Health and Social Care (Community Health and Standards) Bill

HL Deb 13 October 2003 vol 653 cc697-754

8.34 p.m.

House again in Committee on Clause 6.

Baroness Barker moved Amendment No. 135:

Page 3, line 36, after "provide" insert— ( ) the application is endorsed by the relevant local authorities. Primary Care Trusts, patients' forums and representatives from local staff side organisations,

The noble Baroness said: Shortly before the House resumed, there was an interesting debate on the issue of consultation. I apologise to the Committee for not being able to be present. The question of authorisation of trust status is one to which we have paid considerable attention, not least in the light of the statement by the Minister here and by his colleague in another place about the keystone of foundation trusts being the extent to which they are creations that are owned by the local authority in which they exist. Amendment No. 135, which stands in my name and that of the noble Lord, Lord Clement-Jones, would address exactly that point.

Something that has not always been at the forefront of our deliberations on the Bill is that an acute trust is one part—admittedly a very key part—of the local health economy. However, it is only one part and the partnership with which it does its work is of key importance. The decision to apply for foundation status can work in practice only if it has the support not only of key individuals in the community—I note that, in some parts of the country, they are already being consulted about the proposal that their local hospitals should become foundation trusts—but of organisations that have a key part to play in the health economy. That is why our amendment would create a requirement for an application to be endorsed by the relevant local authorities, primary care trusts, patients forums and representatives of staff.

It is unlikely that a foundation trust could operate to the standards required throughout the Bill if it did not, from its inception, have the support of the key bodies in the area. If those bodies do not give their consent to the application, it is highly likely that the whole creation will be flawed from the beginning, not least because the trust's governance arrangements will be set at an early stage. The bodies that represent the people who have now and will continue to have the biggest investment in the NHS and in the outputs of foundation trusts must be involved in them.

If an applicant foundation trust cannot convince the bodies set out in the amendment, there will be a significant question over whether it can convince others in the wider population and, indeed, conduct its business, once it is established. An application should, as a matter of good practice, have the endorsement of those bodies. I hope that the Minister will give the amendment a positive response. I beg to move.

Baroness Andrews

It is good to see the noble Baroness back in her place for another debate on consultation. We missed her in the earlier debate. The noble Baroness will not be pleased when I say that, for some of the reasons that I explained in the earlier debate, we do not believe that the amendment is necessary.

Clause 6 allows for regulations to prescribe who should be consulted as a minimum about an application. It is an important measure, which ensures that the views of local communities are sought and listened to. Consultation will always involve key local parties and players. I agree with the noble Baroness: without the agreement of the partners that she identified, an application would not stand a chance of success. That is why there is no need to prescribe the key partners separately.

Another reason is that we have already specified a range of local partners, including those listed in the amendment, in the list of consultees in the guidance on consultation. We intend to specify those partners, including those listed in the amendment, in the regulations. I made a commitment earlier that we would consult on the regulations, and I am sure that the noble Baroness will want to have an input into that.

It is self-evident that, if applicants are serious about their application, they will have to have had discussions with staff, primary care trusts, stakeholder groups and local authorities. That is the only way in which they will be able to gauge the depth of support or opposition. They must make sure that they know those views. However, we should also be sensible about what we are trying to do. Although we want to be sure that an applicant trust is not just going it alone, against the views of staff, patients and all the critical people, we cannot give local partners what is, in effect, a veto over an application. The views of those partners are critical, but the power to veto is inappropriate. In response to a similar debate, the Minister in another place said: Both the Secretary of State and the regulator would carefully examine the situation to see if there was significant local opposition: that is right".—[Official Report, Commons Standing Committee E, (Part 2), 20/5/03; col. 281.] That information must be obtained. The Secretary of State and the independent regulator will scrutinise applicants, ensuring that all partners are consulted and their views taken on board. In some local areas, there may be disagreement. We believe that it is right that there should be a thorough scrutiny of the application, but not a veto. 1 hope that the noble Baroness agrees and withdraws the amendment.

Baroness Barker

I thank the Minister for her reply, which, as she guessed, is the one that I thought she would give. A requirement to consult, as opposed to a requirement to have an agreement, is qualitatively different in a context in which the resources at stake are not equal between the partners. Given the concentration of resources, first, within PCTs as opposed to social services, and, secondly, within the acute sector as opposed to the community sector, there is a difference in the extent to which consultation and agreement are necessary in order that a local health function is not upset. I have no wish to take the noble Baroness back through our interesting and fascinating discussions on the Community Care (Delayed Discharges etc.) Act, but it is a good example by which to judge.

In putting forward the amendment, perhaps we are tilting the balance in an uneven situation rather more in the right direction. I shall read in the Official Report the comments made by the noble Baroness. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Noakesmoved Amendment No. 136:

Page 3, line 39, at end insert— ( ) The applicant may at any stage make written representations to the regulator about the terms of its authorisation and the regulator shall reply in writing to the applicant. The noble Baroness said: In moving Amendment No. 136, I shall speak also to Amendments Nos. 147 and 189, which seek to insert the ability of a prospective or actual foundation trust to make representations to the regulator. One of the things that is missing from the scheme for the regulation of foundation trusts is the right of appeal. I believe that regulatory systems set up elsewhere have included appeal rights. A regulatory system without appeal rights has no remedy, other than judicial review, against a regulator who may be acting perversely or, simply, may not have understood a point of importance to the appellant. The amendments go nowhere near as far as full appeal rights, but offer a middle way.

Amendment No. 136 introduces into Clause 6 the right for a prospective foundation trust to make representations to the regulator about the terms of its authorisation and requires the regulator to reply in writing. A foundation trust applicant is not only interested in whether it has passed or failed the regulator's tests for becoming a foundation trust. It will also have an interest, for example, in the restriction on private patient income, under Clause 15, in assets designated as protected property, under Clause 6, or in its authorised services, under Clause 14. If the applicant thought that the regulator was likely to authorise it on terms that the trust would find difficult or even unacceptable, it would need an outlet for its concerns. Amendment No. 136, which falls far short of an appeal mechanism, allows the issues to be raised and dealt with on a semi-formal basis.

Amendment No. 147 deals with Clause 9, under which the regulator can vary an authorisation. This is curious. Under Clause 9(2), the regulator is required to consider what a local authority overview and scrutiny committee or the Commission for Patient and Public Involvement in Health think, but he is not obliged to consider what the foundation trust thinks. Since technically alterations can be made whether or not the foundation trust agrees with them, this amendment is important because the regulator would then have to consider the representations of the foundation trust.

Lastly, I turn to Amendment No. 189, which deals with Clause 23. If a foundation trust is threatened with a notice that it is failing to meet the terms of its authorisation, it has the right to appeal in writing to the regulator. This is stronger than simply making representations as sought in my other amendments because what is at stake is greater. Even here, however, we have not suggested a major appeal process involving outside parties.

When this matter was considered in standing committee in another place, the Minister said that there was no issue to be dealt with because regulators have a duty under general public law to act proportionately and reasonably. While that is all very well, it means that the only remedy would be judicial review. Most would consider that remedy rather akin to using a heavy and blunt instrument, difficult both to use and to achieve effective results. It would also significantly restrict the ways in which a foundation trust can properly be heard.

We were minded to draft a full-blown appeals mechanism for this part of the Bill. Whether we do so at a later stage will depend on the Minister's response. I beg to move.

8.45 p.m.

Baroness Andrews

As the noble Baroness said, this issue was debated in another place. I shall probably give her the same reply as that given at the time by the Minister.

I turn first to Amendments Nos. 136 and 147. It is important to reiterate that the independent regulator, who will be fully independent of the Secretary of State and the Department of Health, will be responsible for granting authorisation to applicants for NHS foundation trust status and for setting the terms of authorisation under which they will operate. He will also monitor trusts' compliance with those operating conditions, with powers to intervene where necessary to bring a trust failing to meet its obligations back into line.

Under Clause 8 the independent regulator will be able to vary the terms of authorisation of an NHS foundation trust. In deciding whether and how to vary such an authorisation, the regulator will be required to take account of the results of any recommendations arising from the statutory consultation process, no matter in what form. He will also have to take into account other relevant evidence, including the views of those affected by the variation. I suggest that that covers the points of concern for the noble Baroness and that her amendments are not strictly necessary.

I wish to add a further assurance and repeat once more the point about the common law, because it is a powerful argument. The common law imposes a number of duties on statutory offices such as that of the independent regulator. One very important duty is that a statutory office holder is required to give a fair hearing to both sides when making a decision. Discussions with an NHS foundation trust would therefore always form a natural and fundamental part of the process for setting and reviewing the terms of authorisation, and the regulator would be required to seek the views of a trust and take them into account. So I do think that the concerns are met by those points.

Amendment No. 189 seeks to allow a foundation trust to make a "written appeal" to the regulator where a warning notice is issued under Clause 23. The intention seems to be to ensure that the regulator does take into account the views of a trust when issuing a warning notice. However, as I have said, the requirement is already imposed on the regulator by common law.

A warning notice, along with the more serious powers available to the regulator under Clause 23, can be exercised by the regulator only once he has given a foundation trust a fair opportunity to put its case. This is a well-established legal principle and I do not think it appropriate for the legislation to interfere with it in the way suggested by the amendment. It may well be a harmful intervention.

Let me cite an example. If a CHAI report indicated a potential breach of terms of authorisation, the NHS foundation trust would have an opportunity to prepare a response to the report which the independent regulator would consider alongside the CHAI report in deciding whether any action is appropriate. For all those reasons, I would argue again that Amendment No. 189 is unnecessary.

Finally, I want to reiterate that, just as with the Secretary of State, while there is no formal mechanism for appeal against the independent regulator's decisions, if the regulator failed to act reasonably and proportionately in response to any representations made by the foundation trust, he would be subject to judicial review. That is not a light sanction and, on those grounds, I hope that the noble Baroness will reconsider her amendments.

Baroness Noakes

I thank the Minister for that unsurprising reply. She referred to the common law environment as being powerful but she knows that the only remedy is judicial review, just as it is at the moment if the Secretary of State behaves in a way that dissatisfies an NHS body. Anyone who has ever sought to obtain relief through a judicial review will know that that remedy is costly to obtain and not very often used.

It is easy to satisfy a judicial review. Someone sits in a department with their lawyer at their right hand. The lawyer says, "Secretary of State, you must consider what is before you". The Secretary of State then says, "I have considered it", and puts the matter to one side. It is very easy to deal with the process element of a judicial review.

The noble Baroness did not say why this scheme of regulation does not have appeal rights while other schemes in the public sector do. For example, the railway regulators and the energy regulators all have appeal rights. I am not convinced that we should leave this issue to the common law and we shall return to it with some force at the next stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 137 to 142 not moved.]

Clause 6 agreed to.

Clause 7 agreed to.

Lord Clement-Jones moved Amendment No. 143:

After Clause 7, insert the following new clause—

"PILOT SCHEMES

1. (1) The first seven NHS foundation trusts to be authorized under section 6 shall be known as "NHS foundation trust pilot schemes".
2. (2) Two years after the authorisation of the seventh NHS foundation trust pilot scheme, the Commission for Healthcare Audit and Inspection shall initiate an independent evaluation of all seven pilot schemes against the criteria set out in subsection (3).
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3. (3) The criteria against which the independent evaluation will assess the pilot schemes shall be—
1. (a) the quality and effectiveness of the health care services provided by the pilot schemes;
2. (b) any changes to the range of services provided or patients treated by the pilot schemes since they were established;
3. (c) the impact of the pilot schemes on other parts of the NHS, including neighbouring NHS trusts, local Primary Care Trusts, and systems for patient and public involvement;
4. (d) the impact of the pilot schemes on the speed and equality of patient access to NHS services;
5. (e) the effectiveness of the pilot schemes in promoting greater community involvement and influence, with particular reference to their success in ensuring that the membership of foundation trusts' public constituencies is representative of their patients and local residents;
6. (f) the success of the pilot schemes in promoting greater innovation in the delivery of healthcare services; and
7. (g) the views of residents in the locality of the pilot schemes, of patients and their relatives, and of staff working in the pilot schemes and their representatives.
4. (4) The results of the independent evaluation will be published in a report, which will be laid before Parliament by the Secretary of State.
5. (5) Following the authorisation of the seven NHS foundation trust pilot schemes, no further NHS foundation trusts may be authorised by the regulator until after the publication of the independent evaluation of the NHS foundation trust pilot schemes.
6. (6) In determining which bodies to authorise as NHS foundation trust pilot schemes, the regulator shall endeavour to ensure that the pilot schemes reflect, so far as is possible, the full range of services and contexts that characterise secondary care in the NHS."

The noble Lord said: The amendment seeks to introduce pilot schemes for the first seven NHS foundation trusts. The policy for foundation hospitals has been developed without trial or public consultations, as the Government themselves will admit. They pray in aid the Spanish model as a precedent but, as is now commonly recognised, that is very different.

The Government claim that foundation hospitals will improve local accountability and allow more scope for staff to innovate and improve services. However, no one has been able to show convincingly that that will be the case and that there will not be adverse impacts such as the poaching of staff and the emergence of a two-tier health service. The noble Lord, Lord Warner, used the phrase that reformers always have to demonstrate a negative. In fact, they have to demonstrate a positive—that is the minimum expected of them—that foundation hospitals will have the desired effect.

In their 1999 White Paper, Modernising Government, the Government stated, we must make more use of pilot schemes to encourage innovations and test whether they will work".

Well, amen to that. A number of recent Government initiatives have been piloted, including children's trusts, the savings gateway scheme and the new adult learning gateway grant. Furthermore, the Government recently conceded that they should have piloted the A2 examination, the second half of the new A-level curriculum, whose introduction caused chaos last year.

What happened to evidence-based policy in the Department of Health? We on these Benches believe, as does a very wide coalition of interests and organisations, that before any decision is taken to introduce foundation trusts, they, too, should be piloted, and their impact evaluated.

Amendment No. 143 would designate the first seven foundation trusts authorised as "NHS foundation trust pilots" and would require their impact to be evaluated before any further foundation trusts could be authorised. I beg to move.

Baroness Cumberlege

I rise to support the amendment. I think the noble Lord, Lord Clement-Jones, is absolutely right. One should see this in the context of what is happening in the National Health Service generally.

If we look at the very recent reforms that the NHS has carried out, Shifting the Balance of Power within the NHS is still in its infancy, with PCTs being responsible for 75 per cent of the budget. I work quite a lot with primary care trusts; I think they are very brave, but many of them are struggling.

We look to the 28 strategic health authorities that have also been introduced only very recently and are taking on duties from 100 health authorities. This month, the four health and social care directorates have been or are about to be abolished.

All these reforms have undoubtedly caused disruption to staff and patients. I do not argue that they have been detrimental, because some of them have probably been a very good improvement. But as these reforms have been introduced, some things have gone backwards. I cite specialised commissioning, which has been held up for a year now because the policy has not been well defined. Some really detrimental things have happened, for instance in neonatal intensive care, where mothers and babies are being transferred long distances because of a lack of cots.

