Sitting of 13 October 2003

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Southwark.

Iraq: Rules of Engagement
Lord Campbell of Allowayasked Her Majesty's Government:
Whether rules of engagement have been ordained for all coalition forces in Iraq concerning the opening of fire other than in self-defence, when death or injury may be occasioned, on refusal to stop a vehicle at a road block; and, if so, whether compliance with such rules affords any immunity from legal process.
The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Bach): My Lords, it has been the practice of successive United Kingdom governments not to comment on certain aspects of operational policy, including rules of engagement. Any such information could potentially be of use to the enemy and put the lives of our servicemen and women deployed on operations at risk. I am, therefore, withholding this information under exemption one of the code of practice on access to government information. The United Kingdom's rules of engagement do not strictly in law provide UK service personnel with immunity from the UK legal process. However, they are robust and are drawn up in accordance with international and domestic law. Therefore, acting within the rules is very likely in practice to provide protection from prosecution.
Lord Campbell of Alloway: My Lords, I thank the noble Lord for that somewhat enigmatic reply. May I ask what is the actual position of our Armed Forces in these lethal hostile conditions—some 20 attacks a day, no civil power—when they, in the course of duty, open fire to enforce a road block, to search for weapons, or to guard essential facilities from sabotage? What is the position?
Lord Bach: My Lords, I am sorry if the noble Lord thought that my reply was enigmatic. I hoped that it was clear. The noble Lord asks a good second question but it is one that he knows, as he asks it, that I am not able to answer in any detail at all. He himself has had distinguished careers both in the Armed Forces and in the law and he will know that it is the combination of those two things that make it difficult for me to say any more than I did in my original Answer, save to repeat that the rules of engagement are indeed robust.
Lord Astor of Hever: My Lords, in the light of the first part of the Minister's response to my noble friend
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Lord Campbell of Alloway, will he consider an off-the-record briefing for both opposition defence spokesmen and those in the House who need to know about the matter?
Lord Bach: My Lords, I am grateful to the noble Lord who was good enough to advise me beforehand of the question that he might ask. That question is currently being considered by the Ministry of Defence. I shall, of course, write to the noble Lord, to his colleagues on the Liberal Democrat Benches and to noble Lords on the Cross Benches as soon as a decision is reached. We shall try to be as sympathetic as we can.
Baroness Carnegy of Lour: My Lords, I believe the Minister said in his first Answer that if troops kept within the rules that was very likely to afford protection. Why is it not certain to afford protection?
Lord Bach: My Lords, the reason it cannot be certain in law is because rules of engagement are for guidance only and do not constitute law, which is for the courts to determine. I shall try to assist by making the distinction between immunity from legal process— which is the subject of the Question—where there can be no guarantee that legal process may be instituted, and practical consequences. Where a member of the Armed Forces acts within the rules of engagement— that could, of course, be a matter for the court eventually to have to decide—the matter is unlikely to go to court and almost certainly would not result in a finding of liability or guilt.
Lord Hannay of Chiswick: My Lords, will the noble Lord be so kind as to explain what in the circumstances of the Iraq of today constitutes the enemy?
Lord Bach: My Lords, the potential enemy are all those, wherever and whoever they are, who seek to engage British forces in a hostile manner.

Iraq: Legal Advice
2.40 p.m.
Lord Goodhartasked Her Majesty's Government:
Whether they will publish the full text of the advice given to them by the Attorney-General on the legal basis for the use of force against Iraq; and the instructions for the giving of that advice.
The Lord President of the Council (Baroness Amos): My Lords, there is a long-standing convention adhered to by successive governments, and reflected in paragraph 24 of the Ministerial Code, that legal advice from the Law Officers is not publicly disclosed. This is consistent with paragraphs 2 and 4d of the Code of Practice on Access to Government Information.

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The Law Officers advise the Government in confidence. It is very important that both the legal adviser and the client should be able to give and receive advice candidly and freely on the understanding that it will not be disclosed.
Lord Goodhart: My Lords, on 17th March we were given a one-page summary of the views of the Attorney-General. The Government have now given an enormous amount of information—which no doubt they were not legally obliged to give—to the Hutton inquiry. Why will not the Government now produce the full legal advice on the basis of which we went to war, which is surely an even more important question that that being considered by the Hutton inquiry? Are the people of this country really going to have to wait for another 30 years before we find the answer to that question?
Baroness Amos: My Lords, I hope that in my opening Answer I made the position clear. The Attorney-General's advice on international relations, security and defence is confidential and we never disclose or comment on advice given by the Attorney-General. So far as we are concerned, the Government's policies on Iraq are legal and they comply with our international obligations.
Lord Lester of Herne Hill: My Lords, legal professional privilege can properly be claimed by the Government as by any other client on behalf of their legal adviser, the Law Officer. However, is the Minister aware that legal professional privilege can always be waived? Would she not agree that, as my noble friend said, by relying in part on 17th March on a snippet or gobbet of advice from the noble and learned Lord the Attorney-General, the Government have waived their privilege? If not, will she explain why?
If the rule is so inflexible, will the Minister also explain why in cases such as Factortame the opinion of the Law Officers was fully disclosed to courts? In that case, their opinion was that the Merchant Shipping Act would be unlawful under Community law. The rule is not inflexible and rigid, as has been suggested.
Baroness Amos: My Lords, I am not a lawyer and cannot go into the details of the noble Lord's final point. I am not aware of the case to which he referred. If it has bearing on the matter, I shall be happy to respond to it. On his specific point on breaching the convention, I shall repeat what I said before. My noble and learned friend the Attorney-General made a statement on 17th March setting out his views on the legality of the use of armed force against Iraq, but his advice was not disclosed. I repeat: the actual advice that he gave to the Government was not disclosed. We are confident that our policies and actions in Iraq are right and consistent with our international obligations.
Lord Thomas of Gresford: My Lords—
Noble Lords: Oh!
Lord Howell of Guildford: My Lords, we would like to have a say. Although in our view there was and is a robust case, under Articles 39 and 41 of Chapter 7 of the United Nations Charter, for getting rid of that madman and mass murderer—the world will be a better place still when he is dead—does the noble Baroness agree that much ambiguity remains, as the questions that she is receiving indicate? Would it not be better not only to publish a summary of the Law Officers' advice, despite it breaking precedent, but to have a thoroughgoing judicial inquiry—much wider than Hutton—so as to reassure the public and, even more importantly, the troops in Iraq of the Tightness of our cause?
Baroness Amos: My Lords, the Government are absolutely convinced of the Tightness of our cause. We have made that position clear time and again and will continue to do so. I said that in this House last week. The basis on which we went to war was that Iraq and Saddam Hussein flouted 17 UN Security Council resolutions with respect to weapons of mass destruction. That remains the case.
Lord Marsh: My Lords, does the Minister not agree that one of the significant differences between a democracy and a dictatorship is that a government's point of view alone should not be considered when a decision of such magnitude is taken?
Baroness Amos: My Lords, I totally agree. That is why we had debates in this House, a number of debates in another place, and a significant debate in the other place with a vote. It is the first time that we have had that.
Lord Davies of Coity: My Lords, in a democracy, it is the decision of the elected government to which we must adhere, not the advice that that government are given. Like my noble friend the Leader of the House, I am not a member of the legal fraternity and certainly not a lawyer. However, am I right in believing that lawyers, including those on the Liberal Democrat Benches who have asked the questions, preserve and protect the confidentiality that they have with their clients?
Baroness Amos: My Lords, one would have to ask the lawyers on those Benches, but I am sure that that is the case. I am being asked for the Government to do something unprecedented—to publish the advice that we were given by my noble and learned friend the Attorney-General. We have already done something not done by any other government in terms of the statement that he made on 17th March, which set out very clearly his views on the legality of the use of armed force against Iraq. However, a government have to retain the right to keep confidential the advice that they are given by their legal officers.
Lord Wright of Richmond: My Lords, the Minister says that the advice of the noble and learned Lord the Attorney-General is confidential. Speaking as someone

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who was in the public service for 36 years, I was brought up to believe that the advice of public servants to Ministers was also confidential. Does she not agree that the proceedings of the Hutton inquiry have totally changed the situation regarding confidentiality?
Baroness Amos: My Lords, everyone in the House would agree that the situation is unprecedented. Information became available through Hutton that we all know would have been kept confidential for 30 years under the rules that currently govern the advice that officials give to their Ministers. That is not a usual event. To change completely the rules that govern the relationship between officials and Ministers, and between a government's law advisers and that government, is not a decision that any government would want to make.
Lord Thomas of Gresford: My Lords, we ought not to assume that the views of the legal basis for the use of force against Iraq, which was how the matter was described by the noble and learned Lord the Attorney-General in March, accord with the advice that he gave to the Government. If he gives us a summary of his advice, is it not in the public interest that we be told on what those views are based in its entirety? What is being concealed?
Baroness Amos: My Lords, we were in an unprecedented situation in March. The Government made it absolutely clear that we were happy for my noble and learned friend the Attorney-General to make a statement setting out views on the legality of armed force because a number of questions were being asked in relation to that. However, we preserved what is important for any government to have; that is, confidential legal advice. It was on that basis that the advice itself was not published. That was considered such a serious issue between the Government and Parliament and the Government and the people that it was felt important that the Attorney-General made a statement. He made a statement on the basis of the rumours which were being published about the nature of his advice, so he made his views on the legality of the use of armed force absolutely clear. However, the Attorney-General did not publish the advice itself.

House of Lords Reform
2.50 p.m.
Baroness Sharpiesasked Her Majesty's Government:
Whether the Weatherill amendment for the retention of 92 elected hereditary Peers until stage 2 of House of Lords reform was negotiated on terms which were regarded as binding by those who gave it their assent.
The Parliamentary Under-Secretary of State, Department for Constitutional Affairs (Lord Filkin): My Lords, the Weatherill amendment was negotiated on terms considered to be binding by all those who
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gave it their assent. It was agreed on the basis that it was a transitional arrangement and that agreement on final reform was within reach in the near future. It has not been possible to obtain that agreement, and consequently the basis on which the amendment was negotiated has changed. We have therefore developed proposals which form the next stage of reform and which go as far is possible at this point. There was never any intention that the Weatherill amendment should become a permanent settlement.
Baroness Sharpies: My Lords, I find the noble Lord's Answer less honourable than the Question, which is all about honour. Perhaps I may ask the Minister why the noble and learned Lord the Lord Chancellor is not answering my Question. Is he aware that this House is being blamed for what has occurred in the Commons, where his honourable friends did not come to a consensus on the issue?
Lord Filkin: My Lords, I shall pass the first comment by, although later in my Answer I hope that I will have an opportunity to demonstrate why the Government have behaved utterly correctly and honourably in terms of the agreement that was reached. To the perhaps flippant question of why my noble and learned friend the Lord Chancellor is not answering, there are two answers. First, that is what junior Ministers are for. Secondly, there is a physical reason. Noble Lords will have noticed with amusement the soft-shoe shuffle that Lord Chancellors have to perform in moving left and right to the microphone.
Noble Lords: Oh!
Lord Filkin: My Lords, I have it on very good authority that my noble and learned friend the Lord Chancellor would be delighted to be sitting on these Benches and answering Questions at Question Time, but he would need to be released from his position as Speaker to do so.
Lord Peyton of Yeovil: My Lords, what an interesting remark the noble Lord has made; namely, that junior Ministers are there only to draw fire from their superiors. I entirely agree with my noble friend's suggestion that it would have been seemly for the noble and learned Lord on the Woolsack to have answered the Question, since he is such a pioneer when it comes to improving your Lordships' House.
Lord Filkin: My Lords, I accept the compliment and agree with it strongly. The Lord Chancellor is a genuine pioneer in reforming this House. We have seen a range of reformist measures during the past three months that do the country credit and will do this House credit when they are implemented.
I shall to turn to some of the specifics, because there is a danger—
Noble Lords: No!
Lord Filkin: Then I will stay with supplementary questions if noble Lords wish me to, which is why the

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Lord Chancellor is not answering the Question. He is not answering because that is exactly what Ministers in a department of state do. They answer questions across the full span of their brief and it is a pleasure and a privilege to do so.
Lord Howe of Aberavon: My Lords, does the noble Lord recollect that the principal reason set out for removing the hereditary Peers was to end the situation where one political party had dominated the Houses of Parliament, regardless of anything else? Does he recognise that, since the changes were made, the Government now win three out of four whipped Divisions and that the House is clearly responding to debate and is no longer dominated by one party? Is that not a relevant change of circumstances since the original review was carried out?
Finally, does he recollect that his noble and learned friend the Lord Chancellor, when he spoke about the matter last week, paid glowing tribute to the surviving hereditary Peers, pointing out quite rightly that many are among our most active and effective Members and expressing the hope that they might well survive as life Peers in the future? If that is a valid tribute to their quality, as indeed it is, why cannot arrangements now be made for them all to survive into the future on that basis?
Lord Filkin: My Lords, I echo the words of my noble and learned friend the Lord Chancellor in paying tribute to many of the remaining hereditary Peers who serve in this House. It is the nature of this House that over a period of years one comes to respect and to like people across all Benches and to be appreciative of their contributions. That does not mean that one does not move on issues of principle to make change when it is clearly necessary. The argument that there should be a continued presence in this House of people who owe their presence here to birth rather than to other proper processes of merit has been lost some time ago. It does not do this House any credit whatsoever to argue that we should perpetuate that.
My noble and learned friend the Lord Chancellor clearly signalled that if, as part of a process of change, other parties seek to nominate to life peerages people who currently sit by virtue of birth, that is a matter for them. However, I emphasise the point that while we respect and value the contribution that has been made, that is not a sufficient reason for perpetuating a constitutional and historical anomaly, and the country recognises that.
Lord Goodhart: My Lords, is it not the case that if the Government were determined to achieve a proper democratic reform of your Lordships' House, they could do so? It was said in the Statement on 18th September that:
"On the further reform of this House, we will continue to look for a way forward".
Do the Government really mean that or are they simply propounding that any further reform beyond the current proposals should be kicked into the long
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grass until some distant time in the future? Are the Government proposing any further reform before the end of this Parliament or will the issue be included in their manifesto for the next?
Lord Filkin: My Lords, the position in those respects was made very clear indeed in the Statement that the Lord Chancellor gave to the House in September. He said two things: first, that it was necessary to bring stability in the medium term to this House. That is what those proposals will do. He also made clear that that was not the final stage of reform and there were a range of issues set out in the consultation paper that still await resolution at some point in the future.
However, given where we are in the lifetime of this Parliament, we will be busy indeed putting these measures into legislation. Therefore, I think that it is unlikely that there will be further legislation in the lifetime of this Parliament. As for the manifesto, I am pleased to say that I am not in a position at this stage to say what will be in that.
Lord Carter: My Lords, the proposals that the Government have made for an appointed House were substantially accepted by this House in February, while it rejected the six proposals for an elected element. On the proposal to put the Appointments Commission on a statutory basis, there was an opposition amendment to the 1999 reform Bill which would have put the Appointments Commission on a statutory basis, so I presume they will support that. My noble and learned friend has already spoken about the future of the 92. He has indicated a way forward in which some of them could stay. Is our discussion today, therefore, perhaps a shade synthetic?
Lord Filkin: My Lords, I have no difficulty in agreeing with my noble friend Lord Carter. I shall emphasise why I think there is a degree of manufactured outrage about some issues. Perhaps I may illustrate the weight of the reform that we are proposing at this stage.
First, for the first time in British history, we are ending the Government's ability to control the size and the composition of this House. Never again will a Prime Minister be able to do what has happened in the past; namely, to bias appointments to this House in his own favour. Secondly, we are ending membership by birth and replacing it with membership by merit. Thirdly, we will enshrine in statute that never again will any party command an overall majority in this House. The Opposition Benches had 20 years in which to do that had they so wished. There was not a whiff of that whatever. Fourthly, we are putting in place a statutory Appointments Commission, which will put completely beyond the influence of the Government the ability to appoint people to the Cross Benches of this House and vet those Members of the House who are nominated by their party political leaders.
Next, we are separating the judiciary—
Noble Lords: Order!
Lord Filkin: Your Lordships have made my point for me: there is not time to list out all the measures in these changes.
Lord Elton: My Lords, might a hereditary Peer be heard?
Baroness Amos: My Lords, we are out of time and we should move on to the final Question.

Afghanistan
3 p.m.
Lord Dubsasked Her Majesty's Government:
What progress has been made in the reconstruction of Afghanistan and the creation of a stable and peaceful society.
Baroness Amos: My Lords, considerable progress has been made in Afghanistan since the fall of the Taliban in November 2001. A broad-based transitional administration has been established and President Karzai has been elected for a two-year period from June 2002. Progress has also been made in economic and social recovery. The economy grew by 30 per cent last year. Schools have reopened. But there remain major challenges ahead and we are committed to help Afghanistan to meet these now and over the long term.
Lord Dubs: My Lords, I am grateful to my noble friend for that Answer. Will she comment on the security situation in Afghanistan outside Kabul? In particular, will she comment on the difficulties posed by the estimated 4 million landmines in the country and the fact that an estimated 740 million square metres of the country are contaminated by landmines or unexploded shells or bombs?
Baroness Amos: My Lords, my noble friend is right to point out the difficult security situation outside Kabul. That is why the provincial reconstruction teams, including one in Mazar-e-Sharif headed by the UK, have been established. As regards unexploded ordnance and landmines, the United Nations mine action service is responsible for co-ordinating the NGOs working in this area. We have provided £5.3 million in funding. At the end of 2002, an estimated 850 square kilometres remained contaminated. However, we have overseen the training of 2.4 million people to identify and avoid mines and, in 2002 alone, the programme cleared mines and unexploded ordnance from about 111 square kilometres of land.
Baroness Northover: My Lords, is the noble Baroness aware that the US has spent 11 billion dollars on its military operations in Afghanistan but only 800 million dollars on reconstruction? Will she give the House the breakdown for military operations and reconstruction as regards UK expenditure?
Baroness Amos: My Lords, with respect to military expenditure I do not have the figures on that and I shall write to the noble Baroness. With respect to reconstruction, to date we have spent some £147 million and over the next three years will be spending some £300 million.
Lord Judd: My Lords, does my noble friend agree that if we are to win the peace in terms of establishing global stability and combating extremists, we must give the same priority and resources to reconstruction and peace-building as we give to the military operations themselves?
Baroness Amos: My Lords, I agree that it is important to give priority to reconstruction and peace-building. My noble friend may recall that there was an international conference in Tokyo in January 2002 for the international community to pledge its support for Afghanistan. A needs assessment was undertaken by the World Bank, the UN and the Asian Development Bank and donors pledged some 4.5 billion dollars over a five-year period. That total has increased to 5.2 billion dollars.
There is an issue with respect to absorptive capacity. Noble Lords may be aware that at the margins of the World Bank meeting in Dubai there was a further meeting to look at the reconstruction needs of Afghanistan, which I attended. The point is very well recognised.
Lord Elton: My Lords, when will the elections be held in Afghanistan next year and will the security situation be sufficient for them to be effective?
Baroness Amos: My Lords, the Bonn process set out a timetable which will see elections in, I think, July. I shall write to the noble Lord if I have the month wrong. There will be a Loya Jirgah in December to look at the constitutional issues, which will then lead into that process. We are working hard as an international community to improve the security situation. The Germans are leading on policing; the Americans are leading on reform of the Army; and the Italians are leading on reform of the justice sector. At present, we have no reason to believe that the security situation will prevent elections taking place.
The Earl of Sandwich: My Lords, does the Minister agree that elections have been postponed beyond the original date of June and that that was due in part to the donors not coming up with the funds—including, I am afraid, the United Kingdom Government?
Baroness Amos: My Lords, I am not sure to what the noble Earl is referring. My understanding is that the constitutional Loya Jirgah, which was due to have been held earlier, will be held in December and that the proposed election date under the Bonn process will go ahead.

Legal Deposit Libraries Bill
Read a third time, and passed.

