New Clause 5 — Contingent liabilities under the Private Finance Initiative

Orders of the Day — Finance Bill — [1st Allotted Day] – in the House of Commons at 8:12 pm on 3rd July 2002.

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'.—(1) Section 156 of the Finance Act 1998 (c. 36) is amended as follows.

(2) At the end of subsection (4) insert "and to generally accepted accounting practice.".

(3) After subsection (4) insert—

"(4A) The Financial Statement and Budget Report shall include a statement of the aggregate amount of all financial liabilities, actual and contingent, to those persons who are or who will become the owners of assets which are to be made available to or for the benefit of any Department of State and which are to be financed through the Private Finance Initiative.".'.—[Mr. Flight.]

Brought up, and read the First time.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I beg to move, That the clause be read a Second time.

This is an important new clause because it addresses growing concerns expressed by the various authorities and professional bodies involved, by the City of London, and by citizens up and down the land. It calls for amendment to the Finance Act 1988 requiring a statement of the aggregate of all contingent potential liabilities as well as actual liabilities relating to private finance initiative and public-private partnership deals.

A variety of issues are raised by the new clause. The Opposition continue to support the broad principles of PFI under which the private sector is brought in to do things, and often to do them better than the public sector. Under that initiative efficiencies can be achieved in funding and trade union Spanish practices can be addressed. It operates according to the principle of transferring operational risk. We have greater concerns about PPP, when that risk is often not transferred. When such arrangements are made, under PPP and under PFI, it is axiomatic that financial matters should be transparent. Because of the Government's unique position in terms of being able to issue letters of comfort and guarantees that can be rolled over, the accounting standards should be more demanding, if anything, than those in the private sector.

This Government—I do not include those Members with whom we have been debating this Finance Bill—have crafted a web of deceit and an Enron-style system in which there is a lack of accounting and a lack of disclosure. There has been a desperate determination to move investment in the public sector off balance sheet, and, as far as possible, to do so without describing it fully or accurately in the Red Book.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I shall do so in due course.

The Government have been incurring contingent liabilities in relation to PPP deals, and, to some extent, PFI deals, which are recorded nowhere in the Red Book. The total extent of those liabilities is unknowable, but I have identified £25 billion alone relating to transport. That comprises a £2.67 billion guarantee for London and Continental; the Government undertaking through the Strategic Rail Authority to repay the £9 billion of commercial borrowings by Network Rail within three years if those are not refinanced; and the Government's letters of comfort in respect of 95 per cent. of the borrowings of the tube PPP contractors—their total borrowings over the first two phases are expected to be £15 billion. Sizeable potential contingent liabilities also relate to defence PFI deals, and there may be contingent liabilities in relation to other PFI deals.

With regard to those contingent liabilities, the Government have interpreted the Accounting Standards Board's FRS12 directive and structured vehicles in a way designed to avoid disclosure. The principle of FRS12 is that, unless a contingent liability is remote, it should be disclosed, except when it is immaterial. In assessing remoteness—the key issue—the potential ability to roll over liabilities must not be taken into account until after a roll-over has been implemented. On 11 April, I asked the then Chief Secretary to the Treasury whether the Government guarantee via the Strategic Rail Authority of Network Rail's £9 billion commercial borrowings would be treated as a public sector liability. He responded that, although that would not really be the case, the contingent liability would not score as, given the unlikely event of alternative private sector refinancing not being obtained, it was unlikely to be called.

If that is the case, which is questionable, it is because the Strategic Rail Authority's liabilities can be rolled over for a further three years to enable commercial refinancing. Indeed, they can be rolled over for ever. A brilliant little wheeze has been invented giving a guarantee against which the private sector happily lends, and each time the end of the three-year period comes near the liabilities can be rolled over again. That is very clever and fits a narrow definition of the remoteness rules, but does not fit the roll-over rules. Given the Government's power on this matter, common sense suggests that materiality should be a major factor in determining their policy on the disclosure of contingent liabilities. 8.30 pm

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

My hon. Friend may not be aware that, yesterday evening, the chief executive of Network Rail confirmed at a meeting of the all-party railways group that Network Rail will be treated, for accounting purposes, as a subsidiary of the Strategic Rail Authority. However, the debts and liabilities built up by Network Rail will not manifest themselves in the Government's accounts.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I thank my hon. Friend for those comments. I shall come to that issue and to the tortuous structure that has been crafted by some of the best legal brains in the City of London to achieve that end.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London)

Further to that point, is the hon. Gentleman aware that the second footnote of the minutes that the Secretary of State for Transport issued on 20 June says:

"Direct rights would be exercised under a 'Put option' whereby, in certain specific circumstances, commercial lenders can require the SRA to purchase all amounts due to them from Network Rail Group"?

Does the hon. Gentleman agree that that suggests that, far from the debts being able to be rolled over, the Government and the Government agency—namely the SRA—could be forced by the lenders to repay them? Therefore, those debts should be on the Government's balance sheet.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Indeed, I accept that point, but another issue is relevant. The Government could be forced to repay the debts but, because the money is lent by the private sector against the undertaking from the SRA, the Government have relied on the remoteness argument that it is unlikely they would ever be called upon to disclose them. At best, that is a questionable interpretation of FRS12. At worst, it is downright deceitful hiding of the true position of the public finances.

