INVESTMENT: LIMIT

HC Deb 29 February 2000 vol 345 cc170-216

".—(1) The Treasury shall ensure that the aggregate of outstanding expenditure under section 16(1)(b) and (c) does not at any time exceed £400 million.

(2) For the purpose of subsection (1)—

1. (a) outstanding expenditure in respect of the acquisition of assets, securities and rights shall be taken to be the aggregate of amounts paid for the acquisition of assets, securities and rights which have not been disposed of,
2. (b) outstanding expenditure in respect of a loan shall be taken to be the amount outstanding in respect of the principal,
3. (c) outstanding expenditure in respect of a guarantee shall be taken to be the aggregate of amounts which have been paid in fulfilment of it and in respect of which the Treasury has not been reimbursed, and
4. (d) the Treasury shall make arrangements for evaluating outstanding expenditure in respect of anything done under section 16(1)(b) or (c) which is not addressed by paragraphs (a) to (c) above.

(3) The Treasury may by order substitute a new amount for the amount for the time being specified in subsection (1).

(4) An order under subsection (3)—

1. (a) shall be made by statutory instrument, and
2. (b) shall not be made unless a draft has been laid before, and approved by resolution of, each House of Parliament.'.[Miss Melanie Johnson.]

Brought up, and read the First time.

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The Economic Secretary to the Treasury (Miss Melanie Johnson)

I beg to move, That the clause be read a Second time.

Madam Speaker

With this it will be convenient to discuss the following: Amendment No. 8, in clause 16, page 8, line 44, after "on", insert "upstream".

Amendment No. 9, in page 8, line 44, after "business", insert "activities".

Government amendments Nos. 27 and 28.

Amendment No. 10, in page 9, line 6, after "provide", insert "further".

Amendment No. 11, in page 9, line 7, leave out from "connection" to end and insert— with the carrying on of its business, equal to 200 per cent, of the total finance provided under subsection (1)'. Amendment No. 12, in page 9, line 9, leave out from "conditions", to the end of line 11 and insert— but may not comprise the following forms—'. Amendment No. 13, in page 9" leave out line 13 and insert— () long term equity investments in public-private partnership projects'. Amendment No. 16, in page 9, line 13, at end insert— (5) The accounts of a body to which financial assistance is provided under subsection (1)(b) or (3) shall be open to inspection of the Comptroller and Auditor General and that body shall give such explanations of those accounts as he may reasonably require.'. Amendment No. 14, in clause 17, page 9, line 14, leave out subsection (1) and insert— (1) In section 16, "upstream public-private partnerships activities" means acting as a manager in the organisation of public-private partnership projects, providing public sector organisations with expert advisory and implementation skills, providing interim finance for feasibility studies for local government public-private partnership projects and negotiating the necessary arrangements for particular public-private partnerships with the relevant government departments and the Treasury.'. Amendment No. 15, in page 9, leave out lines 34 to 36 and insert— (b) references to public-private partnership projects include those carried on outside as well as within the United Kingdom.'. Government amendments Nos. 29 to 31.

Miss Johnson

The Government are introducing new clause 7 to provide a statutory limit to the level of investment that the Treasury can make in Partnerships UK. When the matter was discussed in Committee, I indicated that the Government had no objection in principle to the imposition of a limit, that we had been considering the matter and that we would return to it after further consideration. I also made it clear in Committee that we would ensure that our commitments were the minimum necessary to ensure the successful launch of PUK, while at the same time ensuring that they represented value for money. I also said, however, that we should not impose a restrictive limit because of the position that PUK will occupy. It is important to ensure that the company is funded to a level that will allow its continued development over time.

Opposition Members will note that the limit that we have set is £100 million below the figure that was suggested in Committee by the hon. Member for Arundel and South Downs (Mr. Flight). The £400 million limit will apply to all forms of investments, including any loans or guarantees. It is a fixed, aggregate figure that is not insulated against inflation.

The limit is subject to change only by means of affirmative resolution. That ensures that the procedure for changing the level of the investment in the new company, which may be proposed by this or, indeed, any other Government, will be open to consideration by the House. I should like to take this opportunity to mention that my officials consulted the National Audit Office on the matter of a limit, as requested by the right hon. Member for Haltemprice and Howden (Mr. Davis), who has just joined us.

I shall speak briefly on the issues covered by the other Government amendments on PUK. Amendments Nos. 27 and 28 have been introduced to provide clarity of purpose. The redrafted clause gives a more accurate explanation of the Government's financial commitments to the new body. Partnerships UK will be a public-private partnership, and the Government will invest on a basis that ensures the best value for money. All financial provision by and on behalf of the Treasury will be on commercial terms.

Amendment No. 28 also makes it clear that the moneys provided may be used in connection only with a public-private partnership business. Under that amendment, the position remains that investment may be made only in one body. Those points, along with the imposition of a limit, should allay the fears of those who are concerned that the Treasury will be providing a blank cheque.

Amendments Nos. 29 to 31 are drafting amendments. They are necessary to remove from the Bill some text that is no longer required. I agreed to introduce these amendments during an exchange with the hon. Member for Arundel and South Downs in Committee.

Mr. Howard Flight (Arundel and South Downs)

If I may put it thus, the Government have, somewhat trickily, put into a Bill about Government resource accounting the legal provisioning to set up Partnerships UK. Announcements were made by the Government last July on the scope and activities of Partnerships UK. They included putting private finance initiatives into better shape more quickly, pump-priming for feasibility studies for local authority projects, expanding the range of projects that can be undertaken and seeking to make good the public sector skills deficit in putting together private finance initiative deals.

I submit, having looked at clauses 16 and 17, that what the Government intend Partnerships UK to do is unclear. The provisions go much wider than the announcements that were made last year, after considerable debate and spinning on the subject. The clauses as drafted would indeed enable the new body to step into territory that has been raised by the TUC, the CBI and the existing private finance initiative industry, which could lead to major conflicts of interest.

Mr. John Bercow (Buckingham)

Before my hon. Friend expatiates on that point, will he confirm that he heard the Minister say that the investment limit would be increased only after "consideration" by the House? Trawl through the measure as I may, I can find no reference to "consideration"—only a reference to approval by resolution. Would my hon. Friend care to try to get the Minister out of the conundrum into which she has plunged herself?

Mr. Flight

I thank my hon. Friend for his, as ever, valuable contribution. New clause 7 is almost as opaque and as lacking in clear description of its intent as the existing clauses. It seems that the Government's intent is that anything in excess of the prescribed limit of £400 million should require the affirmative resolution of both Houses—but I question whether that is what the words in the measure really add up to.

Moreover, new clause 7 contains a loophole: apparently the £400 million limit applies only to subsections (1)(b) and (c) of clause 16 and not to subsection (1)(a). As subsection (1)(a) empowers the Government to put up finance for the body, how much do they intend to provide up front?

As the Minister commented, the figure is £100 million less than I had suggested as a maximum for all forms of finance—as a cap to prevent things from running out of control. I welcome the acceptance of the principle that there should be a cap defined by an amount of money. However, as I have pointed out, I am somewhat doubtful as to how powerful the cap is. What is the total likely to be, including the initial expenditure under subsection 1 of clause 16?

Mr. Michael Fallon (Sevenoaks)

When there were previous caps that could be increased—for example, in the nationalised industries—in each case the increase had to be made by a specific Bill. Throughout the 1970s and 1980s, the House was presented with measures for borrowing-power increases and so on for the nationalised industries. If the cap is to be increased, surely it would be far better if it were done by primary legislation, which would be properly considered by the House.

Mr. Flight

I thank my hon. Friend for that sensible and pointed suggestion based on his prior experience. I agree that, for a cap to be meaningful, it would be better if any increase were made under primary legislation.

Will the Minister say a little more about how the Government expect that money to be spent? Ministers have stated that Partnerships UK will have a balance sheet of £1 billion. A balance sheet implies the taking of deposits. Is that £1 billion target only to be the total net assets? The Government are supposed to be putting up 49 per cent., with 51 per cent. from the private sector. A £1 billion target certainly implies about £490 million from the Government.

Will the Minister clarify the meaning of subsection (2)(d) of the new clause, which contains some rather strange wording? It refers to arrangements for evaluating outstanding expenditure in respect of anything done under section 16(1)(b) or (c). That means matters that are not covered by the definitions of assets, loans and guarantees in the preceding subsections. It is not clear what the Government will be required to do under that provision, nor is it clear to which type of situation it will relate—apart from those already prescribed. Will the Minister also tell us how the Government intend to account for their investments in PUK, both in the new format of the national accounts and in terms of prospective forecasts of Government spending?

The crucial issue relates to what PUK will do. In that regard, I come to amendments Nos. 8 to 15, which were tabled by my hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley) and me. Amendments Nos. 8 and 9 are designed to limit the purposes and activities of PUK to those which the Government have described to date and which the industry, lawyers advising on such matters and the PFI team in the Treasury have defined as reasonable activities that would not cause major conflicts of interest.

There is also an issue of European law. The process of procurement for private finance initiative projects is required under European law to be fair and to ensure a level playing field. If, as appears to be the Government's present intention, PUK is to have a privileged position in investing in PFI projects, that is likely to contravene European law.

Amendment No. 14 defines the specific territory of upstream public-private sector activities. We have subsequently defined the term "upstream", and I shall come to that in due course; it is well understood in the PH industry and contrasts with the concept of downstream activities, which involves the management of equity investment after the financial closing of PFI deals.

Although the Government do not seem to have resolved what they want PUK to do and how they want it to develop its business, there has been substantial debate about it across the industry. The conclusion has been that upstream activities make sense in the provision of support and assistance to the public sector prior to financial close. It is unclear how the key features that have been outlined will be implemented, however. The aims of PUK appear—on the face of it, at least—to involve idealistic but clashing objectives: making money as a private sector entity and helping the public sector.

As described, PUK will be there to advise the public sector and to hold equity interests in projects. It will act as co-sponsor with Government Departments, but, at the same time, have a private sector business and culture. It will develop a revenue stream to finance its activities, but it is not supposed to compete with the private sector. How will those fundamental conflicts be reconciled? What do the Government expect PUK to do?

The principal focus appears to be the requirement on PUK to develop a skills base, to develop the means of financing PFI businesses and to support that skills base, but those aims seem to be an afterthought. That is contrary to the sensible way of setting up a business. It is generally accepted that the PFI team in the Treasury has been a great success and played a key role in negotiating with the Treasury and related Departments to make PFI projects happen, where previously many proposals had gone round in circles. The original proposals in the Bates report envisaged the main objective of Partnerships UK as being to continue the role of the Treasury taskforce but to "PFI-ise" it. That is dramatically different from the Bill's provisions and the range of activities described subsequently.

4.30 pm

The role of Partnerships UK as we believe the Government originally intended was to assist with deal flow. On 20 September 1999, the Chief Secretary to the Treasury confirmed in a speech to launch the Institute for Public Policy Research that Partnerships UK would act as a project manager for PFI deals, providing public sector organisations with expert advisory and implementation skills. He said that it would help get more PFI deals done better and more quickly. Helping deal flow and providing upstream support to public sector bodies is welcome and the Chief Secretary's approach is generally supported. It has been said that there will be a pump-priming role, in putting up finance for local authority PH feasibility studies—to be repaid when PH deals are signed off.

Partnerships UK will encourage the public sector not to impose unnecessary risks on the private sector, and it will promote stability and intelligent standardisation. That is welcome in all parts of the House and throughout industry.

In the early days of PFI, many deals were undeveloped owing to a lack of funds, to funds being misspent or to delayed decisions. If Partnerships UK can be a mechanism for the commercial testing of projects, that also makes sense.

Historically, the key private sector concern has been that the public sector is not sufficiently incentivised to close deals efficiently. Partnerships UK will incur its own costs during negotiations. That is a positive factor and should encourage a deal-doing mentality. It is important that PUK seeks to streamline the bid process, to create a greater flow of deals.

In developing the skills base, it is important to acknowledge the difficulties involved in attracting and retaining staff for Partnerships UK. The existing pool of experienced PFI professionals is relatively small, and demand for them is high. Partnerships UK should not be staffed with project and corporate finance executives with limited or no PFI experience, as that would undermine the logic of establishing PUK. The standard of public sector project managers varies. It is key to the successful development of the PFI that each spending Department should be able to develop its own skills base.

How will PUK continue successfully with the two key existing roles of the Treasury team? Will it potentially serve as the negotiator with Departments for all PFI deals, or only for those in which it becomes involved? Will it play the same role in negotiating with the Treasury? How can it reasonably combine those roles with commercial roles, if it is to have them?

The relationship with other Departments and public sector bodies needs considerably more thought. There will have to be a close working relationship with the Office of Government Commerce, and historically the British Government have not been particularly successful in developing relationships with non-governmental bodies. If PUK is launched without the full support of Departments most active in PFI, that will clearly put considerable risk in front of its success.

We argue strongly that PUK should not be involved in the downstream side and I repeat that that seems to be the collective view of businesses and the trade union movement. The Government have not made clear whether it will be involved downstream, although the Bill would enable that to happen. There are concerns about PUK's involvement with the management and equity investment of project companies after financial close—that being the definition of downstream activities—and major conflicts of interest could arise here. How could PUK advise a public sector client on achieving the best commercial deal if it also had a commercial interest in the reverse occurring? The competitive bidding process would become compromised as PUK would participate in choosing the preferred bidder, in which it would have a future investment.

PUK could, for example, recommend for selection the bidder that offered it the most favourable participation. As it will not pay the on-going tariff, it is also difficult to see how its interests in that regard would identify with those of its co-sponsor, the public sector purchaser. Confidential information gained as a shareholder or lender in one transaction could be used against the same private sector bidders in later transactions. As a participant in a project management company—either as a shareholder or a lender needing to make returns and reduce investment risks—how could it negotiate effectively against the public sector tariff payer, its co-sponsor, during the concession life on a refinancing or a variation required by the public sector?

PUK's exit criteria may be different from those of the rest of the shareholders or the lenders to the concession, particularly if it needs liquidity to pay its overheads.

