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20 Feb 2007 : Column 67WH—continued

Just over two years ago, the Office for National Statistics received advice from the Department for Transport that the Government’s support for Network Rail’s borrowing was a “contingent liability of government” and was classified as such in the national accounts. Nevertheless, the Government have guaranteed the debt, and the fact that the company, which is limited by guarantee and has almost £20 billion of debt, is still regarded as having an AAA credit rating gives rise to the presumption that the market, at least, recognises that those debts are effectively owed by the Government.
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If we were to put substance before form, therefore, they should be on the public balance sheet.

One reason why criticism of PFI has been so muted is that, over the past decade, private sector operators, contractors, consultants, lawyers and accountants have made hay as advisers in a process that has proved extremely lucrative for them. It is incontrovertible that the explosion in PFI projects will vary from bad to appallingly bad value for the taxpayer, although as a means of avoiding up-front Government debt, they have also allowed an almost unprecedented level of school and hospital building.

However, we need to stand back and face some harsh political facts. In the same way that privatisation under Conservative Governments in the 1980s and 1990s proved irreversible—even the present Government’s pledge to reverse rail privatisation in the final year of the Conservative Administration had to be quietly dropped—so too will PFI, even though the positions will be reversed. In many ways, from the Labour party’s point of view, that is the great genius of the vast expansion of such projects that has taken place since it came to office. The cost that the taxpayer will have to meet in the future for PFI projects that are agreed now—the agreements have been reached, and the projects have been or are being carried out, but they will have to paid for in the decades ahead—will amount to an ongoing additional burden on public expenditure over the next 25 years or so. However, the political fallout of trying to unravel PFI projects in essential services means that the room for manoeuvre for any future Conservative Government in public expenditure and taxation will be considerably limited.

This country’s economic fundamentals do not look so smart going forward, and we are simply kidding ourselves about the true costs of accounting in the future. Ironically, the Chancellor of the Exchequer recognised that expressly in his early justification for his golden rule that the Government will borrow over the economic cycle only to invest and not to fund current spending. He stated:

I have spoken in the House before about the principle of generational conflict, and nowhere is it more pronounced than in the area of pensions reform. Unfunded public pension liabilities mean that tomorrow’s taxpayers will be obliged to fund today’s ever-larger deficits. Alternatively, those who have made their pension contributions in good faith will see their entitlement collapse. Pensions payments are another example of deferred expenditure or, to put it another way, Government borrowing.

Another element of the unsung extent of Government borrowing is in the field of public pensions. The Government have claimed that their unfunded public pensions liability amounted to £460 billion as of 31 March 2004. However, that figure was calculated on the basis of a discount rate of 3.5 per cent., which the Government Actuary’s Department has now revised downwards to 2.8 per cent. In answer to parliamentary questions on the matter, the Treasury accepts that the total liability for unfunded public pensions amounts to
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£650 billion and that the unfunded element of local government pension schemes amounts to an additional £70 billion.

Once more, there is no easy way out. In essence, today’s pensioners and those retiring in the near future will be able to rely on considerably more generous benefits than those just entering the workplace, who will pay for those liabilities. Given that there are twice as many voters over 55 as there are under 35, and that they are twice as likely to vote, it is unrealistic, to put it mildly, to expect anyone in the political arena—on either side of the political divide—to stand up and state some fairly bald facts on this matter.

Nevertheless, despite orchestrated campaigns by today’s pensioner groups, the fact is that today’s pensioners have never had it so good. The reason why many pensioners in their 70s and 80s believe that they have so little is that they have failed to pay anything like enough into the system to warrant what they now expect to receive. I am sad to say that such unrealistic expectations have been created, and are periodically raised, by politicians across the spectrum. That somewhat unpalatable message plays no part in the policy prospectus of any major political party, perhaps for rather obvious reasons. However, it is clear that such a state of affairs cannot continue indefinitely. The unspoken message of the political class to anyone under 30 is that their generation will need not only to foot the bill for the unfunded cost of pensions for those who are older, but significantly to lower their own financial expectations when the time comes for them to retire and benefit in some way from public pensions.

We run the risk of quite serious social unrest in the decades ahead, as the evidence of that appalling generational pyramid sales scam becomes evident. There is no doubt that future Government spending will have to be much higher, not least because there will be ever fewer people in the work force to subsidise an ever larger number of dependants, while the costs of the national health service, for example, will continue to rise exponentially as the population ages.