Now we are embarking on more reforms; we know that financial flows will be changed, and that staff structure will be changed through Agenda for Change We are introducing patient choice, whereby, by 2005, patients will be offered the choice of up to five hospitals by their GPs. Again, that is something I very much welcome. It is interesting that the London Health Link has been involved in a pilot scheme for this, and says that it is going well.

We know that reforms such as these ensure that people get distracted from the business in hand. It is very hard to argue against pilot schemes. In my experience, when we introduced nurse prescribing, we had eight pilot sites and saw how they went. After that, we had a whole trust area and saw how that went. As we were able to evaluate these schemes, it ensured that people had confidence in the new proposals.

I think that the noble Lord, Lord Clement-Jones, has made an absolutely irrefutable case for having some pilot schemes to test out these reforms before they are introduced nationwide.

Lord Warner

I have already indicated that piloting is unnecessary and unacceptable. Piloting would not achieve the radical and comprehensive reform that is required to deliver the freedoms and local accountability central to the Government's policy.

Interestingly enough, the chairman of the Audit Commission does not seem to agree with the noble Lord, Lord Clement-Jones. I quote briefly from a piece in his name in the Health Service Journal on 9th October. He stated: In Bournemouth, I said the often ill-informed debate about foundation trusts (but certainly not the policy) was a red herring— a distraction from the challenge of improving the NHS by devolving power to the front line. The Audit Commission supports the principle of foundation trusts because they would be part of a more locally owned and managed service which would, in turn, be more responsive to the community and the individuals it serves". There is more, but I am sure that the noble Lord will be able to check the source in the Health Service Journal of 9th October.

Clearly, we will learn from the experience of the first wave applications. Many of the characteristics of piloting will be evident in the rollout of NHS foundation trust status. For example, the sourcebooks on governance, HR, finance and so on are not static documents and will be updated as we gain experience of the process. I have already given a commitment that we will ask the regulator to conduct a review of governance arrangements in the light of first wave experience.

The amendment allows only seven NHS foundation trusts to be established in the next two years, which would considerably increase the risk that a two-tier system would be created within the health service. That is quite unacceptable to the Government. We want NHS foundation trusts to be a policy for the many not the few—noble Lords may have heard that phrase before. Eligibility for NHS foundation trust status should be based on merit, as we have repeatedly said. As hospitals improve and gain the skills that they need to operate as an NHS foundation trust they should be able to apply for NHS foundation trust status and move quickly to it.

On our first day in Committee, I explained that by the end of 2004, if all current applicants for NHS foundation trust status are successful, well over 25 per cent of the population of England will be able to benefit from trusts that are NHS foundation trusts, and will be eligible to participate in the governance arrangements of at least one NHS foundation trust. Only a fraction of that number would be included if a pilot scheme were adopted on the basis proposed by the noble Lord. We should not exclude all those people from benefiting from the devolution of power and the real opportunities to participate in the governance of their local hospital that come with NHS foundation trusts status, simply because of an arbitrary cap on numbers as part of a pilot scheme.

The noble Lord's proposal would choke off all those coming forward, such as mental health trusts. Many of the 80 mental health trusts would be able to apply for NHS foundation trust status, as applicants in 2004–5. We are already talking to some of those mental health trusts—they want to know more about the process. The amendment would break the considerable momentum to become NHS foundation trusts. I know that the noble Lord likes to present the process as a steamroller being driven from Richmond House, but he overestimates our capacity to dragoon all those people into coming forward.

Many people, even as we speak, are considering their options. There is a real momentum, and we do not want to disappoint the growing numbers of local people who want to move in that direction and have local freedoms and the involvement that it provides. The amendment is progress halting, and certainly does not seem to capture the support of the chairman of the Audit Commission.

Lord Clement-Jones

I thank the Minister for that reply. He seems to believe that the words of the chairman of the Audit Commission will be utterly persuasive. I have huge respect for the chairman of the Audit Commission, but on occasions I disagree or agree with him. On occasions, like the Minister, I will selectively quote him and pray him in aid for my arguments. I could agree with him on all sorts of areas, such as the fact that targets are sometimes futile. Perhaps I should riffle through my back copies of the Health Service Journal to use them as an instrument of that kind of verbal warfare.

I thank the noble Baroness, Lady Cumberlege, for her remarks. We need to rely on the experience of previous Ministers to a large degree. Piloting is not designed to hold up the great onward march of progress. I envisage a somewhat Stalinist statue of the onward march of foundation trusts that the Minister seems to think will be held up by this puny arm insisting on pilot schemes. The Government seem to have a completely circular argument with regard to foundation trusts, that of we must have them because we want them. That is a fairly immature attitude towards policy making. It is quite breathtaking. The Government are mostly relying on assertion. I have not seen any evidence that the Government pray in aid that all this will benefit the patient at the end of the day.

The Minister talks about an arbitrary cap on numbers and the fact that we shall hold up the momentum. But who has created the demand well ahead of the legislation? I believe that the previous Secretary of State announced foundation trusts in January of last year and people have planned since then. No wonder there is some momentum. However, I invite the Minister to consider the whole issue of GP fundholders. I think that the Minister and his colleagues would have used similar language at the time that measure was introduced. When that initiative was introduced Ministers said, "We are not giving too many inducements to local GPs to adopt fundholding; it is all spontaneous. Local GPs want to do this". All I say is that local managers and clinicians in the NHS are only too used to spotting the signs and making a beeline for the latest project that the Secretary of State adopts. That is the culture of the NHS. There are some extremely fine managers. They are very good at managing change and handling ambiguity.

This is a bit of a steamroller; I do not dissent from the Minister's language in that respect. It is a steamroller; it should not have got up steam quite as early as it did; and there should be pilot schemes. The noble Baroness, Lady Cumberlege, expressed the matter extremely well when she mentioned looking at the experience that we already have in a number of other areas in the health service. I do not believe that it would be a bad thing at all to do that. At the end of the day I believe it would help us to develop a model for devolution that would be considerably better than this extraordinary scheme that seems to have been conjured up by the Government out of thin air. Clearly, I shall not persuade the Minister quickly, if at all. In the mean time. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 [Amendments of constitution]:

Baroness Noakesmoved Amendment No. 144:

Page 4, line 21, at end insert— ( ) The regulator shall not give his approval under subsection (1) unless he is satisfied that the amendments have been approved by the board of governors of the NHS foundation trust and, if he considers it necessary, by a majority of the members of the NHS foundation trust. The noble Baroness said; I rise to move Amendment No. 144 which would add a new subsection to Clause 8. Under Clause 8( 1) the trust can alter its constitution with the approval of the regulator but there is nothing in either Clause 8 or Schedule 1 which says what processes must be followed in making an alteration.

I am sure that there are good reasons for changing the constitution of a body. Time moves on and things that were not thought about get invented and other circumstances change. I have no problem with that. In the company law sector, which the Minister tends to discount entirely, there are clearly laid down ways of changing a company's memorandum and articles, which is the equivalent of a constitution. They involve resolutions put to the members and have to be passed normally by 50 per cent or 75 per cent of the members voting, depending on the issue. However, this Bill is completely silent on the matter.

When this issue was debated in another place in Committee in the context of a slightly different amendment, the then Minister, Ms Blears, said: At this stage, we do not want to prescribe numbers in the Bill, or to be inflexible about how that change might come about".— [Official Report, Commons, Standing Committee E, 22/5/03; col. 306.] Let me translate that for the Committee; as with so much of the governance arrangements for foundation trusts we do not have the faintest idea how this will work, so we shall make it up as we go along. The Committee will not be surprised to learn that there is nothing in the guide to developing governance arrangements either. It appears that the Government still do not know the answer.

Our amendment is an attempt to put some process in the Bill. It states that the regulator must be satisfied that the board of governors has approved a change, which in the corporate sector would be a certified board minute. It would also give the regulator power to require the change to be approved by the members. Other approaches could doubtless be taken but, whatever the imperfections of our amendment, it is many times better than complete silence. I beg to move.

Baroness Andrews

Schedule 1 sets out minimum requirements for the constitution of public benefit corporations, in a statutory framework within which National Health Service foundation trusts must operate with flexibility to recognise their local circumstances. I hope that I can elaborate on that and deal with the accusation that we do not have the faintest idea what is happening.

I shall briefly set out how changes can be made and accommodated. Clause 8 provides for a foundation trust to change its constitution, subject to the regulator's agreement. For example, it might be appropriate to adjust the boundaries of its public constituency or, as patterns of services develop over time, to bring new partner organisations on to the board of governors. Those changes would require a change to the constitution. In that case, a copy of the revised constitution would be included in the register kept by the Registrar of Companies under Clause 10(2). Under paragraph 20(1) of Schedule 1, copies must also be made available for inspection by the NHS foundation trust.

Schedule 1 sets out minimum requirements, but any change to the constitution has to be authorised by the regulator. We have permitted flexibility, quite rightly, in that it is for the constitution of each foundation trust to set out the detailed processes of determining what changes to the constitution will be put to the regulator for approval. The constitution will set out the respective roles of members and the board of governors in the process.

We do not want to prescribe the way in which any changes should be considered. We have enough respect for the autonomy of the foundation trusts to want to leave it in their hands to make such decisions. Some trusts may wish to hold a vote, while others may set out in their constitution a different method to ensure membership involvement in the process, such as additional consultation. The board of governors, as the voice of members in the organisation, would be responsible for ensuring that any changes were in line with and reflected the wishes of the membership. Again, we leave the processes up to the trust itself.

When we come to the implications of the amendment, it is worth emphasising the practical realities that the proposed change would involve. As we stressed in a debate last week, the trust is based on integrity. It is tripartite, with a board of governors, a board of directors and the membership. Together they make up the trust, and it is the trust that has to decide whether the constitution is to change. The board of governors is not a separate entity in that; it has to work in concert with its partners. If the trust wanted to make major changes in its constitution, it would surely seek agreement from all parties. Indeed, I suggest that its future success depends on a shared view of the future. Also, the trust would hardly put forward changes to its constitution that had not been agreed by all the relevant parties.

It is also important to recognise again that the constitution itself is subject to consultation with local communities and partners, so the membership will have the opportunity early on to ensure that the process for amendment is proper and appropriate. As the noble Baroness mentioned, a variety of matters may need to be put right or added. They may range from the relatively technical to a change in a major issue of policy. That flexibility is extremely important. As part of the application process, both the Secretary of State and the independent regulator must ensure that provisions in the constitution are appropriate. Therefore, through the checks and balances that we have built in, 1 hope that the noble Baroness is reassured that the concerns raised by her amendment are answered and that it would be particularly problematic to separate out the board of governors from that process.

Baroness Noakes

The Minister has disappointed me, as I expected she would. She talked about some of the provisions in Schedule 1 as laying copies somewhere. That is not the kind of process that I was talking about. I was talking about the process of agreeing to something. She talked about the regulator having to approve something. Then we heard about some kind of holy trinity of the foundation trust, which would involve all the parts. One part could not make a decision but all three would. We get into a kind of theology of foundation trusts, which was so vague and nebulous that it might even have been invented by the Prime Minister.

The Minister did not pray in aid the f-word— flexibility, of which the noble Lord, Lord Warner, is so enamoured. I cannot see that we should leave so many fundamental issues, such as how a constitution should be changed, to be addressed on the hoof by holy trinities making applications to be foundation trusts. It is another example of the shabby arrangements that the Government have put forward in the Bill. There is no point in my continuing with the amendment. I beg leave to withdraw.

Amendment, by leave, withdrawn.

Baroness Noakesmoved Amendment No. 145:

Page 4, line 22, leave out subsection (2).

The noble Baroness said: In moving Amendment No. 145, I shall speak also to Amendments Nos. 148 to 150. They all concern the registrar of companies and his involvement in the records of foundation trusts.

Amendment No. 145 is a probing amendment which would delete the requirement to send copies of the constitution to the registrar of companies in Clause 8(2). Amendment Nos. 149 and 150 take a slightly different approach to Clause 10, substituting the regulator for the registrar of companies as the person who should keep a register of NHS foundation trusts.

We were mystified as to why the registrar of companies had been selected as the keeper of foundation trust records. The Minister, when challenged on our first day in Committee by the noble Baroness, Lady Barker, positively rejected the use of companies legislation and even threatened that that would involve non-compliance with EU obligations. Therefore, when it suits the Government, they say that foundation trusts are not like companies—they are co-ops, mutuals, social enterprise or whatever Third Way language pops into Ministers' heads.

However, they then completely muddy the picture by saying that the registrar of companies is the repository of foundation trust data. What is the man in the street to make of that? The only logical conclusion is that foundation trusts are indeed companies in all but name.

The most logical place for people to search for information on foundation trusts is the regulator, just as is the registrar of companies the logical place to look for information on companies, or the Charity Commission for information on charities. Sticking with the regulator would avoid confusion all round.

I am struggling with the logic of the Government's decision, unless there is a sub-plot to turn foundation trusts into companies in due course. I hope that the Minister can enlighten the Committee. I beg to move.

Baroness Andrews

Again, I hope that I can enlighten the noble Baroness. There is nothing illogical, sinister or theological about our decision.

In brief, applicants for NHS foundation trusts will be required to publish forward business plans and reports and accounts, along with the constitution and authorisation. They must be made available to the public. That is the point. It is not a muddying of the picture. Our intention is, in keeping with our general commitment, to secure as much public understanding, access and involvement as possible. The Wanless committee referred to public engagement as being a great virtue. This is another example of us trying to secure that. In order to ensure that those documents are widely accessible to the public, the registrar of companies will keep a register of foundation trusts. That will have to include the key constitutional and financial documents and other specified information—for example, the members of the board of directors and governors—for each NHS foundation trust. We are doing this because this is the way in which we can guarantee that the man and woman in the street will have access to information. This is a familiar and customary point to access information. Members of the public will have free access to inspect the register. That register will form the source and will be in a format which can be recognisable and easy to access.

This group of amendments seeks to place responsibility for keeping the register on the independent regulator, but we would argue that this would reduce access and openness. Indeed, the decision that the Registrar of Companies should hold the register was a deliberate one—because it is more accessible that way. In addition, the location of the register with the Registrar of Companies means that information about any joint ventures or spin-off companies on which foundation trusts might decide to embark will be available in the same place as information about the foundation trusts themselves.

I would therefore argue that in all logic, and certainly in order to guarantee openness, this is the right decision.

Baroness Barker

The Minister will recall that the NHS Plan contains a proposal that foundation trusts should be able to form companies with the private sector in order to run some services. I imagine that they will be charitable companies which are similarly registered with Companies House. Is that the logic behind this proposal, or is the implication of the Minister's comments that the foundation trusts will be incorporated entities which need not form separate companies in order to carry out some services?

Baroness Andrews

I can only repeat what I have said. The decision to make the information available with the registrar was made for the reasons I have suggested. The other questions are outside the scope of the amendment. I shall be happy to write to the noble Baroness and give her some more detail about that.

Baroness Noakes

I am surprised that the noble Baroness feels unable to answer in our Committee a question which seems to me to be germane to the amendment we are debating. I am sorry that she felt unable to do so.

