APPENDIX 1

Computing the Grant Equivalent in Public Aid to Industry

Set out below are the sources of information on each programme of public assistance to industry in the United Kingdom. These notes relate to the more general discussion in Chapter 3.

LOCAL EMPLOYMENT ACTS

Data source: Eleventh Annual Report, 2 August 1971, HC559, Appendix V.

The present discounted value of the subsidy-element in loans and advance factories was crudely assumed to be 1 0 per cent of expenditure on the basis of advice from a number of sources.

INDUSTRIAL DEVELOPMENT ACTS

Data source: Fifth Annual Report on Investment Grants, 1970-71, HC580, Table 2, p. 4.

This source provides an incomplete breakdown of aid by SIC order number. Disaggregation of investment and hireq assets grants was accomplished using industry weights based on both employment figures by SIC and region and the differential between development and non-development area grants. The total for computer grants was allocated among industries on the basis of sales figures kindly provided by Peddar Associates of Surbiton.

277

278 Trade Effects of Public Subsidies

INDUSTRIAL EXPANSION ACT

Data source: Report, 17 December 1970, HC194.

The announced terms of the loans to the aluminium smelting industry are sufficiently vague as to make it hazardous to guess at the true subsidy component of these loans. There appears to have been an early period of interest-free loans between 1968 and 30 September 1972. The published terms were 7 per cent repayable over twenty-eight and thirty years beginning on 30 September 1972. Disbursements began much earlier than this. A rate of 8.45 per cent was chosen as the alternative the companies would have faced on the private market. This choice is more fully discussed in Chapter 9.

SHIPBUILDING INDUSTRY ACT

Data source: Annual Report of the Shipbuilding Industry Board for 19 70-71, 2 August 1971, HCS 54.

No details were provided of the terms of a loan of £2.6m. While the first report of the Board (HC361, July 1968) had set its interest rate of 71/2 per cent, the rate then current on government loans of this type, the probability is extremely high that interest rates of this order of magnitude greatly underestimate the cost of providing funds to this industry. On the advice of independent sources, 80 per cent of the loan was considered a grant.

MISCELLANEOUS SHIPBUILDING AID

Includes covering advances of loans to Short Bros and Harland. This company is almost 70 per cent government

Computing the Grant-Equivalent in Government Aid to Industry 279

owned, and the sum involved was arbitrarily treated as a grant. Shipbuilders' relief from indirect taxation is estimated as 2 per cent of the value of ships completed.

INDUSTRIAL REORGANIZATION CORPORATION

Data source: IRC Report and Accounts 1970-71, 7 July 1971, HC443.

IRC aid involved a blend of medium-term loans, equity subscription, deferred interest charges and management advice. A ''loan" to Rolls-Royce was arbitrarily treated as a grant. All other loans were deemed to carry an interest rate one percentage point below the rate likely to be charged by alternative sources of finance. Equity injections were treated as grants.

SCIENCE AND TECHNOLOGY ACT 1965, NATIONAL RESEARCH DEVELOPMENT CORPORATION AND

RESEARCH ASSOCIATION GRANTS

Data sources: Sixth Report from the Expenditure Committee: Public Money in the Private Sector, 6 July 1972, HC347-II, pp. 729-740.

Third Report from the Select Committee on Science and Technology, 21 July 1971, HC525, p. 27.

The NRDC and Science and Technology Act industrial support contract expenditure figures were allocated among industries according to the implicit weights contained in the publicly funded Research and Development figures found in Economic Trends, No. 205, November 1970, p. xii, Table 4, col. 10.

NORTHERN IRELAND ACTS

Data sources: Investment Grants and Loans, 5 October 1971, HC2127.

280 Trade Effects of Public Subsidies

Industries Development Assistance, 8 December 1971, HC2179.

