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Lord Warner: I hope that the extensive and informative text that I send to the noble Baroness will convince her that things are not quite as she would have us believe.

I should correct myself. I may have confused the noble Lord, Lord Clement-Jones, by referring to Amendment No. 247. That was a slip of the tongue, as I was talking about Amendment No. 156. I mixed up the old numbering with the new numbering. I apologise.

As regards Clause 12 I shall not go over all the arguments again. We believe that the measure we are discussing will be available shortly. I do not have a particular date in my head at the moment or in my brief but I shall try to cover that point in a letter, which will be sent to the noble Baroness shortly. I shall respond to her quickly.

I do not want to go over the arguments again about people being consulted. We have made clear that the regulator has certain obligations. We believe that the Secretary of State needs to be consulted. Much preparatory work is being done in this area. That would need to be shared with the regulator for him to consider. The Secretary of State has responsibility for the overall funding of the NHS. Given his general duties in relation to the wider NHS, we think that it is appropriate in those circumstances for him to be consulted by the regulator when he draws up the prudential borrowing code. There is nothing more sinister than that. It is not an attempt at back-door instructions to the regulator. It is a sensible way to ensure that relevant information is provided to the regulator.

Lord Hunt of Kings Heath: Given that the regulator must consult the Secretary of State, can I take it that the ultimate outcome will be a fair share basis? Given that the prudential borrowing code has to fit the external expenditure limit of the department, there has to be a basis on which the borrowing code must relate to the overall expenditure of the department. Therefore, there must be a fair share basis between foundation trusts with a borrowing code and non-foundation trusts with the traditional approach to access to capital.

Lord Warner: As is often the case, my noble friend is absolutely on the ball. However, as I tried to say earlier, there is not a zero sum game in the sense that there might have been in the past. It will be appropriate

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for the Secretary of State to offer views on the needs of the wider NHS and the regulator is under an obligation to have regard to the wider needs of the NHS in drawing up the prudential borrowing code, as indeed he is required to do in the way he exercises other powers and duties. Ultimately, the code is the regulator's responsibility but many of the draft codes, key notes and ideas are already with applicant trusts. However, I shall come back to the noble Baroness on the timing of a further version.

Lord Clement-Jones: The noble Lord, Lord Hunt, raised a very interesting issue. In one of my earlier contributions I made an assertion that, as I understood it, under the prudential borrowing code capital would not be allocated to foundation trusts according to regional or national priorities. It seems to me that in responding to the noble Lord, Lord Hunt, the Minister opened the door to saying that the prudential code is not just about ability to repay, and therefore it is not purely a calculation relating to the assets and cash flow of the individual foundation trust. One is able to take a broader view about priorities within a region or, indeed, nationally depending on the circumstances and priorities that may be set by the Secretary of State. Is the Minister really saying that in response to the noble Lord, Lord Hunt?

Lord Warner: No, I am saying that the regulator has a requirement to take account of the wider interests of the NHS across a range of his duties. The person who has much information about future funding of the NHS is the Secretary of State. In setting the prudential borrowing code the regulator will have a set of matrices which he will want to fit into a context of the total amount of resources available for the NHS. That will enable individual NHS foundation trusts to use the prudential borrowing code to see how they may advance and take forward their borrowing in a sensible way without having a damaging impact on the rest of the NHS.

Lord Clement-Jones: I apologise for speaking again, but I must say that the whole prudential borrowing code becomes less and less clear as we hear it spin out from the Minister. I think that we all look forward to the clarity to be contained in the letter to follow.

Baroness Noakes: A few moments ago, I debated whether to oppose the Question, thinking that Members of the Committee might be wearying of matters financial. However, I am rather glad that we have had the debate, especially as with the intervention of the noble Lord, Lord Hunt of Kings Heath, it has been confirmed that fair shares will be a dominant feature. All those NHS trust applicants can think again about freedoms, which may simply be a figment of their imaginations. I hope that what the two Labour Peers have said gets wide publicity among the NHS trusts considering becoming foundation trusts.

I agree with the noble Lord, Lord Clement-Jones. I am becoming more and more concerned that all the rigmarole of prudential codes, all the language of free

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cash flow and metrics and ratios, is simply an elaborate smokescreen for life going on as before, probably in the most dishonest way.

Today is not the day to challenge formally whether Clause 12 should stand part of the Bill, as we have much to look forward to in the Minister's reply to the many detailed points that we have raised. However, he should be on notice that the area will receive the most careful attention at the next stage of our deliberations.

Clause 12 agreed to.

Clause 13 [Public dividend capital]:

Baroness Noakes moved Amendment No. 158:

    Page 6, line 10, at end insert—

"( ) Where in the twelve months immediately preceding an NHS trust becoming an NHS foundation trust an amount of its public dividend capital has been written off, the amount of its initial public dividend capital shall not be treated as having been reduced by the write-off unless it has been approved by each House of Parliament."

