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Mr. Flight: 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.
Rob Marris (Wolverhampton, South-West): Will the hon. Gentleman give way?
Mr. Flight: 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
Chris Grayling: 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.
Mr. Flight: 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.
Mr. Edward Davey: 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"?
Mr. Flight: 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."
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.
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