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Lord Sainsbury of Turville: I have two points to make in response to the noble Viscount. There are obvious areas where one could envisage such a need; for example, a social issue—and we shall be dealing with that in a moment on the question of support for the network. However, if reassurance is required on the matter, I can assure noble Lords that any favourable rates would be constrained as a state aid in these circumstances according to the European situation. Therefore, such flexibility could only be used in very limited circumstances.

Baroness Miller of Hendon: I have to tell the Minister that I am not at all satisfied with his reply. The bottom line here is the fact that the noble Lord has said on numerous occasions in this Chamber—indeed, this has also been said in the other place—that such borrowing will be conducted on commercial rates. However, he has also said that we cannot put such provision in the Bill because we must have some flexibility. Quite frankly, the noble Lord's explanation as to what that might mean is similarly unsatisfactory.

Although I accept that there may have to be the opportunity for subsidies, which I believe we will deal with under Clause 102, we on this side of the

15 Jun 2000 : Column 1769

Committee would point out that that is because of certain actions that the Government are taking. But, if that has to happen, there is no reason why loans should not be secured on commercial rates. The Bill is supposed not only to safeguard the universal service obligation but also to bring forward competition.

I do not see why competitors should have to borrow on different rates—and that situation could arise if the Minister invokes this flexibility provision. Clause 68(2) very clearly refers to,


    "such rates as the Secretary of State may, with the approval of the Treasury, direct".

We do not believe that to be correct. I wish to test the opinion of the Committee.

3.54 p.m.

On Question, Whether the said amendment (No. 70) shall be agreed to?

Their Lordships divided: Contents, 85; Not-Contents, 139.

Division No. 1

CONTENTS

Allenby of Megiddo, V.
Anelay of St Johns, B.
Astor of Hever, L.
Attlee, E.
Blatch, B.
Brabazon of Tara, L.
Bridges, L.
Brougham and Vaux, L.
Burnham, L. [Teller]
Buscombe, B.
Butterworth, L.
Byford, B.
Campbell of Alloway, L.
Carnegy of Lour, B.
Coe, L.
Cope of Berkeley, L.
Courtown, E.
Cox, B.
Craig of Radley, L.
Cranborne, V.
Dean of Harptree, L.
Dearing, L.
Denham, L.
Dixon-Smith, L.
Elles, B.
Elton, L.
Fookes, B.
Gardner of Parkes, B.
Geddes, L.
Glenarthur, L.
Glentoran, L.
Goschen, V.
Hayhoe, L.
Henley, L. [Teller]
Higgins, L.
Hooper, B.
Howe, E.
Jenkin of Roding, L.
Jopling, L.
Kingsland, L.
Kirkham, L.
Knight of Collingtree, B.
Luke, L.
Lyell, L.
McConnell, L.
Macfarlane of Bearsden, L.
Mackay of Ardbrecknish, L.
Marlesford, L.
Mayhew of Twysden, L.
Miller of Hendon, B.
Molyneaux of Killead, L.
Monro of Langholm, L.
Monson, L.
Mowbray and Stourton, L.
Moynihan, L.
Murton of Lindisfarne, L.
Northbrook, L.
Northesk, E.
Norton of Louth, L.
O'Cathain, B.
Onslow, E.
Oxfuird, V.
Park of Monmouth, B.
Plummer of St. Marylebone, L.
Rees, L.
Renton, L.
Roberts of Conwy, L.
St John of Fawsley, L.
Seccombe, B.
Selborne, E.
Simon of Glaisdale, L.
Skelmersdale, L.
Soulsby of Swaffham Prior, L.
Strathclyde, L.
Swinfen, L.
Tenby, V.
Thomas of Gwydir, L.
Trefgarne, L.
Vivian, L.
Wade of Chorlton, L.
Walton of Detchant, L.
Weatherill, L.
Wilcox, B.
Windlesham, L.
Young, B.

