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Session 2007 - 08
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General Committee Debates
Sale of Student Loans Bill

Sale of Student Loans Bill

The Committee consisted of the following Members:

Chairman: Miss Anne Begg
Anderson, Mr. David (Blaydon) (Lab)
Boswell, Mr. Tim (Daventry) (Con)
Cawsey, Mr. Ian (Brigg and Goole) (Lab)
Dorries, Mrs. Nadine (Mid-Bedfordshire) (Con)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Foster, Mr. Michael (Worcester) (Lab)
Hayes, Mr. John (South Holland and The Deepings) (Con)
Irranca-Davies, Huw (Parliamentary Under-Secretary of State for Wales)
Linton, Martin (Battersea) (Lab)
Marris, Rob (Wolverhampton, South-West) (Lab)
Marsden, Mr. Gordon (Blackpool, South) (Lab)
Moran, Margaret (Luton, South) (Lab)
Rammell, Bill (Minister for Lifelong Learning, Further and Higher Education)
Teather, Sarah (Brent, East) (LD)
Watkinson, Angela (Upminster) (Con)
Williams, Mark (Ceredigion) (LD)
Wilson, Mr. Rob (Reading, East) (Con)
Hannah Weston, Celia Blacklock, Committee Clerks
† attended the Committee


Bill Rammell, MP, Minister for Lifelong Learning, Further and Higher Education , Department for Children, Schools and Families
Michael Hipkins, Director, Student Finance Strategy, Department for Children, Schools and Families

Public Bill Committee

Tuesday 4 December 2007


[Miss Ann Begg in the Chair]

Sale of Student Loans Bill

10.30 am
The Chairman: Before we begin, I will make a few preliminary announcements taking us through what we are going to do. I am happy for hon. Members to remove their jackets. Will they ensure that their mobile phones and pagers are turned off or switched to silent? I remind the Committee that there is a money resolution in connection with the Bill, copies of which are available in the room. I also remind hon. Members that adequate notice should be given for amendments. As a general rule, I do not intend to call starred amendments.
As we are still in the early days of taking oral evidence in Public Bill Committees, it might help if I briefly explain what is proposed, so that the procedure is clear. First, the Committee will be asked to consider a programme motion, which is on the amendment paper, for which debate is limited to half an hour. We will then proceed to a motion to report written evidence. I am glad that the Minister has just come in as he will propose the motions. They are followed by a motion to permit the Committee to deliberate in private, in advance of the oral evidence session. I hope that we can take all those stages formally.
Assuming that the motion is agreed to, the Committee will move into private session. When we get through the formal part of our proceedings, we will ask the public to withdraw and the Committee will decide how it will ask questions. Once it has deliberated, the witnesses and members of the public can come in. At that stage, the oral evidence session will begin.
If the Committee agrees to the programme motion, we will hear oral evidence first. As there is only one set of witnesses, there has been a discussion, through the usual channels, that if appropriate we will take a 10-minute break and then go into the line-by-line consideration of the Bill as part of this morning’s sitting. That has not happened before in a Public Bill Committee, and it is up to the Committee to agree to it. We have moved rooms to allow us that flexibility, should the Committee so wish. If the Committee does not agree to that, we will move into line-by-line scrutiny in the afternoon sitting. Those are decisions for the Committee.
The Minister for Lifelong Learning, Further and Higher Education (Bill Rammell): I beg to move,
(1) the Committee shall (in addition to its first meeting at 10.30 a.m. on Tuesday 4th December) meet—
(a) at 4.00 p.m. on Tuesday 4th December;
(b) at 9.00 a.m. and 1.00 p.m. on Thursday 6th December;
(c) at 10.30 a.m. and 4.00 p.m. on Tuesday 11th December;
(2) the Committee shall hear oral evidence from the Department for Innovation, Universities and Skills on Tuesday 4th December, and the hearing of that evidence shall (so far as not previously concluded) be brought to a conclusion at 1.00 p.m.;
(3) the proceedings on consideration of the Bill in Committee shall (so far as not previously concluded) be brought to a conclusion at 7.00 p.m. on Tuesday 11th December.
I am pleased to move the motion. The Programming Sub-Committee met and agreed the timetable without opposition, and I hope that, on that basis, we can approve it.
Question put and agreed to.
That, subject to the discretion of the Chairman, any written evidence received by the Committee shall be reported to the House for publication.—[Bill Rammell.]
The Chairman: Copies of any memorandums that the Committee receives will be made available.
Motion made, and Question proposed,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—[Bill Rammell.]
Rob Marris (Wolverhampton, South-West) (Lab): With regard to the wording of the motion, what would be the procedure if, after hearing the witnesses, the Committee wishes to sit in private, perhaps to discuss the evidence? Could we proceed in that way? I am concerned that if we pass the motion, we cannot subsequently sit in private in that sitting after the witnesses have been admitted even if the Committee wishes to do so.
The Chairman: My understanding is that the answer is no. Either we will suspend at that stage and move on to line-by-line consideration, or we will come back in the afternoon sitting for line-by-line consideration. It is possible for the Committee to decide to take evidence from more witnesses as the Bill goes through the Committee and to sit in private again then. However, this is a short Bill and we do not have a lot of sittings. Coming back into a private sitting to discuss what happened in the open sitting is not possible. It will be up to hon. Members to debate the issues that are raised during the public oral evidence session.
Question put and agreed to.
10.36 am
The Committee deliberated in private.
10.44 am
On resuming—
The Chairman: We are now in the open oral evidence session and will hear from representatives of the Department for Innovation, Universities and Skills. I welcome the witnesses. Bill Rammell, would you like to introduce your colleague to the Committee?
Bill Rammell: Mike Hipkins is the director of student finance.
The Chairman: I remind hon. Members that questions should be within the scope of the Bill.
Q 1 Mr. Robert Flello (Stoke-on-Trent, South) (Lab): The issue of the face value of the student loan book is of concern and interest to me. Historically, Governments of all persuasions have not always been as successful as we might have wished in valuing assets that have been sold off, whether one wants to look back to the 1980s or more recently. My concern is about who has valued the student loan book, and how you have made sure that that valuation is robust, so that there is no vested interest in terms of the financial markets knowing that they will ultimately pick up something that will make them a large profit at the expense of the taxpayer. Finally, regarding the future value of the student loan book, how have you projected forward to ensure that its value in future is recognised in this current valuation and that, for future sales, that value is reflected?
Bill Rammell: I would say this, would I not, but I think that, regarding this Government’s management of student loan finance since 1997, we have a good track record of getting the estimates correct. We already have a track record in respect of the sale of the mortgage-style student loans, where I think that we demonstrated value for money.
Clearly, the Bill gives us enabling powers to undertake value-for-money assessments over a long period of time and also to undertake sales of the student loan book. In order to arrive at valuations, we have undertaken those assessments internally and also with external advice, and consequently we have robust estimates. However, within the context of having enabling provisions, we have said within the forthcoming three-year comprehensive spending review that we are looking to make sales to the tune of £6.3 billion. Having said that, if we do not judge that the market conditions are appropriate for those sales and we do not think that we will get value for money, those sales will not go ahead. Just because we are passing the legislation does not mean that the sales will automatically take place within a certain time scale.
Q 2 Sarah Teather (Brent, East) (LD): May I ask a further question on that subject? I wonder whether or not there has been any discussion of the National Audit Office report into QinetiQ and, if there has been, has that informed your deliberations about value for money for the student loan book?
Bill Rammell: We obviously look at all reports regarding the sale of Government assets. However, what we are looking at here is a particular type of sale where we have a robust track record. The sale of the mortgage-style loans that took place in 1998 demonstrated value for money, but I am not sitting here today saying that, by passing this Bill, we will automatically undertake x amounts of sales within y periods. It will depend on the market circumstances and on both the internal advice and the external advice that we receive about market conditions. If we cannot demonstrate value for money, the sales will not proceed.
The Chairman: I think Rob Wilson has a question that might be slightly out of order in terms of the scope of the Bill. I will not bring him in if it is not within its scope.
Q 3 Mr. Rob Wilson (Reading, East) (Con): It is subsequent to what the Minister just said. What are the procedures that you have laid down in your Department to ensure that you achieve the best value for money?
Bill Rammell: We undertake detailed internal assessments through my own officials in conjunction with those at the Treasury. We have also sought external commercial advice about the way in which these sales will be conducted. We will be appointing a sales adviser to administer the establishment of the special purpose vehicle that will be set up to take on board the loans that are sold. There will also be a rigorous ongoing assessment of the market conditions to determine the stage at which x amounts of loan finance are sold. Overseeing that process, the National Audit Office has already indicated that it will review the first tranche of sales and will be reporting to the Public Accounts Committee. Within that context, there is a rigorous and robust framework in place to ensure that we not only get value for money, but demonstrate that we have achieved it.
Q 4 Mr. John Hayes (South Holland and The Deepings) (Con): Further to that question and before I start my series of questions, what mechanisms are in place to test market conditions? As other people asking questions have made clear and as the Minister has said, this matter is partly about track record, but it is also partly about market conditions. It would not be beyond the wit of man to devise a set of circumstances where you could test market conditions by well-established mechanisms. Has that been done?
Bill Rammell: Recently, there has been some market volatility. While I think that there is still some market volatility, there are indications that the situation is improving. It is crucial that I make it clear that, while we indicated in the comprehensive spending review that we intend to recoup £6.3 billion from these sales over the next three-year period, that is not set in tablets of stone. A major element of the internal and external advice that we will receive will focus on the market conditions and whether they are ripe for getting best value for money. If, according to both the internal and external advice, that test is not proven and the bar is not passed, the sales will not proceed.
I am not sitting here today saying definitively that we will reap £6.3 billion and engage in sales to reach that amount during the next three-year comprehensive spending review. That is our intention, but it is not set in tablets of stone. It will depend on the market conditions.
Q 5 Mr. Hayes: The Minister has spoken of both internal and external advice. Presumably it is reasonable to ask him from where that advice has been sourced. One wants to feel that the Government are taking the best possible expert advice on this matter.
Bill Rammell: Mike, do you want to go through the detail of that?
Michael Hipkins: There are three elements to understanding how the value-for-money equation will work. The first is that the market understands the nature of these loans because they are different from consumer credit. We have to ensure that the market understands their particular characteristics. The second element is to ensure that the market is functioning properly, with proper competition.