The noble Baroness talked about public understanding and access, a familiar and customary point being the Registrar of Companies—and that in the context of the man in the street. I put it to the noble Baroness that this is just nonsense. There is no good reason for this. It is another example of muddled thinking in the Bill on which we must reflect most carefully before we come to Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 agreed to.

Clause 9 [Variation of authorisation]:

Baroness Noakesmoved Amendment No. 146:

Page 4, line 26, leave out "is to" and insert "must"

The noble Baroness said: Amendment No. 146 is a straightforward amendment relating to the use of the words "is to" in Clause 9(2). My amendment replaces these words with "must". At one level, this straightforward amendment is designed to improve the language that the Government have used in the Bill. It is a variation on our old favourite, "may"/ "shall". Clause 9(1) provides that the regulator "may" do something; subsection (3) provides that he "must" do something; but subsection 2 provides that he "is to" do something. I believe that the "is to" formulation is unusual, but even more so where the contrast is with the surrounding subsection. We believe that the regulator must have regard to the matters in subsection (2) and that any other formula can only import ambiguity into an area which should be absolutely clear.

There is another level to the amendment. Subsection (2) provides that when the regulator varies an authorisation for a foundation trust, he is to have regard to what the local authority overview and scrutiny committees and the Commission for Patient and Public Involvement in Health think. However, when a foundation trust is initially authorised, there is no formal role for those bodies. That was the focus of an amendment to which the noble Baroness, Lady Barker, spoke a little earlier.

Under Clause 6, those bodies might be involved in consultation prior to authorisation but there is no requirement for the regulator to have regard to their views. However, for some reason, by the time we reach variations, it is regarded as important that regard should be had to their views. Will the Minister explain the rationale for that? It seems to us that, like so much of the Bill, that is utterly lacking in logic. I beg to move.

Lord Warner

By including the word "must", the aim of the amendment appears to be to require the regulator to take into account the matters listed in the subsection. But that is already the effect of the words on the face of the Bill. There is no legal difference in the terms proposed.

Baroness Noakes

I thank the Minister for explaining that there is no legal difference. In that case, first, it would be a simple matter to accept the amendment. Secondly, will he answer my questions about why the regulator must have regard to the opinions of the bodies that I mentioned when variations come into play?

Lord Warner

I have already indicated that. At this stage in our deliberations, having a discussion about an amendment which does not alter the legal purport of the Bill does not seem to me to be a very sensible use of the Committee's time.

Baroness Noakes

If that is to be the way that the Minister intends to conduct the rest of our Committee stage, we shall have a rather difficult time. I invite him to answer the simple question that I posed and I hope that he will write in order to put it on the record for the Committee. I also hope that his temper will improve and that we shall conduct our Committee proceedings in the normal way for the rest of this evening's session. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 147 not moved.]

Clause 9 agreed to.

Clause 10 [Register of NHS foundation trusts]:

[Amendments Nos. 148 to 150 not moved.]

Clause 10 agreed to.

Clause 11 [Power of Secretary of State to give financial assistance]:

Baroness Noakes moved Amendment No. 151: Page 5, line 21, at end insert "including the guarantee of any obligations of an NHS foundation trust The noble Baroness said: In moving Amendment No. 151, I shall speak also to Amendments Nos. 152 and 153. All the amendments relate to Clause 11, which deals with the Secretary of State's power to give financial assistance to foundation trusts. I shall also speak to Clause 11 stand part in order to raise a number of general issues about the financial regime under Clause 11.

It would help the Committee to consider this clause if the Minister were able to set out for the record how he expects foundation trusts to be funded. Clause 11 gives the Secretary of State wide powers to make payments to foundation trusts. We need to be clear how the Government intend to use those powers. Perhaps I may pose a series of questions to the Minister.

Will foundation trusts have access to grant moneys for, for example, modernisation or IT on the same terms as NHS trusts? Will the Government allow foundation trusts access to capital moneys on the same basis as NHS trusts currently have such access or will there be any differences? When will the Government publish the terms under which foundation trusts can obtain money from the Government? When that was considered in another place, the Minister, Mr Hutton, said that borrowing for protected businesses would attract the prevailing national loan fund rate, which is fairly straightforward, but that loans for non-protected businesses would be set at a level consistent with private sector borrowing rates. The Minister will be aware that that is a moveable feast. Therefore, will he be more specific about the rates that the Government will use?

Will the NHS bank have any role in the financing of foundation hospitals? Again, in another place, the Minister, Mr Hutton, said that there would be a new financing facility, which the Department of Health is establishing. He said that it would involve independent credit specialists and that the financing facility would be operated on an arm's length basis. Is that the NHS bank or a new organisation? Can the Minister explain what that is? Can he describe the legal basis of the constitution of that organisation? If it is the NHS bank I have always been told that the legal constitution is yet to be determined. When it was originally announced as the NHS bank, it was announced as an arm's length body, which sounds like the body to which Mr Hutton referred, with a board of governors. However, I understand that at present it is run by a few civil servants and NHS managers on a part-time basis.

Against that general background I turn to our amendments. Amendment No. 151 adds to the end of subsection (1) the power to guarantee obligations of NHS foundation trusts while Amendment No. 152 deletes subsection (3), which allows the Secretary of State to guarantee private finance agreements. Can the Minister explain the logic of taking a specific power to guarantee PFI obligations while not taking the equivalent power for other borrowing? That is particularly important because foundation trusts will not be able to borrow against the security of their protected assets and if no guarantee is available to them they may find it very difficult to borrow from the private sector, particularly if they want to borrow to fund significant new premises, for example.

There may be nice theory about private sector lending on the basis of the strength of operational cash flows, but the experience of PFI, which did not get off the ground until the Secretary of State took the legal power to guarantee projects, should have taught the department that the private sector will not lightly take the credit risk of dealing with the NHS.

Amendment No. 152, which knocks out the ability of the Secretary of State to guarantee PFI contracts is also important because subsection (3) flatly contradicts what Mr Hutton, the Minister in another place, said: The Government are proposing that, in future, all Department of Health-approved NHS foundation trust PFI schemes will be under novation to the Secretary of State. PFI consortia will be in a direct primary contractual relationship with the Secretary of State. The Secretary of State will, in turn, appoint the NHS foundation trust either as his agent or subcontractor".—[Official Report, Commons Standing Committee E, 22/5/03; col. 333.] That is a quite different arrangement from the guarantee envisaged in subsection (3). Can the Government explain why subsection (3) has been included if it is not the Government's policy?

Finally, Amendment No. 153 inserts the requirement for an annual report covering all the financial flows or arrangements under Clause 11. It is clear that there will be significant interest, both in Parliament and among those bodies which have not been allowed to be foundation trusts, in what financial support has been given to them by the Secretary of State. I am happy to go through the individual requirements but the simple point is that they require the Secretary of State to account for his financial support to foundation trusts, and 1 hope that that will not be controversial. I beg to move.

9.30 p.m.

Lord Warner

I shall try to respond to as many as possible of the questions raised by the noble Baroness. However, I should like to do that in a form in which I set out the Government's position on the specific amendments. Given the remarks by the noble Baroness on the last amendment, I assure her that I am in an extremely affable mood, so I shall be as helpful as I possibly can be.

The position on Amendment No. 152 is that as independent organisations, NHS foundation trusts will fall outside current arrangements for the allocation of capital in the NHS. Instead, they will have access to a wider range of financing options than is currently available to NHS trusts. Capital made available to NHS foundation trusts by the Department of Health will be on a loan basis and they will be expected to pay off both the principal and the interest of any loan, rather like a mortgage.

However, to the extent that any public funds are made available for any central initiative—for example, implementation of national service framework initiatives—NHS foundation trusts should have access to an equitable proportion of those funds, whatever the actual source. Such funding might be paid to NHS foundation trusts by way of a grant or injection of public dividend capital from the Secretary of State.

That is why we are taking those powers to ensure that the Secretary of State is able to make loans or issue public dividend capital or grants when providing financial assistance to NHS foundation trusts. Those powers mirror the equivalent legislative provisions applying to existing NHS trusts.

That power is not intended for bailing out failing NHS foundation trusts. It is an essential aspect of the new disciplines being placed on management, as the quid pro quo for the additional freedoms that come with foundation status, that the Secretary of State will not guarantee debt. In the event of failure, the Government will of course stand behind NHS patients and essential NHS services—that is, protected services. We will not stand behind or bail out poor management. Instead of bailing out NHS foundation trusts, the Bill includes specific powers in Clause 24 for the independent regulator to intervene in the operation of an NHS foundation trust if it cannot meet its financial commitments. We have made our intentions quite clear on that. The amendment is wholly inconsistent with our policy aims and therefore ought not to be pursued.

On Amendment No. 152, which concerns private finance initiatives, our position is as follows. PFI schemes are and will continue to be an essential part of the building programme for the NHS. We intend to ensure that sponsors and funders of PFI schemes are left in no worse a position as a result of the introduction of the Bill and the establishment of NHS foundation trusts. Foundation trusts will continue to be able to access the PFI process to finance major capital investments, subject to similar terms and oversight as apply under the current arrangements.

To achieve that, we propose that in future the Department of Health-approved NHS foundation trust PFI schemes can, if necessary, be guaranteed by the Secretary of State. The Secretary of State would be able to undertake a "deed of safeguard", accepting the obligation to pay sums due under the PFI contract if they were not paid by the NHS foundation trust. He could also enter into an agreement with the NHS foundation trust. Such an agreement would give the Secretary of State the ability to reclaim from the foundation trust any moneys that he had had to pay as a result of the non-performance by the foundation trust of its contractual obligations. The same agreement would also make clear that performance of the PFI contract on a day-to-day basis was a matter for the NHS foundation trust.

The Secretary of State already has the legal powers necessary to allow him to guarantee PFI deals entered into by foundation trusts. However, parliamentary convention requires that any ongoing government expenditure should have express legislative cover. The Bill was therefore amended in the other place to provide the required legal cover, should it be needed. The amendment would remove that provision and is therefore inappropriate.

Amendment No. 153 concerns the Secretary of State providing foundation trust information to Parliament. We have always made clear that the additional freedoms that come with NHS foundation trust status will be balanced by appropriate safeguards to ensure the public benefit and protect NHS services. That is why we have provided for each NHS foundation trust to make its accounts available to the public and the National Audit Office and to lay the accounts before Parliament.

The Bill therefore already provides more than adequate provision for public and parliamentary scrutiny of the financial arrangements for foundation trusts. The requirement for the Secretary of State to prepare additional financial accounts for presentation to Parliament is an unnecessary burden. Any necessary information will be provided through individual foundation trust accounts presented to Parliament.

I have tried to deal with the points in a policy context. The noble Baroness asked many detailed questions. I shall read Hansard very carefully and I promise to write to her if I have failed to deal with any aspects or details in my response.

Baroness Noakes

I thank the Minister for his response. I hope that he will reply in detail on the financing facility—which may or may not be the NHS bank—and to my questions on the constitution of the financing facility, or that of the NHS bank, all of which appear to be shrouded in mystery.

On Amendment No. 151, the Minister said that the Government had no intention of bailing out bad management. I assure him that we will return to the subject in more detail later, because it is important.

I shall read to the Minister something that the Treasury's whole of government accounts team prepared in April this year: Other provisions in [the Bill] suggest that the Crown will be responsible for any overall liabilities, and so has a participating interest, as well as exercising dominant influence". That is the clearest existing indication that the Treasury accepts that the doctrine of standing behind, which has applied to all public bodies—especially those classified to central government, as are the NHS trusts—will apply. That may mean that the Secretary of State will be liable for the liabilities whether or not they are formally guaranteed. The Minister's assertion that he will not bail out bad management means that he thinks he might walk away and leave lenders with unmet liabilities on their hands. That raises significant issues, which we shall explore later.

On PFI, I understood the Minister as saying that Mr Hutton got it wrong in another place. Perhaps he will confirm that point when he writes to me. Mr Hutton was very explicit about the terms of the arrangements, and they are not those that were explained to the Committee today.

I was disappointed that the Minister rejected the call for an accountability statement, which was sought in Amendment No. 153. He says that individual accounts of NHS trusts will be laid before Parliament. That is true, but the arguments here are exactly the same as those for summarised accounts that we discussed earlier. It is not a question of the individual accountability of the NHS trust, it is accountability overall. In this case, it is the accountability of the Secretary of State for the way in which he has flowed different sources of money on different terms to foundation trusts so that, in particular, bodies that are not foundation trusts can see what is happening.

This is an unsatisfactory area that will doubtless repay careful consideration, especially in the light of the information that I hope the Minister can provide on a timely basis. I look forward to discussing the matter again on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 152 and 153 not moved.]

Clause 11 agreed to.

9.45 p.m.

Clause 12 [Prudential borrowing code]

Baroness Noakes

moved Amendment No. 154:

Page 5, line 33, at end insert— ( ) For the purposes of this Act, borrowing includes commitments to make payments over periods exceeding one year whether or not they are shown on the balance sheet of an NHS foundation trust. The noble Baroness said: I rise to speak to Amendment No. 154 and will also speak to Amendments Nos. 172 and 181 in this group. All of these amendments concern PFI in one way or another. Under Amendment No. 154, the prudential borrowing code under Clause 12 and the borrowing limits under Clause 17 would have to take explicit account of liabilities such as those arising under PFI contracts. However, it is not limited to PFI contracts, but covers all periodic payments over one year including short-term leases of property or other assets.

The amendment states that the actual accounting treatment in the books of the foundation trust is to be ignored. The accounting treatment for leases and PFI transactions can be arcane. They can have the curious effect that the private sector treats the PFI deal as a financing deal—like a loan—while the NHS trust treats it as an off-balance-sheet item. That is not fantasy: it really does happen in hospital PFI deals. However, I do not want to get into the accounting niceties today because the crucial issue is not the accounting but the substance.

PFI liabilities are real and significant obligations and should be taken into account when calculating what borrowing would be prudent under any code if borrowing can be allowed in practice under specific borrowing limits. In Standing Committee E in another place, the Minister made it clear that the Government had no intention of scoring PFI deals for the purposes of borrowing codes or limits. He said that a PFI deal would, in effect, be taken into account by cash-flow calculations. I do not see why the Government are so afraid of taking PFI liabilities into account explicitly. Implicit calculations run the risk of missing the substance, which is that hospitals with major PFI deals are up to their eyes in debt.

The problem with this treatment is that it could cause an unnatural bias in favour of PFI deals because, if the borrowing code and borrowing limits exclude PFI, that would automatically boost the attractiveness of PFI, whatever the underlying economics. That may please the Chancellor, who needs PFI to help him balance the books, but it is not necessarily good for the NHS.

The Government's approach will also be inequitable. Foundation trust A will have its existing PFI deal largely ignored by the borrowing provisions of the Bill. Foundation trust B, which financed its last hospital conventionally, will have its debt fully counted, and foundation hospital C, which is still operating in un-modernised premises, will not get a new hospital unless it enters a PFI deal.

We have grave reservations about how PFI is used in the NHS. However, the main issue is one of clarity. That is why Amendment No. 181 in this group inserts into Clause 17 a declaration that the borrowing limits do not affect agreements that involve payment for the use of assets. If that is what the Government really do intend, we invite them to confirm that by accepting Amendment No. 181.

