Examination of Witnesses(Questions 60-79)
MR TONY
MCNULTY
MP, MR DAVID
GREEN AND
MS SARAH
MILLINGTON
WEDNESDAY 8 JANUARY 2003
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.
Chairman
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
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