The third element is to do some form of value-for-money comparator, which I think is the element to which you are referring. That is to do with estimating the difference between the value for money of retaining the loans on the Government’s balance sheet and selling them into the market. That is a complex calculation and is about trying to discount the future cash flows that will come from loan repayments, as against a lump-sum payment coming to the Government soon. Those are estimates rather than complete answers.
We must also factor it in that there will be some transfer of risk from the Government to the private debt owners. That element of risk will have to be given a financial value and factored into the equation. To do that, we are getting advice from our colleagues in the Treasury, speaking to the NAO and taking advice from commercial companies that can help us in the overall sale process.
Bill Rammell: I want to follow that up explicitly. For the overall advisory process, we have engaged KPMG and in terms of assessing the external market, we have engaged Morgan Stanley and Goldman Sachs.
Q 6 Mr. Hayes: So that someone else can get in, I will make this my last question and give respite to the hard-pressed witnesses. The point about advice and experience is presumably that the Government are drawing on precedent. We have the precedent of the sale from 1998 and 1999. What specific lessons were drawn from that? What international comparisons are there? Has this been done elsewhere and what can reasonably be learned from that? The critical thing is that we get best value for money, that we sell at the right time and that the matter is managed as effectively as possible. It would be useful, therefore, to get some feel for what the Government have learned from past experience here and elsewhere.
Bill Rammell: I will make some comments and Mike might wish to follow up. Certainly, this is a different type of sale to the 1998 sale, which had an ongoing discount arrangement. That is built into the sale price with these sales and that, in part, is because the rules governing the accounting for Government debt have changed. If we conducted this sale on the basis of the 1998 sale, we would not demonstrate that we were transferring the debt from the public to the private sector, so that is certainly different from what happened in 1998.
With regard to international comparisons, it is difficult to draw analogies. There are few examples of countries that have gone down the road that we have taken, where the student finance system is derived from the public sector. Obviously, there is a huge amount of student debt in the United States, but that tends to be private debt, so I am not sure that there are easily comparable international examples.
Q 7 Sarah Teather: I want to ask some further questions on the answers that you have just given. First, on the point about mortgage-style loans, could you give some indication of the level of discount that was given, which you undertook to do after Second Reading? Secondly, on the point about transferring risk, is not it the case that if a student dies or goes bankrupt, the Government underwrite that risk? To what extent are we really transferring risk to the private sector?
Bill Rammell: That is the key element that we are transferring to the private sector. Through the competitive bidding process, investors will make a judgment about the attrition rate—for want of a better phrase—that will potentially take place over the 25-year duration of the repayment of the student debt. That will take into account factors such as how often students are likely to earn more than £15,000 a year, above the threshold, how often they are likely to be unemployed, how many of them might be permanently disabled and how many of them might die. In those circumstances, a judgment is reached on what is reasonable to put forward as a proposal for the sale, and that is part of the way that we demonstrate value for money.
Michael Hipkins: I think the loans will be sold with a set of fixed terms and conditions, but there are elements of risk that will transfer, as well. You mentioned that bankruptcy, death and permanent disability are reasons for the loan to be cancelled as part of those terms and conditions, but the risk associated with the loans is rather wider than that.
On mortgage-style loans, it is quite difficult to ascribe a precise discount because the loans were sold for face value with an interest rate subsidy that has been paid and continues to be paid because those loans are not yet all paid off. Therefore, it is quite difficult to ascribe a discount value. As the Minister mentioned, it would be unwise to say what sort of a discount the Government are prepared to take on loans this time around, before the loans sale process has not even started.
Q 8 Angela Watkinson (Upminster) (Con): I wonder if I could probe a little further on how the figure of £18.1 billion was calculated. Is that the value of current loans plus interest up to the date at which that calculation was made, or is it current and any future loans if they were to run to their full term, bearing in mind the vagaries of the market and other complications? How were comparisons made between the full term value and the possible sale income of the bulk of the loans now? You have already explained how complex those calculations are, but I am not clear what the £18.1 billion represents.
11 am
Michael Hipkins: The £18.1 billion represents the loan balances as of 1 April 2007. That is the English loan balances, of which £17.1 billion is for income-contingent loans—the new-style loans that will be sold, rather than the old mortgage-style loans. It is the value of the balances of the loans at that point.
Q 9 Angela Watkinson: Will it be possible to compare the estimated sum that will be realised from the sale, to the value of the loans if they were to run for their full term?
Michael Hipkins: Yes. That underpins the value-for-money framework that I mentioned a few moments ago.
Bill Rammell: That is the key comparator to be drawn as a fundamental part of the value-for-money framework. The level of the outstanding loan balances, given that we are in the early phase of the income-contingent loan system, will expand rapidly over time.
Q 10 Mr. Hayes: While we are on the subject of value, the 2007 Budget report—in paragraph 6.42, from memory—states that the sale will yield some £6 billion. On Second Reading, the Minister used a phrase such as “at the higher end” in relation to that figure. It is a projection for 2010-11. I cannot square that with the current face value of the book. Presumably, you have made projections of how the face value will change over that period. This is a dynamic situation, rather than a static one, so what are those projections? We must have some feel for how the book will change and grow over the period, which will affect the figure of £6 billion, will it not?
Bill Rammell: The £6.3 billion is a cautious estimate; it is not set in tablets of stone. We have undertaken it cautiously, on the basis that we have sufficient information on the volume of sales needed to recoup that sum, and that we have enough information from within the marketplace for that to take place. I made the point on Second Reading that it would be unwise for us to make public statements about either the expected face value of the loans to be sold or the expected proceeds. Were we to do that, we would cut the ground from under ourselves with regard to the competitive bidding process.
Q 11 Mr. Hayes: Hence the use of terms such as “around” and “at the higher end”, which are sufficiently imprecise as not to give away commercially sensitive details. Is that the point?
Bill Rammell: I have to be honest—I would have to check Hansard. I do not recall using the phrase “at the higher end”. The point that I was trying to make was that it is a cautious estimate of the proceeds that we think that we can gain over three years. But we are not definitively as of today saying that we will take forward those loan sales to achieve that sum of money.
Michael Hipkins: In order to achieve the proceeds of £6.3 billion, we will need to sell sufficient loans to cover those proceeds. That is not the whole of the £17.1 billion that is the income-contingent loan balances as of 1 April this year; it will be as many of those loans as need to be sold. It is important to understand that this is also a continuous process; the £17.1 billion will rise, we think, to £21 billion on 1 April 2008 and to £25 billion on 1 April 2009. The Government plan a continuous series of loan sales in order to manage this large, increasing asset.
Q 12 Mr. Hayes: That is precisely the information I was trying to get at. Essentially, the projected value of the book will grow, but the figure of £6.3 billion will remain static. The question is: what percentage of the face value do you sell? Is that where we are? There is a determination to make £6 billion-ish regardless of what percentage we sell.
Michael Hipkins: The forecast figure of £6.3 billion is for the whole of the 2008-09 to 2010-11 CSR period. Clearly, in the next CSR period there will be further loan sales, and the value to be derived from those is yet to be determined.
Bill Rammell: I will not give the percentage figure today. Were we to do that, we would reveal the discount that we would expect to come about through the competitive bidding process. As part of the value-for-money framework, I want to maximise the receipt for the public sector.
Q 13 Mr. Wilson: Can you give us some sort of guide as to what area you are thinking of in terms of how much you will have to sell to raise the £6.3 billion? I know that you do not want to give any figures, but is there a framework that you are operating within on which you could raise the veil and let us have a quick peep at?
Bill Rammell: I am a polite Minister, but I am struggling to avoid the word no. The value-for-money framework will need to demonstrate that there is enough market information about the sales for people to come forward and make reasonable proposals. We will have to make a judgment about the volatility of the market and, crucially, we will have to undertake a comparator between what the net current value of the loans will be if they are sold as opposed to remaining on the Government’s books. It would be extremely counter-productive from a value-for-money perspective to give a greater indication than that.
Q 14 Mr. Wilson: Would I be right in saying that in the previous sales in 1998 and 1999, you lost about a third of the value? So we would be talking about £9 billion-plus to raise £6 billion if we were to use the previous occasions as examples for this sale.
Michael Hipkins: In some ways it is quite difficult to make a direct comparison with the mortgage-style loan sales and the sales that are proposed this time. The mortgage-style loan sale was just a straight auction, but it was an auction with an interest rate subsidy that continued throughout the life of those loans. We are not proposing to sell the income-contingent student loans in that way. It is quite difficult simply to make a straight comparison between one and the other.
Q 15 Mr. Hayes: I am much more nervous about this than I was when the questions began. We seem to have arrived at a situation whereby we have a value of an asset that we are going to sell in parts. While there may be a proper consideration in respect of value for money, if we are determined to sell £6.3 billion-worth of loans, we can vary the proportion that we sell to meet that target. That is very risky, is it not, because in a normal sale the value would be set by market conditions? This sale, regardless of market conditions, could be designed to raise £6.3 billion and what will vary is how much of it is sold. That is not a standard transactional relationship. It gives me cause for concern. I wonder what your comments are on that.
Bill Rammell: With respect, I have been at pains both on Second Reading and today to make it emphatically clear that the £6.3 billion income projection during the current CSR period is an estimate of the amount of money that we will gain. It is not a guaranteed sum. If the market conditions are not appropriate and if we cannot demonstrate value for money, the sale will not go ahead.
Q 16 Mr. Hayes: Value for money measured by empirical, objective independent analysis?
Bill Rammell: Yes. Independent advice will inform our analysis.
Q 17 Mr. Wilson: In that respect, you may find that during the sale process you get some pressure from the Treasury to raise the funds that it requires to fill black holes in the CSR. That pressure may force you into selling the loans at a level at which you are unwilling to sell. How will you stop the Treasury putting pressure on you to do that?
Bill Rammell: As you would expect me to say, I do not think that we have black holes within our spending plans. If we analyse the Opposition’s spending plans, we find somewhat greater black holes.
Q 18 Mr. Wilson: But if I may, Minister, you have already suggested that £6.3 billion is in the three-year spending plans? If you are therefore also saying that you may or may not raise that money, that immediately leaves a hole in the spending review, because if you do not raise the money, there is a deficit.
Bill Rammell: No, because if we are unable to achieve that sum of income, there is a range of means by which the Treasury Red Book can be squared: there could be greater than anticipated income from other sources or committed expenditure might not be as high as was anticipated, and ultimately the public sector net debt requirement could increase while remaining within the golden rule framework. I am confident that we have cautious and prudent estimates in these proposals, and the value-for-money framework, on which the National Audit Office will make a judgment that will be reported to the Public Accounts Committee, will guide both my Department and the Treasury in undertaking these sales.
