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I shall try to work through as many of the points as I can that were raised by noble Lords, as that will help to clear the ground for Committee. The noble Lord, Lord Hanningfield, raised the issue about the legal uncertainty in Clause 1, which I have dealt with in part. A fuller answer is perhaps due. We take the view that when two pieces of legislation potentially speak to the same issue, there can be confusion as to what Parliament intended. The Department for Transport and LCR have identified that it is not clear from a literal reading of the CTRL Act whether the Secretary of State’s ability to provide financial support to the High Speed 1 railway applies in the operational phase, when, for example, he or she would wish to provide financial support to a domestic service franchisee. The impact of any uncertainty over the legal and regulatory powers could be binary, in that due diligence on behalf of the purchaser or financer of the railway could identify a flaw in legal or regulatory powers supporting the project’s revenues and financing. That might lead to a position in which reduced bids from some potential investors in HS1 could deter others from bidding at all. Of course, we would not want that situation to arise because that could compromise securing best value for money.
The noble Lord also asked whether Clause 1 allowed for Eurostar services in the UK to be subsidised and how that might affect the access charge loan and the guaranteed rolling stock leases. Clause 1 gives the Secretary of State the same commercial flexibility to support HS1 as she has for the national rail network, including flexibility to subsidise international operators in the same way as we currently support domestic franchise operators. It would also allow the Secretary of State to support Eurostar through the access charge loan or by continuing to guarantee rolling stock leases if the Secretary of State chose to go down that route. However, it is the Government’s objective to reduce international operators’ reliance on public support, so we do not intend to subsidise international services through a franchise or any similar arrangement.
The noble Lord, Lord Hanningfield, understandably made a plea for services to stop at Stratford. I would expect that of him, given his keen advocacy of all things Essex. No doubt he sees Stratford as the gateway to Essex—and I might be with him on that particular point. I certainly understand what the noble Lord said about the access charging regime in that context. Ultimately, it is an issue for Eurostar as to whether it sees a value in services stopping in Stratford. Domestic services will call at Stratford from December 2009 and Eurostar expects to call there as soon as high quality
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The noble Lord also made some observations about the appropriateness of the Secretary of State to maintain some regulatory powers over High Speed 1 and the Office of Rail Regulation in relation to access. He asked what the respective roles were for the ORR and the Secretary of State on High Speed 1. It is important that there is clarity over commercial points before any sale process starts. Issues such as the level of access charges will remain with the Government as they affect the value that the Government will recoup on their investment in HS1.
Under the development agreement, the Secretary of State oversees access contracts between the HS1 infrastructure operator and train operating companies for HS1 track and stations. Under the Railways Infrastructure (Access and Management) Regulations 2005, the Secretary of State is also responsible for setting a framework for HS1 access charges and ensuring that the charges comply with the requirements of those regulations.
The Office of Rail Regulation is the appeal body under the 2005 regulations in relation to disputes over HS1 access or charges, a point also raised by the noble Lord, Lord Bradshaw. I was also asked about the Office of Rail Regulation's overriding duty and whether it would impact on the development agreement. That raises the question of whether the Office of Rail Regulation should give precedence to the development agreement. As we see it, the overriding duty of the Office of Rail Regulation is not to impede the development agreement and that is obviously an existing one.
The circumstances in which one might expect the ORR to take this overriding duty into account would be, for example, if a train operator wanted to start running competing international services to those on HS1 using the main domestic rail network. Another example might be if HS1 were blocked because of engineering works or some other disruption on the line and HS1 services needed to use the domestic rail network—or vice versa, if domestic rail lines were blocked and HS1’s were needed. The overarching duty gives any potential purchaser of HS1 comfort that its interest will be taken into account when the Office of Rail Regulation is taking regulatory decisions in relation to the national rail network which could affect the operation of HS1. In overall terms, it should protect value.
The noble Lord, Lord Hanningfield, also asked about how the Office of Rail Regulation's safety functions will be funded. The ORR’s safety functions are funded through the safety levy payable by all train operators, and that levy is made under health and safety regulations.