The natural exit from a deal for PUK would be at a financial close, when it would be paid for its services in cash out of the proceeds of the project finance, in the same way as other advisers.

On European requirements, the procurement process for PFI projects is governed by European law. All projects need to be advertised in the Official Journal of the European Communities and to follow certain well-established rules to ensure that the process is fair and conducted on a level playing field. It involves moving through each selection stage on the basis of an evaluation that establishes technical competence to perform the project and, later, the best price. There are usually several stages. A number of potential bidders are chosen in pre-qualification and, following interviews, three or four are invited to tender. Further negotiations usually follow. After that, a preferred bidder is chosen, which takes the process through to financial close.

From advertisement in the Official Journal to financial close, the process takes between 18 months and two years to complete. Fundamental to that is the integrity of the process, which requires a clear separation between client and bidders. The client or its advisers must have no conflict of interest in the outcome, otherwise the process would be tainted and in breach of Official Journal rules and European Union law.

If PUK had the opportunity to invest in the equity of the winning bidder, and played a part in its selection, there would be a major risk that such conflict would arise and it would be accused by the losers of preferring certain bidders over others during the competition. In that case, the process would be tainted and the playing field uneven. That aspect has not been discussed adequately, and the Government have not fully focused on the integrity of the competitive process.

It has been argued that PUK should be a provider of last resort of equity in projects where the market is not willing to provide equity on sensible terms, and that PUK's investment guidelines might require it, on all transactions, to answer positively that the equity market had been approached and was unwilling to provide the required funding.

If such equity investment were limited to those situations, it could be argued that that practice would avoid PUK crowding out the private sector, but even that slant is inappropriate because PUK will be majority-owned by the private sector and there seems little logic in private sector shareholders wanting the business to invest long term in PFI projects that no one else will touch. Even though conceptually that argument might appear to make sense to the Government, I cannot see how it can work commercially.

Government amendments Nos. 27 and 28 remove references to financial assistance and grants and seek to make it clear that subscriptions to PUK will be for investments. I repeat: what sort of investments? Going back to the heart of the issue, is PUK to be essentially a skill advisory body or an investing body?

The amendments leave in the Bill the ability to provide finance by way of guarantee. The Minister wrote to me following the debate in Committee to make it clear that those guarantees would be provided on the same basis as other guarantees, but I note from her response that they will appear as contingent liabilities in the supplementary statements to the consolidated fund and national loans fund accounts.

The essence of our concerns about guarantees is that they are at the bottom of the page, on a contingent basis, and it will become ever more difficult to know what the real commitment is. Technically, one clearly cannot put guarantees in as capital expenditure to be depreciated, but we will stray into an area where, as Government guarantees mount, their real liabilities become more and more obscure.

Our amendments Nos. 10 and 11 seek to provide an alternative cap on Government expenditure and certainly to include the expenditure under clause 16(1). We are broadly happy to accept in principle the Government's approach, with the proviso that we want to know what will be included under subsection (1).

Amendments Nos. 12 and 13 seek to exclude from financial assistance guarantees and long-term equity investment in public-private partnership projects. The amendments have not been published in the form in which I tabled them, but that is their intent. As I have just said, there is no need to use the guarantee mechanism for putting up finance; it is much sounder if finance is provided up front and then appears clearly in the Government accounts.

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The central question is what the Government intend Partnerships UK to do. The industry does not know, Parliament does not know, I am not clear, and I question whether the Minister is entirely clear. She speaks of allowing it to develop and to have sufficient flexibility in the future. The danger of that approach is that it will develop major conflicts of interest and the same bad habits as the equity bank of the 1960s.

On amendment No. 16 to clause 16, it is of course correct and desirable that Partnerships UK's accounts should be open to inspection by the Comptroller and Auditor General, but what will be the accounting policies of Partnerships UK? What will be its depreciation policies?

The Government have an interest in PUK at one remove and as a minority shareholder. The accounting principles of Partnerships UK and who will determine them are a crucial matter still to be resolved. Few topics could be more relevant to the issues raised by the rest of the provisions. Unless the rest of the Bill is changed as proposed, no one will have a clue what the Government's interests are in Partnerships UK or how they will account for its activities.

I shall deal now with amendment No. 14. Reading through Government announcements at the time when Partnerships UK was launched, I attempted to distil its intended role as the Government perceived it. We have sought to limit the definition of Partnerships UK's role to those activities. As amendment No. 14 states, upstream public-private partnerships activities" means acting as a manager in the organisation of public-private partnership projects, providing public sector organisations with expert advisory and implementation skills, providing interim finance for feasibility studies for local government public-private partnership projects and negotiating the necessary arrangements for particular public-private partnerships with the relevant government departments and the Treasury. Those are the activities that the Government claimed when they spun the story of the setting up of Partnerships UK. The definition offered by the amendment is considerably more explicit and narrower than that provided by the Bill, which is broad and unclear and which opens the door to all sorts of conflicts of interest.

The first potential conflict of interest arises from the fact that Partnerships UK exists in an idealistic sense to give good advice to public sector bodies, but it also aims to grab the business as profitably as possible for itself.

The second potential conflict of interest is that Partnerships UK will have privileged access to private finance initiative deals and a privileged position in its relationships with the Treasury and Government Departments, but it is majority owned by the private sector. It is therefore in competition with a considerable number of other bodies in the PFI industry. The Bill gives it a privileged position which will be impossible to manage. It would be improper for Partnerships UK to be permitted to participate as a long-term investor in PFI equity projects.

The rest of the amendments are relatively straightforward. Government amendments Nos. 29, 30 and 31 broadly cover the same territory as amendment No. 15. They try to make it clear that Partnerships UK can be involved in PFI business outside the United Kingdom. That involves less conflict than does such business in the United Kingdom, and it is clearly welcome if PUK can make money through business outside the country.

Mr. Bercow

My hon. Friend hinted at a possible conflict between the Bill and European law. Given the unimaginable embarrassment that this Government of Europhiles would suffer if, in the context of the clause and the amendments, they faced legal action from the European Union, does he agree that it would be helpful if they published the legal advice that they received on the matter?

Mr. Flight

I thank my hon. Friend for his pertinent remarks. I suspect that this Europhile Government may not even have thought of the problem, just as they had not sufficiently considered European Court of Justice issues in relation to the Financial Services and Markets Bill.

I apologise if I have spent too much time in taking hon. Members through the precise arguments for the amendments, but I hope that I have made it clear that a potential problem exists unless the activities of Partnerships UK are limited to the upstream activities that I defined.

The Bill is at its Report stage, yet clauses 16 and 17, which are tucked away, provide substantial powers for Partnerships UK without giving a clear definition of its activities. The Government have not resolved that. The Government have been warned by the industry, business and the trade union movement that, if the measure is left as wide as it currently stands, it will put Partnerships UK in a position in which it will face unacceptable conflicts of interest.

For those reasons, our amendments try to limit and define much more precisely the activities of Partnerships UK. If there was reasonable scope for those activities to broaden in future, they could be reconsidered in further legislation. The argument that we must have the widest possible measure now to enable Partnerships UK to develop does not stand up. I urge the Government to reconsider what they want out of Partnerships UK. The other place, if not the House, will need to follow up our points and limit the role of Partnerships UK to that which is proper.

Mr. David Davis (Haltemprice and Howden)

I want to speak briefly about three amendments in the group. First, I want to comment on the limitation that the Minister mentioned at the beginning of our proceedings. Secondly, I want to consider amendment No. 16, which is in my name and the names of the right hon. Member for Swansea, West (Mr. Williams) and the hon. Member for Newbury (Mr. Rendel). I also want to probe the Minister slightly on the philosophy that underpins the accounting for Partnerships UK.

I welcome the Government's decision to accept our suggestion in Standing Committee on limitation. That is sensible. I also thank the Minister for consulting the National Audit Office on that; it was clearly worth while. I want to ask a question that may turn out to be about a technical point, but I hope that the Minister will clarify it when she winds up. Does the limitation refer to proposed new paragraphs (b) and (c) of clause 16(1), but not to subsection (1)(a), which states: The Treasury may incur expenditure in respect of the establishment of a body for the purpose of carrying on public-private partnership business? That opens up the option of creating a dowry. I do not think that that was the intention; I suspect that it is just the way in which the wording is made rather general. But I should like to hear that that is the Government's view. There may be a need for amendment by the Government in the other place.

The second issue is raised by amendment No. 16, in my name and the names of two of my colleagues on the Public Accounts Committee, the right hon. Member for Swansea, West and the hon. Member for Newbury. It says: The accounts of a body to which financial assistance is provided under subsection (1)(b) or (3) shall be open to inspection of the Comptroller and Auditor General and that body shall give such explanations of those accounts as he may reasonably require. The amendment is designed to remedy an omission from the Bill. It provides for the Comptroller and Auditor General's access to Partnerships UK. The Government intend to establish the body as a limited company to exercise a key role in developing the private finance initiative. Partnerships UK will take decisions having a wide impact on the use of public money. The Treasury will be able to use public money to fund it. It will take on functions that are currently performed by a taskforce within the Treasury, whose work is currently open to scrutiny by the Committee of Public Accounts through the Comptroller and Auditor General's current statutory access rights.

Mr. Oliver Letwin (West Dorset)

Does my right hon. Friend agree that this is an interesting test case of whether the Government intend to constrict the applicability of the National Audit Office and the Comptroller and Auditor General, since, after all, the body in question is one that they are setting up de novo, and they have claimed repeatedly that they have tried to allow all new bodies to be within the purview of the Comptroller and Auditor General?

Mr. Davis

I do not agree with my hon. Friend. As will be clear in a second, it is a test case of something else, of whether or not we can have in statute, rather than by Executive promise, the rights that apply.

The Chief Secretary, giving evidence to the Committee of Public Accounts last month, acknowledged the important role of the Committee in scrutinising the apportionment and transfer of risk under public-private partnerships and private finance initiatives. He gave a commitment that the Committee would have full scrutiny of and oversight over public money paid to Partnerships UK, as well as of money going into projects for which Partnerships UK will be responsible. That commitment is welcome; it was unanimously welcomed in the Committee. The amendment would simply secure in statute the mechanism for providing the Committee with the oversight role, by giving the Comptroller and Auditor General the necessary access powers to obtain information to inform the Committee.

Mr. Letwin

I accept my right hon. Friend's correction. It is encouraging to many of us to hear of that commitment. However, does he agree that if the Government are reluctant to accept the PAC's amendment it would suggest that that commitment may be temporary?

Mr. Davis

I am perhaps more generous than my hon. Friend in my judgment of the Government. The problem here is not so much that the commitment of today's Government may be temporary; it concerns the commitment of some future Government. All Bills set the framework for the Government and Parliament in the future.

Mr. Nigel Griffiths (Edinburgh, South)

The right hon. Gentleman speaks with much knowledge of the position inherited by the present Government, when, against all the appeals from the Public Accounts Committee, none of the outside arms-length agencies that were set up were required to be vetted by the National Audit Office. But I know that the right hon. Gentleman supports me and the rest of the Committee in applauding what the present Government have done to ensure that all arms-length bodies have been included since the last election.

Mr. Davis

Not quite all—19 out of 21. If the hon. Gentleman had been in the Chamber the other day he would have known that I tabled an amendment on behalf of the National Audit Office about the Financial Services Authority. That was not accepted. So the matter is not as clear-cut as he suggests.

The point that the hon. Gentleman perhaps wanted to make was that over the decades from the 1960s onwards Governments have slipped by this particular problem. It is one that should be straightened out for ever now.

However, let me return to my generous tone, which was to accept and applaud the Chief Secretary's commitment. It should properly be put into statute, for good reason. The private finance initiative is still new; it is still finding its feet; we are still discovering its weaknesses and its strengths. In the development of such a policy, one that is common to both sides of the House, the gains from value for money studies are enormous. They relate not just to the particular body or project that is being considered at any one time, but to all the projects that may benefit from them in the future. The Public Accounts Committee has already published a report demonstrating the lessons learned from four PFI studies. Considerable leverage is given by the ability to scrutinise and to report.

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Of course, another important scrutiny function relates properly to Parliament, and should not be a discretionary consideration for Government. Parliament's rights are involved here, not the Government's wishes or the Government's good will. The amendment is offered not in any spirit of conflict, but because I—along with the other Members in whose names it is tabled, and others—believe that Parliament's rights should be recognised. The House is being asked to approve the statutory funding of Partnerships UK; the amendment would secure in statute the House's right to scrutinise the use to which that money is put.

May I ask the Minister another question about accounting for Partnerships UK? There is a philosophical point that we did not have time to consider in Committee, but which needs to be understood. The private finance initiative is, in my view, worth while, and I applaud the Government's intention to increase its use. It will give us better management, risk transfer, and a valuable weapon for the pursuit of output-oriented government. But how we account for the private finance initiative, or the private-public partnership, is critical, because it may lead to a perverse incentive in the way in which the PFI is used—an incentive driven by the way in which we account for it on the Government's balance sheet.

Traditionally, decisions about whether to put an item on a company's balance sheet are based on how the risk is allocated—whether it falls on the project or on the company. There is a good reason for that: the interest of those who are most concerned with the balance sheet. Both the company's shareholders and its creditors have an interest in the financial risk that afflicts it.

The taxpayer's interest in the Government's accounts is rather different. Most taxpayers do not expect the Government to go bankrupt tomorrow; neither do most of their creditors. The Government may be a late payer, but they are not going to go bankrupt. The taxpayer's interest is in the future taxation incurred by Government's decisions. That is why I want to know how the Minister expects Partnerships UK to be accounted for, in the context of the Government's overall accounts and the balance sheet that the Comptroller and Auditor General will be required to audit at some time in the future.

I think it proper for capital accounting for the PFI—the liability that goes on to the Government's balance sheet—to reflect, irrespective of risk transfer, the stream of cash that taxpayers will have to fund in the future. How does the Minister expect that to be dealt with? It is, 1 think, one of the key issues in relation to whether the PFI is treated properly. If it is not treated properly, future Governments will be tempted to try to minimise the apparent liabilities on the balance sheet by, as it were, having public services on the never-never, and none of us would approve of that.

