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Lord Elliott of Morpeth: My Lords, does my noble friend accept, from someone like myself who has been involved in the production of beef cattle over a considerable time, that we realise the enormous logistical problem involved in the proposed killing of so many cattle? From time to time, we hear criticism of the Government for being slow in getting the process under way. However, those of us who understand slaughtering and what it involves become angry at those criticisms. Can my noble friend assure me that although the slaughter of the cattle is necessary and is going ahead, the process will be humanely carried out?

Viscount Cranborne: My Lords, I am grateful to my noble friend for his understanding. We all wish to see the difficult process proceed seamlessly and without problems. The fact that it had to be introduced speedily, involving a massive number of cattle, has made teething problems more the order of the day than anyone would wish. However, I hope and believe that they are being solved rapidly.

Of course, humane killing is extremely important. My noble friend will be aware of the improved measures that have been taken in that respect in the past few years.

Lord Soulsby of Swaffham Prior: My Lords, I am grateful to the Leader of the House for the Statement. All of us in this country who are connected with animal health, as well as those on the continent, in Germany, France and countries which appear to be giving us trouble, understand that the scientific evidence is that there is no reasonable connection between BSE and the human disease, CJD.

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What needs to be done now is to make that fact abundantly clear, both to our own public and to people in the European Union by whatever means the Government have in their power. Unfortunately, I meet many people who ask me about the evidence when it is quite clear to me, but it seems that it has not yet reached the public. I make the plea that an effort be made in that direction, not only with our own public but also that of the European Union and elsewhere in the world where our beef is banned.

Viscount Cranborne: My Lords, as the whole House knows, my noble friend speaks with great authority on such matters and I am grateful for what he said. I can only refer him to my earlier answers. The fact that he is as keen on it as I will make us redouble our efforts.

Lord Monson: My Lords, in order to put the significance of our current negotiations in Europe in proportion, can the noble Viscount tell us approximately what percentage by value of our traditional exports of beef and beef products is accounted for by tallow, gelatine and semen?

Viscount Cranborne: My Lords, I fear that I cannot do so off the top of my head. Rather than mislead the noble Lord with an approximate answer which I could give him, I shall write to him.

National Health Service (Residual Liabilities) Bill

5.8 p.m.

Second Reading debate resumed.

Lord Blease: My Lords, the written content of the Bill is small but in my view the text presents large issues of definition, compliance and practical application. While I shall address my remarks to Clause 3 concerning Northern Ireland, I fully support and concur with the points ably and clearly stated by my noble friend Lady Jay.

Over the past five years, it has been my misfortune to be a more frequent user of the Northern Ireland health services than I should have wished. In my experience, there have been many great forward, progressive and effective developments in the health services in Northern Ireland, especially in hospital treatment and care. Much of that steady improvement has been the result of nursing care--of the personal attention and dedication of doctors, surgeons and nursing staff.

There is, I believe, a link between the issues in the Bill and the sitation in the Northern Ireland health service over the past few months. A newspaper leading article, after quoting a Northern Ireland doctor, who is also an MP, said that,

    "the Health Service (...proudly) created in 1947, and which in the past decade has been systematically dismantled [by those] intent upon imposing free market ideologies on an essential service that belongs to us all".
I could continue with various quotations on the situation as expressed in numerous newspapers in Northern Ireland which indicate that the Northern Ireland health

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service is in a very serious situation. Indeed, some of the trusts already established are on the verge of collapse. That is not an over-exaggeration. I do not want to take up the time of the House on that particular detail. I merely want to mention that there is a crisis in Northern Ireland and elsewhere throughout the United Kingdom in relation to the future of our health services and health authorities.

It is worth drawing attention to the fact that health and healthcare policies involve much more than financial and economic factors. Disciplines such as ethics, sociology and medicine have crucial roles to play in helping to resolve the difficult dilemmas that face contemporary health policy makers and the necessary health and hospital services. In that respect the Bill ignores the full implications of the proposed transfer of residual liabilities.

I invite the noble Baroness, Lady Cumberlege, kindly to defend the word "liabilities" in Clause 1. As I understand it, the legal implications of the word include obligations and duties. So, in any transfer, consideration must be duly given not only to finances and property rights, but also to obligations and duties and the commitment of the body concerned to patients and the community and the vital ethos of the health service unit concerned.

I turn to the proposed procedure for exercising the power in Clause 3 of the Bill relating to Northern Ireland. The Order in Council procedure of the Northern Ireland Act 1974 is exercised by the Northern Ireland Secretary of State and the Northern Ireland Office. Surely the time factor involved in implementing the Clause 3 provisions is unwieldy, especially when one is faced with the consequences of the day-to-day administrative necessities of modern health services and hospital commitments and also the proposed transfer of liabilities, in the full sense of the word. What about community traditions? Can those be transferred? Can the Bill provide for the continued support of local voluntary workers?

It is claimed that the Bill is necessary to fill a gap in health service legislation. I hold that the Bill is seriously flawed and inadequate. I should welcome in the Minister's reply some hope of ministerial adjustment and administrative reality, all in the best interests of our world-renowned National Health Service.

5.15 p.m.

Lord Rea: My Lords, I declare an interest. Until recently I was for nearly 40 years a National Health Service practitioner working mainly in a health centre but also in National Health Service hospitals.