Health and Social Care (Community Health and Standards) Bill
3.7 p.m.
The Parliamentary Under-Secretary of State, Department of Health (Lord Warner): My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
Moved, That the House do now again resolve itself into Committee.—(Lord Warner.)
On Question, Motion agreed to.
House in Committee accordingly.
[The CHAIRMAN OF COMMITTEES in the Chair.]
Clause 2 [Independent Regulator of NHS Foundation Trusts]:
On Question, Whether Clause 2 shall stand part of the Bill?
Earl Howe: I hope that the Committee will allow me to dwell for a few moments on this clause. It contains only three sentences, yet carries huge implications for the working of this part of the Bill. Perhaps the most bandied-about epithet relating to the regulator is that he will be independent. I am reminded a little of Lewis Carroll's Through the Looking Glass, where Alice remonstrates with Humpty Dumpty that the word "glory" does not mean the same as "a nice knock-down argument". The reply she receives is,
"When I use a word, it means just what I choose it to mean— neither more nor less".
It is a strange reading of the Bill that allows one to believe that the regulator is truly independent of political control. We shall be seeing in later amendments how many aspects of the regulator's existence and remit are subject to the prior approval of the Secretary of State. I shall not anticipate those debates now.
No one can argue with the need for some regulation of foundation trusts. I would not seek to wish away the regulator. Nevertheless, the degree of control that he will be able to exercise over foundation trusts is unnecessarily large. What concerns me at least as much as that is the regulator's lack of accountability. As I read the Bill, the regulator is not accountable to Parliament or to anyone else. In theory, the Secretary of State, as the employer of the regulator, may have some residual accountability to Parliament for the regulator's actions. But, as I understood it, the whole
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aim of Shifting the Balance of Power is to remove the Secretary of State from responsibility for the front line of the NHS. Therefore, it is a tenuous line of accountability at best.
Clause 3 confers on the regulator the same duties as those borne by the Secretary of State, yet nowhere in the Bill are we told what happens if the regulator fails to fulfil those duties. If the Secretary of State or the Government do things that the electorate do not like, they can be questioned in Parliament. If that does not work, there is an easy remedy—they can be voted out through the ballot box. If the regulator does things that the public do not like, they can only complain. Foundation trusts will be in exactly the same position. The regulator has no obligation to make a response.
The relationship between the regulator and a foundation trust will be dependent on the content of the licence that he issues. But there is no requirement on the regulator to consult local people on the content of that licence, on the property which the trust may not sell off or on the services that it must provide. The regulator does not have to consult any of the 28 strategic health authorities, whose role is to maintain important services, such as intensive care and child and adolescent mental health services across an area. He is not even bound to consult the PCTs, which will commission services from the foundation trust. That is an extraordinary state of affairs as, nine times out of 10, the regulator will have absolutely no grassroots knowledge of a particular area and no awareness of what local people want or value.
Until now, Ministers have simply deployed a stock answer. They have said that it is incumbent on the regulator to act reasonably and proportionately and that, if he does not do so, he is liable to judicial review. That does not seem satisfactory. To me, judicial review is not a remedy of choice; it is expensive, cumbersome and time-consuming. It is also, by its very nature, retrospective. By the time an issue is determined by a judge, it can be too late to protect patients from the effect of failing services. It really should not be necessary to go to law every time someone voices a serious grievance against the regulator.
To the extent, therefore, that the regulator is, indeed, an independent being with considerable powers, the absence of a legal remedy against his errors or omissions is serious. I do not know what the Government can do, if, indeed, they want to, to address this accountability vacuum. However, I hope that the Minister will take these concerns away with him. We are in danger of replacing central control by elected officers of government with central control by an unelected bureaucrat. I cannot believe that that represents a step forward.
Lord Clement-Jones: I believe that the noble Earl, Lord Howe, expressed the matter absolutely correctly, quite apart from clearly having done his literary homework over the weekend. Our debate on this clause reflects very much the concerns expressed thus far in the amendments to Clause 2. Further concerns

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about the regulator will arise as we debate the remainder of Part 1, but I shall take a sample of some of the points that have been discussed.
First, there is the question of whether the regulator should be yet another one on top of the 40 or so who are entitled to inspect NHS hospitals or whether he should be part of CHAI. That point was put strongly from these Benches. Secondly, should there be a duty on foundation hospitals to report to the regulator or should the regulator himself report on the impact of a foundation trust on the local health economy? That issue was also debated, with a number of extremely important interventions.
There is the key question of whether the regulator should concern himself with the impact on the local health economy of foundation trusts and whether he really will act to prevent practices such as staff poaching. Such practices are the fear of both staff representatives and many of the existing non-foundation applicants.
Then there is the question of the appointment of the regulator by the Secretary of State being carried out by the appointments board, although that is not set out explicitly in the Bill. In Committee on 9th October, the Minister stated that it was the intention of the Secretary of State to appoint the regulator. The only ray of sunshine was the fact that there may be more than one regulator. Indeed, the Minister seemed to give that proposition a reasonably favourable wind.
Then we have the whole question of the duties of the regulator and whether he must act in a manner that is,
"consistent with the performance by the Secretary of State of the duties".
By the admission of the Department of Health, the words "consistent with" mean only "takes account of. Those are not directly imposed duties on the regulator, and, again, that makes people worry about what precisely the regulator will do and what he will enforce and implement, and so on.
The noble Earl, Lord Howe, was very eloquent on the subject of the relationships of the regulator. One question is: what relationship will bodies such as the workforce development confederations have with the regulator? That is not explicit. What about the planning functions of strategic health authorities? Clearly they will not performance-manage foundation trusts, but what relationship will the regulator have with them? Indeed, as the noble Earl, Lord Howe, asked, what relationship will the regulator have with primary care trusts?
All that adds up to a lack of accountability on the part of the regulator, and, indeed, the relationship with Parliament is by no means clear. Therefore, I believe we must conclude that the regulator idea may be superficially attractive in the sense that foundation trusts may need a regulatory body to oversee them, but scratching the concept brings to the surface a large number of contradictions. I very much hope that the Minister will respond to this debate.
3.15 p.m.
Baroness Carnegy of Lour: From the Liberal Democrat Benches, the noble Lord has just said that foundation trusts may need to be overseen by a regulatory body. I wonder whether that is the case. At Second Reading, the Minister stated what the Government see as the key difference between foundation trust hospitals and existing hospitals. He said:

"The key difference between NHS foundation trusts and other types of trust is that though both will be required to meet national standards, the new trusts will be free to decide how they achieve them".—[Official Report, 8/9/03; col. 12.]
Surely, in order to do that, one needs a system which establishes standards across all hospitals, puts in place an independent system of inspection to ensure that those standards are maintained, and sets up an independent audit system to ensure that the finance is properly managed. That is what one needs.
This regulator has been inserted into the system for whatever reason—presumably with the hope that freedom will stay with the trust. But, as my noble friend Lord Howe said, from the foundation trust's point of view, the regulator is the Secretary of State's representative on earth. He is appointed by the Secretary of State; his staff and set-up are settled by the Government through the Minister responsible for the Civil Service; and, as we shall see as we go through the Bill, he has numerous roles. One such role, as set out right at the beginning of the Bill, is that he will decide which hospitals can become foundation trusts and whether a trust is not adhering sufficiently to the Secretary of State's rules and must therefore stop being a foundation trust. He has enormous power, and his answerability is such that he is a creature of the Secretary of State.
The Minister must justify to us how the sentence that I quoted from col. 12 of Hansard fits with the existence of the regulator. If the new trusts are to be free to decide how they achieve standards, I question whether the regulator is necessary at all.
Lord Warner: Noble Lords may detect the odd weary note in my voice as I go over some of the arguments that we have already put to the Committee. It is clear that the independent regulator is just that: independent. We shall debate that in detail later and I shall deploy some of the arguments to show that this independent regulator is more independent than some of the regulators used in other parts of the public service. I do not want to anticipate that debate at this stage.
The regulator is clearly accountable. I thought that the noble Earl, Lord Howe, put it quite well. As with other public bodies, the regulator has to behave proportionately and reasonably in his actions and is vulnerable to judicial review if he does not do so. The noble Earl and his noble friends cannot have it both ways. From time to time we are attacked because the regulator is not deemed to be independent enough and when we do not wrap around him a whole lot of

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accountabilities which would damage his independence we are told that we are failing in our duties in that respect.
We have set up a system which, rightly in my view, requires the regulator to satisfy himself that the applicants for NHS foundation trusts have made the case for the authorisations which he is able to give under the Bill. He has responsibilities if there are gross failures of those authorisations to take appropriate action under the Bill. He will take that action unfettered by the Secretary of State in accordance with the provisions in the Bill. We do not think there is a need to go further. We believe that the checks and balances as set out in the Bill are appropriate.
However, we have listened to the arguments put forward about whether there should be a board structure around the regulator and I have agreed to come back to the Committee with possible changes in the light of the report into regulators shortly to be published by the Better Regulation Task Force. So, we shall consider those issues in that context.
The noble Lord, Lord Clement-Jones, referred to concerns about poaching staff and so forth. We shall have another discussion on that at some stage. However, let me make one point crystal clear. It is not the job of the regulator to force himself or herself into the relationship between employers and employees. If the noble Lord considers the roles of regulators in other fields he will see that they do not get into the detail of industrial relations and negotiations between employers and employees and in our view it would be inappropriate for this regulator to do so.
We have debated whether CHI should be merged with the regulator and we simply do not agree with the noble Lord. As I tried to summarise the arguments, CHI is essentially an inspector; the regulator is essentially a referee. We do not think that those roles can be combined in a single office but believe that it is appropriate to keep those roles separate. As it stands, the Bill makes a good fist of setting up the regulator as an independent body. In all probability we shall again consider the issue of whether there should be a board structure around the regulator. However, at present we believe that Clause 2 is appropriately drafted and should stand part of the Bill.
Earl Howe: This has been a useful short debate and I am grateful to all noble Lords who have taken part, including the Minister for his reply. However, to come back as he did to judicial review as a remedy for the regulator's action is an unsatisfactory position to take. There is provision in the Bill for the regulator to submit annual reports to Parliament. I do not belittle that requirement in the least. Certainly, it is better than nothing. However, I cannot believe that that kind of retrospective arm's-length process amounts to accountability for the man or woman in the street who believes, for example, that the licence issued to their hospital has omitted something important, nor indeed, is it a remedy for the foundation trust which believes it is being unfairly dealt with.
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There are ways of delivering accountability that would address those day-to-day issues. Later we shall debate amendments which deal with the NHS complaints system, for example, and others which deal with patients forums. I believe that the themes raised in this debate will return as we progress through the rest of Part 1. I hope that we shall be particularly mindful of the key issues of independence and accountability.
Clause 2 agreed to.
Schedule 2 [Independent Regulator of NHS Foundation Trusts]:
[Amendments Nos. 90 to 95 not moved.]
Earl Howe Earl Howe moved Amendment No. 96:
Page 113, line 29, leave out "or misbehaviour" and insert ", misconduct or incompetence"
The noble Earl said: In moving Amendment No. 96 I shall speak also to Amendment No. 97. Paragraph 1 of Schedule 2 sets out the terms of the regulator's appointment. It includes the provisions governing his resignation or removal from office. The two grounds on which the Secretary of State is empowered to remove him from office are incapacity or misbehaviour. "Incapacity" I can understand. "Misbehaviour" seems very odd. I might have expected to see the word "misconduct", which has a well established pedigree in legislation. Misbehaviour seems to me an altogether looser term, and one that is perhaps open to a measure of subjective judgment. For example, it might cover the Secretary of State if he wanted to sack the regulator just because he did not like his style. Perhaps the Minister could tell the Committee whether there is a legal precedent for that term and what difference there is legally between "misbehaviour" and "misconduct".
However, there is a wider issue; that is, whether the Secretary of State should have an unfettered prerogative to remove the regulator on the grounds listed in paragraph 2(b). There are two issues here: first, that the word "misbehaviour" leaves far too much scope for a subjective judgment, as I have said. Secondly, if the regulator is to be truly independent of government, approval by Parliament of his premature and involuntary departure from office buttresses that point of principle. Also, it makes for transparency, which I would argue is important in such circumstances. I beg to move.
Lord Warner: I shall try to help the noble Earl by taking him through, if he will bear with me, some of the precedent arguments. Certainly, based on the experience of other precedents the Bill has been drafted to ensure that in the case of either misbehaviour or incapacity the Secretary of State has appropriate powers to remove the regulator from office. The regulator still can be dismissed for incompetence but that would be a reason for dismissal in the contract of employment rather than on the face of the Bill, which is the way that statutory office holders are usually dealt with when incompetence occurs. Specifying incompetence on the face of the Bill

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could have adverse implications for the application of wider employment law and moves away from standard wording currently used in legislation.

The choice of the words "incapacity" or "misbehaviour" as the grounds for removal is based on precedence. Precedents include the chair and other members of Ofgem; the rail regulator; the director-general of water services, Ofwat; and the chair and non-executive members of Ofcom, which is probably the most recent parliamentary example in relation to which those words have been used. There has been slightly different wording in earlier legislation. However, I have given the noble Earl some of the most recent examples.
Amendment No. 97 would make the regulator's removal subject to the approval of Parliament. There are already sufficient safeguards to ensure that the Secretary of State cannot behave precipitately. He will be bound by the terms of the regulator's appointment contract and by common law in deciding whether to remove the regulator from office. If the situation is so serious that the Secretary of State has to act, he needs the flexibility to act quickly to safeguard NHS interests. As I said, the model set out in the Bill is based on precedents, so I shall not repeat those. We do not think that making that removal subject to the approval of Parliament is appropriate.
Having said all that, I should like to put on record that we do not anticipate that the Secretary of State will have to remove the independent regulator from office. We do not want to give the impression, before any appointments have been made, that we are just aching to be able to remove the regulator from office before he or she has arrived.
3.30 p.m.
Earl Howe: I fully endorse the Minister's final comments. I am sure that when appointments are made, they will be good for the long term. I am grateful to the Minister for what he told us about the meaning of the words "misbehaviour" and "incompetence" and their precedent in legislation. 1 shall read carefully what he said about that.
The larger question in my mind concerns Amendment No. 97, which proposes parliamentary approval—some kind of check in the process for Parliament—thereby buttressing the independence of the regulator, as I explained. I understand the Minister's point about speed of action, should that be necessary. I shall have to reflect on the matter between now and Report, but I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 97 to 102 not moved.]
Earl Howe Earl Howe moved Amendment No. 103:
Page 114, line 24, leave out "(generally or specifically)"
The noble Earl said: I want to raise what may seem a small issue but it is is one about which we need to be clear. Schedule 2(4) allows for the regulator to delegate the performance of his functions to a member of his
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staff. He may give authority for that to happen either generally or specifically. It would be helpful to know what "generally or specifically" means in practice. If the regulator issues a general authority, what kind of activity might that embrace and who might be given it? What implications does that have for decision-making within the office of the regulator?
Equally, if he issues a specific authority, it appears from the Bill that he could do so on any matter whatever that is within his legal powers. I am once again uncertain what implications that will have for foundation trusts, which are looking for consistency of decision-making on the regulator's part, as well as consistency in how they are regulated. They also want to feel that they are being dealt with on behalf of the regulator by a grade of staff competent to do them justice. It is important that foundation trusts have confidence in the regulator.
That form of words may well be a standard provision. We all understand that the regulator, like Ministers, needs to be able to delegate his role for appropriate practical reasons, but there is surely a limit to that. The purpose of this probing amendment is to discover what are or should be those limits and what effect internal delegation may have on how the regulator exercises his primary functions. 1 beg to move.
Lord Warner: As the noble Earl suggested towards the end of his remarks, we are in the territory of standard provisions. Perhaps I may quickly take him through the arguments.
The Bill provides for the regulator in effect to delegate functions to his staff. The inclusion of the words "generally or specifically" is a standard drafting device that simply makes clear that the regulator does not have formally to delegate his functions on each and every occasion that he wants a member of his staff to do something on his behalf. It would of course be completely impractical for him to be required to do so. Many aspects of his role could and should routinely be carried out by the staff of his office.
For example, under Clause 26(3), the regulator is required to send a copy of any notice given under Clause 23 or 24 to the registrar of companies. That is obviously a simple administrative task and to require the regulator specifically to ask a member of staff to do it on his behalf each time would be absurd. So the precedent of the words "generally or specifically" in a power to devolve functions currently includes the Food Standards Agency, Ofgem, the rail regulator, the director-general of water services, the Chief Inspector of Schools at Ofsted and the director-general of telecommunications. Those are examples in which we have used that wording in regulations.
I agree with the noble Earl that the regulator will need to ensure that his staff carry confidence with the people receiving correspondence, decisions and advice from his office. However, returning to our previous debate, the regulator, like other bodies, is required to behave reasonably and proportionately and obliged to ensure that his staff are fit for purpose to carry out the

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duties of his office. If his decisions are strange and wonderful, they are subject to judicial review. So we have checks and balances in the system, but this is standard wording that follows precedents in other areas.
Earl Howe: I am most grateful and beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes Baroness Noakes moved Amendment No. 104:
Page 114, line 27, leave out paragraph 5 and insert—
"5 (1) The Secretary of State shall make such contributions to the regulator's expenses as the regulator shall request.
(2) If the Secretary of State believes that the amounts requested by the regulator are unreasonable, he shall refer the matter to the chairman of the Select Committee for Health whose decision shall be binding on the Secretary of State."
The noble Baroness said: The amendment concerns the financial independence of the regulator. I shall speak also to Amendment No. 188, which concerns the regulator's finances.
we have already debated, the regulator is termed an independent regulator, and we shall probe what that independence means in practice. Amendment No. 104 concerns financial independence and would replace the existing Paragraph 5 of Schedule 2 with a new one. The current paragraph gives the Secretary of State the power to contribute to the regulator's expenses; the new one requires the Secretary of State to pay what the regulator asks for. That may be regarded as somewhat sweeping, so the second leg of the amendment contains an arbitration mechanism in case of dispute, suggesting the use of the chairman of the Select Committee on Health in another place.
The regulator will not be independent if the scale of his operation is determined by the Secretary of State. If he cannot determine how many people he needs or how much he needs to invest in systems and property, he will not be truly independent. That is what the amendment is about: ensuring that he has the resources to do the job as he determines. If the Government find that amendment too bitter a pill to swallow, I invite the Minister to say how the financial independence of the regulator is to be guaranteed.
I turn to Amendment No. 188, which deals with Clause 21 and fees charged by the regulator to foundation trusts. That has a slightly different link to independence. The Consumers' Association suggested in its submission to the Committee that the independence of the regulator could be severely compromised by the introduction of fees paid by foundation trusts. Its view is that the regulator would find it difficult to remain independent of foundation trusts if he knew that his actions might well jeopardise the recovery of costs. I should be interested to hear the Minister's views. The amendment requires the fees to do no more than recover the costs associated with dealing with the trust during the relevant period.
Clause 21 mentions a reasonable fee, but I am sure that the Minister will be aware that if you put a dozen accountants in a room, they will come up with a dozen different versions of what is a reasonable fee. The clause does not even state from whose perspective the fee is to be adjudged reasonable: that of the regulator or of the foundation trust. Our amendment ties fee levels to the costs incurred. I hope that the Minister will agree that, on that basis, it would not be acceptable for the total costs of the regulator to be spread across all foundation trusts regardless of a trust's behaviour and whether it complied fully with its obligations.
I hope that the Minister can enlighten the Committee on how much the regulator will expect to recover. The Explanatory Notes say that the costs for 2004–05 will be £2.3 million. Divided among 32 foundation trusts for next year, that will leave them with around £72,000 each. Is that roughly how the system will work? Will all the costs be recharged to foundation trusts under the mechanism?
Amendment No. 188 is a probing amendment. We wish to understand how the Government see the fees systems working in practice. I beg to move.
Baroness Andrews: The two amendments deal with different aspects of funding. The first is the responsibility for funding the regulator's office and the regulator's potential to raise fee income. We have made clear in Schedule 2 our intention that the Secretary of State will fund the office of the independent regulator directly. I do not have to explain in detail why that is the case. As part of his overall responsibility, for which he is accountable to Parliament, he must have control over that expenditure.
Amendment No. 104, which would effectively remove that power, is not acceptable in those terms. If, as the noble Baroness suggested, the amendment is aimed at ensuring that the Secretary of State provides sufficient resources or does not unreasonably withhold them, I assure her that the independent regulator will be a very significant office with a major new responsibility in the health service. It will be funded appropriately. As we discussed earlier, the regulator is accountable to Parliament and required to report to it each financial year in the exercise of his functions. That information will include a report on the office's expenditure. There can be no better check. If the Secretary of State funds the office appropriately, he must make it clear to Parliament.
It is not so bitter a pill for me to address the question of a guarantee, which the noble Baroness raised. Members of the Committee will know that this is hardly a unique model for accountability. There are many examples of bodies funded similarly by Government. The Government's record on NHS funding should provide reassurance. We can be confident that the office will be funded to do its job properly, because we intend that the NHS should be funded to do its job properly. This will be no different, so we see no reason for different legislative provisions.