The other amendment in the group probes how PFI fits in more generally. Clause 16.1 states that a, foundation trust may not dispose of any protected property without the approval of the regulator". Amendment No. 172 would disapply that approval requirement when a PFI deal was involved. On 14th January 2003, my noble friend Lord Astor of Hever received a Written Answer to his Question on whether foundation trusts would be able to transfer their existing assets as part of a PFI transaction. The noble Lord, Lord Hunt of Kings Heath, replied: NHS foundation trusts will continue to be able to procure capital schemes using the PFI process subject to the same degree of oversight as applies under current arrangements".—[Official Report, 14/1/03; col. WA 39.] There was no mention of the role of the regulator. However, Clause 16 seems to suggest that the regulator will have to give his approval when the PFI scheme involves the disposal of property or an interest in it, which will very often be the case. How will the PFI process work in future? Will the approval and oversight procedures of the Department of Health and the Treasury have to be gone through, as implied by the noble Lord, Lord Hunt of Kings Heath, and then gone through again with the regulator? If the regulator really is independent, he will surely not just nod through anything that the Department of Health and the Treasury come up with. If he does have substantive involvement prior to giving his consent, will that not extend timetables, which I understand are already stretched, still further?

The Minister may be aware that many in the private sector are concerned about the recent slowness in completing PFI health deals. How much additional time will be taken if the regulator's approval is also necessary? At what stage or stages will the regulator become involved? I beg to move.

Lord Warner

I shall do my best. This is not the territory on which I would prefer to trade exchanges with the noble Baroness. I may have to write in some detail on some of the more detailed points that she raised.

I shall deal with the amendments in order. Amendment No. 154 would require that commitments to make payments over periods exceeding one year should count as borrowing. That is inappropriate and unnecessary. The prudential borrowing limit will determine the ability of NHS foundation trusts to repay debt. Any payment commitments will affect the free cash flow of an NHS foundation trust, and that parameter is used in the calculation of the prudential borrowing limit. So, the prudential borrowing limit already takes account of any such payments, and the limit will be reduced as those commitments are increased.

If the amendment is intended to ensure that any PFI commitments are included in an NHS foundation trust's borrowing limit, it is inappropriate. PFI contracts are not borrowing by the foundation trust and therefore will not be treated as borrowing for the purpose of the borrowing limits to be set for NHS foundation trusts. Under existing off-balance-sheet PFI arrangements, NHS trusts contract with a PFI project company for a service. That does not constitute borrowing for trusts. That position will remain unchanged for NHS foundation trusts. I emphasise that we are not seeking to change the system for PFI approvals. I do not want to go into detail at this stage on the exact arrangements for the regulator's involvement, but I am happy to set out our understanding of it in the letter that I will write to the noble Baroness and make available to other Members of the Committee.

I turn to Amendment No. 172. The regulator will designate property as protected, if it is required for the provision of essential services. It is therefore right that an NHS foundation trust should not be able to dispose of the property without the regulator's consent. There is no reason why that should be any different for property disposals as part of a PFI agreement. We are not making any fundamental difference to the protection of property, whether it is under a PFI deal or otherwise.

Amendment No. 181 is unnecessary. There is nothing in Clause 17 that would prevent an NHS foundation trust from entering into an agreement involving periodic payments for the use of assets. For example, they are able to enter into PFI projects. Access to assets and services through PFI is paid through a unitary charge, which is an operating cost. Any unitary charges paid by NHS foundation trusts will reduce their free cash flow and the amount of money available to support new borrowing; that is, debt. The implication is that, all things being equal, that will reduce an NHS foundation trust's prudential borrowing limit.

I have tried to clarify, as quickly as I can, the reasons for the Government's objections to the amendments. I will write in more detail on some of the more detailed points that the noble Baroness raised.

Baroness Noakes

I want to clarify one point. Is the Minister saying that all PFI deals are excluded? What about the ones that are already on the NHS balance sheet? I am sure that the Minister will be aware that two treatments are adopted in NHS trust accounts. Some PFI deals are on-balance-sheet and some are off-balance-sheet. When they are on-balance-sheet, they are scored as a loan; when they are off, they are not. Will the Minister comment on the differences between the two?

Lord Warner

I was talking about PFI deals that are off-balance-sheet.

Baroness Noakes

Can I clarify that PFI deals that are on-balance-sheet would be included as borrowing in the calculations?

Lord Warner

Before making a rash commitment, I would like to take legal advice. I will cover that point in the letter that I will send to the noble Baroness.

Baroness Noakes

I thank the Minister for that and look forward to the letter. I am sure that it will be fascinating.

The Minister said that it was inappropriate and unnecessary to count PFI borrowing and that it would be taken account of in free cash flow. I put it to the Minister that that is an indirect method of calculation, which, over time, is likely to result in error. How robust is this form of calculation? It is a great concern that PFI liabilities are ballooning out of control. They are not being recognised. Because they are being suppressed, no one wants to add up the numbers. Therefore, they are not fully taken into account either at the aggregate level of the Chancellor or at the micro-level of an individual NHS trust or NHS foundation trust. These are important issues. I look forward to the Minister's reply. I may seek to pursue this matter further at the next stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Noakes

moved Amendment No. 155: Page 5, line 36, after "loans" insert "and in particular any generally accepted principles that apply to loans The noble Baroness said: Amendment No. 155 is a probing amendment. If agreed, Clause 12(2) would require the regulator to have regard, to any generally accepted principles used by financial institutions to determine the amount of loans and in particular any generally accepted principles that apply to loans to non-profit making bodies". Without the amendment, the regulator would have to have regard only to such principles as they apply to a non-profit sector.

The amendment has two purposes. First, it seeks to determine why the Government want to have regard only to principles that apply to non-profits. Are the Government saying that there are no general principles that apply to borrowing in the commercial sector that are of relevance to foundation trusts? I would be surprised at that since the vast bulk of commercial lending, other than to government, is to the commercial sector, which is where the principles of lending can be most easily discerned. They will have regard to issues such as cash flow and earning strength, interest cover and security. To a greater or lesser extent, these must be relevant to foundation trusts. Why are the Government ignoring them?

Secondly, the amendment seeks to determine what exactly are the generally accepted borrowing principles that apply to non-profit-making bodies. What have the department's researches revealed about these generally accepted principles? Do they differentiate between non-profit-making bodies such as Standard Life and BUPA, at one extreme, and my local hospital or village hall committee, at the other? Is the department clear that there are market-wide principles? I am far from clear that the clause is workable. What if there are no generally accepted principles for non-profit making bodies across the board? What will the regulator do then? How will he differentiate between the principles for major neutrals or for the Co-op and those for small charities? I beg to move.

Lord Clement-Jones

I shall speak to Amendment No. 157. I am delighted to speak in the wake of the expert noble Baroness, Lady Noakes, so that 1 do not have to be technical about my amendment. Having heard the debate, the PFI exemption drives a coach and horses through the prudential borrowing code. It is rather like excluding a whole type of debt from a company; for example, if debts are factored, that excludes them from a whole class of borrowing. The noble Baroness, Lady Noakes, is correct.

There are also wider objections to the way that the prudential borrowing code operates. It is related to foundation trusts purely according to their ability to repay loans. It is not allocated according to any regional or national priorities. We live in a dog-eat-dog world as regards foundation trust borrowing. One set of borrowing by a foundation trust will be at the expense of other NHS trusts. Effectively, it is about who gets their applications in first. Private finance will not count, but, probably, foundation trusts will be more able to obtain private finance than NHS trusts.

In the process of determining the somewhat extraordinary prudential borrowing code, no real external obligation is placed to consult anyone except those whom the regulator believes should be consulted. Of course the Secretary of State will be consulted. That is fine. Every NHS trust intending to submit an application to become an NHS foundation trust should do so, but that covers a very limited class of people to be consulted.

In essence, Amendment No. 157 seeks to broaden the classes of people who could be consulted in the process. The amendment is probing in nature and sets out a representative sample by suggesting, representatives of employers, employees and patients". Those groups all have a vested interest in learning how these borrowing limits are to operate. However, this seems to be the Treasury's way of making jolly sure that, because NHS foundation trusts will not necessarily be able to spread their wings very far, if we are not careful they may come crashing to Earth. It would be sensible to provide for a broader franchise for consultation over this rather strange instrument than purely NHS trusts and the Secretary of State.

I hope that the Minister will be able to indicate at least an intention to provide for broader consultation and not simply rely on the wording in Clause 12(3)(c), which states, such other persons as the regulator considers appropriate". That seems a rather feeble provision.

10 p.m.

Lord Warner

I shall respond first to Amendment No. 155. The prudential borrowing code concerns limits on overall borrowing, not the terms and conditions under which loans are issued. These are matters for lenders, not the regulator. We do not think that the PFI system drives a coach and horses through this and, as I said in response to an earlier amendment, the servicing of the PFI arrangements will be taken into account in setting the prudential borrowing limit for each individual NHS foundation trust.

Changes in the terms and conditions of loans which might affect the ability of an NHS foundation trust to service debt are already taken into account in determining the prudential borrowing limit. Any charges paid by foundation trusts would reduce both their free cash flow and the amount of money available to service new debt. Thus, all things being equal, this will reduce a foundation trust's prudential borrowing limit.

I can tell noble Lords that we have consulted widely on the financial matrix that commercial institutions use to assess credit-worthiness and we would be happy to expand on that consultation in a follow-up to the written response that I have already promised to the noble Baroness, Lady Noakes, and other noble Lords.

If an NHS foundation trust took out a loan under inappropriate terms, that would constitute a breach of the duty under Clause 38 to exercise its functions effectively, efficiently and economically, and if necessary the regulator could step in to protect NHS services. That sets out our position on Amendment No. 155; we would not find it acceptable.

I now turn to Amendment No. 157, spoken to by the noble Lord, Lord Clement-Jones. In drawing up the prudential borrowing code, the regulator must consult the Secretary of State, applicant NHS trusts and such persons as he considers appropriate. Nothing in those arrangements prevents him taking account of the views of people such as those listed in the amendment. However, I would suggest that the groups set out in the amendment would not have any particular expertise when it comes to prudential borrowing. In our view, therefore, it would not make sense to set down a requirement for them to be consulted. However, as I have said, there is nothing to stop them being consulted, along with a number of other people whom the regulator may consider it appropriate to consult.

Lord Clement-Jones

Perhaps the Minister could indicate the types of people under Clause 12(3)(c) who would be consulted.

Lord Warner

This is a rather circular discussion. They would be the kind of people whom the regulator considers have some advice and expertise to offer in the area of setting prudential borrowing limits and devising a prudential borrowing code. As I said, there is nothing to stop the regulator choosing whom he wishes to do that, but expertise in this particular area is likely to be a major watchword.

Baroness Noakes

It may be that one or both of us are tired, but I do not believe that in his reply to Amendment No. 155 the Minister addressed any of the points that I made when I spoke to it. However, I am prepared to do a deal. If he reads what I said in Hansard and is prepared to respond to the points I made, I shall read what he said to ascertain whether or not I am wrong, rather than prolong the agony today.

Lord Warner

I am happy to give the noble Baroness that assurance. I am not a man to prolong the agony.

Baroness Noakes

In that event, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Noakes

moved Amendment No. 156: Page 5, line 36, at end insert "and have regard to the impact of private borrowing by foundation trusts on NHS trusts' access to capital The noble Baroness said: We come to the zero-sum game, or dog-eat-dog. Amendment No. 156 requires the regulator, in drawing up the prudential code under Clause 12, to have regard to the impact of private borrowing by foundation trusts on the access of NHS trusts to capital. This zero-sum game caused concern to a number of noble Lords at Second Reading.

We on these Benches favour freedom for foundation trusts to borrow, but not if the price is to starve the remainder of the NHS of capital. But that is the effect of the shabby compromise reached between the Chancellor and the Secretary of State for Health, when the Chancellor got his way and removed one of the most attractive aspects of foundation trust status.

When we debated this issue at Second Reading, the Minister was in denial. He said that the arguments were, a bit unconvincing".—[Official Report, 8/9/03; col. 108.] But the only argumentation that he produced was in regard to the extra money going into the NHS. But the NHS is not awash with cash. I can take him to many parts of it which are struggling to make ends meet while meeting the Government's endless stream of targets.

The department's expenditure limits will have a real impact on the NHS if foundation trust capital takes pound for pound away from the remainder of the NHS. That is why it is so important that the regulator takes that into account when determining the prudential borrowing code. 1 beg to move.

Lord Clement-Jones

I entirely echo what the noble Baroness said. We on these Benches have put our names to the amendment because we believe that, as the foundation hospitals are currently written into the Bill, this issue will be one of the real problems facing them. We are concerned about its impact on the remainder of the NHS and this "beggar my neighbour" approach could have a widespread effect.

As the noble Baroness said, the problem arises from the unwillingness of the Treasury genuinely to allow foundation hospitals a degree of freedom over their capital borrowing. In this context, capital is of course of huge importance in terms of development of services. I believe that this will be one of the major stumbling blocks in future, both in the way in which non-foundation trusts view foundation trusts and the way in which foundation trusts will be able to develop their own services when they are constrained in this way. There is no reason why they should be because whether foundation trusts will be able to borrow will depend on whether lenders believe they are a good risk. That is the crux of the matter. This set of provisions does not take enough account of that. They are hedged around with all kinds of artificial restrictions.

Lord Warner

I think we just fundamentally disagree, and I will set out the arguments as convincingly as I can.

NHS foundation trusts will be given the opportunity to access capital from both the public and private sectors and to use a wider range of financing options than is currently available to existing NHS trusts. Because accessing capital will in future be tied more closely to individual financial performance, it will enable each NHS foundation trust to better tailor capital planning to its individual circumstances, offering the opportunity to finance a wider range of healthcare delivery focus projects than it can at present. Examples of such projects might include new diagnostic centres, patient information systems or environmental improvements.

However, as we have tried to make clear already, NHS foundation trusts will be able to borrow only what they can afford to repay under a prudential borrowing code drawn up by the independent regulator. They cannot take the view that Father Christmas has come to town and just splurge on whatever comes to mind.

The independent regulator must, by virtue of Clause 3, exercise the functions in a manner that is consistent with the performance by the Secretary of State of the duties under Sections 1,3 and 5 of the National Health Service Act 1977. This includes the duty to provide a comprehensive health service that is free at the point of use. So there are constraints on the regulator as well by requiring him or her to act in accordance with the Secretary of State's duties.

In drawing up the prudential borrowing code, the independent regulator will have to take account of the impact of any borrowing on the wider NHS as part of his Clause 3 duty. NHS foundation trusts will not be robbing Peter to pay Paul, and we think Amendment No. 247 is unnecessary.

The noble Baroness drew attention to the remarks I made at Second Reading. But we cannot just sweep away the fact that the Government are changing the agenda in terms of both the revenue and capital that is available to the NHS. While I do not want to make narrow political points, I suggest to the Benches opposite that their thinking may be a bit conditioned by their own experience in government. I shall give a couple of statistics rather than a long line of them.