Insufficiently disaggregated figures were split among SICs using statistics on aid-created new jobs found in HC2179, p. 4, Table 2, weighted by an index of investment per man obtained from the UK Census of Production. In those cases where the data on new jobs is provided on too broad a classification, employment data was taken from the Northern Ireland Digest of Statistics, September 1971, p. 10, Table 9. Leased-assets grants were allocated among industries on the basis of Northern Ireland 1970 gross investment by industry and, in cases where this was insufficiently disaggregated, an arbitrary division was made.

The grant element in loans and advance factories was estimated as 10 per cent of expenditure as had been done for the British Local Employment Acts.

BRITISH STEEL CORPORATION

Data source: BSC Annual Report and Accounts 1970-71, 27 July 1971, HC471.

The 1970-71 loss of £1Om was considered as likely to be written off against public dividend capital and thus treated as a grant. The company's estimate that it would have earned an extra £250m in revenue in the first four years of operation if it had not had its pricing policy dictated by the government suggests the existence of a user-subsidy. An amount of £60m extra revenue was incorporated in the published Profit and Loss account, HC471, p. 58, to produce, after taxation, an estimated revenue surplus of £20m. This would have repre­sented a £30m improvement on the observed performance. The difference between this and the £1Om loss suggests a user subsidy of £20m. This aid to user industries was apread over SICs using weights constructed from Table D, column 43 of the 1968 Input-Output Table.

Computing the Grant-Equivalent in Government Aid to Industry 281

CONCORDE AND OTHER AEROSPACE

Data source: Public Money in the Private Sector, 6 July 1972, HC347-II, pp. 729-40.

The whole expenditure on Concorde was considered as an investment grant. The sums expended in 1970-71 were used for development and production of the prototype. While an unknown fraction of these costs is to be included in the selling price of production models, it will not be possible to identify that part of the Concorde budget which is a pure subsidy until many years have elapsed. Accordingly, it was considered reasonable to regard all the funds as a grant. The case of the RB-211 aero-engine, for use in the Lockheed Tri-Star, is considerably more complicated since the commer­cial viability of the project is considerably greater. In the early stages of the project the Government was committed to providing 70 per cent of the 1968 estimated launching costs of £65.5m. The selling price was to include a levy to recover these funds and the Government was to participate in profits above a specified level. As with the Concorde, it would be impossible to estimate the subsidy element in government spending until long after the engine was in use. A number of past engine projects, the Dart, Avon, Conway, Tyne and Spey have more than repaid government launching aid. The only possibility of subsidization in these cases arises if the surplus above launching aid is less than the interest costs of alternative sources of finance. Cost overruns on the RB-211 made it impossible to restrict the Government's share of launching aid to 70 per cent and, when these overruns led to the collapse of Rolls-Royce, the engine and some other assets were transferred to the wholly government-owned Rolls­Royce (1971) Ltd. This has led us to treat all the 1970-71 expenditure on research and development of the RB-211 as a grant. The £30m paid by the Government for these assets during 1970-71 was treated similarly.

APPENDIX 2

Effects of Grants on Capital Costs

This appendix sets out the basis of the calculations used in Chapter 9.

The annual capital cost (interest and depreciation) was calculated using the compound interest formula

r(l + r)h L=A----

(1 + rt ~ 1

where L is the annual capital charge, A, the total capital involved, r the market rate of interest, and n, the number of years over which the capital is to be depreciated. The values of [r(l +rtJ/[1 +r)n --1 for r=0.0845, and n = 12.5 and 20 are 0.13297 and 0.10528 respectively.* For depreciation rate (a) therefore, the annual capital cost without investment and builing grants is given by

0.13297 X 0.75K + 0.10528 X 0.25K

where K is the total capital cost of the smelter. Similarly, the annual capital costs taking the grants into account is given by

0.13297 X 0.45K + 0.10528 X 0. 2122K

The percentage reduction in capital costs is therefore 34.81. If capital costs account for 20 per cent of total costs, this is equivalent to a reduction in total costs of

(.3481 x .2) x 100 = 6.961 per cent

When all capital is depreciated at the same rate, the percentage cost reduction resulting from the grants is independent of n and r; annual cost without the grants would

*Financial Statistics, July 1971, for the redemption yield on debenture and loan stocks.

