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The second dog that did not bark-the noble Lord, Lord MacGregor, just referred to it-is the case for a national infrastructure bank, often referred to as a national investment bank. Fortunately, they have the same initials so it does not matter-NIB. I noted that the noble Lord, Lord Myners, called for such an institution when he spoke in the debate on the comprehensive spending review on Monday. On this matter, the committee sat firmly on the fence. We resoundingly concluded that the pros and cons should be kept under review and, the nature of that recommendation being what it was, the Government cheerfully agreed with us. I do not think, however, that the recommendation quite captured the general tone of the group's discussion. Some of us, at any rate, find it hard to see what it is, precisely, that such a bank would do. Is it going to lend at rates keener than private sector banks? If so, that distorts the market. If the rates are the same, why bother? Despite the failings of the banking sector over the past three years, not all of us are convinced that more publicly owned banking

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is the long-term answer to Britain's economic problems. After all, the crash itself, to a great extent, owed its origins to the misdoings of two American public institutions-Fannie Mae and Freddie Mac.

The committee believes that this report represents a reasonable and balanced contribution to the ongoing debate about an evolution of a public finance initiative and so we commend it to the House.

6.06 pm

Lord Newby: My Lords, I commend the committee on this extremely interesting and timely report and my noble colleague Lord Vallance for his clear introduction to today's debate. I was amazed, in reading the report, to see that, despite the amount of political discussion there has been on the subject, there has been no comprehensive review of PFPs by any parliamentary body for a decade. This report certainly helps fill that gap. I was also surprised, as the NAO pointed out, that there is no apparent robust and systematic evaluation of the use of private finance at either a project or programme level across government. So it is no wonder that it has proved so difficult to form a definitive view of the effectiveness of PFPs and no wonder that so much of the political debate on the subject has been so ill informed.

However, the report points out that PFPs have a better record of being produced on time and to budget than traditionally procured projects. For the period ahead, as we look to radically update our infrastructure, private finance is clearly going to play an even greater role. One has to accept at the start, as the noble Lord, Lord Lipsey, pointed out, quoting the NAO, that this model does not work for everything. In some areas where it has been tried-London Underground being one example-it has failed pretty spectacularly. In other areas, such as defence and IT projects, the basic underpinning concept does not work very well because you cannot, at the end of the day, transfer the risk so the Government end up bearing the risk. So there are clear limits to where this approach is the most appropriate.

However, in many areas it clearly has worked relatively effectively and, given that the estimate of the infrastructure expenditure we need over the next decade in the UK is £400 billion, we are clearly going to need to look to sources of funding beyond general taxation to meet the majority of that. I wanted this afternoon to concentrate on looking at the funding of future infrastructure projects in the UK. In some respects the UK should be relatively well placed to attract the funds. In a report produced and published yesterday by Berwin Leighton Paisner, 85 per cent of the experts on infrastructure it surveyed believed that the climate for global investment in infrastructure would improve over the years ahead, and that the UK was considered the most attractive location for delivering infrastructure projects anywhere in the world, but that the availability of funds would be a major constraint. Fifty-nine per cent of the respondents to that survey saw PFP as being important or very important in stimulating demand for infrastructure investment.

In the report, the committee looks at potential sources of funding for infrastructure investments and specifically refers to pension funds as an area of

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potential. It is interesting that at the moment UK pension funds lag behind in the proportion of their funds that go into infrastructure investment. In the UK, only 0.5 per cent of pension fund investment goes into infrastructure compared with 2 per cent in the Netherlands, between 4 and 5 per cent in Australia and as much as 10 per cent in Canada, so there is clearly considerable scope if the structures are right for greater pension fund involvement in this sector.

There are clearly significant amounts of overseas funding looking for a home in UK infrastructure. I understand that the Mayor of London's office is regularly approached by potential investors, including sovereign wealth funds, that are looking to invest in infrastructure in London because they see it potentially as an extremely safe, long-term bet. Does the Minister believe that at present there is an effective way of capturing approaches that are coming in to the UK, to the mayor's office, to central Government or elsewhere, from sovereign wealth funds and others that are looking to invest in infrastructure? At the moment, I am not sure who I would tell any such person to approach in government, and I do not know how successful we have been in converting such approaches into the hard cash that we need.

A further area that is cut out for infrastructure expenditure is the sukuk model of Islamic finance. An asset-based approach to finance could be developed very significantly here. Given that that sector is increasing by 20 per cent a year globally and that there are already very strong links and a very strong Islamic finance sector in the UK, that is a specific area that we could look at further.

The noble Lord, Lord Lipsey, referred to the national infrastructure bank. The report refers to the European Investment Bank, which is committing €1 billion a year to the UK. There is a wonderful quote in the report from Mr Simon Brooks who said that it would be ridiculous to introduce an investment bank in the UK. He said,

We may have the European Investment Bank, but if the sum total of its potential in terms of the UK is €1 billion a year, it is clearly not going to fill the gap. I am a lot less sceptical than the noble Lord, Lord Lipsey, about the potential of the green investment bank because, as the Wigley report pointed out, there are a number of areas of market failure in the area of infrastructure investment which can be met only by new mechanisms of financing, and the green investment bank is potentially one of them.

The big question about a lot of this kind of expenditure is that it will take place only with some sort of government guarantee: underwriting, a cap of risk or some sharing of risk. The obvious example is that if we are going to build the high-speed rail link with private finance, investors are almost certainly going to need to be guaranteed a baseline level of revenue if they are to invest the billions of pounds that will be required. I welcome the Minister's view on this. The role of government is hugely significant here, not just because many projects will not go ahead at all unless there is an element of government underwriting, but because the cost of financing the projects will fall to the extent that

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government accepts some of the risk. I was interested and intrigued by paragraph 3.16 of the National Infrastructure Plan, which came out last week:

"Reducing the cost of capital by reducing the level of risk transfer to the private sector has the potential to achieve considerable cost savings. A one per cent reduction in the cost of capital on a total infrastructure investment programme of £500 billion is worth £5 billion per annum".

That is significant money, and the attitude of government towards accepting risk will therefore be crucial. Unfortunately, having made that immensely interesting comment, the National Infrastructure Plan gives no indication of whether the Government are therefore going to take their own advice, but risk is central to infrastructure expenditure more generally and to PFPs in particular.

There is great potential in infrastructure expenditure and investment in future using the model that is described in the report if the Government and the private sector can build on experience to date and look to more flexible and innovative ways of developing it in future.

6.18 pm

Lord Tunnicliffe: My Lords, it is the lot of a Whip, whether a government Whip or an opposition Whip, that by the time a topic has cascaded down to one's level, one usually finds oneself talking about a subject that one had not heard about 48 hours before. It is therefore a refreshing change, although it is perhaps going to be a painful one, to find myself talking about a subject in which I have had very considerable personal involvement. I shall declare my interests in PFI; I was managing director of London Underground and subsequently its chairman between 1988 and 2000, a period in which it was a leading player in PFIs. London Underground bought a fleet of Northern Line trains on PFI, handed over management of its power and communications systems, both telephone and radio, to the private sector, had a very successful ticketing programme, to which I shall return, and had the infamous London Underground PPP, of which I will admit to being the architect. I say that because it has been explained to me that success has many parents, whereas failure is an orphan, so there will be little contention of my claim to be the architect of the London Underground PPP.

I shall touch on the contributions of other Peers before I start. I thank the members of the committee for the work they have done on this report, and the noble Lord, Lord Vallance, for his presentation of it. I am very respectful of the report and greatly welcome its contribution. I thank the committee for finding the new term-PFP-which I shall try to use in future in this confusing terminology. I shall touch on a number of the points made by the noble Lord, Lord MacGregor, but we have a joint confession to make that during that period he was at one point my boss, so there is some coresponsibility in this Chamber. I thank the noble Lord, Lord Lipsey, for his quote from the NAO. It is probably a good summary of where we are on what we now call PFP. It is like the curate's egg, but there is a lot of good in this egg as well as some problems. On banking issues, I would be trespassing on areas where I have no in-depth knowledge. The

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noble Lord, Lord Newby, brought up risk. I shall spend a little time on it. It is ill understood in the realm where PFPs happen.