In the six years from 1997–98 to the end of 2002–03, NHS capital increased by 42.3 per cent in real terms. In the last five financial years of the Conservative government, it went down by 22.9 per cent in real terms. I am using those figures not just to make a narrow political point but to suggest that one's view about whether the other parts of the NHS may be "robbed" by NHS foundation trusts must, to some extent, be influenced by one's knowledge and experience of how much capital is in total available to the NHS. I am trying to say that the experience under this Government is different from that which Ministers will have had under a Conservative government.

If we look at the growth of capital that is envisaged over the next five years—and there is no reason for thinking that this will not take place—and at the 11 years from 1997–98 to 2007–08, the period covered by NHS foundation trust changes, capital will increase by 246.1 per cent in real terms, more than doubling in a decade. So the total volume of capital that is available to both NHS foundation trusts and NHS trusts is far, far greater than has been the case in the past. The revenue allocations are going up by around 7.5 per cent in real terms.

I am not saying that some people in the NHS would not like more money; I am saying that the financial climate influences the outcomes in relation to the subjects covered by the amendment.

Baroness Noakes

I accept that there is more capital going into the NHS now than there was during the early 1990s, but despite the increases the Minister referred to, there is still a very significant backlog in the NHS. The backlog maintenance must be something like £2.5 billion or £3 billion, even without considering the demands on the NHS for new medical technology or replacing existing technology, such as scanners—for which, again, there is a significant backlog.

Although increasing sums have gone in, we should not regard ourselves as being in some kind of seventh heaven so far as capital is concerned, because the capital needs in the NHS are very large. Our concern has always been that the foundation trust sector would have the ability to take resources away from the rest of the NHS because of the way in which the pound for pound calculation works on the departmental expenditure limit. The Minister has not really answered that point, which we see as a major problem.

I am not sure whether the amendment that we tabled is the right way to deal with the problem; we may need something even more direct. I shall reflect on that and read Hansard again, and doubtless we shall discuss the issue further. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 157 not moved.]

On Question, Whether Clause 12 shall stand part of the Bill?

10.15 p.m.

Baroness Noakes

We have already debated several aspects of the clause, so we shall not return to them. However, I shall use this brief debate to raise a few more issues with the Minister.

First, when will the draft prudential code be available? I understand that a draft is available. The noble Baroness, Lady Andrews, told me recently in a Written Answer that something called metrics and ratios will be published shortly. "Shortly" is one of the most flexible words in the Government's vocabulary, so will the Minister tell us when that will be? He indicated a few moments ago that he would include that in one of the many letters that he will have to write after today's sitting. Perhaps he would confirm that.

Secondly, will he say why the Secretary of State should be consulted by the regulator on the prudential code? What information could the Secretary of State give the regulator to which the regulator did not already have access? On the other hand, is this another backdoor way for the Secretary of State to give the regulator directions and, perhaps, tell the regulator how the Secretary of State sees the performance of his duties, in effect making that binding on the regulator?

Thirdly, to reinforce a point discussed by the noble Lord, Lord Clement-Jones, under one of his amendments, who will be consulted on these matters? There is a provision for it to be whoever the regulator believes to be appropriate. The noble Lord tabled one suggestion for discussion, but I am still in the dark about who it will be. Will NHS trusts, which will be the victims of any zero sum game, be consulted on the prudential code for NHS foundation trusts?

I am inclined to think that the prudential code is a mere flourish. At best, it will add nothing to individual decisions that must be made about borrowing limits for individual tasks under Clause 17, to which we will come in due course. At worst, it will tie up a simple process in financial sector gobbledegook, with the result that the wrong decisions will be made. We shall need a lot of convincing that the clause should stand part.

Lord Warner

I hope that the extensive and informative text that I send to the noble Baroness will convince her that things are not quite as she would have us believe.

I should correct myself. I may have confused the noble Lord, Lord Clement-Jones, by referring to Amendment No. 247. That was a slip of the tongue, as I was talking about Amendment No. 156. I mixed up the old numbering with the new numbering. I apologise.

As regards Clause 12 I shall not go over all the arguments again. We believe that the measure we are discussing will be available shortly. I do not have a particular date in my head at the moment or in my brief but I shall try to cover that point in a letter, which will be sent to the noble Baroness shortly. I shall respond to her quickly.

I do not want to go over the arguments again about people being consulted. We have made clear that the regulator has certain obligations. We believe that the Secretary of State needs to be consulted. Much preparatory work is being done in this area. That would need to be shared with the regulator for him to consider. The Secretary of State has responsibility for the overall funding of the NHS. Given his general duties in relation to the wider NHS, we think that it is appropriate in those circumstances for him to be consulted by the regulator when he draws up the prudential borrowing code. There is nothing more sinister than that. It is not an attempt at back-door instructions to the regulator. It is a sensible way to ensure that relevant information is provided to the regulator.

Lord Hunt of Kings Heath

Given that the regulator must consult the Secretary of State, can I take it that the ultimate outcome will be a fair share basis? Given that the prudential borrowing code has to fit the external expenditure limit of the department, there has to be a basis on which the borrowing code must relate to the overall expenditure of the department. Therefore, there must be a fair share basis between foundation trusts with a borrowing code and non-foundation trusts with the traditional approach to access to capital.

Lord Warner

As is often the case, my noble friend is absolutely on the ball. However, as I tried to say earlier, there is not a zero sum game in the sense that there might have been in the past. It will be appropriate for the Secretary of State to offer views on the needs of the wider NHS and the regulator is under an obligation to have regard to the wider needs of the NHS in drawing up the prudential borrowing code, as indeed he is required to do in the way he exercises other powers and duties. Ultimately, the code is the regulator's responsibility but many of the draft codes, key notes and ideas are already with applicant trusts. However, I shall come back to the noble Baroness on the timing of a further version.

Lord Clement-Jones

The noble Lord, Lord Hunt, raised a very interesting issue. In one of my earlier contributions I made an assertion that, as I understood it, under the prudential borrowing code capital would not be allocated to foundation trusts according to regional or national priorities. It seems to me that in responding to the noble Lord, Lord Hunt, the Minister opened the door to saying that the prudential code is not just about ability to repay, and therefore it is not purely a calculation relating to the assets and cash flow of the individual foundation trust. One is able to take a broader view about priorities within a region or, indeed, nationally depending on the circumstances and priorities that may be set by the Secretary of State. Is the Minister really saying that in response to the noble Lord, Lord Hunt?

Lord Warner

No, I am saying that the regulator has a requirement to take account of the wider interests of the NHS across a range of his duties. The person who has much information about future funding of the NHS is the Secretary of State. In setting the prudential borrowing code the regulator will have a set of matrices which he will want to fit into a context of the total amount of resources available for the NHS. That will enable individual NHS foundation trusts to use the prudential borrowing code to see how the)' may advance and take forward their borrowing in a sensible way without having a damaging impact on the rest of the NHS.

Lord Clement-Jones

I apologise for speaking again, but I must say that the whole prudential borrowing code becomes less and less clear as we hear it spin out from the Minister. I think that we all look forward to the clarity to be contained in the letter to follow,

Baroness Noakes

A few moments ago, I debated whether to oppose the Question, thinking that Members of the Committee might be wearying of matters financial. However, I am rather glad that we have had the debate, especially as with the intervention of the noble Lord, Lord Hunt of Kings Heath, it has been confirmed that fair shares will be a dominant feature. All those NHS trust applicants can think again about freedoms, which may simply be a figment of their imaginations. I hope that what the two Labour Peers have said gets wide publicity among the NHS trusts considering becoming foundation trusts.

I agree with the noble Lord, Lord Clement-Jones. I am becoming more and more concerned that all the rigmarole of prudential codes, all the language of free cash flow and metrics and ratios, is simply an elaborate smokescreen for life going on as before, probably in the most dishonest way.

Today is not the day to challenge formally whether Clause 12 should stand part of the Bill, as we have much to look forward to in the Minister's reply to the many detailed points that we have raised. However, he should be on notice that the area will receive the most careful attention at the next stage of our deliberations.

Clause 12 agreed to.

Clause 13 [Public dividend capital]:

Baroness Noakesmoved Amendment No. 158:

Page 6, line 10, at end insert— ( ) Where in the twelve months immediately preceding an NHS trust becoming an NHS foundation trust an amount of its public dividend capital has been written off, the amount of its initial public dividend capital shall not be treated as having been reduced by the write-off unless it has been approved by each House of Parliament. The noble Baroness said: I shall speak also to Amendment No. 159. Amendment No. 158 was prompted by the fact that Mr Hutton, a Health Minister in another place, said in Committee on 22nd May: We have asked applicant trusts to make a case where they believe historical deficits should be written off before they achieve foundation trust status".—[Official Report, Commons Standing Committee E, 22/5/03; col. 360.] If those deficits are written off, some part of the trust's public dividend capital will need to be written off. Will the Minister say under what power the write-offs referred to by Mr Hutton will be made?

I am well aware that deficits sometimes need to be written off. There are many trusts with accumulated deficits, and doubtless they would all like their balance sheets cleaned up. For example, the Comptroller and Auditor-General, when he reported on the last set of summarised accounts—a most useful source of information, as I have told Members of the Committee several times today—noted that 46 trusts, which is 15 per cent of the total, were managing significant financial difficulties.

The purpose of the amendment is to make such write-offs subject to parliamentary approval where they precede the setting up of a foundation trust, so that a level playing field exists. We do not want to see the favoured few—the NHS foundation trust applicants—having their accounts polished up so that they look bright, shiny and successful if the same treatment is not also available to the NHS trusts that languish under direct Secretary of State control. Parliament will surely want to satisfy itself that the write-offs do not conceal financial weakness and are otherwise properly made.

Amendment No. 159 is a probing amendment related to Clause 13(3), under which it appears that the Secretary of State can make a retrospective alteration to the terms on which PDC has been issued. In what circumstances do the Government believe that such a power might be exercised, and why is there no provision for the consent of the foundation trust to the alteration? Is it possible that the terms could be worsened from the foundation trust's perspective without its permission? I beg to move.

Lord Warner

Public dividend capital represents the Department of Health's equity interest in defined public assets across the NHS. It constitutes an asset of the Consolidated Fund. The department is required to make a return on its net assets, including the assets of NHS trusts, of 3.5 per cent. For NHS trusts, that takes the form of a variable charge—a public dividend capital dividend—paid twice yearly. That payment represents—I emphasise the word—a notional cost of servicing, but not repaying, debt. Effectively, it is an interest rate of 3.5 per cent, which includes a premium on the costs to Her Majesty's Treasury, but it is less than might be payable in a commercial environment.

Repayments of public dividend capital are made only when the trust has surplus cash; for example, land sales proceeds not spent on new capital assets. The PDC of an NHS trust applicant for NHS foundation trust status, immediately before authorisation is granted, will continue as PDC under the same conditions for the NHS foundation trust. NHS foundation trusts will pay public dividend capital dividends on exactly the same terms as NHS trusts, so there would be no significant change.

Amendment No. 158 is perhaps misguided. Cancellation of PDC is subject already to Treasury and parliamentary approval. The Treasury prepares a Treasury minute which it must put before Parliament, so the Secretary of State could not simply write off the PDC of an NHS trust or an NHS foundation trust. The amendment is therefore unnecessary. In any case, cancellation of PDC, as opposed to repayment, usually occurs only on the dissolution of an NHS trust, in which case, the cancellation of the PDC is matched by cancellation of the net asset reserves in the dissolving trust's books. Under Clause 7(5), on becoming an NHS foundation trust, the body corporate, which was an NHS trust, is not dissolved, but continues, albeit under a different name and with a different status. The applicant's property rights and liabilities, including PDC, continue with the new body.

I turn to Amendment No. 159. PDC is not a government asset, so it is entirely appropriate that the Secretary of State should, with the consent of the Treasury, determine the terms of NHS foundation trusts' PDC, just as it does now with NHS trusts. In addition, the Secretary of State must consult the independent regulator before setting the terms under which PDC is issued to an NHS foundation trust. That is the system that is in place. It is in no way as sinister as some noble Lords may suggest.

10.30 p.m.

Baroness Noakes

I suppose that I should thank the Minister for the lesson on PDC, but perhaps I am one of the few people here who did not need it, along with the noble Lord, Lord Hunt of Kings Heath. The Minister said that Amendment No. 158 was not necessary because there was already a procedure for a Treasury minute on PDC. The amendment proposes that in instances where the PDC of an NHS trust is written off or cancelled in the 12 months prior to the NHS foundation trust being set up, that should require the approval of each House of Parliament. I think the Minister will agree that that is a different matter from a Treasury minute. A Treasury minute basically informs Parliament. 1 was talking about an approval process.

I am not sure that the Minister addressed the specific question that I raised, which was about the processes that are in place to clean up potential foundation trust balance sheets prior to their being set up. I understand the process whereby in the minute before a foundation trust is created, what is on the balance sheet carries over to the new one. That is fairly straightforward. I was focusing on what was going to be forgiven— knocked out of the balance sheet—in the lead-up to that process. Will the Minister comment on that?

Lord Warner

I was trying to make the point—and I thought that 1 had done so—that the applicant's property rights and liabilities, including public dividend capital, will continue with the new body. I am not sure where the idea of "cleaning up" comes from.

Baroness Noakes

The idea of "cleaning up" came from Mr Hutton on 22nd May. It was part of the quote I read out in introducing my amendment. He stated that applicant trusts had been asked to make a case where they believed that historical deficits should be written off before they achieved foundation status. Is the Minister telling me that that process is not taking place or that it is?

Lord Warner

I will look again at the noble Baroness's point and at the source she is quoting. My briefing states that the applicant's property rights and liabilities, including public dividend capital, will continue with the new body. If some legitimate changes can be made before that transfer, no doubt they will be made. However, it is not true that we are writing off public dividend capital.

Baroness Noakes

I thank the Minister for agreeing to go away and look at the matter again. The quotation I made was from one of his ministerial colleagues in another place and it raised significant issues. These PDC issues might seem small and trivial but I suggest that we wait until the Minister has had a chance to look again at the matter and we can reconsider it. I hope that he will write to me with the outcome of his further inquiries and we can return to the matter on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 159 not moved.]

Clause 13 agreed to.

Clause 14 [Authorised services]:

[Amendment No. 160 not moved.]

Earl Howe moved Amendment No. 161: Page 6, line 33, leave out ", subject to any restrictions in the authorisation, The noble Earl said: In moving Amendment No. 161, I shall speak also to Amendments Nos. 162, 165 and 166. I come to a somewhat troubling set of issues arising from the provisions in Clause 14. They point to the likelihood of an authorisation for foundation trust status being made conditional on a trust providing for particular goods or services. I find these prescriptive provisions surprising and contrary to the claims that the Government have been making about foundation trusts We thought that foundation trusts were going to be free to configure their services in a manner appropriate to local needs as they saw them. We see from this clause that the regulator will decide what services they must provide.

We thought that local patients and the public were to have an influence on the development of service provision. We now see that any influence they may choose to exercise will be curtailed by the regulator, who will effectively have second-guessed them. Subsections (4), (7) and (8) are, in my view, misconceived. We earlier debated cancer networks. I do not believe that we need Clause 14 to safeguard those, if that should be a concern.