282

Effects of Grants on Capital Costs

be qK, where q is any value of the expression

r(I + r)n

(1 + r)n - 1

283

The annual capital cost after deducting the grants is given by qK (1 -g), where g is the overall rate at which the grants are applied. The resulting percentage reduction is therefore

qK(I- g) ~-'-----=-'-- - 1 X 1 00 = -1 00 g

qK g is dependent on the ratios of plant and machinery, and

buildings to total capital, and the rates at which the investment and building grants are applied. In this case it is equal to

0.75 X 0.4 + 0.108 X 0.35 = 0.3378

The percentage reduction in capital costs when all capital is depreciated at the same rate is then 33.78.

Selected Bibliography

Set out below is a select bibliography relating to subsidies to industry as an issue in international commercial relations. The titles given are recent contributions to the discussion that has been developing on the subject. They are all monographs or volumes. Journal articles have been set to one side, but are cited in the notes and references with each chapter, as and when relevant.

Thus the bibliography has been designed for both general readers and specialists. In no sense though is the list meant to be comprehensive. Included in it are a number of publi­cations of the Trade Policy Research Centre which has taken a particular interest in the issues raised by non-tariff interventions in industry and trade.

BELA BALASSA, The Theory of Economic Integration (London: Allen & Unwin, 1962).

BELA BALASSA, Trade Liberalization among Industrial Countries: Objectives and Alternatives (New York: McGraw-Hill, for the Council on Foreign Relations, 1967).

ROBERT E. BALDWIN, Non-tariff Distortions of Inter­national Trade (Washington: Brookings Institution, 1970).

JAG DISH BHAGWA TI et al., Trade, Balance of Payments and Growth, Papers in International Economics in Honour of Charles P. Kindleberger (Amsterdam: North-Holland, 1971 ).

A. J. BROWN, The Framework of Regional Economics in the United Kingdom (Cambridge: Cambridge University Press, for the National Institute of Economic and Social Research, 1972).

SIR ALEC CAIRNCROSS et al., Economic Policy for the European Community: the Way Forward (London: Macmillan, for the Institut fiir Weltwirtschaft an der Universitat Kiel, 1974).

285

286 Trade Effects of Public Subsidies

RICHARD N. COOPER, The Economics of Interdependence: Economic Policy in the Atlantic Community (New York: McGraw-Hill, for the Council on Foreign Relations, 1968).

HUGH CORBET and ROBERT JACKSON (eds), In Search of a New World Economic Order (London: Croom Helm, for the Trade Policy Research Centre and The Round Table, 1974; and New York: Wiley, 1974).

W. M. CORD EN, The Theory of Protection (Oxford: Clarendon Press, 1971 ).

W. M. CORD EN, Trade Policy and Economic Welfare (Oxford: Clarendon Press, 197 4 ).

GERARD CURZON, Multilateral Commercial Diplomacy (London: Michael Joseph, 1965).

GERARD and VIC TO RIA CURZON, Hidden Barriers to International Trade, Thames Essay No. 1 (London: Trade Policy Research Centre, 1970).

GERARD and VICTORIA CURZON, Global Assault on Non-tariff Trade Barriers, Thames Essay No.3 (London: Trade Policy Research Centre, 1972).

VIC TO RIA CURZON, The Essentials of Economic Integra­tion: the Lessons of EFT A Experience (London: Macmillan, for the Trade Policy Research Centre, 1974; and New York: StMartin'sPress, 1974).

KENNETH W. DAM, The GATT Law and International Economic Organization (Chicago and London: University of Chicago Press, 1970).

GEOFFREY DENTON (ed.), Economic Integration in Europe (London: Weidenfeld & Nicolson, for the Reading Graduate School of Contemporary European Studies, 1969).