Q 19 Mr. Wilson: Could I just say, Minister, that I am not that reassured by what you say? In effect, you are saying that the black hole will be dealt with either through cuts in expenditure—I hope that I am correct in saying that—or because you expect to get extra revenue from elsewhere. With the dark economic clouds hanging around, it is highly unlikely that any black hole will be filled with extra revenue from elsewhere. So I return to my main point—
The Chairman: Order. May I remind the hon. Gentleman that we must remain within the scope of the Bill? I think that going on to Government spending plans in general is a bit wide. If you would like to narrow your questions to the Minister and not get into the more general point about spending, that would be much appreciated.
Bill Rammell: If I can just say so, Miss Begg, the Government have an excellent track record in managing the public finances over 10 years and I think that we would be able to carry that forward, in major part because the estimates here are very cautious—
The Chairman: The same goes for the Minister.
Q 20 Mr. Wilson: One of the issues, Miss Begg, is that this is almost a Treasury Bill rather than a further education Bill. Having said that, I think that we can move on, because I have exhausted the line of questioning that you will allow me to make.
The Chairman: I think so.
Q 21 Mr. Flello: I have a quick supplementary question to the previous question, to try to get some clarity. Are we looking at a capital receipt? You talked about income coming in, but would this sale be a capital receipt to the Department and the Treasury rather than an income receipt, and therefore have implications for that type of sale? I will let you answer that question before I move on to my main question.
Bill Rammell: It is an income receipt that is available to be spent on a range of Government priorities.
Q 22 Mr. Flello: To return to my previous line of questioning, there is a concern in some quarters that, when Government assets are sold—certainly, when one goes back 20 years—the financial markets, for example the merchant banks, had two attempts to make some money: one was in the form of additional profit from an asset that was perhaps sold at undervalue; the other was that they could make money from the advice that they gave and by presenting the asset to market. Can you give me some information about what proportion of the value of the sale you anticipate having to pay out in costs to make that sale? Indeed, can you give me some information about the costs of the advice that you are receiving from the independent advisers? Furthermore, how are you testing those costs to ensure that they really are value for money and that the taxpayer is not bearing a disproportionate cost as against any other person putting something to market?
Michael Hipkins: Perhaps I can take that question. Given the size of the sale, the fees and other expenses that are charged by advisers will be comparatively small. Having said that, we intend that a competitive process will take place between those institutions that aim to help us as a sales adviser. We think that that competitive process will drive the expenses down to a reasonable level.
Q 23 Mr. Flello: Given that there are not hundreds and hundreds of merchant banks out there that would be able to put this type of package together, what research are you doing—I appreciate that there have not been many examples of this process in the past—to ensure that this sale is comparable to other sales that have been put through the merchant banks?
Michael Hipkins: As I said, we will use the competitive process and the experience of our colleagues in the Treasury, who undertake more asset sales than we do, to help us to decide who the best sales adviser is.
Q 24 Rob Marris: What assurances can you give on future interest rates on these loans?
11.15 am
Bill Rammell: This Government are committed to a regime that we brought forward with the introduction of the income-contingent loans, that there will be no real rates of interest and the repayments will start only above a threshold of £15,000 a year. We do not intend to vary that, and it could be varied by any Government only with explicit authority from this House.
Q 25 Rob Marris: But, the loan purchaser would be bound in that regard.
Bill Rammell: They would. The treatment of both the sold loans and the loans that remain with the Government will be dealt with in exactly the same way. The interest rate, the threshold, the repayment terms and the maximum period for repayment will be exactly the same, whether one’s debt is owned by the Government or by the private sector.
Q 26 Rob Marris: Is not the loan purchaser therefore going to be buying a bit of a pig in a poke, because you are not surrendering the power to change the loan rules retrospectively? You are specifically keeping that power, so they will be buying into a bit of an unknown. For example, a future Government could whack the threshold up to earnings of £30,000 a year.
Bill Rammell: Within the contract, there would have to be a compensation clause to assure the private purchaser on that basis. The implication of your question is: why should a private purchaser go through with this process? Based on detailed external advice, we believe that there is an appetite for this type of sale. It enables investment organisations to diversify their portfolio and to get a secure level of income over a period of time. In general terms, graduates who are repaying their student loan finance are a sound source of repayers. Taking all those factors into account, the advice that we have indicates, and our judgment is, that there will be a market for this sort of sale.
Q 27 Rob Marris: What steps will you take to avoid the scandal that we had with many of the early private finance initiative contracts, where the contractors made the big money, not by delivering the service or the goods directly, but by rebundling it and selling it on when interest rates changed? Huge amounts of money were made by the private sector at the expense of the taxpayer, simply by refinancing after the PFI had been signed off.
Bill Rammell: To be honest, I do not believe that the circumstances with this approach are identical with or analogous to PFI sales. Clearly, in the competitive bidding process, the purchaser makes a judgment about the implicit discount rate and, yes, over the course of time that can be an overestimate or an underestimate. I think that through the competitive bidding process and the other criteria that we are using, we will be able to demonstrate value for money. However, the Government no longer having to bear that risk by getting the private sector to bear it over the longer term is one of the advantages to the Government and the taxpayer that comes from this approach.
Michael Hipkins: I think that the loans sale is not quite the same as the PFI refinancing that you mentioned. However, we think that there will be a process by which the loans are restructured and securitised to be sold into the market in the form of bonds. We think that there are advantages in doing that. It allows investors to buy into a different sort of asset class. It allows for the matching of the investor’s risk appetite. It also allows the adjustment of the terms of the loans to what investors would like to buy. Those three factors are important in adding value, compared with just selling the loans straight. Those processes will be an important part of the sale process.
The other important element is the transfer of risk from the public sector to the private sector. As I mentioned earlier, that is an important element of the overall deal.
Q 28 Rob Marris: I appreciate that, but many of the propositions that you just advanced are precisely those that were advanced for PFI, when many of us pointed out these sorts of difficulties. Sadly, those difficulties came to pass. Windfall profits were made, particularly on early PFI contracts, to the point where in later PFI contracts there was a kind of clawback on refinancing windfall profits. I am asking whether, to whomsoever you sell, you are going to put some kind of windfall clawback in your sale agreements, in the event that the loan purchaser, in a fast-changing marketplace, makes a windfall profit through some sort of loan refinancing, just as happened with PFI.
Bill Rammell: Were we to put in place such a mechanism, we would not be transferring the risk in accounting terms from the public to the private sector. The aim is genuinely to transfer that risk and ensure that we get guaranteed income over the uncertainty—the projections can go up and down over time—about the amount of money gained through the ongoing income receipt from graduates repaying their loans.
Based upon the judgment that ministerial colleagues and I made after having received external advice, we think that we can demonstrate good value for money through that approach. However, as I said previously, this measure is not a cast-iron commitment to sale today. Our aim is to establish a set of enabling provisions that allow us to make the judgments over a period of time, reach the conclusions and to ensure that we can demonstrate value for money.
Q 29 Rob Marris: With respect Minister, I suggest that you should go back to your financial advisors, because you can transfer the risk on a one-way bet so that, if things start to fall apart, the loan purchaser will bear the cost, and if there is a windfall profit through refinancing, the Government can claw back some of the profit. If you have that kind of one-way bet, of course there will be a price to pay; the sale proceeds will be lower because it will be riskier for the loans purchaser. However, you can have precisely the kind of arrangement that we have under current PFI, whereby if things go belly-up, the PFI contractor has the problem, and if the contractor refinances and gets a windfall, the taxpayer will get some of the money back. I respectfully suggest that you go back to your advisors on that. If they are telling you that you cannot go down that route because it would not be transfer of risk, I suggest that they are wrong.
Bill Rammell: Within the value-for-money framework, I do not think that we would be able to demonstrate value for money by pursuing that approach in respect of those income-contingent loan sales. That is why we are pursuing those sales in a way that is based upon precedent, the detailed external advice that we have obtained and, crucially, the principle that we want to transfer risk from the public to the private sector. We want to be able to demonstrate that we will get value for money through this action. I make the point again that the sales will not go ahead unless we are confident that we can demonstrate value for money, and the National Audit Office and the Public Accounts Committee will be able to scrutinise the process that we will undertake.
The Chairman: A number of hon. Members want to come in.
Q 30 Mr. Hayes: I want to follow up on a number of the points raised by Mr. Marris. I wonder whether you might have considered placing those value-for-money criteria, which you assure us are robust, on the face of the Bill. It seems to me that a repeating theme in the questions that have been asked so far, and the absolute essence of this, is ensuring value for money from the public perspective. Given your stated determination, I wonder whether we ought to be clearer about that up front. You are right, of course, that other agencies will check—you mentioned the National Audit Office and others will no doubt scrutinise and monitor it—but I wonder whether that ought to be on the face of the Bill. Did you consider that and would you consider it?
Bill Rammell: I am not convinced that that needs to be on the face of the Bill. However, on Second Reading I clearly and explicitly read into Hansard the detail of the value-for-money framework that would be undertaken, which gives considerable reassurance on how those decisions will be made.
Q 31 Mr. Hayes: Further to the previous questions, the advice that you received on that will have included advice on the likely resale of the debt. All the information that I have gleaned is that the debt is likely to be resold in parts or in whole, as is normal practice. What estimate have you made of the likelihood of that and what implications does it have for the sale?
Bill Rammell: I think that it is unlikely, although I cannot guarantee it, that the loans will be resold; I have discussed that in detail with officials. I say that, based upon the fact that we envisage it taking place through the establishment via our sales adviser of a special purpose vehicle to undertake the sales of the loans. The funds will then be raised via a process of securitisation and bonds against those sales. That will allow the trading of those bonds on the markets. I think that that should ensure a robust income stream. I cannot rule out that, at some stage, the special purpose vehicle may be sold on, but I do not anticipate it as a likelihood.
Michael Hipkins: My understanding, if the securitisation proceeds in the way in which we think that it may, is that the loans will be sold to the special purpose vehicle, and there they will rest. The bonds will be the tradable security from that.
Q 32 Mr. Hayes: Would the prohibition, or the partial prohibition, on resale be so injurious to the prospects of making the original deal that it would be unacceptable?
Bill Rammell: We have a number of tools at our disposal for our protection if there were to be an onward sale, such as the Secretary of State being a party to the sales agreement.
Q 33 Mr. Hayes: Presumably, that is because of the sensitivity of the product. We are dealing with a product that collectively can be spoken of in the commercial terms we are using today, but that individually matters a great deal to the people who take out the loans, in terms of things such as collection and ongoing security. Is that the purpose of the protection?