The Opposition's position on the report is in many ways the Government's, in so much as it is contained in HL 114. I am sorry that the noble Lord, Lord MacGregor, found the Government's response dismissive. I will concede that on some issues there should have been more reflection and more depth, but one is between a rock and a hard place in trying to get the response out quickly-we are grateful for the commendation-and responding in depth. Tonight is only the beginning of what will be a continuing debate on how the new Government will respond to the issues brought out in the report.

The first area that I would like to touch on, which is touched on gently in the report, is what I will call government pressure on public sector managers to use the private road for procurement. In the 1990s-I will limit myself to that time because I have no direct personal experience-the pressure at official level was not gentle, it was brutal. You were flatly faced with the fact that if you wanted your project, it had to be done the private way. I tried all I could to make sure that our submissions were honest and fair and balanced, but when you think of that pervasive pressure right the way through the system, it is not surprising that questions are asked as to whether the right public sector comparator was used, et cetera.

Treasury pressure is touched on in the report, but possibly the strongest paragraph is paragraph 61 in which the Government are asked to commit to not bringing institutional pressure on parts of the public sector to use private procurement. So, the first assurance I seek from the Minister is that best value for money will be the principal consideration when deciding whether to use a PFP procurement road. In responding to that question, I would like him to reflect upon the need for there to be practical public alternatives if that evaluation is to be made in an even-handed way.

All Governments fail to see-they say the words but they do not enact them-that investment in infrastructure is investment in what makes our country work. That is quite different from present consumption. The actuality of finding the money for investments from public sources is extremely difficult for a public sector manager; he is driven in this private direction. It was seen as almost the only way for investment to be brought into the business one was responsible for.

It is extremely easy to talk about risk at a theoretical level, but in the real world it is not like that. When you have big projects and you are in the public sector, you do not say "you take the risk" and that is the end of it. In practice, with a big project you are in what I describe as a deadly embrace. Yes, the survival of your supplier depends on your behaviour towards them, how you push risk and how you prosecute the route, but your ability to trade tomorrow depends on that supplier. The worst example in my professional career was not in private sector procurement; it was in the acquisition of 85 trains for the Central Line. That company threatened to go broke about a year and a half into the project. Our problems were so extreme

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and our options so few that we seriously considered buying the factory off the receiver and going into train manufacture. In the end we did a deal with one of the co-parents and paid the money for a parent company guarantee to see the project through.

It is a fact of life that in these big projects risk migrates to the party of substance, and that is the public sector. The real risk transfer is extremely modest. The value of private sector initiatives is the way in which small behaviours are incentivised to the public good. I will touch more on that later. For this reason I question the value of the off-balance sheet charades that we have played in this area. The report very much gets to the nub of this. I confess that my Government did not perhaps answer these questions in the required depth. This is brought out particularly in paragraphs 59 and 60. I would like the Minister to answer the challenges in those paragraphs with much greater clarity and much greater depth. Public/private finance capital is, frankly, part of the real balance sheet, and at least it must be exposed in a clear way so that we can see what has happened.

The rest of the report shows guarded support for PFI. I share that view. We have had good experiences. One of the worst things about having Her Majesty's Government as your banker is that they are stunningly unreliable. They will promise you money one year-sometimes just before an election-and suddenly it is withdrawn the next year. The ability through the PPP to assure a partnership and funding is very much demonstrated by today's Oyster card. That development is possible because of a long- term relationship. That programme started 25 years ago. It was translated into the private sector in the late 1990s and flourishes because the private sector has money to develop it and because the partnership works relatively well.

Whole-life costings work. When we acquired the Northern Line trains we discovered, largely because it took them a year and a half extra to build the damn things, that for the first time in all the time we bought electric trains-and we have been buying them for 100 years-the manufacturer suddenly discovered that he could make them more reliable and easier to maintain, which was not exactly surprising because the manufacturer was going to make all the money out of the deal by repairing them and maintaining them. It was a complete re-design. The concentration of whole-life costing was absolutely invaluable.

Finally, I come to my experience, in a sense. The Underground PPP was a ludicrous failure and so on and forth, but its failure was more complex than the report suggests. I put that down to two things. First, the special purpose vehicle-Metronet in particular-was a very unsatisfactory business structure. We really should have seen that. We were trading with an enterprise that was owned by its suppliers, and its suppliers were making their profits between them and the enterprise, not through a share of the profits of the enterprise. Whenever you bring a consortium together, you must make sure that the owners make their profits in the consortium, not in the supply arrangements. Secondly, the Treasury guarantees were probably reasonable in the circumstances, but the Treasury did not have the right tools of transparency so that it could monitor the risk of those guarantees being called in. The

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conclusion I draw from this is not that we should not do big complex private deals-they may, in fact, be the right vehicle-but that public sector teams of extremely high quality are necessary to do such deals.

I would like an assurance-the noble Lord, Lord MacGregor, touched on this-that if the Government contemplate such a deal in the future, they will first make sure that they have a team of the weight, the intellectual horsepower, the experience and the breadth necessary not just to look at the lines of the deal, as lawyers do, but to see behind the deal and address how people are going to behave with the various incentives. I ask the Government not necessarily to be deterred by the LU experience but to learn from it. I hope that the Minister will take account of that.

The one area in which, from my experience, I thought the report was weak-I have a slight difficulty with this, because I have nothing to add to it-is the problem of the preferred bidder. The complexity of PFP deals means that they take a long time to put together and are quite costly. The private sector has this device of saying, "You have to come to a preferred bidder status with someone, otherwise we cannot afford to continue".

It is a real dilemma. The case for having a preferred bidder makes sense, but the problem is that the reality of having an alternative goes out the window. I do not know how, in future, the public sector will be able to establish value during the preferred bidder stage, but be able to find an escape route. But the report lets the process off lightly by not going more into the trap of the preferred bidder. I hope that the Government will think more on that whole issue.

In conclusion, I welcome the report, which gives valuable input to the debate. I would ask the Minister to respond to the report and to the emphasis that I have made. I encourage him to use the report-I think that the noble Lord, Lord MacGregor, touched on this-as source material in the training of public sector teams involved in this work. This very good document, which covers the past, can help people to learn the skills necessary to ensure that the public sector will get best value out of these schemes.

6.30 pm

Lord Sassoon: My Lords, I thank the then members of the Economic Affairs Committee for preparing such a thorough report on the use of private finance to deliver public projects. I extend my gratitude to all those noble Lords, whose contributions to today's debate I have found invaluable. I spend a lot of my time here answering for things that are not in my direct area of policy responsibility, but I am pleased that on this occasion there were not 50 Members of this House talking about such areas, many of which I know little about, but half a dozen valuable contributions on something on which I know a little. I was a director of Partnerships UK between 1992 and 1996. It is also a pleasure and a daunting challenge to follow one of the world's great experts on PFI-the noble Lord, Lord Tunnicliffe-and to have this debate kicked off by my noble friend Lord Vallance of Tummel, with whom I worked in a small capacity a number of years back when he was taking one of our biggest pieces of national infrastructure, British Telecom, into the private sector.

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At the outset, I should stress that it is clear that public/private partnerships will continue to play an important role in underpinning our country's future infrastructure. The noble Lord, Lord Lipsey, reminded us how much has been done. A number of times we have been reminded that this effort has gone through several Administrations, which have now been led by the three main parties in this country. We share a commitment to learning the lessons and making such projects better but also to continuing with them, which is what the committee's report suggests. The report highlights where private finance has brought valuable disciplines to infrastructure planning and implementation.

Many of the questions and comments today have reminded me that there are quite a number of challenges to improve the model going forward. I will do my best to answer a number of those questions now, but I will write on points that I fail to pick up or where, on reflection, I could have given a fuller answer.

