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7.40 pm
The Financial Secretary to the Treasury (Jane Kennedy): It is pleasure to follow the hon. Member for Fareham (Mr. Hoban), and I agree with his opening comments on the quality of the debate; the tone in which it has been conducted has been exemplary. I compliment my right hon. Friend the Member for West Dunbartonshire (John McFall) on introducing the debate, and I compliment the work of his Select Committee on its report, a large part of which we acknowledge has huge merit. The Select Committee clearly cherishes the report, as witnessed by the number of the members of the Committee who have taken part in the debate this evening. Even the hon. Member for Ludlow (Mr. Dunne) has stayed throughout, despite struggling with his voice.
I will try to respond in a way that does the debate justice, as is always the case with debate of this nature. If any hon. Member is looking over my shoulder, they should not be surprised to see a great deal of red on my prepared notes. I will try to deal with a number of points, but I hope that hon. Members who have raised issues that have been well rehearsed will forgive me for perhaps focusing on some of the other issues that the Select Committee report has quite properly raised, to which it is important that I give an early response or an indication of what our response might be.
Just for a moment or two, I shall set out my version of the background. A number of Members have offered their versions and some interesting analysis of what happened and why the circumstances came about. As hon. Members will know, not least because of the detailed description of last summer’s events in the Select Committee’s report, the emergence of problems in the American sub-prime mortgage market led to banks either lending money to one another at much higher rates than previously or not doing so at all. That, in turn, created severe problems for Northern Rock in accessing the financing that its business model relied on, and it had no alternative strategy to cope with those problems.
To prevent Northern Rock from going under, which would have risked instability spreading and serious consequences for the UK’s financial system—something that hon. Members on both sides of the House generally accept—and to prevent risks to the wider economy, the Government authorised the Bank of England to provide special liquidity support, and the Government arrangements for retail and wholesale depositors were also put in place.
The Select Committee’s report criticises the timing of those guarantee arrangements, but as the Chancellor made clear in his evidence to the Committee, it was not at all clear that an earlier announcement would have stopped the queues forming over the weekend. It was also important to be clear about exactly what was being guaranteed and to make an announcement once the markets had closed.
Since those events in September, the Government have explored every option to resolve the situation with regard to Northern Rock and to meet the three principles that we have consistently set out: protecting the taxpayer, protecting depositors and maintaining financial stability.
Mr. Hands: May I ask the Financial Secretary a quick question about Northern Rock Guernsey? Its prospectus on its website says:
“Northern Rock (Guernsey)...does not accept applications from residents of the African continent with the exception of applications from residents of Egypt, South Africa and Zimbabwe”.
What can she tell us about the offshore banking deposits in Northern Rock taken from residents of Zimbabwe?
Jane Kennedy: I acknowledged the expertise that the hon. Gentleman brings to the debate. [ Interruption. ] If he will allow me to continue and not just shout during my response to his remarks, he might hear one or two things that he might welcome. He has a very interesting analysis of what happened and he supports much, although not all, of the thrust of the Select Committee’s report, but I hope that he will accept that that sort of detail is a matter for Northern Rock. We must leave such issues to the management of Northern Rock to take forward, because our arrangements for Northern Rock have been clearly made so that it is at arm’s length. Those will be matters for the leadership to respond to in detail.
Jane Kennedy: I feel a little bit like my hon. Friend the Member for Leeds, East (Mr. Mudie), who feared that he might be attacked from all sides.
Mr. Dunne: The Financial Secretary referred earlier to the discussions with the EU competition authorities. Presumably, the fact that Northern Rock is currently providing above-market deposit rates will be of interest to the EU competition authorities.