GEOFFREY DENTON and SEAMUS O'CLEIREACAIN, Subsidy Issues in International Commerce, Thames Essay No. 5 (London: Trade Policy Research Centre, 1972).

WILLIAM DIEBOLD JR, The United States and the Indus­trial World: American Foreign Economic Policy in the 1970s (New York: Praeger, for the Council on Foreign Relations, 1972).

Selected Bibliography 287

BARBARA EPSTEIN, Politics of Trade in Power Plant; Impact of Public Procurement (London: Trade Policy Research Centre, 1971 ).

EXPENDITURE COMMITTEE OF THE HOUSE OF COMMONS, Public Money in the Private Sector, HC 347-I, Session 1971-2 (London: HM Stationery Office, 1972).

H. G. GRUBEL and HARRY G. JOHNSON (eds), Effective Tariff Protection (Geneva: GATT Secretariat and Graduate Institute of International Studies, 1971 ).

BRIAN HINDLEY, Britain's Position on Non-tariff Protection, Thames Essay No.4 (London: Trade Policy Research Centre, 1972).

HELEN HUGHES (ed.), Prospects for Partnership: Industrial and Trade Policies in the 1970s (Baltimore: Johns Hopkins Press, for the International Bank for Reconstruction and Development, 1973).

D. GALE JOHNSON, World Agriculture. in Disarray (London: Macmillan, for the Trade Policy Research Centre, 1973; and New York: StMartin's Press, 1973).

HARRY G. JOHN SON, Comparative Costs and Commercial Policy Theory for a Developing World Economy (Stockholm: Almqvist & Wiksell, 1968).

HARRY G. JOHNSON, Aspects of the Theory of Tariffs (London: Allen & Unwin, 1971.)

HARRY G. JOHNSON, PAUL WONNACOTT and HIROFUMI SHIBATA, Harmonization of National Economic Policies Under Free Trade (Toronto: University of Toronto Press, for the Private Planning Association of Canada, 1968).

PETER B. KENEN and RICHARD LAWRENCE (eds), The Open Economy (New York: Columbia University Press, 1968).

T. E. JOSLING et al., Burdens and Benefits of Farm-Support Policies, Agricultural Trade Paper No. 1 (London: Trade Policy Research Centre, 1972).

KAREN KocK, International Trade Policy and the GATT 1947-67 (Stockholm: Almqvist & Wiksell, 1969).

PETER LLOYD, Non-tariff Distortions of Australian Trade (Canberra: Australian National University Press, 1973 ).

288 Trade Effects of Public Subsidies

HARALD B. MALMGREN, International Economic Peace­keeping (New York: Quadrangle, for the Atlantic Council of the United States, 1972).

ROY A. MATTHEWS, Industrial Viability in a Free Trade Economy (Toronto: University of Toronto Press for the Private Planning Association of Canada, 1971 ).

FRANK MCFADZEAN et al., Towards an Open World Economy, Report by an Advisory Group (London: Macmillan, for the Trade Policy Research Centre, 1972; and New York: StMartin's Press, 1973).

JAMES E. MEADE, The Theory of International Economic Policy: Trade and Welfare (London: Oxford University Press, 1955).

ROBERT MIDDLETON, Negotiating on Non-tariff Distor­tions of Trade: the EFTA Precedents (London: Macmillan, for the Trade Policy Research Centre, 1975).

SANTOSH MUKHERJEE, Free Trade is Good, But What­ever Happened to the Workers? (London: Political and Economic Planning, 1974 ).

CAROLINE PESTIEAU and JACQUES HENRY, Non-tariff Trade Barriers as a Problem in International Development (Montreal: Private Planning Association of Canada, 1972).

PRESIDENTIAL COMMISSION ON INTERNATIONAL TRADE AND INVESTMENT POLICY, United States International Economic Policy in an Interdependent World, Williams Report (Washington: US Government Printing Office, 1971 ).

A. R. PREsT, How Much Subsidy? (London: Institute of Economic Affairs, 1974 ).

Public Purchasing and Industrial Efficiency, Cmnd. 3291 (London: HM Stationery Office, 196'7).