I turn first to some of the balance sheet questions-I ask noble Lords to forgive me if I do not refer to them by name each time on points that they have raised-which were brought up by my noble friend Lord MacGregor of Pulham Market and the noble Lord, Lord Tunnicliffe. We are constrained here because we are bound by European accounting requirements that set the framework for how each project is recorded in the national accounts. However, I recognise that these requirements can make it difficult to get a clear picture of the public sector's commitments, which is something that we must remedy. It is the Government's policy to ensure that future liabilities are made obvious to the public and that complex financial instruments, such as PFI, should not hide the true cost of investments that the Government have made. Such practices are completely out of step with our strong transparency agenda but also risk the endorsement of projects that do not represent good value to the taxpayer.

For that reason, we have already taken action to bring greater transparency to PPPs. It has been a long time coming, but I can confidently say that next year we will publish, for the first time, whole of government accounts, which will be prepared according to international accounting standards. This will ensure that the vast majority of PFI transactions will appear on balance sheet. In future, we will also publish details of all new government contracts valued at more than £25,000, including PPP agreements. This will enable members of the public to assess the ongoing costs of long-term commitments, and will complement the existing reporting of PFI commitments disclosed on the Treasury's website.

A second area of concern to us and to speakers in this debate has been funding for local government and government departments. There were questions around ring-fencing, bias and so on. Ring-fencing, in particular, meant that government departments and local authorities could use PFI as a means to increase their budgets, with potential for diverting funds away from more beneficial areas-those which offered greater value for money. In answer to the question asked by the noble Lord, Lord Tunnicliffe, I stress that, in this regard as well as in other dimensions, the Government absolutely want to do whatever they can to remove any bias over alternative ways of public procurement, including over

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public versus private financing. We have already taken action to address the particular problem of ring-fencing by removing the existing ring-fence and transferring financial responsibility for the grants back to the relevant government department. This will place all procurement options on a level playing field and ensure that merit rather than increased budgets determine which projects should go ahead.

That leads me on to the impact of PFPs on departments. In answer to my noble friend Lord MacGregor's concern, we will continue to monitor all PFI contracts and information on the flow of payments under those contracts. Of course it is the case that, following the spending review, the budgets for departments will be constrained. Our initial analysis, which we did in conjunction with the spending review, suggests that this should not cause any department a significant problem. However, we will continue to monitor the level of commitments that are being made.

Some speakers have stressed the need for a national infrastructure bank, while others have questioned it and I think that my noble friend Lord Newby offered some mixed messages. My noble friend reminded us of the strong private sector appetite for investment in infrastructure and drew particular attention to sovereign wealth funds. Certainly, my discussions with sovereign wealth funds-both here and on a recent trip to the Gulf-and my discussions with long-term investors, insurance companies and others suggest that there is a strong, latent demand. I can assure my noble friend that we are taking new steps across government to make sure that we co-ordinate our contacts with sovereign wealth funds and with a range of the largest actual or prospective inward investors into the UK. His point is well taken. He challenged me to say whether this has translated into action yet. Of course, it is early days, but we are certainly starting with the co-ordination so that we can understand what investors want and channel their appetite-in so far as it is in the Government's gift to do that-appropriately. When I was in the Gulf, I had a couple of discussions with Islamic finance specialist houses, particularly in Kuwait, so I am well aware of their possible involvement in this area.

Against that background, we have to be careful-the noble Lord, Lord Lipsey, drew attention to this-that Government-backed loans, if and when they are necessary, which is still open to question, do not increase the incentives for the private sector to deliver value for money by transferring risk away from the private provider to the public sector. We must ensure that there is no crowding out of private investors by the Government reducing competition and stepping in where there is not a market failure. For that reason, it is our policy for the Government to make loans only where they do not risk undermining the wider market, or where such loan or construction of a particular financial instrument helps to address a specific market failure. In that spirit, we will look to target the green investment bank-which will initially have £1 billion of government capital and the possibility of proceeds from government asset sales but will not have a mega balance sheet-on helping to relieve particularly challenging areas of risk on projects, particularly at

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the front end or where new technology is involved. We will come forward with the design of the green investment bank by spring 2011.

I turn briefly to the question of project failures and guarantees, which was raised several times. It is important to note that PPP, including PFI, critically allows us to transfer substantially more risks to our partners than conventional procurement. As has been said, we should not shy away from taking on challenging and complex projects. However, I absolutely take the point made by the noble Lord, Lord Tunnicliffe, that we need appropriate expertise in government when we come to such projects. At the moment, there is nothing on the scale and complexity of Metronet in the pipeline, but when we contemplate such projects, yes, we absolutely need the expertise. That is why it was absolutely right of the previous Government to centralise the expertise in Infrastructure UK as an infrastructure financing unit within the Treasury, especially given the particular circumstances of the past couple of years. My right honourable friend the Chancellor confirmed at the time of the Budget that Infrastructure UK remains central to how we take our efforts forward. That is the best answer that I can give to the question about expertise, which we recognise.

My noble friend Lord Newby picked up on a point in the national infrastructure plan about risk transfer and the possibility of reducing costs. I point him to one area discussed in the report, which is whether we can expand the use of the regulated asset-based model as a way of attributing risk in a different way and bringing down the cost of capital. That is very much work in hand.

On the question of preferred bidders, PPPs are now sufficiently complex contracts that they have to be procured under the so-called competitive dialogue procedure. This prohibits any discussion of the scope or cost of the contract with the preferred bidder and was designed to stop the so-called deal creep that has been seen in the past. The Treasury will publish a review of the competitive dialogue procedure-that addresses part of the point made by the noble Lord-later this month.

The committee's report also highlighted the value that private sector expertise and due diligence bring to PPP. In that context, one specific point that was drawn to our attention was bid costs. That issue has arisen again, particularly in the re-review of projects that we conducted following the election and ahead of the spending review. Although government policy remains that bid costs should not be paid unless in exceptional circumstances, the Treasury review of competitive dialogue-which, as I said, is scheduled for publication in November-will set out details of our review of policy in that area.

To wrap up, I emphasise that public/private partnerships, including PFI, will continue to make a valuable and important contribution to our future infrastructure needs. There are more than 670 signed PFI contracts, and the spending review confirmed further new projects, including three maintenance projects and the Nottingham tram extension. However, I think that we all agree that PPP should be used only where it offers real value for money. In pursuit of that objective,

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we have taken steps, as I have described, to improve how we assess those partnerships. We have removed the financial incentives that unfairly encouraged the use of PFI over other delivery structures. I mentioned the steps that we have taken to drive forward transparency. We have set out the broader challenges facing our infrastructure in the first national infrastructure plan, to which my noble friend Lord Newby drew attention.

In conclusion, the Government absolutely acknowledge the points raised in the Economic Affairs Committee report about both the benefits that private finance projects bring and the drawbacks of the current system. We will continue to look at options to improve the way PPPs perform, building on the work that we are already taking forward. In the current climate, there is a particular need to get the best possible deal for the taxpayer, and we are completely committed to that. I welcome the conclusion of the committee's report. I thank my noble friend Lord Vallance of Tummel and the other members of the committee for it. I absolutely take on board the valuable suggestion of the noble Lord, Lord Tunnicliffe, that it should be used as source material for training people in government.

6.48 pm

Lord Vallance of Tummel: My Lords, PFPs clearly present a complex set of financing and procurement issues, and it is relatively easy for them to become politicised-although not, of course, in your Lordships' House. The very adjectives "public" and "private" can produce knee-jerk reactions-a point to which the noble Lord, Lord Lipsey, alluded. As someone who has spent half of his career in the public sector and half in the private, I know that neither has all the answers. What matters in public procurement is to keep learning the lessons of the past, to keep experimenting with new ideas and, critically, to build up real procurement expertise in the public sector-a point made strongly by the noble Lord, Lord Tunnicliffe, and acknowledged by the Minister.

I am very grateful to the Minister for his thoughtful and positive response to our committee's report, and trust that he will keep it high on his agenda.