In the Explanatory and Financial Memorandum to the Bill it is stated that there is,

    "the possibility of ... expenditure under other enactments relating to the NHS... [which] It is not possible to quantify".
Thus, the relatively innocent seeming change that the Bill introduces from the permissive mode of the 1990 Act to the mandatory mode in a reference to the Secretary of State's "duty" to settle the liabilities of trusts opens up a potentially bottomless pit, since trusts may borrow up to £5 billion. I found that a surprisingly

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large amount. However, I read the Treasury Select Committee's report and the noble Baroness, Lady Jay, also quoted that same figure from her reading of the report. It was a highly informative document. Despite that, perhaps we should take some of its contents with a little pinch of salt since it was published on 1st April. It certainly contains some passages which are truly worthy of a publication of that date.

The point is that although the Bill was designed to encourage PFI bids by giving applicants greater security in the event of the financial collapse or other inability of a trust to pay its due fees to a PFI contractor, it contains nothing restricting that proposal to the PFI scheme as such. So debts run up in a variety of other ways could be covered by the Bill. This is where the famous remark of the Secretary of State, already quoted by my noble friend, is relevant. When he said, erroneously, (in col. 618 of the Official Report) that trusts could not borrow, was he revealing his ignorance or was he trying to throw the committee off the scent? Up until now potential lenders may have hesitated a little before making a big loan to a trust. From 1990, when trusts were created, until now, a trust has not been able to offer its physical assets as security, as my noble friend pointed out. That was hastily mentioned by Mr. Andrew Neill, the Secretary of State's adviser before the Treasury Select Committee. Now the sky is virtually the limit in terms of what a trust can borrow, since the Secretary of State will pick up the tab if the trust cannot pay and is dissolved.

In theory, that presents another problem. The Bill requires the Secretary of State to settle outstanding liabilities only if a trust ceases to exist. I see a hypothetical situation in which a trust may not be in a position to pay its agreed PFI dues but does not cease to exist. In fact, it may well be in the Secretary of State's interest to keep that trust afloat, since under the new Bill, when it becomes law, the Secretary of State, in the name of the taxpayer, will be required to settle the liabilities only if the trust ceases to exist.

Potential PFI bidders may not be completely satisfied that this Bill offers them the total security (at taxpayers' expense) that the noble Baroness has claimed for it. It will be interesting to see whether and how quickly the many long awaited PFI-funded schemes get off the ground after the Bill becomes an Act.

Up to now, I have spoken largely about the Bill in front of us rather than the PFI scheme as a whole. With a professor of economics, businessmen, bankers and financial experts also speaking in this debate, I feel rather ill qualified to discuss matters of finance. However, I have a number of worries about the PFI, which are shared by my noble friend Lord Winston and the British Medical Association. In a sense, the whole scheme is a form of hire purchase. It has always been my policy to avoid hire purchase like the plague, because I know that in the end I shall have paid through the nose, possibly double or more than the original price of the article for sale. If I do not have the money, it is cheaper to borrow from the bank. In the Government's

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case, they can obtain a much better rate from their equivalent of my bank than I can. So why go for hire purchase?

I am aware that the public sector borrowing requirement is too large and we must try to avoid increasing it whenever we can do so. But if, through increasing the PSBR, an asset is created as a result, surely that is different from using money taken from the PSBR for current expenditure or revenue. It is the same kind of equation that is known by any competent housewife.

Finally, I am very concerned about handing over not only the building but also the running of a hospital to the private sector. Clinical services, it is said, will be exempt. My noble friend Lord Winston went into that matter in some detail. But the whole ambience of a hospital should be therapeutic. The noble Lord, Lord Harris, in his very interesting maiden speech, said as much. It has been pointed out here and in the other place that the ward or out-patient housekeeper is very much part of the clinical team. Making a profit from a fixed payment is difficult to reconcile with that. Also, voluntary help, which all hospitals have and need, may be less likely to be forthcoming when private profit rather than public interest sets the tone.

Nothing that we have said will be able to prevent the Bill becoming law exactly as it stands--so much for your Lordships' House being a revising Chamber--but it is appropriate that we record our misgivings. It is extremely important that the operation of the PFI is clearly monitored. I hope very much that the noble Baroness will be able to say that independent health economists outside the department will be invited to undertake carefully designed studies to evaluate the effect not only of the Bill but of the whole PFI scheme as it develops.

5.23 p.m.

Lord Haskel: My Lords, the Minister clearly described the relationship between the NHS trusts and the Secretary of State. Obviously there is a flaw in that relationship which so concerned the banks that they required more than a clear statement from the Secretary of State that he will assume the liabilities of NHS trusts if the worst should happen. They required a law--hardly "a technical change", as the Minister described the Bill. Can the Minister tell us what that flaw is?

I am in favour of the PFI. Indeed, some would say that its origins lie with the Labour Party. I well remember some years ago working on a partnership system of raising additional finance for the railways from the private sector. I have no doubt that if private finance is to be used in the public sector, the public sector must be in control. That is not only because the public would expect the project to continue operating even if it got into financial difficulties, but also because, as my noble friend Lady Jay said, the public sector must set the priorities. That is why private finance is suitable for projects which are in addition to publicly financed projects and not, as the Government seem to intend, instead of them. That is why I am surprised that the Minister said to the Treasury Committee on 16th January 1996:

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    "the case where the PFI is the option that we are required now under our own guidance to examine first is where there is a major investment project".

Of course, that created a bottleneck, through which every NHS project had to pass. Perhaps that is one reason for the delays about which my noble friend Lord Winston complained. However, he will be pleased to hear that help was at hand. In April, the bottleneck was partly cleared by a Treasury circular saying that the PFI option need not be examined first if the option was "patently absurd or unrealistic".