A different accounting issue relates to PFI. Note F, which was crafted by the Treasury PFI taskforce, lays down that liability for PFI projects should be based on the risk attached to them. For example, a £100 million hospital could be ignored and disclosure could be made in relation to the basic ownership element that is deemed at 10 per cent. The Accounting Standards Board had initially advised that a much clearer and more transparent practice would have been to look at who was liable for the debt. In the case of such a £100 million hospital project, the risk is placed off balance sheet because the Government argue that 90 per cent. does not count and that the private sector is responsible for 55 per cent. of the remaining 10 per cent. However, in reality, the Government are liable for 94.5 per cent. of the entire hospital. As the senior partner of one of our leading accounting firms commented:

"The Government is effectively fiddling the figures by using a mechanism to disguise its liabilities and that a major danger of disguising the figures is that projects may not be scrutinised effectively."

The Government have also insisted on public sector capital projects being financed off balance sheet by PFI and PPP deals. The total package is, "Make them happen. Get them done by PFI and PPP, and get them off balance sheet". The projects are not then on balance sheet for the purposes of the EU rules in relation to membership of the euro, and public finances appear to be very much better than they are in reality.

So here we have the second scam that has already been exposed. To get the deals through the best value comparator process, there has been what can only be described as a rigged approach. Many crucial details are hidden from public view by the blanket ban on disclosure under commercial confidentiality requirements, and the public sector comparator, which is supposed to show a fair measure of whether privately financed schemes offer better value than conventional public funding, contains many rigged elements. Jeremy Colman, the auditor- general at the National Audit Office, recently described some of the comparators as "utter rubbish". Public service managers are engaging in the sham because they have to show that their PFI plans are cost-effective to get the investment.

Aspects of the rigging that have been exposed include what is widely known as risk costing, under which private operators are allowed to claim a special 12.5 per cent. of costs risk element. That constitutes a key component of the fair value-for-money calculation and knocks down the calculation for the PFI deal. It compares with an average cost overrun on, for example, hospital-building projects of 7 per cent. So even if we accept the principle, the cost is too high.

The British Medical Journal recently published a paper showing how risk costing has been used to distort results to a major extent and to swing projects that qualify marginally which would not have otherwise done so. There is a point of principle to consider. Even if the risk was assessed realistically, the entire exercise is questionable. Would the Government allow a major public service to collapse, as illustrated by Railtrack or the Channel Tunnel Group?

In addition, the Association of Chartered Certified Accountants explains that the Government allow public bodies to reclaim VAT on privately funded projects but not on publicly backed schemes, thereby favouring private finance by 17.5 per cent. National health service trusts have to pay the Treasury a 60 per cent. capital charge on buildings they own, but private builders have no such obligations. The Government also give local authorities an annual grant of 11.5 per cent. of the value of PFI schemes they commission, but that is not the case for publicly funded projects. Although subcontracted private sector projects and managements may be much better than public schemes, in many cases the best value justifying comparators are being rigged when they should be dealt with on a transparent and straightforward basis.

The Office for National Statistics recently confirmed that the Government managed to craft in Network Rail a legal entity with debts that will not be included in public sector borrowing requirements, unlike Consignia. That is at odds with it being billed as a renationalisation and also constitutes a legal model vehicle that could accommodate even more public sector off balance sheet borrowing. Very bright lawyers crafted that. When I approached their firm for information, I was told that they could not assist because it would be a conflict of interest and they were working for the Government to design such a scheme. That is an answer to a maiden's prayer if one wants to keep public-private partnership liabilities off balance sheet.

The Red Book includes PFI payment liabilities for 25 years, through to 2027–28. I wonder whether hon. Members have looked at those because they already amount to £98 billion. That contrasts with the initial capital value of the projects of £20 billion at the time of the deal and reflects a total of about 450 PFI deals. Another 300 PFI deals are in the pipeline and expected to sign up in the next two years. Their current capital value is assessed at £25 billion. Presumably, that will add another £100 billion over 25 years of PFI liabilities. Those are recorded in the Red Book and are material to the public sector accounts.

I participated in the Standing Committee on the Government Resources and Accounts Bill. The Conservative Opposition expressed grave doubts because they felt that it increased the scope of the Treasury to cook the books. We thought that it allowed the Treasury to incur expenditure in respect of the formation of Partnerships UK and to provide it with financial assistance, including, again, substantial Government guarantees on the discharge of financial obligations. So we have yet another conduit through which contingent liabilities can be built up but not recorded.

One of the inimitable results of this complex and devious structure, designed to keep PFI and PPP liabilities off balance sheet, has been horrific mounting legal and other transactional costs.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I understand that PFI started in 1994 under a Conservative Government. Is the hon. Gentleman saying that in the unlikely event that the Conservatives were ever in government again they would abandon PFI, or would they continue the scheme and show everything on the balance sheet? Is he also saying that when the Conservatives were in government, they showed all these costs on the Government's balance sheet and in the Red Book?