W. B. REDDAWAY et al., Effects of the Selective Employ­ment Tax, Occasional Paper No. 32 (Cambridge: Cam­bridge University Press, for the Cambridge Department of Applied Economics, 1973).

PETER RoBsoN (ed.), International Economic Integration, Readings (Harmondsworth, Middx: Penguin, 1971 ).

PAUL SAMUELSON (ed.), International Economic Relations (London: Macmillan, for the International Economic

Selected Bibliography 289

Association, 1969; and New York: St Martin's Press, 1969).

TIBOR SCITOVSKY, Economic Theory and Western Euro­pean Integration, revised (London: Allen & Unwin, 1962).

KLAUS STEGEMANN, Canadial'l Non-tariff Distortions of International Trade (Montreal: Private Planning Associa­tion, 1973).

ROBERT M. STERN, Internal Adjustments to External Dis­turbances, International Economics Discussion Paper No. 42 (Ann Arbor: University of Michigan, 1972).

JAN TIN BERGEN, International Economic Integration (Amsterdam: Elsevier, 1965).

The United States and the European Community: Policies for a Changing World (New York: Committee for Economic Development, 1971 ).

US Foreign Economic Policy for the 1970s: a New Approach to New Realities, a Policy Report by a NPA Advisory Committee (Washington: National Planning Association, 1971 ).

PAUL and RONALD WONNACOTT, Free Trade Between Canada and the United States: The Potential Economic Effects (Cambridge, Mass.: Harvard University Press, 1967).

Index

Agarawala, R., 65, 66, 68 Agricultural Guidance and

Guarantee Fund (FEOGA), 109

aircraft industry, 130-7 Concorde, 131, 136 firms

BAC, 132-4 BEA, 132, 133 Beagle Light Aircraft Co.,

130, 133 Handley Page Co., 133 Hawker-Siddeley, 132, 133,

135 Rolls-Royce, 130, 133, 134 Short Bros., 130, 131

aluminium industry, 201-30 CEGB interest in, 209-13 EEC interest in, 219 EFT A interest in, 229 firms

Alcan, 201, 203-5, 209, 213-15, 220

Alcoa, 201-3 Alusuisse, 202, 203 Anglesey Aluminium Metal

Industry, 209-13 British Aluminium, 205,

208-13, 220 British Insulated Callenders

Cables, 209, 221 Delta Metal, 205 ICI Metals, 205 James Booth, 205 Kaiser, 201,203, 205, 209,

221 Pechinery, 201, 203 Reynolds, 201, 203, 204,

220

Rio Tinto-Zinc Corp., 209, 213, 220, 221

National Coal Board interest in, 214

Norway, 229, 230

Baldwin, Robert, 4, 15, 238 Bhagwati, Jagdish, 10 Blake, Christopher, 68, 69 Bookwright, B. D., 67 Booz-Allen Report, 163, 171-3,

180, 183, 186 Brown, A. J., 101, 102 Buck, T. W., 68, 69

capital subsidy, 64-9 Central Electricity Generating

Board (CEGB), 138, 139 aluminium industry and,

209-13 computer industry, 127-30 Cotton Board, 243 cotton industry, 242-5 Cotton Industry Bill, 243, 244 Curzon, Gerard and Victoria, xv,

249

Development of Inventions Act, 36

Eaton, J. R., 67 electrical engineering, 13 7 European Economic Community

(EEC) aluminium industry and, 219 public procurement, 140-5 policy harmonization, xiv-xv regional subsidies, 108-19 shipbuilding and, 195-8