Surely the decision on whether to use public or private finance is not a matter of absurdity. It must be a matter of suitability. It is suitable to use private finance in a long-term project, say, to construct a building and operate some of the services, where there is every incentive to benefit from good design, efficient management and the opportunity to create a goodwill element. However, the commercial reality that appears to prompt the Bill is different. Risks are being transferred and NHS assets pledged as security. The lenders take the view that the assets belong to the Secretary of State and so we have the Bill.

My business instincts are against the Bill. Perhaps I may explain why. First, no businessman rushes to take on more liabilities. If the Secretary of State already has those liabilities, the Bill is unnecessary. If he does not have those liabilities, does he know what he is taking on? My noble friend Lady Jay explained that he probably does not know, despite the Minister's assurance that "controls" are in place. My suspicions are aroused by the aura of undue haste which surrounds the Bill. Sensible businessmen and presumably sensible Ministers move gingerly and reluctantly to take on new liabilities, even in a sector that they know well. The PFI is untried in the National Health Service. To rush into taking on more liabilities in an area not fully understood will only end in tears.

Secondly, the commitment is open-ended. How can the Secretary of State honour the liabilities of any NHS trust, irrespective of the manner in which they have been incurred? Despite the monitoring, is the Minister satisfied with the probity of every NHS trust? Is the Minister happy to guarantee the liabilities of a yacht in Cannes harbour without which trustees and manager stoutly claim that they cannot run their business? My Lords, stranger things have happened. Would it not be wiser to guarantee the liabilities after proper control and appraisal and after adequate scrutiny by Parliament?

That leads me to my third objection, which is about the issue of off-balance sheet debt. The Bill seems to imply that, instead of using private finance to fund specific projects, the Government are using private finance to fund projects which are not separately identifiable. The benefits of the project appear in the trust accounts as an asset, but the liabilities are in another account. Is the Minister satisfied that the monitoring described by the Select Committee as "rather haphazard" will pick that up?

That kind of accounting is deliberately misleading. The only way to deal with it is to have full transparency because the devil is in the detail and the Bill ignores

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that. It also ignores the fact that, by assuming that liability, the Secretary of State is removing the ultimate sanction of the market; that is, bankruptcy.

In normal business the sanctions are clearly understood. If a company goes bust and nobody else can be persuaded to take it on, then the business ceases. But if a company running an NHS activity goes bust, nobody expects the patients to be put out onto the street. Presumably the sanction is that the management is sacked and new management is brought in to sort out the problems. Without the normal sanctions there must be transparency and clear moral priorities.

The point I wish to make is that, as the sanctions of bankruptcy are removed by the Bill, so the discipline of clarity must be put in its place. Then it will be clear what happens if the trust or the supplier of the hospital goes bust; what the Government do; what the lenders do and who takes over the obligations. The public are entitled to know what arrangements have been made and they need to be spelt out clearly. That is why I entirely support the recent report of the Treasury committee in another place which raised similar concerns and recommended that an annual report be produced which brings together the details of PFI-financed projects undertaken by individual departments as well as details of projects where PFI finance was considered but conventional public finance was eventually preferred.

The Minister assured us that the finance of the NHS trusts is, in practice, under the effective ultimate control of the Secretary of State. If that is so, we need to know precisely what is the nature of their independence and why the Government have to guarantee their liabilities. What has changed since the NHS trusts were created in 1990?

One final point about the Bill that concerns me is the ever-increasing encouragement by the Government for hospital trusts to out-source. They do that not only by guaranteeing liabilities, but also, in April, by exempting the private health contractors themselves from VAT. I cannot speak from experience of serving on a hospital trust, but I can speak with experience of business. Out-sourcing is not all good, as we are finding out. It needs careful management to handle it successfully. The chances of success are much greater when we give an outside organisation something to run which is already up and working. If it is a new activity, it is far less risky to manage the development oneself and retain the skills in one's organisation. The Bill and the pressure to out-source encourage management to ignore that.

During the development phase there are constant changes, and every change costs more money when it is outside one's organisation. We are seeing that happen with the benefits system and the National Insurance computer system. Organisations must retain skills in-house so that they have the option of taking back activities which have been out-sourced unsuccessfully. The Minister may remember that that is exactly what happened when the police tried to out-source electronic finger printing. It was unsuccessful. Because we did not retain the skills, the work had to be contracted out to the police department in Seattle, Washington, at

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immense cost. If the skills are not retained in the NHS, ultimately there will be no alternative to privatisation--whether or not the Government wish that.

Clearly there is uncertainty and confusion here--perhaps that is why there are so few noble Lords opposite supporting the Bill. A lot of public money is at risk and, more importantly, public health is involved. Where public health and public money are concerned, there should be no confusion. I therefore urge noble Lords to oppose the Bill and the Government to think again.

5.34 p.m.

Lord Dean of Beswick: My Lords, I listened with interest to the speech of my noble friend Lord Haskel. It was extremely thorough from a business point of view about the dangers of mixing the public and the private sectors. I should like to ask one or two questions on the costing of projects.

Historically, in the health service and in local government, when local authorities were developing and hospital authorities were instituting procedures to undertake large capital projects, more often than not--certainly in the case of local authorities--they would run into the government yardstick. That quickly indicated whether the project was over the top or whether the money would be forthcoming in support of it. If the yardstick was not changed, the project did not go ahead.

I see my noble friend Lord Sefton nodding his head; I believe that I am right. But in this case we have the reverse. The project will go through and, when it gets into difficulty, the Government will help it out. The trouble is that there is no normal yardstick. Two trusts may have two different standards. If somebody built a hospital in one of the poorer areas of the country socially, I suspect that it would not be as palatial as one built in the stockbroker belt by the trust registered there. I wish to ask the Minister a question, though I do not expect her to answer tonight. Is it worth considering what yardstick should be used to prevent willing investors, if there are any, putting in their money and going over the top on the basis that they cannot lose anyway?