Bill Rammell: Absolutely. We want to be able to demonstrate, and for the reality to be, that a graduate repaying their loan finance will see not one iota of difference in the way in which that process is handled, whether their debt is owned by the Government or by the private sector.
Q 34 Mrs. Nadine Dorries (Mid-Bedfordshire) (Con): Yesterday afternoon I had the pleasure of attending the graduation ceremony at Newcastle university. I notice that clause 1(4)(d) enables
“the Secretary of State to require a loan purchaser to make specified arrangements in connection with the administration of loans”.
It surprised me yesterday how many of the students, six months after graduating, had not yet found employment. The statistics show that many take up to a year to do so.
Using that provision, would it not be a good idea for the Secretary of State to instruct the loan companies to provide some kind of respite gap for new graduates, because while they are waiting to find employment, their student loan is still clocking up interest? Would it not be a good point at which to recognise that graduates are taking longer to find employment? As this sale is going through at the moment should we not put in some kind of provision to make things slightly easier for students?
Bill Rammell: I do not think that there is any robust evidence that graduates are taking longer to find employment. We have increased and widened access to higher education—we have now reached an access rate of about 43 per cent. for the under-30 population. The access rate has increased significantly, yet the graduate earnings premium remains substantial and robust; on average, over the course of their working life, it is worth about £100,000 more, net of taxation, for a graduate than for someone with two A-levels. I refute, based on that evidence, that graduates are taking longer to find employment.
However, the Government have already indicated that they intend to introduce, from next September, exactly the kind of provision that you are proposing, whereby we would institute a five-year repayment freeze for graduates on repayments of the loan to be undertaken once they have graduated. On top of that, we are substantially increasing the proportion of students who will be able to access non-repayable grants. With the changes that we have already made and those that we are introducing from next September, I think that we have a fair and progressive system of student finance. When that is put alongside the fact that applications for university for the current year are up by 6 per cent., it demonstrates that the system is working.
The Chairman: We are moving into the dangerous territory of student finance. Remember to remain within the scope of the Bill.
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Q 35 Mrs. Dorries: Clause 1(4)(d) provides the Secretary of State with the powers to instruct the loan company. I thought that it would be an ideal instrument to use. On the five-year repayment freeze, would interest continue to clock up over those five years?
Bill Rammell: It would be a five-year period during which you would not have to repay your student loan—
Mrs. Dorries: But would the interest continue to accrue?
Bill Rammell: Yes, and it would mean that you would repay for longer. But the intention is to give graduates some repayment respite when they want to buy a flat or a house or to start a family.
The Chairman: Again, we are getting away from the scope of the Bill.
Q 36 Mr. Flello: I want to pick up on some of the points that my hon. Friend Rob Marris raised. I echo what he said about having a clause that ensured that there was a windfall back to the taxpayer if anything was sold on.
My question relates to the transfer of risk. Perhaps I misunderstood or misheard, but you talked earlier about a contract clause being in place whereby if the threshold was increased, there would be some compensation back to a purchaser. That does not strike me as being a complete transfer of risk if there is something in there that means that the taxpayer can be tapped up for extra money or a compensation payment if the threshold is increased. Given that there is not a complete transfer of risk, why is there not something coming back the other way to ensure that if there is a windfall, a compensatory payment is made the other way?
Bill Rammell: At the moment the repayment threshold is £15,000 a year. Were we to raise that to £25,000 a year, it would have an enormous impact on the amounts of money that the loan purchaser could expect back. Were we not to put in place such a safeguard, I do not think that we would have a very long queue of people saying that they were willing to undertake this process and to purchase the debt from the Government’s books.
Q 37 Mr. Flello: So effectively, all the potential for future profit is transferred, but with less risk.
Bill Rammell: No. The risk at the moment to the public sector is the fact that we have to take an estimate over a long period of time about how much money will come back to the Government. We have to take account of a whole variety of factors such as the unemployment rate among graduates, the number who will be earning above the £15,000 threshold, the number who will die, and the number who will be disabled. Taking all those vagaries into account from a value-for-money perspective, we judge that if we get this right, it will be a safer bet for the public purse to get that sum of income up front, which can then be spent on a range of Government priorities. That is the value-for-money assessment that we are undertaking.
Q 38 Sarah Teather: Picking up on the points that the Minister began to talk about with regard to onward sales, could he explain that in a little more detail? I suspect that not every member of the Committee understands all the terms that were used. Can he explain what restrictions the Government intend to place on onward sales? The Bill is a little vague—it uses the word “may”. When would the Secretary of State’s prohibitions kick in? Would that refer only to the onward sales of the special purpose vehicle, or would any of those restrictions apply to the onward sale of bonds? Earlier, we discussed the terms and conditions for borrowers; how will the Government ensure that when the debt is sold on those terms and conditions would always remain the same for the borrower?
Bill Rammell: They would be part of the contract of sale and legally enforceable. As I said earlier, a toolkit is available within the Bill to enable this and future Governments to protect the graduate interest. That may be by means of our enforcing the fact that the Secretary of State should be a party to the onward sale agreement. It may be by prohibiting further sales without the Secretary of State’s agreement. Those mechanisms would enable us to ensure that things that we put in the initial contract are apparent in subsequent contracts, such as continuing to use the SLC for the administration and chasing of debts, and having to have recourse to the independent assessor. I think that that gives a strong degree of reassurance.
Q 39 Sarah Teather: I am not sure that the Minister has answered my question. I asked what criteria would mean that the Government would bring that prohibition in on further sales. What are the reasons that would cause the Minister to say that we are going to prohibit further sales? I was asking him to explain the relationship with the special purpose vehicle and whether it is only with that that those prohibitions would kick in.
Bill Rammell: We want to have a range of tools at our disposal if and when the special purpose vehicle is sold on. I cannot pre-empt every circumstance that could prevail at that time.
Sarah Teather: You could give us some indication.
Bill Rammell: Hold on. I have already made it clear that I think it highly unlikely that the SPV will be sold on, so we are in to the realms of speculation. We have a range of tools at our disposal that will ensure that the kind of reassurances and commitments that we have made through the contractual framework to protect the graduate will be enforced. A starred amendment has been tabled on this issue and when we get to the line by line stage in Committee, I will be happy to address it and provide that reassurance. Mike will take up the point about the difference between the SPV and the bond sales.
Michael Hipkins: I wonder if it would be helpful to explain what the borrowers whose debt is sold will see and experience. The Bill provides that the Secretary of State can constrain the new owner to use the Student Loans Company and HMRC to collect repayments in the same way as is done now. Borrowers whose debt is sold will see exactly the same terms and conditions, such as the £15,000 threshold, the 9 per cent. of the excess condition and the 25-year cut-off. All those conditions will be reproduced for borrowers whose debt has been sold. There will be no material difference between a borrower whose debt has been sold and one whose debt has been retained by the Government. It will still be HMRC collecting the repayments and the Student Loans Company will still maintain the loan accounts.
The difference is in where the proceeds from the repayments will go. They will be funnelled into the SPV that owns those debts and then distributed as interest payments and principal payments to bond holders. The constraints that will be put in the contract between the Secretary of State and the owners of the debt—the special purpose vehicle—will be the use of HMRC to collect and the Student Loans Company to maintain the accounts. Also, all the terms and conditions set out in statute and regulations will apply as much to the sold loans as to the retained ones.
With regard to clause 3(6), imagine at the moment that the sale process will be through securitisation and a special purpose vehicle. That may be true this year, next year and the year after that, but in five years’ time it might be done by some other mechanism. Clause 3(6) provides a variety of ways in which the requirements on the owner can be laid down to ensure that the borrowers experience no material difference. The reason that subsection (6) says transfer arrangements “may” is that the Secretary of State will chose the appropriate way for each case. It should not say that he will do all of them, because they are alternatives.
Q 40 Angela Watkinson: I want to pursue this line of questioning a little further. Will the Minister confirm that the terms and conditions attached to the sale of the first tranche of loans will be standard to the sale of future tranches, and that they will not be open to negotiation with different purchasers?
Bill Rammell: Yes, unless the Government wish to do that. Any future Government could undertake to do so. For instance, I know that the Conservative party is committed to a commercial rate of interest, which we are not. It is within the Government’s discretion to vary it, but as long as they did not wish to change the terms and conditions for both public sector debt and sold debt, the same ones would be maintained through that contractual process, even at subsequent sale periods. As Mike has made clear, we would choose from a range of options available to us in the Bill as to how we would enforce that.
Q 41 Rob Marris: On that very issue, I will speak about the arrangements of the declaration in clause 3(6). I am attracted to the spirit of “shall” rather than “may” applying to clause 3(6)(a); namely:
“(6) Transfer arrangements shall—
(a) prohibit the making of further transfer arrangements without the Secretary of State’s consent”.
I understand that, regarding the other two limbs of that subsection, you may wish to have “may” rather than “shall”, but I would suggest that the Minister take another look at having a mandatory for clause 3(6)(a).
Bill Rammell: I will address the point now rather than later on, although I will doubtless address it later on, as well. I have debated it at length with officials. When we were drawing up the Bill, I asked why we did not enforce the provision, instead of putting it as a discretion. Let me state for the record that clause 3(6) sets out different possible ways in which the Government could ensure that they are able to maintain protection for borrowers in the case of onward sales of loans. Under the current classification rules, it is not likely that we would include in the initial contract a prohibition of transfer without the Secretary of State’s consent. That level of control would probably not be consistent with making a proper sale and transferring the asset from the public to the private sector, but we want it in there as an option because those rules may alter over time, so it is worth having the power to do so in the future.
Rather, in terms of enforcement, we expect to use one or other of the alternative methods set out in clauses 3(6)(b) or (c) to ensure that the Secretary of State is a party to any future contract. That will enable the Government to ensure, for example, that a new purchaser continues to use the SLC, as I said previously, and to make the same complaints mechanism available.
The terms and conditions of the loans are protected because they are contained within the regulations that would come before the House. I am happy to put on the record that we will ensure that any onward sale contract continues to protect the borrower fully. If we come to debate the starred amendment, I would argue that we should resist it, as we cannot be bound to use all the methods in the Bill. Indeed, I would argue that it makes no sense to say that we must use two alternative ways of achieving the end of ensuring that the Secretary of State is party to the contract.
Q 42 Rob Marris: I will not go much further on this matter, because I do not want to pre-empt the debate that we may have if the amendment becomes un-starred and is selected. However, I would again urge my hon. Friend the Minister to take another look at decoupling clause 3(6)(a) from subsections (6)(b) and (c), and at having a mandatory for the former and a permissive for the latter two.