I fear that off-balance-sheet financing is delaying some of the tough decisions that need to be made about the future of public spending. It also delays our debate about the way in which we will need to manage public services in the future to deliver equity and social cohesion, as well as to provide for the vulnerable and voiceless in our society. One of the more depressing prospects in the years ahead is that my generation will be seen as having had it easy, and I fear that this era will be seen as the best of times. We are consuming what we believe we are entitled to without regard to the costs, and future generations will have to meet the liabilities for that short-sighted and selfish approach.

1.47 pm

The Economic Secretary to the Treasury (Ed Balls): It is a pleasure to serve under your chairmanship once again, Mr. Pope, although I think that this is the first time that I have done so in Westminster Hall. I congratulate the hon. Member for Cities of London and Westminster (Mr. Field) on securing the debate. He does a great deal of work in the City of London in pursuing the interests of the companies that operate there, and I have had the opportunity to discuss such
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issues with him many times. I also appreciate the fact that his comments were sincerely made, and I should like to respond to them.

The hon. Gentleman was rather brave to make a Macmillanesque reference to today’s pensioners never having had it so good. I agree that no one wants to be in the position of mortgaging the future or stacking up liabilities that future generations will be unable to afford. However, I hope to reassure him that we are not being cavalier in our outlook, short-termist or selfish and that the fiscal framework that we are operating and the decisions that we have made within it, alongside our commitment to best international practice in accounting standards, mean that we have kept a firm grip on the national debt. At the same time, we have put in place investment resources that will deliver returns for the current and future generations.

The hon. Gentleman talked about our inheritance, and it is true that we inherited a PFI programme in 1997. Its operation was characterised by a rather blanket approach at the time and required some refocusing by the incoming Government. We also inherited a commitment to adopting international practice in the scoring of liabilities and assets on the public balance sheet, and we have continued to honour that commitment, as well as developing it as international best practice has changed. In addition, we inherited a high level of national debt; it was not the highest of any country’s, but it was higher than we felt was comfortable. Finally, we inherited a public investment position that had led to substantial backlogs in investment in our schools, hospitals and transport infrastructure.

The fiscal regime that we put in place—the golden rule that the hon. Gentleman referred to, and our commitment to borrowing on the balance sheet within a ceiling for overall net debt—has allowed a substantial increase in public spending on public investment. The majority of the advances in investment in health, education and transport have occurred on the public balance sheet. That is where the majority of our investment in public services has gone.

At the same time, the hon. Gentleman is right that we have reformed and expanded our approach to using the private finance initiative. More than 185 health facilities have been built or refurbished under PFI; there have been 230 new or refurbished schools, 43 new transport projects, nine waste and water projects, and 180 other projects in sectors including defence, prisons, housing and leisure. We have used the PFI where we have judged that we could achieve a better contractual relationship—a better partnership—between the public and private sectors; we have done so, to use the best skills and techniques of the private sector in management and cost control, so that we could provide better public services.

There is one fact that explains why, for me and for the Treasury, the experience of PFI has been positive: nearly 90 per cent. of major PFI investment projects that have been completed were completed on time. In every case since 1997, the public sector paid what it set out to pay, whereas historically, using traditional procurement, there was a tendency for three quarters of projects provided by the private sector to the public sector to be late and for three quarters to be over budget. We have managed, through PFI, to bind the private sector into a better contractual relationship
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with the public sector, while harnessing its innovation and discipline to modernise public services. Those have been the benefits of PFI.

The intention and motivation for the Government in relation to PFI have never been to move public spending off balance sheet. As I said, the great majority of the expansion in investment in public services has been on balance sheet; but where we judged, for particularly long-term and large projects, that the traditional procurement mechanisms entailed a risk of being late or over budget, PFI provided a much better way of getting value for money for the public sector.

With small projects or IT projects, for which it is hard to specify in advance, in a contract, the nature of the procurement, we have withdrawn from the use of PFI. We announced that in a document a couple of years ago. In such areas, it was difficult to specify PFI. When projects are large and can be specified, and when procurement traditionally has been expensive and late, PFI has in my experience given much better value for money for the public sector. However, at all times, the decision on whether a PFI project is on or off balance sheet has not been made by the Government; that decision is made independently of Government.