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The noble Lord also raised the issue of the planned use of Waterloo and St Pancras and asked why that was dropped. This is obviously a complex issue, but after the revision of revenue forecasts was made in 1998, Eurostar reviewed whether it should operate one or two terminals in London. Eurostar concluded that operating from two terminals would require the operation of two international stations, two depots and two sets of station staff, engineers, security personnel and so forth. It would require the development of a timetable for two sets of journey times into London. Eurostar thought that that was confusing, especially for continental travellers faced with trains to and from two stations. The cost of operating two terminals was financially prohibitive against the marginal revenue benefits and, in November 2004, Eurostar announced that it would move its London operations in their entirety to St Pancras and cease services from Waterloo.
The noble Lord also asked about the likelihood of competition on the line. That is obviously a matter for commercial operators to agree with the owners of the railway. The Secretary of State will put in place a framework to ensure that all access charges allow for open access and fair competition.
The noble Lord, Lord Bradshaw, asked about appeal rights and I have already dealt with that. The noble Lord also raised the prospect of potential buyers and gave us a menu from which we might wish to choose including Railtrack, Eurotunnel, SNCF, Deutsche Bahn, Macquarie and others. It was a fair list and I do not want to comment on the relative merits of each because it would be quite wrong of me to do so. HS1 is a valuable new asset. There are many potential purchasers. The noble Lord gave us a list. We want to see an open and transparent competitive process. The new line will not be sold automatically to Network Rail although it is a potential bidder, as was speculated. As I said, we want to ensure an open and competitive bidding process. Network Rail will be able to bid on the same basis as anyone else.
Lord Bradshaw: My Lords, the noble Lord talks about an open and competitive bidding process as is the case with franchises let for domestic services in this country. However, it does not take account of the wider benefits and seems to many of us to be driven by who bids the highest price, not by who promises the best service and pleases the customers. Price alone is not the only criterion that I should like to see taken into account.
Lord Bassam of Brighton: My Lords, the noble Lord sells the argument a bit short. I do not want to open up a bigger discussion about franchising generally but in short the franchising process has to meet certain specifications. That is one of the plus points of competitive bidding. Clearly, we want to see a high threshold in standards of service and I am sure that will be secured through that process.
The noble Earl, Lord Mar and Kellie, said this should not be just about money. Of course, it should not be just about money but we as a Government have to secure best value. By securing best value we secure in the longer term a better level of investment in the rail network as a whole. I think that is well understood by noble Lords.
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I ought to set out the Government’s view on whether we should develop High Speed 2 because all speakers referred to that. Last summer’s White Paper set out our immediate priority for the future of the main line network; namely, to increase capacity by somewhere in excess of 20 per cent. Our view was that this could be met through a range of options, including road or rail. A high-speed line is, of course, one of the options available. It is far too early to talk about firm plans but we will need to look at this along with other issues in our next plan for the railways in 2012. Therefore, we do not rule it in and we do not rule it out. I certainly understand the case that has been made but we have to prioritise and the present priority is to ensure that we have adequate capacity across the whole of the network. The delivery of High Speed 2 may well be part of that. Of course, we have to consider cost and the potential benefits to passengers of having another high-speed line and these things have to be balanced. The White Paper estimates that the cost of such a scheme could be between £10 and £30 billion. That money might not then be available for other key critical improvements to the network as a whole. The case is obviously one for the future.
The noble Lord, Lord Bradshaw, asked an interesting question about a domestic open access operator. The access and management regulations give main operators a right of access. Therefore, the Government cannot stop domestic open access operators seeking access to HS1, nor would we want to because it may well have benefits. The noble Earl, Lord Mar and Kellie, suggested using access charging to encourage use of the line. What was proposed when LCR’s subsidiaries consulted on access charges would have seen a significant reduction in charges for international services. The Government believe that they should be set at a level that will allow new operators to run services in the future.
I think I have covered most of the main points on which noble Lords sought clarification. I shall have a careful look at Hansard to judge whether I have missed anything. If I have I shall write to noble Lords and circulate that letter to the three noble Lords who contributed to this short debate. I look forward to a constructive Committee stage, and I hope that your Lordships’ House will find full favour with the Bill.