In any case, I find it extraordinary that Ministers are fearful that an NHS trust, once granted foundation status, might suddenly decide to abandon the services it provides to its customers. It is the job of hospitals to provide treatment and services which their patients need and for which they are paid by their respective PCTs. Their raison d'être is to treat patients. The idea that foundation hospitals will not continue to deliver high-quality, broad-ranging services when their patients want those services is absurd.

It looks to me as though the Government are fearful that the operational freedoms being given to foundation trusts will in some way undermine the delivery of mainstream NHS services. I do not believe that. These subsections show the timidity of Ministers. Ministers are not prepared to let go, even when they say that is what they are doing. I find that regrettable, to say the least. I beg to move.

Lord Warner

First we were foolhardy; now we are timid. I want to deal with the two sets of amendments in sequence. First, Amendment No. 161 removes the regulator's powers to restrict NHS foundation trusts' non-healthcare activities. Perhaps I may remind Members of the Committee that the principal purpose of an NHS foundation trust is to provide NHS services to NHS patients. The Bill also provides that foundation trusts may carry out other activities with the objective of generating surplus income to support the NHS principal purpose. These provisions parallel the income generation powers already available to NHS trusts. Examples of income generation activities might include: running occupational health services on behalf of non-NHS employers; engaging in commercial R&D projects; providing non-clinical amenities, such as Internet facilities, for patients, staff and visitors; leasing space to service providers, such as newsagents or hairdressers; and providing private health services.

In normal circumstances, the regulator would not intervene in those activities. We are not setting up the regulator to intervene, and he has restraints on his ability to do so. There must be a significant problem before he can intervene. But it is right that he should have the power to place restrictions on income generation activities to ensure that they do not interfere or conflict with, or detract from, the principal purpose of providing NHS services. That is the purpose of the power of restriction already in the Bill.

I turn now to Amendments Nos. 162, 165 and 166, which remove the regulator's power to protect services. In order to safeguard essential NHS services, the regulator will, under their terms of authorisation, require NHS foundation trusts to offer certain "protected" services to NHS commissioners on a continuing basis. From earlier discussions, I thought that noble Lords were very concerned about this issue. Protected services will include essential education and training and research programmes, as well as NHS clinical services.

The independent regulator's decisions on what should be classified as protected will be based on, among other things, the criteria set out in Clause 14(7). The regulator needs to protect services, in line with his general duty under Clause 3, to act consistently with the Secretary of State's duties under the 1977 Act to promote and provide a comprehensive health service in England and to provide clinical facilities to universities with medical or dental schools.

I am slightly confused. At one moment, noble Lords were concerned that NHS foundation trusts would not meet the wider health needs required; at other times, when faced with provisions which ensure that the trusts will meet those wider obligations, noble Lords want to remove the protection. The amendments would remove the regulator's powers to protect those services, and that would jeopardise the regulator's ability to protect the interests of NHS patients. The effect of the amendments would be that NHS patients could be denied essential services, and that, in the Government's view, is clearly not acceptable.

Earl Howe

I am far more concerned that, if one takes this clause literally, we are likely to have regulation with a heavy rather than a light touch. I am not against default powers or the thought of the regulator intervening where there is a clear need for him to do so. But this clause seems to suggest that he will be highly prescriptive.

I take some comfort from what the Minister said about the selective nature of the use of the powers. Even so, I remain uneasy. There are concerns about the wider health needs across the health service as a whole but, frankly, I doubt whether powers as extensive as this are needed to protect those needs. Nevertheless, I shall read carefully what the Minister said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 162 not moved.]

Earl Howemoved Amendment No. 163: Page 6, line 40, leave out "and may require The noble Earl said: A very similar point arises in relation to this amendment, which concerns teaching and research. No one wants to see research diminish across the health service. We have argued long and hard in this Chamber for sensible mechanisms to ensure the continuation of research in the reformed NHS. But surely we cannot have a regulator who insists on telling a foundation trust that it must carry out, and continue to carry out, this or that type of research. We have only to reflect on what has happened recently in medical schools around the country to realise how misconceived that idea is. This year the DfES decided to skim off 2.2 per cent of the teaching budget in medical schools and channel that money instead into a programme of social inclusion. The result is that medical schools are 2.2 per cent worse off than they were and are having to make cuts.

In some cases those cuts are painful. Collaborative clinical research work between medical schools and NHS trusts is being rationalised and the relevant staff are having to be laid off or redeployed. The effect on some NHS trusts is very direct. However, the point is that that process of rationalisation is something which the medical schools and trusts have no option but to put in train. In any given year it is always possible for the HEFCE to reduce its funding for medical research in certain areas, as has happened this year with Queen Mary's Medical School, for example. At Queen Mary's, as elsewhere in London, there has been a major restructuring of the research base at the behest of the HEFCE.

Against that backdrop it would be totally inappropriate for the regulator to require trusts to carry out particular types of research. It would place a tie on them which is quite unrealistic. If the medical school alongside them, for reasons beyond the trust's control, decided to reconfigure the research base, the trust may have no option but to quit that area of research. Trusts need operational flexibility in the field of research as they do everywhere else. That is why I believe that the provisions in subsection (6) are overly prescriptive. I beg to move.

10.45 p.m.

Lord Turnberg

In speaking to Amendment No. 164 in this group I express an interest as vice-president of the Academy of Medical Sciences and adviser to the Association of Medical Research Charities. My particular concern is in the need to pay specific attention to our major teaching hospitals associated with our medical schools where research is such a vital part of their raison d'êetre.

Research and teaching goes on in virtually all hospitals. That is why I support the amendment tabled by the noble Earl. However, it is much more than simply an optional extra in our medical schools and university hospitals. I suspect that everyone is supportive of the need to pursue medical research. I do not need to expand on that to noble Lords.

Most basic research is done in research laboratories, but at the end of the day it is the research on and with patients which has to be done and that is where the problems lie. It is in hospitals, largely university hospitals, and in the community, where that has to be done and here it is easy for research to be regarded as a distraction from the prime purpose of caring for patients here and now.

Care for today's patients will always take precedence over efforts to improve care for tomorrow's patients. Targets for waiting lists and so forth will always focus the attention of managers on the need to put their resources quite reasonably into immediate care for patients. So, research will always come down the list of priorities. I refer, for example, to major university hospitals. It does not seem to figure highly in bids for foundation status, nor does it contribute to star ratings. So, it has a lower priority than most activities in hospitals.

If we consider that medical research is important— I hope that we do—it has to be specifically identified and protected. I am not talking about the direct costs of research, which are borne by research grant giving bodies—such as the MRC—and medical charities but about the facilities in hospitals for research to be possible: the extra space and extra time needed for staff to pursue the research. Nor is it that those hospitals should simply allow research to be undertaken in a kind of passive way. They have to take research into account when they are calculating their need for staff and other facilities. While funding from the NHS research and development budget undoubtedly helps, it needs more than that. It requires the research ethos of teaching hospitals to be fostered throughout. My fear is that foundation trusts with their new-found freedoms will tend to neglect this seemingly non-essential but vitally important activity in the face of clinical demand.

That is why I tabled the amendment which, although it may not the most elegantly worded that your Lordships have read this evening, focuses attention on the need for foundation hospitals associated with medical schools to accept a key responsibility for that activity.

Lord Clement-Jones

I want briefly to associate those of us on these Benches with the amendment tabled by the noble Lord, Lord Turnberg.

It used to be the other way about: young, ambitious doctors in hospitals wanted to do research as part of the trail that led certainly to academic medicine but also to senior NHS consulting jobs. Unfortunately, that seems to be less the case now. I hope that we are not going down a slope that further diminishes the importance of research, which has been diminished during the past 10 years or so in our teaching hospitals, but which historically has been of enormously high quality. Some contributions have been highly significant. It is not just a question of scientists doing such work; clinical doctors can contribute a huge amount. We should recognise that, which is why the amendment is so welcome.

Lord Hunt of Kings Heath

I echo the remarks of my noble friend Lord Turnberg and the noble Lord, Lord Clement-Jones. No one should underestimate the critical importance of high-quality teaching research in our hospitals—not only for its benefit to patients but for the contribution that it makes to the science base in this country and to UK plc. It can be no coincidence that we in this country have one of the strongest pharmaceutical-based industries. Much of that is based on the excellence of our scientific research and expertise but also on the high quality of teaching research in NHS hospitals.

The amendment is probing, but my noble friend is right. During the past few years there has been concern that in the inevitable emphasis on services to patients—which is right—the duty of the NHS to support teaching research has perhaps sometimes been underestimated.

It is not just a question of what happens in the NHS locally; it is also a question for the Department of Health, the Department for Education and Skills, the Higher Education Funding Council for England and other government departments. If we are really serious about this country having a strong science base, we must acknowledge the critical importance of the NHS in teaching research. I hope that between Committee and Report my noble friend the Minister will consider whether the department can take up other issues with HEFCE and the DfES to ensure that we support teaching research in this country.

Baroness Finlay of Llandaff

I, too, rise to speak in support of the amendment. I have already declared my interest as vice-dean of a medical school. Tomorrow I shall be attending the Council of Heads of Medical Schools at a meeting in Belfast. The issue of teaching and research is of fundamental concern to all medical schools across the UK.

Those who have already spoken in the debate have emphasised most eloquently the important contribution that teaching and research make to the advancement of our standards of care, as well as to that of the care that patients receive. The noble Lord, Lord Turnberg, was absolutely correct to say that an ethos supporting teaching and research must filter through the whole of an NHS organisation—the whole trust—from the top to every single layer.

There are enough hurdles and difficulties already in place for those who are trying to pursue high-quality research without trying to do so in an environment that they perceive as becoming increasingly closed to their pursuing the advancement of science for the welfare of the people of this nation. If we do not invest in teaching and research we will pay and pay dearly in years to come.

Lord Chan

Apart from the remarks of my noble friend and the noble Lord on university medical research and teaching, such a provision is essential if we are to improve primary care. We have now made public health a basic primary care issue, but there will be no improvement in that field if we do not guard a research ethos. Many think that foundation trusts might be the mechanism to give hospitals added incentive to carry out research that will influence teaching. We should remind ourselves that we are increasing numbers of students and doctors. Britain attracts many overseas doctors and students. Basic primary and secondary care are essential, as is the next generation of our doctors.

Lord Brooke of Sutton Mandeville

I hesitate to intervene at this late hour. I speak from a very narrow, London perspective. The constituency that I represented formerly in another place, when its final boundaries were settled by the Boundary Commission, had contained six teaching hospitals when I started as a Member of Parliament. Over 24 years I lived through the rationalisation of that process. I experienced RAWP in the early stages, the decisions taken to merge various teaching hospitals with others outside, and the process that occurred in the University of London. Yet I was always conscious that those hospitals derived their pre-eminence from traditions that went back 200 years and that, therefore, they had a particular contribution to make to the history of medicine in this country.

I do not propose to embroider or embellish anything said by my noble friend Lord Howe or the noble Lord, Lord Turnberg, in speaking to their amendments, except to say that, from that narrow perspective, I am immensely conscious of our heritage and concerned that we manage to maintain it. I declare an incidental interest as Pro-Chancellor of the University of London, the umbrella organisation for those medical schools that remain within our purview. In all other respects, I follow the 18th century example of the Member of Parliament who spoke immediately after Edmund Burke saying, "Ditto to Mr Burke". I do not propose to keep the Committee any longer by repeating remarks made by others already.

11 p.m.

Lord Warner

Before responding to Amendments Nos. 163 and 164, I shall make a few general remarks that, I hope, will reassure Members of the Committee who spoke, particularly those behind me and on the Cross Benches. The Government accept that research is important. I must confess that it is part of my portfolio within the Department of Health. But, in my short time in the department, I have learnt some pretty complex issues surrounding research activity in the NHS and the links between advances in science and carrying those through clinical trials to the ultimate benefits of patients. It is not a simple area; there have been problems of some standing for some time. The issues require attention outside the Bill, and we are considering them.

En passant, NTRAC, which has shown what can be achieved in the field of cancer, demonstrates how one can bring NHS resources to help take advances in science through a clinical trial stage to the great benefits of patients. We must get better at those mechanisms. I am not sure that amendments to the Bill will deal with the kinds of problems about which my noble friends behind me are concerned, but, without making any promises, I shall look at the ideas behind Amendment No. 164 and see whether there is anything more that we can do.

Amendment No. 163 is not likely to achieve the noble Earl's objective. Under Clause 14(6), NHS foundation trusts must be authorised and may be required to carry out research, education or training. To safeguard NHS essential services, the independent regulator will, under its terms of authorisation, require foundation trusts to offer certain protected services, including essential education, training and research programmes as well as NHS clinical services. If a university reconfigures or changes services in the way described by the noble Earl, the independent regulator will need to take that into account in protecting provision of related services by the foundation trust.

Amendment No. 163 deletes the words "and may require" from Clause 14(6). Therefore, although NHS foundation trusts would still be authorised to carry out research and training activities, the regulator would not be able to require that they do so. The amendment therefore removes the regulator's power to protect those services, which I am not sure is what the noble Earl is trying to achieve.

On Amendment No. 164, for reasons that I have already stated, we think there is already adequate provision in the Bill to ensure that the regulator protects the needs of research in giving a particular authorisation. For example, we expect that NHS foundation trusts will provide clinical learning opportunities and placements for nursing, medical and dental students, cadets and staff undertaking NVQ postgraduate training for junior medical and dental staff, and placements for pre-registration students in other health professions. We take very seriously the issues relating to education and training and the linked issues of research. However, as I said earlier, I am happy to look again at this particular amendment to see if there is a drafting improvement that can be made that would signal the Government's commitment to the wider issues of research that I have mentioned.

Earl Howe

This has been a very useful debate and I entirely associate myself with the comments of the noble Lord, Lord Turnberg, and the very wise comments of the noble Lords, Lord Hunt and Lord Chan, and the noble Baroness, Lady Finlay. The continuation of teaching and research in foundation trusts is of fundamental importance. I believe that there is a place for an amendment of the type proposed by the noble Lord, Lord Turnberg. However, that is different from saying that the regulator should have a prescriptive power to insist that particular programmes of research should be pursued. That is my difficulty with this clause. I have nothing against the regulator protecting research or educational activity as a generality, but it is out of place for him to do so in a specific sense.

I bow to the Minister's better judgment on the wording of my amendment. It may not achieve what I had intended. I will go away and think about a different formulation because this is certainly a matter to which we will return at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 164, 165 and 166 not moved.]

Clause 14 agreed to.

Clause 15 [Private health care]:

Baroness Barkermoved Amendment No. 167: Page 7, line 24, leave out "may" and insert "must The noble Baroness said: I vividly recall that, when the noble Lord, Lord Hunt, first came to this House to present the NHS Plan in the early part of 2002, he used in his speech Nye Bevan's phrase about bedpans, Tredegar and Whitehall beloved of health Ministers throughout the ages. I mention that now because the amendments relate to one of the famous things done by Nye Bevan. Perhaps the longest-running sore in the NHS is the issue of pay-beds. I do not propose to lecture a gathering such as this at this time of night on the subject of pay-beds. I shall assume that everybody knows what they are.

