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Mr. Flight: 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.

Mr. Davey: 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 the hon. Member for Epsom and Ewell (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

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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.

9 pm

Mr. Michael Jack (Fylde): 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.

Mr. Davey: 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.

Rob Marris: 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?

Mr. Davey: 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

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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.

Mr. Hoban: 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.

Mr. Davey: 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."—[Official Report, 23 November 2001; Vol. 375, c. 497W.]

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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.

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