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Rob Marris: 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?
Mr. Flight: 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 the hon. Member for Dumbarton (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.
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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.
Mr. Edward Davey: I welcome the new clause and congratulate the hon. Member for Arundel and South Downs (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 the Member for Truro and St. Austell (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."
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.
Rob Marris: 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?
Mr. Davey: 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."—[Official Report, 18 January 2002; Vol. 378, c. 514W.]
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