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

With respect, I would have expected a better question from such a pleasant Member of Parliament. The hon. Gentleman will be aware that the PFI deals done before 1997 were few and, in the main, very straightforward, concerning the building of bridges or roads. We poor, feeble creatures did not get up to all the sophisticated trickery indulged in by his colleagues. He asked a question about principle, but I have already given him the answer: if things are properly done and transparently accounted, there is a great deal of scope for subcontracting to the private sector. There is a question as to whether one can do that safely for 30 years, but we support the principle of PFI; indeed we gave birth to it, and it is utterly usable. Unlike the present Government, this party does not stand for non-transparent and deliberately misleading accounting. If we were in power, we would get the thing cleaned up pretty quickly.

I return to the mounting legal costs. As hon. Members will know, in 1998 the upgrading of the west coast main line was priced at £2.1 billion. The cost of the scaled-down version has gone up to £13 billion this year, over twice the cost of the equivalent French new TGV investment, and much of it arises from the huge legal and transactional processing costs, reflecting the complexity of the legal structure.

The first major project being promoted by Partnerships UK is Project Aquatrine, a PFI deal to modernise the drains at the Ministry of Defence. How pathetic that the Government could not come up with something more worth doing. That deal is worth between £300 million and £400 million, and £37 million has already been spent, mostly on legal fees, without a single drain having been cleaned or improved.

When we introduced PFI, we employed it for much simpler projects such as building bridges and roads. However, PFI and PPP have been the magic solution for this Government, enabling them to keep major public sector investment costs and commitments off balance sheet. The complex structures involved avoid both the Eurostat requirements on what should be included as a public sector liability and British law and conventions on local authority liabilities, which are also to be viewed as central Government liabilities.

The Office for National Statistics is also ducking responsibility for what is happening, although it makes noises of displeasure. However, it comments that, on the question of whether a cost should be included in Government accounts, it takes the advice of others who are specialists. The Treasury ducks the issue by saying that the classification is up to the ONS. The Paymaster General will know that Mr. McFall, the Labour Chairman of the Treasury Committee, has advised, thank goodness, that he intends that the Committee should examine these Enron-style Government accounting practices.

At the crudest level, if the initial capital element of PFI debt alone were brought back on balance sheet it would add £35 billion to the public sector borrowing requirement—excuse my using the old-fashioned term, but it is clear. A further £30 billion would probably be added over the next two years as PFI projects in the pipeline were signed up.

Transparent treatment of PPP and PFI contingent liabilities would have serious repercussions for an application to join the euro. That is one of the main issues driving the web of deceit hiding the commitments, or at least the lack of transparency about them. The treatment of contingent liabilities is absolutely central to the new Network Rail legal structure. In principle, Network Rail is a legal structure whose borrowings are not part of Government debt. They could be rolled over and over, increasing private sector borrowing against a Government guarantee renewed every three years via the Strategic Rail Authority. That would be a nonsensical example of hiding behind the remoteness element of the FRS12 principle relating to disclosure.

It is ironic that in the wake of the private sector accounting problems in the United States the British Government are applying to contingent liabilities certain accounting practices that would be questionable in the private sector. They are certainly not practising the degree of transparency appropriate to the public sector. What is needed is full and clear disclosure of contingent liabilities and where they truly fall, accounting practices for PFI and PPP deals that make that clear, and a speedy end to the practices that have developed—practices that, if the Government are not careful, will run PFI and PPP amok and cast into ill repute principles that are workable and good for making projects happen.

We want clarity and transparency. At the very least, we want all contingent liabilities listed in the Red Book. To be candid, saying that a £9 billion contingent liability does not matter because we have a clever little deal that makes it remote is a disgrace.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London) 8:45 pm, 3rd July 2002

I welcome the new clause and congratulate Mr. Flight on his ingenuity in enabling us to debate the issue—it is not before time.

I agree with the point implicit in the hon. Gentleman's argument. There is not necessarily a problem with off balance accounting or with having contingent liabilities. What is key is that they are transparent and reported properly, and that if off balance accounting is the chosen method, it is chosen for the right reasons and makes economic sense.

Those are not theoretical issues. Off balance accounting is more expensive. The Government guaranteed a bond to finance the channel tunnel rail link rather than use gilt financing, and it ended up costing the taxpayer more. The National Audit Office said that that decision cost the taxpayer an extra £80 million, for no benefit other than to keep the transaction off balance. Going off balance has to be justified because it carries a higher cost.

There is concern that the desire to drive projects off balance has become the sole reason for projects. In other words, decision making in Whitehall is being distorted. If the Minister doubts that, my first exhibit is a letter to my hon. Friend Matthew Taylor from the Under-Secretary of State at the former Department for Transport, Local Government and the Regions. Dated 8 January 2002, the letter, which relates to the debate on what was then called Renewco, states:

"It was clearly understood by both sides that for RenewCo to deliver its objectives and be established successfully it could not be classified as part of either the Government's or Railtrack's balance sheet."

In other words, the negotiations surrounding Renewco were driven by the need to take the vehicle off balance. The driving force was not that that was the best way to run the railways but the desire to move the structure off balance. That is the wrong way to decide how to structure an industry as important as the railways. Policy cannot be driven by accounting definitions.

