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Lord Warner: My Lords, I recognise that the noble Baroness raised concerns in Committee that NHS foundation trusts might find it difficult to borrow from the private sector if no guarantee is available. But I repeat that it is an essential aspect of the new

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disciplines under which NHS foundation trusts will operate, as the quid pro quo for their additional freedoms, that the Secretary of State will not guarantee debt. I was not being coy in Committee; I stated our exact position.

If the Secretary of State had the power to guarantee debt, it is certain that lenders would expect it to be exercised. That would create the precise problem that the noble Baroness has warned of. It would lead to renewed calls for intervention by the Secretary of State in NHS foundation trusts' affairs and so undermine their freedoms.

Such a power is also unnecessary. Foundation trusts will have access to a wide range of financing options. The clause confers powers for the Secretary of State to make loans to NHS foundation trusts, which they will be expected to pay off as both interest and principal. If it takes some time before the private sector is ready to lend to NHS foundation trusts, they will not be precluded in the mean time from funding capital development plans.

On Amendment No. 180, the noble Baroness makes a reasonable point about accessibility of information on how the Secretary of State uses powers in the Bill to provide financial assistance to NHS foundation trusts. I repeat that we expect that within five years or so all trusts will be eligible to apply for foundation trust status. But introducing a requirement to prepare additional financial accounts for presentation to Parliament is an unnecessary burden.

I can confirm that information about financial support provided to NHS foundation trusts will be included in the Department of Health resource accounts. We will discuss with the National Audit Office the best way of presenting that under the current accounting arrangements.

I hope that that will give some reassurance to the noble Baroness in respect of Amendment No. 180. Given what the noble Baroness said about not moving Amendment No. 181, I will not repeat the arguments that we made in support of this clause at earlier stages.

Baroness Noakes: My Lords, I thank the Minister for that response and especially for his amplification of the information that may be found in the Department of Health resource accounts. As the House knows, I am one of the few people who actually reads the reports that come from the Department of Health and I look forward to reading that one in due course.

The Minister disappoints me on the earlier amendment, but does not surprise me, because there are issues about the way in which trusts will be financed—whether they are forced into government financing and not given genuine freedom to borrow outside, and whether there is a level playing field between PFI and any other kind of borrowing. We will return to those issues one way or another as we see the Bill on its way to another place. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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[Amendments Nos. 180 and 181 not moved.]

Clause 12 [Prudential borrowing code]:

Baroness Noakes moved Amendment No. 182:

    Page 5, line 37, at end insert—

"( ) For the purposes of this Act, "borrowing" includes committments 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: My Lords, in moving Amendment No. 182, I will also speak to Amendments Nos. 197 and 209 in this group. The amendments deal with the interaction between the PFI and the foundation trust borrowing regime and are the same as those that I debated in Committee. I regret that that debate did not shed quite enough light on this area, which is why I have returned to it on Report. As I explained in Committee, the provisions in Amendments Nos. 182 and 209 are, in a sense, alternatives. Amendment No. 182 would provide for PFI liabilities to be included as borrowing for the purposes of the borrowing code. Amendment No. 209 says that for the purposes of the borrowing limit, commitments to make periodic payments, which include PFI, should not be counted.

We think that the Government are in a complete muddle over PFI, because the Chancellor, in the name of keeping the apparent government borrowing levels down, has forced the Department of Health to pursue PFI to an unhealthy degree. The Minister has told me in correspondence that, when PFI deals are scored on the balance sheet, they will be scored as borrowing for foundation trust regimes and not otherwise. What a muddle. The Government are allowing rules set by accountants and derived in the private sector—which the Minister tends to disparage—to drive what is borrowing under this regime. We do not think that the marginal differences that so absorb accountants should be allowed to conceal the truth. All PFI borrowing—for that is what it is—should be openly scored as such. Amendment No. 182 is the correct one.

The Minister told us that the department will be borrowing financial ratios and metrics from the private sector to settle borrowing matters. Very late last night, an e-mail arrived from the Minister's officials setting out the ratios proposed. Having seen those ratios, we can now quite understand the comment of one of the foundation trust applicants as reported in the Health Service Journal on 11th September that,

    "you can virtually generate any figure that you one want".

The magic metrics are all about revenue ratios. I will not get into debating the finer points of the ratios themselves, but the most startling thing is that they take no account of balance sheet issues and accumulated liabilities. That is nonsense. Bankers look at balance sheets as well as the revenue accounts and look at the liabilities behind balance sheets. The quality of the free cash flow of trust X with massive overhanging PFI liabilities is much lower than a trust that has managed to avoid PFI. The borrowing capacity will be correspondingly reduced, which is why we believe that PFI borrowing should be explicitly

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counted as borrowing. What we have seen of the ratios makes us seriously concerned about this part of the Bill.