The reason for the amendments is simple. It has never been demonstrated that pay-beds in NHS hospitals make a profit. They earn income for the NHS, which receives about £360 million a year for the private work that it undertakes. However, that is income, not profit. The basis on which private work is done in the NHS has never been transparent. There is good reason to think that, if that work were properly and fully costed—not just on the basis of surgeon time or consultant time—we might find that it cost the NHS money to provide that service.

It is reasonable to expect that foundation trusts should be able to carry out private work; it is not reasonable or acceptable to believe that they should do so at a cost to NHS patients. It is an even greater cause for concern when one considers the shortage of beds in the NHS and the extent to which patients are being treated abroad to make up for deficits in capacity in the NHS, at considerable expense. In addition, one should consider the amount of money spent by the Department of Health on capacity-building operations of one kind or another.

The intent behind the amendments is not to say that private work should not be carried out in the NHS but that, if it is, it should be done on a transparent basis. Independent units within the NHS should be separate and should be transparent about what they do. Private work should not be done at a cost to be paid by the NHS. It is right, therefore, that there should be a cap on the amount of private work that can be done and that that cap should be unambiguous.

The matter was discussed during the Bill's passage through another place. Extraordinarily, there was a move to water down the previous version of this part of the Bill to make it less forceful. That was a strange move, given that we are discussing the ability of foundation trusts to use and expend NHS resources on non-NHS work. It goes contrary to the rest of the Bill.

This would be a good time to resolve what has been a sore in the NHS since 1948, and I look forward to a favourable reply from the Minister this evening. I beg to move.

Lord Warner

Amendments Nos. 167 and 170 would reverse the amendments introduced by the Government in another place. Those changes were necessary to ensure that the independent regulator had discretion over whether he could restrict goods and services that were not provided to the NHS in England. Without that amendment, the regulator would be required to restrict the provision of all services that were not English NHS services, including the provision of services to the NHS in Wales, Scotland and Northern Ireland. That would be the effect of the amendment proposed by the noble Baroness, on which she may wish to reflect before pursuing this particular wording.

I understand the concern that changes introduced in the other place would give the regulator discretion not to apply the private patient cap. That is not the case; to suggest otherwise is misrepresenting the legal position. Under Clause 15(2), the regulator must impose a fixed limit on the amount of private health care which NHS foundation trusts that were formerly NHS trusts can provide. Our position has not changed in any way, shape or form. Therefore, Amendments Nos. 167 and 170 are not appropriate; nor do they achieve the objective described by the noble Baroness. They would cause concerns in Wales, which has already exercised a number of Members of the Committee.

As regards Amendments Nos. 167 and 171. our priority is NHS patients. Clause 15(2) of the Bill mandates the independent regulator to cap the amount of income that an NHS foundation trust can derive from the provision of services to private patients. It will prevent those NHS foundation trusts which were previously NHS trusts from doing a higher proportion of private work than they do today.

The independent regulator needs to have the powers necessary to ensure that foundation trust activities and income are consistent with its primary purpose of providing NHS services. The amendment would seem to provide a loophole for circumvention of the private patient cap. As I understand it, according to the amendment, a foundation trust could set up a subsidiary which resulted in competition for a limited local pool of staff or affected the NHS foundation trust's ability to provide NHS services in other ways. I do not think that it is the noble Baroness's intention to allow this circumvention. Certainly, it is not what the Government would find acceptable.

Baroness Noakes

The noble Baroness, Lady Barker, made a number of suggestions; for example, while private patient income can be seen going into the accounts, there is no public information on its financial effect. Can the noble Lord assist the Committee by giving the type of financial information available in respect of private patient income and the net financial results achieved?

Lord Warner

As I recall, NHS foundation trusts are required to provide the information in their annual accounts.

Baroness Noakes

My question concerned NHS trusts. This has been going on for a long time. It is a question of what information is available on the type of financial returns that are achieved currently by NHS trusts. That is what will be carried forward into foundation trusts. I am trying to tease out what is available.

Lord Warner

I am not sure what information is currently available in the public arena. Certainly, that is an area where information must be provided to the regulator so that he can make a decision. By implication, that figure is capped at the present level. Therefore, in the first annual report of the new foundation trust, it will show a figure within the existing level of private patient income. That is the way the scheme is being set up.

Baroness Barker

I thank the Minister for his reply. I return to my first point: the matter is not income, it is profit; namely, income against cost. I am not sure that the Minister covered that in his reply.

Lord Hunt of Kings Heath

I thank the noble Baroness for giving way. Why would an NHS trust engage in private sector activity if it was not producing a return? Surely, it must be in the interests of the trust and the future foundation trust to ensure that a return was produced. Why would it not want that to happen?

11.15 p.m.

Baroness Barker

For the same reason why hospitals have done so since 1948. It was part of a settlement to keep consultants within hospitals.

Baroness Noakes

I thank the noble Baroness for giving way. Private patient income was expanded massively as a result of the 1998 legislation which effectively authorised significantly greater income-generation powers. I understand that the position since then is that it is necessary for each trust to keep a form of memorandum trading account of every single income-generation activity to show that such activity does achieve a net result.

This is not a hangover from 1948; rather, it is a specific policy decision taken by the previous government to expand income from such sources.

Lord Clement-Jones

At this late hour I suspect that I may be prolonging the agony, but many issues need to be raised in this area in terms of whether a real profit is being made. For example, how are property costs dealt with? That, too, is a key element.

Baroness Barker

I thank my noble friend for his comment. A further point I want to put to the Minister is that I do not see why, in view of debates on every other health Bill in which I have taken part, on this occasion changing the words "may" and "must" signifies in some way a strengthening of the provision. I hesitate to pray in aid the noble Lord, Lord of Kings Heath, in this regard, but I can recall several of his speeches on precisely this point. So I do not accept the argument put by the Minister.

The Minister also made an accusation that the amendments represented a loophole. I direct him to the wording of the latter part of Amendment No. 171 which states, an 'independent unit' means a part of an NHS foundation trust that is run as a separate entity and whose franchise is subject to open competition". I do not believe that that wording suggests a loophole; it marks a strengthening of the basis on which private work may be undertaken.

Finally, in his reply the noble Lord raised the question of patients from Wales. I believe that it is the clear intention that NHS foundation trusts should and would treat patients from the four nations of the United Kingdom. Clearly, we hold completely contrary views of the effects of these amendments.

That said, I shall read the Minister's comments with a great deal of fascination and no doubt we shall return to this matter at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 168 to 171 not moved.]

On Question, Whether Clause 15 shall stand part of the Bill?

Baroness Noakes

I rise briefly to correct a remark I made earlier. I referred to a piece of legislation passed in 1988 rather than 1998. Sometimes it seems like only yesterday that we were still in power. At this late hour, my memory slipped for a moment.

Earl Howe

I hope that the Committee will forgive me if I strike a somewhat different note from that sounded by the noble Baroness, Lady Barker, in the last group of amendments. The cap on the ability of foundation trusts to raise income from private patients is, for us, the single most unnecessary piece of interference in the whole Bill. It is striking that a Bill which professes to be concerned with giving hospitals greater freedom should in fact seek to place greater restrictions on foundation trusts than are in place on non-foundation trusts. What mischief is this provision meant to address?

Over the years we have seen the development of a partnership between the private and the public sectors to the mutual benefit, I believe, of both. That partnership can take many forms, but its advantage for the NHS is not simply to generate additional income, which it certainly does, but often to ensure that state-of-the-art facilities are available to NHS patients which, but for the private sector, would not be available owing to their unaffordability.

My honourable friend Chris Grayling in another place gave some examples. At Basildon and Thurrock General Hospitals NHS Trust there is an MRI scanner that is used out of hours by private patients. The revenue from those patients defrays the costs of the scanner. University Hospital Birmingham NHS trust has both MRI and CT scanners, as well as other services which are all frequently used by the private sector. My honourable friend quoted several other similar examples. One hospital said that private patient use of in-patient services and equipment generated £2.5 million last year for the trust, money that was then available to fund patient care.

The consequence of a cap on private income will be that, taking the last financial year to 31 st March as the base year, no foundation trust will be able to increase the proportion of its income derived from private work beyond the proportion recorded in that base year. That is an absurd and potentially damaging restriction. If a trust is currently generating, let us imagine, only small sums by way of private income but wishes to invest in a new MRI scanner and then use private patient income to defray part of the cost, it will be illegal for it to do so. That is the consequence of what the Government are doing. Removing the cap on private income would not be "doing down" the NHS or allowing hospitals to be taken over by private patients; it is about protecting the mutually beneficial partnerships that currently exist to bring real benefits to NHS and private patients alike.

The Government have done a great deal over the past few years to promote and encourage these partnerships. They are now seeking to put a brake on them—a brake that could lead to perverse and illogical consequences. Suppose a set of services provided by a foundation trust were relocated to another hospital; then the total income of the foundation trust would fall. But, as a consequence, its income from the private sector would also have to fall at the very time when it needed to make up for the revenue it had lost. How can that be logical?

Similarly, if a foundation trust finds that it cannot invest in an expensive piece of equipment because to do so would infringe the cap on private income, it might be tempted to buy in the necessary capacity from a private provider. That would be a way of getting round the rule, but it would almost certainly cost the foundation trust a great deal more than renting out its own machine to private patients in-house. In another situation a trust might find that it had temporary spare bed capacity but that it was unable to offer it to private patients because to do so would breach the legal cap.

This measure will force foundation trusts to behave in ways which defy reason and which are not to their financial advantage. But we know why it is there. It is there not as a means of benefiting NHS patients but as a means of avoiding further embarrassment over the Bill with certain quarters of the Labour Party. That is a very poor reason for including it.

Nothing that I am seeking to do would interfere with the overriding provision in the Bill that the principal purpose of a foundation trust is to provide healthcare services to NHS patients. I seek to do away only with a piece of dirigisme that works against the interests of the NHS.

Baroness Barker

I return to one of the points I made in the previous debate. No one knows with any certainty what is the real costs of the provision of private services within the NHS. In his remarks, the noble Earl, Lord Howe, concentrated almost exclusively on the subject of capital equipment costs. By far the biggest cost in the NHS is for staff and nursing care. A respected health economist, William Laing, tried to carry out an exercise to find out what was the cost of an NHS pay bed but could not do so because the information was not available. We therefore have to ask basic questions about costs, profits and profitability. Some 130,000 extra NHS patients could be treated each year if the 3.000 NHS beds currently devoted to private care were reincorporated into the mainstream healthcare service. That would go a long way towards wiping out waiting lists.

There is a case to be made that using NHS beds in this way, without full and proper costing, distorts independent healthcare. I believe that now, with such a major structural change in the provision of health services taking place, is the time to find out the exact cost of the provision of services. That is the right thing to do.

Lord Brooke of Sutton Mandeville

Once again, I shall be extremely brief. I have no intention of improving on the examples which my noble friend Lord Howe gave in the admirable speech with which he introduced this short debate. However, I cannot help remarking that it is one of the ineluctable laws of this administration that when they introduce legislation that is intended to free things up, the consequence is that they end up with greater restraint and restriction than there was before.

I am not in any way a veteran of the proceedings of the Committee stage of this Bill. I did, however, sit through the entire proceedings of the Licensing Bill. It was introduced—and much testimony was paid to this fact—to free up the industry, and would be welcomed by those practitioners who work in the licensing industry. I read within the past fortnight that those who are practitioners in the licensing industry estimate that their costs will have gone up by £1 billion as a result of the legislation with which they are now faced following the passage of the Act. It is a tragedy of Euripidean proportions. I hope that some day somebody will do a Ph.D analysis of it.

I shall not expand on the point except to say that on a priori grounds I automatically support my noble friend.

Lord Warner

Let us just remember that NHS foundation trusts will have a primary purpose of providing NHS services to NHS patients based on need and not the ability to pay, and free at the point of use. They have an obligation to meet the needs of their communities and not just those who are able to pay.

If there is spare capacity knocking around in the NHS—although some noble Lords suggested earlier that there was not very much—it should be available to meet NHS needs. The noble Earl acknowledged that the Government have moved a long way down the path of encouraging partnerships between the NHS and the private sector. Nothing in these provisions prevents this kind of partnership working, with the private sector providing services under contract to NHS patients through NHS trusts or, indeed, NHS foundation trusts. Diagnostic and treatment centres would be good examples of where the skills and abilities of the private sector are being used for the benefit of NHS patients. Again, the PFI system is another example of that kind of partnership.

To ensure that NHS foundation trusts continue to focus primarily on servicing the needs of NHS patients, the terms of authorisation of an NHS foundation trust will place strict limits on the extent to which they can undertake private patient activity. We make no apologies for that; it is, I am afraid, an area where we have to disagree with the Opposition Front Bench.

Income derived from the provision of services to private patients will be capped as a percentage of total income from clinical activities. The percentage will be fixed as the percentage that applies for each NHS foundation trust in the financial year ending April 2003. This will prevent foundation trusts doing a higher proportion of private work than they do today. That was explained pretty clearly in the other place; I am merely repeating the Government's position on this issue.

As regards the concern of the noble Baroness, Lady Barker, there will be increasing amounts of financial flows of information that will reveal the price of NHS services, which will enable direct comparisons to be made with private services provided by the trust. There will be the ability to infer profit, if one wants to do so. However, I suggest to the noble Baroness that the critical issue, which we have provided for in the Bill, is to cap income. As the noble Lord, Lord Hunt, suggested, it would be pretty strange if foundation trusts were engaging in private work that was a loss-maker rather than an income generator.

11.30 p.m.

Earl Howe

The Minister and I agree on one thing, which is that the primary purpose of a foundation trust is to provide services to NHS patients. 1 have no argument with that, but that is why I believe that the Government are being short-sighted over this issue.

I concentrated my remarks on capital equipment, as the noble Baroness, Lady Barker, said, because the expansion of privately provided beds is likely to be via the DTCs in the years ahead rather than any in-house expansion in NHS trusts.

The Government's position will lead not only to perverse consequences but to adverse consequences for NHS patients. It is directly counter-productive. I heard the Minister repeat the Government's position, but I did not really hear him justify it. The truth is that there is no real justification apart from doctrine; that is highly regrettable, when the Government in many other ways are freeing themselves up from the rigid thinking that dominated their first few years in office.

Clause 15 agreed to.

Clause 16 [Protection of property]:

[Amendment No. 172 not moved.]

Baroness Noakesmoved Amendment No. 173: Page 8, line 2, at end insert "but does not include property acquired subsequent to the date of its establishment as an NHS foundation trust The noble Baroness said: In moving this amendment, I shall speak also to Amendments Nos. 174 and 175, all of which relate to the protected property provisions. The amendments do not concern themselves with the basic concept of protected property, though that does not mean that we support the scheme, but test out what might happen over time.