I read extensively the Second Reading speeches in the other place and some of the evidence submitted by the Secretary of State to the appointed finance committee on the subject. I can only draw the conclusion that, whatever takes place, if the project collapses the Government will have to step in. They certainly could not stand aside and do nothing. We have heard it asked in the past, "Who will launch the lifeboat?" There is no question but that the Government would have to launch it. They could not leave an area of the community without adequate health services simply because a business collapsed.

I asked a Question today which the Minister answered meticulously and pointedly. However, I may have misunderstood part of the answer; it may simply be a matter of words. It concerned a National Health Service chief executive who talked about a gentleman who was

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extensively reported for his lack of probity in the Yorkshire Regional Health Authority. The chief executive did not say that the gentleman would not be employed in the health service; he said that he certainly would not be given another job as a regional controller when the changes took place.

I have with me today a friend who is a prominent consultant. He said that those comments underpin quite clearly the fact that, if a person is found to be at fault in connection with a large number of incidents which result in substantial sums of money being lost to the National Health Service--minor sums can be reclaimed--even though he can be dismissed for that lack of probity, there is no way that he can be prevented from taking a job with another trust if he applies and is offered one.

In my experience in local government, if a city treasurer--we are talking about a senior officer, not an office boy; the person involved was a regional controller--of one of the large cities was found to have manipulated funds to suit himself, he would receive short shrift. I have no doubt that none of the other local authorities would touch him. When we were on the Wessex trail before, I asked the Government to bring in punitive measures against people who were raiding public funds.

What comes across clearly from the examination by the National Audit Office is that those who were at fault felt in some way that what they were doing was all right by the Government and that they were not bound by the Whitley Council. One of the ladies concerned who was found to be grievously at fault in the Yorkshire Regional Office said that they had checked with some of the other regional authorities. They already knew what was going on in Yorkshire but they were using health service money to balance up the negative equity of their houses. It is beyond belief that health service money could be used for any such purpose. I am not a lawyer but that is not ultra vires; it is outright fraud. No one has been prosecuted.

When the Government first brought into the health service this method of privatisation I wonder whether they were right in saying, "We are going to introduce the entrepreneurial factor". An entrepreneur means someone who is a yuppie or a whiz-kid--they will do it their way but they will succeed. I believe that when they read that they were all entrepreneurs and that they were being given these jobs, they felt that the rules did not matter. Was any example set to dissuade them when the first clutch were found out?

I do not want to go back to the issue of Wessex but I must because it has been mentioned today. What took place there and subsequently is mentioned in the National Audit Office report. What did the Government do over Wessex? The loss of money to the health service in that area alone had reached £63 million. Those are not my figures but the figures of the National Audit Office. Some of that money was reclaimed but the majority was not.

It took me almost two years, with the assistance of other Members--the noble Baroness, Lady Robson, was one--and of a new Back-Bench Member in another

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place who lived in Wessex, to get to know what was happening in Wessex. The then Secretary of State, Mrs. Bottomley, and her number two, the Minister of State--the present chairman of the Conservative Party--had issued an instruction that a district auditor's report had to be kept confidential. The Public Accounts Committee met for four-and-a-half hours to grill the then chairman of Wessex, Mr. Robin Buchanan, and Mr. Duncan Nichol, who was then the top gun in the health service, and discovered that the way they had run the place was beyond belief. If a town clerk or a council leader had run a city in the way they had run their authorities they would soon have found themselves with Ronnie Barker doing "porridge". There is no question of what would have happened. But nothing was done.

One of the people most criticised by the Public Accounts Committee was then the chairman of Wessex. He was not the main culprit. He was put in to rescue the job. However, he did not do it very well and he himself came in for severe criticism from the Public Accounts Committee in its final report for purchasing a computer for £3 million which could have been bought for £1 million. Someone was criticised for paying 104 salaries for a period in order to privatise the computer sector when fewer than 70 people were actually working. When he was challenged by the Public Accounts Committee, he said, "You don't expect me to go round counting". No, but we do not expect someone to pay 104 salaries which he had no right to be paying.

I come back to this question. What did the Government do? They knew that all this was going on and they knew that it was bound to hit the surface. When Bob Sheldon, the Chairman of the Public Accounts Committee, commenced his remarks by saying that the proceedings of the committee would be open as there was so much public concern on the matter, the lid blew off. But then the Government made a colossal blunder. They gave the impression that it did not matter, because while all that was going on, the second chairman, who had been severely criticised, was appointed chairman of the Supplies Authority, a new body which the National Health Service was setting up, which is the biggest spending unit in the National Health Service. It has an out-turn of between £3 billion and £4 billion a year.

It is only realistic to assume that all the chairman of these bodies knew what was going on. I had it in local government. I knew what they were doing in Liverpool and they knew what we were doing in Manchester because we used to meet and talk about what was going on. I firmly believe that when the chairmen of the former regional authorities came down to London for meetings and dinners they knew what their colleagues were doing. They were not islands. They did not act in isolation. They knew the code of conduct, but they all broke it. In this situation a person criticised by a senior committee of the House of Commons was not only not dealt with but was given a substantial promotion.

People who were doing the same or similar things, but not on the same scale, in other regional health authorities might say, "They are not going to touch us. It is okay". I pleaded in this House for the Government to subject those people to the same surcharges faced by

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local councillors. I am talking about appointed members, as I know that employees can be dealt with. I am talking about appointed members, whoever they are and whichever party they belong to. But no one bothered. We were told that they had done nothing wrong, that they were lacking in probity but had done nothing illegal. We were told that it was ultra vires. And on that basis they got away with it.

