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Mr. Hammond: Amendments No. 32 and 50 amendments seek to address the PFI exemption, if we can call it that, from the limits. Amendment No. 50 seeks to include all PFIs as credit arrangements. We have approached the issue in a slightly different way, but the intention is clearly the same. Amendment No. 32 is linked to amendment No. 36, to which we will come later. Amendment No. 36 would remove the power that the Secretary of State has under clause 8(4), which has been used to lay draft regulation 7(3)—the regulation that effectively exempts PFI contracts from this process. We have sought to analyse what a PFI contract is and to identify the fact that often one part of it will effectively be the procurement of a capital asset and another will be the provision of a service. If we are to Column Number: 110 see through the structures that are put in place and look at the fundamental transaction, we must see a PFI arrangement as being a credit arrangement for the provision of an asset and then a services contract on top of that. Amendment No. 32 seeks to identify the part of the liability that is akin to a credit arrangement for a capital asset, and to treat it as being on a level playing field with other credit arrangements in terms of borrowing limits. However, it would allow the part of the PFI contract that represents the fee for the provision of services to be treated as a separate matter outside the constraints of the capital borrowing regime.The problem with the approach proposed by the Liberal Democrats is that, by including the whole of the PFI arrangement within the areas to be taken into account in calculating the use of borrowing limits, there would be a danger of catching something that should not be caught—the provision of a service. For example, in a PFI contract for a building, the capital cost of the building element should properly be caught, but the provision of maintenance and support and security services should not. That latter element should be treated as more akin to revenue expenditure. We accept, as the hon. Member for Kingston and Surbiton suggested, that it is wrong for local authorities to be pushed into particular forms of transactions because of the arbitrary exclusion of PFI liabilities from the calculation, but we believe that the solution is to divide the PFI liabilities into two separate component parts and to take into account the part that is similar in nature to a capital transaction. Draft regulation 7(3) would exempt PFI from the restriction on the use of credit for the provision of services, but would not address the capital element that might exist in a PFI contract. A further concern that should be addressed in considering the clause is the apparent assumption that all leases are equivalent to liabilities. On the face of it, a lease is a liability, but it is possible that the asset has an offsetting value. An example would be a local authority that has a 20-year lease on a building that it partly occupies itself, but partly rents to a major supermarket chain. The whole cost to the authority of that lease over time should not be treated as a net liability. It is a gross liability, but it is offset by a net asset, in terms of the rolled-up stream of income that will be generated from the part of the building that is sub-let. I am not sure that the arrangements proposed by the Under-Secretary cover that, because they seem to me to treat the lease of all assets, including buildings, as a future liability to be rolled up and capitalised at the outset. I would also like the hon. Gentleman to address the way in which the Bill proposes to treat PFI deals. The proposal would not only mean that PFI deals would be excluded from the capital controls but also, in practice, allow the hypothecation of a revenue stream in preference to the general creditors of the local authority for the provision of that capital asset. Great play has been made elsewhere of the continuation of the arrangements whereby all local authority debt ranks pari passu. However, by financing an asset such as a building through PFI, Column Number: 111 and thus making payments for the use of that building—not repayment of debt as would be the case if the money had been borrowed, but the payment of a service fee under a PFI contract—that obligation is ranked ahead of payments to other unsecured creditors of the local authority. That is important because, as the hon. Member for Kingston and Surbiton pointed out in another context, it is driving local authorities towards entering into certain forms of transaction rather than others. We believe that the Government should be neutral about the form that the transactions take.I look forward to hearing the Under-Secretary's detailed analysis of why the clause is necessary. Everyone recognises the significance of PFI transactions and the use to which local authorities can put them, but the Committee is concerned about local authorities being steered in the direction of one type of transaction rather than another that would possibly not be in their best interest, if it were not for an artificial incentive provided by the clause. Mr. Leslie: Amendments Nos. 32 and 50 would amend clause 7, which deals with the definition of credit arrangements. It should not be forgotten that there is also the context of the affordability test for the prudential