Mr. Edward Davey (Kingston and Surbiton)

I think the House is grateful to the hon. Member for Arundel and South Downs (Mr. Flight) and the right hon. Member for Haltemprice and Howden (Mr. Davis) for their analysis of the amendments and the Government's proposition. The Committee was also grateful for their analysis of Partnerships UK. The Liberal Democrats support almost all that they have said today; we also support the Government's new clause 7, which deals with expenditure limits. The Minister suggested in Committee that the Government would table such a measure, and they have delivered on that promise, for which hon. Members—including those who were members of the Committee—are grateful.

Mr. Letwin

Does the hon. Gentleman agree that there is the lacuna that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) pointed out: because subsection (1)(a) is not covered, the Government could under the Bill put in, for example, £1,000 million at the start and not be limited by the £400 million?

Mr. Davey

I am grateful to the hon. Gentleman. He has anticipated what I was about to say. With that exception, we welcome the new clause. I hope that the Minister will say that that was an oversight and that the Government will fill that lacuna in the other place.

I hope that the Minister will talk a little more about the philosophy behind the Government adopting the expenditure limit. The point was not touched on in Committee. Although an expenditure limit could prevent abuse of the Government guarantee for Partnerships UK and ensure that there is a level playing field for other companies, there is an alternative to such a limit. The Government could have ensured that the constitution setting up Partnerships UK had a no bail-out clause saying that they would not give it any guarantees after the initial funding, and would in no way come to its rescue if it encountered difficulties.

I would be interested if the Minister said why the Government did not choose that route, which is perfectly legitimate. Other countries have used it for corporations that have been set up by statute. The Liberal Democrats have examined it in other areas such as London Underground and the Post Office. It would perhaps have been one of the most appropriate ways to look at innovation in public sector finance and could have brought many of the benefits that the Government seek from setting up Partnerships UK, without having to have the expenditure limit. I make it clear: we are not against the expenditure limit approach. We would like to hear why the Government have gone down that route and not another.

The hon. Member for Arundel and South Downs spent some time talking about the role of Partnerships UK and rightly sought from the Government clarification of what activities the body will undertake. I hope that the Minister will expand on that because many of us have worries that they have no clear direction for the body. Perhaps they will want it to take over more and more of the capital management of the public sector, but with no clear criteria about the sort of projects that will be most appropriate for Partnerships UK.

That is one of the problems with the private finance initiative. It is welcome in many areas of the public sector and has brought many benefits. Many projects have gone ahead that otherwise would not have done. Many lessons and skills have been learned by public sector managers, particularly on procurement. It has clearly brought many benefits, but, as we all know, there have been many examples of PFI projects having problems, where assets have been undervalued and money has disappeared.

That is why some of us are concerned that Partnerships UK is being created without any clear framework for its activities. Although it may be the right approach, we do not feel that the Government are setting down the guidelines that are needed at this early stage.

A few weeks ago, members of the Sub-Committee of the Select Committee on the Treasury took evidence from various advisers on the PFI and looked at where it had been successful and where it had not. It was clear that there were a significant number of successful PFI projects but, equally, a range where the PFI was not so appropriate and had not worked so well. That tended to be where the body had many different parts—say, a large hospital—a service there was being PFIed, but was used by a number of different people. The transaction costs in performing that re-arrangement proved to be not only very high, very complicated and time consuming, but did not deliver good value for money.

In their remarks to the Committee, the specialist advisers made it clear that the PFI could generally be characterised as a case of learning on the job and of trial by error. That is not a good way of trying to discover the best way of maximising value for taxpayers' money and of ensuring that capital projects are completed in the most efficient manner. It is about time that the Treasury—perhaps using outside advisers, perhaps from academia—analysed rather more intelligently the most appropriate cases for use of the PFI.

If public sector managers operate a PFI project, they will have the benefit of cheaper capital and—potentially, in some cases—of lower transaction costs. However, those gains have to be set against the efficiencies that could be gained in many spheres by private sector management. There is therefore a trade-off in deciding who is best able to operate parts of a PFI project. Moreover, it seems almost self-evident that it is possible to analyse the spheres in which such a trade-off will work.

I hope that Partnerships UK will not have to learn by experience, and that, in a few years, we shall not have to contemplate a series of failures and projects in which money has been wasted.

Mr. David Davis

Some of the issues that the hon. Gentleman has raised were addressed in the Public Accounts Committee's report on the PFI. However, rather than focusing on the trade-offs that he has described, the report made it clear that design of PFI projects is critical to their success. The report also made it clear that, in the public sector, understanding of the separation of risk is very primitive indeed. Under the previous Government, the pricing mechanism used in road projects, for example, served to increase risk, making projects more expensive than they needed to be. There is, therefore, much to be gained in addressing the issue of project design. Moreover, in relation to project design, Partnerships UK is a good development. However, the report also reinforces the point that value for money studies not only demonstrate the good and bad aspects of a project, but provide lessons to be learned for the future.

Mr. Davey

I certainly agree with the right hon. Gentleman on value for money studies, which would be promoted by his amendment No. 16, and which we must ensure are continued in all PFI projects. I do not think that he and I disagree on that. Liberal Democrat Members believe, for many of the reasons that he has outlined, that the PFI could be very useful in many spheres. His comments on project design also reinforce my previous comments. Although some projects can be designed so that the private sector is readily able to assist in improving efficiency, it is very difficult to see how other projects—I gave an example of one earlier—can be designed to ensure that we receive best value for money. I therefore hope that the Minister will say a little more—as she was pressed to do earlier by the hon. Member for Arundel and South Downs—on the activities of Partnerships UK.

Amendment No. 16 was tabled by the right hon. Member for Haltemprice and Howden and other members of the Public Accounts Committee, and is not, as the hon. Member for Arundel and South Downs said, a Liberal Democrat amendment. However, Liberal Democrat Members are certainly happy to support it and, in many ways, wish that we had got there first.

Throughout our proceedings in Committee, the Government demonstrated a surprising unwillingness to expand the role of the National Audit Office. In Committee, although Ministers described their interest in and support for expanding that role, and even boasted about their record in doing so, when we made specific proposals, they moved away. We are now debating another specific proposal, and it will be interesting to see whether the Minister goes down the same road. In Committee, she made it clear that she was not attracted by such an amendment. She said that Partnerships UK would be a risk-taking private sector body, with the majority of its members being private sector investors and that those were not the normal conditions under which a body would be inspected by a public sector audit body.

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Mr. Letwin

Does the hon. Gentleman agree that, in the light of the interesting information that we have received from my right hon. Friend the Member for Haltemprice and Howden (Mr. Davis), the Chairman of the Public Accounts Committee, that there has been a Damascene conversion in the Treasury and the Chief Secretary has made a commitment to allow the Comptroller and Auditor General in, it is extraordinary that the Government should apparently resist an amendment that merely locks in that commitment?

Mr. Davey

During the evening we may find that the hon. Gentleman anticipates what I was about to say on a number of occasions. The Chief Secretary has made that commitment. It follows that Ministers should accept amendment No. 16.

Mr. Letwin

I promise that I shall not pre-empt the hon. Gentleman this time, because I want to ask him a question. Would he care to speculate on why there might be such a discrepancy between that commitment and a willingness or otherwise to accept the clause?

Mr. Davey

I was not about to go on to that, but I shall answer the hon. Gentleman. Perhaps the reason is that the Government are concerned about setting a precedent, because Parliament would then be entitled to say that many other corporations and trading companies with public sector involvement should be overseen by the National Audit Office. I suspect that that lies behind the Government's possible opposition to amendment No. 16, but we shall see.

Another reason why the Government should deliver on the Chief Secretary's commitment is that such public bodies, created by statute by the House of Commons, ought to be audited by the National Audit Office. Partnerships UK would not exist if statute did not create it. It is not a private company. That creates a prima facie case for National Audit Office involvement.

We know from new clause 7 that public money will be involved. Moreover, Partnerships UK will be a key tool of public policy. The Government want to develop the private finance initiative and public-private partnerships. There is no disagreement about that basic aim. Elsewhere in the Bill, the Government say that a body should be under the jurisdiction of the National Audit Office only if its role could be carried out by a Government Department. A Department clearly is undertaking the role of Partnerships UK. The Treasury set up a taskforce, which started work soon after the Government came to office. Yet again, by the Government's criteria, Partnerships UK ought to be under the institutional jurisdiction of the Comptroller and Auditor General.

Mr. Flight

The hon. Gentleman has just raised the nub of the matter: is Partnerships UK going to take on the Treasury taskforce's role, as has been advertised, or is it going to do something entirely different? The Bill empowers it to do something totally different that may even be harmful to the present role that the Treasury taskforce has carried out well.

Mr. Davey

The hon. Gentleman makes a fair point. I may be naive in accepting that the Government were going to do what they had said elsewhere that they intended to do. It is the Government's stated intention that the responsibilities of the Treasury taskforce will be taken on by Partnerships UK, but the hon. Gentleman is right to say that, given the drafting of the Bill, Partnerships UK could go much wider. The point made in amendment No. 16 is that the body should come within the scope of the National Audit Office.

The Liberal Democrats want the Government to deliver fully on their commitment. We want them to ensure that all public money that goes to Partnerships UK is properly audited. We want to make sure that the commitment given by the Chief Secretary to the Treasury is delivered and we believe that the best way to do that is for amendment No.16 to be agreed to.

Finally, let me say a word in favour of public sector managers. When we debate private finance initiatives and Partnerships UK, we are often left with the feeling that right hon. and hon. Members believe that civil servants cannot procure capital goods or get good value for taxpayers' money. In reality, over many decades they have performed those functions very well. Indeed, in many areas they are still charged with the responsibility for capital procurement for the public sector. Whether or not Partnerships UK develops and takes on more of that work, many public sector managers will retain that responsibility.

I hope that, in establishing Partnerships UK, the Government will ensure that public sector managers are able to learn from Partnerships UK, and that they are not simply able to get advice from Partnerships UK, but are brought in for their skills and expertise as they will still be in charge of much of the capital spending in the public sector.

Mr. David Davis

I applaud the hon. Gentleman's comment about public sector managers and draw attention to one factor that we in Britain take entirely for granted—the fact that more than 99 per cent. of our public sector managers are totally honest. We cannot take that for granted in respect of everything that happens on behalf of the Government. When something goes wrong, it is often at the interface between the public and private sectors. We are increasing precisely that possibility by going down the PHI route—not wrongly—and we have to be aware of it.

Mr. Davey

The right hon. Gentleman is absolutely right. The Government should accept his amendment so that the public-private partnership can be developed with the probity that we have come to expect from our civil servants.

Sir Michael Spicer (West Worcestershire)

What worries me about new clause 7, and particularly the way in which the Minister spoke to it, is that the £400 million cap is the wrong cap. It is focused on what might broadly be called the operating costs of the monopoly organisation that has been set up to administer the public sector element of the PFI scheme. However, it does not restrict or contain the public moneys that are going into the PFI and that really should worry right hon. and hon. Members in the context of the Bill and the proposed new clause.

The Minister gave the impression that the new clause provided a real cap on heavy spending by the public sector on the PFI. That is quite manifestly not the case. As the provision is spurious and there is no such cap, there are all sorts of unfortunate consequences, some of which have been referred to by my right hon. Friend the Member for Haltemprice and Howden (Mr. Davis).

For instance, more and more of a fudge is emerging between capital and current spending. The expansion of PH in a totally unconstrained way is resulting in the breaking of the Government's own golden rules. Borrowing is being conducted through spurious capital expenditure, unconstrained through the PFI, which actually turns out to be current expenditure. That puts a horse and cart through the Government's self-proclaimed golden rules. More generally, this kind of mishmash of Government and private spending in an uncontrolled way will be combined with the phoney privatisation schemes that are beginning to emerge—the Post Office being one example. We shall have to wait for the result of the mayoral contest to find out whether the underground will be another. Less and less control is being exerted and certainly, as my right hon. Friend said, totally unaccountable control is being exerted over public spending, particularly capital expenditure.

That is increasingly worrying. The Select Committee on the Treasury interviewed the Governor of the Bank of England this morning. There was discussion about the fact that, contrary to the public perception and the Government's propaganda, there is reason to believe that public spending is beginning to get out of control.

A report published yesterday by the Lombard Street research group showed clearly that the growth of public spending is taking off, and that it is matched by falling growth in tax receipts. Everyone thought that the deficit gap had been solved, thanks to the sound finances handed over by the previous Administration. It had been, for a while, especially when the Government took over the previous Administration's tight expenditure plans.

However, there is now the real possibility of laxity in this country's fiscal management. That would have all sorts of consequences, as the Select Committee discussed this morning. One of the reasons why our interest rates are on their way up is that there is an anticipation that public spending is getting out of control, as a result of the ways that the Government have found to get around their own rules and public expenditure constraints. There is a clear need for capping and constraining public expenditure.

New clause 7 is spurious. Its impression of great control and probity by an open Government contrasts with what is really going on. The Bill is part of a fudge that disguises loss of clarity and accountability in the Government's conduct of the public finances, as my right hon. Friend the Member for Haltemprice and Howden rightly said. Many issues arise connected with risk, for example. There is a contrast between what the Bill proposes and the way that risk is managed in the private sector.

The Government are pretending to have achieved a match between private finance and public finance, and between risk and reward, in a way that is satisfactory to the private sector. However, their fudge means that public expenditure is gradually getting out of control. That is a worrying trend.

Mr. David Ruffley (Bury St. Edmunds)

I wish to draw particular attention to amendments Nos. 8 and 9, at whose heart is the critical distinction between upstream and downstream activities.

Upstream activities are defined in a later amendment as a set of activities that provide for support and assistance to the public sector prior to the financial close. Downstream activities are defined elsewhere as involvement in the project's management and equity investment after that close. As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said, it is the inclusion in the Bill of a role in downstream activity for PUK that most troubles Opposition Members, City practitioners and commentators.

That worry was noted when details of PUK were leaked to the newspapers last summer and aroused much confusion. The more one studies the Bill, the more one sees that many details are not covered. It was also clear in Committee that there were lots of loose ends. The devil really is in the detail. There are conflicts that have not been resolved thus far because of insufficient understanding of the critical difference between upstream and downstream activities.

