London Underground (Hansard, 13 March 2002)

§ Lord Ezra
asked Her Majesty's Government:
In what circumstances the capital invested in the London Underground under the public private partnership scheme would count as public expenditure.

§ Lord McIntosh of Haringey
My Lords, the PPP saves £2 billion of public money over the first 15 years of the contracts, in comparison to funding the same projects through conventional public investment. The plans will mean £16 billion of investment over the next 15 years.
In accordance with generally accepted accounting practice, capital invested in London Underground under the PPP would count as public expenditure if London Underground Ltd's accountants and auditors judged that the assets should be on London Underground's balance sheet.

§ Lord Ezra
My Lords, will the noble Lord confirm that the Government have issued a letter of comfort 820 for the funds that will be borrowed by the infrastructure companies from the banks? In that event, would this count as part of the public sector borrowing requirement, or would it count as part of the balance sheet of Transport for London? In either event, would it not mean that the whole of the risk for investment in the Underground would be borne ultimately by the public sector, thus negating what we thought was one of the objectives of the PPP?

§ Lord McIntosh of Haringey
My Lords, those are two slightly different questions. On the point about the letter of comfort, yes, it is true that a letter of comfort has been issued, underwriting 95 per cent of the third party debt, which is not the same as shareholder funds. London Underground Ltd is a public corporation. Therefore, what is on its balance sheet affects the public sector net borrowing, which does not have any effect on the targets under our fiscal rules. On the noble Lord's final point, it really does not make any difference to the benefits of the PPP as we see them. That depends on the saving of £2 billion of public money. That applies whether the capital invested is off balance sheet or on balance sheet.

§ Lord Peyton of Yeovil
My Lords, I wonder whether it is too late for the noble Lord to seek to persuade the Secretary of State for Transport—who is somewhat prone to error—to resile from yet another serious mistake in introducing the PPP. Will the noble Lord point out to him that the recent report from Ernst & Young on this matter seems to me to be one of the most Delphic communications ever to emerge from a firm of consultants?

§ Lord McIntosh of Haringey
My Lords, I have listened carefully to the exchanges in this Chamber on the issue of the Ernst & Young report. I have listened to what the noble Lord, Lord Peyton, has said previously, and to what my noble and learned friend Lord Falconer has said in reply. It has nothing whatever to do with "on balance sheet" or "off balance sheet". Nevertheless, I thought that my noble and learned friend gave rather effective replies to the questions raised.

§ Lord Saatchi
My Lords, does not the Question reflect the growing concern that the dangerous practice that has been revealed recently in the private sector of hiding a build-up of debt off the balance sheet might now creep into the public accounts via the public/private partnerships? Is not full disclosure the answer? Will the Government publish an analysis of the full amount of public liability that is, or may be, involved in all the existing public/private partnerships?

§ Lord McIntosh of Haringey
My Lords, the noble Lord is in danger of drawing a false analogy between what is happening here and what happened, for example, with Enron, where, indeed, funds—or lack of funds—were kept off the balance sheet. The issue here is one for London Underground's auditors. They have to decide whether the amounts of money involved in 821 the public/private partnership make a change to London Underground's assets as a whole. By " London Underground's assets as a whole" I do not mean merely the book value of the assets—which exclude all the written-down assets over more than 100 years—but the total assets. That is the consideration that will influence the auditors in making a decision as to whether the amounts are off balance sheet or on balance sheet.

Lord Bruce of Donington
My Lords, will the noble Lord give the House an undertaking that he will deal with these matters in greater and more pertinent detail, in relation to the Statement which I understand is to be made later?

§ Lord McIntosh of Haringey
My Lords, no; the Statement which will be made this afternoon is not even remotely on this subject. It is about audit and accountancy in the public sector. The Statement is about the Sharman report, which is not about London Underground. It would take some ingenuity to get me to respond later this afternoon to these matters.

§ Lord Blackwell
My Lords, does the Minister accept that, wherever this particular expenditure is scored, the real test of whether it is effective to replace public with private funding is, first, whether there is transfer of risk from the public sector to the private sector; and, secondly, whether it achieves the introduction of effective private-sector management disciplines? Would he be prepared for the PPP, in this case, to be judged on those two criteria?

§ Lord McIntosh of Haringey
My Lords, yes; I entirely agree with the noble Lord, Lord Blackwell.

§ Lord Northbrook
My Lords, would it have been cheaper or more expensive to finance the London Underground capital investment through Ken Livingstone's bond option rather than through the PPP?

§ Lord McIntosh of Haringey
My Lords, the answer is no—partly for the reason just given by the noble Lord, Lord Blackwell, with which I have just agreed. As he rightly said, the issue in this case is the transfer of risk. Although that could be done by issuing bonds, and the price of bonds would be lower than the rate of return on capital that the private partners will expect, the private partners will be taking very significant risks in return for that rate of return. When such risk has been taken by the public sector—as, for example, in the extension to the Jubilee Line or the improvements to the Central Line—it has been shown to be very poor value for money for taxpayers.

§ Baroness Carnegy of Lour
My Lords, perhaps I should already understand this—I am sure that I should—but, given that the noble Lord is telling us that sometimes these enormous figures will be on the 822 balance sheet and sometimes they will not, according to what the accountants say, how will the public know what their total debt is?

§ Lord McIntosh of Haringey
My Lords, the figures will not be sometimes on and sometimes off the balance sheet. At some stage soon after 10th April, when it is expected that the agreement between the private partners and London Underground will be signed, KPMG, London Underground's accountants, will make a decision on the whole of the amount. It will either be on or off. It will not be partly on and partly off.

§ Lord Boardman
My Lords, without discussing the balance sheet, can the noble Lord say whether giving letters of comfort exposes the Government to the risk and liability of ultimately having to meet the balance that they have guaranteed?

§ Lord McIntosh of Haringey
My Lords, as I made clear in an earlier answer, the letters of comfort are confined to third-party debt. Public discussion on these matters tends to make the wrong assumption—that they relate to shareholder funds.