Motion agreed.

European Social Fund (EUC Report)

Copy of the Report Vol 1
Copy of the Report Vol 2

Motion to Take Note

6.50 pm

Moved By Baroness Howarth of Breckland

Baroness Howarth of Breckland: My Lords, I present this report as chair of the Social Policies and Consumer Protection Sub-Committee at the time when the inquiry was conducted and the evidence heard. I am grateful to my noble friend Lady Young of Hornsey, the present

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chair, for graciously allowing me to make this introductory speech. But then, she has inherited one of the best jobs in the House of Lords. During my time with Sub-Committee G, the staff, Kate Meanwell and Alistair Dillon, were always engaged and informative. I thank them both for that service, along with Talitha Rowland, the present Clerk to the committee. We were aided in the inquiry by our specialist adviser, John Bell, who helped to guide us through a mountain of information and complexity. I am grateful to them all.

The European Social Fund is one of the EU's main structural funds and aims to improve employment opportunities for workers in the Union. Key to this role is the concept of developing individuals' employability, above all through targeting the hardest to reach and the low skilled. The fund is worth €4.5 billion to the UK in the current programme, which runs from 2007 to 2013. This inquiry was conducted by the Social Policies and Consumer Protection Sub-Committee against the backdrop of the financial crisis and rising levels of unemployment, and the report was published in March. The committee undertook the inquiry with three aims: to assess the effectiveness of the fund both in terms of meeting its objectives and in responding to the financial crisis; to review its policy priorities in the context of the economic recovery and the imminent introduction of the Europe 2020 strategy; and to make recommendations on the long-term role and functioning of the fund.

The Committee heard evidence from a wide range of stakeholders, in addition to visiting ESF-funded projects. At the end of all of that, we were left in little doubt as to the worth of the ESF, which has particular benefits in terms of introducing new ideas, social inclusion and economic development. However, we concluded that there are a number of ways in which the ESF could be made more effective. Chief among these were that greater effort needs to be made to target the hardest to reach and that the achievement of soft outcomes, which help move participants towards work if not into full employment, need to be given greater value. We also drew attention to the need for flexibility, both mid-programme and regionally, to be assured. On the longer term functioning and role of the ESF, the committee considered that there should be closer alignment between the ESF and the European Regional Development Fund on the one hand and national job creation programmes on the other. This is vital to ensure that there are sufficient jobs for those helped by the ESF to take up. The committee also felt strongly that the ESF should continue to be available throughout the EU and should not be withdrawn from wealthier member states, because some of them may not remain wealthy. That was our main point of disagreement with the previous Government because there are pockets of deprivation in all countries.

We were pleased to note that the coalition Government, in their response to the report, agreed with the committee that the ESF should be focused on supporting the hardest to reach. These are the individuals who are furthest from the labour market and possess the fewest characteristics needed for participation in that market. They are also likely to be difficult to engage. There was broad agreement among our witnesses that the ESF was well placed to target these groups. We

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consider this to be particularly valuable work and have recommended that priority be given to safeguarding this aspect of the ESF's role.

The committee had the opportunity to observe at first hand the hardest to help support provision when it visited a charity, Tomorrow's People Trust, which works in the East End of London helping to tackle the cycle of unemployment. Its target groups include the over-fifties, those with disabilities or health problems, ex-offenders and the long-term unemployed. We welcome the Government's agreement that work with the most disadvantaged and the least skilled should be the focus of the ESF, and we look forward to learning how this will be ensured in the next tendering rounds. The committee felt that the third sector is often particularly well placed to target these groups and we therefore also welcome the commitment in the Government's response to encourage smaller voluntary organisations to participate in the programme and deliver contracts. Again, I would welcome further details as to how this will work in practice. Many small voluntary organisations felt that they had to pull out because they could not engage in the present arrangements.

The committee recognised that in many cases helping the hardest to reach will not necessarily lead to a tangible outcome such as employment during the life of the programme. Instead, there is a multitude of what I mentioned before-soft outcomes, which, although harder to measure quantitatively, are no less significant. These can include developing participants' confidence, improving their ability to work with others-anger management was one example-and improving their timekeeping. My noble friend Lady Young talked of the young man who was just managing to get up in the mornings. These benefits were highlighted in a visit to Step Up, an ESF-funded project in Elephant and Castle which is targeted at 14 to 18 year-olds. These soft outcomes are important interim steps on an individual's difficult journey towards employability. The committee was concerned that this should be sufficiently recognised in measuring effectiveness and that payment should not be withheld from providers unless they are successful in securing jobs for participants. This runs the danger of encouraging organisations to cherry pick participants who are closer to the labour market and easier to deal with. The committee felt that this danger could be overcome by improved measuring of soft outcomes and by placing a requirement on providers to collect such data in addition to hard outcomes.

The committee was particularly impressed with the potential of longitudinal cohort surveys to measure soft outcomes and, although the Government do not propose to make these compulsory, we were pleased to note in the Commission's response that it intends to explore the potential of these surveys further. The Government also stated in their response to the report that soft outcomes are included in contracts "where appropriate", with providers required to record them. Can the Minister tell us when such inclusion might be deemed appropriate and how such outcomes will be valued for the purpose of paying providers? Payment by results is a strong phrase these days, but we need to know what the results look like.

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We also emphasised the need for the ESF to be sufficiently flexible in order to be able to respond to external factors such as the recent recession and to the different economic profiles of regions. The committee was pleased to note that the Government broadly accept its points, but I reiterate its recommendation that the reason for delay in the disbursement of extra funds resulting from the revaluation of the euro should be fully reviewed in order that lessons can be learnt.

I turn now to the future of the ESF. We were pleased to note that the committee, the Government and the Commission are all agreed that the ESF and other structural funds have a crucial role to play in making the Europe 2020 strategy a reality. Sustainable development is an important aspect of this, and the report places emphasis on green jobs and skills being recognised and given sufficient support. The committee's report also recommends that job creation programmes, whether EU or member state funded, should be more closely aligned. In this context, we noted with interest the revised welfare to work programme which formed part of the coalition agreement. We would be interested to hear from the Government regarding the link between this programme and the ESF. We are particularly concerned that any uncertainty over the future work programme should not jeopardise ESF provision.

The report also recommended that the ESF and the European Regional Development Fund, the ERDF, should be strategically aligned. The Commission's recent paper reviewing options for the EU's post-2013 budget suggested the adoption of a common strategic framework encompassing the actions covered currently by the Cohesion Fund, the ERDF, the ESF, the European Fisheries Fund and the Rural Development Fund. Such a framework would, the Commission suggests, provide greater coordination and could,

We would be interested to learn the Government's position on this.

The committee remains convinced that the ESF has worth for all member states. Unemployment does not respect national boundaries and, as such, we believe that the ESF should continue across the EU wherever there is need. This was a point where the majority of our witnesses were in agreement, including the Welsh Assembly Government. Many of our witnesses also made the point that EU-funded projects provided a degree of security, with funding over a seven-year period, which was not available at member state level due to the unpredictability of politics and national priorities. We welcome the Government's policy to maintain ESF provision in the UK over the next financial perspective but we are extremely concerned about their policy of advocating withdrawal of the fund from wealthier member states over time.

Our concerns here are twofold. First, we are in agreement with the Commission that the ESF is a valuable and concrete expression of solidarity among Europe's citizens. Indeed, the committee recommended that awareness and visibility of the ESF should be improved. Secondly, it is not clear what would replace the ESF if funding were reduced or withdrawn. This is

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particularly vital given that ESF provision is, by definition, additional to existing national programmes. The previous Government were unable to give the committee any indication of this when questioned during the course of the inquiry and it is not covered in the coalition Government's response to the report. I hope the Minister will be able to respond to that point today as well as providing clarity on the Government's present position with regard to the future of the ERDF and the ESF in the UK budget review.