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My hon. Friend correctly observed that with regard to downstream activity, a body advises the public sector on how to get the best deal while being able to take an equity stake by way of remuneration for its involvement in the deal. That equity stake will involve it in trying to get the best deal for itself as a shareholder. That inherent structural conflict is built into these provisions.

PUK will seek to develop a revenue stream to finance its activities, but we are being told that that will not and should not crowd out private sector activity. That is clearly another conflict.

The Minister will probably tell us a great deal about Ministers' consultation with the private sector before drafting the Bill and how the Government listened to Opposition views in Committee. They may have listened and they may have consulted, but they have not come to the proper conclusions. It is to some of the outstanding points that have not been tackled that I would like to turn my attention.

I do not think that anyone has a problem with upstream activities. They are typically undertaken by the Treasury taskforce—and a very good job it did in the main.

Mr. Letwin

Does my hon. Friend agree that if the upstream activities constitute the main burden of the Government's case, clause 16(1)(a) should have been captured by the £400 million limit? It cannot conceivably be the case that the upstream activities would require to have more than £400 million spent on them all told, including the initial investment.

Mr. Ruffley

Given my hon. Friend's premise, he is of course right, but he misunderstands me if he believes that I think that the burden of the Government's case is the importance that they attach to upstream activities. The importance that they attach to downstream activities is my concern. However, given his premise, he is right in making that logical and typically powerful point.

Mr. Letwin

Following his own logic, would my hon. Friend then agree that the fact that clause 16(1)(a) has been omitted from the £400 million limit is virtually proof that the Government intend the body to have a great deal to do on the downstream side?

Mr. Ruffley

My hon. Friend has it. That is exactly the point of my remarks further downstream, if I may make such a pun. It is at the forefront of Conservative Members' concerns.

Let us remember what upstream activity is and why it is important. To demonstrate what a reasonable chap I am, I will gladly pray in aid the view of the Chief Secretary to the Treasury. In a speech to the Institute for Public Policy Research on 20 September 1999, he suggested that the importance of PUK was in helping to get more PFI deals done better and quickly. We would all like that. It is what the Treasury taskforce was dedicated to ensuring, so there is no problem thus far.

PUK will also encourage the public sector not to impose unnecessary risks on the private sector. That is another of the Government's stated aims. We have no problems with that. It is also implicit in the logic of the role carved out for PUK's upstream activity that it should promote greater standardisation of contracts. That is most important, as is the fact that PUK should try to streamline the bidding process so as to encourage greater deal flow.

However, when we try to find out what the measure says about upstream activity—the subject of amendment No. 8—we seek in vain. We cannot discover ways in which that pre-closing and troubleshooting advice could be delivered. We have what is technically a private sector company, which will employ staff who represent a better skill base; that is what we are asked to believe. The company will be better than the embodied form of the Treasury taskforce.

However, concerns remain as to the kind of staff who will be attracted to PUK and retained. The pool of experienced PFI professionals is relatively small and the demand for their services in the private sector is high. Will the Minister tell us what is being done to recruit and retain staff who will deliver high-quality, upstream activity advice?

As one considers the significance of upstream activity, another question automatically leaps out. What relationship will PUK have with other Departments? Those people who have wandered the corridors of Whitehall in a previous life will understand that some Departments are not awfully good at interacting with non-governmental bodies. Will the Minister tell us what mechanisms—if any—the Government have put in place to incentivise Departments to work efficiently, promptly and in a co-operative spirit with PUK when it has been set up?

I cannot close my remarks on the importance of upstream activity—the subject of amendment No. 8—without adverting to the points in other amendments about downstream activity to which my hon. Friend the Member for West Dorset (Mr. Letwin) referred a few moments ago. The Opposition regard downstream activity as dangerous. My hon. Friend the Member for West Worcestershire (Sir M. Spicer) alighted on that fact.

Let us consider briefly why the involvement of PUK in downstream activity—the management of investment and the participation in equity investment during a PFI or public-private partnership deal—could be problematic. What conflicts of interest might arise if PUK indulged in the downstream activity of which we disapprove?

PUK will be advising public sector clients on how to achieve the best commercial deal. However, at the same time, it will, in some cases, have an equity stake in the deal. The commercial interests in securing the best return on that stake would be diametrically opposed to the interests of the public sector client to whom PUK was giving the advice in the first place. The competitive bidding process could be compromised if PUK participated in choosing a preferred bidder in which it had a future investment interest. In other words, PUK could recommended a bidder to be selected if it offered the most favourable participation to PUK.

Mr. Charles Wardle (Bexhill and Battle)

Is not everything that my hon. Friend says in support of his amendments and about the pitfalls likely to be found in downstream activities a powerful argument in support of amendment No. 16, which was tabled by my right hon. Friend the Member for Haltemprice and Howden (Mr. Davis) and relates to the Comptroller and Auditor General's right of access?

Mr. Ruffley

I concur with my hon. Friend's assessment that our right hon. Friend, who is Chairman of the Public Accounts Committee, has alighted on an important point. That is why he tabled an amendment to act as an important set of belt and braces if we cannot get rid of downstream activity. I fear that, despite the power of our arguments, we may not succeed in doing that today. However, that amendment would ensure that there would be proper accounting of the PUK's spending and scrutiny by the National Audit Office.

Mr. Letwin

Even if we do not succeed today, does my hon. Friend not agree that it is almost certain that, if the Government continue to resist such amendments, the other place will ensure that they are not allowed to continue with their proposals for downstream activities?

Mr. Ruffley

I stand corrected by my hon. Friend. Perhaps, I am too much of a pessimist. I heard what he said, and I now share his optimism that the Government will listen to the objections that we are making in a reasoned and sensible spirit about the risks posed by the downstream activity envisaged in the Government's new clause.

I return to the list of potential conflicts of interest. Confidential information that PUK gains as a shareholder or lender in one transaction could be used against other private sector bidders in later transactions.

Mr. Letwin

I am sorry to interrupt my hon. Friend again, but I have just caught up with his lightning intellect and realised what he was saying. Does he really mean what he said? Is it not likely that the Government will not so much listen as hear an enormous shout from the other place? Eventually, they will be compelled to listen.

Mr. Ruffley

I hope that the Government will be compelled to listen to the points that we have made, and that the other place will no doubt make, about the dangers of downstream activity. My hon. Friend is right in that regard.

We have a further concern about downstream activity. If PUK is a participant in a project company either as a shareholder or a lender and needs to make returns and reduce investment risk, how will it negotiate effectively during the life of a deal against the public sector tariff payer that is its co-sponsor if that deal has to be renegotiated? For example, it might need to be re-financed and, in those circumstances, there will be a clear conflict of interest.

We are not totally clear from the Bill what price PUK will charge for its services. It has been observed in many quarters outside the House that a natural exit from a deal for PUK would be at the financial close, when it would be paid for its services in cash from the proceeds of the project, financed in the same way as other advisers. If that route were followed, services could be clearly priced. Other advisers could see how much PUK was charging, which would result in benefits from more competition. My hon. Friend the Member for Bexhill and Battle (Mr. Wardle) observed that we are entering the realm of monopoly providers, when we want more competition.

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If remuneration were paid up front, it would increase PUK's liquidity and avoid the need to scramble for sweat equity, which would be unattractive to many parties—not least bid sponsors and the public at large in the shape of taxpayers.

My hon. Friend the Member for Buckingham (Mr. Bercow), in an intervention on my hon. Friend the Member for Arundel and South Downs, referred to the way in which European law impacts on the way that PFI procurement is undertaken in the European Union. All projects must be advertised in the Official Journal of the European Commission and follow well-established rules, to ensure that the process is deemed fair and conducted on a level playing field.

The process, which is lengthy, begins by establishing the technical competence of bidders and goes on to examine whether best value and best price have been secured. Pre-qualification involves a number of potential bidders from a wide field. Following the third or fourth round of beauty contests, an average of three or four bidders are invited formally to tender. Thereafter, further negotiations are conducted, normally resulting in two bidders being invited to put their best and final offers. Then a preferred bidder is chosen, which should take the process to final closure.

That legal—and legalistic—process can take one and a half to two years to complete. I should like to hear from the Minister whether the integrity of that process is compromised in any way by the kind of conflict of interest that I and others of my hon. Friends have outlined in relation to downstream activity. It is widely suggested by eminent legal practitioners in the City of London that, under that regime, there should always be a clear separation between the client and bidder in the interests of fairness, transparency and integrity. The client and its advisers—PUK in this example—should have no conflict of interest in the outcome, otherwise the process could be tainted and possibly in breach of EU law.

I repeat the question posed by my hon. Friend the Member for Buckingham. What legal advice have Treasury Ministers received in relation to conflicts of interest compromising or breaching EU law? If the Minister will not publish that advice, perhaps she will tell us whether she was given any in the first place or thought it prudent to request such before introducing the Bill. I think that I saw rubric to the effect that the Bill is deemed to accord with the principles of the European convention on human rights. Does it accord with the principles of EU law, other than the ECHR?

I should like to go on—

Mr. Thomas McAvoy (Glasgow, Rutherglen)

The hon. Gentleman is going on and on.

Mr. Ruffley

If the hon. Gentleman stops muttering and wants to stand up to engage in the debate I shall happily give way, but I see from his rather strange expression that that is probably beyond him.

The Government pray in aid various arguments to the effect that they are well intentioned, that none of those conflicts of interest will conceivably come to pass and that one should not be concerned about breaches of law, conflicts of interest or double dealing. But it is worth reminding ourselves of their professed intent when they introduced the proposals. We were told that PUK would recover the cost of financing any public-private partnership feasibility studies by direct reimbursement from the Treasury, that the Treasury would be reimbursed when the projects got ahead and that it would not always or even necessarily be the case that PUK would have to take an equity stake to recover its costs. We were also informed that it saw its role as merely supporting Departments, acting as a co-sponsor with them and smoothing the passage of PPP projects that it had worked up in co-operation with public sector clients.

I am afraid that that is not good enough because the Government clearly want PUK to be a significant pump primer and, as has already been observed, the figure of £0.4 billion should make us all pause and scrutinise the thinking behind the creation of PUK. We are in the realm of empire building and the Bill does not spell out exactly what is going on. I refer to comments by Sir Stephen Robson and Mr. Adrian Montague, the chief executive of the Treasury taskforce. Let me quote Mr. Montague on why there will not be any conflicts of interest that should bother anyone. He said: in designing the capital structure we won't allow PUK to be taken hostage by anyone on the private sector side of the fence in order to gain unfair preference. As for the worry that PUK will do down the public sector to achieve a better return for itself, he said: the one thing that is not understood is that PUK will have a single client—the public sector. The suggestion is that If PUK does a single deal, which the public sector regards as gouging, or exploiting a conflict of interest, it is dead. No one would ever deal with it again and that it will have to be terribly careful as Its goodwill is single source and precarious. We are being asked to rely on the suggestion that we do not need to write any of that down and do not need to worry about conflicts of interest because they will not happen as PUK will be so sensitive to commercial and City opinion that it would not dream of gouging or doing a preferential deal when an equity stakeholder.

However, in the same breath Mr. Montague said: it is not enough to rely on the underlying understanding. We will have to have rules in place to prevent the evil that he identified and that we have been identifying. I have looked in vain in the Bill and in Committee proceedings for the rules to prevent gouging or preferential deals arising from a conflict of interest. There are no answers to those questions.

Guarantees go to the heart of the Government's attitude to the PFI, which is why our amendment No. 12 would remove references to PUK making guarantees. We believe that giving guarantees in any particular deal and using taxpayers' money so to do would undermine the demand that private sector contractors strive to achieve the very best efficiencies, savings and cost-effectiveness under a PFI or PPP deal. The problem is that if a bail-out occurred during a deal as a result of a guarantee being given, that would look like nothing but shadowy, off-balance-sheet public spending. That is all that those guarantees would amount to and, for that reason, our amendment is very important.

The PFI and private sector contractors enjoying the benefit of guarantees that could run to many millions of pounds—if the Government amendments and new clauses are anything to go by—should worry us all because that is not in the spirit of the PFI and represents a poor deal for the British taxpayer.

Mr. David Rendel (Newbury)

This will not be my main contribution—amendments and new clauses in my name and those of other Opposition Members appear in every subsequent group—but as my name is attached to amendment No. 16, I am delighted to speak to it briefly. I strongly support the right hon. Member for Haltemprice and Howden (Mr. Davis), the Chairman of the Public Accounts Committee, who said that—for some reason that is not fully explained and which I want to explore—the Government appear to be unwilling to put in statute their stated intention to give the National Audit Office and the Comptroller and Auditor General the right to study the accounts of Partnerships UK to make sure that its finances are properly ordered and that it is using the money granted to it by Parliament for proper purposes.

The Government were prepared to give that commitment, but appear unwilling to include it in the Bill. That seems odd, particularly in the light of a perhaps slightly unfortunate party political remark made by the hon. Member for Edinburgh, South (Mr. Griffiths). I am sorry that he is no longer present as he seemed to suggest that the blame for the NAO's lack of access lay with the Conservative party, and the previous Conservative Government in particular. He rightly praised his Government for the number of new bodies that they have established over which the Comptroller and Auditor General has full audit rights. I echo that praise and, although the figure may not be quite 100 per cent., most have him in charge of their audit. We all welcome that.

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If the Government reject the amendment, we will lack a safeguard against any changes being made in future. Of course, we accept that the Government intend the amendment's effect to come into play, but if the amendment is not made, a future Government may make a different decision. Indeed, this Government may make a different decision in future, although presumably they do not, at present, intend to do so.

The hon. Member for Edinburgh, South made it clear that he was worried about what might happen if, God forbid, we ever had a Conservative Government in charge of the country again. If that is a worry for him, I hope that he will be supporting the amendment wholeheartedly, in line with his support for the Public Accounts Committee's report, which suggests that the amendment should be made so that the Government's commitment would be in statute.

