§ Mr. French
To ask the Secretary of State for Energy whether he has considered the British Coal Corporation's initial response to the report by the Monopolies and Mergers Commission on the corporation's investment programme.
§ Mr. Parkinson
As announced by my right hon. Friend the Chancellor of the Duchy of Lancaster, the MMC446W published its report on the investment programme of British Coal on 25 January. The corporation has now provided its initial response, a copy of which has been placed in the Library.
The MMC rightly draws attention to British Coal's impressive achievement over the last five years in reducing costs and restructuring the industry, but identifies a need for a more cohesive and systematic approach towards its business planning, including fuller and more regular analysis of risk scenarios and contingency responses, greater use of modelling, and more local input on business prospects as the market evolves. I share the commission's view that these are priority areas for attention.
The United Kingdom market for coal is becoming increasingly open, with greater price differentials both regionally and as between market sectors. This makes it particularly important to identify, and base business decisions upon, the true profitability of individual coal flows, so that management at all levels can respond promptly and concertedly to the impact of market developments on profitability. Exposure to loss-making business must be reduced if the corporation is to achieve its objective of maximising profitability. I accordingly welcome the corporation's intention to continue to adapt its business planning systems and organisation to meet changing circumstances, and I expect the detailed steps taken under each of the commission's recommendations to be fully set out in the corporation's further responses to the MMC report. My recent appointment of a second deputy chairman should help to strengthen the corporation's efforts in this direction over the coming year.
The commission concluded that British Coal's controls over capital investment are generally good, and expressed confidence that the corporation's investment programme is achieving a rate of return of at least 5 per cent. Since its report was published, the Government have increased the required rate of return to 8 per cent, and I will be considering with British Coal over the next 12 months the implications of this for the test discount rates for individual categories of expenditure.
I do not share the commission's view that the Asfordby project was never viable; as British Coal points out, an independent review in July 1983 suggested that at that stage an acceptable rate of return could be achieved. But I agree that such large projects, particularly where lead times and payback periods are long, tend to be financially more risky than many other types of expenditure, and that this requires to be fully recognised in the criteria for initial investment appraisal. This should minimise the risk of future projects being 'piece-mealed through time'; as regards Asfordby itself, it is important that the substantial balance of the expenditure still uncommitted should show a robust financial return. I also share the commission's view that, in general, conditional approval should not be given in advance of a sound financial prospectus.
I welcome British Coal's acceptance of the need to assess the system effect of large projects involving new capacity; as the commission recognises, however, even relatively small amounts of new capacity can have a significant effect in localised or special quality markets. I also welcome the importance attached by both the commission and British Coal to the spread of six-day operations and other more flexible working patterns.
I share the commission's view that new medium-term financial objectives need to be agreed between the corporation and Government, but I recognise that these 447W cannot be sensibly finalised ahead of the coming negotiations with National Power and Power Gen on the terms of coal supply beyond January 1990. In the meantime the external financing path to 1991–92 which I announced to the House on 6 February provides a provisional basis for forward planning.
I am anxious that early progress should be made on this agenda. Under the normal arrangements for the follow-up to M MC recommendations arising from section 11 inquiries, British Coal will be reporting to me after one and three years on progress achieved in implementing the recommendations. I shall lay its report before the House next spring.