We have a high-speed rail link of which, as the noble Lord, Lord Hanningfield, said, we should be proud. It is a train service that links this country to Europe at a speed of 186 mph at its best. St Pancras has been transformed, and with the introduction of through ticketing it is now possible to travel from the north of England to the Continent without negotiating the rigours of the Underground. That means, in my terms, taxpayers benefiting across the nation. We have a regeneration investment estimated at £10 billion, which will be used to improve priority areas in the south-east. On top of all those benefits, we also have the opportunity to gain a tangible financial return on the taxpayers’ investment. That is a political menu to which we should all be able to sign up.
Through restructuring, we will secure the long-term future of the Channel Tunnel Rail Link project, which has delivered and will continue to deliver real
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On Question, Bill read a second time, and committed to a Grand Committee.
Sale of Student Loans Bill
4.07 pm
The Parliamentary Under-Secretary of State, Department for Innovation, Universities and Skills (Baroness Morgan of Drefelin): My Lords, I beg to move that this Bill be now read a second time. Participation in higher education in this country is at its highest level ever. This has been brought about through the hard work of all involved in the sector, increased public investment and the systematic breaking down of financial barriers to higher education. Alongside reintroduced non-repayable government grants and non-repayable bursaries from higher education institutions, we have developed a system of student loans that means that no one need be deterred on financial grounds from fulfilling their potential through higher education.
Income-contingent repayment loans are now available for maintenance and tuition fees. No home full-time undergraduate studying for their first degree has to pay tuition fees as they study. Repayments are made after the borrower has left higher education and are directly linked to the individual’s earnings, with collection through payroll deduction alongside tax and national insurance. Repayments are related to the size of the pay packet, not the size of the loan. This makes them quite different from the old mortgage-style student loans that were sold in 1998 and 1999 for a total of £2 billion. The loans are not commercial loans. The low interest rate, linked to inflation, means that graduates pay back no more in real terms than they borrowed.
We are rightly proud of our record of breaking down the financial barriers to education and widening participation. We are confident that participation in higher education will continue to grow and that the number and proportion of students from lower socio-economic groups will continue to rise. We have sought to support that further, with additional changes to the student finance system announced last year. But growth in participation brings an interesting challenge; as student numbers have grown, so too has the Government’s student loan book. The English income-contingent loan book was valued at £17 billion at the end of financial year 2006-07, and it is set to exceed £50 billion within 10 years. This projected growth makes it all the more important to consider carefully how best to manage this large public asset. That is what this Bill addresses.
In the 2007 Budget, the Government announced their intention to begin a programme of sales of income-contingent repayment student loans. We believe that ownership of the loans would be best placed in the private sector. Transferring ownership of large parts of the loan book will reduce the risk of holding loans on the Government’s balance sheet. The Government anticipate receipts from the proposed
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We have two guiding policy principles in developing this sales programme. First, there should be no adverse impact on borrowers. Terms and conditions for all loans will, as now, be governed by regulations scrutinised by Parliament. The borrowers’ experience will not alter and the collection and administration systems will be the same whether or not one’s loan has been sold. This Bill contains the provisions that we need to ensure that this enduring protection for borrowers is secured. Secondly, any transaction must yield good value for money. Ministers and departmental accounting officers alike must ensure good value for money in all that they do. This responsibility is at the forefront of our minds as we prepare the sales programme.
Retaining the loans in the public accounts exposes the Government to the risks surrounding the repayment of very large amounts of money—tens of billions of pounds. The Government have made forecasts of how quickly the income-contingent repayments will be made. But by the very nature of a system that is fully sensitive to changes in each individual’s earnings over time, we cannot be certain how quickly that money will come back to the taxpayer. It is not usual for government business to remain exposed to large amounts of debt-related risk and we believe that the private sector can take on and manage those risks. Having commissioned expert advice from the financial sector, we believe that there will be an appetite in the market for assets backed by the loan repayments.
All transactions in which loans are sold will be subject to a rigorous assessment that we are achieving good value for money. The assessment will ensure that the sale is competitive and takes place under the right market conditions, that potential bidders have enough information to make informed bids, and that there is a genuine transfer of risk from the Government to the purchasers. There will be a comparison made of the proceeds to be achieved from selling the loans against the value of retaining them on the Government’s books, taking account of the risks involved.