Bill Rammell: Forgive me, but if we made clause 3(6)(a) mandatory, we would not be able to transfer this asset from the public to the private sector.
Michael Hipkins: That is the case under the current classification rules, which may change. Under the current rules it would be unwise to use clause 3(6)(a) because it would cut across the proper transfer of the assets to the private sector. However, if the classification rules were to change in the future, it might be appropriate to use 3(6)(a).
Q 43 Rob Marris: Forgive me, but is the purpose to transfer assets to the private sector or to raise money for the Government? I do not elide the two, as you appear to be doing. I quite understand the desire to raise current capital for the Government through a sale, but that is a separate issue, albeit connected, from the issue to which you refer. Which is the driving force of the Bill: raising money or transferring assets to the private sector?
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Bill Rammell: It is not that there is an ideological principle that we want to vest the assets with the private sector; it is that we do not believe that it is the optimum use of Government resources and the best value-for-money mechanism for the debts to be on the Government’s books as opposed to the private sector’s. It is about transferring that risk and generating an income stream up front for the Government—the two are related.
Q 44 Rob Marris: Therefore, one is a kind of income argument and one is, in fact, an ideological argument. I understand your position.
Bill Rammell: I do not think that the second is an ideological argument. It is about the best means of securing the public perspective.
Q 45 Mr. Hayes: Four or five questions arise from the exchanges that have taken place. Is the reason for the sale essentially to transfer risk, or is it about realising the financial benefit from the sale of the asset?
Michael Hipkins: The underlying reason for the sale is to manage a public asset well. This is a large public asset as it stands; we have mentioned that it is worth £17 billion now and will grow to £25 billion in two years. The issue is how to manage that asset in the best way. The argument is that two things can be done: first, you can reduce the risk on the Government’s balance sheet by selling the loans; and, secondly, you can at the same time helpfully raise some income, which can be used for the Government’s other spending purposes.
Q 46 Mr. Hayes: Therefore, it is about both realising the value of the asset and transferring the risk. The Minister, however, has made it clear that the risk is very low, which makes the sale attractive. We were told that the sale is attractive because we know where people are, they have a good record of repayment and the actuarial issues that the Minister talked about—death, disease and disability—are entirely predictable. Therefore, this is a low-risk product for the private purchaser, but we are selling it because it is a high-risk product for the Government? Is that correct?
Q 47 Mr. Hayes: I understand that. The significance of value for money and the need to be clear about the framework for ensuring it is the repeated theme emerging from these questions. Perhaps we will discuss that later when we scrutinise the Bill in more detail. Are the Government being advised by Rothschild’s, as they were last time?
Michael Hipkins: The process of selecting the Government’s sale advisor is not yet complete.
Q 48 Mr. Hayes: Okay. Presumably, for that reason, there is no clear advice on the cost of the sale.
Bill Rammell: In arriving at our current situation, we have already sought and received external advice and, with regard to the sales process, I have set out that we have already been advised by KPMG, Goldman Sachs and Morgan Stanley.
Q 49 Mr. Hayes: What is the estimate of the cost of the sale? Obviously, the revenue will be the value realised in the sale minus the cost, but we have been given no estimate of the cost.
Michael Hipkins: As I said, we cannot estimate the cost of the sale until we have been through the process of recruiting the sales adviser, because part of the cost will be the fees that they charge the Government. As I mentioned, the competitive process of appointing a sale advisor will get us a competitive set of fees.
Q 50 Mr. Hayes: I am sorry to interrogate you about this, but there must be some notional view of the likely cost of the sale. For example, the Minister talked about setting up a vehicle to ensure that the matter is dealt with in the most appropriate way, for some of the reasons that we are debating. Surely, there must be some notional feel for what the cost of the sale will be.
Bill Rammell: With respect, we are in a competitive bidding process at the moment. In my view, it makes no logical financial sense from the public perspective to reveal our hand in advance of that competitive process being completed.
Q 51 Mr. Hayes: I am sorry, but I do not buy that at all. That is perfectly true in terms of the value of the asset: it is absolutely right that you want to be, to some extent, commercially sensitive about the value and the likely price that would be paid for the asset. However, that has no relevance to making an estimate about what it will cost you to sell the asset, because whatever it costs you to sell it, the people who bid for it will pay—I do not mean the cost of the product, but the cost of the sale.
Bill Rammell: The cost of the administration, for want of a better phrase?
Q 52 Mr. Hayes: Yes. The cost to you—the organisational cost, the setting up cost and the marketing cost. All of those things will have a cost. Obtaining advice has a cost. You said you have taken advice and will continue to do so from a number of sources; you said that you will establish a mechanism for selling the product, and you said that you will market the product. All of those things have costs and they may be very substantial costs; they may not be substantial compared with the sum of £18 billion, but they are certainly not insubstantial in relation to our scrutinising this matter with proper diligence.
Bill Rammell: There is a difference here, I believe, between the cost of the advice that we have already received and the administration costs that will result from setting up the sales adviser. I am happy to try to provide you with a figure on the first issue; some of the costs of that have already been included in the process. Can we try to get that figure?
Michael Hipkins: Yes, we can. However, there is another important point to make. Although there will clearly be a competitive process for buying the assets in the end, there will also be a competitive process for providing advice to the Government. It might not be commercially sensible to say what the Government think that price ought to be while that competitive process is under way.
Bill Rammell: But to be helpful to the Committee, I can say that there is a sum of money that has already been spent, and I see no reason why we should not be able to provide that figure for you.
Q 53 Mr. Hayes: That is most helpful. With your indulgence, Miss Begg, can I just pursue this issue of resale? It is not inconceivable that, if the product is resold, it will be resold to a body or organisation underwritten by the Government. I accept that the Minister says that that is unlikely, but it could happen. For example, I hate to raise the name, to the embarrassment of the Minister, but the asset could be resold to Northern Rock, could it not? There is nothing to stop that happening. If the sale is restricted by the means that are in the Bill, as I understand it, there is nothing to stop the asset being sold to an organisation that is underwritten by the Government.
Bill Rammell: I will not prejudge every individual organisation and every individual circumstance. However, in the Bill we have tools at our disposal. If the accounting classifications were to change, the Secretary of State would have to be party to a sale agreement, which provides an ability to approve the sale or not. Similarly, the Secretary of State may prohibit the making of further sales without his agreement. In both circumstances, the Secretary of State effectively has a veto over any sale.
Q 54 Mr. Hayes: Yes, but the nub of what I thought that you said earlier when answering questions from Labour Members was that the principal reason for that veto was to protect the interests of those graduates who were party to this process. Therefore, the reason that you would have ongoing involvement was to ensure some of the things that you were questioned about earlier—the way that debt would be collected, the interest rate, and so on. I was not aware that the Secretary of State’s involvement was to prohibit certain commercial decisions.
What I am describing is a set of commercial circumstances in which a purchaser might choose to resell and would do so, presumably, according to market conditions. Are you now saying that the Secretary of State would have ongoing powers to stipulate to whom the asset may—or may not—be resold?
Bill Rammell: To protect the graduate, there are a variety of judgments that the Secretary of State will have to reach in order to agree to a sale. The Secretary of State would want to ensure that we are protecting the graduate through any onward sale. For the record, I do not accept the implication of what you are saying about particular organisations that may come forward to seek to purchase.
Q 55 Mr. Hayes: I use Northern Rock as an example only because it springs to mind.
Bill Rammell: I know why you use Northern Rock.
Mr. Hayes: But it could be any organisation that was underwritten or supported by or had some involvement from Government. Any number of commercial organisations have a relationship with Government that might make resale inappropriate or certainly undesirable—not from the student’s perspective, although that may also be true, but from the Government’s perspective, as a matter of public policy. It seems to me that you will have a reasonable amount of control over the first sale of the product, but whether you will have any significant control over some of the subsequent commercial activities, which might in the end be unhelpful from a public interest perspective, bears further scrutiny. You must have considered that in detail.
Bill Rammell: The two principal tools at our disposal enable the Secretary of State to reach a judgment on whether any onward sale should take place, either by the Secretary of State, were the rules of classification to change, being party to an onward sale agreement or by the Secretary of State being able to prohibit further sales without his or her agreement. That is fairly robust.
Q 56 Mr. Hayes: Absolutely. So it is robust and the Secretary of State will exercise, on advice of course, a commercial judgment—not simply a judgment about the protection of graduates, but a judgment about whether a particular resale is appropriate in the public interest?
Bill Rammell: The public interest is the same as the graduate’s interest. Within that framework, the Secretary of State would make those judgments under advice, yes.
The Chairman: May I move us on to questions on disclosure of information?
Q 57 Mr. Gordon Marsden (Blackpool, South) (Lab): Minister, on Second Reading you said:
“HMRC has temporarily suspended its data sharing operations with the SLC in respect of student loans”.
Could you tell us what the current status of that process is?
Bill Rammell: It is still suspended. Let me reiterate for the record what I said on Second Reading, because I am very conscious that hon. Members will want to probe this area. I said,
“No breaches of data protection protocols have occurred in respect of student loan administration... we are certain that no data have gone missing in respect of student loan administration.”—[Official Report, 22 November 2007; Vol. 467, c. 1392.]
But clearly, as a result of the two missing discs within HMRC, the Chancellor of the Exchequer has rightly given instructions for a Government-wide review of data-transmission processes. We are part of that within the Student Loans Company, which is why that particular mechanism is suspended for the moment.
Q 58 Mr. Marsden: Have you any idea when that mechanism may be resumed?
Bill Rammell: I would hope, within a reasonable period of time. Progress is being made. I cannot give you a specific date today, but I would hope, within a reasonable period of time.
Q 59 Mr. Marsden: Fine. I am grateful for that and for the robust repetition of what you said on Second Reading. However, recent events inevitably raise the question whether provisions for data protection in the Bill, which obviously was drafted before the particular problems that we have had, remain sufficiently robust. Therefore, I wanted to ask you on that front whether you have reviewed the provisions for data protection in the Bill, what additional measures you have considered, and what conclusions you have come to as to whether additional measures are necessary.
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Bill Rammell: Again, I made this point on Second Reading. We are committing ourselves to a process that will not start until April next year. Nevertheless, these are important and serious issues. At the top of our priorities is the importance of maintaining the security of personal information. In the context that no breaches of the protocols have taken place, and we are certain that no data have gone missing in respect of student loan administration, there was nevertheless a Government-wide review initiated by the Chancellor. My noble Friend, Lord Triesman, as the Minister responsible for the Student Loans Company, immediately initiated a review of all our procedures. That review is ongoing and I hope that within a reasonable period of time we will reach conclusions—certainly well in advance of any sales taking place next year.