I look forward to hearing from other noble Lords and from the Minister how the ESF can be strengthened and improved and how the vital work it accomplishes with those who would otherwise be outside normal society can be assured for the future.


Lord Liddle: My Lords, I welcome this report and I thank the noble Baroness, Lady Howarth of Breckland, for her excellent speech in introducing it to the House. As a new boy, I have seen this afternoon two excellent examples of the work of the European Union Committee, which is, unfortunately, one of the few examples in the United Kingdom of an attempt to contribute to intelligent debate on the future of the European Union. It is a pleasure to participate in this debate.

I would like to make three points: first, to support the plea of the noble Baroness, Lady Howarth, for the Social Fund to be retained; secondly, to argue that its objectives should be aligned more closely with the Europe 2020 strategy; and, thirdly, to make the case that its delivery in the United Kingdom should be more flexible. I would like to tackle those points in reverse order.

First, on delivery, I read in the report the representations of the third sector, which feels that it is difficult to access Social Fund money for projects. I also read the views of the Local Government Association, which points out that current ESF management and delivery is far from perfect. The fact that ESF money is managed by a range of different government agencies means that local authorities find it hard to help prioritise the fund towards local need. The LGA goes on to give its view that councils, groups of councils or local enterprise partnerships should set the ESF strategic direction and ensure that it delivers outcomes that are relevant to that need. I would like to support that.

However, the local economic partnerships were but a gleam in the eye of the right honourable Eric Pickles when this report was prepared so it could not have considered that point. It seems to me that there is a strong case for the use of the Social Fund to be devolved to local level so that we get away from this silo delivery mechanism through the Department for Work and Pensions. That would fit in with the efforts of the Government to take forward the principle of Total Place so that all the various bodies that have something to do with helping the disadvantaged to gain skills-Jobcentre Plus, the Skills Funding Agency, the FE colleges, the police, probation, social work and all those sorts of groups-can combine their efforts in programmes on the ground. I ask the Minister what his view is of delivery and whether he sees a radical change away from the kind of centralisation that is pursued under the present arrangements.

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Secondly, on objectives, the Social Fund is perhaps a case of not too little subsidiarity-which we debated earlier this afternoon-but too much, in the sense that member states throughout the Union basically use the money available under the Social Fund to supplement what are essentially national programmes. There is not real EU value added additionality. A big problem for the EU is that our national leaders put a lot of effort into devising things such as the Lisbon strategy, which is now the Europe 2020 strategy, which sets a comprehensive set of objectives for the European Union, but they do not ensure that there is a link between those EU objectives and processes-the guidelines, the monitoring mechanisms, the reports on member state actions that are produced in Brussels, the open method of co-ordination-and the way that the EU budget is spent. If there is to be more purchase over what happens in member states, there has to be that link between the EU budget and EU-agreed policies. When we look at the Europe 2020 strategy, we see that there are several items-youth on the move, new skills for new jobs and the platform against poverty-for which the Social Fund could be used.

I would like to draw particular attention to the platform against poverty. The Prime Minister signed up to this at the June European Council. For the first time, EU poverty targets will involve help to get the hardest-to-reach people into work as one of the methods of addressing poverty. If we sign up at EU level to these targets, surely we can also sign up for the proposition that the Social Fund should be retained and should be used in order to take forward those targets. What is the Government's policy on that?

That brings me to the future of the Social Fund. I am a strong supporter of the existence of the structural funds and I do not agree with the view that HM Treasury had under the previous Government that we ought to try to get rid of them. I remember getting quite upset about that when the proposition was initially put forward. Just as I was about to send off some intemperate memo to the Prime Minister to say how wrong I thought that was, one wise official told me, "Oh, don't worry, Roger, let them go and argue it. They'll get nowhere because the Germans will never agree to it". The Treasury thought that it had found some friend in the German finance ministry who thought that the structural funds should not be applied to the richer member states. Then they came up against the reality of German politics-remember that Mrs Merkel represents a constituency in the former East Germany, where these funds are important in demonstrating to the German taxpayer that they are getting some value from their contribution to the EU. I doubt that there is much real prospect of getting rid of the structural funds, but I would like to hear that from the Minister.

I would also like to hear a recognition from the Government that there is a real UK national interest in supporting the structural funds, in particular the Social Fund. That national interest is that we very strongly want to see a better functioning single market in Europe. However, the only way that we will win political consent for that objective is if there are accompanying social policies that deal with the problems of winners and losers in that enhanced single market.

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These are my views: we should retain the Social Fund; it should be more closely aligned with EU policies; at local level, its delivery should be more flexible; and, we should also get away from the centralisation that characterises what now happens. With that, I commend this report.

7.12 pm

Lord Cotter: My Lords, I, too, thank the noble Baroness, Lady Howarth, for opening this debate so well. I will do my best to follow on as a member of her committee that was. We are living through difficult times when social issues and the provision of jobs are more important than ever, so it is valuable and timely to be addressing the examination that has been conducted of the European Social Fund. Every possible initiative has to be sustained and encouraged; that is to say, in my view, to help in particular people into work.

There are many views and outlooks when it comes to this. For example, in evidence given to the committee in 2009, Off the Streets and into Work-one organisation among many that came to talk to us-said:

"As unemployment rates rise, there has been increased investment at national and regional level targeting support at those at risk of redundancy or who have recently lost their jobs. Whilst this is wholly reasonable and appropriate, there is a risk ESF resources will be diverted away for the long-term unemployed, many of whom face multiple and complex barriers to employment. We"-

that is, the organisation-

That is just a bit of the evidence that we had. We had much evidence that was of great interest.

I shall now raise a point that the noble Baroness, Lady Howarth, has already raised, since it needs emphasising: to look ahead. We in the committee and many witnesses were very concerned at the previous Government's view that there should be an end to the availability of structural funds directed towards more prosperous states, including the UK, after 2013. It is great to see the then Minister in his place. I thought that he gave us very good responses on many points and I congratulate him, as I congratulate many people, on the contributions that they made to our deliberations. However, there is that concern. At the time, it was stated that there was no plan for how the ESF should be replaced, so I am not alone in wondering what approach the new Government will be taking, up to and beyond 2013, towards the Social Fund itself. We need to take advantage of every possible opportunity to create and encourage jobs. I hope that the Government will be taking this on board. That is why it is important for them to clarify their long-term objective on the continuation of ESF funding.

There is an immediate risk that the new Government's welfare to work programme-now called the work programme-will be delayed next year. I may be wrong, but if it is it will leave a hiatus during which the role of the ESF may tail off and get lost. Will the Minister assure the House that any delay involved in introducing the work programme next year, were it to happen, will take proper account of the importance of the contribution

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being made by ESF funding to local programmes? The real value of ESF projects in the past has been their small-scale, bespoke nature, working with the hardest-to-reach clients in neighbourhood developments. There is therefore a risk or concern that smaller-scale projects could be put to one side and may not be concentrated upon as they should be. I have one more point for the Minister. Can he assure the House that ESF-type projects will not fall by the wayside because they are less able to produce clients who are able to get and sustain work?

Those are a few points to consider, but here I want to refer to a point that came up in the evidence to the committee. I know that the coalition Government are very committed to addressing the issue of bureaucracy. A number of people who came to the committee said that we must get the balance right between the need to ensure that projects will be delivering what is required, and so on, and keeping bureaucracy to the minimum. This debate has become more important than ever. A programme of necessary cutbacks is in hand but there can always be unseen, unanticipated and, indeed, unwanted consequences.

Recently, I saw for myself the great benefit obtained by small, local projects. In this case, it was a small wood recycling project in Weston-super-Mare, near where I live. It gets financial support, without which it would not be able to deliver what it is delivering: assistance in getting young people who have been unemployed for six months into work and in giving people with mental health problems an opportunity to get into work. It also assists people on probation who are having difficulty getting into work. That did not have ESF funding, but it is an example of the small projects that we need to keep our eyes on while ensuring that we keep them in mind. I hope that the debate today will help to stimulate and encourage schemes-in this case, obviously, those which are ESF-funded-and encourage the very necessary approach that we need in this country: to keep giving people the opportunity to get into work and to enable this country to offer employment to those many, many people who need it.