NOT-CONTENTS

Acton, L.
Addington, L.
Ahmed, L.
Alderdice, L.
Alli, L.
Amos, B.
Andrews, B.
Archer of Sandwell, L.
Ashley of Stoke, L.
Ashton of Upholland, B.
Bach, L.
Barker, B.
Bassam of Brighton, L.
Berkeley, L.
Bernstein of Craigweil, L.
Billingham, B.
Borrie, L.
Bradshaw, L.
Brennan, L.
Brooke of Alverthorpe, L.
Brookman, L.
Bruce of Donington, L.
Burlison, L.
Carlile of Berriew, L.
Carter, L. [Teller]
Christopher, L.
Clarke of Hampstead, L.
Cledwyn of Penrhos, L.
Clement-Jones, L.
Clinton-Davis, L.
Cocks of Hartcliffe, L.
David, B.
Davies of Coity, L.
Davies of Oldham, L.
Desai, L.
Donoughue, L.
Dormand of Easington, L.
Dubs, L.
Elder, L.
Evans of Parkside, L.
Evans of Watford, L.
Ezra, L.
Falconer of Thoroton, L.
Falkland, V.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Filkin, L.
Gale, B.
Geraint, L.
Gibson of Market Rasen, B.
Gilbert, L.
Goldsmith, L.
Goodhart, L.
Gould of Potternewton, B.
Graham of Edmonton, L.
Greaves, L.
Grenfell, L.
Hardy of Wath, L.
Harris of Greenwich, L.
Harris of Haringey, L.
Harris of Richmond, B.
Harrison, L.
Hayman, B.
Healey, L.
Hilton of Eggardon, B.
Hollis of Heigham, B.
Howells of St. Davids, B.
Howie of Troon, L.
Hoyle, L.
Hughes of Woodside, L.
Hunt of Chesterton, L.
Hunt of Kings Heath, L.
Irvine of Lairg, L. (Lord Chancellor)
Jay of Paddington, B. (Lord Privy Seal)
Jeger, B.
Jenkins of Putney, L.
King of West Bromwich, L.
Laird, L.
Lea of Crondall, L.
Levy, L.
Lipsey, L.
Lockwood, B.
Macdonald of Tradeston, L.
McIntosh of Haringey, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
Mackenzie of Framwellgate, L.
McNally, L.
Marsh, L.
Massey of Darwen, B.
Milner of Leeds, L.
Mishcon, L.
Mitchell, L.
Newby, L.
Northover, B.
Oakeshott of Seagrove Bay, L.
Patel of Blackburn, L.
Peston, L.
Phillips of Sudbury, L.
Pitkeathley, B.
Plant of Highfield, L.
Ponsonby of Shulbrede, L.
Prys-Davies, L.
Ramsay of Cartvale, B. [Teller]
Randall of St. Budeaux, L.
Razzall, L.
Rea, L.
Redesdale, L.
Rendell of Babergh, B.
Rennard, L.
Richard, L.
Rodgers of Quarry Bank, L.
Roper, L.
Russell, E.
Sainsbury of Turville, L.
Scotland of Asthal, B.
Serota, B.
Sharman, L.
Shore of Stepney, L.
Simon, V.
Smith of Gilmorehill, B.
Stone of Blackheath, L.
Strabolgi, L.
Symons of Vernham Dean, B.
Taylor of Blackburn, L.
Thornton, B.
Tomlinson, L.
Tordoff, L.
Turner of Camden, B.
Uddin, B.
Warner, L.
Warwick of Undercliffe, B.
Watson of Richmond, L.
Whitaker, B.
Whitty, L.
Wilkins, B.
Williams of Elvel, L.
Williams of Mostyn, L.
Woolmer of Leeds, L.

Resolved in the negative, and amendment disagreed to accordingly.

15 Jun 2000 : Column 1771

4.5 p.m.

Clause 68 agreed to.

Clause 69 agreed to.

Clause 70 [Extinguishment of certain liabilities]:

Lord Sainsbury of Turville moved Amendment No. 71:


    Page 44, line 12, leave out ("this section") and insert ("subsection (1), (2) or (5)").

The noble Lord said: This is a minor tidying-up amendment to make it clear that there is no requirement for the Secretary of State to obtain the consent of the Treasury before he consults with the Post Office company—and its subsidiaries, as appropriate—about the exercise of his powers under the clause to extinguish the liabilities of the Post Office company or its subsidiaries. Clause 70 is intended to facilitate the restructuring of the Post Office company's balance sheet on 1st April 2002, as announced in the White Paper.

The requirement for Treasury consent in the clause is there to ensure that the department with the responsibility for the management of public finances gives its consent before any action is taken which might have an effect on the public purse. The amendment ensures that it is only the extinguishment of any liabilities under subsections (1) and (2) and the repeal of the whole clause under subsection (5) which require Treasury consent and not the preceding consultation with the Post Office company. I beg to move.

On Question, amendment agreed to.

Clause 70, as amended, agreed to.

Clause 71 [Limit on loans and other arrangements with government]:

Lord Dearing moved Amendment No. 72:


    Page 44, line 33, leave out paragraph (f).

The noble Lord said: In moving my maiden amendment I shall not presume to divide the Committee on this great matter. Nevertheless, I shall seek to persuade the Minister.