Lastly, I have retabled Amendment No. 197, which deals with the impact of PFI deals on the regulator. I asked in Committee—but have not received an answer—what stages of PFI the regulator would be involved and how that might impact on the overall time scales for PFI, which have been far from impressive in many respects. I hope that the Minister will be able to answer that question today. I beg to move.

Lord Clement-Jones: My Lords, I support the noble Baroness, Lady Noakes, on Amendment No. 182. I have reviewed what the Minister said in Committee, when he claimed that the failure to include PFI liabilities specifically did not drive a coach and horses through the clause. I used the phrase "coach and horses" at the time. The Minister makes that assertion, but I cannot see how that is sustainable. He said that the servicing of PFI arrangements would be taken into account in setting the prudential borrowing limit for each individual NHS foundation trust. I do not see the chapter and verse for that. The noble Baroness, Lady Noakes, is right to persist in the matter, since a huge amount of the liabilities relating to the capital expenditure of the NHS is now by way of PFI, rightly or wrongly. In my view and that of these Benches, in many cases it is wrongly. But those are the facts of life, and we should be providing for it.

Lord Warner: My Lords, before dealing with the amendments to Clause 12, it might be helpful if I were to mention to noble Lords, who may have a burning desire to have more details about the proposed borrowing code, that the Department of Health is placing on its website a note about the prudential borrowing code. That will include information which has been given to applicant trusts for planning purposes in order to allow them to prepare for NHS foundation trusts. If noble Lords were to find it useful, I can make copies available in the Library.

Amendment No. 182 would require commitments to make payments over periods exceeding one year to count as borrowing. As we discussed when the issue was raised in Committee, it is the Government's view that the amendment is inappropriate and unnecessary. The prudential borrowing limit, which determines the ability of an NHS foundation trust to repay debt, already takes into account payment commitments that affect the free cash flow of an NHS foundation trust. So the prudential borrowing limit already takes account of any such payments. The borrowing limit will be reduced as the commitments are increased.

If, as may be the case, the amendment is intended to ensure that any PFI commitments are included in the NHS foundation trust borrowing limit, it is inappropriate. PFI contracts are not borrowing by the foundation trust and therefore will not be treated as borrowing for the purposes of the borrowing limits to be set for NHS foundation trusts.

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Under existing off-balance sheet PFI arrangements, NHS trusts—not foundation trusts—contract with a PFI project company for a service and as such that does not constitute borrowing for trust. That position will be unchanged with NHS foundation trusts.

Amendment No. 197 is designed to allow NHS foundation trusts to dispose of NHS property as part of a PFI deal. The regulator will designate property as protected, if it is needed for the provision of essential NHS services. It is right, therefore, that NHS foundation trusts should not be able to dispose of property needed for NHS services without the regulator's consent. There is no reason why it should be any different for property disposals as part of a PFI agreement.

Amendment No. 209 is also unnecessary. Off-balance-sheet PFI agreements and other agreements involving periodic payments for the use of assets are not a form of borrowing. It is clear that the prudential borrowing limit will not affect a NHS foundation trust's ability to enter into such agreement. There is, therefore, absolutely no need to state this on the face of the Bill.

Noble Lords may find those arguments remarkably similar to the ones I used in earlier stages of the Bill. That is because the position has not changed, our position has not changed, and we do not believe that these amendments are necessary.

6 p.m.

Baroness Noakes: My Lords, I thank the noble Lord for that response and the noble Lord, Lord Clement-Jones, for his support. We think this is a very important area. It was not a big surprise that the Minister gave similar answers to those he gave previously. The Minister says that PFI agreements are not borrowing. I have to tell him that in the private sector they are generally regarded as such. Those on the other side of the transactions regard them as financing deals. It is something of a myth—encouraged doubtless by the Treasury—that in the public sector they are not.

In fact accounting will catch up with this because international accounting developments tend more and more to treat this as borrowing. So, perhaps the concerns reflected in my amendments will in the not too distant future be dealt with by accounting, which appears at the moment to be driving the result.

I shall make again the simple point that it is wholly illogical to say that payment commitments affecting free cashflow are the beginning and the end of the story. I made the point earlier that the overhang of liabilities affects the quality of cashflow hugely. That would certainly be the case if a private sector lender were looking at the matter. We are of course in the slightly make-believe world of the Department of Health, so the answers I received have not surprised me. I do not think that I will progress any further with the issue today and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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