The Government have sometimes tried in their various discussions on Network Rail and the PFI in general to justify why they are taking things off balance. As far as I have been able to tell, however, the main justification boiled down to a rather obscure economic notion, which I never came across in my studies at university—reputational externalities. These are rather bizarre things and we have again had to go to the National Audit Office to find out what they amount to. The NAO takes the view that the Treasury considers that increasing public borrowing has an external cost in terms of the Government's reputation for prudence and that reputational externality is a calculation to reflect that assumed cost.

That is a bizarrely theoretical reason for promoting off balance accounting. It seems to involve the assumption that the private sector and financial markets are daft and will not notice it. I suggest that when a ratings agency considers Network Rail, it will take those factors into account. Indeed, if the Government continue to follow such a practice, they might be punished when the credit and ratings agencies consider their debt in the next few years. The reputational externalities will seem theoretical nonsense. They are a very thin reed to be used to justify taking so much borrowing off balance. My concern is why the Government are doing that, as they seem to have no clear and good economic rationale.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

May I address the hon. Gentleman in terms of reputational long shots and ask whether, if the Liberal Democrats were ever to form a national Government, they would support PFIs?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London)

We support PFIs. I do not think that there is anything wrong in such methods of financing projects. However, we are debating not whether we support PFIs, but how capital assets that are bought through PFI deals and the contingent liabilities that could fall to the taxpayer are accounted for. That is the problem.

I am grateful to the hon. Gentleman for his intervention, because it takes me to my next point: we could accept off balance accounting if we knew what was happening, but I am afraid that the efforts that my hon. Friends and I have had to make to uncover the process on which the Government are embarking have been so detailed and have required so many letters and parliamentary questions that they do not suggest much transparency.

One must ask what the tests are for moving something off balance. As far as I can see, the Government have been using the commercial, private sector test: statement of standard accounting practice 21, which is about whether a deal is a financial lease or an operating lease. If it is a financial lease, it is deemed another form of borrowing and therefore has to go on to the balance sheet, but if it is deemed an operating lease, it can go off balance.

That creates a few problems. In preparing my speech, I visited the Accounting Standards Board website and looked at statement of standard accounting practice 21. Interestingly, we are told that that practice is currently under review because it is felt that it is not precise enough and that in its own terms, there is some uncertainty about its effects. It is also suggested that transactions that are carried out by private sector firms, but are effectively the same as those in question, are being accounted for in different ways. The private sector admits that there is a problem, as does the Accounting Standards Board, but the Government do not seem worried. That should be a particular cause for concern, given the huge amounts involved.

Although statement of standard accounting practice 21 is not specific in its definition of operating and financial leases, I have spoken to practising accountants to find out what the basic practice is and what they do to make the decision. I am told that although it is not written down, in practice they say that if 90 per cent. of the capital value of an asset is recouped by the lessor out of the capital element of the lease payments over the lifetime of a contract, it is normally deemed to be a financing lease and should therefore count as borrowing. In January, my hon. Friend the Member for Truro and St. Austell asked the then Secretary of State about what proportion of PFI contracts would have been affected by the rule that is used by the private sector. He received the following reply:

"No such estimate has been made. The existing PFI contracts in the Departments are for the provision of a service in return for a unitary payment, the payment of which is dependent on satisfactory performance. The unitary payment is not broken down into constituent parts."—[Hansard, 18 January 2002; Vol. 378, c. 514W.]

That suggests that the Government are not operating the test under statement of standard accounting practice 21, because they do not know which elements of the unitary payment are capital and which are not. Although the Government have been telling us that they have been doing what the private sector do, in practice they have not. That should give us real cause for concern.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

The hon. Gentleman did a better job than I did of explaining the PFI in relation to standard 21. Standard 21 deals with PFI and what is used to hide liabilities in that context, but contingent liabilities are covered by a separate rule, FRS12, which is the doctrine of remoteness. Under that rule, roll-over cannot be used as a justification for believing that a liability may be remote.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London)

I am grateful to the hon. Gentleman. He anticipates me, as I was about to come to that point, specifically to pick up his example of Network Rail, where the remoteness test is the fig leaf that the Government are hiding behind.

The Secretary of State for Transport did not dwell on the matter in his statement of 27 June. He referred Members who asked him about contingent liabilities to the minute that he had just published, suggesting that we went to the Library, put towels round our heads, and studied it. I have not put a towel round my head, but I have indeed studied it. Interestingly, it reveals that in making their decision the Government seem to have leaned heavily on the advice of the Office for National Statistics. Paragraph 19 of the minute, which deals with non-statutory contingent liabilities, refers to the confirmation by the Office for National Statistics that

"Network Rail would not be classified as a public sector organisation and its expenditure and liabilities would not score against public sector expenditure and net debt."

So the Government are relying on the ONS.

On 28 June, the day after the statement and the publication of the minute, the Comptroller and Auditor General, the main watchdog that the House relies on, published a press release entitled "Comptroller and Auditor General's view on the appropriate accounting treatment for Network Rail". Hon. Members should look at it, because it suggests that he is in complete disagreement with the Office for National Statistics. I quote:

"Sir John Bourn, the Comptroller and Auditor General, has concluded that Network Rail should be accounted for as a subsidiary of the Strategic Rail Authority"— the point made by Chris Grayling

"and should be consolidated in the SRA's accounts. He makes this judgement in his capacity as statutory auditor of the SRA.