Jane Kennedy: I could have made a point about that in response to the hon. Member for Hammersmith and Fulham (Mr. Hands), but we have covered such areas many times before— [ Interruption ]—not in the detail that he mentioned, but I hope that the hon. Member for Ludlow will accept all the issues raised in today’s debate and the detail that the Select Committee has included in its report will be looked at very carefully by the Government. We are engaged in a detailed consultation. Opposition Members in particular have criticised us for not doing more, but I draw to their attention—they may have failed to see it—the very significant response that has been included in a well-received consultation document that responds in many respects, although not all, to some of the Select Committee’s recommendations. It is entirely appropriate that we now learn the lessons of the experience of last summer and the decisions and circumstances that led us to nationalise Northern Rock.
The decision to nationalise was taken some weeks after the Select Committee had completed its work, but none the less, we can take into account what then happened and look at the detail of its report and the Government’s response to date with, I hope, a positive outlook.
My right hon. Friend the Member for West Dunbartonshire said that there was too much political involvement in Government proposals for a Cobra-style arrangement during the crisis. A number of hon. Members raised that issue. The Government are consulting on how such arrangements should operate in practice and which institution is involved in which circumstances. Beyond that, we agree with my right hon. Friend that the Chancellor should have the final say on any decision that involves money and that the Bank of England is responsible for the provision of general liquidity. The House may want to know that the memorandum of understanding between the three authorities will also be revised to clarify responsibilities for decisions taken in a crisis.
My right hon. Friend the Member for West Dunbartonshire—again, along with other Members—questioned whether the FSA failed in its regulation of liquidity risk. Primary responsibility for liquidity risk management by banks lies with banks’ boards and management—that is a difficult sentence to get out—and that theme runs through our whole response to this situation. The FSA is reviewing its regulation of liquidity risk in the light of the recent events to learn lessons from market turbulence. The FSA published a discussion paper in December that sets out preliminary ideas for reform. It had a very good response to that document, and it is considering further how to respond to those responses. There is an ongoing debate about how it should respond.
A number of hon. Members asked about international work. The FSA is considering responses to the discussion paper and in the context of ongoing international work on liquidity by the Basel Committee, which a number of hon. Members have mentioned. The FSA expects to publish more definitive proposals in the summer of 2008.
My right hon. Friend also said that the FSA should work more closely with the boards of banks to identify issues early and take corrective action quickly. As set out in the tripartite consultation to which I have referred, the FSA intends to consult on new rules to require banks to produce additional evidence to the FSA at short notice, including strategies for correcting any problem identified.
My right hon. Friend the Member for Norwich, South (Mr. Clarke), who has not rejoined us, argued very passionately and persuasively—as did a number of other Members, including most lately the hon. Members for Ludlow and for Fareham—for a new deputy governor and head of financial stability. All those Members will have seen that we proposed changes to the governance arrangements relating to the Court of the Bank of England to enhance its effectiveness, particularly in respect of financial stability. We also propose establishing a statutory role for the Bank of England again in respect of financial stability. These are ongoing consultations, and we do not seek to be prescriptive. We will listen to the representations in the ongoing debate around exactly what the new structure should be. The Government are thus taking these issues very seriously. As hon. Members will know, the Treasury, along with other tripartite authorities, published that discussion paper.
Let me deal now with the Government’s proposals for banking reform, which several Members asked about.
We are proposing reform around five core objectives and those proposals build on examples of best practice around the world, many of which are highlighted in the Treasury Committee’s report. The hon. Member for Hammersmith and Fulham and the right hon. Member for Hitchin and Harpenden (Mr. Lilley) raised questions about international precedence, and the hon. Member for Twickenham (Dr. Cable) proposed the US model, about whose adoption the hon. Member for Hammersmith and Fulham advised caution. It is true that most industrialised countries have a regime for banks either defined in law—in the US and Japan, for example—or created by specific exemptions carved out for financial institutions from the general insolvency law, as in France and Italy. At that point I was particularly taken with the suggestion by my hon. Friend the Member for Leeds, East that we read the book, “A Random Walk Down Wall Street” if we have not already done so; I shall see whether there is a copy in the Library. I look forward to reading it.
The first objective of our reforms is to strengthen the stability and resilience of the financial system. That covers similar ground to the more recent Treasury Committee report on financial stability and transparency, which we also welcome—in relation to the operation of the securitisation markets, for example.