The noble Baroness said: I shall speak also to Amendment No. 159. Amendment No. 158 was prompted by the fact that Mr Hutton, a Health Minister in another place, said in Committee on 22nd May:

    "We have asked applicant trusts to make a case where they believe historical deficits should be written off before they achieve foundation trust status".—[Official Report, Commons Standing Committee E, 22/5/03; col. 360.]

If those deficits are written off, some part of the trust's public dividend capital will need to be written off. Will the Minister say under what power the write-offs referred to by Mr Hutton will be made?

I am well aware that deficits sometimes need to be written off. There are many trusts with accumulated deficits, and doubtless they would all like their balance sheets cleaned up. For example, the Comptroller and Auditor-General, when he reported on the last set of summarised accounts—a most useful source of information, as I have told Members of the Committee several times today—noted that 46 trusts, which is 15 per cent of the total, were managing significant financial difficulties.

The purpose of the amendment is to make such write-offs subject to parliamentary approval where they precede the setting up of a foundation trust, so that a level playing field exists. We do not want to see the favoured few—the NHS foundation trust applicants—having their accounts polished up so that they look bright, shiny and successful if the same treatment is not also available to the NHS trusts that languish under direct Secretary of State control. Parliament will surely want to satisfy itself that the write-offs do not conceal financial weakness and are otherwise properly made.

Amendment No. 159 is a probing amendment related to Clause 13(3), under which it appears that the Secretary of State can make a retrospective alteration to the terms on which PDC has been issued. In what circumstances do the Government believe that such a power might be exercised, and why is there no provision for the consent of the foundation trust to the

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alteration? Is it possible that the terms could be worsened from the foundation trust's perspective without its permission? I beg to move.

Lord Warner: Public dividend capital represents the Department of Health's equity interest in defined public assets across the NHS. It constitutes an asset of the Consolidated Fund. The department is required to make a return on its net assets, including the assets of NHS trusts, of 3.5 per cent. For NHS trusts, that takes the form of a variable charge—a public dividend capital dividend—paid twice yearly. That payment represents—I emphasise the word—a notional cost of servicing, but not repaying, debt. Effectively, it is an interest rate of 3.5 per cent, which includes a premium on the costs to Her Majesty's Treasury, but it is less than might be payable in a commercial environment.

Repayments of public dividend capital are made only when the trust has surplus cash; for example, land sales proceeds not spent on new capital assets. The PDC of an NHS trust applicant for NHS foundation trust status, immediately before authorisation is granted, will continue as PDC under the same conditions for the NHS foundation trust. NHS foundation trusts will pay public dividend capital dividends on exactly the same terms as NHS trusts, so there would be no significant change.

Amendment No. 158 is perhaps misguided. Cancellation of PDC is subject already to Treasury and parliamentary approval. The Treasury prepares a Treasury minute which it must put before Parliament, so the Secretary of State could not simply write off the PDC of an NHS trust or an NHS foundation trust. The amendment is therefore unnecessary. In any case, cancellation of PDC, as opposed to repayment, usually occurs only on the dissolution of an NHS trust, in which case, the cancellation of the PDC is matched by cancellation of the net asset reserves in the dissolving trust's books. Under Clause 7(5), on becoming an NHS foundation trust, the body corporate, which was an NHS trust, is not dissolved, but continues, albeit under a different name and with a different status. The applicant's property rights and liabilities, including PDC, continue with the new body.

I turn to Amendment No. 159. PDC is not a government asset, so it is entirely appropriate that the Secretary of State should, with the consent of the Treasury, determine the terms of NHS foundation trusts' PDC, just as it does now with NHS trusts. In addition, the Secretary of State must consult the independent regulator before setting the terms under which PDC is issued to an NHS foundation trust. That is the system that is in place. It is in no way as sinister as some noble Lords may suggest.

10.30 p.m.

Baroness Noakes: I suppose that I should thank the Minister for the lesson on PDC, but perhaps I am one of the few people here who did not need it, along with the noble Lord, Lord Hunt of Kings Heath. The Minister said that Amendment No. 158 was not necessary because there was already a procedure for a Treasury minute on PDC. The amendment proposes

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that in instances where the PDC of an NHS trust is written off or cancelled in the 12 months prior to the NHS foundation trust being set up, that should require the approval of each House of Parliament. I think the Minister will agree that that is a different matter from a Treasury minute. A Treasury minute basically informs Parliament. I was talking about an approval process.

I am not sure that the Minister addressed the specific question that I raised, which was about the processes that are in place to clean up potential foundation trust balance sheets prior to their being set up. I understand the process whereby in the minute before a foundation trust is created, what is on the balance sheet carries over to the new one. That is fairly straightforward. I was focusing on what was going to be forgiven—knocked out of the balance sheet—in the lead-up to that process. Will the Minister comment on that?

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