291

292 Index

European Free Trade Association (EFTA)

aluminium industry and, 229 public procurement, 145 regional subsidies, 108, 109

Feldstein, M. S., 66 Finance Acts, 28 Fleming, J. S., 66

Geddes Report, 162, 165-7, 169 General Agreement on Tariffs and

Trade (GATT), xiii, xv, 4, 6, 8, 119,238,239,253,272, 273

Godley, Wyn, 82 Goodson, G. C., 66, 68

Hindley, Brian, xv, 121, 122 House of Commons Expenditure

Committee, 53 Hunt Committee, 43, 44

Industrial Development Act, 28, 42, 56, 57, 61, 62, 67, 100

Industrial Development (Ships) Act, 165

Industrial Expansion Act, 25, 26, 39,40, 56,210

industrial policy Conservative Government, 25,

26,28-31,34,35, 41, 42, 45,46

Labour Government, 25, 26, 28,29,34,36-9,43,44

Industrial Reorganization Corporation (IRC), 24-6, 37-9, 53, 56, 57

Industrial Training Act, 34 Industrial Training Agency, 3 5 Industrial Training Boards, 34, 35 Industry Act, 35, 46, 170 International Business Machines

(IBM), 128-30 International Computers Limited

(ICL), 127-30 International Monetary Fund

(IMF), 6, 8 investment incentives, 27-32 Isard, Peter, 241

Johnson, Harry G., 76 Jorgenson, D. W., 64

Kaldor, Nicholas, 70 King, M. A., 66 Krause, Lawrence B., 252, 253

labour subsidy, 69-71 Layard, P. R. G., 81 Local Employment Acts, 41-6, 57,

67, 70, 72 Lowe, J. F., 68, 69

Mathieson, John A., 252, 253 Middleton, Robert, xvi Moore, Barry, 71, 1 02 Mutti, John, 238

National Economic Development Council (NEDC), 24, 25

National Research Development Corporation, 35, 36

Organization for Economic Cooperation and Development (OECD)

public procurement, 145 shipbuilding and, 193-5, 198

Organization o-f European Aluminium Smelters (OEA), 228, 229

Plowden Committee, 132, 136 production subsidy, 72

Ramaswani, V. K., 10 Reddaway, Brian, 33 Rees, R. D., 81 Regional Employment Premium,

33,61 regional industrial policy, 41-6 regional subsidy, 98-119 Rhodes, John, 102

sales subsidy, 72, 73 Science and Technology Act, 36 selective employment tax (SET),

32-4 Shepherd, J. R., 82

shipbuilding, 62, 151-99,245 Denmark, 188, 189 EEC interest in, 195-8 firms

Appledore, 183, 184 Austin and Pickersgill, 168,

183, 184 CammelLaird, 169,174,

175,177,178,180-4, 192

Doxford and Sunderland, 184

Harland and Wolff, 168, 169,174,175,177, 181-4, 192

Robb Caledon, 16, 184 Scott Lithgow, 167, 168,

184 Swann Hunter, 168, 184 Upper Clyde Shipbuilders,

168-70, 174-6, 180-4, 192

Vickers, 168 Vosper Thorneycroft, 168 Yarrow, 168, 169, 175,176,

182 France, 188, 189, 196 home credit scheme, 164 Italy, 188, 189, 196 Japan, 155, 188, 189 Netherlands, 190, 191 Norway, 190, 191

Index 293

OECD interest in, 193-5, 198 "shipbuilders relief", 164, 174,

182, 184 Spain, 190, 191 Sweden, 158, 190, 191 United States, 190, 191 West Germany, 188, 189

Shipbuilding Credit Act, 163 Shipbuilding Industry Act, 61, 167 Shipbuilding Industry Board, 166,

168, 173, 174, 182, 184 Srinivason, T. N., 10 Stark, T., 30, 31 Stern, Robert, 237,238 subsidies

capital, 64-9 labour, 69-71 production, 72 regional, 98-119 sales, 72, 73

Thomas, R., 67 Trade Facilities Acts, 163, 164

United Nations Conference on Trade and Development (UNCTAD), 252, 253

unemployment, 19-21

Weinberg, Nathaniel, 249 Wilson, Thomas, 100 Wonnacott, Paul and Ronald, 250