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Baroness Noakes: I thank the Minister for his response. I hope that he will reply in detail on the financing facility—which may or may not be the NHS bank—and to my questions on the constitution of the financing facility, or that of the NHS bank, all of which appear to be shrouded in mystery.

On Amendment No. 151, the Minister said that the Government had no intention of bailing out bad management. I assure him that we will return to the subject in more detail later, because it is important.

I shall read to the Minister something that the Treasury's whole of government accounts team prepared in April this year:

That is the clearest existing indication that the Treasury accepts that the doctrine of standing behind, which has applied to all public bodies—especially those classified to central government, as are the NHS trusts—will apply. That may mean that the Secretary of State will be liable for the liabilities whether or not they are formally guaranteed. The Minister's assertion that he will not bail out bad management means that he thinks he might walk away and leave lenders with unmet liabilities on their hands. That raises significant issues, which we shall explore later.

On PFI, I understood the Minister as saying that Mr Hutton got it wrong in another place. Perhaps he will confirm that point when he writes to me.

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Mr Hutton was very explicit about the terms of the arrangements, and they are not those that were explained to the Committee today.

I was disappointed that the Minister rejected the call for an accountability statement, which was sought in Amendment No. 153. He says that individual accounts of NHS trusts will be laid before Parliament. That is true, but the arguments here are exactly the same as those for summarised accounts that we discussed earlier. It is not a question of the individual accountability of the NHS trust, it is accountability overall. In this case, it is the accountability of the Secretary of State for the way in which he has flowed different sources of money on different terms to foundation trusts so that, in particular, bodies that are not foundation trusts can see what is happening.

This is an unsatisfactory area that will doubtless repay careful consideration, especially in the light of the information that I hope the Minister can provide on a timely basis. I look forward to discussing the matter again on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 152 and 153 not moved.]

Clause 11 agreed to.

9.45 p.m.

Clause 12 [Prudential borrowing code]:

Baroness Noakes moved Amendment No. 154:

    Page 5, line 33, at end insert—

"( ) For the purposes of this Act, borrowing includes commitments to make payments over periods exceeding one year whether or not they are shown on the balance sheet of an NHS foundation trust."

The noble Baroness said: I rise to speak to Amendment No. 154 and will also speak to Amendments Nos. 172 and 181 in this group. All of these amendments concern PFI in one way or another. Under Amendment No. 154, the prudential borrowing code under Clause 12 and the borrowing limits under Clause 17 would have to take explicit account of liabilities such as those arising under PFI contracts. However, it is not limited to PFI contracts, but covers all periodic payments over one year including short-term leases of property or other assets.

The amendment states that the actual accounting treatment in the books of the foundation trust is to be ignored. The accounting treatment for leases and PFI transactions can be arcane. They can have the curious effect that the private sector treats the PFI deal as a financing deal—like a loan—while the NHS trust treats it as an off-balance-sheet item. That is not fantasy: it really does happen in hospital PFI deals. However, I do not want to get into the accounting niceties today because the crucial issue is not the accounting but the substance.

PFI liabilities are real and significant obligations and should be taken into account when calculating what borrowing would be prudent under any code if borrowing can be allowed in practice under specific

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borrowing limits. In Standing Committee E in another place, the Minister made it clear that the Government had no intention of scoring PFI deals for the purposes of borrowing codes or limits. He said that a PFI deal would, in effect, be taken into account by cash-flow calculations. I do not see why the Government are so afraid of taking PFI liabilities into account explicitly. Implicit calculations run the risk of missing the substance, which is that hospitals with major PFI deals are up to their eyes in debt.

The problem with this treatment is that it could cause an unnatural bias in favour of PFI deals because, if the borrowing code and borrowing limits exclude PFI, that would automatically boost the attractiveness of PFI, whatever the underlying economics. That may please the Chancellor, who needs PFI to help him balance the books, but it is not necessarily good for the NHS.

The Government's approach will also be inequitable. Foundation trust A will have its existing PFI deal largely ignored by the borrowing provisions of the Bill. Foundation trust B, which financed its last hospital conventionally, will have its debt fully counted, and foundation hospital C, which is still operating in un-modernised premises, will not get a new hospital unless it enters a PFI deal.