Amendment No. 173 would amend subsection (2) so that protected property did not include property acquired subsequent to the date of the establishment of a foundation trust. If a foundation trust through good management builds up services and acquires further assets, why should those be subject to the regulated powers under the clause? What happens if the foundation trust acquires assets to support its unregulated services, perhaps with the help of a commercial mortgage? Can those assets be grabbed by the regulator as protected assets because he believes that they might be useful for the purposes of authorised services? I hope that the answer to those points is no, because if not any sense of entrepreneurialism in the foundation trusts will be killed at birth.

Amendment No. 174 would require the regulator to consider any representations about designated property from a foundation trust before making a designation. We have already debated the lack of appeal rights, but some right to be heard will be important to protected property because such a designation could significantly impair a foundation trust's ability to expand.

Finally, Amendment No. 175 deals with the different situation of property initially treated as protected property being de-designated. It would also allow for foundation trusts to apply to the regulator for that declaration. We all know that over time the configuration of hospital services changes. It is likely to change further if the vision in the Government's policy document, Keeping the NHS Local—A New Direction of Travel has any impact on the ground.

There are many examples from the past: nurses' homes surplus to requirements, whole units not needed after service rationalisation and, perhaps most striking of all, the redundancy of the large mental illness institutions. Once those assets are no longer needed for authorised services they should be freed up so that the foundation trust can maximise their potential without the regulator looking over its shoulder. The money will not be lost to the NHS; any proceeds will remain within the non-profit foundation trust. But there is no reason then for the restrictive property regime to remain in place. I beg to move.

Lord Warner

There may be a misunderstanding. The primary purpose of an NHS foundation trust does not change over time. As I said on the previous amendment, the primary purpose is to provide NHS services to NHS patients based on need and not ability to pay and free at the point of use. That purpose is unchanging. The fact that the NHS foundation trust may acquire new properties and develop new services does not alter that fundamental primary purpose. The regulator will need to take that into account over time. That is not meant to be a disincentive; there are clear provisions when NHS property is surplus to requirements.

As I have outlined, Clause 14 includes provisions which allow the regulator to require the provision of essential NHS services. The provisions in Clause 16 complement the powers of the regulator in setting the terms of authorisation by giving him the powers he needs to protect the assets required for provision of these essential NHS services. These assets will have special protections applied, so that NHS foundation trusts will not be able to relinquish control over them without the independent regulator's consent, although he has to behave reasonably and proportionately as we have discussed previously.

Amendment No. 173 would mean that property which an NHS foundation trust has acquired, and which is used to provide a service which over time has become an essential local NHS service, would not be protected. This would put in jeopardy the continuity of provision of essential services about which many Members of the Committee have expressed concern. The independent regulator needs powers to ensure that the primary purpose of these organisations is, as I said, to provide NHS services to NHS patients. To ensure continuity of NHS services, protections must also apply to essential NHS assets in the event that an NHS foundation trust is dissolved, but we will discuss those issues in relation to Clause 25.

Amendment No. 174 is unnecessary. The independent regulator will be required as a matter of administrative law to exercise his powers fairly, hearing both sides of the case. The views of an NHS foundation trust will always therefore be sought and considered by the regulator before designating property as protected. I hope that gives some reassurance to the noble Baroness.

Amendment No. 175, which would give the regulator powers to remove—"de-classify"— protected property, removing restrictions on its use and disposal, is unnecessary. The regulator already has powers to do this by varying a foundation trust's authorisation under Clause 9. The regulator is under a common law duty to act reasonably and discussions with foundation trusts would naturally form part of the process for determining (and revising) the list of protected assets.

Baroness Noakes

I thank the Minister for that reply. We were not suggesting with these amendments that services would be put in jeopardy but rather that assets which were no longer needed for what the Minister described as essential services could be freed up, or that assets subsequently acquired were also not subject to controls. One of the points I was trying to make was that this lock on assets—the need for which has been debated in the past and we are not seeking to debate with these amendments—acts as a brake on the NHS and on the entrepreneurialism of the NHS and therefore we may not maximise the potential for a foundation trust. We had understood that foundation trusts were meant to become more entrepreneurial. That was certainly what Mr Hutton, the Minister in another place, told Peers when he came to speak at a meeting of Peers last month organised for us by the noble Baroness, Lady Andrews. In a sense, the amendments responded to that entrepreneurialism that we were told was in effect part of the policy.

One aspect of Amendment No. 175 was that foundation trusts could apply for their assets to cease being designated as protected property. Is that procedure available? I do not think that the Minister covered that in his reply.

Lord Warner

I was trying to suggest that the regulator had powers to vary foundation trust authorisation under Clause 9. As I said, he is under a common law duty to act reasonably in discussions with foundation trusts. If they come to him with a reasonable case for revising the list of protected assets, he is able to do that under the present provisions.

Baroness Noakes

I thank the Minister for that clarification. The area is difficult, and I shall consider carefully what he said. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 174 and 175 not moved.]

Clause 16 agreed to.

Clause 17[Financial powers]:

Baroness Noakes moved Amendment No. 176:

Page 8, line 13, leave out subsections (2) and (3) and insert—

1. "(2) The trust shall have no constraints on its right to borrow except as outlined in subsection (3).
2. (3) A trust's total borrowing shall not exceed 100 per cent of its total revenues without the approval of the regulator."

The noble Baroness said: I shall speak also to Amendments Nos. 178 and 179 in the group. Amendment No. 176 amends Clause 17 so that no borrowing limits will apply to the individual foundation trusts other than an overall limit set at 100 per cent of total revenues. Above that limit, the regulator would need to give his consent, and doubtless the prudential code that we discussed earlier would come into play. The notion behind the amendment is that borrowing limits should not be constraints on a day-to-day basis for most organisations. They should not be the subject of annual review. All that is control-freak thinking that suggests that the Treasury has had too much to say in the drafting of the Bill.

I referred a moment ago to NHS foundation trusts needing to be more entrepreneurial. We would very much like to believe that assertion made by Mr Hutton. In that context, any controls on borrowing should be at a level that prevents only excesses but does not constrain ordinary activity. In the commercial sector, borrowing limits in constitutions are rarely an issue. They are set very high and only occasionally have to be altered. The position of borrowing limits in loan agreements is different, and borrowers typically have to satisfy a number of criteria of various types. However, the main point again is that the limits are constraints only if the borrower is in some financial mess. Then, the greater the mess, the stricter the limits.

The Government's scheme leaves the whole issue of limits in the hands of the regulator, who can set only an absolute borrowing limit. He cannot use more sophisticated indicators of the private sector and generally seems to have relatively little flexibility because he is in an annual review cycle and so on. We do not favour that scheme, and think it highly likely that it will operate as a straitjacket, which is why we favour a high overall limit only.

Our other amendments in the group concern some more detailed aspects of the borrowing regime. Amendment No. 178 deals with the case where the regulator carries out his annual review and sets the limit below the current level of borrowing. Our amendment says that the limit should be not less than the actual borrowing if that borrowing has been acquired within the regulator's previously set limits.

That is not fanciful. Let us suppose that a foundation trust decides to finance a development, possibly for authorised services but not necessarily so. It finances that conventionally with borrowing, but for some reason the development is not a success. Perhaps the quality offered for the authorised services was outclassed by another trust and patients went elsewhere, or a commercial venture went wrong. Whatever the reason, the foundation trust has debt which the regulator thinks is too high. If the regulator immediately reduces the limit, that may mean that the foundation trust must immediately reduce its debt, which may not be the most sensible strategy. The amendment would give a breathing space to the foundation trust so that a proper strategy could be drawn up to restore financial health.

Finally, Amendment No. 179 would require the regulator to review borrowing limits if the foundation trust requests it and would otherwise allow him to review limits other than annually. The amendment would give more flexibility in dealing with dynamic situations which often cannot be compartmentalised into neat, annual packages. How the borrowing regime works in practice for foundation trusts is of the utmost importance to them. That is why we propose the amendments. I beg to move.

Lord Clement-Jones

I shall be brief. It is extraordinary how, under the provisions before us, the foundation trusts are still shackled as regards their borrowing powers. It is almost like a Faustian pact. We have seen the politics of it, but it is the Treasury's continued determination to control foundation trusts that has led to this complicated set of provisions. If the term "control freaks" applies to No. 10, it applies to the Treasury with even greater force.

Our amendment proposes a different form of loosening of the bonds. It states simply: The trust's borrowing shall not endanger, or incur the loss of protected property". That is the key to the matter, but we believe that lenders will impose restrictions in any event on foundations in those circumstances and all the paraphernalia of the Bill will only make life far too complicated for foundation trusts.

The Minister will accuse me of accusing him being of either too timid or too impetuous. In this case, he was too timid, but it is perfectly possible to combine the two, because he is being impetuous by imposing a model that is untried and untested, but that model, in many respects, particularly in respect of borrowings, is far too timid. I hope that he realises that it is possible to square the circle.

11.45 p.m.

Lord Warner

I will not respond to the previous remark. All I would say in relation to some of the comments made is that I used to have to say in a previous incarnation that some of my friends were social workers; now I have to say that some of my friends are in the Treasury. I am not sure that they are quite as sinister as the noble Lord suggests.

I shall address Amendments Nos. 176 and 177 together. The prudential borrowing code will balance the need to provide a framework that safeguards NHS finances while giving foundation trusts freedoms to borrow without reference to the regulator or to the Secretary of State.

Amendments Nos. 176 and 177 would take away that balance of safeguarding patients' interests while allowing freedom to innovate. That would either reduce the NHS to a market with no protections for NHS patients and services or give no clarity about what prudential borrowing means. Amendment No. 176 in particular would allow foundation trusts to borrow up to 1 per cent of their income irrespective of their outgoings. That is quite inappropriate, since the ability to service debt is more likely to be determined by cash flow than by income alone.

Amendment No. 177 would allow foundation trusts to borrow without limit, provided that protected assets were not at risk, but that is not a safeguard against financial failure. Even without being able to secure borrowing against protected property, a foundation trust could run up unaffordable debt. We consider the amendments to be a trifle irresponsible and the level of risk of failure is simply not acceptable for organisations which will be providing an essential public service.

I fear it is likely that I shall continue to be accused of being timid, but that is the Government's position. In any event, Clause 16 already provides that foundation trusts may not use protected property as security for loans without the approval of the regulator. This safeguard ensures that the property of a foundation trust that is used to provide essential NHS services is not endangered by the trust's borrowing. That is another attempt by us to protect essential services for NHS patients.

I turn to Amendment No. 178. The principle that an NHS foundation trust should not be penalised because its prudential borrowing limit is revised to a level below its current borrowing is correct, but the amendment is unnecessary. The regulator has no powers to intervene in a loan or other borrowing agreement a foundation trust has already undertaken. Any such agreements would not be affected by a change in a foundation trust's borrowing limit. The foundation trust would simply be unable to borrow any more until it had fulfilled its previous commitment.

On Amendment No. 179, the prudential borrowing code will provide a clear and transparent framework governing borrowing by foundation trusts based on their ability to repay. The annual review, I suggest, should provide ample opportunity to take account of changes in foundation trust's circumstances. In exceptional circumstances—for example, in response to a breach or serious failure—the regulator can still exercise his powers of intervention under Clause 23 to place restrictions on a foundation trust's borrowing beyond the borrowing limits determined by the prudential borrowing code. Alternatively, he could set extra conditions to an authorisation about borrowing over and above those in the code. So we do not agree with this amendment for the reasons I have indicated.

Baroness Noakes

I thank the Minister for his response. He mentioned that Amendment No. 176 referred to a limit of 1 per cent of income. Actually, it was 100 per cent of income. If he expressed shock at 1 per cent, 100 per cent will shock him even more—and I am unrepentant about that.

Lord Warner

That was a slip of the tongue. I meant 100 per cent.

Baroness Noakes

I note what the Minister has said. He owned up to having friends in Her Majesty's Treasury. I shall make a confession to the Committee: I worked for two years at the Treasury and so I clearly recognise the kind of Treasury thinking that has dominated this part of the Bill.

From our perspective, the borrowing codes will squash the entrepreneurialism out of NHS foundation trusts. We thought that they would become more creative in this area, but the more we see of how the provisions will work, the more negative and constraining rather than enabling they appear to be. We will therefore want to continue to consider these issues.

I was grateful for the Minister's comments on Amendment No. 178: that there was no question of foundation trusts having to reduce borrowing imminently in order to meet a new borrowing limit. That was a helpful clarification. I shall consider carefully his reply before considering what to do at a later stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 177 to 179 not moved.]

Baroness Noakesmoved Amendment No. 180:

Page 8, line 17, at end insert— ( ) An NHS foundation trust may not invest in assets or classes of assets prescribed by the regulator. The noble Baroness said: Subsection (4) provides that: An NHS foundation trust may invest money … for the purposes of or in connection with its functions". Our amendment proposes that it, may not invest in assets or classes of assets prescribed by the regulator". Its purpose is to discover whether the Government intend to give foundation trusts carte blanche to invest surplus cash as they wish. It is quite possible that a foundation trust would have surplus cash; for example, it may be accumulating surpluses to finance a new capital development which it has not paid for. It will be right and proper that that surplus cash is put to good use and not simply left in the bank. Will the Minister say what he expects to happen if a foundation trust has surplus cash? I believe that NHS trusts are currently required to deposit surpluses as reverse NLF. I may be out of date with regard to that, but I am sure that there are some kinds of restriction on what they can and cannot do.

Noble Lords may remember what happened in the London Borough of Hammersmith when the director of finance thought it a good wheeze to invest surplus cash in derivatives without realising how risky those investments were. More recently, another council finance director thought it a good idea to deposit money with BCCI without understanding the basic rule that higher returns equate with higher risk. The financial world is full of high-risk investment opportunities—split caps, precipice bonds and so on.

If the Minister does not like my amendment, will he say what controls or constraints there will be to stop a foolish foundation trust investing its money unwisely? I beg to move.

Lord Warner

There is no need to give the regulator a specific power to limit the nature of assets in which foundation trusts may invest. Under Clause 14(3), the regulator already has powers to restrict a foundation trust's non-healthcare-related activities. He could therefore exercise that power to restrict the nature of the assets in which a foundation trust could invest, if he had good reason to do so. The legislation already restricts the power of foundation trusts to invest, for the purposes or in connection with its functions". That limits foundation trusts to investments that fall within the framework of the legislation. That means that a trust cannot simply invest in any venture that it sees fit. We would expect the regulator to provide some kind of guidance in this area.

In addition, the regulator's powers to limit investment are broader than those proposed in the amendment. First, Clause 6(3) gives the regulator the power to set any terms to an authorisation that he or she sees fit, and that includes terms relating to investments. Secondly, under Clause 14(3), the regulator has powers to restrict a foundation trust's non-healthcare-related activities, as I indicated. Therefore, he could exercise that power to restrict the nature of assets in which an NHS foundation trust could invest. Thus, we believe that plenty of safeguards exist and that there is plenty of scope for the independent regulator to give guidance to foundation trusts if they are in doubt.

Baroness Noakes

I thank the Minister for that reply. I must confess that my attention started to waver as we are just coming up to midnight. I shall read his response carefully tomorrow in Hansard. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 181 not moved.]

Clause 17 agreed to.

Baroness Andrews

I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.

House adjourned at one minute before midnight.