The accounting judgment is taken by the relevant independent audit body, the National Audit Office, the Audit Commission or the audit bodies for the devolved Administrations. Those auditors use the same independent accounting standards that the private sector uses, which are consistent with UK generally accepted accounting practice. Where the independent accountants judge the deal to be off the public sector balance sheet because the risk is genuinely being transferred, it seems to me that it would be wrong to second-guess their view and score it on balance sheet anyway, exactly as it would be wrong for us to override the judgment of independent auditors and accountants who judged that the PFI project should be dealt with on balance sheet.

As the hon. Gentleman will know, about half of all PFI projects have been scored on to the public balance sheet—including the tube and most, or probably all, of the prison building programme, because the risk, as he said, is with the public sector. In other areas, the risk has been transferred, but even where the risk is still with the Government and the project is therefore scored on balance sheet, we judge that there is value for money for the public sector, because of the improvements in quality, timeliness and affordability, and because of the innovation that can be had from a proper partnership between public and private sector in continuing with PFI. We are advised by an independent advisory body that studies such issues all the time; we try to make sure that we keep in touch with best international practice.

On the PFI rules that we use, the hon. Gentleman talked about the unitary payment, and we correctly classify those payments on to the balance sheet, depending on the advice of accountants. Indeed, we do so exactly in line with the practice of private sector accountants. The Audit Commission makes the judgments on local authority deals. When there is no genuine risk transfer or it turns out that we are not providing value for money, the Government have been
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willing to act. In one contract, involving the Teddington science laboratory, the contractor failed to deliver through the PFI project and the Government terminated the deal, so it is not true that we have not been willing to act when the private sector did not deliver. However, in the majority of cases, the PFI process has given value for money even when it has been scored on to the public balance sheet.

The hon. Gentleman quoted two cases: one was that of London and Continental Railways, in which at every stage the Government provided full information to the Office for National Statistics and the National Audit Office. We acted in good faith and told the ONS all the relevant facts in 1998. The Department for Transport has always accounted for its relationship in a correct and transparent manner, and the hon. Gentleman is right that the ONS re-examined the case in the light of evolving international accounting practice and changed its view on the scoring. That is perfectly appropriate; it was for the ONS, not the Government, to decide that. We have never tried to second-guess those judgments.

Mr. Field: How did the Office for National Statistics become involved in that sort of process: through its own work in the matter, or because central Government asked whether various PFI projects should appear on balance sheet? I think that that question goes to transparency. I accept that things of that kind are not entirely straightforward, because we live in a complicated financial world where ever-more financial instruments are being created. It is with that in mind that we need to know how independent the judgment of the ONS is about the example in question and many other projects that Opposition Members think should be going on balance sheet.

Ed Balls: I challenge the hon. Gentleman to produce evidence to suggest that the Office for National Statistics has not been allowed to act in a free and independent way in such matters. He also raised the issue of Network Rail, which was a body set up at arm’s length from the Government in the aftermath of the Railtrack difficulties. The judgment about where Network Rail should score was a matter for the ONS in its capacity as an operationally independent agency. It judged it to be a private sector company, and in reaching that decision, it used internationally agreed standards for producing national accounts—the European system of accounts. It sought and received advice from the EU statistical agency, EUROSTAT. That was a matter for the ONS, not for the Government. The same was true in the case of LCR, when a different view was taken. In each year in the national accounts, decisions about the scoring of PFI are made not by the Treasury but by the ONS. It is its responsibility to produce the accounts. If they, or international practice, change, the Government will need to respond, but we use the best practice of the time.

The hon. Gentleman also mentioned public sector pensions. Again, the scoring of those liabilities is long established on the basis of international best practice, and the Government’s position has not changed from the pre-1997 position. I urge the hon. Gentleman not to be fooled into believing in an off-balance-sheet ruse. As I said, the majority of projects are going on to the
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Government balance sheet. What we are talking about is an effective partnership between the public and private sectors, to secure the best value for money in the procurement process. Where we can demonstrate that that can be provided, PFI is the right answer. Where it does not give value for money, we should not go down
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the PFI route. In my judgment, that is independent of the scoring or balance-sheet decision, which is a matter for international advice and best practice.

It being Two o’clock, the motion for the Adjournment of the sitting lapsed, without Question put.


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