Q 60 Mr. Marsden: That is understood, but you will also understand that the Committee, in scrutinising the Bill, wants to probe a little further into what the hypothetical situation for robustness might be when the Bill is finally enacted.
Bill Rammell: Let me try to give some reassurance. Before the Committee met, I thought about areas that Members would have concerns about and anticipated that this would be one such area. Let me be clear and explicit: personal data is currently exchanged between the SLC and owners of the old mortgage-style loans electronically, using a secure virtual private network. That VPN is facilitated using an internet protocol secure encrypted tunnel and that method of data sharing is considered very robust by industry standards. Most people who have passed comment on recent events would accept that to be the case.
In respect of the Bill, as we plan to require purchasers of income-contingent repayment loans to use the SLC to administer and enforce the sold loans, loan account data would not need to be transferred to the purchasers for day-to-day purposes. In the event, however, that the purchasers require access to data—for example, for audit purposes—the method of data transfer would be secure and encrypted. That should provide reassurance to hon. Members on that account. As part of the Government-wide review, even though we are certain that there have been no breaches of protocol at the SLC and no data have gone missing, all processes are being reviewed.
Q 61 Mr. Marsden: That is extremely helpful. The detail is helpful. I am sure that those who are more technically literate than I am will peruse some of those details carefully. I am sorry to have to refer back to the HMRC case but, of course, it is the case on which the questions are now being focused. You will recall that one of the problems—I do not want to prejudge the outcome of any inquiry—was that it was alleged that the material was sent unencrypted by a junior official. Of course, that raises the question of the level at which encryption will be authorised and supervised. That is one question that I want to press with Mr. Hipkins.
Michael Hipkins: SLC computer systems already have levels of security such that the number of people who have access to the full database is limited, and access to any means of copying parts of the database on to moveable media is also limited. So there are already systems in place to ensure that there is not free access to the whole database or to means of downloading it on to moveable media.
Q 62 Mr. Marsden: At what civil service grade would that authorisation be given?
Michael Hipkins: The SLC is not a civil service organisation, so its grades are different, but the highest level tends to be with the analysts and some of the IT specialists.
Q 63 Mr. Marsden: That is helpful. May I move on to discuss some of the issues relating to the release of data to potential purchasers? I know that you have touched on this, but just to clarify the issue for the Committee, could you tell us what sort of data you intend to release to potential purchasers?
Bill Rammell: Clearly, a purchaser would need some individualised information to make an assessment of the price they were prepared to pay. That would be undertaken on an anonymised basis, so there would be no personal details. We are also making it clear in the Bill that the enforcement of repayments would be undertaken through the Student Loans Company in the name of the private investor. Therefore, for any of those mechanisms there would not be a need for the individual’s information to be passed on to private investors. The only circumstances in which there may be a need for individualised, identified information would be in respect of audit and due process, and that would be in a handful of cases, relatively speaking. Again, the data protection framework would be in place. We are also increasing the criminal penalties associated with the unwarranted releasing of detailed personal data to third parties.
Q 64 Mr. Marsden: In drawing up the contract with the SLC, what procedures are in place to obtain students’ consent for the release of information, anonymised or otherwise?
Bill Rammell: The student, on graduation, must sign certain consents.
Michael Hipkins: The SLC is bound by the Data Protection Act 1998, as others are, and the release of information to others is controlled by that. Where information is for auditing, as the Minister said, the details can often be anonymised.
Q 65 Mr. Marsden: Just to be clear, are students implicitly to understand when they sign the contract that the data may be used individually for audit purposes and collectively on an anonymised basis, or is that explicitly stated in the contract that they sign?
Michael Hipkins: I am afraid that I cannot remember the detail of what the student signs, but I imagine that it will say that the Student Loans Company agrees to be bound by the Data Protection Act and all the protections that it brings.
Q 66 Mr. Marsden: It would be helpful to me and, I suspect, the Committee if we could be provided with that information at some stage. The only reason I am being pedantic is that concerns will be raised, rightly or wrongly, about consent as we move into the private sector, and it is important for the Committee to know precisely what situation pertains. Would it be possible for you to give us that information?
Bill Rammell: We can provide that.
Michael Hipkins: May I add, though, that for information that comes from HMRC, there is already a so-called HMRC gateway from HMRC to the SLC? There is a tighter level of control over those personal data, and that will extend, through the Bill, to any debt owner.
Q 67 Mr. Marsden: We have had some discussion about the implications of selling on loan material, and I appreciate that you, Minister, have said that, in your opinion, those implications are likely to be less than has been suggested, for the various reasons that you have given. Nevertheless, the issue may arise. If the situation were such that there was a significant selling on of debt, where does that leave us in terms of the people who buy the debt being obliged to observe whatever protections and safeguards you have originally specified to the original purchasers?
Bill Rammell: That will be enforced and re-enforced at every stage of a subsequent sale through the contractual process, and will be overseen and bound by the regulations concerning student finance that are passed within this place.
Mr. Marsden: To be absolutely clear for the purposes of the Committee, the fact that there may arise a situation, to use that phrase, where an initial sale of a student loan chunk is subsequently outsourced to another organisation, that will not affect the original requirements in terms of data protection that were placed on the original purchaser.
Bill Rammell: Absolutely.
Q 68 Sarah Teather: I think that the Minister has answered our questions, but I will just get him to clarify, to make sure that I have completely understood. Can he say that no individual data will be passed on if the graduate defaults on their loan payment—that no individual data will be passed from HMRC or the Student Loans Company to the owner of the debt?
Bill Rammell: That is correct. We are specifying through this process that the Student Loans Company would be the agent for the private investor, or the special purpose vehicle, and that there need not, in respect of those cases, be the passing on of that detail.
Q 69 Sarah Teather: And there will not be? Are we clear that the data protection legislation ensures that that is the case?
Bill Rammell: This Bill ensures that, not the data protection legislation.
Michael Hipkins: I think that it is right to say that when the loan is sold to somebody else, that owner then has the right to the information, but I think that what the Minister said is that, for all practical purposes, with the Students Loans Company acting as the agent of the debt owner, there will be no need to transfer data from the Student Loans Company through to the debt owner, because the SLC will do everything that the debt owner needs.
Bill Rammell: There is the caveat that I set out for audit and for due diligence purposes, which would require that, but that is going to be in a handful of cases, relatively speaking.
Q 70 Mr. Hayes: We know from the history of collateralised debt obligations that they are frequently sold on and broken into parts. It is possible that that may mean that the product is sold overseas to companies beyond UK jurisdiction. Has the Minister given that any consideration, and if so what conclusions has he come to?
Bill Rammell: Again, I might want to comment on this. I do not think that there is the financial attraction in establishing, or selling on, the special purpose vehicle that would generate the market demand for that, but the sale and the exchange is going to take place through the bond process.
Michael Hipkins: Yes, that is absolutely right.
Q 71 Mr. Hayes: Was any of the debt that was sold in 1998-99 sold on?
Michael Hipkins: The process was different in that case. It was not sold to a special purpose vehicle. In the case of the previous down-sales, it was sold to Rothschild, which then did the securitisation. In this case, the sales adviser will do the securitisation on behalf of the Government.
Q 72 Mr. Hayes: Have we got a clear idea about what happened to the debt? Are you saying that the purchaser still owns the whole of that debt?
Michael Hipkins: I am not close enough to the detail to be able to say what precise changes have taken place to the ownership of the debt since it was first sold.
Q 73 Mr. Hayes: Would it be useful to the Committee for the Minister to come back with some details on that? That would, presumably, reassure us, or indeed frighten us, about what might happen in this case—hopefully, the former rather than the latter.
Bill Rammell: I am happy to do that but, again, in the mechanisms that we are setting out here, we would have an ability, first, to agree or not to the onward sale and, secondly, to enforce the terms and conditions so that, even if there were to be a subsequent onward sale, the graduate would see no difference.
Q 74 Mr. Hayes: Are those terms and conditions absolutely legally binding on the initial purchaser and subsequent purchase in respect of the anonymising of data?
Michael Hipkins: Yes, that will be set ou+t in the contract.
Q 75 Mr. Hayes: Again, for the benefit of the simple souls on the Committee such as myself how will the data be anonymised? I do not understand what form it will take. It might be useful to have a feel for how that happens. Speaking as a former businessman, if I were to buy a product I would want to know a fair bit about it, not only for audit purposes, although I appreciate that point, but also to value it from the perspective of a potential purchaser. There would have to be some exposure to make an assessment of risk.
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Bill Rammell: My understanding, and Mike may want to supplement this, is that the kind of information that would come forward is x person of y age with z income. The information would not tell you that it was John Hayes.
Q 76 Mr. Hayes: My wife had a letter from the Government this morning, stating that her personal details had been cast to the four winds. You will understand a certain sensitivity on my part and that of my family in this respect.
Further to the questions that were asked by Mr. Marsden, one appreciates that the contract will be tight in the way that the Minister has described and that there will further obligations on purchasers in the event of a resale. However, what kind of consideration has been given to the compatibility of systems, which was the cause of recent problems? We use fairly primitive means of communication because no other means are available to us. Any data that is transferred by less than secure mechanisms regardless of intent can go astray. Have any lessons be learned, as Mr. Marsden asked?
Bill Rammell: I set out very clearly that the level of encryption is substantial. From the reaction that I got from the Committee, I gather that there was assent to the proposition that the mechanisms were secure. Nevertheless, as the hon. Gentleman knows, we as a Government take this very seriously, and have initiated a cross-Government review of the processing and transmitting of data to ensure that we can be as certain as possible that everything that should be done is being done. That process of review, including arrangements between HMRC and the Student Loans Company, is ongoing.
Q 77 Mr. Hayes: Will that will include an audit trail in respect of onward sale of debt?
Bill Rammell: The review looks at every aspect of data transition across and without Government.
Q 78 Mr. Hayes: An area that we have not explored is the timetable and the scale of the sale. We understand that the debt will be sold in portions. That was made clear both in the original statement of intent in the Budget and in the debate on the Bill, but we do not have a clear indication of the likely size of those portions or the anticipated timetable. Although I appreciate that none of that is set in stone, I assume that the Minister has reached some initial conclusions, following advice that he has received.
Bill Rammell: In respect of the £6.3 billion or what?
