the whole community. There is not much point in having decent homes and refurbished homes in areas where people do not want to live. Nottingham's record up to now is something that, whichever option is chosen, we want to build on.

I discussed with the national federation many of the issues that my hon. Friend has raised, particularly about flexibility, and how ALMOs go forward in terms of a level playing field and other elements. I have told it, for now at least, that the one thing that cannot happen is that ALMOs be set in aspic as a 2001 or 2002 solution to problems that will still exist in 2010, 2020, and beyond. They need to evolve, and discussions are taking place about how that might happen over coming years. I do not think that that will necessarily impact on the criteria for rounds three and four, but it must be an organic and evolving model—a dynamic model, rather than a fixed one. That is entirely right.

As for flexibility, we have just introduced the 5 per cent. flexibility rule for issues such as the environment. We want to see how that beds in before we go any further in topslicing ALMO money. In addition, my hon. Friend made points about other flexibilities to allow best-performing ALMOs scope for borrowing and other such elements. Those things are on the agenda and are being considered. I can say no more than that; they will not happen in an instant.

I thank my hon. Friend for that helpful reply on the question of flexibility. I take it that he is saying that if the council, the ALMOs and the tenants all felt that the balance could be adjusted, he would be open to their representations for more flexibility than 5 per cent.

I would certainly be open to listening to their views as and when ALMOs are up and running and developing. We put in the 5 per cent. flexibility rule precisely to take into account aspects of the shift from bricks and mortar to elements such as regeneration of the environment. That will be reflected, at least in part, in the bidding criteria for successive rounds—that is only right and proper.

People may have concerns about adequate funding. Sufficient funding is in place for rounds three and four. It is complicated, my hon. Friend will know, by the tails from rounds one, two, three and four—there is money there. However, there is still a good deal of money that can make a difference to many communities. With the support given in 2002–03, there is a four-year total of £2.1 billion. Of that, we estimate that about £1.4 billion has been or will be allocated to existing ALMOs through the tail that I mentioned, with some £700 million available for new ALMOs started in 2004–05. As my hon. Friend has said, there is interest; some 200,000 tenanted properties, of which 54 per cent. are assessed as failing the standards, are covered by expressions of interest for round three. If those expressions all lead to bidding by the closing date of 16 May, ALMOs could be looking to invest over £1.5 billion between 2004 and 2010. That is not necessarily £1.5 billion of the £700 million that is left, so we are in negative equity, for want of a better phrase. It is about the tails that will follow through.

I cannot comment on the success or otherwise that the Office of the Deputy Prime Minister will have in the next comprehensive spending review round; bidding does not start until 2004. However, there is a strong commitment, as I said to the national federation, from the ODPM that existing ALMOs and those from rounds three and four will make a substantive difference to their communities and will be funded accordingly. As in many areas of ODPM work, the shift must be away from bricks and mortar to sustainability. It is no accident that the ODPM's core policy document on that area was called "Sustainable Communities: Building for the Future". ALMOs will have to dovetail with the range of other initiatives and programmes.

I know that Radford and Hyson Green new deal for communities programme is in Nottingham, East. The NDC and the city are talking about what they both do in the housing field—they dovetail and complement each other rather than going along separate routes. That is important. There will be other initiatives in Nottingham, now and in the future. The ALMO will have to take account of and work with them. Nottingham council is very active and hands-on anyway, but I know that the council's role does not stop post-ALMO. The people still belong to it; they are its communities. They may have sidelined certain management functions in a particular spot through the ALMO, but the estates are still a vibrant part of the Nottingham community and the council still has a significant role.

What is the way forward for Nottingham? It is in Nottingham's hands. By 2006 it has to come up with a stock option appraisal. It is more than welcome to go down the route of applying for an ALMO. In the next few weeks we shall issue new guidance on both the option appraisal and the criteria for ALMOs. I encourage—I know that it is happening anyway—the city of Nottingham to explore all the options, to consult widely, and to press on with the options and appraisals. If an ALMO is shown to be the right option for Nottingham, I look forward to receiving its bid, and I wish the city council and my hon. Friends the Members for Nottingham, North and for Nottingham, East the best of luck in their bid, should it come, for serving their constituents and the people of Nottingham in something as crucial as housing and the sustainability of communities. That is what we are here for.

This has been a worthwhile debate and I encourage and commend Nottingham for all that it has done so far. If a bid is forthcoming, I look forward to receiving it. However, I make no comment on its chance of success.

Question put and agreed to.

Adjourned accordingly at one minute to Two o'clock.