The paragraph that the amendment would delete has the effect, as I understand it, that the equity that the Government put into the new company shall count against the limits on the Government's financial arrangements set out in subsection (1). My concern, which I am sure many Members of the Committee, if not all, will share, is that when the company is created it should be one that will emerge in the liberalised postal market of Europe as one of the main successful players. If we are to achieve that, and if the Post Office is to enter into partnership agreements with other players, it must do so from a position of negotiating strength, and to that end it will need a strong balance sheet.

I asked the Government whether they would look at this issue when they decided the balance sheet, and I obtained assurances from the noble Lord which I welcomed. Perhaps I owe him an apology for pushing

15 Jun 2000 : Column 1772

the matter again today. But on rereading the White Paper and what I interpret the Government had to say, and in view of the recent announcements by the commission on its intentions to reduce the monopoly far more than the Government had intended, I thought that we had a new situation and that we ought to think about it.

As I understand it, the White Paper said that the Government were minded to pull out of the Post Office balance sheet the £1.8 billion of retained earnings which have been invested in the National Loans Fund or other government assets over the years and to deprive the Post Office of the income of £107 million a year that derives from those investments.

If that were to happen, then it follows that the balance sheet of this Post Office company, which is going into a much more competitive world, will be much weaker than the present balance sheet. The main British competitor in that market would be correspondingly weakened and, in my view, we should be doing the national interest a disservice.

The world in which the Post Office will be operating will be an increasingly competitive one. There will be growing competition from the new technologies. Twelve years ago, when I was chairman, I was already apprehensive about the long-term implications to the post of new technology. It can only be a matter of time before it begins to impact.

The new technology is disturbing the operations of the post offices and sub-post offices. We expressed concern at Second Reading about the intentions of the Department of Social Security to pay people's pensions through the banks. I read that it places one third of Counters business at risk. It is a serious competitive issue. But the competitive issue I have in mind in the light of the aspirations of the Commission relates to the core postal business.

The Post Office said in a public statement on 30th May that if the Commission has its way—that is, it reduces the monopoly to 50 grams compared with the Government's intention of 150 grams (the present weight is 350 grams)—then the Royal Mail would lose all its profit. If, at the same time, we are weakening the balance and taking away an income of £107 million, how will the Post Office compete effectively? How will it enter into negotiation with collaborative businesses from a base of strength? FedEx has a capitalisation of £7 billion; UPS has a capitalisation of £45 billion. I remember from my days in the Post office that the Dutch Post Office was a particularly entrepreneurial, strong, competitive organisation. Now it has acquired TNT it is doubly strong.

The postal market of Europe will be highly competitive. In a few years there will be only three or four major players. My concern is that Britain should have one of those major players. Directly relevant to that is the strength of the balance sheet. I am sure that the Government will take a forward-looking view rather than looking to the past; that they will want to ensure that the Post Office is strong and that they will want to take into account the implications of the Commission's proposals and thus what may happen to the Counters

15 Jun 2000 : Column 1773

business. I hope that they will reflect on whether it is right to withdraw that £1.8 billion or, if they must withdraw some, will only withdraw that element of it which they have said it would be right to take as dividends in the future; that is, 40 per cent, perhaps abated by the 20 per cent that has already been taken.

That is my main point of substance. Of course, the amendment seeks to omit the paragraph. Perhaps that is a touch optimistic. But if we want this to be a strong balance sheet, we should not count against that limit the initial capitalisation of the Post Office in setting up the company and regard that limiting sum as available for subsequent injections.

I cannot compete in knowledge with the Minister on balance sheet structuring. I am an amateur. But I have a certain amount of Treasury experience. One can liken the Treasury in mythology to the dragon Fafner. But where is the Siegfried who can outface the dragon once it has taken the reserves of the Post Office? The dragon defends the public sector borrowing requirements against all Siegfrieds. So have a care in sacrificing the Post Office.

If the Treasury dragon were the only one, terrified though I am of its powers, I would be less anxious. But I am aware that the UPS has appealed to the Commission in relation to what it alleges to be unfair support from the German Government to the Bundespost. It will be vigilant about any new capital that the Government puts in. So if they wish to serve the national interest well, they will take care to ensure that the balance sheet of the new company is a strong one. We hope that they will be prepared to learn from Europe and be much as the French Government are as Europeans; that is, concerned at all costs to serve their national interest. In our case, that is the British interest.

4.15 p.m.

Lord Sainsbury of Turville: I know that the noble Lord, Lord Dearing, wants the Post Office company to emerge from the current reform process in a strong position to recapture the commercial ground it has lost in past years and with the ability to become one of the most successful postal operators in Europe. I agree that we need to look forward to the situation in the future, rather than backwards to the history of the Post Office in the past.

The noble Lord also expressed his concern during the Second Reading debate that whether or not the Post Office company is able to be successful in the new environment will depend very much on the framework within which it will operate. That is correct.