The Government said that the commitment should not be in statute because that was not the Bill's original purpose. They have used that argument in a number of instances during discussions on the Bill. It is an unfortunate argument for two reasons.

The first, and general, reason is that it seems rather odd that if a measure is right and proper and will benefit the public and Parliament, it should not be included in the Bill simply because it was not part of the Bill's original purpose. That indicates an almost childish pique on the part of the Government. It is almost as if they are saying, "We did not think of it first, and we are not prepared to allow you to get the credit for having thought of it, so we will not include it in the Bill." That is a silly way to behave, and I hope that the Government will recognise that and stop behaving in that way.

The second reason is particular to PUK. Part of the Bill's original purpose was to set up PUK. Part of setting up such a body is laying down how its accounts will be properly verified and audited and by whom. It is, therefore, part of the Bill's original purpose that statements on how that auditing should be carried out should be in statute. In this case the Government have even less reason for using their excuse about the Bill's original purpose than they do with other aspects of the Bill.

I hope that the Government will see the sense of amendment No. 16 before we come to vote on it at heaven knows what hour tonight or tomorrow morning. It would make a valuable change to the Bill; it is in line with the Government's thinking, and the Government could easily accept it without losing face.

Mr. Fallon

I do not entirely agree with my hon. Friend the Member for West Worcestershire (Sir M. Spicer) that the new clause gives the impression of control—that is not the way that I read it. However, I agree with him that the Government have chosen precisely the wrong cap.

It is after all ironic that the Treasury, which is telling every other Department of State that what matters is the quality of spending, not the quantity, and is negotiating public service agreements all over Whitehall, is simply setting a quantitative cap on the expenditure of its own body, rather than a qualitative cap. It is saying that it does not matter what the body gets up to, provided that it does not spend more than £400 million.

I would far rather that new clause 7 fleshed out the meaning of the terms and conditions in clause 16. At the moment, PUK and the Treasury can simply make things up as they go along. They can draft whatever terms and conditions they like under which assistance can be provided. Rather than setting a quantitative cap of £400 million, the Minister should have come to the House with a new clause that imposed qualitative control over the type of assistance provided, whether grants or equity, and gave us a handle on that process in statute, so that it was not left to the Treasury or to PUK to define the terms and conditions themselves. That is a central weakness of the new clause.

A second weakness of the new clause and of clause 16 is the coyness about what the body is. I notice that even my hon. Friends refer to it as a "body". Let us be clear that it is a bank. The Government deny that. In a written answer to me last July, the then Chief Secretary said: There are no plans for a state investment bank.—[Official Report, 16 July 1999: Vol. 335, c. 367W.] Now we are to have a body that is enabled by the state to make investments on behalf of the state. If it sounds like a bank and looks like a bank, it probably is a bank, and we should refer to it as a bank, because it has banking functions. They are set out clearly in clause 16 and new clause 7. They are functions of lending and of taking an equity stake, whether in assets or securities.

Mr. Letwin

My hon. Friend raises an interesting question. Does he imagine that the body would or should be under the control of the Financial Services Authority? Does he believe that the Bank of England might want to take an interest in it?

Mr. Fallon

I shall deal later with the way in which the valuation is carried out, but my hon. Friend touches on an important point. A banking function will be carried out by an agency of the Treasury, so perhaps that function should be subject to supervision by the banking authorities.

The first step in the whole process is for us to stop being coy and to call the body a bank. It is a state investment bank. I know why the Minister does not want to call it a bank: it conjures up rather dismal memories of the 1970s, which you, Mr. Deputy Speaker, will recall. The previous Labour Government made a rather unhappy attempt to pick winners through the National Enterprise Board, but none turned out to be a winner—"picking losers" might have been a better description of its activity. It would have been helpful if the Minister had clarified the purpose of this body.

I turn now to the lending function. The body will be able to commit money in the form of a loan, so it is essential that it is subject to terms and conditions that it does not itself define. There must be independent assessment. We shall come to the accounting function later, and that is the afterthought because it consists of examining whether the money has been properly spent for the purpose for which it was designated. However, we cannot get a handle on the accounting function unless we can measure and audit what the loan was intended for in the first place.

As the Bill is drafted, nobody is clear about who can decide the terms and conditions under which financial assistance may be provided. Clause 16(4) simply says: Financial assistance … may be provided on terms and conditions… That is completely meaningless; it does not even make it clear whether PUK or the Treasury will set the terms and conditions, or whether the terms and conditions will be made public.

There is a good example of that practice in public-private partnerships in the new commercial freedom being given to the Post Office. Even before legislation was brought before the House, the Post Office was enabled, under secret terms and conditions, to go wandering around Europe, playing at being an international business and buying outfits such as German Parcel. When we asked what were the terms and conditions under which the Treasury had allowed the Post Office to purchase other businesses, we were told that they could not be made available because the memorandum of understanding could not be published. Now the Government have had to bring legislation before the House and the matter may well become a little clearer.

There is no point in the Minister saying that the Government cannot clarify the terms and conditions or tell hon. Members exactly how the money will be lent, but they can tell us that, however messy it all is, at least the amount involved will not be more than £400 million. That does not help us at all, and that is a weakness in the new clause.

The third aspect of the new clause to which I want to draw the attention of the House is PUK's power to take an equity stake. I am surprised that, even at this late stage, the Minister has not had second thoughts about that. Everyone else thinks that it is a thoroughly bad idea. The Minister will have seen—it has been published—the evidence taken on the matter by the Select Committee. The Major Contractors Group, the Business Services Association and the CBI all think that it is a bad idea, and even the Trades Union Congress was opposed to the Government taking an equity stake through Partnerships UK.

The reason is simple. Even the TUC understands that once Partnerships UK can take an equity stake in some projects rather than in others, the projects that it chooses will be labelled and endorsed. There will be an A list and a B list. There is obviously the danger that Partnerships UK may cherry-pick the best projects. There is equally the danger that having invested political capital in particular projects, it will start interfering with the contract terms to make sure that it achieves the right outcome. The project must succeed if Partnerships UK has not only been working on it but invested in it.

There is a huge danger that there will be two different types of project—those in which there is a significant equity stake, and all the others. There is nothing in new clause 7 to eliminate that danger or to clear up the confusion. I was pleased to hear my hon. Friend the Member for Arundel and South Downs (Mr. Flight) draw attention to the difficulties that Partnerships UK will have with other bodies, particularly with the Office of Government Commerce, which will try to police this aspect.

I am not sure what powers of supervision the Office of Government Commerce will have over Partnerships UK. Perhaps my hon. Friend, who has been labouring on the Bill in Standing Committee, is a little clearer. I am not at all sure what will happen when Partnerships UK has taken an equity stake in a project with a high political profile and the project starts to go wrong. If PUK starts tweaking the original terms of the contract, will the Office of Government Commerce be able to come in at that stage in a supervisory role and prevent PUK from doing that? Can my hon. Friend enlighten me?

Mr. Flight

I am as unclear as my hon. Friend, but there is a further matter on which he may wish to comment. How can Partnerships UK negotiate in the same way with the Treasury and Government Departments in circumstances in which it is an equity investor, and in circumstances in which it has no involvement at all? How can it continue the existing role of the Treasury taskforce if it is charged as an investor?

Mr. Fallon

That is precisely the weakness of giving Partnerships UK a banking function. That is tantamount to asking PUK to construct within it a Chinese wall that cannot be constructed.

Everyone will know which projects Partnerships UK will invest in or is considering investing in. If we are to go down that route, we will have to hear a great deal more about the Office of Government Commerce and give it more supervisory power, to make sure that PUK does not abuse its position, otherwise PUK will be able to muscle all over Whitehall and all over the contracts, putting others at significant risk. In an earlier intervention—I apologise, Mr. Deputy Speaker, for having to slip out of the debate for another meeting—I referred to the weakness of subsection (3). What is the point of setting the limit at £400 million if the Government can increase it any time they want? I do not understand that.

As I said earlier, every time a nationalised industry in the bad old days wanted to extend its borrowing limit, which happened often enough, with British Shipbuilders, British Coal and all the other endless drains on the taxpayer, at least it had to come back to the House. It was, perhaps, allowed to increase its borrowing limit once, by another £100 million or whatever, but thereafter, in each case it had to get permission from the House through primary legislation—through another borrowing powers Bill.

6.15 pm

Mr. Ruffley

Is my hon. Friend as troubled as I am about how the figure £400 million was arrived at? How were limits determined in the 1960s and 1970s for nationalised industries? What was the methodology?

Mr. Fallon

I cannot assist my hon. Friend. I was not in government at the time. I do not know how that was done, but at least the nationalised industries recognised some restraint. They gave themselves power to borrow up to a particular sum, which could be increased once, by order, and that was it. They then had to come back, which they did, with fresh legislation—another British Shipbuilders borrowing limits increase Bill, for example.

As the new clause is drafted, the Minister does not have to come back to the House, except through statutory instrument, and there is no limit to the number of statutory instruments that she can promote. She can come back and help herself to another £100 million, week in, week out. Indeed, she can double or treble the £400 million.

That is a meaningless limit, because the new clause that introduces it gives the Minister the power to increase it, which she can do by statutory instrument. We all know the deficiencies of that procedure. I hope that when the Minister sums up, she will give us some reassurance that the £400 million limit is for the first five years or whatever, and that she has no immediate plans to come back when Partnerships UK takes a fancy to a particular investment proposal, or, as we get nearer to an election, is cajoled into investing in a project that has a high political profile but which the market otherwise would not touch.

We are justified in asking the Minister to do that. The reason is simple. The £400 million is being provided, essentially, for Partnerships UK to invest in projects in which the market is not prepared to invest fully; otherwise it would not be necessary. The Minister should at least be able to clarify where the figure of £400 million came from, the time scale over which it will last—I assume that it is not an annual total—and the prospects of her coming back to extend it.

Subsection (2)(d) of the new clause deals with the arrangements that the Treasury proposes to make for "evaluating outstanding expenditure". I have not seen that phrase before. Evaluating outstanding expenditure should be done by some body other than the Treasury. It is the Treasury's money, which it is giving to Partnerships UK, and we will want to judge not just the record of PUK in spending its way through the £400 million, but the Treasury's wisdom in giving it the money in the first place. The Treasury should not be judge and jury, deciding how well the money was spent.

I would support any of the independent arrangements proposed in other amendments. Indeed, I would have hoped that the evaluation could have been done independently, and that the Treasury would have seen no problem in inviting another body—the NAO or the CAG, for example—to make the evaluation.

Amendment No. 14 is a helpful amendment. It distinguishes much more carefully between the upstream and the downstream activities. There was an exchange on that involving my hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley). When my hon. Friend ran through a little menu of upstream activities, he did not touch on the provision of interim finance. He described his approach as reasonable, but I wonder whether he and my hon. Friend the Member for Arundel and South Downs are not being a little too reasonable in the drafting of the amendment.

I am not at all clear what "interim finance" for a feasibility study is. Either it is finance, or it is not. How can it be "interim"? Is it a loan? Is it a grant? If it is a loan or a grant, how can it be justified as an upstream activity? Perhaps my hon. Friend can help.

Mr. Flight

The activity is upstream because it ceases when the PFI deal is signed. Finance is provided for feasibility studies of, for example, potential local government PH projects. As I said in my speech, when those projects are finally negotiated and put to bed, the money will be repaid from the total finance for the project. The Treasury could repay it. The inclusion of that in upstream activities is intended to support the objective for Partnerships UK—

Mr. Deputy Speaker (Sir Alan Haselhurst)

Order. The hon. Gentleman cannot make a winding-up speech in an intervention.

Mr. Fallon

I apologise, Mr. Deputy Speaker, if I tempted my hon. Friend too much. However, I want to press the point. What happens if the feasibility study recommends that the project should not go ahead? What will happen to the finance? Will it be repaid? If so, who will repay it? Does it constitute a grant that will simply be written off? I am unhappy about allowing Partnerships UK to go even further than the existing Treasury taskforce and start spraying public money around town halls on all sorts of feasibility studies for projects such as supertrams that will not be realised, and for which we will not get our money back. Perhaps my hon. Friend the Member for Bury St. Edmunds can assist?

Mr. Ruffley

I seek not to assist my hon. Friend but to ask a question. If the Treasury taskforce were involved in upstream activity, who would bear the loss if a feasibility study was undertaken but the project did not go ahead?

Mr. Fallon

The Treasury would bear the loss. I hesitate to criticise my hon. Friend because he is a distinguished lawyer, but perhaps the phrase "interim finance" needs more work. However, amendment No. 14 is helpful.

I hope that my hon. Friends on the Front Bench will be robust about new clause 7. I oppose it. My hon. Friends have already criticised it so strongly that I conclude that we should not accept it and I hope that, such is the power of their arguments, the Economic Secretary will reconsider it. At least she said that she was trying to allay some concerns and did the House and the Committee the courtesy of acknowledging that anxieties exist. They have been expressed to the Select Committee by all sorts of reputable bodies and by those who we want to be engaged in the specific work that we are considering.

If the Economic Secretary acknowledges the problem, I hope she will also recognise the solution. We need much firmer controls on the expenditure that we are discussing, and they must be qualitative as well as quantitative. Simply sticking a figure into the Bill and claiming that, however messy matters become, at least the amounts will not exceed £400 million does not satisfy the genuine anxieties of Conservative Members and industry.

Mr. Letwin

Before I begin, I shall reiterate the declaration of interest that I have made repeatedly on Second Reading and in Committee in relation to the Bill and the amendments: slightly ironically, when I have spoken, it has been against my interests.

The most important feature of the debate on new clause 7 and the accompanying amendments has been that we have revealed a symptom of the problem with the Bill. Hon. Members have tackled the vexed question of the scope of the application of the £400 million limit for which new clause 7 provides. I do not generally prefer to spot a conspiracy when error will serve as an explanation. On the principle of Occam's razor, one should always choose the simpler explanation. It could be mere oversight, as the hon. Member for Kingston and Surbiton (Mr. Davey) suggested, that the £400 million limit does not cover clause 16(1)(a). However, if that is the case, I am surprised that the Economic Secretary has not brought it to our attention. I have two reasons for supposing that it is not the case.