I believe that there are still substantial sums of money which may have been removed from the aegis of the health authorities. The cases of Wessex, West Midlands and the one in Yorkshire may involve enough money to build a major hospital. We are not talking about peanuts. The former nine regional health authorities that were left ought to be examined on the basis of what people have said. As far as I am concerned--I might be wrong--three authorities have been examined and the probity of the people involved at the highest level was found wanting. It is worth calling in the National Health Service ombudsman or someone from the National Audit Office to go through the whole matter so that if there is a clean sheet we shall know and we need not waste our time in future tilting at windmills.

5.49 p.m.

Lord Desai: My Lords, this is a short Bill. I do not intend to discuss the merits of PFI as such. I shall confine myself to discussing whether the Bill is necessary. There is a cautionary tale behind the Bill.

As the noble Baroness, Lady Robson, said, there has always been a provision in the National Health Service since 1948 that the Secretary of State for Health is responsible for the assets and liabilities of hospitals and other practices in the National Health Service. So why do we suddenly need this particular Bill? Thereby lies a story of what I might call the unforeseen consequences of privatisation, as the Secretary of State said to the Select Committee in another place. Now it is necessary to make clear that the Secretary of State has the duty to take over the liabilities of trusts, etc., which may shut down. Before that the Secretary of State did not have a duty, but a general responsibility. That is because if there are private finance initiatives in the National Health Service, it is not clear what is the status of a trust. A trust is not a private company which can be made liable for its own debts. Therefore, one has to have some kind of a new quasi-law of bankruptcy as regards trusts.

Because of private finance initiatives one has to make the risk very clear to private investors that if they invest in a health trust and undertake a project in a hospital they will not be left with a firm which goes bankrupt with debts unpaid. So we are now saying that anyone who invests in the National Health Service under the PFI will have a clear guarantee that if anything happens the liabilities will be taken over by the Secretary of State for Health.

That is a very interesting consequence because PFI was originally invented in order to get money from the PSBR. We have not thought through the consequences of PFI properly and there is a likelihood that some of them may come back to the PSBR. I am intrigued to

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read in the first clause of the Bill the words, "ceases to exist". Why does a hospital trust "cease to exist"? It can be administratively shut down or it may merge voluntarily. But can it technically go bankrupt? Is this Bill being introduced because we may find that units undertake liabilities for which there is no matching cash flow and, because of that, they go bankrupt? Is this Bill being introduced foreseeing the possibility of what we technically call bankruptcy in commercial operations as regards units in the National Health Service?

If that is so, we have to be very clear that such cases which involve a mismatch of cash flow and liabilities will not harm the clinical operations of the unit. A hospital trust may go bankrupt because some building, or whatever, takes place under PFI but does not generate sufficient revenue to meet the interest commitments. The unit will go bankrupt. That will happen if something is privatised or semi-privatised.

Given the distinction between clinical and non-clinical operations, how does one make sure that the clinical operations of a technically bankrupt hospital trust are protected? If bankruptcy arises that does not mean that it ceases to exist. The trust is only financially bankrupt and not physically destroyed. I would like the Minister to address the question of whether the Government have thought through technical bankruptcy for hospital trusts and whether this Bill is designed to foresee those conditions. If a trust ceases to exist for financial reasons, are there ways of protecting its clinical operations so that at least that side of the hospital is allowed to proceed while the unit is being restructured financially?

As I am sure noble Lords who have been in business know, a company which goes bankrupt can be reconstructed and begin operating again. I would like the Minister to say whether the financial and clinical side will be sufficiently separated to protect the latter, whatever happens to the former?

The next matter is germane to the general PFI issue although not necessarily to the NHS. This provision is going to come to the universities. The Government are urging PFIs on universities in quite a large way. The liabilities of universities are not going to be taken over by the Secretary of State for Education. If a university goes bankrupt because it has taken on private finance and cannot meet its commitments, have the Government thought through the consequences? The noble Baroness need not answer that question because it does not concern her department. Have the Government really thought through what will happen to universities which go bankrupt? Since the Government have postponed decisions by appointing a committee to look into university finance, within the next 18 months one or two universities are going to go bankrupt. At that stage we shall have to face up to the question of what happens to the assets and liabilities when they go bankrupt.

My general point is that if one adopts a market strategy without having a full range of private property institutions there will be problems. We shall have then a half-baked market. Hospital units are neither private firms nor government departments. We now have to consider the possibilities. The NHS operates not under

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market conditions but with quasi-fixed prices, so we shall continue having the problem where this kind of privatisation will lead to unforeseen difficulties. I hope that the Government have thought through what they are doing in this Bill because it is too short and has no explanation. I am not at all sure whether the Government are aware of many of these difficulties.

5.57 p.m.

Lord Monkswell: My Lords, I had hoped to keep my contribution very short tonight. I hope to keep to that. It has been a very interesting debate so far. One of the most interesting contributions came in the maiden speech of the noble Lord, Lord Harris of Peckham. I believe he reported that there had been a 90 per cent. cost reduction by doing a job in-house rather than getting contractors to do it. I wonder whether, in the fullness of time, we might find out that massive savings to the Treasury and the Exchequer will be provided by converting these private finance initiative projects into straight, public sector borrowing requirement elements.