As I said when I repeated a Statement to the House in December 1998, and the Government restated in the White Paper in July 1999, the Post Office company's balance sheet will be restructured by 1st April 2002 in order to place the company on a more commercial footing, and one where it can be better benchmarked against its competitors. We have had preliminary discussions with our advisers about the issues involved with the restructuring and agreed a preliminary

15 Jun 2000 : Column 1774

workplan. I emphasise, however, that no decisions have been taken at this early stage as we intend to consider all the issues thoroughly and to hold discussions with the Post Office before reaching any final conclusion.

We will also need to consider how the development of the Post Office's business between now and the deadline for restructuring on 1st April 2002 might affect the final decisions about the shape of the balance sheet. I therefore cannot speculate at this stage on what the final outcome might be. But we understand that the Post Office company must be equipped to develop its business if it is to provide the postal services that will be needed by its customers. That may well involve forging new alliances and commercial partnerships with those having complementary skills.

So we are fully aware of, and committed to, the need for the Post Office company to have a fair commercial balance sheet which gives it both the incentive to perform and the financial scope to enhance its business. In those circumstances, some might ask why we intend to deprive the Post Office company of previously earned assets as part of the restructuring exercise. But, as I said earlier, we intend to put the Post Office company on a more normal commercial footing. In a normal business, money that the Post Office has put into gilts and other deposits with the National Loans Fund would have been paid to the owner as dividends, rather than being allowed to accumulate on the balance sheet. The Post Office company will therefore cease to hold, and have access to the interest from, the present level of accumulated EFL surpluses as part of the exercise to restructure the balance sheet. The business will then operate and report on the same basis as a private sector one. But as I have already said, no decisions have been taken at this early stage.

Under the policy of allowing the Post Office greater commercial freedom, we have already put in place the new financial regime which will provide the opportunity for the Post Office to fund its commercial development, allowing the Post Office to retain more of its profits; to have automatic access to £75 million each year to fund growth investments and to borrow larger sums to fund growth investments providing the proposals are consistent with the strategic plan, commercially robust and pose no undue risk to the taxpayer. These provisions already provide the Post Office with the springboard to move towards its goal of becoming a world-class distribution company.

There should also be no anxiety about whether the current ceiling on the financial arrangements with government would be sufficient to allow the Post Office company to make a major acquisition. The figure of £5,000 million is a sensible limit, based on a commonly used formula for the present time and the foreseeable future. But we have built flexibility into the clause by providing that the limit may be increased by an order approved in draft for the House of Commons, should this prove necessary in the future. Such an increase would depend on whether it was considered at the time that the Post Office company could sustain a higher limit. I cannot speculate at this stage as to what

15 Jun 2000 : Column 1775

such a limit might be or the circumstances in which the Post Office company might request the increase. It is worth remembering that not all transactions may be funded by cash but that exchanges of equity might be used to cement alliances.

Perhaps it would be helpful to explain the nature of the purpose of the provision that the noble Lord is seeking to delete. For the purposes of calculating the amount of the outstanding indebtedness to government, Clause 71(2)(f) provides that:


    "sums paid or treated as paid by or on behalf of the Treasury or the Secretary of State in respect of the issue of securities in pursuance of section 63 of this Act or the acquisition of securities in pursuance of section 64 of this Act",

shall count towards the limit.

Any money required by the Secretary of State or the Treasury to acquire securities or the rights to subscribe to securities will be provided by Parliament. Under company law, the company has a liability to repay the face value of a security to its holder in a similar way to its liability to repay a loan. So in the same way as a loan from the National Loans Fund to the Post Office company or any of its subsidiaries will count in the overall calculation of indebtedness to government, any public money invested in securities of the Post Office company or its subsidiaries will also count in the overall calculation of indebtedness to government, as the face value of the security is effectively repayable to the Government.

However, in the light of the noble Lord's amendment, we are considering whether to bring forward an amendment to modify Clause 71(2)(f) so that sums paid or treated as paid in respect of securities which have been disposed of under Clause 67 do not continue to count against the limit. It would seem wrong in such circumstances that such sums should continue to count against the limit after they have been disposed of and value obtained for them.

I should also like to look further at the interaction between the clause and the shareholders' funds. We need to ensure that there is a limit on the debt owed to government while still allowing the Post Office company sufficient scope for borrowing to develop its business. We will double-check to see whether these provisions are entirely satisfactory.

I hope that that gives the noble Lord some comfort. I hope that I have reassured him that our intention for the restructuring of the balance sheet is to place the Post Office company on a firm but fair commercial footing, and that we have already put in place provisions for the Post Office company to be able to develop its business and to achieve its strategic objectives. I hope that the noble Lord will continue to want to withdraw his amendment.


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