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On those grounds, it is inappropriate for the chairman of the Health Select Committee to determine government expenditure.
I shall now discuss Amendment No. 188 and the regulator's ability to raise fees under Clause 21. The Bill refers to "a reasonable annual fee". That simply indicates that we are building foresight into the provision. It is included simply to ensure that the option of funding the regulator's office through a fees structure is not ruled out. We do not intend to commence the provision currently. There is no question of integrity being challenged here.
I accept that there is a reason for raising the concern in Amendment No. 188 that the regulator might make a profit through his power to raise fees. I reassure Members of the Committee that that is simply not possible. Even after the commencement of Clause 21, the regulator would not be able to generate funds through fees that exceed the total expenses of his office. Clause 21 requires that fees be reasonable. The Bill does not give the regulator any power either to generate a surplus or to distribute surplus funds to anyone under the legislation. If we commence the provision to allow the independent regulator to charge fees, it will be for him to determine the level of fees payable by the trust.
The noble Baroness asked whether we have in mind a system, and whether the fees will be set according to criteria. There is a specific legislative requirement only that the fees be reasonable. But if the fees structure was size-based, according to the number of trusts or the increase in a trust's size, for example, the fee might grow accordingly. But those are matters for the future, as are the recovery issues.
I reiterate that, as a matter of law, the regulator will simply not be able to charge fees that exceed the total expenses of the office. Those safeguards will ensure that the running costs of the office will not be unreasonable but will be appropriately funded. I hope that, on those very reasonable grounds, the noble Baroness will be able to withdraw her amendment.
3.45 p.m.
Baroness Noakes: I thank the noble Baroness for her response. I was particularly pleased to hear that there is no current intention to implement the fee-charging provisions. That helps for the moment, at least.
On the core issue of financial independence, the noble Baroness said that the Secretary of State must have control. That is at the heart of the issue. The Secretary of State must have control of money because he must have control of the regulator. That is implicit in many of the models cited today. I thought that we were trying to get a genuinely independent regulator for the NHS. Advertisements for the regulator stressed the peculiar independence of the office. We do not have that here; therefore, we will need to reflect on that aspect on Report as part of our overall view on the regulator. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes Baroness Noakes moved Amendment No. 105:
Page 114. line 28, at end insert—
"Accounts and audit

(1) The regulator shall keep proper accounting records.

(2) The regulator shall, for each financial year, prepare accounts in accordance with directions given by the Treasury.

(3) The accounts prepared by the regulator for any financial year shall be submitted by the regulator to the Comptroller and Auditor General.

(4) The Comptroller and Auditor General shall examine and certify any accounts submitted to him under this paragraph and shall lay before each House of Parliament a copy of the accounts as certified by him together with his report on them."

The noble Baroness said: The amendment would add a new paragraph after paragraph 5 of Schedule 2. It is a probing amendment setting out requirements for the regulator to keep proper accounting records, to prepare annual accounts and to submit them to the Comptroller and Auditor General, who then audits them and lays them before Parliament. It is a pretty standard formulation for a public sector body. But the purpose of the amendment is not to refer to the detail of that, but to establish what are the accounting and auditing arrangements for the regulator, as I could find no reference to them in the Bill.
I hope that that is not an oversight on the part of the Government. I invite the Minister to explain the auditing and accounting arrangements for the regulator. I beg to move.
Baroness Andrews: One rises always with trepidation to discuss public accounts with the noble Baroness. Of course I agree with the principle that the independent regulator must keep proper accounts to ensure both probity and proper accountability. But there is no need to include that in a statutory provision.
Members of the Committee may well know that detailed public accounting rules apply to non-ministerial government departments. The office of the independent regulator would be a non-ministerial department so the provisions will apply automatically. The noble Lord, Lord Warner, indicated earlier that we would review the structure of the office in the light of the Better Regulation Task Force report on independent regulators, and that we would ensure that such accounting requirements continue to apply—if necessary, by including explicit provision in legislation if any changes are made in that way to the relevant clauses or schedule.
The regulator is also required to report to Parliament in the exercise of his functions. That will also include a financial report. I hope that, with those assurances, the noble Baroness will be satisfied that we have made appropriate provision.
Baroness Noakes: I am grateful for the noble Baroness's response and her confirmation that the office will be a non-ministerial government department. I understand that from that flow the auditing and accounting arrangements. That was the assurance that I sought. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes Baroness Noakes moved Amendment No. 106:
Page 114, line 32, at end insert—
"( ) The annual report shall include a summarised account for all NHS foundation trusts for the financial year."
The noble Baroness said: The amendment would add a new sub-paragraph to paragraph 6 of Schedule 2. Paragraph 6 concerns the regulator's annual report, to which reference has been made, which must be laid before Parliament. Our amendment would make it a requirement for the annual report to contain a summarised account for all foundation trusts for the financial year. I am not sure that I will hold the attention of all noble Lords on the subject of summarised accounts, but I shall do what I can to sex it up. Apparently, the Department of Health produces summarised accounts for the NHS each year—I have brought a copy, so Committee Members can see the exciting tome that is available each year. It is a weighty document. It summarises the different flows within each part of the NHS and includes a section on NHS trusts. The summarised accounts therefore give a financial overview of the NHS that is not otherwise available.
For example, if we want to see the amount of money that flows through NHS trusts or PCTs altogether, that is where one can look for the information. Importantly, the Comptroller and Auditor General includes an informative narrative at the beginning of the summarised accounts that reveals data that are interesting to some people, such as the amount of deficit and who has financial problems. It is my understanding that, unless we do something in the Bill, there will not be a summarised account for foundation trusts which means that Parliament will be deprived of access to important information. It may also make it difficult for the Public Accounts Committee in another place to conduct a review of the issues arising from the foundation trust sector as a whole.
Our amendment does not involve the C&AG, but it would be essential if there were a summarised account. If the Government were minded to accept our amendment, I am sure that that could be dealt with later. I beg to move.
Lord Warner: At the heart of this amendment is the issue of the clarity of accountability. I suspect that the noble Baroness will agree that the accounting arrangements need to reflect that NHS foundation trusts are public sector bodies ultimately accountable to the public. That is why we have provided in Schedule 1 for each foundation trust to make its accounts available to the public and the National Audit Office and to lay the accounts before Parliament. Therefore, the Bill provides more than adequate provision for public and parliamentary scrutiny of the financial arrangements for NHS trusts.
It is not normal practice for regulators to come along and try to provide summaries of the accounts of the bodies that they regulate. It is important that those who exercise freedoms—we are expecting NHS foundation trusts to do that; that is one of the main purposes of this legislation—should be accountable for the results of their actions. The requirement for an
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independent regulator to prepare summarised accounts is an unnecessary burden and is potentially misleading, which is perhaps the more serious argument. The presentation of accounts to Parliament would normally be carried out by an accounting officer who was responsible for the expenditure reflected in those accounts. Although the independent regulator sets the accounting requirements and borrowing limits for NHS foundation trusts, he is not accountable for an NHS foundation trust's expenditure or its operational management.
Of course, no one is arguing that the regulator should not assist Parliament when required to do so. Indeed, as has already been said, the regulator will make a report to Parliament on the discharge of his functions and the content of that report is a matter for him in the light of the way that he has discharged those functions. He could also assist Parliament by preparing summaries of financial information relating to NHS foundation trusts if requested to do so—by a parliamentary committee, for example. However, if there were a legislative requirement for him to act as this amendment suggests, the implication is that he is the accounting officer for the information contained therein. As I have tried to explain we believe that that would be quite inappropriate.
Baroness Carnegy of Lour: I see the Minister's argument about the regulator. I know that he does not like my questions because he does not always expect them. However, will there be a summarised account of foundation trusts anywhere? The difference between the costs of foundation trusts and other trusts will be of great interest throughout government. It will also be of interest to the Scots Parliament because, with the Barnett formula, its funding is dependent on what England spends. This change will therefore be very important to the Scots Parliament. Will it be possible to see the summarised accounts anywhere under the arrangements in the Bill?
Lord Warner: Let me make it clear: I very much enjoy questions from the noble Baroness and I am not in any way affronted by her question. Ministers usually learn not to try to forecast the future—at least those who have managed to survive in office a reasonable amount of time—so I am not going to attempt to do that. I expect that, as is often the case, if the regulator is asked to provide information by a parliamentary committee, he will try to respond positively—as most of us do when put in that position. I think we will just have to wait and see.
Baroness Carnegy of Lour: I hope that the Minister will go on enjoying my questions because that is a great encouragement to me. It was extremely nice of him to say that. However, I am asking whether there will be a summarised account anywhere of the cost of foundation trusts. A Select Committee could ask the regulator for one but, leaving the regulator out of this

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for a moment, will there be a summary account anywhere in the volume that my noble friend Lady Noakes showed us and which made my heart sink?
Lord Warner: We will have to wait and see. We do not want to anticipate doing anything that damages the clear accountability framework for NHS foundation trusts that we have set out in this legislation.
Baroness Noakes: I thank the Minister for his reply and my noble friend Lady Carnegy for her insightful intervention. As usual, she puts her finger on the issue. There will be a lack of information after this Bill and a whole area of the NHS about which we will not be able to get a financial overview, which is an important matter. I completely accept the Minister's concerns that to summarise might imply accounting officer responsibility, but that should not stand in the way of creating this important source of information.
I do not believe that, in moving from NHS to foundation trust status, people will understand it if an important source of summarised information disappears. It is strange that we will have to wait for a parliamentary committee to request a summary when it is perfectly plain and obvious that something is disappearing from the arrangements and needs to be replaced to allow information to be available. I will consider carefully what the Minister has said about not implying accountability alongside the provision of information, but I feel sure that we can get around that and I look forward to debating the matter again on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 107 not moved.]
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 108:
Page 115, line 4, at end insert—
"8 The regulator must report in person to any Committee of either House of Parliament, or a Committee of both Houses, which requests information on the discharge by the regulator of his functions."
The noble Lord said: Paragraph 7 of Schedule 2 is something of a curiosity. It states:
"The regulator must respond in writing to any recommendation which … is made by a Committee of either House of Parliament, or a Committee of both Houses, and … relates to the exercise by the regulator of his functions."
It is not immediately clear why paragraph 7 is written in that way. Certainly, written evidence given by a regulatory body is perfectly usual in these cases, but oral evidence is also perfectly usual and acceptable. Indeed, it is often very important that oral evidence is given to a Select Committee. In practice of course, the Health Select Committee would be the one most likely to be involved. As currently drafted, does the fact that the paragraph refers only to written evidence—it states "respond in writing"—mean that the intention is to have the regulator respond only in writing? Is there some hidden intention? Is it possible for the Select Committee to call the regulator to give oral evidence?
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It is not clear whether the provision in the schedule is explanatory, limiting or whatever. The bare fact is— this is the reason for the amendment—that the ability of a Select Committee to take oral evidence is an important part of the accountability of a regulator to Parliament. 1 look forward to hearing what the Minister says. I beg to move.
4 p.m.
Baroness Finlay of Llandaff: I have added my name to the amendment. Like the noble Lord, Lord Clement-Jones, I have a concern about the ability of Parliament to drill down in depth into information that may be provided in the report. We should allow Parliament the capacity to scrutinise beyond the boundary of the items that are included in the report, to allow any destabilisation in the health economy to be detected in questioning.
Baroness Cumberlege: I support the amendment. Noble Lords who have a good memory may remember that, at the beginning of the Committee stage, I proposed six clauses that would have established an agency that would be responsible for the day-to-day running of the NHS. 1 hope that, in a year or two, that will come about. I see some of the proposals in the Bill as paving mechanisms to prepare the ground for an agency in the future.
In proposing those clauses, I was keen to try to get a different relationship between Parliament, Ministers, the Department of Health and the NHS and to get the politics in their rightful place. A crucial element of that was safeguarding the independence of the agency—in this case, it is the independence of the regulator—and ensuring that the accountability was to Parliament. Having heard through the media the oral evidence that is being submitted to the Hutton inquiry, I find it interesting to see how, when people have to respond immediately to incisive questions, they reveal information that they would not reveal in a written report, in which it would be easier to get away with some weasel words.
It is a good amendment, and I hope that the Minister will agree to it.
Baroness Andrews: I can reassure the Committee that there is nothing sinister about the fact that paragraph 7 of Schedule 2 specifies that the regulator should respond in writing. The provision is there to make it clear that the independent regulator must submit a report to Parliament and must respond in writing to any parliamentary committee with regard to the exercise of his functions. However, that is hardly the limit of his accountability to Parliament.
The fact that it is specified that the regulator must respond in writing does not rule out the fact that he will be available to any Select Committee of either House that wants to scrutinise his activities. The regulator's activities will be subject to the scrutiny of any parliamentary committee, including the Select Committee on Health and the Public Accounts Committee, before which he is summoned to give evidence. We know that Select Committees have the

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power to order people to attend to give evidence, but we do not expect that they will have to exercise those powers with regard to the independent regulator, who will have a public office with public responsibilities.
In recent months, we have seen the Select Committees, with their formidable reputation, making a strong impact on the public consciousness and on the workings of government. I would not have thought that we needed to provide powers to require the regulator to respond to order. Select Committees have amply demonstrated in recent months the fact that a simple invitation to attend will suffice. If and when that invitation comes, the regulator will surely be pleased to give evidence to the committees.
Lord Clement-Jones: I thank the Minister for that reply. It would be difficult to impute sinister motives to her, given such a reply. Nevertheless, the drafting of the schedule is interesting. If we simply took it at face value, we might ask why that paragraph should exist in the first place. If the Select Committees have the power to insist on the production of papers and people—their general power—why is the schedule drafted in that way?
I am sure that the Government do not have sinister motives, but they may have signposting motives. They may wish to indicate that that is how they think a Select Committee should operate. In a way, that is almost as unhelpful as a sinister motive. It should be expected that the regulator should appear regularly in person before the Health Select Committee to describe his policies.
I am half-satisfied by the Minister. I never would have thought that there would be any sinister motives in the Department of Health, but I do not believe that the paragraph signposts as well as it should do the kind of relationship that the regulator should have with the Health Select Committee. We may pick the matter up at a later stage, but, in the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 109:
Page 115, line 4. at end insert—
"Right of appeal to regulator
Employers of health service staff in non-foundation trusts affected by decisions made by foundation trusts in respect of their terms and conditions of employment may ask the regulator to judge if these are a breach of section 26 of the Health Act 1999 (c. 8) (co-operation between NHS bodies), as amended by this Act."
The noble Lord said: In describing the model, as he likes to call it, in the Bill, the Minister says increasingly frequently that it is not the job of the foundation hospital to do something that is proposed from parliamentary Benches or that it is not the job of the regulator to do something else. That is a circular argument. One of the problems that we have with the Bill is the mindset that the regulator should do X, Y and Z and that any amendment that tries to extend the scope of his functions is illegitimate. That is not the
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most constructive may to proceed with the Bill, particularly if some of the anxieties about the impact of foundations hospitals are to be allayed.
I am interested by the mantra that the Minister is beginning to use. He says that it is a case of "referee versus inspector". That reminds me of how, during the passage of previous health Bills, the noble Lord, Lord Hunt of Kings Heath, assured us that the system was a managed system, not a regulated system, and that those systems were completely counterposed. What happened in the end? That was in response to wanting to merge the functions of CHAI—
Lord Hunt of Kings Heath: The point is that we managed the system so well that we were able to evolve and move on to a regulated system. It is a serious point. By setting up institutions such as NICE, the national service frameworks and CHAI, we have created the conditions in which it is possible to move to a decentralised, regulated system, rather than a managed one. However, we must start with management.
Lord Clement-Jones: I think back on the number of times that the noble Lord talked about how strong performance management in the NHS was and how important it was. Clearly, we are moving away from performance management because of the enormous success that the noble Lord and his colleagues have had over the years.
That is backdrop. In this context, one of the key fears of those who have doubts about foundation trusts is that they will be able to poach staff by improving pay and conditions for staff to a level above those of other hospitals in the area. It is not yet clear what pay flexibility will be available to foundation trusts, and it is hard to see what additional freedoms trusts might require over and above those in Agenda for Change. Many of us welcome the fact that the general broad approach will be that foundation trusts will be expected to implement Agenda for Change, which already offers significant new pay flexibility to all NHS organisations, including an ability to increase pay rates by up to 30 per cent in each organisation to tackle problems with recruitment and retention. It is important that trusts exercise such freedoms with proper regard to the wider local health economy.
The amendment is designed to add weight to Clause 29, which imposes on foundation trusts a duty under the Health Act 1999 to co-operate with other NHS bodies. It would help ensure that the creation of foundation trusts strengthened rather than undermined relationships between hospitals and other NHS organisations. I beg to move.
Earl Howe: The noble Lord's amendment is grouped with my Amendment No. 199, which brings us face to face with the duty of co-operation in Clause 29. As regards the practical operation of the clause, many services are dependent on collaboration between NHS trusts and are provided in hospitals where the skills of the staff are appropriate to the complexity of the disease. That is particularly important, for example, in

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the treatment of cancer. Some hospitals are designated cancer centres covering the more complex cancers; other hospitals are designated as cancer units providing care for the more common cancers. What is essential is that hospitals are integrated into a network so that patients are referred to a place with the right expertise. That is a fundamental principle which transcends the interests of individual NHS organisations.
The cancer policy framework document, published in 1995, states:
"Great importance is also attached to the integration of the work of the Cancer Units with the Cancer Centre. This can only be achieved by strong links for all the professions, common treatment policies, audit arrangements and participation in trials".
The recent study by Eurocare revealed that five-year cancer survival rates in Britain are below the European average. If foundation trusts are literally free to provide the kind of services which suit their own interests as trusts instead of what fits in best with local hospitals, there will be a serious risk for patients. Providing the right care in the right place cannot be left to chance. Patients must know that it is there for them.
That means that bodies which currently participate in clinical networks must continue to co-operate to co-ordinate both care and capacity. One answer would be to build these arrangements into a contract. Without a legally binding contract, there is no mechanism for resolving disputes between a PCT and a foundation trust in respect of specialised services. The current provision is very vague and could not be relied upon to back up a demand by a PCT that a foundation trust falls in with a joint commissioning arrangement.
Another route is that suggested in the amendment whereby the regulator becomes the arbiter of any dispute involving a lack of co-operation by a foundation trust. Whichever direction this issue takes, it is too important to be ignored. I should like to hear the Minister's answers to the concerns raised by the noble Lord, Lord Clement-Jones and myself, if, over the long term, clinical networks are to remain the mechanism by which specialised services are delivered by the NHS.
Baroness Finlay of Llandaff: Noble Lords have highlighted the tremendous importance of partnership in the provision of high quality services. Indeed, it is in cancer par excellence that that is demonstrated. For example, the number of patients requiring upper gastro-intestinal cancer surgery each year is small, which means that patients need to be concentrated in order to develop a centre of expertise. Over the years, there has been a great deal of evidence that hospitals performing one or two oesophagectomies per annum have much worse results than those performing a critical number with an experienced team around them.
Currently, there are partnership agreements in place. What assurances are there that these partnership agreements will remain in place and will be respected? So far, I am not clear how bad co-operation must be for it to be deemed non-co-operation and to
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cause the regulator to intervene. I am uncertain, too, at what point the national clinical director will be consulted for opinions about the quality of service and whether developments within a foundation trust may jeopardise the quality of service in other parts of the NHS within a clinical network.
4.15 p.m.
Lord Warner: I shall respond to the two different issues in respect of the two amendments. As regards Amendment No. 109, I enjoyed the exchange between the noble Lord, Lord Clement-Jones, and my noble friend Lord Hunt, who, as is often the case on these occasions, almost took the words out of my mouth. I do not want to disappoint the noble Lord, Lord Clement-Jones, by not using one of my mantras. This is an appropriate point at which to use my mantra about flexibility. He knows that it is our belief that NHS foundation trusts should have a degree of flexibility on staff pay and conditions, just as NHS trusts do now. The important point is that it is also our strong belief that employment contracts are a matter for staff, their unions and the employers. They are not issues which should be arbitrated upon by a third party, such as the regulator.
However, it is essential that NHS foundation trusts do not act in ways that are inconsistent with equal pay principles and that they do not prejudice the interests of the wider NHS, including other NHS employers. Quite frankly, a beggar-your-neighbour policy on pay among NHS bodies serves no one's interests, including anyone who started along that path. The balance between freedom for staff, their unions and the employers to negotiate what is right for them, flexibility for NHS foundation trusts and looking after the interests of the wider NHS is precisely what we will achieve in the current arrangements that will apply to NHS foundation trusts.
As the noble Lord acknowledged, first, NHS foundation trusts will implement the new Agenda for Change pay system. The Secretary of State will not support applications from NHS trusts without a clear commitment to implement Agenda for Change. Under the new pay system, NHS foundation trusts will be specifically represented in forums for national collective bargaining on staff terms and conditions of service. That will be a contractual right for all Agenda for Change staff. These national negotiations are a matter for employers and unions, and not for the Secretary of State.
Secondly, national negotiations and terms and conditions of employment are not—I emphasise, are not—a matter for the independent regulator either. The amendment would drag the independent regulator into those sets of arrangements. He does not and should not have the power to intervene in the contracts agreed between NHS foundation trusts and their staff. Effectively, that is what the amendment would do.
However, we recognise that safeguards need to be in place to ensure that the employment policies of individual NHS organisations are not detrimental to the NHS as a whole. That is why NHS foundation