We are stuck a little by the creative accounting that appears to be emerging not only within the different National Health Service trusts and the way in which they seem to account for some things "off balance sheet", which I believe is a technical term, but also in terms of national accounts. Various speakers have mentioned the problem that the Government have with the very high PSBR that we are faced with and the desperate need to satisfy the international money markets to reduce it. We need to look a little more closely at how the Government are doing that. We have the PFI and the reason for it appears to be to cut the PSBR.

We have heard from the noble Lord, Lord Haskel, that the idea of the private finance initiative came from the Labour Party when it was looking at ways of ensuring capital investment in the railways. It is worth looking at that a little more closely. Perhaps I may give an example. Ford makes a large range of engines for its cars at Bridgend. The cars themselves are produced in Halewood, Dagenham, Germany, Belgium and Spain. If Ford decides that it wants to transport those engines from South Wales to its car manufacturing plants across Europe by rail, it could go to British Rail and the other railway companies on the Continent and say, "We would like to move our engines by rail. Will you provide the rolling stock and the engines to haul that rolling stock?" Given that most railway systems are nationalised, the burden of that would fall on the public sector borrowing requirement and the capital investment to provide that rolling stock would have to be provided by governments.

If, however, Ford invested in that rolling stock itself so that it retained ownership of the rolling stock and provided the capital financing necessary for that, and if that rolling stock was used on the national railway systems and hauled by national railway system locomotives, the effect would be to move what is a capital requirement for the public sector borrowing requirement on to the private sector. That would be genuine private financing of a capital requirement. I am sure that everybody recognises that. The international

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money markets could say, "This is not a government liability. It is a private liability and Ford will have to carry it".

The added advantage of doing it that way is that Ford would have an incentive to utilise the capital stock that it had created by continuing to move its engines by rail. If Ford did not have that capital involvement, it could turn round a few months later and say, "We have decided not to bother moving our engines by rail", and the Government would then be saddled not only with a capital debt owed to the money markets through the public sector borrowing requirement, but would have assets that were virtually useless because the rolling stock would probably have been specially constructed to haul those Ford engines. That situation is rather different from what happens in the National Health Service, the university sector or the education sector generally, where the provision of the service is a public provision. The public can turn round and say, "We may or we may not carry on with that activity".

One of the interesting things about the Bill is that it changes that situation. Previously there was a real risk for private investors in capital projects in the National Health Service that an NHS trust would, effectively, go out of business and leave the investor with those liabilities. There was therefore a justification for charging a higher rate in the market because of that associated risk. In effect, the Bill says that that risk no longer obtains. In effect, the Government would be the lender of last resort and the liabilities that accrue as a result of capital expenditure patterns by NHS trusts would reside with the Government. In that situation, it would make sense for the Government to borrow money as a lender of last resort from the international money markets at a cheaper rate than is available to any private financier, and for the Government to use the money to provide the capital infrastructure. On that analysis, it seems to me that, although it absorbs some parliamentary time and keeps us in employment, putting this Bill through Parliament is a nonsense because it destroys the argument for private finance in the National Health Service.

6.4 p.m.

Viscount Chandos: My Lords, I thank the Minister for her introduction of this far from technical little Bill and pay tribute to the sang froid that she showed in explaining its merits. It was perhaps a case of the unhesitating in pursuit of the unquantifiable. The precision with which other noble Lords have dissected this particular specimen speaks highly for their surgical and intellectual skills and just as tellingly of the extraordinary contradictions contained in the 37 modest lines of draft legislation.

I should repeat a previous declaration of an interest. A company of which I am a director has a subsidiary which acts as an adviser to NHS trusts on PFI funding and to consortia bidding for contracts with such trusts. I play no part in its running or its operations and I was not involved in setting it up. Indeed, I opposed it--not just on political but on commercial grounds. In the light of that and of the fact that the views that I shall be

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expressing are unlikely to be regarded as in the company's financial interest, I decided that it would still be appropriate for me to speak today.

If that was the first quandary that I faced, I immediately came to a second. If any measure proposed by this Government promised to promote investment in the National Health Service, could there be any grounds for quibbling? Other noble Lords far more expert than me--namely, the noble Lord, Lord Harris of Peckham, in his authoritative maiden speech, and my noble friend Lord Winston--have described the urgent requirements of the health service, while my noble friend Lady Jay of Paddington described the catastrophic shortfall in investment which this Bill is being rushed through to rectify.

Even increased funding may not be a sufficient condition for the improved provision of services by the NHS, but it is certainly a necessary one. It is perfectly possible to acknowledge that the nature of healthcare provision means that the demand for new services, updated technology and better resources cannot be fully met but still to assert that an improvement in the current level of investment is needed and can be determined within the insatiable demand that exists.

Does the end justify the means? I think not. My noble friend Lady Jay, the noble Baroness, Lady Robson of Kiddington, and others have demonstrated that rather than PFI adding incremental investment to the NHS, it is merely substituting for what has previously and properly been the Government's direct responsibility. Instead we should recognise that at the heart of the Government's rapidly growing projection for the use of PFI in health and other areas lies dodgy accounting--the public accounts equivalent of the racy old days of the 1980s when an enterprising company could buy another one twice its size and yet one would have been hard pressed to tell from the published accounts subsequently that the chairman had done any more than buy a new helicopter. Just as economic reality caught up with creative accounting in the corporate sector, the same will inevitably be the case in the public sector. When there is that rendezvous with reality, you can be sure that the reaction, the correction and the restructuring will negate whatever temporary benefits there may have been in the meantime, if any.