We have grave reservations about how PFI is used in the NHS. However, the main issue is one of clarity. That is why Amendment No. 181 in this group inserts into Clause 17 a declaration that the borrowing limits do not affect agreements that involve payment for the use of assets. If that is what the Government really do intend, we invite them to confirm that by accepting Amendment No. 181.

The other amendment in the group probes how PFI fits in more generally. Clause 16.1 states that a,

    "foundation trust may not dispose of any protected property without the approval of the regulator".

Amendment No. 172 would disapply that approval requirement when a PFI deal was involved. On 14th January 2003, my noble friend Lord Astor of Hever received a Written Answer to his Question on whether foundation trusts would be able to transfer their existing assets as part of a PFI transaction. The noble Lord, Lord Hunt of Kings Heath, replied:

    "NHS foundation trusts will continue to be able to procure capital schemes using the PFI process subject to the same degree of oversight as applies under current arrangements".—[Official Report, 14/1/03; col. WA 39.]

There was no mention of the role of the regulator. However, Clause 16 seems to suggest that the regulator will have to give his approval when the PFI scheme involves the disposal of property or an interest in it, which will very often be the case. How will the PFI process work in future? Will the approval and oversight procedures of the Department of Health and the Treasury have to be gone through, as implied by the noble Lord, Lord Hunt of Kings Heath, and then gone through again with the regulator? If the regulator really is independent, he will surely not just nod through anything that the Department of Health and the Treasury come up with. If he does have substantive

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involvement prior to giving his consent, will that not extend timetables, which I understand are already stretched, still further?

The Minister may be aware that many in the private sector are concerned about the recent slowness in completing PFI health deals. How much additional time will be taken if the regulator's approval is also necessary? At what stage or stages will the regulator become involved? I beg to move.

Lord Warner: I shall do my best. This is not the territory on which I would prefer to trade exchanges with the noble Baroness. I may have to write in some detail on some of the more detailed points that she raised.

I shall deal with the amendments in order. Amendment No. 154 would require that commitments to make payments over periods exceeding one year should count as borrowing. That is inappropriate and unnecessary. The prudential borrowing limit will determine the ability of NHS foundation trusts to repay debt. Any payment commitments will affect the free cash flow of an NHS foundation trust, and that parameter is used in the calculation of the prudential borrowing limit. So, the prudential borrowing limit already takes account of any such payments, and the limit will be reduced as those commitments are increased.

If the amendment is intended to ensure that any PFI commitments are included in an NHS foundation trust's borrowing limit, it is inappropriate. PFI contracts are not borrowing by the foundation trust and therefore will not be treated as borrowing for the purpose of the borrowing limits to be set for NHS foundation trusts. Under existing off-balance-sheet PFI arrangements, NHS trusts contract with a PFI project company for a service. That does not constitute borrowing for trusts. That position will remain unchanged for NHS foundation trusts. I emphasise that we are not seeking to change the system for PFI approvals. I do not want to go into detail at this stage on the exact arrangements for the regulator's involvement, but I am happy to set out our understanding of it in the letter that I will write to the noble Baroness and make available to other Members of the Committee.

I turn to Amendment No. 172. The regulator will designate property as protected, if it is required for the provision of essential services. It is therefore right that an NHS foundation trust should not be able to dispose of the property without the regulator's consent. There is no reason why that should be any different for property disposals as part of a PFI agreement. We are not making any fundamental difference to the protection of property, whether it is under a PFI deal or otherwise.

Amendment No. 181 is unnecessary. There is nothing in Clause 17 that would prevent an NHS foundation trust from entering into an agreement involving periodic payments for the use of assets. For example, they are able to enter into PFI projects. Access to assets and services through PFI is paid

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through a unitary charge, which is an operating cost. Any unitary charges paid by NHS foundation trusts will reduce their free cash flow and the amount of money available to support new borrowing; that is, debt. The implication is that, all things being equal, that will reduce an NHS foundation trust's prudential borrowing limit.

I have tried to clarify, as quickly as I can, the reasons for the Government's objections to the amendments. I will write in more detail on some of the more detailed points that the noble Baroness raised.

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