Q 79 Mr. Hayes: We understand that the debt will be sold in chunks. What size will the chunks be, and over what time do you expect the sale to take place? Is 2010 a firm date and will the debt be sold in three chunks over that period, or will bits be sold off on a monthly basis? How will the sale work?
Bill Rammell: Forgive me, enticing though the argument is, I think that we are going back over the territory of forcing me to reveal my hand over the face value of the loans that we are going to sell in order to generate £6.3 billion.
Q 80 Mr. Hayes: We have done so, but what we have not explored is where we go from there.
Bill Rammell: Beyond the £6.3 billion?
Mr. Hayes: Beyond the initial sale.
Bill Rammell: No, we have not reached conclusions about that, in major part because the Government examine three-year projections of their forward finances through the CSR process. The Bill will give us the ability to initiate an onward programme of sales. In principle we could reach a situation where we sell all the student loan book over time, but we shall mount a case-by-case series of judgments within a robust value for money framework.
Q 81 Mr. Hayes: The original intention stated in the Budget was that the Government would raise £6 billion by the end of 2010-11. The exact quotation says “around” £6 billion, rather than at the higher end. The higher end came in on Second Reading, I think. That suggests, does it not, that we are only going to sell one chunk until 2010-11—the first part of the sale? Is that still the case?
Michael Hipkins: The pre-Budget report indicated figures for each of the three years from 2008-09 to 2010-11, with an indication of what proceeds might be taken in each of those years. The frequency and size of sales are issues that we shall need to discuss with our sales adviser. Those issues are yet to be determined.
Q 82 Mr. Hayes: So in fact, if we have in place a robust value for money framework, we might not sell anything by 2010-11, or if the market conditions are such that we feel it is desirable to offer more of the loan book, we might sell more than that first portion. The Government’s plans in that regard are entirely flexible and the Bill will enable legislation to give those plans life. Is that fair?
Bill Rammell: It is certainly conceivable that we could end up, at the end of the three years, not selling anything, but I do not anticipate that that will be the case. Despite recent volatility, we think that there are improvements and that we can reasonably judge that we will be able to undertake sales starting in 2008-09. However, an important point of principle is that if the market conditions were not appropriate for us and we could not demonstrate value for money, the sales would not go ahead.
Q 83 Mr. Hayes: Returning to the value for money framework, I pushed the Minister earlier on whether that might form part of the Bill itself, or at least part of guidance. We have returned to it time and time again this morning, and it is critical to the essence of the Bill and the determination of all Members to get the best possible outcome. Will it be in guidance? How can the value for money framework be absolutely enshrined in further considerations? You will understand that people more sceptical than me will argue that with substantial, £24.2 billion public sector borrowing—£6.7 billion up on last year—there will be a temptation to cash in. I have no doubts about the Minister’s integrity in that regard, but a value for money framework would give him the extra security of knowing that he was protected from the ravages of the Treasury.
Q 84 Mr. Hayes: That kind of approach would apply to any Government at any time, and we would all suffer from similar pressures in those circumstances. Given that the Minister set out the framework in Hansard on Second Reading and has emphasised it strongly today—I have no doubt that he will do so ad nauseam as the Committee’s proceedings continue—why not append it to the Bill, at the very least in the form of guidance? I do not understand the objection to that.
Bill Rammell: I honestly do not think that it is necessary.
Michael Hipkins: There is a general responsibility for Ministers on the one hand, and for the Department’s accounting office on the other hand, for obtaining the best value for money for the taxpayer, as with any transaction. That applies as much to the sale of student loans as to anything else, so there is an existing and explicit responsibility and accountability.
Q 85 Mr. Hayes: I do not want to be unnecessarily partisan, but one thinks of QinetiQ and of the sale of the gold reserves. At the end of the day, it is understandable that people are nervous about Governments per se—I will be entirely even-handed about this—when it comes to realising the value of assets. Anything more that we can do to be absolutely certain is desirable from a public interest perspective.
Bill Rammell: I understand the argument that is being put forward but, with respect, I do not accept it. The clear setting-out of the value for money framework, against which we will be judged, gives a robust mechanism to ensure that the public get value for money in respect of these sales.
Q 86 Angela Watkinson: I am sorry to press even further on this specific point, but the term, “value for money” is to a degree a subjective one. Will the Minister help by explaining just how one does the calculation of the bottom line, below which a sale would not proceed because it would be judged not to provide value for money?
Bill Rammell: It is probably worth while restating what I set out on Second Reading with respect to value for money. The Bill is about enabling a long-term programme of student loan sales, so we need to think about market conditions over the longer term, not just the short term. As far as any continuation of the current market turbulence translating into poor value for money of any sales of student loans, if those circumstances prevailed, we would not go ahead with the sale at that time. I also said that part of the value for money assessment will involve gathering full and clear market information and, crucially, assessing the value of keeping the loans in the public sector on our balance sheet. We need to do that in order to be able to compare bids for selling the loans against the value of holding them. Assessing those values requires a number of projections that estimate the level of repayments that would be made by borrowers stretching far into the future. We will estimate the rate at which graduates will repay and the number of loans that will be written off because, for example, the borrower has become permanently disabled. Those projections have to be based on assumptions and estimates, so there is a degree of risk built into them.
In assessing value for money, we also need to take into account the value of transferring that risk from the public sector to the person or the organisation who buys the loan—that is not something that lends itself to easy quantification. As a result, the assessment will need to consider a range of values based on differing assumptions and estimates of risk. That is only one part of the value for money test; the others include ensuring that the sale is competitive and that it takes place under normal market conditions. It also entails ensuring that potential bidders have enough information to make good bids—that is an important requirement, so we will make a judgment about what type of loans in general are initially being sold—and ensuring that there is a genuine transference of risk from Government to the purchasers. That is the framework within which we will make judgments. It is also the framework against which the NAO, the PAC and others will be able to judge us in the longer-term, once the sales have taken place.
Q 87 Mr. Wilson: Following on from the questions of my two hon. Friends, I wonder if I might tease out a little more information and perhaps fill a few gaps. I know that the Minister has been here for a couple of hours now, so he is probably beginning to feel a bit tired.
Bill Rammell: I have a glass of water, I hasten to add.
Mr. Wilson: I want to ask the Minister how the Government will go about selecting the loans that will be sold. Is there a selection process? Is it going to be random? Will you look at selling high-risk groups first or the low-risk groups first? How exactly are you going to do it?
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Bill Rammell: I shall say something, and Mike might want to follow up. Clearly, we want to engage initially with loans where we can demonstrate a good track record of graduates repaying, so that the purchaser has confidence in the proposals and we can generate the maximum income. We would certainly want to ensure a good element of those kinds of sales initially. It will not be on a random basis. We will make judgments about—this fits in with the value-for-money framework—the best ways in which to generate the maximum return.
Q 88 Mr. Wilson: Are you saying that you will sell the low-risk loans first?
Q 89 Mr. Wilson: That would suggest that you expect there to be diminishing returns as you sell one tranche after another.
Bill Rammell: No.
Q 90 Mr. Wilson: Presumably, if you sell the ones with a track record first, as you go through the loans—
Bill Rammell: I believe that with the subsequent tranches we will have demonstrated a good track record of returns. However, that will not necessarily be so. We are still in the initial stages of the income-contingent loans, some of which will need longer to demonstrate a strong track record. That does not mean that I do not believe that that track record will become evident.
Q 91 Mr. Wilson: But one of the reasons for selling the loans and getting them off the Government’s books is to move the risk to the private sector. From what you say, it sounds as if we will be left with the biggest risks still on our books. That does not sound like a fantastic deal for the taxpayer.
Michael Hipkins: Let me be clear about this. We discussed with our sale’s adviser how to get the loans on to the market. I said that it might turn out that the advice is to leave a period between when a graduate is due to repay and when the loan is put on to the market. New loans will be due for repayment every year. It is not as if there is a fixed pot of loans and that we will sell the nice ones first and be left with the rest. As the loans process continues, as new ones come on every year, and with greater experience of how they perform over time, we could gradually sell more and more.
Q 92 Mr. Wilson: But you are still going to sell the ones with the best track record, which will be the lowest risks to the purchaser.
Michael Hipkins: No, that is not what I was saying. I said that you might delay the sale of some loans, but you would still sell them in the end.
Bill Rammell: Not because inherently they are greater risks, but because, owing to where they are in the repayment cycle, they cannot demonstrate a secure track record. That does not mean that they will not one day demonstrate a track record.
Q 93 Mr. Wilson: I am not clear about this, so let us go back over it. You will be selling loans first that have a track record and which, therefore, will be a low risk to the purchaser. That is what you said, Minister. However, subsequently, I feel that Mr. Hipkins has backtracked.
Michael Hipkins: May I draw the distinction between low-risk loans and loans about which it is difficult to establish a track record? Those are two distinct things. The Minister was not saying that it is the Government’s intention to sell the low-risk loans. It is the Government’s intention to sell all of the loans, but to bring those loans to sale when there is enough known about them for the risk to be properly calculated by a potential purchaser.
Q 94 Mr. Wilson: If you know that there are high-risk loans and you have information about them, are you going to try to sell those loans?
Bill Rammell: Can you define what you mean by high-risk loans?
Q 95 Mr. Wilson: If somebody has a sporadic level of repayment of their loan and it is therefore regarded as a higher risk for a potential purchaser, will you try to sell such a loan in the tranches that you sell off?
Bill Rammell: The default process under the income-contingent repayment system is fairly difficult to achieve because it is very clear that repayments are made through HMRC when you are in work and earning more than £15,000. In the very small number of cases where there is a default, it is the responsibility of Government and whoever owns the debt to deal with that through the Student Loans Company.
The difference is not between high risk and low risk for determining in what order the sales take place; it is about which loans have a sufficient track record of repayment. Those who have just graduated from university and started their repayments in April the following year will not have demonstrated themselves to be robust repayers. In no sense does that mean that they will not achieve that status. It simply means that it is too early in their repayment profile for them to have demonstrated it.
Q 96 Mr. Wilson: No, but people can have a good or a bad track record of repaying. You will have gathered the information on both of those categories. I am trying to get at how you intend to include both of those in the sale process and when.
Michael Hipkins: Both of those sorts of loan would be in the sales process. A point I made earlier in the sitting is that we want the potential purchasers of loans to understand the sort of asset that will underpin the bonds that they will buy. Part of that is understanding how undergraduates’ salaries change over time and what the range of graduates’ salaries are. We have some track record for the portfolio overall. The intention is not to distinguish between loans that are low risk and high risk and to sell one category and not the other. The intention is to sell all of the loans. In order to get a good price for the loans, the purchasers have to understand them. We are talking about the process of ensuring that they understand how the loans perform in the generality so that they can put the right price on them.