First, the articulation of new clause 7 and amendment No. 28, and the original distinctions in clause 16(1), lead one to conclude that there is meant to be a difference between incurring expenditure in the initial phase and thereafter. That suggests that the £400 million limit has been specifically targeted at expenditure after the initial phase, rather than through mischance. It is notable that new clause 7(1), to which amendment No. 28 refers, makes it clear that the original phrase in clause 16(1)(b)—"may provide financial assistance"—needs to be expanded. In amendment No. 28, proposed new paragraphs (b) and (c) of subsection (1) read: may incur expenditure for the purposes of investing in the body … and may provide loans and guarantees and make other kinds of financial provision. New clause 7 invites us to perceive a fundamental difference between clause 16(1)(a), which will not be capped by the £400 million limit, and provides that the Treasury, may incur expenditure in respect of the establishment of a body, and proposed new paragraphs (b) and (c) of subsection (1), which provide that the Treasury, may incur expenditure for the purposes of investing in the body, or may provide loans and guarantees. There may be some deep inwardness that we laymen miss. However, if that is the case, I am again surprised that the Economic Secretary has not seen fit to intervene and correct us amateurs on the basis of advice from her gurus.

On a layman's statutory construction, I incline to the view that the scope of clause 16(1)(a) is not only uncapped but unlimited. To take an absurd example, it could permit the expenditure of billions of pounds on the establishment of a body. I am sure that the Economic Secretary will tell us that it is not the intention of the prudent Chancellor of the Exchequer to permit billions of pounds of expenditure to be incurred. However, if I am right, and the scope of clause 16(1)(a) would allow for such investment, the massive concession that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) so painstakingly eked out of the Government—that new clause 7 should impose a limit of £400 million—is vapid, nugatory, empty and meaningless: the £400 million limit is no limit.

I draw the House's attention to that not only because it is important—although several of my hon. Friends have proved its importance through eloquent speeches—but because it is symptomatic of a general problem, which is that matters are not as they appear. There appears to be a control, just as there seems to be proper accounting in other provisions, which we shall discuss later. We have a limit that is unlimited, a concession that is not a concession and a control that is uncontrolled.

6.30 pm

The problems with the £400 million limit, so called—the unlimited limit—do not end there. The situation gets considerably worse. Here, I am much indebted to prolonged discussion with my hon. Friends. The scope of the £400 million limit is constricted in another respect: it very specifically refers to the expenditure of moneys by the Treasury, not to the expenditure of moneys by the body itself—the body which my hon. Friend the Member for Arundel and South Downs referred to as a bank. My hon. Friend the Member for West Worcestershire (Sir M. Spicer) pointed out that the £400 million limit in no respect limited the totality of PFI expenditure. This we must agree, and knew.

I am speaking not of that failure of control, which might be expected in such a new clause, but of the fact that there is no limit on the activity of the body which it was the purpose of my hon. Friend the Member for Arundel and South Downs to have limited: there is a limit only on the expenditure by the Treasury on that body. According to my reading of the new clause, the body itself is capable of piling up unlimited liabilities that are not capped by the £400 million limit: indeed, there is no articulation in the new clause that would allow such liabilities to be capped.

After traversing some other ground, I shall come on to the question of the accounting of those liabilities, which is a vexed question indeed. Before we come to that, let us deal with the economics. I take it that it is part of the body's purpose that it should not be utterly controlled in its day-to-day operations by the Chancellor of the Exchequer, because were it to be so, as my hon. Friend has repeatedly pointed out, the purpose of transferring from a Treasury taskforce to a separate body would be nil. PUK may well seek to build up large liabilities in carrying out its business, and if it does, the following economic question arises: is the full faith and credit of Her Majesty's Government behind this body in what may be sizeable guarantees?

If those guarantees should, for example, grow to billions of pounds—or tens or hundreds of billions of pounds—over time, will Varley Marshall Assurance principles obtain? Will ECGD principles obtain? Which principles will obtain? Who can say how much Parliament will find Her Majesty's Government have turned out—on purpose or by error—behind liabilities that we thought, or might have thought, would be capped at £400 million but which in practice have not been capped at any amount, £400 million or otherwise?

Mr. Edward Davey

Does the hon. Gentleman think that the solution is to introduce in another place a cap on the liabilities, or does he think that Partnerships UK should have in its constitution a no-bail-out clause? I was probing the Minister for her views on that. Does the hon. Gentleman think that it may be the way forward?

Mr. Letwin

The hon. Gentleman and I are swapping inclinations. I was about to observe that I thought that his proposal of a no-bail-out clause to handle this potential problem was highly intelligent. I do not know, and I do not know whether the Government's lawyers in all their wisdom—and they have much—know, whether a no-bail-out clause would work. I do not know, because I do not think there has yet been a case that has been seen to work.

We all recall the vexed situation when local councils got into considerable financial difficulties and lenders found to their surprise that there was no bail-out, without that having been stated. But there have also been cases—British Leyland and Varley Marshall Assurance, to which I alluded, are cases in point—in which it was at least believed that full faith and credit might operate, notwithstanding the fact that the original agreements had been so constructed as to avoid its operating. This is a vexed area of law, about which great experts may disagree. It may be that a robust no-bail-out element could have been inserted in the new clause; I do not know.

What is clear is that either Ministers did not intend such a result, or that the draftsmen did not know how to achieve the desired result because it cannot effectively be achieved in law, or that Ministers did not consider the question. If Ministers did not consider it, of course the draftsmen would not have considered it. In fact, no one would have considered it. That, I suspect, is the empty box into which we are staring.

I think that what happened is that the force of rhetoric of my hon. Friend the Member for Arundel and South Downs in Committee, and the force of logic behind his rhetoric, were such that Ministers said, "We are in a frightful fix. The PAC, the Liberal Democrats and the Conservatives—and, for all we know, many of our own Members—are worried that we are doing something that may not be quite kosher. Officials—go away and construct the best limits you can that will have the following characteristics: they will not limit anything or even seek to impose a limit that would actually limit anything because they will not to any degree control the activities of the body but will merely control the Treasury. And just in case there is any kind of gap in the total discretion that we shall allow ourselves, just make sure as well that we can give PUK however many billions we want up front without any control whatever." If that is what happened, it is a symptom of an attitude to our proceedings in Committee and on Report that is very distressing.

Another possible interpretation, I admit, is simply that there was undue haste. It is possible—it may even be plausible—that the problem with the new clause was brought about by undue haste. The whole of the Bill has been afflicted by the insertion of an extraneous foreign body. In the first place, there is no reason for clauses 16 and 17 being in the Bill; they belong in quite another Bill—a serious Bill dealing with the serious matters concerned—and got into this Bill, where they now sit, by the mysterious processes of Cabinet committees and the like. The Government have been in undue haste to get the whole of the rest of the Bill, which deserved prolonged consideration, through because they are so desperate to get clauses 16 and 17 through. That, at least, is what we have been told.

If the result of that is that, through honest error, new clause 7 has been introduced in its present form—with a limit that is not a limit and does not address the problem—the situation is much less distressing. There is the possibility of the Government's bringing forward on slightly more mature reflection—for which I have no doubt their lordships will give them ample opportunity, because I hope that another place will reject the new clause as it stands—a proper new clause that provides the limit that we seek. Then we can ditch all the ghastly conspiracy theories and recognise that the problem was simply one of undue haste.

Why this haste? I know that this is a matter of Government policy, but there are many Government policies. It does not seem to me to be a matter of life or death whether these provisions are passed tomorrow or the day after. I cannot see that there is such a rush. This is not controversial—so in principle it will not be got rid of by a future Government. We all accept in principle that the PFI is an excellent thing.

In constructing the new clause, therefore, Ministers should have had in mind the necessity for something with consensus behind it—something that provided a robust solution in the long run for a policy that hon. Members on both sides of the House support. The new clause certainly does not do that in respect of control.

Mr. Edward Davey

Has the hon. Gentleman considered two other possible reasons why the Government have not adopted the no-bail-out solution to their problems? One may be that they are concerned that it would set a precedent that could be applied to other public corporations or corporations in the public sector in which they have an interest. The other is that the Treasury is so used to exercising absolute power that it does not believe that, if a no-bail-out clause were written into the constitution of such a body, Parliament would not, because it is sovereign, simply override it.

If the hon. Gentleman agrees with that second possible answer to the question of why the Treasury did not go down that route, does he not think that that demonstrates the dinosaur attitude in the Treasury?

Mr. Letwin

I do not think that the first explanation can be right. If, in this instance, the Treasury were concerned about the maintaining of control or power—as the hon. Gentleman knows, we will allege that later, but in respect of other matters—it would surely have introduced provision for a genuine control, phrased, perhaps, as "a limit on the total liabilities" that could be incurred by the body. The fact that it neither did that nor introduced a no-bail-out clause suggests that the Treasury was not in control mode on this occasion.

The hon. Gentleman suggested a second possibility: that the Treasury, or the draftsmen—or, indeed, Ministers—did not wish to create a precedent. I am well aware that Whitehall is particularly keen not to create precedents. Government are not like other bodies; they are often afflicted by precedent, and often take steps that they do not consider right in particular cases because they are influenced by the argument that they have done the same in other cases. They may have acted without due heed.

I accept that that is frequently a powerful argument, and it is possible that the desire not to create a precedent is one of the causes—or even the cause—of the opposition to a no-bail-out clause; but, if that were the explanation, it would be irrational. I see no reason for the Treasury to object to such a clause becoming a widespread precedent: it is the bail-out clauses that create the precedent to which, on a rational basis, the Treasury should object. The idea of a range of bodies that are somehow associated with the state, but against which no claim ought to be made entailing a claim on the state and in respect of which no faith and credit are given by the state, is surely attractive to the Treasury. It might not be attractive to a Department wanting to achieve a particular result in particular circumstances, but I should have thought that it would be highly attractive to the Treasury.

I cannot think that that is the explanation; certainly, I hardly ever accuse Her Majesty's Treasury of being irrational. I think that the explanation is either undue haste, or a mild conspiracy. I hope that the Minister will tell us that it is a case of undue haste: that would give us an opportunity to reverse the position, and improve on new clause 7.

My right hon. Friend the Member for Haltemprice and Howden (Mr. Davis) and other PAC members have tabled an amendment dealing with the important question of the scope of action of the Comptroller and Auditor General—a theme that we shall traverse in awesome detail when we discuss the general issue of the CAG's scope of action in regard to non-departmental public bodies, which we debated at length in Committee.

The amendment presents us with an interesting example. My right hon. Friend rightly corrected me when I made the improper assertion that the Government did not want the PAC, the National Audit Office and the Comptroller and Auditor General to be involved. He corrected me because he had information that I should have possessed, but did not. It appears that after the Minister had said in Committee that she would not have the Comptroller and Auditor General anywhere near this stuff—I parody slightly—her esteemed colleague the Chief Secretary to the Treasury went to the PAC and said that, as a matter of fact, the Comptroller and Auditor General would not just be somewhere near but would be allowed to audit the body.

That proposition, which we welcome, led to this question: why is the PAC amendment—amendment No. 8, if I recall correctly—necessary?

Mr. David Davis

I fear that, for the second time today, a slight misapprehension has arisen. The amendment requires access, not audit rights: that is a milder requirement. Audit rights would not be possible, because the organisation would be constituted as a company, and it is not currently possible for the Comptroller and Auditor General to audit companies. The amendment asks for access, so that Parliament can know that its money has been spent properly.

6.45 pm

Mr. Letwin

My right hon. Friend is right to correct me. I slipped into talking of audit when I should have talked of access, which is one of the two limbs of what the PAC seeks to impose on a wider scale. That is all that is sought in this instance—but this question remains: why is it necessary to table an amendment to put in statute what we now discover that the Chief Secretary wants to do in any event? I invited both my right hon. Friend and the hon. Member for Kingston and Surbiton to speculate about that, but I am not yet satisfied that we have got to the bottom of the matter.

The Economic Secretary had ample opportunity to intervene during that discussion, and, if she catches your eye, Mr. Deputy Speaker, she will have another opportunity to explain. I am, of course, prepared to be corrected if my speculations prove to be wrong; but I am bound to say that it is a rum situation when a Government have an avowed intent to do something that they have an open statutory opportunity to do without any delay or difficulty, and do not do it.

Normally, when Ministers do not want to enact proposals, they say that they have no time in which to legislate, but if the Economic Secretary said that this evening, it would be a slightly weak excuse, because here we are, legislating. There cannot be a drafting difficulty, as my right hon. Friend the Member for Haltemprice and Howden has behind him just about the largest group of drafting assistants available to any living human being, in the shape of the National Audit Office. In any case, the draft is blissfully pellucid.

The hon. Member for Kingston and Surbiton speculated that it might again be a matter of precedent—that the Treasury wanted to avoid setting a precedent by giving the PAC access to a body such as this. But why should it want to avoid setting such a precedent? If the Chief Secretary has decided that the Comptroller and Auditor General should have access to one body, it presumably follows that the same should apply to other such bodies. I see no logic that should lead to one conclusion without leading to the other.

Mr. Edward Davey

I tend to agree that the logic suggests that it should be possible for all such bodies to be scrutinised by the NAO. However, the Secretary of State for Culture, Media and Sport recently made it clear that the Government were not willing to allow the NAO properly to scrutinise the BBC, which is a not dissimilar body. Surely the Government are not following the logic of the Chief Secretary in any respect in regard to corporations such as this.

Mr. Letwin

The hon. Gentleman tempts me to agree with him—and, indeed, I do, in the case of the BBC. I wish that we could debate that subject, but you, Mr. Deputy Speaker, ruled that the amendment concerned should not be selected.

There may be deep concern about the possibility of extension to bodies such as the BBC. The fact is, however, that if the Chief Secretary thinks that he can avoid having that precedent argued against him when he has conceded the precedent in this instance, he is much mistaken. I have no doubt that my right hon. Friend the Member for Haltemprice and Howden and his pack of hounds from both sides of the House in the PAC will assail the Chief Secretary daily with points about the precedent that he has set, and rightly too.