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trusts will be subject to the same duty of partnership that applies to all NHS bodies; namely, a duty to co-operate in the exercise of their functions, as set out in Clause 29. Any persistent attempt at disregarding neighbouring partners would bring a foundation trust into breach of this partnership requirement.
An NHS foundation trust would be able to increase pay rates only if it were able to generate enough efficiency savings to offset higher costs. We shall probably turn to this issue at a later stage, but all NHS organisations will be bound by a new national tariff for NHS services. Foundation trusts will not be able simply to increase charges to NHS commissioners to cover the costs of an increased wages bill. There are reasonable checks and balances that make the amendment unnecessary. Most inappropriately, if agreed, it would drag the regulator into the field of industrial relations, where he or she does not belong.
The arguments are rather different in relation to Amendment No. 199. I do not disagree with some of the sentiments expressed by the noble Earl, Lord Howe, and the noble Baroness, Lady Finlay, about integrating care for patients, especially in the area of cancer. Nothing in the Bill damages the capacity of individual health professionals to work together to integrate care for patients.
It may be helpful to noble Lords if I give some indication of what the duty of partnership really means. Good partnership working for NHS foundation trusts will involve consultation with PCTs on service development and expanding capacity in line with commissioning requirements, participating in the training and education of the NHS workforce, working together with workforce development confederations and universities to ensure effective co-ordination, as well as working across clinical networks to deliver services along integrated care pathways. Every NHS foundation trust will be under a statutory duty to work in partnership with its neighbours and others involved in that kind of work.
We do not think that anything set out in the Bill would in any way damage those clinical networks and pathways towards integrated care that large numbers of health professionals now deliver day in and day out. It is not the purpose of this Bill to disrupt those activities. Many of those relationships are very much the result of health professionals working together. All we have done in the Bill is to set up an organisational framework which will ensure that partnership working continues in a way beneficial to patients.
The independent regulator has the responsibility of overseeing NHS foundation trusts, including their compliance with statutory obligations. Under Clause 3, he must act in the best interests of the wider NHS, not only NHS foundation trusts. Under Clause 6(3) the regulator can set any terms to an authorisation that he considers appropriate and, under Clause 29, has powers of intervention which he can exercise where an NHS foundation trust significantly fails to meet its statutory obligations. Therefore the independent regulator could issue an NHS foundation trust with
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warning notices or, in extremis, even replace managers if that trust persistently continued to act in a way contrary to its statutory obligations.
We believe that adequate safeguards have been put in place in this legislation to ensure that a clear signal is given about the importance of partnership working and that enforcement mechanisms will be made available to the regulator, should the need arise.
Baroness Cumberlege: As I understand the legislation—I am sure the Minister will put me right if I am wrong about this—foundation trusts will be able to sub-contract services to the for-profit sector through PFIs and other schemes, as well as to transfer staff. Can the Minister tell the Committee what will be the role of the regulator in those circumstances, in particular if the for-profit sector were to increase pay in a way not in accordance with NHS pay scales?
Lord Warner: I do not think that I can easily forecast exactly what might happen in all circumstances. However, in the situation indicated by the noble Baroness, the outsourcing, as it were, of a particular piece of work to a for-profit organisation would not in any way enable the foundation trust to opt out of its obligations in the way that I have suggested.
It would be unusual to encounter a set of circumstances where the market rate for a particular skill or competency is X and that was changed dramatically by whoever is the source of service provision. However, issues would arise for the foundation trust as regards the best way of organising and managing a particular service.
I cannot answer a hypothetical question of the kind raised by the noble Baroness, but I have sought to give some indication of our thinking.
Baroness Carnegy of Lour: I ought probably to know the answer to this question. Given that the trust will be subject to national wage negotiations in the way just confirmed by the noble Lord, does it mean that the only way in which a trust may attract better staff or exercise its freedom in how it employs staff is by putting individuals into more highly promoted posts, as is the case with universities?
Lord Warner: I would not want either to confirm or deny what a particular NHS foundation trust might do in a given set of circumstances and according to its individual needs. All I would say is that "terms and conditions of service" is a broad term that is available to NHS foundation trusts and goes much wider than simply pay. It takes account of a wide variety of circumstances which may influence its ability to recruit and retain staff.
Lord Clement-Jones: I thank the Minister for his reply and for his responses to the interventions. This is one of the more important replies that we have been given during the course of the Bill and it requires some consideration.

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Because of the concerns that have been expressed, the common factor uniting noble Lords on these Benches is the wish to give the regulator more teeth in respect of the duty of co-operation, whether in the narrower area suggested in my amendment or more widely as put forward by the noble Earl, Lord Howe. I recognise the statement made by the Minister about the balance to be struck between flexibility and looking after wider NHS interests. However, the crux of the matter is whether the regulator really does have the power to maintain those interests while retaining the flexibility of NHS foundation trust behaviour.
The Minister's helpful and extended response requires further considered reading in Hansard. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 2 agreed to. Clause 3 {General duty of regulator]:
Earl Howe Earl Howe moved Amendment No. 110:
Page 2, line 4, leave out "performance by the Secretary of State of the"
The noble Earl said: In moving Amendment No. 110 1 shall speak also to Amendment No. 111. I have remarked on a previous occasion on the very interesting and, to my mind, revealing phraseology of Clause 3, which brings us face to face with some harsh realities about the regulator and his role, and what those will mean for foundation trusts.
We have heard rather often how this Bill ushers in a new era for the NHS, enabling it to become free of political interference from Whitehall and free to chart its own course according to local priorities and local ownership. The newly created independent regulator will be there to ensure fair play and that foundation trusts comply with the terms of their authorisation and, more generally, that they adhere to the requirements of Part 1 of the Bill. That is the official position on the regulator.
Yet how independent will he be really, and how far removed from the influence of the Secretary of State? We have already debated a number of telltale signs that point to a rather different picture. Clause 3 takes us further down the path of discovery. We see here that the independent regulator will be constrained to behave in a way consistent with the performance by the Secretary of State of the duties laid down in the National Health Service Act 1977. That says a great deal more than simply that the regulator has those same duties. Clearly he does have those duties, but he must also perform them in a manner consistent with the way in which the Secretary of State performs them; that is, he has no independence to interpret those duties in a way substantively different from that of the Secretary of State.
This tells us as clearly as we need to be told that the regulator will live not only in the shadow of the Secretary of State, but actually in his shoes. The idea, therefore, that in this legislation we have separated in one bound foundation trusts from the control of Whitehall is a myth.
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That has direct consequences for NHS foundation trusts. It will be idle for a foundation trust to pretend that all it needs to do is to maintain a high quality of health services within the terms of its authorisation and listen to the voice of its local members. It will have to do more than that. It will have to keep a weather eye on what the Secretary of State is saying to the rest of the health service: the targets he is setting and the directions he is issuing. If it fails to do this and instead tries to plough its own furrow as it wishes, the inevitable consequence will ensue—the regulator will descend upon it and pull it into line. Thus the way in which the Secretary of State performs his duties under the 1977 Act will exert a direct pull on the behaviour of foundation trusts.
I am sure that the Minister will argue that this is a necessary—and, indeed, healthy—state of affairs. I am sure he believes that the duties imposed by the 1977 Act should rightly overlay everything in Part 1 of the Bill. But the Secretary of State's performance of those duties also overlays Part 1. In my amendment I am suggesting that this amounts to a backdoor power of direction by the Secretary of State which is both unnecessary and inconsistent with the objectives that the Government have set for foundation trusts. It means that the much-vaunted operational freedoms of foundation trusts will be circumscribed in a way that may not at once be obvious but which is, nevertheless, quite real and evidenced by only the shortest of short trails to Dr Reid's office in Richmond House. I beg to move.
4.30 p.m.
Lord Peyton of Yeovil: I applaud the remarks of my noble friend. It is not unusual for me to do so, but on this occasion I do so with exceptional warmth. I should be grateful if the Minister can tell the Committee whether there is any precedent for bidding a regulator to act in a manner consistent with the way in which a Secretary of State performs his duties. It seems to be a weird criterion.
I am quite accustomed to regulators and others being told that they must do what the Secretary of State orders them to do, but to state that they must accept as a criterion the way in which a Secretary of State performs his duties is going a little too far into the realms of vagueness and speculation. I hope that the Minister will be able to satisfy my curiosity, at least on the point of whether there is any precedent for this kind of criterion to be set up as a standard to which a regulator, or anyone else, should aim.
Lord Blackwell: My noble friend's amendment goes to the heart of a question which has been puzzling me throughout the passage of the Bill. If the Secretary of State were to declare a target in future—for example, a waiting time target in respect of certain operations— would the fact that he had declared that target automatically have any impact or effect on foundation trusts? If the Bill were not amended, would the

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regulator be the means by which such targets were imposed on the foundation trusts, or would they be completely free of any such targets under the Bill?
Lord Warner: Let me state quite categorically that this is not a backdoor power of direction. I cannot quote chapter and verse off the top of my head for the noble Lord, Lord Peyton, but I shall be happy to write to him when I have carried out more research in this area. However, whatever the outcome of the letter, I do not believe his point is necessarily valid.
Perhaps I may put the term "the duties performed by the Secretary of State" into context. The duties performed by a Secretary of State in the field of health will, to some extent, change over time for good and sound reasons which are not much to do with the political process. We would not expect a Secretary of State to have regard to exactly the same circumstances in relation to healthcare today as would a Secretary of State in 1948. There will be changes in resources, people and money; new professions will develop over time as people develop new skills to cope with new healthcare needs; there will be rapid changes in technology, drug use and development; and there will be changes in public expectations and choice. If Secretaries of State, of whatever political party, were so foolish as to simply ignore such changes in the way in which they performed their duties under NHS legislation, I suspect that they would not last terribly long. It would be Canute-like behaviour that ignored the real processes of change taking place in society and the healthcare field. So to pretend that a Secretary of State would perform his duties in exactly the same way, year in, year out, is a myth we should not perpetuate.
We discussed on earlier amendments the need for the general duties of the independent regulator to strike the right balance between ensuring consistency with the requirements of the NHS as a whole and retaining his or her independence. Striking that balance as we have tried to do, as I have explained on a number of occasions, does not damage in any way the independence of the regulator.
Amendments Nos. 110 and 111 would remove the reference to the Secretary of State's performance of his duties under the 1977 Act. For the reasons I have briefly explained, that would be a slightly unreal way of behaving. Under Clause 3, the independent regulator is required to take account of the wider interests of the NHS by ensuring that he acts consistently with how the Secretary of State performs his duties under the NHS. But we are leaving it—and this is a feature of his independence—to the regulator to determine how to achieve this. What he cannot do is simply ignore how a Secretary of State, at a particular point in history, is performing his duties under NHS legislation. For the reasons I have explained, that would be a rather Canute-like approach to dealing with the healthcare sector.
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The removal of the reference to the performance of the Secretary of State's duties is not acceptable because it would allow the independent regulator to second-guess a Secretary of State—who is accountable to Parliament for the performance of his duties—in ensuring that a comprehensive health service was available across the NHS as a whole. We believe that the amendments are not appropriate.
Baroness Carnegy of Lour: I should like to hear the Minister's answer to my noble friend Lord Blackwell.
Lord Warner: We do not want to anticipate the detail of the way in which a particular regulator will behave in particular circumstances. I have made it clear that he must take account of the Secretary of State's performance of his duties, as is appropriate, at a particular point in history.
Earl Howe: That is an extremely revealing answer. My noble friend Lord Blackwell put his finger on the issue: is it or is it not the case that the Secretary of State, at one remove, will be micro-managing the health service? That is what it amounts to. It appears that there could be circumstances in which the Secretary of State was doing just that. This is not ruled out by Clause 3. That is what my amendments were designed to get to the heart of.
I am grateful for the backing and support of my noble friend Lord Peyton on these amendments.
Lord Warner: Can the noble Earl explain to the Committee how, if his party was in office, he would cope with the situation? If the wording was removed and the circumstances in which the Secretary of State had to perform his duties in relation to healthcare were to change over time, how would he deal with the issues I have outlined?
Earl Howe: First, the Conservatives are not in office—we have a Labour Government—and we on this side have a duty to ask the Government questions, not the other way round. Secondly, I do not think the Minister's question is very well put. The point at issue is not whether the regulator should have a general duty to abide by the duties in the 1977 Act—we can see why that should be. The question is whether his every step should mirror the steps of the Secretary of State. That is the point with which I take issue.
Once again, we shall need to return to this matter as we debate the rest of Part 1. How independent foundation trusts will really be, despite the appearances that the Government like to construct, is a very important issue. In view of the time, I do not intend to spend further time on the amendments, but no doubt we shall come back to them later. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 111 to 113 not moved.]
Earl Howe Earl Howe moved Amendment No. 114:
Page 2, line 6, at end insert—
"( ) In performing his duties under this Act, the regulator must have regard to such of the following as appear to him to be relevant in the circumstances—

(a) the principles under which regulatory activities should be
transparent, accountable, proportionate, consistent and targeted only at cases where action is needed;

(b) the different needs and interests of persons using NHS
services and in particular of the different interests of
children, and of those living in rural and urban areas;
and

(c) the principles set out in the compact between the
Government and the voluntary sector and the codes of practice set out under it."

The noble Earl said: It is perhaps a statement of the obvious that by creating the new office of a regulator, the Bill gives rise to regulation in a new form. The hazards inherent in that process are equally obvious: they are, in simple terms, that the principles of good regulation may not be at the front of everyone's mind when the time comes for the regulator to take up his or her duties. My amendment is designed to address that concern.
The principles of good regulation were enunciated by the Better Regulation Task Force. They were: transparency, accountability, proportionality, consistency and a duty to act only where necessary. We need to decide whether those principles should be reflected in the regulator's statutory obligations as laid out in the Bill.
This is not some dry, theoretical issue. I take the view that deregulation, when it is put into practice, acts directly to enhance operational freedom. The corollary is also true. So we can see that these are principles which have a direct bearing on the extent to which foundation trusts are truly free of unnecessary red tape.
I have made the assumption, rightly or wrongly—the Minister can tell me which—that when an Act of Parliament is silent on the duties of a regulator, no duty that is not explicitly mentioned in the Act can be ascribed to him. It is quite remarkable, to me at least, how so little in the way of general duties for the regulator is laid down in the Bill. Foundation trusts are supposed to be responsive to the health needs of their patients and the local public. You would have thought, therefore, that the regulator might be given a general duty to ensure responsiveness on the part of NHS bodies which he oversees, but there is no such duty. Nor is there a duty to ensure that NHS bodies fulfil their proper duty towards the various elements of the population in a balanced way.
This is not the same as talking about a comprehensive health service, free at the point of need. It is about such things as being aware of the differing needs of patients in rural and urban areas and about interacting with local authorities in configuring children's services, particularly where there are children's trusts.
We would also expect to see some mention of the NHS's duty to interact constructively with the voluntary sector. That should not merely be on the wish list—it is a statement of the Government's policy. The Department of Health website says that all NHS organisations in England should be,
"signed up to a geographically relevant Local Compact by 31st March 2004".
We need to ask, in the light of that unequivocal statement, whether the regulator will be required to adhere to the compact which, at national level, is an agreement between the Government and the NCVO. For one thing, it is quite possible that at some point in the future, organisations in the voluntary sector such as hospices will elect to apply for foundation status. The Bill provides for that. If that happens, those voluntary organisations would, of course, come directly under the wing of the regulator.
The principles in the compact are good ones: for example, the principles of fairness and equity in applications for NHS funding. Unless there is some reference on the face of the Bill to those principles and the duty of the regulator to abide by them, they might as well never have been articulated, for all the relevance they will have to the regulator. They will simply not be part of his job description. I beg to move.
4.45 p.m.
Lord Peyton of Yeovil: I feel that my noble friend deserves support; I particularly applaud his dazzling faith. His amendment requires that a regulator— somebody who is about to make a government regulation—has regard to transparency, accountability, proportionality, consistency and targeting, all of which are favourite words of governments. However, if you thumb through the pages of regulations that your Lordships have approved in advance and been able to do nothing about in practice, these things are somehow never present. Still, my noble friend's persistence in advocating virtue in the place of sin is admirable.
Baroness Cumberlege: I, too, support my noble friend on this very well thought through amendment. When regulators have been introduced in this country, they often feel they have to win their spurs by being very tough. If one looks across the Atlantic to the United States, one sees the enormous damage that very tough regulators have done to the electricity industry, for instance, in order to keep down prices.
Price is not an issue here, but it seems to me that having a board of regulation, as the Minister said might happen in the future, is very good indeed. The Minister has said that he will pursue that. Introducing that element would moderate some of the excesses of an individual who would feel they had to be very tough. When a person comes in to a new post such as this and wants to make a mark, they could easily go off beam. The amendment would, I feel, keep the

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regulator on the straight and narrow, and nothing concentrates the mind more wonderfully than having it in legislation.
Lord Blackwell: I particularly support proposed paragraph (a), which refers to regulation being,
"targeted only at cases where action is needed".
We had an interesting intervention earlier from the noble Lord, Lord Hunt, about the movement from managed to regulated activities. The important thing about regulation as opposed to management is that regulation only addresses situations in which we move away from acceptable norms and activities, whereas management tries to encompass everything that organisations do. But without the amendment I can see nothing in the Bill or schedule which describes what the regulator should be doing, other than the clause we have just debated, which effectively seems to pass on any targets, priorities or initiatives that the Secretary of State should impose on him. Unless we pass the amendment, the regulator could equally well be defined as a manager at one step removed. Therefore, I support the notion that we need a definition like this, which makes it clear that the regulator should deal only with exceptions.
Lord Warner: It may surprise the noble Lord, Lord Blackwell, that I agree with his concerns, but not with his solution. In particular, proposed paragraph (a) of the amendment is totally superfluous. As a public office holder, the regulator is under a duty to act proportionately and reasonably. The Bill has been drafted with a view to establishing a light-touch regulator. Clause 23, in particular, requires the regulator to intervene only where contravention or failure is significant. We simply do not believe that we need paragraph (a).
Paragraph (b) would add nothing whatever to the regulator's duty to ensure that there is comprehensive provision of healthcare in line with the Secretary of State's duties under the 1977 Act, which I justified in an earlier debate and which seemed to cause some upset to some noble Lords. We do not believe that paragraphs (a) or (b) are necessary.
Perhaps I could develop the slightly different arguments about the compact in relation to paragraph (c). We of course support the compact with the voluntary sector, and one would not disagree with the spirit of the provisions set out in paragraph (c). As a recent chairman of the National Council for Voluntary Organisations, I would not dare do other than to support the spirit of that amendment. As head of a non-ministerial department, and consistent with his common law duty to behave reasonably and proportionately, the office of the independent regulator will already be expected to work within the compact, as agreed with the community and voluntary sector in 1998. There would therefore be an obligation on him or her to act in co-operation and in the spirit and letter of the compact.
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To reinforce the point, the Department of Health is determined to see all NHS organisations in England signed up to a geographically relevant local compact by 31 st March 2004. Applicants are likely to have local compacts in place when they become NHS foundation trusts. The duty in Section 11 of the Health and Social Care Act 2001 on NHS organisations to make arrangements to consult and involve patients and the public will also apply to NHS foundation trusts and provide an additional statutory incentive for NHS organisations not already signed up to a local compact to do so. The local compact will be one of several mechanisms through which NHS organisations will be able to demonstrate their compliance to their Section 11 duty.
Therefore, there is already a framework in place to ensure that, in effect, the requirements in paragraph (c) are provided for under a mixture of current legislation and the new Bill. It might help noble Lords to know that, in an audit of progress in February, we found that more than half of NHS trusts and primary care trusts were either already members of a local compact or working towards it. We expect the next audit of progress, in February 2004, to demonstrate that, overwhelmingly, trusts and primary care trusts are signed up to a local compact. For the reasons that I have given in detail, paragraph (c) is also unnecessary.
Earl Howe: I am most grateful to the Minister for what he said with regard to local compacts—that is an encouraging picture. I am also grateful for the support of my noble friends behind me, for giving again the arguments that I tried to articulate on paragraph (a) of the amendment.
The Minister has tried to be reassuring, and I accept his assurances in the spirit in which they are given. However, the issue is not whether the regulator is expected to abide by good deregulatory principles or might wish to work within them. The issue is whether the regulator is legally obliged to have regard to the duties, if they are not directly referred to in the Bill. The Minister referred to common law duties, but I am not sure that that is enough. Everyone needs to have certainty that the regulator will behave in a proportional and consistent way.
The regulator is a great deal less accountable than the Secretary of State, as we have discussed. If a foundation trust believed that the regulator was not acting consistently, proportionately or transparently, what remedy would it have? It cannot appeal against any decision taken, as the Bill does not allow for that. It can seek judicial review, but judicial review is dependent on interpreting legislation. That brings us round in a circle to where we began.
I must reflect further on the issue. I should add that the inclusion of children's services in the amendment deliberately picks up the later reference in the Bill to the rights and welfare of children in Clauses 47 and 74, which set out the respective functions of CHAI and CSCI. With thanks once again to my noble friends, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.