Let us go back and examine the principles of PFI. The Government may seek greater efficiency in both the construction and purchasing of new facilities and in their subsequent operation. There is no reason for that to be muddled up with how those facilities are financed. The subcontracted outside provision of non-clinical services on a turn-key project basis can be perfectly well achieved, if that is what the situation demands, quite independently of the source of funding for that project. The taxpayers' interest is that the funding of the project should be on the best possible terms. Since the Government will, in almost all circumstances, be able to borrow on finer terms than any other entity in the UK, the only justifiable reason for raising finance by other means is if there is a transfer of risk. As long as the Government had at least the theoretical option of allowing an NHS trust or any other PFI-funded enterprise to fail, there was at least a veil of intellectual

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respectability behind the use of more expensive private sector funding in lieu of direct borrowing by the Government. This Bill removes that thin veil and lays bare the creative accounting, as described by my noble friend Lord Monkswell, that is being perpetrated by the Front Bench opposite.

Can the Minister say whether, as a consequence of this Bill, the aggregate future obligations of the NHS trusts to the private sector will be included in the public sector borrowing requirement? If not, why not? In the corporate sector the accounting standards bodies have increasingly required leases to be brought on to companies' balance sheets. Surely the fact that the Bill has been deemed a money Bill is prima facie evidence that the obligations covered by it should be included in the public sector borrowing requirement. Students of this Government's past inconsistency towards the definition of the PSBR may remember in the 1980s the abandonment of the gas-gathering pipeline project in the North Sea, which promised a valuable economic and environmental return, because of the Government's insistence that the residual liability entailed had to be counted in the PSBR. That occurred at the very time that the formal guarantee of the debts of the computer company, ICL, which the Government had deemed to be politically expedient to support, were excluded. Even with that and other precedents in mind, I find it difficult to imagine how the hard men of the Treasury--the praetorian guard of the financial Chief Secretary--can be squared to exclude these obligations from the PSBR. If the noble Baroness tells your Lordships' House that the obligations will be included in the PSBR, perhaps she can also justify the additional costs to be incurred by paying private sector rates for explicitly public sector obligations.

At the heart of this Bill lies not a commitment to the interests of the NHS and its patients but, I suspect, the most vivid illustration of the manipulation of the public accounts by the Government in a desperate attempt to give themselves the apparent ability to offer tax cuts in the next Budget--if they last that long. The ever-increasing levels of PFI funding projected in the Red Book in recent years--so little of which has taken place--betray the purpose of the Government, which is to consign essential, not optional, investment to the never-never world of the PFI in order to give themselves room for manoeuvre and throw the electorate a little pourboire here and a douceur there when the underlying state of public finances, stripping away the mirrors, wheezes, dodges and fiddles, would not otherwise justify this largesse.

We are watching the Benches opposite and their trick accounting. The country is watching them, too. When the Minister says in her introduction that the Bill is for the benefit of taxpayers and patients alike, we know that this is being as creative with words as the PFI is with public accounting. How can the noble Baroness maintain that it benefits the taxpayer when the cost of financing is higher than direct government borrowing? How can it be to the benefit of patients when the funds,

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if and when they are raised, merely replace the 17 per cent. cut in the NHS capital budget referred to by my noble friend Lady Jay?

This should be the Bill that died of shame--shame at its intellectual dishonesty and cynical electoral motivation. As my noble friend Lady Jay has said, we on these Benches still support the principles of partnership funding, but only when there is a true reduction in cost or transfer of risk. That is unlikely to provide quickly a massive flow of funds. Therefore, in reality the largest part of the NHS's capital expenditure will need to be financed by traditional means and accounted for accordingly.

Nor do we accept uncritically what may be termed Treasury orthodoxy. There remains a powerful case for separating capital and current expenditure in an accurate fashion in the public accounts so that the Government, electorate and markets can judge more clearly the true position of the nation's finances. In the meantime, the Government should stop fiddling and get on with putting out the fires by direct and established methods.

In the end, however, this Bill will inevitably pass. It may at least free the investment blockage created by the Government's cynical policies that threaten the comfort, health and even lives of patients. For that we should be thankful.

6.16 p.m.

Lord Carter: My Lords, we have had a very good debate on the Bill. We have heard some excellent speeches, but none better than the maiden speech of the noble Lord, Lord Harris of Peckham. We look forward to future contributions from him to debates on the National Health Service with the great experience that he brings to them.

This is a money Bill. It will pass through all of its stages and we will not be able to amend it. From this side of the House--the lack of contributions from the Benches opposite is noted--we will try to point out the weaknesses in the Bill, which we believe has already been done very well, and examine the situation when the Bill becomes law, as it surely will. If we look for a definition of PFI in the context of the National Health Service, it can be described as a wheeze for transferring risk from the public to the private sector, at the same time as transferring a good deal of government costs from the pot marked "capital expenditure today" to the pot marked "current expenditure tomorrow". That definition, which was given in the Independent on 16th May of this year, sums up the position very well. That point was extremely well made in the speech of my noble friend Lord Chandos.

I should like to make clear from the Dispatch Box that the Labour Party is not opposed to PFI in every situation. However, in the present circumstances of the National Health Service it is not in favour of PFI as a substitute for proper capital investment by government and as a possible route to the privatisation of clinical services.

I shall deal immediately with clinical services. The Secretary of State has made clear that clinical services will not be put out to the private sector without the

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consent of local clinicians. First, it means that the Government are prepared to contemplate in principle the letting out (privatisation) of clinical services. Secondly, it means that that will be done as long as local clinicians consent to it. But patients must also be involved in it. What is to happen to the Patient's Charter if we are to privatise clinical services and only the consent of local clinicians is required?