The Chief Secretary has set the precedent anyway, and I cannot for the life of me see why he should make it worse for his own cause—his own bad cause, in this instance—by incorporating in legislation a provision that will have the effect that he says he wants in any event. The only people he could possibly limit are a future Government, and that will not involve him. He cannot feel that, having said something to the PAC—that awesome and solemn body—he can go back on it. Putting the provision in statute would involve no loss to him.

I apologise for coming up repeatedly with the same febrile explanations, but I am bound to say yet again that I consider this to be a case of undue haste. I think that the Government feel that the PAC is being a frightful nuisance. They are willing to tell the PAC that they are going to do things and then, no doubt, to do them. When the Chief Secretary—a thoroughly reasonable man—is in front of the PAC, he finds himself compelled to make thoroughly reasonable utterances. When the Government talk to the draftsmen, however, their basic instruction is "Press ahead. Delay not. Do not tarry. Do not instil in the Bill anything that could lead to further doubt or hesitation. We want the thing out quickly. If the PAC presents an amendment that is not drafted quite correctly we might find that it would have to be revised later. There might have to be Government amendments; the Lords might be given more of an opportunity to delay. No, keep it out: we will give the assurance, and the PAC will go home to bed."

The presence of my right hon. Friend the Member for Haltemprice and Howden proves that the PAC has not gone to bed, and is not going to. If this is a matter of undue haste, it is also a matter of hastening slowly. The Economic Secretary to the Treasury would do better to slow down, to incorporate my right hon. Friend's amendment and to proceed deliberately to consider applying the access rights to a wider range of non-departmental public bodies, as should, indeed, happen.

I turn to the next element of the debate on this important Bill. I admit that it is an odd topic in the context of the Bill. It is the broad range of questions about the forethought—or rather, I regret to say, the lack of forethought—that the Government have displayed on the purpose of the entity or, to use the phrase that my hon. Friend the Member for Sevenoaks (Mr. Fallon) used, the bank. May I say in passing that I genuinely do not know whether it is a bank. As there is no reference to the Securities and Futures Authority, I take it that it is not a bank. If it is not, what it is I do not know. I suspect that my hon. Friend was trying to say that none of us has the foggiest clue exactly what the item is. It would be helpful if someone told us.

Mr. Fallon

I hope that my hon. Friend is not suggesting that he does not know what this body is. He is supposed to know what it is. Does he agree that, if it has a lending and an investment function, it will be a bank?

Mr. Letwin

My hon. Friend raises an interesting question—the sort of question that is much debated in the City, when it has time to debate things, which is not often: whether an investment bank is a bank, particularly when it is not a licensed deposit taker. The body is not a licensed deposit taker, and it may or may not be an investment bank. I am not clear whether it has the capacity even to be funded as an investment bank is funded, or to gear itself up as an investment bank does. The honest truth is that no one the length and breadth of Whitehall has the foggiest clue what the answers to those questions are.

My hon. Friend is slightly unfair in saying that I should know. It is not possible to know the nature of something that has been created by people who do not know what it is.

Mr. Fallon

May I clarify? I was not implying that my hon. Friend should know something because he should know it. I was implying that, because of his background and great expertise, if anyone in the House could judge what it is, it would surely be him. That is why we look forward to him throwing further light on that particular vehicle.

Mr. Letwin

I am charmed and delighted that my hon. Friend, who is a much greater expert in these matters than I am, thinks that I have some expertise on what is a bank and what is not, but my problem is that I do not even know what this body does in the first place. Even if I knew that it was to be a bank, as my hon. Friend the Member for Arundel and South Downs has abundantly and eloquently pointed out, we do not know whether it will engage in investments. We do not know at which stage in the process it will intervene, or is meant to intervene.

There is a possible explanation, which is roughly the one that Ministers, in certain moods, have given of the entity: it is a sort of consultancy or facilitator. Another possible explanation arises from reading the Bill, which my hon. Friend the Member for Sevenoaks has done, with all his customary acuity: it looks very much like a bank. If something is made to look in statute very much like a bank and, in descriptions of it by those who founded it, very much like a consultancy, we are left with the question: what is it? Does anyone know what it is? My answer to those questions is that I do not know and no one else knows.

Mr. Fallon

Does my hon. Friend at least accept that, if the body—let us call it a body—takes an investment under subsection (4)(c), it will not be a consultancy?

Mr. Letwin

I feel that we are going to intrude on your good will in a moment, Mr. Deputy Speaker, but there are consultancies that take investments. Every time a consultancy takes a success fee, it takes a kind of investment. I suppose that the bank or consultancy—whichever it may be—might take success fees, call them investments and thereby satisfy the terms of the Bill, yet might be in no sense a bank.

If the body is designed to deal with what, in the hideous jargon, is called the "upstream" bit of the activity—which means consultancy, helping a project off the ground—it could agree, for example, to offer its services for equity, which is a sort of success fee and investment but not a banking activity. However, if it is intended, as my hon. Friend the Member for Arundel and South Downs suspects, to use the clause 16(1)(a) loophole to spend a large sum of money from the Government and, no doubt, from the private sector to finance projects in which, in a conflict of interest, the body has previously engaged as an adviser, it verily is a bank making proper investments, but is not the item that Ministers have described in their various statements. I repeat: I genuinely do not believe that we have the slightest idea what the body is. What is much more worrying is that I do not believe that Ministers have the slightest idea what it is.

I suspect that the account that Ministers would give, if they were being honest and at the same time as transparent as possible, is that it is an advantage not quite to have decided what the body is because they want to leave a little flexibility—they do not quite know how it will operate and there is an experiment going on. We could have some sympathy with that proposition, except that statutes are not the places in which to base experiments. Experiments are much better done on an administrative basis, under all the control that that allows. Statutes are much more applicable to things about which one has a pretty clear idea, so that the statute clearly describes the controls and the nature of that which it sets up.

I would have thought that that was a reasonable principle of legislation. I do not think that Ministers have followed it. I assume that they are being straightforward; I do not think that they are trying to pull a fast one on us. If they are being straightforward, they are setting up the basis for a widespread, over-hasty experiment without a clear idea of where they are going.

It is not really on those matters that I wanted to concentrate in relation to new clause 7. Above all, I wanted to draw out the impact of the new clause and of how it relates to clause 16 on our understanding of matters that are to come before us later. I think that the impact is profound and that I have at last understood how deep the problem with clauses 16 and 17 is in the context of the rest of the Bill—and hence how deep the problem with new clause 7 is.

It is not just that we do not know what the body is, which might be regarded as an ontological problem that Parliament does not need to concern itself with. There is a much more practical problem: we have not the foggiest clue how it will be accounted for.

I admit to being a simple man when it comes to such matters, but the Bill is entitled Government Resources and Accounts Bill. It is meant to be the Bill in which the Government set up a system of accounts in which things will be accounted for—

Mr. Flight

Properly.

Mr. Letwin

Properly, as my hon. Friend helpfully says from a sedentary position. That is the whole purpose of the rest of the Bill. Clauses 16 and 17 are in the Bill, I admit, by sleight of hand, but they are there. They should display, if any provision should, the principles of proper accounting that are meant to be enunciated in the rest of the Bill. It will be a sad day for accounting if this is meant to be a sparkling example of clarity about how something should be accounted for.

Despite repeated entreaties about these matters in Committee, as far as I can see, new clause 7 contains not a single mention of the accounting treatment of that mysterious body, whose nature we have already owned we cannot discern. As my hon. Friend the Member for Sevenoaks has pointed out repeatedly, if we look at new clause 7 and clause 16, to which it refers, it may be that the body will incur considerable liabilities in respect of guarantees, loans and non-equity investments. How will those be accounted for?

The body may have investment assets. We may be told by Ministers that that is not the intention, but I repeat: that is what is provided for in the Bill and, by implication, in new clause 7. The very first paragraph of the register of assets, which underlies the whole of the Bill, states: The National Asset Register covers all central Government departments together with their executive agencies (including trading funds). 7 pm

Is Partnerships UK a trading fund? We are back to the ontological question. I do not know whether it is a trading fund, but I suspect that it is not. I may be wrong about that, and am open to correction. Is it an Executive agency? I do not think that it is. I may be wrong, and am more than happy to be corrected on that point, too. However, I am convinced that it is not a central Government Department, so its assets will not be in the National Asset Register.

Therefore, the first point about the body's accounting is that the asset side of its balance sheet will not be there—it is Macavity; it is gone; it has disappeared. It has, in fact, not even appeared. It is pretty bad news, is it not, to discover not only that a body being established by the Government Resources and Accounts Bill will be exempt from the access of the Comptroller and Auditor General, but that the body's whole purpose will be entirely mysterious and its assets will not be accounted for? That is genuinely self-parodic.

The situation is much worse on the liabilities side. In what, I have to admit, is one of the most remarkable and brilliant pieces of apparent clarification ever offered by a Minister to a Standing Committee member, the Economic Secretary has cast a profound veil of obscurity over the issue of liabilities. In Committee, my hon. Friend the Member for Arundel and South Downs raised the pertinent issue that I am raising now in relation to new clause 27. He asked how the liabilities, and particularly the guarantees, that the body might give, and that might be given to the body by the Government, would be accounted for.

On 10 February, the Economic Secretary replied at some length to my hon. Friend in a letter. Although I would be surprised if it were the intention that anyone should be able to understand what she said to him in that letter, I am certainly assured that no Opposition Member in the Chamber has the slightest understanding of it. She said: Firstly, you asked about the procedure for reporting guarantees and whether any guarantees given to PUK will appear in Government accounts or in a note to them. I can assure you that Parliamentary reporting arrangements in respect of contingent liabilities—which includes those arising from guarantees—will not change under the GRA Bill. Therefore, the first thing that we are told is not the answer, but that nothing will change. As we did not know what the situation was in the first place, that is not helpful. Nevertheless, the Economic Secretary went on to say: As I said in Committee, there is no intention to hide guarantees. The arrangements for reporting guarantees are set out in section 26.3.13 of— at this moment in reading the letter, one hopes to hear the "Resource Accounting Manual", which is the document that has been produced in line with the Bill, but no. The letter says that the arrangements are set out in section 26.3.13 of Government Accounting, which I take it is to be superseded, or at least outdated, by the very item that underlies the Bill that we are discussing.

The letter continues: In respect of PUK this would mean— or that item that was no longer relevant would mean— that a statement would be laid before both Houses of Parliament in the event that a guarantee were given. Such a statement would indicate that the liability would be charged to the Consolidated Fund. Any guarantee provided would appear, like other contingent liabilities, in the Supplementary Statements to the Consolidated Fund and National Loans Fund Accounts. We have before us two of the most distinguished members of the Government, but I venture to prophesy that they have never seen, let alone read or studied, the supplementary statements to the consolidated fund and national loans fund accounts. I suspect that there is not an hon. Member who has the slightest idea which guarantees are or are not contingent liabilities recorded in those supplementary statements.

I may be wrong about that. Perhaps, all of a sudden, the Financial Secretary and the Economic Secretary will leap up and tell me the exact figure for the contingent liabilities recorded in the supplementary statements to the consolidated fund and national loans fund accounts. I doubt it, however, not only because those are among the most profoundly mysterious documents that have ever been produced by Whitehall, but because they are intended to be so.

Mr. Edward Davey

Is not the hon. Gentleman simply criticising the whole Supply procedure? Such documents exist, and they are very important documents that Ministers and the House should examine. The fact that the House does not properly examine the Government's estimates is the real reason why those documents do not receive the attention that they should receive.

Mr. Letwin

The hon. Gentleman is right. At a more serious level, I am saying the same. He says the same in other amendments that we shall discuss later, and with which we profoundly agree. There is a massive issue here that goes way beyond the scope of new clause 7, and we shall discuss it later in our proceedings. Perhaps the most interesting development in Committee was that we touched on the issue, when some of us began to understand the profound lack of parliamentary scrutiny that occurs because of the intense opacity of the arrangements that have been constructed for the control of genuine public liabilities.

I am making the much narrower point that the Economic Secretary's letter was a masterpiece of opacity, the purpose of which was to tell us about an outdated system, which itself was obscure, for making a contingent liability disappear. The letter said nothing about how contingent liabilities will be accounted for in the system that the Bill—this is the supreme irony—establishes. One might have thought that that would be relevant to the question of how far, in the Bill, the liabilities from the new body to the Government and from other entities to the new body will be accounted for. That, of course, takes us straight to the "Resource Accounting Manual".

The extraordinary thing is that when we go to the manual, we discover nothing more, or at any rate nothing more that is in any way clear. The point is very pertinent to the concerns that my hon. Friend the Member for Sevenoaks expressed about the nature of the beast.

In paragraph 4.7.6 of the "Resource Accounting Manual", we are told: separate disclosure of information about a particular contingency need not be made if that information has a protective marking. There are, therefore, certain types of information that have a "protective marking", about which not even a statement on contingent liability needs to be made. As I cannot understand paragraph 12.1.23, I do not know what it is to have had a protective marking or what qualifies as having a protective marking. I understand from paragraph 12.1.23 that the description of protective markings is given in the "Manual of Protective Security: Framework and Guide", issued by the Cabinet Office. I spent a while with that document, which, for all I know, my right hon. Friend the Member for Haltemprice and Howden is the author of or a guru on. However. I have to admit that my paltry intellect was quite incapable of deciphering the rules for protective marking.

Mr. Davey

In Committee, did not the right hon. Member for Haltemprice and Howden describe protective markings as sophisticated and not for National Audit Office eyes?

Mr. Letwin

The hon. Gentleman may have a valid point. However, let me pass on from all of that.

Let us assume for a moment that the protective marking is not an issue, and simply ask ourselves whether the contingent liabilities that we are discussing will have to be disclosed. The answer is that we do not know, because we do not know whether my hon. Friend the Member for Sevenoaks was right about the nature of the beast.

If, broadly, Partnerships UK will give financial guarantees—which are almost certain to be called if the risks that they are covering materialise—and if the chances of those risks materialising are high, according to the "Resource Accounting Manual", it will be necessary to disclose those contingent liabilities, although they will remain simply a disclosed item and not on the Government's balance sheet. Conversely, if the body will not give those types of guarantees, but something quite different, it is unclear whether those will have to be listed as contingent liabilities.