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[Amendment No. 115 not moved.]
Clause 3 agreed to.
Baroness Barker Baroness Barker moved Amendment No. 116:
After Clause 3, insert the following new clause—
"EQUALITY DUTY

(1) The regulator shall, in carrying out his functions, have due regard to the need to promote the equalisation of opportunity and the elimination of unfair discrimination and harassment so as to ensure that persons do not suffer detriment or are not denied opportunities and benefits for reasons related to one or more of the following grounds—

(a) age;

(b) colour, race, nationality or ethnic or national origins;

© impairment;

(d) family status;

(e) gender re-assignment;

(f) marital status;

(g)pregnancy;

(h) religion or belief;

(i) sex;

(j) sexual orientation.

(2) As soon as is reasonably practicable after the end of each financial year the regulator must publish a report containing—

(a) a statement of the arrangements made under subsection
(1) and having effect in the year;

(b) an assessment of how effective the arrangements were in promoting the equalisation of opportunity.

(3) The report must also contain a statement of the arrangements which the regulator has made, or proposes to make, under subsection (1) in respect of the financial year immediately following that referred to in subsection (2).

(4) The regulator must send a copy of the report to the Secretary of State."

The noble Baroness said: We come to a debate that picks up in a different way some of the arguments just aired under the previous amendment. It is obvious that the main concern about the creation of foundation trusts, which has been expressed publicly, is the extent to which it will cut across some of the founding principles of the NHS and the principle of equality.
The four amendments seek to set out a fundamental duty—to the regulator, the two NHS trusts, CHAI and CSCI. That is a duty of equality. The amendments would build into the legislation the principles of good practice. They would build on existing principles within the NHS. Many of those principles are to be found in different parts of legislation and practice in the NHS—in the National Health Service framework and the NHS employment initiative, for example.
Noble Lords may ask why we should set out the principles in such an obvious manner. The tariff system for payment for treatment will have a significant influence and it is difficult to see how it will be possible for foundation trusts to perform their duties and live up to all the functions and tasks set them by the regulator, without transgressing the principles of equality. There is very real fear that those
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patients who will lose out are not as articulate or as powerful—or as organised into lobbies—as others; hence the amendments.
The NHS has had a history of trying to tackle inequalities. It is fair to say that there has been progress, but there is also a recognition that there is a great deal more to do. A report from the Leonard Cheshire Foundation earlier this year noted the extent to which disabled people failed to be offered treatments that other people would be offered, for services unrelated to their disabilities—some screening services, for example. The only reason that could be found for that was discrimination on the part of the providers.
The amendments would impose a duty on all parts of the NHS in the new set-up to have principles of equality as part of what they do. I imagine that the Minister will come back with his usual response about the amendments being too prescriptive. I argue that they are not: they constitute principles that have to be adhered to. It is up to each part of the NHS how they implement those principles in practice. Provided they can do so, and can prove that they can do so in an annual report, they are not being prescriptive.
I believe that this approach has been built on not just in the NHS but, since the Macpherson report, in other public bodies such as the police. In those services it has proved not to be a cumbersome or bureaucratic requirement which has got in the way of their primary function, but a great benefit to what they do. One can see that the application of these principles in the NHS could have immediate and beneficial effects in areas such as primary prevention and preventative treatment. It is in that light that I recommend this series of amendments.
5 p.m.
Lord Peyton of Yeovil: Before the noble Baroness sits down, will she explain what is meant by "gender re-assignment"? It is not a term with which I am familiar.
Baroness Barker: It is a technical term referring to people who are born of one gender but who feel themselves to belong to another and who undergo a process of surgical and medical treatment to be changed into the gender into which they feel they should have been born. I beg to move.
Baroness Finlay of Llandaff: I give my strong support to the amendment. Some groups in the population find it much more difficult than others to access healthcare and require much more flexible healthcare. People do not want to be treated alongside members of certain groups in the population, particularly prisoners. Prisoners are stigmatised and sometimes encounter difficulties being treated on general wards. The same applies to people with severe disability and particularly to those with severe mental handicap.

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In referring to paragraph (b) of the amendment, which mentions,
"colour, race, nationality or ethnic or national origins",
I take the opportunity to probe the Minister a little further on a response he gave me on the first day of Committee regarding patients from Wales. He said that,
"it is likely that that trust will continue to provide those services as before, provided that the local health board in a devolved administration area continues to contract with that NHS foundation trust … The regulator will not and should not be able to protect the provision of services to Welsh patients. That is a matter for the National Assembly for Wales".—[Official Repor, 7/10/03; cols. 183-184.]
I seek assurances that the regulator will have a dialogue with the National Assembly for Wales to ensure that those services which are not provided in Wales will remain available to Welsh patients and that they will be treated with equity. I envisage a situation where a foundation trust's services may come under pressure and patients who have travelled some distance, who perhaps also demand accommodation and local help, may find themselves subtly discriminated against. I am also concerned that a foundation trust could decide to drop its contracts with local health boards in Wales before it drops contracts with commissioners in England.
Baroness Greengross: I add my strong support for the amendment. I spoke on this issue at Second Reading. It concerns equitable treatment. Equitability is not a word that we use often but it may apply in this context. Some groups—I think particularly of older people or people with mental health problems—need flexible treatment. They often need quite expensive treatment. It would be sad if they were denied that treatment. We know that the national service frameworks are not strictly enforceable. The measure would constitute a protection for the many groups whose needs must be protected, and the regulator is in a position to do that.
Lord Warner: On the subject of Wales, I repeat the assurances that I gave earlier to the noble Baroness, Lady Finlay. The issue of commissioning is a matter which will be taken forward in discussion between the Secretary of State, the Department of Health and the National Assembly for Wales. I do not think that that is an area for the regulator. I certainly do not accept that the noble Baroness's concerns are well-founded; namely, that many trusts are waiting to offload their current arrangements regarding Welsh patients. I tried to say as clearly as I could that under devolution commissioning services for people who live in Wales is the responsibility of the National Assembly for Wales. I said neither more nor less than that. I thought that was a statement of the obvious.
As regards the amendment moved from the Liberal Democrat Front Bench—
Baroness Finlay of Llandaff: I hope that I may interrupt the Minister for a moment. I thank him for
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giving way. Will he clarify the line of communication that will be established between the National Assembly for Wales and the regulator when a trust applies for foundation status which has a contract to provide a service which is not provided within Wales? I am concerned about whether there is a formal line of communication in that regard.
Lord Warner: It is for the Secretary of State to consider applications for trust status. No doubt he will take account of the kind of considerations that the noble Baroness mentioned when an application is made. In my experience, if the National Assembly for Wales has concerns about anything it is usually able to find a way to express its concerns and put its points across to all those who need to receive the relevant messages.
Although I applaud the sentiments of the amendments spoken to so eloquently by the noble Baroness, Lady Barker, their inclusion in the Bill is largely unnecessary and would considerably confuse the situation. I do not wish to take a long tour through discrimination legislation but it is worth bearing in mind that we already have on the statute book a Human Rights Act. Section 6 provides that it is unlawful for a public authority to act in a way that is incompatible with human rights. Such public authorities would include the independent regulator, NHS and independent health and social care bodies, CHAI and CSCI, as by definition at Section 6(3) of that legislation "public authority" includes,
"any person certain of whose functions are functions of a public nature".
The effect of that is when making decisions such bodies must act in a way which is compatible with the convention. The Sex Discrimination Act, the Race Relations Act and disability legislation provide very particular protections for particular groups. Those Acts incorporate processes for dealing with discrimination and apply both in employment situations with particular individuals and to the actions taken by a particular public body.
I suggest that the regulator, CHAI and CSCI are also being created for specific reasons. The regulator is being established to regulate healthcare provided by a foundation trust; CHAI is to be responsible for the inspection of NHS bodies and the regulation of independent healthcare providers; and CSCI will have a similar remit in relation to social care. Clearly the primary considerations of those bodies will need to be the inspection and regulation of the services with which they are concerned. Of course that does not mean that the regulator, CHAI and CSCI, or the bodies with which they will be concerned, will not take account of the need to promote equality and combat discrimination. But as I said, anti-discrimination legislation of the kind I have mentioned already exists and it provides clear mechanisms for dealing with those kind of issues. The legislation will apply to NHS foundation trusts, the regulator and the new inspectorates, just as it currently applies to NHS and social care bodies. We have not changed the obligation on bodies related to the NHS and social care to take

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account in their behaviour and conduct of anti-discrimination legislation. The amendments are unnecessary.
Baroness Barker: I thank the Minister for that reply, which I rather suspected would be along those lines. It is therefore important to explain that, while I understand that equality legislation as it stands has not been changed, one reason why the amendment was tabled in such a form is that there is some doubt about the extent to which that legislation applies to healthcare. That is why the much tighter and neater form of expression of how equality legislation needs to cut across the whole of the health service—it is right to include the regulator, CHAI and CSCI in those functions—is important. The drafting of the amendment makes much clearer what the outcomes of that should be, without recourse to other legislation.
That said, I accept in part some of the Minister's comments about how existing legislation will be binding on some functions of some of the new offices. I shall study his reply in detail, and may come back to the matter at a later stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 4 [Applications by NHS trusts]:
[Amendment No. 117 not moved.]
Earl Howe Earl Howe moved Amendment No. 118:
Page 2, line 10, leave out from "trust" to end of line 11.
The noble Earl said: I shall speak also to Amendments Nos. 123 and 130. Amendment No. 118 is very simple. It is designed to ask the Minister why, when a hospital applies to the regulator for authorisation to become a foundation trust, it is necessary for the Secretary of State to endorse the application in advance. That amounts to a duplication of the application process. I imagine that a trust would have to put a detailed case to the Department of Health for the Secretary of State's consideration. We do not know what form that case will have to take; the Bill is silent on that, and silent on the criteria that the Secretary of State will use to make his decision. We do not know how much time that element of the application process will add to the process as a whole.
I cannot see why that duplicated approvals process is needed, or why it is necessary to dilute the autonomy and independence of the regulator, in whose hands the decision is supposed to rest. The Bill lays out quite clearly the matters on which the regulator must be satisfied before issuing an authorisation. Why cannot the regulator simply decide whether an application by an NHS trust is appropriate and worthy of approval?
One is driven to think that, in reality, the decision will rest not with the regulator but with the Secretary of State. After all, that is the position with the first wave of foundation trust applicants. It is Ministers who will decide which of the current applicants are to become foundation trusts in April 2004. The regulator does not yet exist. If the Secretary of State decides that he can support an application, are we really meant to imagine that the regulator will turn it down?
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Conversely, if the regulator approves an application and the Secretary of State disagrees, what happens then? A veto in advance by the Secretary of State would be a very considerable blow to a hospital trust, but there is no way that it could then look to the regulator for any comfort, as the decision would have been removed from it.
If my criticisms of the Secretary of State's involvement apply to applications from NHS trusts, they apply with even greater force to applications from non-NHS bodies. I find it quite difficult to imagine a private or voluntary-sector body applying of its own volition to become part of the NHS. Be that as it may, I simply do not see why the regulator should not be entrusted with the responsibility of assessing and authorising such applications. The Secretary of State's prior involvement makes the whole decision-making process politically based rather than merit based. It takes political interference too far.
The Minister may well say that the Secretary of State has a legitimate interest in the decisions taken by the regulator in the authorisation of foundation trusts. I see that that is so, which is why I have tabled Amendment No. 130. It would allow the Secretary of State to object to an application if he had reasonable grounds for doing so. That is different from what the Bill states, which is that an application cannot even be made to the regulator without the Secretary of State's prior blessing.
My formulation represents a better balance and respects rather more clearly the autonomy and independence of the regulator as the person who takes the lead on authorisations. I beg to move.
5.15 p.m.
Lord Clement-Jones: On these Benches, we have very considerable sympathy with the amendments spoken to by the noble Earl. However, the focus of Amendments Nos. 122 and 128 is rather narrower than that put forward in his amendments.
What exactly is intended by Clauses 4(4)(b) and 5(7)(b)? Clause 4(4)(b) suggests that, after the NHS trust has made an application to become a foundation trust, it,
"may do anything … which appears to it to be necessary or desirable for the purpose of preparing it for NHS foundation trust status".
Similarly, Clause 5(7)(b) suggests that, after the certificate has been issued,
"the corporation may do anything … which appears to it to be necessary or desirable for the purpose of preparing it for NHS foundation trust status".
In our previous debates, the Minister has been reluctant even to contemplate that CHAI has a role to do with foundation hospitals. Obviously, that will remain a bone of contention between us. However, what limits are there on the foundation trust doing anything, such as making changes to clinical services and how it performs them? For that reason, we would add CHAI to the Bill. That would be a way at least to establish that in the run-up, before the trust has even

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started the process of performing as a foundation trust, CHAI has some handle on how it will perform its clinical services.
Our amendments are probing. The paragraphs are very wide and need some testing.
Lord Peyton of Yeovil: Once again, I find myself in cordial and warm agreement with my noble friend. I do not always find myself in that position, but this afternoon I do. One feature of modern governments that I profoundly dislike is the habit of mistrust. Having made an arrangement that on the face of it is perfectly justifiable, they then double-bank it.
The arrangement in the first instance is made, partly at any rate, for the Secretary of State's protection. If anyone comes to him and says, "I hope that you will give me permission here", he can say, "That is really a matter for the regulator". Now he will require some applicants to go through a previous hoop to gain his own approval. What is the point of that? If he approves an application, surely the regulator will not say, "I do not approve of that".
The provision is ridiculous. I hope that the noble Lord will take the amendment seriously. We all know that at the bottom of his brief will be the single word "Reject". I hope that the noble Lord is capable on occasion of some measure of disobedience to those monotonous requests. I hope that my noble friend will go so far—and he will have my support if he does—to say that the matter will be raised again on Report and thereafter and that we will certainly press it to a Division. I find hideous the idea that a Secretary of State can appoint a regulator and then say, "I have to allow for the possibility that he might screw everything up and make a hideous mistake and I have to stop him". It is nonsense and I hope that the noble Lord opposite has sufficient crumbs of candour left in him to admit it.
Lord Hunt of Kings Heath: My noble friend has shown already that he can be extremely flexible in his approach to the Bill, but I hope that he will not provide comfort to the noble Lord on this occasion. It is eminently justifiable for the Secretary of State to have a role in the processing of applications for foundation trust status. I do not have a problem with the architecture of the Bill because, as the noble Earl, Lord Howe, suggested, the Secretary of State, at this stage, has a lot of information on which to make a judgment and to enable applications to be passed to the regulator. I do not have a problem with the Bill as it is constructed.
I would find it helpful if my noble friend could give the Committee some idea of the timetable for the processing of the first wave of foundation trust applications. There is an assumption among a number of the applicant foundation trusts that the regulator will not take much time to turn around the applications once received from the Secretary of State. It will be helpful to know whether the incoming regulator has agreed to a timetable or whether that
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regulator intends to go through each application in great detail. That is highly relevant to the timetable for those foundation trusts.
Lord Peyton of Yeovil: I cannot resist the temptation to intervene. The noble Lord, whom I greatly respected when he was answering for the department, is obviously suffering from rather too long a sojourn there and has come away with its habits of mind indelibly stamped on his own. I am so sorry. I do sympathise with him.
Lord Hunt of Kings Heath: It is true that when I entered the Department of Health I went through a process of re-education, but I am fully recovered and I am speaking from my own mind in saying that the Secretary of State has a role to play in going through the applications to inform the process for the regulator. That should be supported.
Baroness Carnegy of Lour: The noble Lord, Lord Hunt, obviously thinks—and he is probably right because he probably knows—that the process will be that the Secretary of State goes through all the facts and then says to the regulator, "This is okay". In that case, I would like to hear from the Minister on what grounds the regulator might then say, "No, Secretary of State, you are wrong".
My noble friend Lord Howe made a very good point. He asked whether the facts would be gone over twice—first by the Secretary of State and then by the regulator—and whether that would not be duplication. He had a good solution, which was that the regulator would do the work and then ask the Secretary of State, "Is this okay?" If the Secretary of State were to object, it would not be okay. That is what the amendments of my noble friend—Amendments Nos. 118 and 130—amount to. We need to know whether it is the Secretary of State who is doing all the work, as the noble Lord, Lord Hunt, suggests, with the regulator endorsing it—I hope the Minister will explain why she objects to that—or whether it is the other way round. Whichever it is, either the Bill is all right or my noble friend is all right, but we do not want duplication of work. The question of whether it becomes a foundation trust is extremely important to a trust and very important to the public. We need to know precisely how that will be decided. I hope the Minister will provide a precise answer.
Baroness Howarth of Breckland: I wish to add just a few words and to seek clarification. When hospital trusts are making their application, the transparency of the process will be extremely important. In our discussion, the issues have sounded almost like boundaries of governance. Who has the responsibility and in whose job description is included the right to have the final say? I agree with the noble Lord, Lord Hunt, that the Secretary of State may ultimately need to have defined responsibilities, but it would be extremely helpful if we had some kind of diagram or picture in our heads which sets out a clear process and

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a clear set of accountabilities and responsibilities, so that all of those involved would know where they could turn.
Baroness Andrews: I shall attempt to be precise; I shall attempt to offer candour; I shall attempt to offer simplicity. Unfortunately, I cannot provide a diagram, but I shall do my best to answer the questions that have been raised, which range from the general to the specific. The combination of the noble Earl, Lord Howe, and the noble Lord, Lord Peyton, is quite formidable. I reassure them that we take seriously the issues that have been raised, but I must disappoint them in rejecting the amendment for reasons which I hope will become clear. Perhaps I may spend a little time explaining the difference in the roles between the Secretary of State and the regulator. I hope that I can also reassure the noble Baroness, Lady Carnegy, about the process. I am grateful to my noble friend Lord Hunt for having anticipated what I wanted to say about the Secretary of State and his role, because we have come to the part of the Bill which addresses the process and the distribution of roles within it. It is therefore important to be clear.
Perhaps I may first make the case for the role of Secretary of State as gatekeeper. We must have a process for determining the preparedness of the trusts that want to go forward to become foundation trusts. I do not think that anybody would quibble with that. We must have a process that makes sure that they have done their homework, have presented their case properly and are ready to take on that additional responsibility.
During the past nine months, the Department of Health has issued a whole series of advisory documents to help trusts prepare their case. That started with guidance on the application process in December last year. It was followed in July with notes on the determination of criteria, setting out what would be required under six headings. We have since produced material which describes the process of governance, and further documents are in preparation which address the financial health-checks and what is necessary.
It is important that it is the Secretary of State's task to ensure that those preparations have been made, that the information has been provided and that the trusts which go forward are proceeding in the appropriate way in providing all the information that it is necessary for that judgment to made. Why the Secretary of State? First and quite simply, we would all surely agree that he is responsible for ensuring that the whole of the NHS thrives in all its parts. The primary purpose of the foundation trusts is to play a key role in delivering NHS services to the highest standards. Those foundations trusts are NHS trusts; they are part of the family; they are working to the highest standards. They will be given the extra challenge of being innovative and of being at the leading edge, but they are firmly within the firmament of the NHS. Therefore, the Secretary of State has a legitimate and appropriate role in deciding, not at the end of the process, but at the beginning, at the formative stage,
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the broad direction in which those applications are going. As the person responsible for the funding of the NHS, he must have a role in advising on the development and the number of foundation trusts, particularly as foundation trust borrowing is scored against the Department of Health's expenditure limit. Indeed, my noble friend recently anticipated that by October next year 25 per cent of people in the country may be covered by foundation trusts. This is a large element of the NHS.
A second and equally powerful reason is that the existing performance framework means that the Secretary of State, as the responsible Minister, is evidently well informed and well placed to consider the performance and potential of NHS trusts and whether they are ready to go forward. That is well in line with the principle of earned autonomy. Yes, we are starting with our best-managed hospitals and it makes sense to do that. In the first wave of foundation trusts, the acute and specialist trusts will have won three stars in the performance rating. However, I reluctantly dispute with the noble Earl that that is a political judgment. It is not. These judgments are based on merit. The merit has been obtained by CHAI standard-setting and the award of those criteria. We know from the various processes that applicants have satisfied the key criteria in terms of the three-star rating.
However, nothing in that process compromises the independence of the regulator. I say to the noble Lord, Lord Peyton, that the Secretary of State will not suppress the regulator—far from it. The regulator will make the final decision. The regulator will determine the success or failure of an application and, yes, I can envisage him turning down an application. He is not compelled to accept any application that comes forward: he can ask for extra information. That will not be duplication, to reassure the noble Baroness, Lady Carnegy, because he can ask for more information if he does not feel satisfied. That is the case in respect of any aspect of the application: on governance; on the process of consultation; and on financial management. If the regulator is not satisfied, he can go back to ask for more information. That is independence and we have every confidence that that will happen.
Amendment No. 130 introduces another confusion of roles. It would allow the Secretary of State to prevent an applicant from being authorised as an NHS foundation trust by objecting to the application. It extends the Secretary of State's role well beyond the gate-keeping function and in an unhelpful way. My primary concern is practical in relation to the impact it will have on applicants. They will have to prepare full applications, spend time and money and, in doing so, put in management effort. That is even before the independent regulator considers granting them an authorisation. If the Secretary of State objected at this stage, much more time and effort would have been wasted. Furthermore, applicants who have gone to great efforts would feel extremely demoralised if the Secretary of State could veto the application at that point. The amendment parachutes the Secretary of

