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Lord Peston: My Lords, will my noble friend clarify one aspect of this matter that I have always found difficult to follow? Who bears the risk in the case of a typical PFI project? In particular, is there any implicit or explicit financial liability to the Government involved in a typical PFI project? Will my noble friend assure us that the Government bear no risk at all?
Lord McIntosh of Haringey: My Lords, there is a great deal of misunderstanding about the private finance initiative. If that is my fault, I apologise. The impression appears to be getting around that we are making a change as between entirely public sector activity and privatisation. Neither of those is the case. Even without the private finance initiative, public sector investment is carried out by the private sector. We do not have public sector building firms building hospitals or schools. That is done by the private sector. The difference we are discussing is that the private sector contractors who build the schools or hospitals, or whatever it may be, are responsible for the maintenance of what they build over the life of the asset. That is the risk transfer that justifies the private finance initiative.
Lord Tebbit: My Lords, does the Minister agree that the closest parallel to PFI is one of those old-fashioned
Lord McIntosh of Haringey: My Lords, I do not think that that is a good analogy. As I said to my noble friend Lord Peston, if a private sector firm designs, builds and hands over a hospital to the public sector but there is no redress against that private sector contractor if anything goes wrong afterwards, the risk is held by the public sector. That is what happened with the Jubilee Line extension and with the modernisation of the Central Line on the London Underground. That was a very poor deal for the taxpayer. But if a private sector contractor is locked into maintenance over the life of an asset, there is indeed a transfer of risk. That is worth a considerable amount to the taxpayer.
Lord Newby: My Lords, will the Minister acknowledge that a relatively small number of companies are bidding for many PFI projects and that that is the result of a relatively small number of companies winning them? Will he also acknowledge that that runs the serious risk of overstretch in terms of management and the balance sheet? Further, if one of the companies goes bust, who picks up the pieces?
Lord McIntosh of Haringey: My Lords, the position about whether any contractor goes bust is no different whether that occurs under the private finance initiative or previous arrangements; someone has to pick up the pieces. That is true whether or not there is a continuing contract with the company. On the risk of private sector contractors going bust because they are doing too much, accounting officers and departments will have to take that consideration into account.
Lord Saatchi: My Lords, the Minister has just apologised to the noble Lord, Lord Barnett, for the errors contained in a Written Answer. Is that a result of the fact that, as he himself said, there is much misunderstanding about PFI? Does he agree that, given the extreme sensitivity about the level of government borrowingwe shall hear more about that tomorrowthe Government should accept an independent audit of the Government's borrowing forecast?
Lord McIntosh of Haringey: My Lords, even the question of whether there is extreme sensitivity about government borrowing I shall leave for the Chancellor of the Exchequer to elaborate on tomorrow. I shall not anticipate even by implication anything he might say.
Baroness Sharp of Guildford: My Lords, am I right in thinking that the PFI is off the balance sheet and does not enter into the public sector borrowing requirement?
Lord McIntosh of Haringey: No, my Lords. A very large number of PFI projects are on balance sheet. For
Baroness Hooper: My Lords, will the Minister tell us whether any government research into, or evaluation of, the effectiveness of PFI schemes is being undertaken? Is it the Government's intention to issue good practice guidance in relation to PFI schemes, given the wide variety of schemes that exist?
Lord McIntosh of Haringey: My Lords, the primary evaluation of PFI schemes has been carried out by the National Audit Office, which does not report to government. We do not control what it does. However, the matter has been debated in the House previously. The NAO has reported on a substantial number of schemes. The assistant auditor general, Mr Jeremy Colman, is on record as saying that,
Lord Blaker asked Her Majesty's Government:
Lord McIntosh of Haringey: My Lords, on 6th September the Treasury sent to the Treasury Committee of the House of Commons a paper that made it clear that the preliminary and technical work, which will be published alongside the assessment of the five tests, will include analysis of the sustainable real exchange rate, which is a key indicator of convergence and of obvious importance to the convergence test and all of the tests.
Lord Blaker: My Lords, I am grateful for that reply and I am glad that the Government are showing some interest in the importance of the exchange rate for our possible membership of the euro. Is not the importance of the subject shown by the example of Germany, which is now stuck with a fixed, certain and
Lord McIntosh of Haringey: My Lords, it is not appropriate for me to comment on issues of German economic policy. I rather doubt the conclusion that the noble Lord, Lord Blaker, draws from his premise.
Lord Lawson of Blaby: My Lords, does the Minister recall that when five years agoalmost to the daythe Chancellor launched the five tests, he also explicitly said that, regardless of the results of the five tests, the Government would contemplate joining only a successful monetary union? Given that, during the four years that have elapsed since the euro, growth in the euro-zone has been considerably lower than that in the United States and in countries in the European Union that are outside the euro-zone, by what criteria will the Government decide whether or not monetary union has been successful?
Lord McIntosh of Haringey: My Lords, the noble Lord, Lord Lawson, tempts me to anticipate the conclusions of the analysis of the five tests, and I am certainly not going to do that. The criteria by which the Government will make their judgment at the conclusion of the period will be set out in the publication in which the decision is reached.
Lord Sheldon: My Lords, does my noble friend accept that those five tests were set out in 1997five years agoagainst a background of high unemployment and high interest rates? They were understandable then but the situation has changed considerably since then. We now need to look to the really important aspect of entry into the euro mechanism; that is, the value of the pound. If we get the value of the pound wrong, there will be severe constriction on our development and investment for several years.
Lord McIntosh of Haringey: My Lords, my noble friend Lord Sheldon is right to draw attention to the fact that, over the past five years, the Chancellor of the Exchequer has been responsible for a remarkably successful macro-economic policy. It is true that the five tests that still apply were drawn up in 1997. However, the conclusions on the five tests will be reached on the basis of the economic situation as we see it in 2002 and 2003. The fact that the wording of the tests was drawn up five years ago is no disadvantage.
Lord Taverne: My Lords, as the exchange rate has, for a long periodsome 75 yearsbeen a source of major economic and political upheavals and convulsions, and as it is therefore one of the key issues, would it not be sensible for the Government, if they decide to enter, to announce a range of between perhaps 1.25 and 1.45 euros to the pound as a basis for negotiation for entry, which should in itself have a considerable influence on the market?
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