I turn to the heart of the PFI: the cost of money. At Second Reading in another place on 12th March the Secretary of State made it clear, at cols. 813 and 820 of the Official Report, that 48 schemes costing a total of £225 million in the NHS under the PFI had already gone ahead. Therefore, those schemes must have passed the value-for-money test and got the go ahead without this Bill. It follows that the Government must know the costs which the finance providers are charging without the Bill. They have said that they have already spent the £225 million involved in the projects which have been agreed without the Bill, so they must know the finance costs of those schemes. It further follows that the Government must now be able to negotiate the finance terms after the Bill becomes law. They can look at the proposals as they come forward and the cost of finance included in them with the Bill on the statute book. We know that it is the bankers who want this Bill. As lenders they will now have a government guarantee for their ultimate liability. If a trust or health authority goes broke, or whatever happens, they will be repaid. Therefore, the Government must be able to negotiate the keenest possible rate of finance to be provided when the Bill becomes law. The figures that we heard from my noble friend Lord Chandos throw doubt on that. But that is a fact. If the bankers know that whatever happens they have the finest possible guarantee for their ultimate liability, surely the Government must be able to negotiate a keen rate. There is a simple question which I am sure the Minister will be happy to answer. What is the cost of finance without the Bill, and what is the cost of finance with the Bill?

If I go to a bank and borrow today, the keenest rate I can obtain for lending, secured on, say, agricultural land, is 1 per cent. over base rate. In the calculations for the PFI, what are the carrying costs of the money which are being included, which has, as I said, a government guarantee against risk? It is a simple question. If the Minister is unable to provide the answer, our worst fears will be realised. To put it another way, as other speakers have done, exactly who carries what risk and for how much?

A further question arises. What are the residual arrangements at the end of these agreements? Normally, on a finance lease, the property reverts to the borrower at the end of the lease for a nominal sum. Do the Government intend to negotiate similar arrangements for the NHS PFI? What are the residual arrangements at the end of these agreements? Who gets the property?

I have to say in the nicest possible way that a Secretary of State who did not know that the NHS trusts had the power to borrow is likely to be something of a pushover when it comes to hard financial negotiations.

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So where are we with the NHS PFI? The Evening Standard put it extremely well on 10th May in its pink financial section:

    "The Private Finance Initiative could never be deemed one of the Government's greatest successes. It has been plagued by the worst excesses of civil-servanthood: delays, obfuscation, abrupt changes of plan and startlingly few completed projects".
It is the Evening Standard and not the Labour Party saying that, although we agree of course. The article continues:

    "The Health Service has not been immune to these setbacks but it has a separate problem all of its own. This little difficulty cuts to the very heart of private finance in the State sector, exposing fundamental flaws in the way the Government proposes to fund its plans".
The article goes on to state that the bankers are saying that the funding mechanisms employed by NHS trusts and authorities are not compatible with long-term loans. Most trusts take on contracts with purchasers, which run for between one and five years, but we know that the trusts will be seeking much longer terms for their PFI agreements. We all know that borrowing long to operate short is a sure route to Carey Street, except in the case of the NHS PFI at the end of Carey Street will be the welcoming arms of the taxpayer, if the trust ever gets there.

However the Evening Standard had it wrong in its final paragraph when it stated:

    "But banks will need more reassurance before they are prepared to risk their capital to fulfil the Government's ambitions. Eurotunnel can never be far from any banker's mind".
Eurotunnel is the wrong analogy, but a first-class warning. If Eurotunnel had been financed on the same terms as proposed for the NHS PFI, it would be the taxpayer who would be picking up the £8 billion overrun costs and not, as it is now, the consortium of lenders. The Government and the banks have both learnt a lesson from Eurotunnel. Unfortunately the bankers appear to be quicker and shrewder learners than the Government.

Only this morning at a meeting of trustees--not to do with the Bill--it so happened that one of the other trustees present was the chairman of one of the largest building firms in the country. I happened to mention in passing that this afternoon I would be dealing with the National Health Service (Residual Liabilities) Bill. It is as well for the Minister that she was not present to hear his reaction. Naval language would be the politest way that I could put it. He said that the PFI in that company's case--it is a substantial household name in building--had led to delay, confusion and substantial extra costs with a substantial reduction in its hospital building programme.

Perhaps I may return to the point made by my noble friends Lord Chandos and Lord Monkswell regarding the PSBR. It seems to me that the Government are taking on what an auditor would call contingent liability. What are the Treasury rules on that? Do the Government intend to include a note to the national accounts as any auditor would, which would spell out that contingent liability? It will be interesting to see how the masterminds in the Treasury draft the appropriate note. If it is not to be included in the PSBR, there should

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be some indication of the contingent liability that the Government are taking on. I never thought the day would come when I would see a British government indulging in financing off the balance sheet, which is the term usually used.

An interesting point arose in the speech of my noble friend Lord Desai: what about the university medical schools? He said that the universities are not protected in the way that the NHS will be. They have no protection. Is it correct that if a university were to go broke the Government would not be standing behind the liabilities as they will with the Bill? If there were a medical school in that university, how would it be affected?

Finally, we heard this afternoon in the Statement on BSE made by the Prime Minister and repeated in this House, that we have now wheeled out the heavy artillery with regard to Europe. We are going to hold up the convention on insolvency. Will that have any effect on the PFI?

Far from being the sound money government that the noble Baroness, Lady Thatcher, espoused as Prime Minister, I fear that we now have a profligate government who are happy to adopt live now and pay later policies. There is a simple reason for that which has been referred to by a number of speakers. They know that they will not be there to pay the reckoning. As with so many other aspects of policy, it is a Labour government who will have to deal with the problem.

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