Select Committee on Regulatory Reform Minutes of Evidence

Examination of Witnesses(Questions 60-79)



Mrs Curtis-Thomas

  60. You claim that these proposals will improve conditions for tenants. Do you think it is going to improve conditions for tenants with more money in housing stock? How does your proposal bring about improvements for tenants?
  (Mr McNulty) The upshot of this particular proposal is if all these contracts come to fruition 30,000 more homes will be up to and beyond the decent home standard. It is not a claim, it is a matter of fact if they go through. This needs to be seen, as Mr White said earlier, in the context of the four specific arrangements we have for public housing and it is but one aspect of that. I could go into a full routine about how housing capital has increased by 2.5 times over the last number of years and how we have £1.5 billion more now to spend on housing that Mr Prescott is going to talk about further when he makes his statement, but in the broader context of public housing this is a key element especially for the 30,000 tenants involved. I think our record is currently second to none and growing.

  61. That money would be there irrespective of this PFI. It is not conditional on this PFI. So why does this PFI make a difference in that regard?
  (Mr McNulty) Because for 30,000 people it will mean their homes come up to a decent standard.

  62. Are you saying, Minister, and forgive me for my ignorance in this matter, that that money would not be available unless the PFI is there? My understanding is that the money is there in the housing budget.
  (Mr Green) It is a means of drawing in private sector—

  63. But it is not the only means, is it?
  (Mr Green) No.

  64. The question I asked you is how does this PFI give them any more benefit when they could receive that benefit without it?
  (Mr McNulty) Will these 11 local authorities bring these 30,000 homes up to a standard of decency without the PFI route? I suspect the answer is no.

  65. That is a very different answer. That is using the PFI to induce a reaction from the local authorities to get them to do something and I suggest this is in view of the measures that you could choose to do that.
  (Mr Green) No, it is not. We are trying to give authorities more options for how they bring about investment into their housing. It is giving more flexibility.

  66. So it is about flexibility?
  (Mr McNulty) And choice.

Mr Bercow

  67. Minister, good morning to you. How can you assess the risks associated with the delegation of housing management without simultaneously assessing the risks of PFI? Does not the bland statement contained in the explanatory document, annex A, paragraph b, ". . . no risks are associated with the changes being made", demonstrate a failure to assess properly the implications of these proposals?
  (Mr McNulty) I do not think so because I do not think it is a blind statement, it is accurate. In the context of the very narrow and specific changes that this Order is about there are no lesser or greater risks. In the wider context of a risk transfer in terms of the specific PFI contracts, they are part of that wider process and we all know that risk transfer is a key part of that process. Within the narrower confines of the changes to Section 27 and the shift to delegate further housing management, we do believe as a Department there are no further risks other than what there are in the contracts and that is in the contracts that have been drawn wider than specifically resolving issues around these specific contracts.

  68. In a sense you are distinguishing between different forms of risk, risk in the general sense and risk in the rather specific and financial sense that we associate with PFI and that is a perfectly legitimate distinction for you to make. Given that we are talking about a greater delegation and given that you are the Minister on behalf of the Government recommending this change through the reform process being made, are you yourself satisfied with the specific provisions in terms of the potential for financial penalties for poor performance in relation to these contracts? And if you are about to say you are I feel sure that you will want to give us at least a brief illustration of what those specific financial penalties are in respect of contracts.
  (Mr McNulty) I cannot give you the specific boundaries for the specific contracts. In the case of north-east Derbyshire and Manchester, you may think I carry round the contracts in my head but I am afraid I do not. There will be specific penalties in there for failure to deliver. You are absolutely right in the sense that my concern and the Committee's concern is specifically in terms of the risks associated with the delegation of house management and not a fuller assessment of the risk involved with the PFI contract and in that context and in the wider context about protection we spoke about earlier, the Audit Commission regime and this not being some mystical contract that is outwith the entire internal and external regime and the auditing and financial regulatory regimes that local authorities are obliged to operate within. With all those caveats I would say I am satisfied that the risks involved with the delegation of housing management are as we say, there are no real risks and it is not for me, very very happily in terms of my time and efforts, to prejudge the details of each and every individual PFI contract.


  69. What would happen if a PFI contract collapsed?
  (Mr McNulty) Hopefully to my left or right someone else will jump in shortly. What would happen is exactly the same as would happen in any case of a contract collapsing in terms of contracts let by local authorities, there will be severe penalties involved and the local authority would have to pick up the pieces.
  (Mr Green) In the event of a possible termination then the banks have a right to bring in new contractors to try and resolve the situation. In the event of a termination because of poor performance, there are compensation payments to be made to the authority[6].

Mr O'Brien

  70. On the question of replacing the windows, what happens to the tenants' interests? Do we wait until the new contracts are signed? What happens to the tenants' contracts?
  (Mr McNulty) The delegation would refer back to the local authority and they would continue the work.

  71. So they will have to bring in new contractors?
  (Mr McNulty) Or do it themselves, yes.

  72. If there is a public works department.
  (Mr McNulty) We are not talking about huge projects here.

  73. If we are talking about three or four houses and tenants who have their windows out at this time of the year maybe, that is not unusual and suddenly the contractor says I cannot continue and we have tenants left in this situation, what happens to their interests?
  (Mr McNulty) The council will act in their best interests and get the thing resolved as soon as possible. It is not an unfamiliar tale even with private contractors or, in one or two cases, with DLOs.