Sir John's view is that the Government's interest in Network Rail is akin to an equity shareholder's interest. The Government is effectively providing security for the providers of debt finance to Network Rail and is acting as a lender of last resort in the event of financial difficulties. Therefore the Government is the party bearing the risk that would normally be borne by equity capital."

That is pretty clear. It goes on:

"Financial reporting standards look at the substance of transactions as well as legal form and on that basis Sir John has advised that the assets and liabilities of Network Rail should be accounted for on the balance sheet of the SRA."

Sir John is therefore saying that, in substance, there is a liability to the public sector. The Government may use rules that the Office for National Statistics dreamed up for them, but they refuse to accept the point on substance, about which, as Sir John points out, we should be worried.

Photo of Michael Jack Michael Jack Conservative, Fylde 9:00 pm, 3rd July 2002

The hon. Gentleman is speaking with great clarity. Does he agree that our focus on rules may not enable us to examine reality? When Railtrack experienced problems, the Government believed that they were the only body that could sort out the liabilities that are associated with the railway system. If Network Rail ran into unforeseen problems and was in commercial difficulties, who would be there to pick up the pieces? The Government of the day.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London)

The right hon. Gentleman is right, and reaches the core of the debate. The political point is that hon. Members cannot be clear that the Government's finances are being soundly run. We are elected to make those judgments and ensure that the taxpayer is not being saddled with debts that will result in higher taxes or cuts in public expenditure down the line. That lies behind this welcome and important debate.

I was discussing the difference between the focus of the Comptroller and Auditor General on substance and that of the ONS on rules. A report in The Times on 29 June states:

"The Times has learnt that the Statistics Commission, the watchdog appointed by the Chancellor to police the national accounts, is to investigate the ONS's view and may seek to overturn it."

I have no confirmation of that quote; I am sure that The Times had its information on good authority.

The Government appear to be structuring Network Rail on guidance that the ONS has accepted. However, the ONS watchdog is examining the information and is worried about it. The National Audit Office has made a public statement to express its concern. Hon. Members should take serious note of that, and the Government should provide a proper, full debate in their time so that we can ensure that we know what is going on.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

The hon. Gentleman has been generous in giving way. His comments suggest a difference of opinion between various watchdog bodies. Against that background, how could the new clause be implemented, when such a range of opinion exists about the way in which figures can be drawn up?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London)

I am not sure whether I understand the hon. Gentleman. The new clause would help matters because it would flush out the issue so that it was in the public domain. That needs to be done. The issue needs greater public debate by Select Committees, including the Public Accounts Committee. If we are to put the future of rail, not simply an individual PFI, into the financial structure, we need greater clarity and transparency. I welcome the new clause because it would help to achieve that.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

The new clause appears to change the rules of accounting for Government liabilities to bring them in line with generally accepted UK accounting practice. I believe that the Comptroller and Auditor General is relying on that practice to state that Network Rail is Government controlled and the liabilities should therefore be on the Government's balance sheet.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London)

The hon. Gentleman is right. I believe that when the Statistics Commission examines the actions of the ONS, it will agree with him and the NAO. That is why the new clause is so welcome.

Let us consider the debate between the various bodies. The Government have been trying to say, "Well, the ONS has told us that that's okay." Yet the ONS is acting simply in an advisory capacity; it is not making decisions for the Government. It is up to the Government to decide, the ONS to advise and the NAO to audit the decisions. The Government cannot try to escape responsibility by relying on the words of others. The spirit of the Government's rules, to which they presumably try to keep when making such important decisions, is being broken.

Two key documents cover this matter. One is "Government Accounting", and chapter 26 is the relevant section, for those hon. Members who want to wade through that heavy document. Technical note 1 deals with accounting for PFI transactions. In the case of Network Rail, as was the case for London Underground, the whole framework seems to rest on the edifice of letters of comfort. What does chapter 26.3.1 of "Government Accounting" have to say about letters of comfort? It says:

"Departments should approach any request for a letter of comfort . . . with a strong predisposition to reject it."

If that is the basis for the Government's rules, under which they are setting up the new structure for the rail industry, we should be really worried. The Government's own rules say that they should not do this. The paragraph goes on:

"Proposals to issue a letter of comfort should therefore be exceptional".

They should not be the basis for the whole railway industry. The Government seem, effectively, to be breaking their own rules. They know exactly what they are doing, and they are trying to hide this.

My hon. Friend the Member for Truro and St. Austell anticipated the Government's thinking on this. In November last year, he asked a parliamentary question of the then Under-Secretary at the then Department for Transport, Local Government and the Regions. My hon. Friend asked:

"what representations he has received from potential financiers of the successor body to Railtrack for non-legally binding assurances from the Government on their support for Railtrack's successor body".

The answer was:

"The Government are not anticipating having to provide any non-legally binding assurances on their support. If contingent liabilities are required to be entered into, they will be notified to Parliament as part of the standard procedure."—[Hansard, 23 November 2001; Vol. 375, c. 497W.]

In other words, in November, the Government were not intending to go down that route, because they knew that it should be used only in exceptional circumstances. Unfortunately, they have been forced back because of their failure to structure the organisation properly.