The second objective is to reduce the likelihood of banks’ failing. That includes new powers for the Financial Services Authority to gather and share early information and to make improvements to the framework for the provision of liquidity assistance. I am very conscious that another debate is about to take place, Mr. Deputy Speaker, so I offer my regrets if I do not manage to cover all the issues that have been raised. They are all important, but I will try to cover those that I think the House would most like me to deal with.
A number of Members attacked, although some defended, the role of credit rating agencies. The current tripartite consultation to which I have referred identifies a number of causes for concern about the role of credit rating agencies, including conflicts of interest, the information content of ratings and over-reliance on ratings. We are supporting international work by the Financial Stability Forum and the European Union to look further into the role of rating agencies in financial markets. The Treasury, the Bank of England and the FSA are fully involved in those discussions, so I hope that that reassures not only those Members who had concerns about credit rating agencies but those who wanted to see us work more in an international context.
My hon. Friend the Member for West Bromwich, West (Mr. Bailey) asked a very good question: if the FSA did not use its powers, what was the point of giving it any more? That is a paraphrase of what he
said. The FSA is reviewing its internal supervisory systems in the light of Northern Rock and it will publish some conclusions in the spring. My hon. Friend also asked why we do not treat building societies in the same way as banks. The authorities appreciate that building societies are fundamentally different from retail banks; however, they must mitigate the risk of a building society failing, so they are consulting on which parts of the special resolution regime should be applied to building societies. We propose that liquidity assistance provided by the Bank of England should be exempt from the calculation of the proportion of building society funding which arises from wholesale funding. That change, would remove an impediment to a building society being able to borrow from the Bank of England and would ensure that building societies are treated in a similar way to banks for these purposes.
I am very much up against the clock at this stage, but I cannot resist responding to my right hon. and dear Friend the Member for Holborn and St. Pancras (Frank Dobson), whose rumbustious contribution raised several always very interesting points. I would like to reassure him on one particular point—that interventions using special resolution tools, which interfered with shareholders’ property rights, would be to secure the wider public interest in financial stability, the continuity of banking services and the protection of depositors. Very careful consideration would need to be given as to whether compensatable value remained in a bank where such interventions were necessary. In other words, shareholders are a long way down the list of those who will be considered for compensation.
This has been a very interesting debate, to which I have been privileged to listen and to be invited to respond. We have a wide-ranging set of proposals and the Government are committed to legislating on them as soon as possible—but only when we are satisfied that we secured the right response to the circumstances that we all lived through last summer. These proposals are only part of our work to learn the lessons from what has happened over the last six months or so. As the Chancellor has set out, we are also determined to play a full role in the European Union’s and the international response to what has clearly been an international series of events. The UK is heavily involved in work at both the EU and the G7 level to analyse the causes of market turbulence and to develop an appropriate international response.
As I hope I have explained, the Government are looking closely at the issues raised by the Treasury Committee under the chairmanship of my right hon. Friend the Member for West Dunbartonshire. We will keep the Committee’s views firmly in mind as we continue to consult on our proposals and as we take them forward to legislation.
Question deferred, pursuant to Standing Order No. 54(4) and (5) (Consideration of estimates).
Department for Transport
London Underground
[Relevant document: The Second Report from the Transport Committee, Session 2007-08, HC 45, on the London Underground and the public-private partnership agreements.]
Motion made, and Question proposed,
That, for the year ending with 31st March 2008, for expenditure by the Department for Transport—
(1) further resources, not exceeding £2,059,473,000, be authorised for use as set out in HC 273,
(2) a further sum, not exceeding £1,859,129,000, be granted to Her Majesty out of the Consolidated Fund to meet the costs as so set out, and
(3) limits as so set out be set on appropriations in aid.— [Liz Blackman.]
7.56 pm
Mrs. Louise Ellman (Liverpool, Riverside) (Lab/Co-op): I wish to record the apologies of my hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody), the Chairman of the Transport Committee, who is recovering from illness.