  74. This is new.
  (Mr McNulty) But the kind of contract you are talking about going belly up and the tenants being the ones most directly affected because there is work on-going, the council would have to act in an urgent capacity to get that resolved ahead of resolving the issue of who the new contractor is, but that sort of happened as well under the CCT regime.

Mr Love

  75. I apologise for the fact that I am becoming a little more confused as we go on. As I understand it all these PFIs have been introduced to arm's length management organisations. As I understand it the decision has been taken that only those housing managers who are considered to be three star or whatever is the current definition are allowed to be arm's length management organisations, so we have some security in that although it might not be very good it is the best of local Government housing managers that are going into this process. I would ask you to confirm how that is being done. The second thing is, as I understand it under the current definition only certain people can act as agents of the local authority. That limits the amount of risk that can be transferred through a PFI scheme. Can you confirm that without the changes that we are talking about here there will be some curb on the ability of an arm's length management organisation to transfer the risk to the other organisation involved in the PFI? Finally, is it housing associations acting as the PFI partner in these situations or is it other private sector organisations, i.e. building contractors or whoever? Perhaps you could give us some indication.
  (Mr Green) These are two separate things. PFI housing projects are separate from ALMOs, they are two distinct forms of investment. Sorry, my mind has gone.
  (Mr McNulty) While your mind is coming back let me go back to Andy's first point. I am sorry if there is some confusion. Whilst the changes to this Order can potentially impact on Brian's three privatisation routes, PFI, stock transfer[7] and ALMOs, the contracts that we are talking about are PFI contracts that are coming to fruition and need this particular aspect to come to what we think is the most satisfactory solution. At the moment no ALMO is anticipating going down this route. We are simply saying that if it is drawn broad enough they may decide in the future to do that subcontracting. On your point about how housing departments apply to become ALMOs, it was only those who had the best value inspections who got three stars. The Chancellor in the last Pre-Budget Report or the last Budget knocked that down to two stars, so it is still the very best of local Government, but at two stars it will run at a three star level. ALMOs may use this, but at the moment the first likely use of this is PFIs and in that context all we said before about protection from the old section 27 to this remain, what I said about the local Government auditing regime remains, and hopefully by this stage Mr Green's brain is engaged again and he can pick up the other points.

  (Mr Green) As the Minister says, we do not anticipate ALMOs making use of these changes. We are certainly not aware of any housing contractors being involved in ALMOs at the moment. Are there any other points?

  76. Just the point about risk transfer under the PFI. Is that in any way constrained by the current legislation and is the change that we are talking about here in order to allow you to transfer more risk under the PFI?
  (Mr Green) It makes no difference. The change from agency to the two paragraphs that we intend to insert makes no change in that respect.
  (Mr McNulty) In terms of risk, they do give that dimension of flexibility.
  (Ms Millington) I think there could be a slight problem with the risk transfer with the agency as agent and it is preferable not to use the words "as agent".

  Chairman: Mr Bennett is going to pursue that item in a few minutes. We will leave that.

Chris Mole

  77. Presumably as part of the risk assessment the examination would be that there would be some form of bonding for the contractor that would require that bond to pay for the additional costs that the local authority would incur for the emergency works of the sort Mr O'Brien was talking about?
  (Mr Green) Yes. In the current projects we are looking at the private sector to do that and to take out insurance as well.

  Chris Mole: Thank you.

Andrew Bennett

  78. Can I go on to this question about taking out the phrase "as agent". Can you just explain to me what is going to happen as a result of subsections 13 and 14 of the proposed new section 27?
  (Mr McNulty) Given that sounds like a legal question the lawyers can have a look at it.
  (Ms Millington) Could you just repeat your question again, sorry?

  79. Can you explain what the real significance of taking the words "as agent" out is?
  (Ms Millington) The purpose of the proposed amendments of section 27 is to enable the local housing authority to make a management agreement giving another person the ability to exercise certain housing management functions. The purpose of the amendment is to enable that person to make a sub-agreement with another person to carry out some or all of those functions. If it is an agency, "as agent" implies that a lot remains with the principal under the general law of agencies. So it is clearer to remove the words "as agent" and to reflect what was in the 1994 Deregulation and Contracting Out Act as a more modern provision and to provide specifically what the relationship between the parties to the management agreement is and that is done in subsection 13. So essentially the local housing authority remains liable to third parties and subsection 14 states that that does not apply for the purposes of the management agreement or for the purposes of criminal proceedings. It enables a manager to make arrangements between the various management agencies without having to fit in the framework of agency and principal and agent.

6   The statement is not strictly correct since there may be a payment to the contractor in these circumstances reflecting their investment in the project to-date. Procedures following termination are complex and governed by HM Treasury guidance, `Standardisation of PFI Contracts', chapter 20. The aim is to ensure `That the Authority is no worse off as a result of termination . . .' and that `it does not give the Authority a windfall gain . . .'. In addition, the contractor is likely to have suffered heavy penalties leading up to termination. Back

7   Refer back to page 7. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2003
Prepared 24 January 2003