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State in at the wrong point. We must have a gate-keeping function. He should be involved at the beginning and not the end.
I turn to Amendment No. 122 tabled by the noble Lord, Lord Clement-Jones. Of course CHAI is involved in the process. It will have been involved in the determination of star ratings, but we do not want CHAI to act as another barrier at this stage of the process. These amendments seek both in respect of NHS trusts and potential non-NHS trusts to give the power of approval to CHAI. I do not want to go over our debates, but it confuses the role of inspection and audit with the regulator's role of independent arbiter and referee.
Applicants for NHS foundation trust status will have to undergo rigorous checks. They will have to meet a number of stringent criteria before they can be authorised. They obviously include high attainment in the NHS performance ratings. Although CHAF's views on performance will inevitably be considered as part of the application process, we do not believe that it should be the appropriate judge of whether the preparatory steps taken by an applicant are sufficient or necessary for achieving that status.
I turn to the specific questions the noble Lord asked about Clauses 4(4)(b) and 5(7)(b). They are intended to allow prospective NHS foundation trusts to prepare for that. They are simply enabling provisions; for example, to discuss the terms of authorisation with the regulator or to discuss contracts with the PCTs. I hope that that will satisfy the noble Lord. They are not a carte blanche provision; they will be able to do only that which is necessary and related to becoming foundation trusts. They offer an enabling power.
My noble friend Lord Hunt asked about the timetable. We are at the mid point of the consultation process and good progress is being made. However, we will ensure that the independent regulator has the time he needs to give full and proper scrutiny when he is considering the applications.
5.30 p.m.
Baroness Cumberlege: I thank the Minister for the sincerity of her response. I understand what she is saying in terms of the Secretary of State, who is the guardian of the NHS in its widest terms. However, I fail to understand one aspect of the Government's proposals; that two people have the right of veto or the right to accede to the request.
The Minister said it would be demoralising if the Secretary of State had a veto once people have gone through the process with the regulator. But in the system laid out before us, the regulator has the right of veto. That is equally demoralising for applicants because here is another body. Perhaps we can look at some of the other processes and laws which govern the way in which we behave in this country. Under the Town and Country Planning Acts, for instance, the inspector, or the regulator, has the first call and the right of appeal is to the Secretary of State. That is a more logical way. However, if the Minister is so anxious to try to define the
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different roles and responsibilities of the Secretary of State and the regulator, would it not be clearer and easier for applicants if the regulator were not involved and we knew that the Secretary of State would agree or disagree with the applications? That would prevent many fears which will arise in respect of the present system.
Baroness Andrews: I am aware that the noble Baroness has long experience in the health service. I believe that her proposal will leave us with a highly politicised situation—exactly that so deplored by the noble Lord, Lord Peyton. The point of the regulator is to introduce an independent, unconditional element of fair play on which everyone can rely and can take comfort from.
Baroness Cumberlege: I believe that that is a charade. I believe that the whole thing is politicised. The Bill uses the words:
"if the application is supported by the Secretary of State".
I cannot imagine a regulator going against the Secretary of State. Who will appoint the regulator and ensure that he produces the type of regulations that the Secretary of State wants? We are tied into the political system—which of course is why we need an agency.
Baroness Carnegy of Lour: There is another element, which has not been mentioned. Clause 4(3) states:
"The applicant may modify the application with the agreement of the regulator at any time before the authorisation is given".
That means that the regulator will negotiate with the hospital about altering its submission. If, having done that, the regulator asks the hospital to change the submission from the one which the Secretary of State has approved, and if it happens in a way that the Secretary of State does not much like, how long will the regulator last, especially if he keeps doing that?
My noble friend Lady Cumberlege made an important and constructive suggestion. This is a political operation. It is no good trying to disguise it by giving the regulator a role which carries the pretence that he is making the final decision if he cannot disagree with the Secretary of State. It would be far better if the Bill stated specifically that, ultimately, the Secretary of State decides. Everyone will want him to decide. There may be a great row or problems in relation to a certain hospital, and everyone will want the Secretary of State to carry the responsibility. I consider that to be a very serious suggestion and one that the Government should take on board.
Lord Peyton of Yeovil: I want to take up what my noble friend Lady Cumberlege said about the noble Baroness's reply to the amendment. It was very gracious. I agree with my noble friend that the response was most amiable, fair and generous. But my difficulty is that, greatly to my regret, the noble Baroness is neither immortal nor the Secretary of State. If she were both those things and if the Government were sensible enough to keep her in office for ever, then my difficulties would be removed. As it is, Secretaries of State are not only temporary but also fallible, which I am sure the noble Baroness is not.

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My anxiety on this matter is huge. The noble Lord, Lord Hunt, suggested that he has been cured since his treatment in the department, but I rather doubt that. What he said just now seemed to me to be absolutely what the noble Baroness was waiting for in support of a case which had been written out for her by the department.
I believe that this is pure double-banking. One assumes that the Secretary of State has done his best to appoint a reliable and competent person as regulator but he is now going to say, "Well, I need to have a first look at this to make sure that this man will not have an opportunity to make an ass of himself. It has been known to man for Secretaries of State to make very grave mistakes and real asses of themselves. Therefore, it is more likely that a regulator, drawing a certain amount of peace of mind and detachment, will sometimes be a fairer judge than a Secretary of State.
Lord Clement-Jones: I return briefly to Amendments Nos. 122 and 128.I believe that perhaps the noble Baroness's response was more illuminating than she intended. She said that CHAI's views on an application by a trust for foundation status would be taken into account. However, that seems to go rather wider than simply considering the star rating of the trusts concerned—particularly the current trusts—and seeing whether they are eligible for foundation trust status. Precisely how will CHAI's views be taken into account? Clearly they will not be determinative but will form part of the process.
Baroness Andrews: Secretaries of State are not immortal, although sometimes they seem to be so. On the other hand, they sometimes also seem to undergo a rather rapid turnover.
I believe I shall have to agree to disagree with the noble Baroness, Lady Cumberlege. With regard to what she and the noble Baroness, Lady Carnegy, said, perhaps I may talk a little about the objectivity on which the process is built. I believe that the processes— for example, those relating to the six heads which a trust is required to prove that it has in terms of governance, clinical governance and consultation, and so on—are objective. They are not processes with which the Secretary of State can interfere. Either they will have been validated or they will not. That is an objective process.
There are other objective processes. Each trust will be required to produce a five-year service development plan setting out its financial and operational business strategies. That is an objective process. The trusts will be required to hold that plan up to a health test, administered by some of our leading accounting firms. I am sure that the noble Baroness will be pleased to know that those include KPMG, Deloitte & Touche and PricewaterhouseCoopers. They will all be involved in examining what a trust aims to do in relation to its objectives and ambitions to become a foundation trust. Therefore, there is a solid, factual-based objectivity about the process, which I believe will be successful. I hope that noble Lords will be reassured to hear that there will be no political input
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into the process at every level. Obviously it is too important for that, and also too many mechanisms have been built in—necessarily and properly so.
The regulator will be able to go back to the trusts and ask for modifications, but the Secretary of State has no locus in that. The regulator will say, for example, "I think your governance arrangements are admirable but I believe that there are some additional questions that I would want to have answered I seek reassurance on this point, for example. Have you ensured full consultation with this group?" I am simply thinking aloud, but that is the type of question that the regulator will be able to ask. No regulator worth his salt will be afraid to disagree with the Secretary of State. I believe it is extremely unlikely that there will be no dissent and no contradictions.
In response to the question raised by the noble Lord, Lord Clement-Jones, as I said, CHAI's views on performance and quality will inevitably be considered as part of the application process. The three-star ratings will be in place. But the trusts will also put forward other evidence which will show their clinical competence, and so on. I imagine—if I am wrong, I shall write to the noble Lord—that that might form part of the CHAI inspections.
5.45 p.m.
Baroness Noakes: Perhaps I may ask the noble Baroness a question which relates to the provision of CHAI's views on applicant NHS foundation trusts. Clause 54 states that CHAI is to keep the regulator informed about,
"the provision of health care by or for an NHS foundation trust".
It says nothing whatever about applicant NHS foundation trusts. Therefore, can she explain how CHAI can provide information to the regulator about such applicants?
Baroness Andrews: I believe I have done so already in that I said that CHAI would have gone through the process which generated the three-star ratings. If other aspects of clinical competence are to be judged, then it is possible that CHAI will put those forward. Again, if I am incorrect about that, I shall write to noble Lords.
Earl Howe: This has been a very good debate. I believe that my noble friends Lady Cumberlege and Lady Carnegy got it absolutely right. Let us be honest about this. If it is the Secretary of State's job to ensure that the application is all in order, why have the regulator go through the whole process again? As my noble friend Lord Peyton said so well, it is double-banking.
Amendment No. 130, which I tabled, seeks to get the balance slightly different. It acknowledges the point made by the noble Lord, Lord Hunt, that the Secretary of State has an interest in the decision, but it says that it is up to the regulator, first and foremost, to reach the main decision.
During her first intervention, my noble friend Lady Carnegy asked who should do the real work here. I maintain that the regulator should do it. The noble

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Baroness's answer told me that, in practice, the regulator will play only a secondary role in the decision-making process. He will ask a few detailed questions but will not be truly independent as the arbiter of foundation trust applications. His role cuts in only once a decision has effectively been made in the Department of Health to create a shadow NHS foundation trust. So, right up to the point of the creation of the shadow trust, the regulator is effectively nowhere. His job is a rubber stamp. That is more than just a pity. It is wrong in principle and unnecessary. As I have tried to suggest, there is a better balance to be struck.
Lord Hunt of Kings Heath: I thank the noble Earl for giving way. He suggests that the role of the regulator is that of a rubber stamp. However, does he not agree that the whole history of regulation in this country suggests that regulators are not rubber stamps, and that they have been keen to assert their own independence? Why would the behaviour of the regulator of foundation trusts be any different? Surely, the incoming independent regulator will seek to assert his or her independence. That was the reason I asked my noble friend a question regarding the timetable. It is important that we know the amount of time that is likely to be taken by the regulator so that foundation trusts know when it is that they are likely either to be given their authorisation or finally to have it turned down.
Earl Howe: The reason that other regulators are able to act in a much more independent fashion is that they do not have the Secretary of State round their necks in precisely the way that the Bill will lead to with the regulator of foundation trusts. If, to be worth his salt, the regulator wants to assert his independence, he can do that by disagreeing with the Secretary of State. He would not do that flippantly or without cause, but it is not clear what scope he has to do that. Once the Secretary of State has examined the proposal in detail, presumably the process will have been gone through in a thorough and effective way and the regulator will be left standing there saying, "I agree".
Baroness Andrews: In simple terms, the regulator sets the terms of the authorisation as well as deciding whether to authorise. That is his critical role and the Secretary of State has no role in that.
Earl Howe: That is helpful. I thank the noble Baroness and shall reflect on that distinction. It is quite a nice distinction, but the noble Baroness is a very nice lady and that is an illuminating point to have made. In view of the progress we need to make today, I do not think that we should spend longer on the point. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Deputy Chairman of Committees (Lord Tordoff): Before calling Amendment No. 119, I must inform the Committee that if that amendment is
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agreed to, I cannot call Amendments Nos. 120 and 121, which stand in the name of the noble Lord, Lord Hunt of Kings Heath.
Earl Howe Earl Howe moved Amendment No. 119:
Page 2, line 21, leave out paragraph (a).
The noble Earl said: Amendment No. 119 raises a concern prompted by Clause 4(4)(a), which relates to the actions that an NHS trust may take once it has submitted its application for foundation status. It seems to me that an applicant for foundation status is likely to take its cue from this clause to rush ahead and set up membership lists, run elections and establish boards of governors. In doing so, clearly it will anticipate approval of the application by the regulator. But what if the application is not approved? In that event the trust will have gone to enormous trouble and expense for no benefit. In the process it will have raised public expectations only then to have to dash them.
I am concerned that the Bill gives explicit permission to trusts to jump the gun in that sense. Perhaps the Minister can explain what lies behind this provision and how he believes, if he does, that it will not lead to a waste of public money in those cases where applications are turned down. I beg to move.
Lord Warner: I apologise to noble Lords in advance for the fact that the nice, amiable, infallible noble Baroness, Lady Andrews, is not going to respond to this amendment.
Amendment No. 119 would prevent NHS applicants from effectively setting up shadow governance arrangements in preparation for authorisation as NHS foundation trusts. However, it is clear that they will need to do that in order to be ready for NHS foundation trust status. In our view it would not be acceptable for there to be a gap between the removal of the powers of the Secretary of State over the trust and the setting up of the local accountability mechanisms which replace them.
Furthermore, the regulator will need to see an applicant's proposed governance arrangements before he issues an authorisation in order that he can satisfy himself that they are in accordance with Schedule 1 and are otherwise appropriate.
I understand that the noble Earl may be concerned about wasted effort. However, I reassure him that he should be aware that there is nothing to prevent an NHS trust resubmitting an application. So, if a trust has done the work and the application fails, the work is not wasted because it can be taken forward in a resubmission.
We have discussed issues concerning the cost of governance and I see no need to repeat the arguments and assurances I have given. Amendment No. 119 could create a hiatus in those trusts which are ready to move forward to foundation trust status and we think that it should not be proceeded with.
Earl Howe: Once again the Minister has given me food for thought. This situation is all rather chicken and egg. However, I see the force of his point. To add

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to what the Minister said, I believe it is the Government's intention that all NHS acute trusts should achieve foundation status within five years, so presumably no work would be wholly wasted. However, it would be more than just a disappointment if a trust fails to achieve foundation status at the first attempt, because all the effort and the publicity will have been expended. The eager public would be waiting to cast their votes for real, to elect the board of governors and to have their say and suddenly they would not be able to do that. Nevertheless, what is stated in the Bill may be the lesser of two evils. I shall reflect on that. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hunt of Kings Heath Lord Hunt of Kings Heath moved Amendment No. 120:
Page 2, line 22, leave out "17" and insert "17A"
On Question, amendment agreed to.
Lord Hunt of Kings Heath Lord Hunt of Kings Heath moved Amendment No. 121:
Page 2, line 23, leave out from first "of to end of line 24 and insert "establishing the initial membership of the NHS foundation trust and of the board of governors, and the initial directors, and enabling the board of governors and board of directors to make preparations for the performance of their functions"
On Question, amendment agreed to.
[Amendment No. 122 not moved.]
Clause 4, as amended, agreed to.
Clause 5 [Other applications]:
[Amendment No. 123 not moved.]
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 124:
Page 2, line 33, leave out from "trust" to end of line 34 and insert "provided those persons do not continue to undertake commissioning work on behalf of NHS patients"
The noble Lord said: The wind has been somewhat taken out of the sails of Amendment No. 124 by Amendment No. 9 tabled by the noble Lord, Lord Blackwell, on which we had an interesting debate. We on these Benches agreed with the response but it was probably not quite to the taste of the noble Lord, Lord Blackwell.
Amendment No. 124 concerns the issue of whether the status of foundation trusts is accordable under this legislation to bodies other than acute hospital trusts. It has been clearly indicated that in future mental health trusts will be able to benefit from this legislation. However, from the response given by the noble Lord, Lord Warner, on the first day of Committee at col. 188 of Hansard, it seems clear, although there does not appear to be a bar under the Bill, that it is not the intention of the Government to accord foundation status to primary care trusts at this stage under this legislation. Indeed, the noble Lord went as far as to say that he did not think this model was appropriate for primary care trusts.
Be that as it may, the Bill as drafted does not appear to prevent primary care trusts achieving that status. It is in the discretion of the Secretary of State and the
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regulator. On these Benches we believe that there should be a bar. If the Government are genuine about saying that they do not intend to give foundation status to primary care trusts, we believe that words to that effect should remain on the face of the Bill. I do not intend to debate the issue of the Secretary of State's approval, as we have already had a considerable debate on that relating to applications by NHS trusts, but Clause 5, "Other applications", currently leaves the possibility of a loophole that would allow primary care trusts to attain foundation status.
Not only is the model set out inappropriate for acute hospital trusts, as is well known and as we have made clear throughout discussion of the Bill, it would be even worse when applied to commissioning bodies— primary care trusts. We seek reassurance from the Government; indeed we want them to agree to such a bar in the Bill. I beg to move.
6 p.m.
Baroness Andrews: I am grateful for that explanation of the amendment, which I initially found rather puzzling. It would, first, remove the requirement for applicants other than NHS trusts to obtain the Secretary of State's support. On previous amendments, we discussed why it is appropriate for the Secretary of State's support to be sought before any body—whether an NHS organisation or otherwise—applies for NHS foundation trust status. Although such organisations do not yet exist, as a later amendment will allow me to say in a little more detail they should be treated exactly the same and subject to the same criteria.
We had a good debate on Amendment No. 117 on the position of PCTs, which I do not want to rehearse. We have designed the model—I cannot think of a better word—in the Bill with provider organisations in mind. We are not opposed in principle to applying democratic or foundation principles to PCTs, but the time is simply not right.
I know that the noble Lord has been exercised during the past 18 months about capacity issues in PCTs and will agree that they are embryonic organisations. They are in development and have a way to go before they are doing the job that we want them to do. They are simply too new at present to be able to cope with another set of demands and requirements. So we cannot accept the amendment, and I hope that the noble Lord will agree that there are reasonable grounds for our not doing so.
Lord Clement-Jones: The Minister's reply seems to agree precisely with the tenor of my argument: not only can PCTs not deal with the set of demands on them; it would be inappropriate for such a model to be imposed on them. That gives stronger force to the need for some wording in the Bill to prevent commissioning bodies achieving such status. I very much agreed with what the noble Lord, Lord Warner, said, when dealing with Amendment No. 9 moved by the noble Lord, Lord Blackwell, whom I am pleased to see in his place.

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We felt that it was inappropriate for a commissioning body to achieve that status. In that sense, the Minister has made a stronger case than I did.
Baroness Andrews: In case the noble Lord is under any misapprehension, I reiterate that the model was designed with provider organisations in mind. It requires the principal purpose of any NHS foundation to be the provision of services. It does not provide a framework for dissolving a PCT and transferring its staff, assets and liabilities to an NHS foundation trust. That would simply not work. For those practical reasons, I ask the noble Lord to withdraw the amendment.
Lord Clement-Jones: But it is possible under Clause 5 for a PCT to achieve foundation status. I hear what the Minister says and entirely agree with her. But, in that case, if the model set out in the schedule is the wrong one, why does not the Bill say so?
We can bat this ball back and forward for several more happy moments, but there is a flaw at the heart of the Government's argument on the matter. We certainly intend to return to the matter, because if that is really the Government's intention, it should be in the Bill. Otherwise the Government are giving hope to all those organisations that may want to become foundation trusts, inappropriate though they may be, that they may be able to do so, by not clearly delineating that they are talking about bodies such as mental health trusts, not primary care trusts. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Earl Howe Earl Howe moved Amendment No. 125:
Page 2, line 37, after "trust," insert—
"( ) the financial position of the applicants,"
The noble Earl said: I shall speak also to Amendments Nos. 126 and 127. I am sure that the Minister will be delighted to read my "may" and "shall" amendment, without which no Committee stage would be complete. However, it has a serious purpose, which is to highlight the matters that the regulator must consider before issuing a certificate of incorporation for a non-NHS body to become a public benefit corporation.
What are those matters? Subsection (3) appears to set them out, but at the end we find that even if those conditions are met, the regulator still does not have to issue the certificate. Why is that? Why might he not issue a certificate when he is satisfied on the matters contained in paragraphs (a), (b) and (c)? There should be no hidden agenda; the applicant ought to be aware of exactly what is expected of him when he makes the application; but it seems that that may not be so.
I have tabled a further amendment intended primarily to probe the Minister about quality standards. Where a non-NHS body applies to become a public benefit corporation, it would seem only logical that it should have to pass the same sort of quality tests as would an NHS body in the same
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situation. However, there is nothing to say that that will be so. Whether it will have to receive a formal star rating before its application is advanced is another matter again, but I should be grateful for any comments that the Minister may feel able to make on the matter.
By the same token, the regulator will clearly need to guard against the possibility that non-NHS organisations that are financially failing may take advantage of the provisions of Clause 5 to gain access to public money. I am sure that that eventuality is most unlikely, but there seems no reason not to guarantee a financial focus on the applicant as an extra guard against that risk. The only safeguards that appear in the Bill are the need for the application to be approved by the Secretary of State—despite my earlier amendments, I have not contested that principle—and the general level of scrutiny by the regulator.
We could imagine a charity that to all outward appearances was a high quality provider of services applying to the Secretary of State for foundation status knowing that it had over-stretched itself and hoping that a state bail-out would be the answer to its prayers. I should be glad if the Minister would sympathetically consider the amendment or reassure me that my concerns are misplaced. I beg to move.
Baroness Andrews: I hope that we do not drift into surreality in debating the amendment or the clause, because they deal with organisations that as yet do not exist, but which may well do in future. For clarity's sake, perhaps I could offer some brief background about the intention behind the clause and how it will work.
The NHS foundation trust model has been designed to be sufficiently responsive to allow organisations outside the NHS to advance a proposal to support the establishment of a new organisation that would become part of the NHS family. That is to say, it would share the values and commitments of the NHS. Such a body would generate the formation of a new public benefit corporation. There is no provision for converting an existing organisation into another one; a new organisation must be formed. Organisations would do that by agreeing to enter into sponsor or partnership arrangements. They might then be eligible to seek the support of the Secretary of State in an application. Clause 5 provides for that potential, but, since we are dealing with the future, it is not possible to anticipate the range of organisations, and no invitations for applications have been issued yet. Applications could conceivably come from voluntary organisations or hospices, as mentioned by the noble Earl.
I agree with the intention of Amendment No. 125 that applicants for NHS foundation trust status should be financially sound, and that non-NHS organisations should not be able to obtain the status if it is not in the wider interests of the NHS. Non-NHS organisations will have to conform. Au fond, no matter what their status, organisations that come forward will have to conform to the same set of standards and principles, regardless of their initial status.