Is it any wonder that people are concerned about this matter? The process is neither transparent nor clear. The Government are not keeping to their own rules and guidance, and Parliament's main watchdog is not happy. The Government must think again, and promote a much wider debate on this issue. If they do not, their whole financial framework for the public finances will be undermined. They must tell us why they favour these off balance sheet approaches.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

"Off balance sheet" can mean two different things, but, at least, if these matters are not part of the national balance sheet, the notes to the balance sheet should clearly record everything that is in place. That is what transparency is about.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London)

The hon. Gentleman is right, and if the Government do not do what he is asking, and do not respond to this kind of debate more fully, the Treasury will be acting as the Andersen to the Department for Transport's Enron.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

With great respect to the hon. Members who spoke earlier, this is the most important debate on Report. I appreciate that we need to move on, so I shall make just a few comments. I entirely agreed with the contribution of my hon. Friend Mr. Flight. I share his grave concerns about the Government's off balance sheet approach, and about the way in which, as a result, headline public expenditure is reduced for the purposes of the public accounts.

I might be able to pre-empt Rob Marris by saying that, while I shall not pledge to scrap PFI—in the highly unlikely event that I ever hold office in this place—I have always had grave reservations on the subject, going back to the early 1990s, when I practised as a lawyer in the City of London. The whole PFI project—now superseded by PPP and enhanced, specifically in the last five years, by a considerable number of projects that are now in train and will be for some years to come—was made highly attractive to public sector investors, the construction industry, and the vast number of advisers in the City of London, many of whom I represented, in a pastoral way, at least. Often there has been little evidence of a substantial risk being transferred. That is one of the concerns mentioned by both the previous contributors to the debate. The real test, and the cost to the taxpayer in the longer term, may become apparent only in the second decade of this century, as the projects come to an end.

My great fear is that we will find that many of the PFI projects have not been well structured and are not good value to the taxpayer. That may become evident, as I said, only in the second decade of the century, which may unfortunately also be a time when, for whatever reason, we are going through a recession. If, in those circumstances, we suddenly have significant expenditure from the public purse, it would be a nightmare.

I entirely agree with my hon. Friend the Member for Arundel and South Downs that we need greater transparency. I also agree with Mr. Davey that we must ensure that substance, rather than legal form, is the test of any transaction.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I hope that the hon. Gentleman will forgive me; I know that others want to speak. I hoped that I had pre-empted at least one of his questions.

I hope that the Minister will make a statement in relation to the new clause. It is unlikely that the clause will win through today, but it is at the core of the grave concerns that have been expressed about the manner in which the Government seek to present their finances. If Government finances and finances generally are to be trusted, it is crucial that they are accompanied by increasing transparency, security and trust. It is clear from the events of recent months around the world that we need a greater degree of trust. It is incumbent on the Government to ensure that the finances and accounts that they present to the country warrant full trust.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

We are fortunate to have the example of Network Rail to illustrate the arguments in favour of the new clause moved by my hon. Friend Mr. Flight. As someone who has practised as an accountant in the past, it is clear to me that the Government are exploiting the difference between accounting standards to create a transaction and a structure that get them off the hook in terms of accounting for the liabilities of Network Rail as a debt on their balance sheet.

As Mr. Davey observed, the Comptroller and Auditor General recognised that Network Rail was a subsidiary of the Strategic Rail Authority and should therefore be included on the SRA's balance sheet, and on the Government's balance sheet as a public body that should be counted as such. Of course, the Comptroller and Auditor General is not the first to identify that. There was an article in the Financial Times on 20 June, I believe, which reported that the SRA's own auditors, PricewaterhouseCoopers—the firm for which I used to work—had also identified that the debt should be on the SRA's balance sheet and therefore be counted as part of public sector borrowing, and that the Department for Transport had confirmed that.

Transactions are being deliberately structured to ensure that they are not counted as part of the public borrowing, by ensuring that the Office for National Statistics uses the European standards of accounts 1995. The art form of structuring transactions to meet the form of regulation, rather than ensuring the substance of the transaction that is being accounted, underpins the problems that we have witnessed in the US with Enron. We have seen a rules-driven approach trying to ensure that liabilities are kept off the balance sheet.

It is important for the Government to recognise that if we require, rightly, the accounts of private companies to present a true and fair view of their assets and liabilities, it is right that the Government's accounts show the very same thing. They should recognise that the definitions used in UK general accounting practices should be used to determine their own liabilities. It is the view of both the CAG and PricewaterhouseCoopers that the SRA has dominant control or influence over Network Rail. In its report, the ONS tried to justify this accounting treatment. The SRA is a strategic partner and funder of Network Rail, and its influence is clear. Cleverly structuring transactions so that the majority of board members are from the private sector is not the right way to go about accounting for a £9 billion liability.

We need to accept and recognise the reality of this transaction, which is that the SRA controls Network Rail through its funding and its role as a strategic partner. That is how the transaction is structured at the moment. However, we should also recognise, as the Government did last year, that if things go wrong they will pick up the bill. The Government will act as the lender of last resort, so it is clear that there is a real liability to the taxpayer. That may be seen to be contingent now, but it could well be actual, and the public accounts should recognise that fact.