I am very pleased, Mr. Deputy Speaker, that the House has the opportunity to consider the Transport Committee’s report on London Underground and the public-private sector partnership agreements. The PPPs on London Underground are the Government’s creation and have always been extremely controversial. This short inquiry centred, however, on the spectacular collapse of Metronet, one of two private sector consortiums that had signed 30-year PPP contracts to renovate and modernise specific parts of the London Underground. The two Metronet infracos went into administration on 18 July 2007 following the failure of an appeal to the PPP arbiter for additional funding through an increase in the infrastructure service charge.
As the Select Committee’s report clearly documents, that was a double failure: it was a failure to deliver public services and it was a catastrophic financial failure. Contracts that were supposed to deliver 35 station upgrades over the first three years in fact delivered 14—a 40 per cent. delivery of the requirements. Stations that were supposed to cost Metronet-SSL £2 million in fact cost £7.5 million—375 per cent. over the anticipated cost. By November 2006, only 65 per cent. of scheduled track renewal had been achieved.
If that were not enough, the service delivery failure has come with a £2 billion financial tag—a tag reported tonight in the estimates’ request for additional funding—which takes three forms. First, there is a £1.7 billion grant to Transport for London to cover Metronet’s debts; and, secondly, a £158 million grant for Transport for London, which is understood to be the first instalment of the costs caused by Metronet’s going into administration—and it is believed that the total cost of that is about £630 million. The third part is £150 million of further grant to Transport for London in recognition of the increased costs. I hope that the Minister will inform the House whether that is, indeed, the full bill and what the impact of approving that additional funding will be on other transport projects.
The Committee took evidence from the PPP’s arbiter, Unite, the Transport Salaried Staffs Association, Tube Lines, the chairman of the Greater London assembly’s
transport committee, the former chairman of Metronet, the PPP administrator at Transport for London and the Secretary of State. The report reveals shocking deficiencies in the construction and operation of the failed PPP contracts. Those include a tied supply chain, with most of the capital expenditure contracts awarded to Metronet’s parent companies—WS Atkins, Balfour Beatty, Bombardier, EDF Energy and Thames Water. Risk transfer was minimised with 95 per cent. of lenders’ debt guaranteed by London Underground. In short, as the report concluded,
“the Metronet contract did nothing more than secure loans, 95 per cent. of which were in any case underwritten by the public purse, at an inflated cost—the worst of both possible worlds. As with the shareholders, what minimal risk was borne by Metronet’s lenders was disproportionately well rewarded, at the expense of the tax and fare payer.”
A reading of the Committee’s report indicates that what has happened is nothing short of a national scandal.
The report identifies the failings of the PPP in both concept and practice, and makes recommendations for the future, suggesting that the PPP itself might be a flawed model, but indicating the importance of transparency and accountability to ensure efficiency and value for money in future, through a public or private sector vehicle. Following the collapse of Metronet, Transport for London was the only applicant to take over its work. In October last year, a memorandum of understanding was signed between the Department for Transport and Transport for London.
Important questions arise from the report and subsequent events, which I hope the Minister will be able to answer. How will the delay in Metronet coming out of administration affect what is to happen next, and how will it affect costs? It was anticipated that Metronet would come out of administration by 18 January. That has not happened. If finance for the future cannot be secured at reasonable terms, without guaranteeing the vast majority of the debt in the public sector, will loans direct to the Government be considered? Do the Government agree with the Committee’s findings that there should be no further PPPs without a comprehensive assessment of genuine risk transfer? It is vital that the Government remember the catastrophic collapse of Metronet when its parent companies next bid for publicly funded work. That is extremely important, as is the future of the repairs and upgrades on the London underground.
The Government entered into the PPP, with great controversy, because of their concern about some inefficiencies in the public sector. However, it is important that they remember that when private companies fail to deliver on large public projects, those private companies can walk away and the taxpayer picks up the pieces. That is, indeed, what is happening with Metronet.
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