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Organisations will have to satisfy rigorous assessments; for example, financial and business tests. As the department's guidance on the preparatory phase makes clear, all applicants will have to prepare a five-year service development plan—a robust business plan. The plan will set out the anticipated range and volume of services to patients, and it will have to provide evidence that what is envisaged will lead to benefits for patients. That will be underpinned by an independent "health check" by accountants. That process is in line to be applied to the first wave of applicants at present. Those requirements will ensure that both the Secretary of State and the regulator have the information that they need to assess an applicant's position.
In addition, under Clause 6(2)(f), the regulator can impose any additional requirements on applicants. I hope, therefore, that the noble Earl is reassured that non-NHS trust organisations that might apply will be treated in the same way.
The same principles will apply as regards quality standards. Amendment No. 126 rests on a tautology. The same quality standards will, and must, apply to all forms of NHS care, regardless of the nature of the organisation providing it. Non-NHS organisations will, in time, provide NHS care.
Clause 5 provides for the establishment of new public benefit corporations. The Bill does not provide for organisations other than NHS trusts to become public benefit corporations. The applicant would have no way to demonstrate that it could meet the quality standards, only that its supporter-partner could. It could never be incorporated as a PBC otherwise. We are building in that requirement.
The noble Earl raised the "may/shall" debate. We should have a new parliamentary ritual to greet the appearance of the first such debate in every Bill. This is a classic example. Amendment No. 127 would remove the regulator's discretion to incorporate a PBC if it meets the criteria in Clause 5. That is a step too far. Once incorporated as a public benefit corporation, applicants can exercise the functions of the corporation on its behalf until the governance arrangements can be put in place. That is a considerable responsibility for a new organisation. It is therefore necessary and appropriate that the independent regulator retains discretion over whether he issues a certificate of registration to an applicant.
The independent regulator may become aware of factors other than those set out in Clause 5(3)(a) to (c), which should be considered before an applicant is incorporated as a public benefit corporation. He might discover, for example, that it is not in the best interests of the NHS as a whole, for financial or other reasons.
Clause 5 is slightly complicated. I hope that I have reassured the noble Earl. I will be very happy to write to him if there are other questions that he wishes to explore.
Baroness Carnegy of Lour: It is very sad that the Government are not considering the merit of thinking on this side of the Committee. I know that the noble
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Baroness is not personally responsible, as she was simply speaking to a brief—she did so beautifully. But the future of voluntary organisations is not necessarily financially sound. Very often, they depend on donations from members of the public—on flag days, for example. Voluntary organisations go in and out of fashion. To be sure that they are capable of such changes, it would be very important to go into such details. The organisations, and those who contribute to them, should know that those matters will be examined. Voluntary organisations are different creatures. The funds of applicant hospitals come from the taxpayer. They are a different matter.
The Government should think harder about the issue. I felt that their response was just a way of replying to my noble friend and not a proper argument. The department is not doing well in responding to the most sensible and important amendments moved on this side of the Committee or by Cross-Benchers.
The amendment would require,
"that the applicant has demonstrated the ability to meet quality thresholds".
How can they? Are they talking about the past or the ability to meet thresholds in the future? Voluntary organisations are different. They vary among each other and in their own performance over the years. Having been involved in many voluntary organisations, I speak with great feeling on the issue. The Government should think jolly hard before they turn down the amendments.
6.15 p.m.
Baroness Andrews: I hope that we are responsive to thinking on the other side of the Committee— certainly, as the noble Baroness mentioned, the role of the voluntary sector coming forward if it wishes. The precise purpose of building additional flexibility into the Bill was to enable applications to be made by voluntary organisations, or any bodies outside the NHS, that feel that they have something to contribute and that foundation trust status would be the way forward for them.
We all know the huge contribution that the voluntary sector makes to health care provision—in particular, palliative care. We wish to use all our imagination and resourcefulness to ensure that, if the criteria were satisfied, that would happen. Such responsiveness has been built into the Bill.
It is difficult at present to talk credibly about what we mean by applying quality thresholds to organisations that do not exist. It is a very dynamic process. When applications are invited and then received, those new organisations will undergo growth and change. They will have to conform to the quality standards that we would expect throughout the NHS.
I will be happy to write to Members of the Committee to discuss further the details of our plans, if it would help.
Baroness Carnegy of Lour: The noble Baroness certainly need not write to me, as she would just reiterate what she has been saying—she expressed a point of view. In this instance, as I have thought on several occasions, the Government should accept the spirit of the amendments and return with something like them. They should provide that a voluntary organisation must be able to show that its financial position is consistent with what will be its continuing responsibility if its application is accepted, and that it can meet the thresholds required—because they have already done so or they will be able to in the future. Those are good points. Could not the noble Baroness accept the spirit of the amendments?
Baroness Andrews: What we would expect of the NHS organisations putting themselves forward to be foundation trusts is no more nor less than we would expect of the non-NHS organisations. Clause 5 specifies the provision of goods and services and the ability to provide the constitution in accordance with Schedule 1. It conforms with what we expect NHS trusts to do. On that basis, I hope that the noble Baroness will accept that we are opening every possibility for these organisations to come forward when invited.
Earl Howe: I could not be more grateful to my noble friend Lady Carnegy for her support. However, there are two stages for a non-NHS body wanting to become a foundation trust. First, it should receive a certificate of incorporation as a public benefit corporation. Without that it cannot become a foundation trust. Uncharacteristically, the Minister did not give me a very good answer to my "may"/"shall" amendment because Clause 5(3) relates to the process leading to gaining a certificate of incorporation. When I first read that subsection, it appeared that (a), (b) and (c) were likely to be enough to gain a certificate—they were the necessary and sufficient conditions. However, the only trouble is with the word "may".
The Minister explained the inclusion of that word by saying that there may be wider considerations such as the way that approval of the certificate may affect the wider NHS. However, that is surely a consideration for stage 2, when the regulator considers the application for NHS status. It does not make much sense to deny a certificate of incorporation for extraneous reasons not contained in the subsection. Therefore, I am not particularly happy with the Minister's answer.
The Minister also suggested that my Amendment No. 126 was not necessary. I had understood that star status and the standards that CHAI will assess apply to NHS bodies. CHAI will be involved in the process of acute healthcare bodies. All sorts of other bodies may apply for foundation status that CHAI will not have to assess. It is entirely appropriate that we insert something in this clause to say that those bodies should achieve equivalent standards to those achieved by NHS bodies. That was the reason for the amendment. Again, the Minister did not answer that point as fully as I had hoped. Nevertheless, we will have the
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opportunity to return to this matter on Report. Time is moving on and it is right for the Committee that I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 126 to 128 not moved]
Clause 5 agreed to.
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 129:
After Clause 5, insert the following new clause—
"PUBLIC CONSULTATION

(1) The Secretary of State shall—

(a) by regulations require that an NHS trust proposing to
make an application under section 4(1) or any person proposing to apply under section 5( 1), shall first consult prescribed persons;

(b) by regulations prescribe persons to be consulted which
shall include—

(i) the NHS trusts and Primary Care Trusts in the area in which are resident all or any of the persons to whom the applicant NHS trust has provided goods or services for the purposes of healthcare, or to whom the applicant person (as the case may be) intends to provide such services if its application is successful,

(ii) the Patients' Forums for those NHS trusts and Primary Care Trusts, and

(iii) local staff side trade unions and such other persons as the Secretary of State considers may be affected by the application.

(2) In section 7 of the Health and Social Care Act 2001 (c. 15)
(functions of overview and scrutiny committees)—

(a) in subsection (3) (matters to be covered by regulations) at the beginning for "may" substitute "shall";

(b) in subsection (3)(b) at the end insert "which shall include all matters prescribed under subsection (3)(c) below,";

(c)in subsection (3)(c) at the end insert "which shall include
any application or proposed application under section 4 of the Health and Social Care (Community Health and Standards) Act 2003"."

The noble Lord said: In moving Amendment No. 129 I shall also speak to Amendments Nos. 139 to 142 and 200. Clearly, as Committee Members will see from the Marshalled List, we on these Benches feel so strongly about consultation that we have tabled one amendment twice, just to confuse the department in replying.
The new clause set out in Amendments Nos. 129 and 200 would require the Secretary of State to regulate for public consultation on applications for foundation trust status. Many of us have now seen quite a bit of material emanating from foundation trusts. I have personally seen material from two of my local hospitals and other material from Moorfields Eye Hospital, all of which differs considerably between hospitals and is probably constructed in different ways. I have also read the guidance on foundation trusts that is available, which is, in a sense, a precursor of the regulations due to be made under the Bill.
A quiet aside to this debate is that the Government seem to jump the gun on these matters. We are debating a very important aspect of the Bill, yet all the

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time the steamroller moves forward. Only recently, the noble Lord, Lord Warner, announced a large number of additional trusts to the ones already earmarked that had made their applications. The juggernaut rolls on despite the fact that the Government do not know at this point whether the legislation will actually pass.
Be that as it may, the intention of the amendments is to set out the process of consultation in a much clearer fashion than would otherwise be available by regulation. I recognise the intention is to have provisions by regulation, but as the Bill goes through the House, there is no guarantee that the draft regulations will be available to us. All that we have is the guidance made available to those current applicants for foundation trust status.
The new clause would require the Secretary of State to require public consultation on applications for foundation trust status. Both the NHS trusts and non-NHS bodies applying—this is one of the most important points in this set of amendments—must consult relevant patients forums. In the case of NHS trusts, any relevant local authority overview and scrutiny committee must also be consulted. That is because existing legislation only requires consultation with such committees by local NHS bodies. The amendment would also ensure that the overview and scrutiny committee's right of referral to the Secretary of State will apply if it is unhappy with the merits of the NHS trust proposal. That would ensure that local people would have a say through the local democratic process in whether or not an NHS trust in their area applies for foundation trust status.
In the case of non-NHS applicants, overview and scrutiny committees do not have rights of referral as these apply only in respect of local NHS consultations. As under Clause 5, as we discussed earlier, any body can apply to be a foundation trust, even if not an NHS organisation. The amendment would also require the Secretary of State to require consultation by such organisations with all local patients forums. As patients forums—and indeed CHCs, if the Bill goes through and they still exist—have broader referral powers than overview and scrutiny committees, which may not exist in every area, that would ensure that there is a local mechanism to refer to the Secretary of State an unwelcome application for foundation trust status from a non-NHS organisation.
The amendments integrate, therefore, the foundation trust application process with the new system of patient and public involvement that this Government have been at such pains to introduce— the word pain is what springs most to my mind when I think about the long and convoluted way in which the patient and public involvement system that we now have was introduced.
On Amendments Nos. 139 to 142, the first amendments of the group require the regulator to take account of the outcome of any public consultation in giving an authorisation to foundation trust status. The second amendment suspends the application process if an overview and scrutiny committee for a patient's forum exercises referral rights under new Clause 5.
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Until the Secretary of State has responded to any referral under the new clause and confirmed his continued support for the application, the regulator may not proceed.
We believe passionately that devolved structures such as the foundation trusts must have the wholehearted support of the local community. That is exactly what the amendments are designed to achieve. I beg to move.
6.30 p.m.
Baroness Finlay of Llandaff: I strongly support the amendments. They insist that the local population should have an involvement and a say. There may be groups in the local population that would not come forward to register themselves as members of any body and may not know the routes by which they can make their voice heard. That is why there must be an active process of consultation.
The other reason why I believe strongly that a local consultation process is required is that there may be local intelligence, particularly about new bodies that may come forward later, apart from the standard NHS hospitals. That local intelligence may be crucial to the regulator to inform the decision. There may be issues that are not well publicised but are well known on a local grapevine. That grapevine will be tapped into only by a rigorous consultation process.
Earl Howe: I support the amendment moved by the noble Lord, Lord Clement-Jones, and I shall speak to Amendment No. 138.
There is an irony at the heart of this part of the Bill, which is that a set of measures designed to put the patient at the centre of NHS planning and to devolve autonomy omits the one feature that should come before all else: the requirement to ensure that those who will be directly affected by such monumental changes are happy with them. The blueprint for foundation trusts, devised from behind desks in Whitehall and, no doubt, intended for the good of everybody, is being imposed on the NHS from the centre, whether people like it or not.
There is plenty in the Bill about a would-be foundation trust having to consult on how it will operate—its governance arrangements, for example— but there is nothing to say that it must consult on whether it moves to foundation status at all. It is revealing and disturbing that the consultation document issued by King's College Hospital says this:
"It is important to clarify that this is not a consultation about the pros and cons of the government's policy on foundation trusts (which is a matter for government) or whether King's should apply (which is a decision for the board)".
In drawing that distinction, King's is not to be criticised; it has followed the guidance given to it by the Department of Health. The department has gone to great lengths to point out that the creation of a foundation trust is not something that legally requires consultation. The reason for that is that it is not a disestablishment or merger of the trust; nor is it a substantial variation in service. If it were either of

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those, consultation would be a legal requirement under existing legislation, but the department is keen to prove that consultation on the big issue—the setting up of the foundation trust in the first place—should not happen.
That attitude may be understandable from a government who believe in what they are doing and genuinely want to improve the NHS, but it is not understandable, or right, that the cardinal principle articulated after the Bristol scandal should be ignored; that is, the principle that, wherever decisions are made that affect services, patients and the public should be involved. That principle was also endorsed by Derek Wanless. If we are to create a truly patient-centred health service, we must involve patients from the outset in what we are doing. Anything else is just paternalism.
It could be, for example, that a community wants to see foundation status go ahead at some point, but not immediately. There might be concerns that a hospital needed another couple of years of tight performance management on its clinical outcomes or its A&E waits before taking the step of freeing itself from the oversight of the strategic health authority. Without consultation, nobody will know that. Without consultation, nobody will know whether there are enough people sufficiently interested to participate in a very bold democratic experiment.
Enforcing more democracy on people may sound like a benign and benevolent thing to do, but it is not. It is inconsistent with the democratic principle itself. Consultation should therefore be made a requirement, before any foundation trust is established. The power of the Secretary of State to make regulations should become a duty. That would mean that all trusts— indeed, all non-NHS bodies—would be made to consult their local communities before they could apply for foundation status. The local overview and scrutiny committee would be given a role in relation to NHS bodies, and patients forums would be given a role in relation to non-NHS bodies. The regulator would then need to take account of the result of the consultation.
I hope that the Minister will be receptive to the amendments and the arguments of principle underlying them.
Lord Blackwell: It is difficult to oppose the principle of consultation, but I would like the Minister to explain whether, if the amendments were made, the requirement to consult would have the implication that foundation trusts and the Secretary of State would be bound by the results of that consultation. It is one thing to consult; it is another thing to be clear about what one does with the results.
If they are to be bound by the results, I have some nervousness about subsection (l)(b)(iii) of the proposed new clause, which would require foundation trusts to consult,
"local staff side trade unions".
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If, as a matter of national policy, one or more of those trade unions decided that they opposed the introduction of NHS trusts, that opposition would be represented locally, whatever the particular circumstances. We should be careful about giving a power of veto—if that is what it amounts to—to the trade unions in that respect. I would be grateful for clarification on that point.
Baroness Andrews: I know that the Committee feels strongly about consultation, as do the Government. That is why it occupies such a key position in everything that we have tried to do to take forward the process for achieving foundation trust status. Without local consent and involvement and the widest possible reach—I take the point made by the noble Baroness, Lady Finlay of Llandaff—we would be on shaky ground. Local trusts who seek foundation status know that well.
I shall deal with the amendments as a group. Amendments Nos. 129, 138 to 142 and 200 relate in different ways to the way in which we ensure that applications for NHS foundation trust status are properly consulted on. Amendments Nos. 141 and 142 are virtually identical. I see no difficulty in that. It is always good to know that the Liberals are clear about where they stand.
I can assure the noble Baroness, Lady Barker, who, unfortunately, is not in her place, that this is not another example of the consultation industry gearing itself up to no effect. The noble Baroness spoke powerfully last week about the cynicism that can be generated when consultation takes place and there is no effect. She has immense experience of and respect for the consultation process. So do we. We want it to work as well as it can.
With the Bill, we are intent on improving services for NHS patients. To achieve that, we want staff, patients and local communities, with all their expertise and their experience of local hospitals and the health service as a whole, to bring that experience and knowledge to bear not at the end of the process, but at the beginning. Such experience and knowledge can make a difference to the practical way in which the vision—I am not ashamed of using that word; it is the word that we want to use—for NHS foundation trusts is realised and how it is worked through in detail.
Perhaps I may return to the analogy deployed by the noble Baroness, Lady Cumberlege; namely, that this is where the canvas is being secured to the frame and where it is being stretched, and where the proportion, the content and the colour scheme are being determined. As the noble Earl, Lord Howe, said, this is a bold, democratic experiment. We have not been here before. We have never embarked on this kind of local consultation at such a formative stage when making public policy intent on enhancing institutions. It is ambitious because it needs to be. It is an essential part of our commitment to public ownership. Put simply, it comes down to practical involvement.
Examples have been given of the way in which the consultation process is becoming visible in our communities. Noble Lords will have seen the