This debate is well timed. The example of Network Rail is highly appropriate. The transaction has been structured in such a way as to focus on its form and to get the liability off the public sector balance sheet. That is not the way in which accounting should be done for these transactions. We should ensure that our public accounts are honest, transparent and open.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 9:15 pm, 3rd July 2002

It was interesting to listen to this debate, especially to the impassioned defence of the new clause by Mr. Flight. I was slightly surprised by the colourful and, dare I say it, slightly intemperate language that he used to describe Government accounting. I am sure that many hon. Members agree with me that the accounting issues that Enron and WorldCom have exposed in the United States are extremely serious and should be dealt with across the globe as well as in the US. They could have serious consequences for investor confidence and for ordinary people working in and around those companies. I do not think that such language is appropriate to describe genuine differences in the United Kingdom in the accounting treatment of various liabilities, some of which have to do with the PFI, but many of which have absolutely nothing to do with it or with the words of the new clause.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I hope that the Minister heard what my hon. Friend Mr. Hoban said. He is a qualified accountant, and he made the point that the approach that is being followed, which is to exploit the rules rather than the substance, is precisely what Enron off balance sheet accounting was about.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

That is absolutely not the case. I found much of this debate confused. When the hon. Gentleman considers the arguments as I respond to the debate, perhaps he will withdraw this completely unnecessary and muddled new clause.

The new clause would require the Government to follow generally accepted accounting practice in preparing the Red Book in addition to the code of fiscal stability. It would also require us to publish an aggregate figure for liabilities under the PFI. I intend to deal with each of those points in turn.

First, I should like to point out to hon. Members, especially Opposition Members, that the Government already follow GAAP. Spending data in the Red Book, including commitments under the PFI, come from Departments' accounts. We are one of the few Governments in the world to require by law Departments' accounts to follow GAAP.

I am also surprised that the hon. Gentleman has suddenly decided to retreat from the Bill that was introduced with bipartisan agreement—now the Government Resources and Accounts Act 2000—which was part of a process that started in 1994 and was described by the then Chancellor and the Conservative Government as the most important financial reform since Gladstone. I am delighted to see that Mr. Davey accepts that fact.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London)

May I say how much I agree with that statement? It was an extremely important reform. However, as Mr. Flight said, in Committee we debated the way in which the Government treat contingent liabilities. Neither Conservative nor Liberal Democrat Members were happy about the way in which contingent liabilities were being treated under resource accounting and budgeting. This is not a new point, therefore—we have been arguing this for some time.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I accept the point made in good faith by the hon. Gentleman, and will deal with the treatment of contingent liabilities under PFI projects in due course.

The Government Resources and Accounts Act 2000 was passed as a result of the transformation of public accounts under resource accounting and budgeting. Section 5(3)(b) provides that a Department's accounts must

"conform to generally accepted accounting practice subject to such adaptations as are necessary in the context of departmental accounts".

The adaptations are necessary because GAAP, desired in the main for the private sector, does not have to deal with issues such as military assets or nuclear decommissioning liabilities that we have to deal with in the public sector.

We have an independent statutory advisory board—the financial reporting advisory board—to advise us on the application of GAAP to the public sector. It was this Government who put that independent advisory board on a statutory basis, and we have never rejected its advice in the five years of its existence. We have a system for public sector financial reporting that is among the most advanced and transparent in the world. I believe that this part of the new clause is therefore superfluous, but it is also confused.

There is a wealth of data in the Red Book not covered by GAAP, because GAAP cannot say anything about unemployment assumptions, for example, or oil revenues. Instead, under the very Finance Act that the new clause seeks to amend, we subject changes to these assumptions to the audit by the independent National Audit Office. In practice, the new clause would require these numbers to conform to GAAP, which is silent on these issues.

The second part of the new clause would require the Government to publish an aggregate figure for all financial liabilities actual and contingent under the PFI. Again, I believe that that is misleading. First, the Opposition should look at table C19 of the latest Red Book, in which the Government published their estimated payments under the PFI going up to 2028, consistent with the audited data in Departments' accounts.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I readily acknowledge that the totals add up to £98 billion, as I mentioned.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The new clause wants a figure for possible liabilities, but PFI rarely gives rise to contingent liabilities. PFI deals are contracts for the provision of a service. We pay only for the services received. In the event of a default, the financiers are required to look for alternative service providers. If that fails, which would be very rare, termination proceedings would begin. That is the course of normal business—it does not give rise to a contingent liability in any proper sense of the term.

In a small number of specific cases involving public-private partnerships, we have provided for some sort of public formal guarantee to the financiers. One example is London Underground, where a letter of comfort sets out different sets of circumstances whereby the Government would underwrite some of the financiers' commitments. That letter was of course put before Parliament, as we are required to do and as happens in the normal course of events. The Government report to Parliament all such letters of comfort and all contingent liabilities that arise which account for more than £100,000.