We should be clear that the assessment will be a matter of judgment for the Government of the day for each proposed transaction. My honourable friend the Minister for Lifelong Learning, Further and Higher Education has already made a commitment in the other place that the Government will report to Parliament after each sale. The National Audit Office will scrutinise the sales and has already signalled that it may report to the Public Accounts Committee on this sales programme.
We must bear in mind that this Bill is designed to enable a long-term programme. We expect student loan sales to become a regular feature of the student finance system. The precise way in which sales might be carried out may vary over time. Our current approach to proposed sales is different from the approach to sales made 10 years ago due to the way in which markets operate having evolved. In the same
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Therefore, the Bill needs to support sales arrangements more broadly than the particular way that we are planning to conduct the initial sales. It may, however, be useful to noble Lords if I explain our current approach to the sales transaction. In making a sale, the Government would not expect any financial institution to want to own the loans on its balance sheet. Therefore, our current plans are that the loans will be securitised. This is a process by which a special purpose company, or SPV, is created to issue bonds, which purchasers can trade in the financial markets. Those bonds are backed by income received from the student loan repayments of the portfolio, not by repayment of particular individual loans. A much wider range of investors will be more interested in purchasing tradable bonds than in buying a package of loans outright, because they will know that they can sell these bonds in the markets if they want to.
Structuring the loan portfolio into different bonds will attract a wide range of investors and maximise its value. Different investors will be interested in different types of bonds with different risks and return profiles. Pension funds and banks, for example, may want the relatively secure investment of AAA bonds, whereas other investors, such as fund managers, may prefer the relatively greater risks but higher returns of less secure bonds. As a result, the Government believe that there will be a keen appetite for these assets in the private sector at a price that will yield good value for money. Following a procurement competition, we recently appointed the sales arranger to prepare for the potential sales in 2008-09 for the Government on this basis and to arrange sales following the Bill’s Royal Assent.
Once the loans are sold and securitised, we expect them to be sold on very rarely, if ever, because owning the loans is the central purpose of the special purpose vehicle. The Government will decide on the portfolio of loans to be sold in any given transaction. We need to be sure—this is particularly important—that the loans that we offer for sale are of a type where there is sufficient information for the market to be able to price them properly, otherwise there will be no prospect of obtaining good value for money. This might mean, for example, selecting for sale loans of a certain maturity so that borrowers will have been out of university for a sufficient period to be generally connected with the repayment system through HM Revenue and Customs. We will not be selecting on the basis of the characteristics of individual loans, such as salary levels or what subjects have been studied, and loan purchasers will have no say in which loans are available for them to buy.
I give existing and future borrowers this reassurance. Purchasers of loans will not be able to charge a different rate of interest, change the income threshold for repayments or use a borrower’s personal details for any purpose other than managing the loan. Purchasers of bonds backed by the loans will have no direct relationship with borrowers, the Student Loans Company or the Government. Their interest will be solely in the income which the bonds can provide.
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I now turn briefly to the individual clauses of the Bill. It is not a long Bill so I shall take the time to do so. Clause 1 allows the Government to sell the loans, while retaining the power to require that purchasers administer the loans in a way that meets our requirements. Clause 2 concerns various provisions that can be included in sales contracts. Clause 3 enables onward sales and deals with provisions relating to such transactions.
Clause 4 enables regulations to refer to purchasers and to continue to govern loans when they are sold. Clauses 5 and 6 enable the flows of money and information needed for the current repayment system to operate for sold loans as well as retained loans. Clause 7 is a declaratory statement explicitly confirming an existing understanding that all income-contingent student loans are exempt from the terms of the Consumer Credit Act 1974 because their characteristics differ substantially from commercial loans. Clause 8 provides powers for the Welsh Ministers, in respect of Wales, which are equivalent to those which the Bill proposes for the Secretary of State in relation to England.
The last time this House considered student loans it was a matter of some controversy. By contrast, I believe that this short and mainly technical enabling Bill is quite different. Its provisions have no relation to future decisions on broader student finance policy and have no impact on how students obtain financial support for their time in higher education. Rather, it enables the Government to manage efficiently a large and growing public asset. I commend the Bill to the House.
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