7.19 pm

Baroness Young of Hornsey: My Lords, it is with a mixture of pleasure and sadness that I rise to speak in this debate. It is a pleasure to be once again participating in a debate on an EU Select Committee scrutiny report, led so ably by my noble friend Lady Howarth of Breckland, and it is sad because this is the last occasion on which the work of Sub-Committee G will have the benefit of her wisdom and leadership. I express my heartfelt thanks for all the support and guidance she has given me and other members of the EU Sub-Committee on Social Policies and Consumer Protection. She is right; it is a great job, but she has made it quite a hard act to follow, as experienced and diligent as she continues to be. We hope, although we are sad at losing her, that she is enjoying her move to Sub-Committee D on Agriculture, Fisheries and Environment.

I want to elaborate on some of the key points raised by my noble friend regarding so-called hard and soft outcomes. I should say here that although it is widely

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used, and although I use it myself, it is not terminology that I find particularly helpful. I also want to look in a bit more detail at the role of the third sector and sustainability.

Sub-Committee G recognises the value of the contribution of the ESF in its support of a variety of projects in different parts of the country. Based on the evidence, we concluded that it is an important component of the EU's broader social and economic cohesion policy. As my noble friend Lady Howarth and others have stated, it is clear that we are facing huge economic challenges and such a backdrop must inevitably inform how we think across all categories of expenditure. Clearly, in such circumstances, it is all the more important that we gain maximum value for money.

I think it is worth mentioning here how useful it was to go and talk to participants in an ESF project. We visited Step Up at the Elephant and Castle, a project working with 14 to 18 year-olds, helping them to gain new skills and prepare for employment. The majority of the participants, when asked what they valued about the project, responded that the mentoring was very important. They very much enjoyed learning new skills and saw getting the educational qualifications needed for work-or for FE or HE-as really important to equip them for work, but they also saw it as important that they were helped to build up the confidence to aspire to something other than the route mapped out for those considered to be troublesome, difficult young people. This attitudinal change was crucial for them and very much a part of the work carried out at the centre.

The aim of working with those hardest to reach-those with the most difficulty in securing employment-is an aim that most of your Lordships would see as laudable and indeed essential, I am sure. Different agencies have different strengths, and this is an area where a multiagency approach, involving the Government, further and higher education, the third sector and the private sector, can have real benefits if appropriately organised. In particular, the third sector is well placed to make a substantial contribution to such programmes, as we heard from a range of witnesses and written submissions, as well as from noble Lords this evening.

Many witnesses pointed out that it is necessary to have a certain amount of bureaucracy in any programme of this sort, and we agree. Efficient bureaucratic processes serve as democratic checks on public spending. However, it is essential that these processes are proportionate to the size of the programme and help the programme to achieve its objectives, not hinder them. We recommended that the Government continue to press for the reduction in the 10-year record retention requirement for smaller organisations, whose valuable role should not be hampered by disproportionate audit requirements. We are pleased to note that the Government have assured the committee that they will continue to work for the rules on document retention to be simplified and proportionate when the structural fund regulations are renegotiated prior to coming into force in 2014.

One of our concerns is that the system of competitive tendering under cofinancing in England, while it has several merits, could lead to providers recruiting those participants who are easiest to place in the labour

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market; my noble friend Lady Howarth referred to that. This issue is linked to that of how the success and effectiveness of programmes is assessed. If the sole measurement of the success of a programme, and thus the basis on which providers are paid, is how many people end up in employment, it could lead to cherry picking. Of course, we understand that it is crucial that a funding programme seeking to get more people into a position where they can secure paid work delivers on that objective, and the number of people getting work as a result of participating in the programme is an objective measure of that.

However, as important as that is, by definition, many of the people who constitute what is called "hard to reach" will face a variety of enormous challenges in their quest for work. For example, someone for whom depression has meant that getting up, washing, cleaning their teeth, getting on a bus, communicating with people face to face, et cetera, whose problems are seemingly insurmountable, may take some while to reach the stage of employability. This does not mean that they will not benefit from an appropriate ESF programme. If at the end of a programme, that person is able to complete what seem to most of us to be ordinary, everyday tasks, it would represent a substantial step forwards-a step towards employability-but the person is not quite there yet.

How can we best capture the distance travelled by that individual? How can we appropriately recognise the work of a programme that enables such progress to be made? We accept that such questions are not easy ones and that it is crucial that providers are able to give a clear account, one as objective as possible, of what they think they have achieved. There are methodological evaluation models that can capture and measure this kind of progress, and these should be deployed where possible.

Our investigation led us to conclude that there is an excessive reliance on measuring hard outcomes, almost to the exclusion of soft outcomes. As we have said, we recognise that outcomes in terms of jobs secured are the ultimate and legitimate aim of ESF interventions but, particularly with the hard to reach, it is necessary to undertake intensive, intermediate work to improve employability.

Our report also recommended the use of longitudinal cohort studies, which would be useful in terms of capturing hard and soft outcomes from programmes but also, crucially, facilitate us in the assessment of the sustainability of hard outcomes, such as job retention and progression. The Government do not wish to introduce any new ESF data collection requirements for administrative and, I would imagine, financial reasons. Nonetheless, this is an important point, because so much is being invested in participants gaining work. If this work is short-lived-there would need to be a control study to check against average length of employment-and the participant is thrown back into low self-esteem, lack of confidence, et cetera, we would need to assess the success and value of that programme rather differently. In its response to this concern, the EC thinks longitudinal cohort surveys "highly relevant" to assessing the sustainability of hard outcomes. The Commission notes that some member states have been

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including this as an element of their evaluations since 2007, and that we could gain something from exploration of this issue. We await developments on this front with interest.

I also reiterate the strong view of the committee regarding the withdrawal of funds from richer states. Other noble Lords have spoken comprehensively about that and given a rationale, and I support those views.

Finally, focusing on sustainable development and the development of green jobs and low-carbon economies is vital globally, not just in Europe. This will be a crucial element when the priorities for the ESF in 2014-20 are being fleshed out and I agree with the noble Lord, Lord Liddle, that the alignment of the EU 2020 strategy with the ESF objectives is desirable. The issue of green skills and whether some regions in the UK are better suited than others to adapting to this agenda was one that arose. Given that the Government agree in principle that, within a reduced ESF budget for 2014-20, the most disadvantaged groups should be targeted for getting into work, what strategies will be put in place for ensuring that we have the right infrastructure to facilitate people in these priority groups to participate fully in and maximise the benefits of ESF programmes with a focus on green skills and jobs?

As the new chairman of Sub-Committee G on Social Policies and Consumer Protection, I look forward to working with colleagues following up on the issues raised in the report and the Government's response to it.

7.29 pm

Lord Knight of Weymouth: My Lords, it is a real pleasure to be able to speak in this debate about this useful and interesting report from your Lordships' European Union Committee on the excellent work done by the European Social Fund. I join others in paying tribute to the work of the members of the sub-committee, led so ably by the noble Baroness, Lady Howarth of Breckland, who summarised her report so well earlier in the debate.

I confess to your Lordships that I find myself yet again in a slightly odd position in leading for the Opposition on a report that scrutinises my work when in government; indeed, I was the Minister who gave evidence to the committee back in February and approved the evidence given to the committee by the Government. In the circumstances, it is tempting to oppose by adopting what some would unkindly term the Liberal Democrat principle, by which I mean a graceful three-point turn under the excuse that the outcome of the election has changed everything. However, I have reread the evidence that I gave in the light of the committee's conclusions, and was pleased to find that not only does it appear that at the time I might have understood these issues but I mostly agree with what I said back in February.