The long and the short of it is that on neither the asset side nor the liability side of the balance sheet do we have the slightest idea—nor, if we are to judge by what Ministers have said in new clause 7 and in the Bill, do Ministers have the slightest idea—how the body that Ministers are creating will be accounted for. That is in the realms of self-parody.

Miss Melanie Johnson

It is important to say first that Partnerships UK will fill a unique role. The Government make no apologies for that. There will be nothing to equal it in the private sector to address the weaknesses in the public sector, particularly in skills and commercial experience. I take nothing away from the good quality of management that we have in various areas of the public sector, which the hon. Member for Kingston and Surbiton (Mr. Davey) celebrated. PUK's role will be that of co-venturer, strengthening the public sector client in private finance initiative and public-private partnership transactions. PUK will help the public sector to raise its game, as the Treasury taskforce has done to date. It will enable the public sector to become a more effective client. That should mean more opportunities for everyone, more deals, lower costs and greater clarity and speed in PFI and other PPP deals. PUK will not only improve the deal flow in existing PFI sectors, but open up new sectors and develop new models of public-private co-operation.

The Opposition amendments would do nothing to further those aims. There could be a reason for that. They may not be intended to help us to pursue those aims, but perhaps that is uncharitable. I am a little confused by the debate, because some hon. Members seem to be experiencing extremely bizarre problems. The hon. Member for Arundel and South Downs (Mr. Flight) believes that the relevant clauses are tucked away. I am not sure how a clause can be tucked away in a Bill. I await elucidation.

If we accepted the amendments, PUK would be unnecessarily restricted. Its role should be to adapt to fit the needs of particular public sector bodies and projects. Under the amendments, PUK could help to negotiate arrangements for a PPP project with Whitehall Departments, but not, for example, with NHS trusts or non-departmental public bodies. I am not sure why Opposition Members have made that distinction and why they appear to want to leave out NHS trusts and some NDPBs. In addition, PUK would not be able to participate in PPP deals as a co-developer with public bodies, as we envisage that it should. It must have the freedom to develop in a changing PPP market if it is to build on our reforms to the PFI process and the current success of the taskforce.

Opposition Members have expressed concerns that the body will have an unfair advantage because of limitless funding from the Government purse. That is not the case. I shall deal with some of the specific points that have been raised. The hon. Member for Arundel and South Downs raised what he saw as a conflict between making money and helping the public sector. PUK will act as a co-venturer and co-developer of projects. Its role will be structured to maximise the overlap of interests with the public sector. There will also be appropriate checks and balances in the corresponding structure to ensure that PUK works in the public interest.

There is no question of PUK competing unfairly. It is not a bank or a general adviser. Opposition Members spent a long time speculating on whether it was a bank and entertained themselves greatly on the subject. That entertainment was not universally experienced. Apparently, they had not listened to a word that was said in Standing Committee. In a brief contribution on 20 January, I said: Partnerships UK will not operate as a bank. It must retain the flexibility to generate new business.—[Official Report, Standing Committee A, 20 January 2000: c. 266.] I could not have given a clearer statement of the fact that we do not view it as a bank. It will not invest or pick winners or losers. Its core business will be to make the public sector a better procurer and to make the PH work better.

7.15 pm

Mr. Letwin

I entirely accept that the hon. Lady said the words that she has quoted from column 266, which I have before me. I mentioned that she had said that. Does she accept that new clause 7 wholly fails to put those principles into the Bill?

Miss Johnson

No, I do not accept that. PUK has a distinct role that will address the skill deficit in the public sector. I thought that Conservative Members appreciated the work of the Treasury taskforce and recognised that someone needed to fulfil that role. The hon. Member for Arundel and South Downs asked why we did not continue with the Treasury taskforce. Private finance needs private sector skills. Private sector people cannot be kept in the public sector for ever. It is likely that in the longer term they would go native or leave. The only way to sustain private sector deal-doing expertise over the longer term for the benefit of the public sector is in a PPP classified to the private sector, which can offer appropriate rewards and disciplines. If we were to carry on with the Treasury taskforce, we would need to expand it. That is another point that Opposition Members have not considered.

Departments will choose whether to use PUK. We are consulting public bodies during the business planning on PUK. Reaction from them and from the City has been favourable. A question was raised about the role of the Office of Government Commerce. The OGC, PUK and the Treasury will work together. We made that clear when we published the Gershon and Bates reviews.

PUK will not be out cherry-picking. Because it is a private sector organisation with a clear public sector mission, its focus will be on those parts of the public sector that currently find it hard to engage in PFI projects. It should result in additional business. Like its predecessor, the taskforce, PUK will have selection criteria for the deals that it chooses and will concentrate on difficult, complex and awkward projects where it can add most value. The public sector will use PUK on a voluntary basis when it believes that it can add most value.

The hon. Member for Sevenoaks (Mr. Fallon) asked whether PUK was a state investment bank. As I have said, it will not operate as a bank and it will not be state-owned. Its core business will be to make the public sector a better purchaser. It will be a private sector body and will not invest on behalf of the Government.

There has been considerable discussion about expenditure under clause 16(1)(a). That issue was initially raised by the right hon. Member for Haltemprice and Howden (Mr. Davis). That paragraph relates to the establishment of Partnerships UK. Opposition Members have suggested that large sums—I believe that there was a mention of dowries—could be provided to PUK. I assure hon. Members that that is certainly not the case. Such sums would relate to on-going activities and would be covered by clause 16(1)(b) and subject to the limit. That is a good reason for introducing a specific limit, which Opposition Members have accepted in principle.

Mr. Flight

I specifically asked what the intended establishment costs were.

Miss Johnson

I hesitate to put a figure on that, but we are talking about less than £10 million. I think that we will probably come in under that maximum, but I hesitate to specify a figure, because only when the body is established can we be clear about the cost. We are certainly not talking about sums anything like the overall figure of £400 million or to any figures that might be mentioned in relation to dowries.

Mr. Letwin

I am grateful to the hon. Lady who has been very good about giving way. Would she consider the possibility of including those costs within the £400 million so that the whole issue can be laid to rest?

Miss Johnson

I am happy to take that idea away and think about it, but I can give the hon. Gentleman no specific assurances.

Mr. David Davis

I support my hon. Friend's suggestion. I raised the matter in the first instance because the phrasing of the Bill is not very clear. I did not believe that the Government had another agenda; it seemed to me that the phrasing in the Bill ought to be clear. I would not object if those costs were included within the limit and the limit was increased by £50 million, or whatever figure was appropriate. That would be a sensible move.

Miss Johnson

I am grateful to the hon. Member for West Dorset (Mr. Letwin) and the right hon. Member for Haltemprice and Howden for those suggestions. I am particularly grateful to the right hon. Gentleman for clarifying his response. I shall give the matter further consideration, but I can give no specific assurances. It is important to emphasise, however, that our intention is no different from what the right hon. Gentleman is saying. He is concerned that the provision is not sufficiently clear. Parliamentary draftsmen and my advisers clearly believe that it is, but the point has been debated this evening.

In regard to the £400 million, I feel that I should not have listened to the hon. Member for Arundel and South Downs. Having virtually taken up the suggestion that he made in Standing Committee, I sat here this evening and listened to complaints from some Conservative Members—not the hon. Gentleman—that any figure had been included in the provision. Others complained that the figure had been set at £400 million. However, the hon. Member for Arundel and South Downs said in Committee that at one stage the Government said that the figure should be taken seriously. A maximum of £500 million should be more than sufficient to finance whatever substantial portfolio of start-up feasibility studies may be necessary in the public and local authority sectors. We agreed with him, but we thought that £500 million was a little too much and that we should look at a lower figure. We have come up with £400 million, which I believe is the right ballpark figure because it provides maximum benefit at minimum cost. It will still allow the new company some flexibility.

Mr. Letwin

I am grateful to the hon. Lady, but perhaps she should take another look at column 256. My hon. Friend the Member for Arundel and South Downs said: £500 million should be more than sufficient to finance whatever substantial portfolio of start-up feasibility studies may be necessary… My hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley) then said: It will be useful to draw attention to the potentially unlimited expenditure in which the new body could engage.—[Official Report, Standing Committee A, 20 January 2000; c. 256.] There were serious signals to the Minister that we needed an overall limit on the financing of the body and its expenditure.

Miss Johnson

I accept the hon. Gentleman's point, however there has been a certain lack of charitableness in the Opposition's response to our picking up the exact drift of the intentions of the hon. Member for Arundel and South Downs and his hon. Friends in Conunittee.

As I have said, we have no objections in principle to imposing that limit, and within the limit we shall ensure that our commitments are the minimum necessary to enable the successful launch and development of PUK. At the same time we shall make sure that they are on terms that represent a sensible investment for the public sector.

Mr. Fallon

I am grateful to the Minister who is being extremely kind in giving way. I know that she is trying to answer a number of points, but if she is leaving the £400 million limit, will she say for how long it is likely to apply? Will it be one year or five years? Will she explain why it is extendable only by order?

Miss Johnson

I shall come to that in just a moment. First, let me turn to Opposition amendment No. 16.

Mr. David Davis

I could have raised this matter on a point of order. The Minister describes amendment No. 16 as an Opposition amendment, but the amendment is in my name, that of the right hon. Member for Swansea, West (Mr. Williams) and that of the hon. Member for Newbury (Mr. Rendel). It reflects the Public Accounts Committee report on the matter.

Miss Johnson

I am grateful to the right hon. Gentleman for that clarification. Of course I am aware of which right hon. and hon. Gentlemen have put their names to the amendment. However, it is not a Government amendment. Perhaps I should refer to it as the Public Accounts Committee amendment. It seeks to open PUK's accounts to scrutiny by the Comptroller and Auditor General. As I said in Committee, PUK will be a risk-taking private sector body. It will have a majority of private sector investors who will expect a return on their investment. PUK will, of necessity, need to act commercially to raise finance and make a success of its business. That is a job for a Companies Act auditor appointed in the normal way for private companies.

There has been some question as to the accountability for PH and PPP projects which will, as now, remain with Whitehall Departments and other public sector bodies that commission them. The National Audit Office has already reported on a considerable number of private finance schemes. In addition, last July the Treasury issued guidance on the standardisation of private finance contracts which make it clear that PH contracts should include an appropriate clause which will ensure appropriate NAO access. So I do not believe that there should be a problem with the NAO securing the access that it needs to PFI projects, although the matter has been raised several times during the debate.

Any Government investment in Partnerships UK under the provisions of the Bill will come out of voted money, and so will be covered by appropriation, or soon by the resource accounts, which are also audited by the NAO. It is no different from other payments to the private sector by various Government Departments, so I do not believe that the Comptroller and Auditor General does not have the access that he requires to do his job effectively.

I now turn to some other points that were made in the debate. I start with some more specific comments on the interest of the taxpayer in relation to the accounting in whole of Government accounts to which the right hon. Member for Haltemprice and Howden referred in his opening remarks.

PUK will be accounted for in accordance with the guidance on the PFI schemes which has been reviewed by both the Accounting Standards Board and the Financial Reporting Advisory Board and has been incorporated in the "Resource Accounting Manual". In terms of accounting mechanisms it is fully covered and we have set out very clearly the way in which we intend it to be treated. It is difficult to believe that there should be any problem with that.

Mr. Letwin

Will the Minister give way?

Miss Johnson

I should make some progress as we have spent a considerable time on this motion.

Any financial provision to PUK will be out of voted money. As I said, the NAO can audit those sums. As my right hon. Friend the Chief Secretary has made clear, as a private company in a commercial environment, it would be entirely appropriate for PUK to have commercial audit arrangements. That means that the NAO should not have unfettered access to PUK's accounts. I hope that the right hon. Gentleman accepts that.

Mr. David Davis

Although I do not expect a response from the Minister, I want to put on record that her judgment of what is the appropriate access for the National Audit Office is clearly different from that of the Comptroller and Auditor General. Amendment No. 16 was drafted by the National Audit Office on the basis of the Comptroller and Auditor General's judgment of what he needs. His judgment is obviously different from that of the Government.

7.30 pm

Miss Johnson

The right hon. Gentleman said that he did not expect a response, so I shall take up that generous offer and not give one.

The hon. Member for Kingston and Surbiton commented on the objectives for managers and the objective of making the public sector more efficient. He should remember that the Office of Government Commerce is being set up to find £1 billion in savings through better procurement.

The hon. Member for West Worcestershire (Sir M. Spicer) is not in the Chamber, but he asked about the limit of expenditure. I believe that I have answered that point. That limit was never the purpose of new clause 7, so he must have been confused when he asked his question.

The hon. Member for Bury St. Edmunds (Mr. Ruffley) spoke about EU public procurement rules. Policy advice to Ministers is confidential, as the hon. Gentleman—who is a former special adviser to the Treasury—should know, but the Government, of course, will adhere to those rules.

The hon. Member for Arundel and South Downs asked about the affirmative resolution procedure in the House. I explained that any changes to the limit would be subject to that procedure. I do not understand what the problem is with that. If the Government were to consider any changes to the limits, there would have to be a debate in the House. At present, the limits are set at specific sums, rather than being inflation-proofed. I think that that also covers the point raised by the hon. Member for Buckingham (Mr. Bercow), who is also absent from the Chamber.

In conclusion, the process of procuring a PFI project under the European procurement arrangements will be just as it is now, but more tightly managed. There is no question that PUK's return, whether as a royalty or an equity, will affect the selection of the preferred bidder. Arrangements will be put in place so that that will be impossible. All bidders will make bids on the basis of the same information.

As to where the guarantees appear in the accounting, I can tell the House that Government accounting rules apply to the guarantees for PUK in exactly the same way as they do for any other body. As I said in my letter—which I am delighted has been much pored over—all the relevant detail will appear in supplementary statements. Nothing will be hidden—a possibility that has exercised Opposition Members.

I commend new clause 7, and the associated Government amendments, to the House.

Question put and agreed to.

Clause read a Second time, and added to the Bill.