borrowing regime. In both cases, the concern is with the treatment of contracts under the private finance initiative. Amendment No. 32 seeks to ensure that such contracts are included in the definition, and amendment No. 50 would classify all public-private partnership contracts and PFIs as credit arrangements. The hon. Member for Kingston and Surbiton, in his usual modest way, did down the technical efficiency of his amendment No. 50, and it is true that terms in the amendment—PFI and PPP—would have to be defined, probably lengthening the Bill. Putting that to one side, the amendments are unnecessary and at odds with the strategy of clause 7. The Government's intention is to rely as far as possible on current accounting practice to determine what does and does not count as a credit arrangement. In the case of PFI, that means that a contract will be treated as a credit arrangement only to the extent that it has to be shown on the local authority's balance sheet. There is a test related to that, and that in turn depends on the degree to which risk is transferred to the private sector partner. Such an approach gives authorities an incentive to achieve a significant level of risk transfer when negotiating such contracts, and it may mean that some issues relating to how PFI will be treated will have to be clarified, as under the present system, but that can be best done in regulations. There is no need to refer explicitly to PFI in the Bill. The hon. Member for Kingston and Surbiton mentioned the Audit Commission and its study into PFI in particular schools. I understand that that survey related to 17 pathfinder projects, since when we have had a further 500 or so PFI arrangements for schools. A lot of lessons have been learned from the 17 projects and the Audit Commission report, and I am confident that the new PFI arrangements have responded to the points that were highlighted. Column Number: 112 I also believe that the new prudential regime will not force authorities down one route or another. It will give them the opportunity to consider not only PFI but other capital financing arrangements, and I assure the Committee that the credit arrangement clauses, and the new prudential borrowing regime in general, are about giving more flexibility and choice to local authorities. Mr. Hammond: If I understand the Under-Secretary correctly, he is saying that amendment No. 32 is unnecessary because subsection (2) provides for the apportionment of the cost of the PFI contract as an item that is a liability on the balance sheet and an item that is not. If so, will he make that explicit and, perhaps by using an example, show how that will work? Mr. Leslie: This is the crux of the hon. Gentleman's argument in tabling the amendment. He seeks to split every PFI contract rigidly into the service and capital components. The best way to do that is to use the current accounting practice mechanism. Certainly in some cases when the balance sheet test is applied there are opportunities to have a separable component, such as when the service elements operate independently from the asset arrangements. I may be able to find specific examples at a later date. I am sure that the hon. Gentleman can think of some.
10.30 amI do not believe that it is easy as simply drawing that line down the middle of a long-term contractual arrangement. Current accounting practices look at the treatment of the whole of the contract and the extent to which risk is transferred to the private sector. Obviously, if the liability remains in the whole on the local authority, it will be classed as on balance sheet. There are plenty of circumstances where the treatment would be off balance sheet if the risk and the liability were similarly transferred to the private sector. I do not believe that a rigid approach requiring the separation in every case is necessary. Mr. Hammond: I am trying to follow the hon. Gentleman. I think that he is saying that it is not an apportionment but an either/or, based on an assessment of where the balance of the liability of the contract lies. Is he therefore saying—if he is, I confess that I have not understood this—that where a PFI contract relates primarily to the provision of the capital asset and, on current accounting practices, is deemed to be a liability that needs to be shown on the balance sheet, the whole of it is to be treated as a credit arrangement for the purposes of the clause? Mr. Leslie: That may well be the case. The point about the provisions that we have set out is to give flexibility so that current accounting practices can in some circumstances see a PFI arrangement as being on balance sheet and in others as off balance sheet. Many of those variables depend on who is bearing the variation in the profits or losses related to the property concerned. For example, does the purchaser have access to be benefits of the property and, similarly, to exposure to the risks inherent in those benefits? Does the purchaser—the local authority—have liability to make payments to cover the costs of the property? Column Number: 113 Those are the issues that are considered in the balance sheet test. I believe that those accounting practices are the best ones to follow. They certainly ensure that each contract is treated on its merits.
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| ©Parliamentary copyright 2003 | Prepared 28 January 2003 |