For the interest of the noble Baroness, Lady Young of Hornsey, I say that the area where I am most likely to reassess my position is around soft outcomes. As I have reflected back on my time as Schools Minister, I have also been taking more interest in assessment-what it is possible to assess and measure. I am now more persuaded that it is possible to assess some of these

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soft outcomes in a more objective way and show the progression that people are taking to get closer to the labour market, which is clearly an area of additionality that the European Social Fund is addressing. I also find myself in agreement with the Government's response to the committee's report. I am pleased that the transfer of functions from the Learning and Skills Council to the Skills Funding Agency, which was one of my main worries, seems to be working well.

On that basis, I could just sit down and leave it all to the Minister, but reading it all through again raised a series of questions about how the European Social Fund will operate alongside the changes that the Government are taking through. I gave the Minister advance sight of my speech this morning to give him time to assemble some pithy answers to my questions. These fall broadly into three areas: additionality under the work programme; how regional priorities will be set; and the integration of employment and skills programmes.

As the Minister knows, I support the principle behind the work programme. I hope that some of the work that I did as a Minister is helping him as he tries to implement it against a very tight timeframe in a difficult labour market, but I will not dwell on those concerns now. I would be fascinated, though, to hear his response to the worries of the noble Lord, Lord Cotter, around delays to the work programme. If he could clarify for the sake of all those who are concerned about the programme whether there is a delay, that would be exceptionally helpful.

What is relevant to this debate is that the European Social Fund funds must be additional to government spending plans. How will that work under the work programme? As I understand it, the work programme will be a single programme for all who can work. It will be designed so that contractors have significant incentives not to park customers who are particularly difficult or cream off profit by just focusing on those who are easier to help into work-the committee used the word "cherrypick". If that were to happen, the programme would not be a success.

Those are the very issues that the committee asked me about in the context of ESF. Is my understanding of the work programme correct? If so, how will the Minister achieve additionality with the continuation of ESF under the work programme? If the work programme is to be for every sort of claimant, be they on jobseeker's allowance or employment support allowance, and the contractor is paid on outcomes not inputs, how can the ESF work be additional? How does the Minister respond to the committee concerns around soft skills in the context of black box contracting?

I also noted the ending of the working neighbourhoods fund in the comprehensive spending review. As the Minister's noble friend Lord Shipley said in Monday's debate, this was not an easy cut to spot. He went on to say:

"The fund has been used across the country to tackle worklessness by investing in voluntary sector partnerships, thus securing additional leverage and ERDF matched funding. It has helped to address community health and community safety issues. It has tackled economic deprivation and has targeted resources to those young people not in education, employment or training. The fund, worth £0.5 billion, has vanished".-[Official Report, 1/11/10; col. 1541.]

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Like him, I too must declare that I am a vice-president of the Local Government Association. Given that the fund has "vanished", how will the Minister deal with the likelihood that the ESF will be used to fund the same sort of work that was funded by the working neighbourhood fund? Will he not be highly vulnerable to the charge that the Government have cut this spending knowing that they can backfill with ESF programmes? Is that not counter to the additionality rules?

The second issue is about regional priority-setting. As the Minister knows, ESF is currently subject to regional priorities set in England by regional committees made up of the Skills Funding Agency, the regional development agencies, trade unions, government departments, local authorities and third sector representatives, and chaired by the government office of the region. As I made clear in my evidence to the committee, I think that this could be rationalised by merging it with the regional employment and skills boards, if the Commission were to agree that this met its audit requirements, which it may not. What I had not envisaged was a rationalisation as a result of the abolition of the RDAs, subject to the Public Bodies Bill going through-a dreadful piece of legislation that we will be debating fairly soon in this House-and the abolition of the government offices themselves. How, therefore, does the Minister see the regional priorities being set in the future? Who will sit on the regional committees? Does he agree with the LGA in its briefing for this debate when, as my noble friend Lord Liddle, mentioned, it says:

"Councils, groups of councils or Local Enterprise Partnerships should set ESF's strategic direction to ensure it delivers outcomes relevant to local need".

In its recent report, EU Funds and Place-based Budgets, the LGA argues that, first, the delivery of the main EU funds-the ESF, the European Regional Development Fund and the Rural Development Programme for England-should be joined up into a set of single programmes at the subnational level; and, secondly, within this framework, we should offer local partners the opportunity to manage local packages of EU funds, should they want to. Does the Minister agree? If so, again, how will it be additional to the previous working neighbourhood fund work carried out by local authorities but now cancelled? My argument for a long-term future without the ESF-which was trashed by the committee-centred on regional structures being in place. It is necessary to be close enough to the ground to identify pockets of need, but with enough of an aerial view to join up programmes strategically.

In the new Government's response to the committee, they say:

"Over time, wealthier Member States should be phased out of the Structural Funds and funding focused on the poorest, enabling them to catch up with the average".

We note the opposition to that position of the committee and everyone else who has spoken in this debate. In the absence of regional policy from the government office and the RDA, I cannot see how this renewal of the policy that I had to justify to the committee works. What are the Minister's justifications for this long-term policy?

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I want to ask about employment and skills integration. The Minister cannot be criticised for a lack of ambition or a drive to join things up. If he manages to pull off the work programme and the universal credit, it will be as a result of the most monumental effort and ambition. Is employment and skills integration also on his radar? Of course, the ESF does both. Can he see a way of commissioning them together from contractors in this programme and more widely as part of the work programme? Is that not vital in giving the contractors the tools that they really need to do the job?

This was a useful and authoritative report by the committee. It has allowed us to focus on the European Social Fund, which has done much to help those in our country who most need help from an active Government. The debate has also allowed us to ask the Government questions about its future, and I look forward to the Minister's considered response.

7.39 pm

Lord Freud: My Lords, I thank the noble Baroness, Lady Howarth, for leading this evening's debate on the European Social Fund. I also thank the other noble Lords who have contributed to this debate. The report and this debate are well timed. They come at the midpoint of the current 2007-13 programme, just at the time when negotiations are about to begin on the future of the EU budget and on the structural funds after the end of this particular programme.

Our approach to the European Social Fund is shaped by the coalition Government's programme for welfare reform. We are transforming the welfare system-as the noble Lord, Lord Knight, mentioned just now-to encourage responsibility, to make work pay and to end the cycle of benefit dependency. The work programme within that ambition is a central pillar of our approach, aiming to move people back into the labour market where it will replace a series of programmes that have been built in the past. One of the elements of the work programme that is novel is its emphasis on sustaining people in the world of work for a much longer period than has been the practice in the past. It pulls in a unified structure that forces providers in practice to treat people as individuals and also gives providers the freedom to tailor the right support for the specific needs of those individuals.

So the question-and it is the question that the noble Lord, Lord Knight, put with his customary elegance-is what role the European Social Fund can play in that context. It is clear that competence for employment and skills policies rests at the national level, as does the primary responsibility for funding. The role of the ESF-as all noble Lords in this debate have pointed out-is to add value to the core offer that the member state provides. This poses what we will call the "Lord Knight challenge". The ESF must fit the integrated approach that we are developing. It must not fund alternative programmes just for the sake of additionality.

The methodology with which we are introducing the work programme is through a framework for employment-related service. In practice, this is a pretty effective structure for integrating the European Social

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Fund with our national employment provision, while ensuring that the ESF remains additional. Let me spend one minute on the attraction of, and the opportunities provided by, the framework. Once you have a framework set up, and providers set up within the framework, it is permissible for any government or local authority organisation to use that same framework. It does not take a lot of imagination to see that one can start to channel different sets of funding to provide an holistic approach for particular individuals.

I pick up on the point that the noble Baroness, Lady Howarth, made so eloquently with her concern about cherry picking and that the most disadvantaged will not be looked after properly. One of the key tenets of the work programme is that we will have price differentiation to encourage providers who will see just as much profitability, ideally, out of helping the harder to help as the easier to help. That is the concept behind it. On top of that, when you have a framework construct, you can see other funding coming into the same place to help the even harder to help. It is potentially a most powerful tool for getting rid of silos and putting in money and extra resources to help the hardest to help. We will write to the noble Baroness with further details. Actually, we will write to the noble Baroness, Lady Young, with further details of the department's next procurement round in due course.