Q 97 Mr. Wilson: I will move on, although we might have to return to that issue at some point in the next few days. Will graduates be informed when their loan is sold on?
Bill Rammell: Yes. As soon as the sales have taken place, graduates will be written to through the Student Loans Company informing them of the fact that the sale has taken place and reassuring them that nothing will change in the terms and conditions and the repayment processes.
Q 98 Mr. Wilson: Have you seen any rise in the number of individual voluntary arrangements being made by graduates who have taken out these loans?
Bill Rammell: There has been an increase. However, that is not due to an increase in graduate indebtedness and default, but to the way that the IVAs operate.
Michael Hipkins: There has been a general increase in IVAs and some of the people who apply for an IVA have a student loan in their loan portfolio.
Q 99 Mr. Wilson: Do you expect those numbers to increase at all? Can you give a rough estimate as to how big an increase there has been?
Bill Rammell: I am happy to provide that information during the course of the Committee.
Q 100 Mr. Wilson: Are you at all worried about student organisations advising graduates that they may want to go along the IVA route if there is a particular Government policy that they do not like with regard to the sale of these loans?
Bill Rammell: That would not be desirable or necessary. I have made it abundantly clear during these discussions that the terms and conditions and the effect on the borrower are exactly the same, whether the debt is owned by the private sector or the Government.
Q 101 Mr. Wilson: I have one final question, which returns to the issue of value for money and the concerns that have been expressed by a number of hon. Members. There are various tranches to each sale. Can you give us an assurance that there will be a report in the House about the value for money achieved which will be independently looked at and commented on by the National Audit Office?
Bill Rammell: The National Audit Office has its own way of reporting to Parliament, as it does through the Public Accounts Committee. I can give a reassurance that, just as my predecessors reported to Parliament on the sale of mortgage-style loans, exactly the same thing would happen with respect to these sales and future sales.
Q 102 Rob Marris: Rather more prosaically I want to return to clause 4(3) and the loan regulations which, as I understand, say that a Secretary of State can pay the bidding costs of a loan purchaser. Is that what it is designed to say? I am not sure why it is in the Bill.
The reason I raise the matter now, rather than during the course of the Bill, is because I thought that we might have a debate to clarify it a little. If it says what I think it does, then I have reservations about it. I wanted an explanation on it, but I may have misinterpreted its import. I see the Minister scratching his head, so I will carry on. It seems to say that the Secretary of State can reimburse the successful bidder for their bidding costs because of the high cost of bidding, for example on PFI contracts, although we are not going to rehearse that discussion again. However, in recent years it has happened that the Government will, on occasion, reimburse the bidding costs for a PFI contract for those bidders who are not successful. Clause 4(3) does not say that.
Michael Hipkins: The measure is meant to reproduce what happens now with the Secretary of State. If an individual borrower defaults and causes the Secretary of State to spend money in order to pursue that default—that would be through the Student Loans Company—that additional expense can be reclaimed from the borrower. That is what happens now with Government-owned debt. Clause 4(3) extends that to privately owned debt. If an expense is caused by an individual borrower defaulting, that expense can also be reclaimed by the private debt owner. It simply puts the Secretary of State and the private debt owner on the same footing.
Mr. Hayes: I did not hear the detail of that, it was too soft.
Michael Hipkins: I am sorry. The present situation is that if a borrower defaults and causes the Secretary of State expense in reclaiming the defaulted payment, that additional expense can be claimed from the borrower. The clause extends that facility to the debt owner if the debt is sold. It puts the debt owner on the same footing as the Secretary of State is now, in the event that an individual goes into default and causes costs in the recovery of that debt. It is not to do with the cost of making a bid.
Bill Rammell: To paraphrase, it is the equivalent of the awarding of costs.
Q 103 Rob Marris: I understand it now. It might have helped if that explanation had been in the explanatory notes—I cannot find it in there—and if the second line of the subsection had referred to reimbursement by the borrower of the costs or expenses incurred. It appears maladroitly worded, but I now understand what it means.
Bill Rammell: I accept that, and if, during the formal part of the proceedings, that point were to be made, we could clarify it for the record.
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Q 104 Sarah Teather: In the absence of my colleague Mark Williams, I should like to ask about Wales. What representations has the Minister received from Welsh Ministers on the Bill? Was consideration given to providing a framework, rather than the mirror powers in the Bill?
Bill Rammell: I have not received representations from my colleagues in the Welsh Assembly. However, my understanding is that they are content with this approach.
Q 105 Sarah Teather: Have there been discussions with the Welsh Assembly?
Bill Rammell: Those discussions have been undertaken at official level, and this is certainly not about the granting of legislative power. The Assembly already has responsibility for student loans. This is about the granting of Executive power to carry out the sales of loans if that is what the Welsh Assembly Government choose to do.
Q 106 Sarah Teather: What estimate has been made of the value of the student loan book in Wales? If the asset is sold on, will the proceeds be made available to the Welsh Assembly, or will they come to the Treasury?
Bill Rammell: The estimate as of 1 April 2007 in respect of Wales was £1.1 billion. As in England, moneys going from any sales of the Welsh loan book are expected to transfer to the Consolidated Fund with no direct financial gain to the Welsh block.
Q 107 Mr. Hayes: I have just two or three final questions. Will the Minister confirm that there is no intention to involve anyone else besides the Student Loans Company in the collection of repayments?
Bill Rammell: That is correct.
Michael Hipkins: HMRC.
Bill Rammell: Yes.
Mr. Hayes: Why is that not in the Bill?
Bill Rammell: It will be enforced through the contract—and, actually, the choice of the Student Loans Company.
Michael Hipkins: The point in terms of legislating for the long term is that the Student Loans Company might not exist in the long term, so there needs to be flexibility in the Bill to specify collection by whomever the Secretary of State would like. The intention is that it will be HMRC in conjunction with the SLC.
Bill Rammell: For the record let me make it abundantly clear: we have no plans to do away with the Student Loans Company. We intend it to continue with the processing and administration of loans in respect of both Government and private sector debt.
Q 108 Mr. Hayes: But in respect of loan regulation, clause 5(2) of the Bill states:
“In particular, regulations or arrangements may provide for—
(a) collection by a person acting on behalf of a loan purchaser”.
Thus, not only is the thing that the Minister has assured us of not in the Bill; the opposite is in the Bill.
Michael Hipkins: Let me clarify clause 5(2)(a). For the most part, collections are made through HMRC, alongside income tax and national insurance. However, some borrowers wish to make additional payments over and above the requirements. If they do that, they make payments direct to the SLC. So the provision allows that to continue for people whose loans have been sold.
Q 109 Mr. Hayes: Is accountability to the Student Loans Company, not the loan purchaser?
Michael Hipkins: If a borrower wants to make a payment over and above what they are required to do through HMRC, they can do so, but they do so through the SLC, which would make the payment either to the Government, in the case of a retained loan, or to the loan purchaser, in the case of a sold loan. The clause allows those two things to continue to happen.
Q 110 Mr. Hayes: Time prohibits further exploration of that, but there is another, related issue. As hon. Members will know, British students’ repayments are currently made through deduction of wages by Her Majesty’s Revenue and Customs, but overseas students are dealt with by the Student Loans Company. What is the record of default and repayment in respect of debts administered by the Student Loans Company, compared with those administered by Her Majesty’s Revenue and Customs?
Bill Rammell: We do not yet have a track record because the ability of students of other European Union countries to access the fee loans came in only in 2006, and the repayment will not start until 2009. However, we have rightly been concerned about such matters and, in particular, we will be looking at EC regulation 14/2001—from memory—which enables us to take a case against a student in default elsewhere in the European Union through the British courts, but for the repayment to be enforced through the courts within his or her own country. We are rightly seeking to ensure that we can retrieve any defaults from students wherever they may reside.
Q 111 Mr. Hayes: Given the greater challenges associated with that, which the Minister has recognised and is dealing with, will that part of the debt be attractive to purchasers? If I were selling or buying the debt, I would not touch it with a bargepole.
Bill Rammell: You might touch it with a bargepole when you were able to see evidence that the repayment mechanisms were robust. I believe that those repayment mechanisms are robust, but clearly we are not yet at the stage of students on a large-scale basis repaying in that way.
Q 112 Mr. Hayes: Given the chronology that the Minister discussed in relation to questions asked by one of my hon. Friends, it is unlikely that that portion of the facebook will be sold at the outset. It simply would not have a track record of repayment. It would not be sufficiently proven to be an attractive part of the sale.
Bill Rammell: Not because it cannot be proven to be attractive over the longer run, but the evidence is not there yet. The earlier question tempted me to go down that route, but I anticipated correctly that the hon. Gentleman would want to scrutinise me on it.
Q 113 Mr. Hayes: So the answer is that we have yet to discover quite how it will work out, but we are determined to put in robust mechanisms to ensure that it works out properly and that it is unlikely to form an early part of any transaction involving the debt.
Bill Rammell: The latter part is correct. It is not that we do not have confidence in the mechanisms that have been put in place, but that they have not had time to demonstrate their effectiveness. We have put in—and rightly so—different thresholds according to which European Union country the graduate resides in. In other countries where average earnings are significantly lower than in this country, having a £15,000 per year repayment threshold might mean that the graduate never reached the repayment level. That is why we brought in a variated threshold based on the cost of living and the wages index within individual countries to ensure that, on a fair basis, if a person had a reasonable standard of living equivalent to £15,000 a year in respect of prices and the cost of living within that country, he or she would nevertheless start repaying.
Q 114 Mr. Hayes: Moving swiftly from overseas to the Principality of Wales, what representations has the Minister received about the way in which the Bill extends the powers of the Welsh Assembly? I am particularly sensitive about the matter, given our earlier worries about Wales under different legislation. I have put that as euphemistically as I can.
Bill Rammell: It is an area about which I am sensitive, given that the hon. Gentleman said that I had “form” on the issue on Second Reading. That question was asked by the hon. Member for Brent, East. There has been discussion between my officials and those at the Welsh Assembly. The matter is about the transference of Executive power to enact the sales. The responsibility already resides with the Welsh Assembly, and my clear understanding is that colleagues there are content with the process that we are undertaking.
Mr. Hayes: I am grateful. Thank you, Minister.
The Chairman: Are there any more questions?
Further consideration adjourned.—[ Mr. Michael Foster. ]
Adjourned accordingly at five minutes to One o’clock till this day at Four o’clock.

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