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Baroness Noakes: I want to clarify one point. Is the Minister saying that all PFI deals are excluded? What about the ones that are already on the NHS balance sheet? I am sure that the Minister will be aware that two treatments are adopted in NHS trust accounts. Some PFI deals are on-balance-sheet and some are off-balance-sheet. When they are on-balance-sheet, they are scored as a loan; when they are off, they are not. Will the Minister comment on the differences between the two?

Lord Warner: I was talking about PFI deals that are off-balance-sheet.

Baroness Noakes: Can I clarify that PFI deals that are on-balance-sheet would be included as borrowing in the calculations?

Lord Warner: Before making a rash commitment, I would like to take legal advice. I will cover that point in the letter that I will send to the noble Baroness.

Baroness Noakes: I thank the Minister for that and look forward to the letter. I am sure that it will be fascinating.

The Minister said that it was inappropriate and unnecessary to count PFI borrowing and that it would be taken account of in free cash flow. I put it to the Minister that that is an indirect method of calculation, which, over time, is likely to result in error. How robust is this form of calculation? It is a great concern that PFI liabilities are ballooning out of control. They are not being recognised. Because they are being suppressed, no one wants to add up the numbers. Therefore, they are not fully taken into account either at the aggregate level of the Chancellor or at the micro-level of an individual NHS trust or NHS foundation trust. These are important issues. I look forward to the Minister's reply. I may seek to pursue this matter further at the next stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Noakes moved Amendment No. 155:

The noble Baroness said: Amendment No. 155 is a probing amendment. If agreed, Clause 12(2) would require the regulator to have regard,

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    "to any generally accepted principles used by financial institutions to determine the amount of loans and in particular any generally accepted principles that apply to loans to non-profit making bodies".

Without the amendment, the regulator would have to have regard only to such principles as they apply to a non-profit sector.

The amendment has two purposes. First, it seeks to determine why the Government want to have regard only to principles that apply to non-profits. Are the Government saying that there are no general principles that apply to borrowing in the commercial sector that are of relevance to foundation trusts? I would be surprised at that since the vast bulk of commercial lending, other than to government, is to the commercial sector, which is where the principles of lending can be most easily discerned. They will have regard to issues such as cash flow and earning strength, interest cover and security. To a greater or lesser extent, these must be relevant to foundation trusts. Why are the Government ignoring them?

Secondly, the amendment seeks to determine what exactly are the generally accepted borrowing principles that apply to non-profit-making bodies. What have the department's researches revealed about these generally accepted principles? Do they differentiate between non-profit-making bodies such as Standard Life and BUPA, at one extreme, and my local hospital or village hall committee, at the other? Is the department clear that there are market-wide principles? I am far from clear that the clause is workable. What if there are no generally accepted principles for non-profit making bodies across the board? What will the regulator do then? How will he differentiate between the principles for major neutrals or for the Co-op and those for small charities? I beg to move.

Lord Clement-Jones: I shall speak to Amendment No. 157. I am delighted to speak in the wake of the expert noble Baroness, Lady Noakes, so that I do not have to be technical about my amendment. Having heard the debate, the PFI exemption drives a coach and horses through the prudential borrowing code. It is rather like excluding a whole type of debt from a company; for example, if debts are factored, that excludes them from a whole class of borrowing. The noble Baroness, Lady Noakes, is correct.

There are also wider objections to the way that the prudential borrowing code operates. It is related to foundation trusts purely according to their ability to repay loans. It is not allocated according to any regional or national priorities. We live in a dog-eat-dog world as regards foundation trust borrowing. One set of borrowing by a foundation trust will be at the expense of other NHS trusts. Effectively, it is about who gets their applications in first. Private finance will not count, but, probably, foundation trusts will be more able to obtain private finance than NHS trusts.

In the process of determining the somewhat extraordinary prudential borrowing code, no real external obligation is placed to consult anyone except

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those whom the regulator believes should be consulted. Of course the Secretary of State will be consulted. That is fine. Every NHS trust intending to submit an application to become an NHS foundation trust should do so, but that covers a very limited class of people to be consulted.

In essence, Amendment No. 157 seeks to broaden the classes of people who could be consulted in the process. The amendment is probing in nature and sets out a representative sample by suggesting,

    "representatives of employers, employees and patients".

Those groups all have a vested interest in learning how these borrowing limits are to operate. However, this seems to be the Treasury's way of making jolly sure that, because NHS foundation trusts will not necessarily be able to spread their wings very far, if we are not careful they may come crashing to Earth. It would be sensible to provide for a broader franchise for consultation over this rather strange instrument than purely NHS trusts and the Secretary of State.

I hope that the Minister will be able to indicate at least an intention to provide for broader consultation and not simply rely on the wording in Clause 12(3)(c), which states,

    "such other persons as the regulator considers appropriate".

That seems a rather feeble provision.

10 p.m.

Lord Warner: I shall respond first to Amendment No. 155. The prudential borrowing code concerns limits on overall borrowing, not the terms and conditions under which loans are issued. These are matters for lenders, not the regulator. We do not think that the PFI system drives a coach and horses through this and, as I said in response to an earlier amendment, the servicing of the PFI arrangements will be taken into account in setting the prudential borrowing limit for each individual NHS foundation trust.

Changes in the terms and conditions of loans which might affect the ability of an NHS foundation trust to service debt are already taken into account in determining the prudential borrowing limit. Any charges paid by foundation trusts would reduce both their free cash flow and the amount of money available to service new debt. Thus, all things being equal, this will reduce a foundation trust's prudential borrowing limit.

I can tell noble Lords that we have consulted widely on the financial matrix that commercial institutions use to assess credit-worthiness and we would be happy to expand on that consultation in a follow-up to the written response that I have already promised to the noble Baroness, Lady Noakes, and other noble Lords.

If an NHS foundation trust took out a loan under inappropriate terms, that would constitute a breach of the duty under Clause 38 to exercise its functions effectively, efficiently and economically, and if necessary the regulator could step in to protect NHS services. That sets out our position on Amendment No. 155; we would not find it acceptable.

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I now turn to Amendment No. 157, spoken to by the noble Lord, Lord Clement-Jones. In drawing up the prudential borrowing code, the regulator must consult the Secretary of State, applicant NHS trusts and such persons as he considers appropriate. Nothing in those arrangements prevents him taking account of the views of people such as those listed in the amendment. However, I would suggest that the groups set out in the amendment would not have any particular expertise when it comes to prudential borrowing. In our view, therefore, it would not make sense to set down a requirement for them to be consulted. However, as I have said, there is nothing to stop them being consulted, along with a number of other people whom the regulator may consider it appropriate to consult.

Lord Clement-Jones: Perhaps the Minister could indicate the types of people under Clause 12(3)(c) who would be consulted.

Lord Warner: This is a rather circular discussion. They would be the kind of people whom the regulator considers have some advice and expertise to offer in the area of setting prudential borrowing limits and devising a prudential borrowing code. As I said, there is nothing to stop the regulator choosing whom he wishes to do that, but expertise in this particular area is likely to be a major watchword.

Baroness Noakes: It may be that one or both of us are tired, but I do not believe that in his reply to Amendment No. 155 the Minister addressed any of the points that I made when I spoke to it. However, I am prepared to do a deal. If he reads what I said in Hansard and is prepared to respond to the points I made, I shall read what he said to ascertain whether or not I am wrong, rather than prolong the agony today.

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