Several noble Lords have referred to the role of the voluntary sector in the European Social Fund. We recognise that localised, specialised voluntary services are often well placed to address the complex barriers that prevent disadvantaged people returning to work. Again, the framework will allow smaller voluntary organisations to participate in consortia, to form partnerships or to act as subcontractors to deliver the work that the core work programme and the ESF contracts. This deals with the concern that my noble friend Lord Cotter raised about the position of voluntary groups.

Several noble Lords asked how the effectiveness of the social fund is measured. We agree with what several noble Lords have said: that there is substantial room for improvement, especially at the EU level. We will judge the success of the ESF by job outcomes. After all, the ESF is primarily a labour market and skills fund. Our objective is to help more people back to work and with the right skills. We make no apology for measuring performance primarily on hard outcomes, particularly hard outcomes around jobs. In this way we are closer to the noble Lord, Lord Knight, of February than the noble Lord, Lord Knight, of November. Having said that, we recognise that people will achieve soft outcomes on their journey to employment. I agree entirely with the noble Baroness, Lady Young, when she says that she has problems with this terminology of soft and hard. We are using it this evening, so let us stick with it.

The work programme that the ESF contracts will encourage sustainable employment. That is the Government's stated objective. In practice, it will not be possible for providers to achieve that hard outcome unless they build the intermediate soft outcomes, so soft outcomes should not be an end in themselves. We need to see through the process where people go

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through the soft outcomes into the hard, measurable outcome. One of the keys in developing the work programme is to make sure that there is a financial structure that allows the provider to see the whole process through to the end, rather than chopping it up and looking at intermediate steps. It is much easier to lead the responsibility through the whole programme.

As the noble Lord, Lord Knight, of February would have said-or maybe even did say-the problem is that, unless one has an extraordinarily effective measurement tool, it is very easy to fall from soft outcomes into spraying money around ineffectively. We have just launched a longitudinal study to capture the status of leavers 18 months after their ESF provision to measure the sustained jobbed outcomes. We are also developing a quantitative impact analysis of ESF.

Several noble Lords referred to the administrative burdens on providers of the programme. We will continue to use the co-financing system to relieve providers of the burden of finding match funding and we will work with the Commission and other member states to seek to simplify EU rules. However, we must also ensure that there is rigorous financial management and control across all member states and that there is value for money for the taxpayer. We also believe that there should be greater flexibility within the overall focus of the European Social Fund on employment and skills. The fund needs to be more responsive to new policy developments, changes in the economy and local needs.

Concerning the future of the European Social Fund-I think that this issue was raised by all noble Lords who took part in the debate-I will respond first to points raised about the budget and then to the policy focus. The Commission published its communication on the EU budget review on 19 October. The Government welcome the Commission's focus on the need for reform of the budget to support the EU's priorities, in particular economic growth. However, the review does not go anywhere near far enough on recognising the economic and fiscal context. We need to see a much stronger focus on prioritisation and where savings can be made. The EU budget cannot be immune from the huge budgetary challenges facing EU member states. This will have implications for the structural and cohesion funds, including the European Social Fund. The funds should focus on stimulating economic development in member states where income per capita is far below the EU average, where there are clear economies of scale with respect to financial and institutional capacity, and where EU spending can significantly add value. Receipts in richer regions, particularly in wealthier member states, should fall significantly in the next financial period after 2013. The share of receipts going to the poorer countries should continue to rise, albeit within a smaller overall structural and cohesion fund budget envelope.

The committee's report criticised the previous Government for seeking to withdraw ESF funding from member states. Under the coalition Government's approach, a reduced ESF budget would continue to fund some activities in the UK in the next financial perspective. However, in the longer run we aim to phase out structural funds from the richest member

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states entirely, and end the recycling of funds between member states that have the capacity and ability to finance their own development.

A smaller budget will make decisions on the targeting of ESF even more important. The Government believe that in the next financial perspective member states should target ESF on the most disadvantaged groups, focusing on employment and skills. For us, this will mean ensuring that the ESF continues to complement the work programme. We will expect the European Social Fund to be consistent and coherent with our policies to help individuals make the most of their lives and to get Britain working again.

The noble Baroness, Lady Howarth, and my noble friend Lord Liddle referred to the strategic alignment of funds. We want better strategic alignment of the ESF with Europe 2020 and national policies, and especially so on challenges such as climate change. My noble friend Lord Cotter and the noble Lord, Lord Knight, pressed me on the timing of the work programme. I will not use the word "delay", as they did. I assure them both that the work programme is on track to be delivered in the first half of next year, starting in the spring. They will be delighted to know that the Treasury, the DWP and the Prime Minister all vigorously support this programme.

The noble Lord, Lord Knight, made a pointed query about additionality and the working neighbourhoods fund. I assure him that we will not use the European Social Fund to backfill that fund. As he will understand, we are ending the piecemeal approach to employment programmes and integrating in an entirely different way. As regards his point on regional priorities, our focus is on local communities and individuals, not on regions, which we regard as artificial and bureaucratic. In our White Paper on local growth, published last week, the noble Lord may have noted our view that labour markets do not exist in the main at regional level, with the exception of London. Therefore, we will want to see the ESF responding to local needs, not to regional priorities.

I close by thanking noble Lords once again for a series of most constructive and thoughtful comments, including some pretty nifty and interesting ones from the noble Lord, Lord Knight, which I enjoyed answering. This evening's debate has reinforced how complex some of the EU rules and principles can be. I can certainly think of better things to do than debate concepts such as EU additionality at this time of the evening-or at any time of the day for that matter. However, we need to make sure that the European Social Fund is integrated with our welfare reforms and is made to work for the most vulnerable. This may raise the question of whether the European Social Fund can be additional if it is also integrated, but then I suspect that additionality is in the eye of the beholder.

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7.57 pm

Baroness Howarth of Breckland: My Lords, I thank the Minister for that reply and all noble Lords who have taken part in the debate. I intend to be brief as, like the Minister, I am not sure that debating additionality at this time of night is what I prefer to be doing. However, as I am no longer responsible for this area of work, I want to speak for a couple of minutes and indulge myself on behalf of the noble Baroness, Lady Young, who will, I hope, get a further reply from the Minister on the issue.

The most difficult aspect of this rich debate is its complexity. If it is complex for us, it is even more difficult for all those organisations on the ground such as probation officers and others in local authorities and the voluntary sector-the noble Lord, Lord Liddle, mentioned those-to comprehend and to determine how the projects to which they are committed on behalf of some of the most needy people in our communities will continue. While we debate conceptual ideas of frameworks, longitudinal surveys and cohorts, which many of us have worked on and understand, it is crucial that those wonderful, ordinary folk-we met some of them-delivering programmes are helped to see how they can continue to do the work that they are doing. That is probably the most essential point.

I love the fact that the noble Lord, Lord Knight, has done a U-turn. I never thought that he was really convinced about this issue, so that is not a surprise. However, if a belief is growing that this ESF funding will not continue in the long term-and funds are very difficult for local authority organisations-it is crucial that we have some understanding of what will replace it if it comes to an end. If not, the projects will come to an end.

One of the other interesting moments we are in is that, because we do not have any picture of the welfare to work programme, or how the new employment frameworks will fit together, we cannot see into that future, just as all the people on the ground cannot. The sooner those things are in place, the sooner great anxiety among those ordinary folks will be relieved. At the moment, people in projects are asking me whether they will have to make their staff redundant-to issue redundancy programmes-in the next few weeks, because they do not know if they will receive grants and they do not know about their future. Those sorts of anxieties need to be removed when people are dealing with aggressive, mentally ill, depressed and deprived clients. It is enough to deal with that without the worries that we add to them.

I do not want to say more in terms of the intellectual debate we might have on additionality. I think it is far more important that we concentrate on the delivery to the folk who need it through the folk who are delivering.

Motion agreed.

House adjourned at 8.01 pm.

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