Photo of Michael Jack Michael Jack Conservative, Fylde

If a PFI hospital deal ran into trouble and there was a gap between the originator of the project and the successor body taking over that required some degree of financing, would that not be a liability? If so, how do the Government account for it?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

If a genuine contingent liability exists, the Government publish that contingent liability as part of the supplementary statement to the Consolidated Fund accounts. Details by Department are available in the notes to Departments' audited accounts, which, again, are laid before the House. It is hard to see how the system could be any more transparent than it is at the moment.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

How on earth could the Minister say to me earlier that a £9 billion guarantee on Network Rail would not need to be disclosed as a contingent liability?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I will come to the treatment of Network Rail in a moment, but I should point out that Network Rail does not actually count as a PFI and, strictly speaking, is not within the terms of the debate. However, I shall be happy to deal with it in a moment.

Opposition Members have charged us with using the PFI and the PPP as a ruse to keep numbers off the balance sheet so that they do not show up in the Government's accounts. That is utterly untrue and complete nonsense. Balance sheet treatment in this country has to be confirmed by independent audit. Recent PFIs and PPPs—including the London Underground, prisons and the second Severn river crossing—are all on the balance sheet; the trend increasingly is to put them on the balance sheet. The issue of whether or not there is a transfer of risk is decided independently. We take independent advice from our advisory body, which we put on a statutory basis. We could not have a more transparent system.

Photo of Adam Price Adam Price Plaid Cymru, Carmarthen East and Dinefwr

Are the devolved Administrations free to enter into their own contingent liabilities, or must they seek Treasury approval?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I will have to check that point and write to the hon. Gentleman. If contingent liabilities arise in UK Departments, they have to be reported to Parliament, as is clear in the treatment of those liabilities in Departments' accounts.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I confess that I used to be a solicitor before entering this House, and not an accountant—[Hon. Members: "Oh!"] I am quite proud of that, although others may not be. There are differences of opinion, so could my hon. Friend explain what the Government understand by the term "contingent liability"? I confess that I do not exactly understand it. I thought I did before the debate began, but I am not sure now whether it has to do with the probability of a risk occurring, a possibility or a tiny possibility. Could my hon. Friend elucidate?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The word "contingent" has different meanings in different contexts and contingent liability for a PFI is slightly different from contingent liabilities arising in other contexts. We have consistent treatment, in which if a liability is possible or likely, it is reported to Parliament. If a liability is remote, it is treated differently, as the hon. Member for Arundel and South Downs has said.

The important thing is that we have a statutory independent financial reporting advisory board, and a framework within which the decisions are taken. In considering the case of Network Rail, we have an independent statistical body—the Office for National Statistics—which applies internationally recognised national accounting standards that are used to compare economies internationally.

Clearly, in the treatment of complex statistical issues other bodies and individuals will take different views in certain circumstances. That is precisely what has happened in the case of Network Rail. The National Audit Office made a different judgment about how liabilities arising should be treated. Do hon. Members really want me to say that we should go against the recommendation of the Office for National Statistics and use a system for Network Rail that does not apply internationally recognised accounting standards, and which treats the matter in a different way?

To reassure the House that we take this issue seriously, we have set up an independent statistics commission that examines our treatment of accounting and whether we treat these issues in an unbiased, objective and professional way. In due course, it will reach a conclusion on whether the treatment of Network Rail is the appropriate one. I suggest that we wait for the commission's review before jumping to a premature conclusion that is based on what Opposition Members have said today.

This country has one of the most transparent accounting frameworks in the world. Under this Government, we have taken an enormous step forward in the treatment of accounting. We have introduced resource accounting legislation and put the financial reporting advisory board, which advises us, on a statutory basis. As I said, we have also set up a statistics commission, which can take an independent view of our accounting and of our statistical processes and treatment. Hon. Members should give the Government some credit for taking this process forward. They should acknowledge the reforms introduced by this Government to ensure that our public sector financial statements are among the most sophisticated and transparent in the world. Those statements fully accord with generally accepted accounting practice and with some of the highest standards in the private or public sector anywhere in the world. On that basis, Opposition Members should withdraw the new clause.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 9:30 pm, 3rd July 2002

I was surprised at the Financial Secretary's sticking to the official line. The City of London and the markets are focusing on the growing totals of contingent liabilities and private finance initiative contracted payments. In particular, they are asking about defence—an area on which there is no information at all. It is well known that the Treasury went to great trouble to establish the Network Rail structure in such a way that the view could be expressed that borrowings would not count as a public sector liability.

The new clause is self-evidently a probing one; it is about substance and getting the substance right, rather than using rules for convenience. The Financial Secretary did not discuss the other side of the coin—the manifest rigging of the public sector comparator to justify PFI deals in the first place. On putting together the different pieces of the jigsaw, virtually all public sector capital investment is off balance sheet via PFIs or public-private partnerships. The precise substance of the Government's liability in relation to PPP and PFI deals is simply not known.

We want a transparent, whiter-than-white system that is more demanding than that applying to the private sector, which it manifestly is not. It is extremely difficult to get information, as Mr. Davey has discovered. The Government will pay the price if they do not clean up this area quickly.

Question put, That the clause be read a Second time:—

The House divided: Ayes 176, Noes 296.

Division number 289 Orders of the Day — Finance Bill — [1st Allotted Day] — New Clause 5 — Contingent liabilities under the Private Finance Initiative

Aye: 175 MPs

No: 296 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.