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University College Hospital advertisements on buses about consultation. That is very dramatic. I cannot believe that public policy has ever been advertised on a bus before. It certainly works. My noble friend has been approached by his local trust. No doubt he was targeted, but, nevertheless, I am sure that he felt that it was part of the consultation process. It is a question of reaching out to local intelligence, whether it be to individual intelligence or to expert patients. We want everyone to have a chance to contribute, which sets the tone and terms of success for the future.
Our purpose is simple. It is to ensure that NHS foundation trusts are properly prepared; that the structure is fit for the purpose. Who better to contribute to that than the people who use the service? That is why Clause 6(4) specifically provides for the Secretary of State to make regulations setting out consultation requirements and why compliance with these regulations is a condition of authorisation. Put simply, we include that power because we intend to use it.
We expect to make regulations under Clause 6(4) in time for the second wave of applications for establishment as an NHS foundation trust from October 2004. I assure noble Lords that we shall consult on the regulations. They are likely to require consultation of the local public, patients—including patients forums, once established—staff, other NHS bodies and local authorities, including overview and scrutiny committees. That is an important measure designed to ensure that the views of local communities and stakeholders are sought, listened to and taken into account.
As the noble Lord, Lord Clement-Jones, pointed out, we have issued clear and detailed guidance to first-wave applicants setting out what the consultation should cover. The guidance is in the House of Lords Library; it is also available on the department's website. It is being used as a practical guide as to what should be done.
The three key areas which consultation must address are the case for NHS foundation trusts, the governance arrangements—that is, the size of proposed membership committees, the composition of the boards of governors, the directors and the election processes—and, above all, the service development vision of what a trust expects and wants to achieve in terms of patient benefit. We have also spelled out the people and organisations that should be invited to consult. It should include not just members of the public who are provided for. It should also include local MPs, community health councils, primary care trusts, strategic health authorities, other local NHS partners, other local health care providers, any local authority with a significant interest—including those which work in partnership—any relevant university, staff, unions, and so forth.
Lord Clement-Jones: I am sorry to interrupt the noble Baroness, but there are two words missing; "patients forums". Do they appear on her list?
Baroness Andrews: I am just coming to that in the next sentence. The guidance document states that it is
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likely that the regulations will closely reflect the requirements set out here. In answer to the noble Lord's specific point, it is our intention to specify patients forums in the list of consultees.
Lord Clement-Jones: I apologise for interrupting again. The Minister will have noticed that in the guidance those two words do not appear.
6.45 p.m.
Baroness Andrews: I shall explain why in the context of another amendment. The noble Baroness, Lady Barker, was sceptical that anyone listens to the consultative process. In response to the point raised by the noble Earl, under Clause 6(4) before supporting the submission of an application to the independent regulator, the Secretary of State must be satisfied that appropriate and meaningful consultation has taken place. There is no question of a Secretary of State supporting an applicant who has not done that. If the regulator was not satisfied that proper consultation had taken place, he could send the application back for improvement and review.
I hope that I have covered many of the intentions set out in the amendments. The Secretary of State and the independent regulator are bound to take account of consultation. However, they are not bound by the result of consultation because there is no right of veto. If there was a situation in which it was clear that the community was divided and that there was not a wholly consistent or a coherent view of what should be done, clearly, the Secretary of State and the independent regulator would be affected by that and would want to investigate further.
Turning to Amendments Nos. 129 and 200, it would not be appropriate to remove the Secretary of State's discretion as to whether to make regulations or to determine what those regulations should contain specifically—a point raised by noble Lords. Realistically, requirements may need to change over time. An obvious example is that the first wave of applicants must consult their local community health councils. After December 2003, when the CHCs are replaced by the patients forums, that will be updated by a requirement to consult new bodies. That is a good example of why flexibility must be retained in the regulations. As regards the timetable, we intend to make regulations in time to apply to consultations on the second wave of applications.
Amendments Nos. 129 and 200 seek to amend the Health and Social Care Act 2001 to provide that local authority overview and scrutiny committees may make reports and recommendations on applications for NHSFT status. That is unnecessary. It is clear in the guidance on consultation sent to applicants that we expect them to consult their local overview and scrutiny committees. Regulations already provide for that if it were appropriate.
Again, I reiterate that the Secretary of State and the independent regulator are clear in their intent and their purpose of taking into account the outcome of consultation when determining whether to support

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applications. We do not need to specify in the legislation how that might happen or how outcomes might be taken into account. Their duty is expressed clearly. I do not need to reassure noble Lords that both would behave reasonably and proportionately in line with their common law duty.
Finally, I turn to the question asked by the noble Lord, Lord Blackwell. As I understood him, he asked whether, if amendments were passed, they would hold. I believe that he raised the point about consultation with the unions. If the amendments were agreed, the Government would have to consider what they should do about them. We would have to have further discussions. I hope that will satisfy the noble Lord for the moment.
Lord Clement-Jones: Perhaps I may answer the question asked by the noble Lord, Lord Blackwell. It is not intended that consultation should be binding, but it should be that regulators shall have regard to the outcome of public consultation. It is not absolutely binding. It is right that it should not be so. Nevertheless, if we are engaged on a bold, democratic experiment—the words which have been bandied about—we should have genuine democracy. I am not so sure that this is a bold, democratic experiment in its current form. It is a statement of aspiration that we should have a newly devolved system of providers thoroughly keyed into the local community.
The noble Baroness has given us a vigorous response with a great deal of assurance. In the Bill, the substance behind that assurance is very limited. The wording of Clause 6(4) is wishy-washy. It states:
"If regulations require the applicant to consult prescribed persons about the application, the regulator may not give an authorisation".
The use of the word "if seems incredibly tentative. The noble Baroness said that it is the Government's intention to publish regulations, but that is hardly a ringing declaration that the local community will have an absolute buy-in to foundation trusts.
If one is considering foundation trusts of this kind, then surely the keystone should be the local community. The foundation trust will be built on that, not on the construct of the Secretary of State speaking on high and determining which hospitals will be eligible for foundation trust status. Members of the local community must ask: is the status right for local patients? It is that which forms one of our fundamental objections to the top-down structure erected in the Bill.
Is the noble Baroness really suggesting, if the consultation process determines that no foundation trust is required—"We are fine, thank you very much, and happy with our current acute trust and we do not want foundation trust status,"—that under the terms of the Bill it will be open for the local community to have such a strong say in the process that the local hospital would decide not to pursue foundation status on its merits? I wonder about that. The pressure currently is such that I do not believe that that would be a reality.
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The noble Earl, Lord Howe, has shrewdly collected material from King's College Hospital which makes it pretty clear that, come hell or high water, it is going to go ahead. No doubt a few points at the edges will be dealt with, but that will be about it. I find that very depressing if this proposal is really meant to be about local communities being tied in to their local providers.
I come back to the scepticism expressed by my noble friend and to which the Minister referred. I am not sure that in the Bill we have anything like the vehicle we need for genuine devolution; this debate about consultation exemplifies that. We have further debate on the matter to come and we shall very much take this into account in our approach to the whole of Part 1. For the moment, however, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 6 [Authorisation of NHS foundation trusts]:
[Amendment No. 130 not moved.]
Earl Howe Earl Howe moved Amendment No. 131:
Page 3, line 28, leave out paragraph (b).
The noble Earl said: I am puzzled and rather worried about the provision in Clause 6(2)(b) which requires an applicant to demonstrate that the actual membership of its public constituency is representative of those eligible for such membership. Perhaps I may couple my remarks on this provision with what I was going to say on Clause 36. As we are likely to reach that clause rather late at night, I thought it best to condense my remarks into one contribution at this point.
Clause 36, covering much the same ground, was inserted into the Bill only at a late stage in the proceedings in another place with little, if any, real debate. The intention behind Clause 6(2)(b) and Clause 36 is clear: on 8th July the latter clause was spoken to in another place by the honourable Member for West Bromwich West. The concern it is designed to address is that the membership of a foundation trust could be unrepresentative of the local population or, worse, that it might contain factions or single-issue fanatics who succeed in hijacking a board of governors and imposing on it their agenda, irrespective of the wider interests of the community. Fears were also expressed that only the more articulate and educated members of the community would put themselves forward for foundation trust membership and that these people would tend to crowd out the views of those less able to speak up for themselves.
Those concerns fall under the general umbrella of what is known rather vulgarly as "entryism", and we are being asked to accept that Clauses 6(2)(b) and 36 will act as means of preventing that undesirable phenomenon. If that is the claim being made, I should like to hear from the Minister quite why he believes that that is so, and what implications it carries for foundation trusts.
What means will a foundation trust have at its disposal to demonstrate that the list of its members is a representative cross-section of the local population? It is a requirement which seems to imply that hospitals

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will have to become socio-economic research bodies. Not only will they have to establish the educational characteristics and health needs of those within their public constituency, they will also need to inquire into the religious and moral convictions of those individuals in order to demonstrate that a particular lobby group forming part of the membership either is or is not representative of patients at large. That, I suggest, is a Herculean as well as a pointless task.
It will never be possible to demonstrate beyond peradventure that a list of members contains a fully representative cross-section of the public constituency. Further, it will be almost impossible to engineer a situation whereby the different elements in the population are represented in the right proportions. If it is feared that the disabled and the inarticulate may not have their needs and wishes represented on the board of governors—in my view, a perfectly legitimate fear—it would be interesting to learn how a foundation is supposed to rectify such an omission. You cannot force anyone to become a member of a body if he does not wish to do so; here I echo a point made last week by the noble Lord, Lord Lipsey. Equally, it is not easy to eject someone from membership of a body without a very good reason.
If it so happened that expectant mothers were represented in the membership list in a disproportionately large percentage, would a trust be within its rights to ask some of those ladies to resign? I doubt that. In practice, a trust's ability to be selective with its members will be extremely limited.
The other practical dimension to this provision is the question of what a hospital is supposed to do, year by year, to prove that its board membership is representative. Like the local population, the membership will change over time. Is a foundation trust expected to continue running a population survey, and exactly how is it meant to do that? What would be the consequences for a foundation trust if at any point the regulator was not satisfied that its board of governors had been elected on a representative mandate? Would the board have to resign?
Clause 6(2)(b) speaks of the membership being,
"representative of those eligible for membership".
I take it that the word "representative" is used here in the narrow sense of being a reasonably typical cross-section of those eligible for membership. What it cannot mean, surely, is that those accepted as members of a foundation trust are somehow expected to represent the views and interests of those who are not members. Nowhere in the Bill is that stated or implied other than here. It would be an impossible condition to attach to membership. Indeed, one of the main faults in the Government's model for foundation trusts is that members have no responsibility beyond the length of their own noses, and no accountability or liability to anyone whatever. They will not even have to pay one pound as a token of their good faith.
I fail to see how the problem of entryism and the risks associated with it have been addressed. I also fail to see a practical answer to these issues without there being a vast bureaucratic effort by trusts. If the
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Minister is inclined to say that no one is talking about such a vast bureaucratic effort, I would have to ask him how the exercise predicated by these two provisions could be anything other than a fudge. If there is a concern that a board membership is unreasonably skewed one way or another, or is seriously atypical of the local patient population, that concern has to be addressed in a thorough and professional manner.
I want to hear whether, unlike myself, the Minister is fully confident that this paragraph and Clause 36 will deliver the benefits that have been claimed for them and, if so, why? I beg to move.
Baroness Finlay of Llandaff: This amendment is extremely important, going right to the heart of one of my concerns about issues of equity of provision for those who are ill. Within the population around a hospital applying for foundation trust status, fortunately the vast majority will be well and not in need of the services of that hospital. If we look at the example of King's College, which has already been cited, that hospital has a very large liver unit. Fortunately, so far as I am aware, the local population does not suffer an excessive incidence of liver failure, but many patients come to the hospital because they are completely dependent on those services to remain alive. The unit provides services of excellence that need to be continued and supported. However, I can envisage a local population beginning to resent the amount of time and resources used up by a highly specialised service for people coming from far away. They may take a different view.
I am also concerned that the most vulnerable people who need to use the service would not be adequately represented by the population-based tokenism set out in these proposals. As the noble Earl, Lord Howe, pointed out, it would be almost impossible to detect large pressure groups hidden in whatever statistics the trust may use. They could say, "We represent this percentage of ethnic minorities" or "We represent this age group", and so on, but within that there could be concealed very powerful single-issue pressure groups putting forward very powerful views.
7 p.m.
Lord Warner: As we have made clear throughout the Committee's discussions, NHS foundation trusts will be a new form of social ownership where accountability for health services will be to local people rather than to central government. We start from a rather different position from some Members of the Committee on the Benches opposite. In this way, much stronger connections will be established between providers of NHS services and their local communities, extending beyond the current arrangements for consultation and building on the sense of ownership that many people feel for their local hospitals.
In listening to the discussions, I am reminded that in many other areas reformers have always been challenged to prove a negative in the future. I have a slight sense of that on this occasion. We have made

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clear in the Guide to NHS Foundation Trusts, paragraphs 2.9 and 2.10, that this is a policy designed to secure inclusion, not exclusion. We are trying to bring people into an engagement with their local hospitals. It is not simply about engaging the people who already support the trusts—for example, through patient support groups or the League of Friends. Access to membership needs to be opened up as widely as possible. Applicants for NHS foundation trust status will be expected to demonstrate innovative approaches to ensuring genuine community membership. They will need to demonstrate that they are establishing new and meaningful ways of connecting with the public, patients and their staff.
They do not have to be socio-economic researchers, as someone said, to engage in a more constructive way with the wide range of people who use their services. We have debated user involvement in services for at least two decades, to my own knowledge and experience. We are not starting afresh. We are operating in a context where large numbers of people involved in health and social care have been trying to engage with their communities and users.
As the noble Earl said, concerns were raised in another place that the governance arrangements of NHS foundation trusts might be subject to, he called it crudely, "entryism"—I am quite comfortable with the term; we know what it means—by interest groups or particular sections of the community. Similar concerns were raised by the Health Select Committee in paragraph 43 of volume 1 of its report on NHS Foundation Trusts. It stated:
"Foundation Trusts must proactively attempt to extend registration so as to achieve real and representative community engagement. This, including the involvement of disadvantaged groups, should be an issue both in assessing applications for FTs and an on-going responsibility for the attention of CPPIH or, failing that the Regulator".
So there is a real understanding across Parliament— certainly in another place—that there has to be an attempt to make the membership of foundation trusts broadly based.
We have listened carefully. Noble Lords have sometimes suggested that the Government have not been listening, but we have listened both in another place and here. I have already agreed to a number of amendments and to consider further other amendments. We have listened to the concerns about entryism expressed in another place and we have accepted amendments there which ensure that NHS foundation trusts are committed to real engagement with their memberships. The requirement for the regulator to be satisfied that an NHS foundation trust's membership will be representative as a condition of authorisation is one such provision. The amendment moved by the noble Earl would remove this provision and weaken the safeguards against entryism.
If noble Lords are concerned that it is not within an NHS foundation trust's gift to ensure that its membership is representative, and that therefore an applicant may be refused authorisation simply because
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it has not been able to build up a representative membership, I can assure them that that is not the case. An NHS foundation trust will not have to persuade every person who is eligible for membership to get involved in order to achieve a representative membership. We are not being unrealistic about this. However, it is important that they are proactive about engaging minority or "hard-to-reach" groups. A number of noble Lords have raised concerns about such groups. We are trying to ensure that a real effort is made to engage with them. It has often been the case in the past that the NHS has failed to engage with some of these hard-to-reach groups.
There are many mechanisms for doing this, and to help applicants develop their membership and governance arrangements the department has produced a governance sourcebook, which has been made available to noble Lords and a copy placed in the Library. This provides for a range of good practice and case studies showing different approaches that have been applied in other areas. It has been put together by the Department of Health drawing on a wide range of contributions from business, public and third sector organisations.
Some noble Lords have suggested that we have been engaged in a silo approach, beavering away in Richmond House to draft all this without engagement with the outside world. I agree that life may be more comfortable like that, but that is not the way we have been working. If you look at the sourcebook you will see that we have not been afraid to look at good practice in other areas relevant to this field. The sourcebook is, as they say in the trade, a "living document". It will be supplemented with learning from the experience of the first wave applicants. I have already given assurances on that.
As I said, it would be perfectly acceptable for an applicant to start off with a relatively small membership, provided its application included suitable proposals for engaging its stakeholders and increasing its membership.
We recognise that this is a great change; we recognise that Rome was not built in a day. In bringing forward their proposals we are asking people to show that they have considered the issue of reaching a good cross-section of people who could reasonably be expected to be a part of the membership and how they are tackling the problem of trying to engage with hard-to-reach groups.
We have tried to respond to the concerns expressed in another place about entryism. I hope that the noble Earl will not pursue the amendment because it would damage those safeguards.
Baroness O'Neill of Bengarve: The Minister has given excellent arguments for being inclusive and for good practice in recruiting, but he has not given any arguments for thinking that those good practices will end up producing a representative cross-section of those eligible to be members. It would be better if it were not stated on the face of the Bill that the target of good practice is to produce something that is

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representative or a cross-section. The Minister stated that that was not the intention. Could he not remove these words from the face of the Bill?
Lord Warner: We do want it to be representative. I said exactly the opposite. I said that we accept that it may take time in the initial stages to build up processes to ensure that a good cross-section of people representative of a particular foundation trust are involved in the membership of that organisation. As I have said before, we are saying that in their application, they need to show that they have a game plan for addressing that issue and will move forward in an orderly way to ensure a better cross-section. We are unapologetic about trying to be bolder in this area.
Earl Howe: The noble Baroness, Lady O'Neill, hit the nail on the head. It is fine to have an aspiration for achieving a representative balance of members, but do we need to have that on the face of the Bill? This is a very difficult requirement to fulfil. The Minister seems to have given us a way forward for foundation trusts that is essentially a fudge.
I asked whether a hospital was supposed to engage in socio-economic research or not. The Minister suggested not. I cannot see how it can fail to have to do that if it is to demonstrate to the regulator that it has fulfilled the requirements laid down here. How, in practice, is a trust supposed to achieve a balance of membership that is truly representative? It can reach out to hard-to-reach groups, but how is it to enlist members who do not show any interest in becoming members? The trust may make an effort, but what if it does not succeed? What happens if a hospital—
Lord Warner: 1 assure the noble Earl that an NHS trust—let us forget NHS foundation trusts for the moment-— has a pretty good idea of and access to data on the demography and socio-economic nature of the area for which it is responsible. This is not rocket science—these data are available to many people in the way they conduct their day-to-day affairs.
Earl Howe: Perhaps PCTs might have that kind of demographic information—I am not sure that I accept that every trust has it. Nevertheless, if the Minister tells me that that is so, I must take it on board.
Placing this requirement on the face of the Bill will lead to serious practical problems. We can all sign up to the general wish that there should be representative membership, but I think it is an unnecessary straitjacket to have it as a legal requirement.
Once again, we must be mindful of the time, and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 132 had been withdrawn from the Marshalled List.]
Earl Howe Earl Howe moved Amendment No. 133:
Page 3, line 36. after "provide," insert—
"( ) the applicant has met quality thresholds set by the regulator and reported on by the Commission for Healthcare Audit and Inspection,"
The noble Earl said: We see in Clause 6 the matters on which the regulator will need to be satisfied before he issues an authorisation for a new foundation trust. "Earned autonomy" is a phrase we have heard rather a lot of in the context of foundation trusts. I have always taken it to mean that a hospital which managed to reach certain targets and quality standards laid down by the Government would be allowed greater freedom to manage its own affairs in its own way. It is quite surprising, therefore, that quality standards are nowhere mentioned in the list of prior criteria on which the regulator will need to be satisfied. The list of matters in subsection (2) is largely administrative.
However, if a trust's performance is to have a bearing on whether its application receives approval— and we understand that it will have a major bearing— we need to be certain that the basis on which it is assessed really reflects its degree of overall competence. I do not intend to have a long debate on star ratings, but we need to recognise that the current assessment system simply does not do that.
If one looks, for example, at out-patient appointment times, a hospital may appear to do very well. But the criteria relate only to first appointments, not follow-up appointments. There are 3 million first appointments and more than 7 million follow-up appointments, which suggests that if there is to be a target at all, the target is too narrow. Similarly, the target for cancelled operations relates only to operations cancelled on the day, whereas operations can often be cancelled several times in succession before the day of surgery. These cancellations are left out of the reckoning altogether.
Star ratings are therefore not necessarily reliable guides to underlying performance. Even if they were, they are unstable. Recently, four trusts which had been invited to apply for foundation status lost a star and had to withdraw. What would happen if they had lost the star after they had been authorised?
It is not clear what would happen if there were an even more precipitate fall. Two trusts recently moved from three stars to zero stars in the space of 12 months. A hospital's record can be quite variable, depending on the time of year—for example, on the four-hour A7amp;E target. Eight of the foundation trust applicants failed the four-hour A&E target in the first quarter of this financial year.
We need to hear from the Minister whether there will indeed be quality standards and what measures of quality the regulator will be using. I beg to move.
7.15 p.m.
Baroness Finlay of Llandaff: I hesitate slightly to speak to this amendment because I completely agree with the spirit of it and have been very impressed with all the contributions from the noble Earl, Lord Howe, to date. Therefore, I feel almost churlish in questioning part of the amendment's wording.
Not enough quality standards are stipulated within the process of approval as it is, and they are set through the national service frameworks and the National Institute for Clinical Excellence. I am concerned that

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the amendment's wording could make the regulator feel that he could override these. I seek a little reassurance from the noble Earl on that aspect.
I also seek reassurance from the Minister that the quality standards laid out by the National Institute for Clinical Excellence and in the national service frameworks, and those that the Government have so successfully driven through their national clinical directive and the national service frameworks, will be the basis on which applications for foundation trust status will in future be judged. That is preferable to the very crude targets encapsulated in the star rating system, with all the criticisms that we have received. We have seen an excellent raising of quality standards over the last few years, and not to embody that in the process of developing foundation trusts would be to throw out the baby with the bathwater.
Baroness Andrews: It is tempting to have a debate on the star rating system, but I shall resist it, as it would tie up the evening.
One can hardly be against the amendment, but it is not necessary. Let me take forward the argument of the noble Baroness, Lady Finlay. This is the first time in the history of the NHS that a government have, over the past few years, established national standards and comparative measures. These are being refined and improved as time goes on.
I agree that the system is not perfect, but it is improving and will continue to improve. The fact that the way in which the ratings are calculated is published and revised in the light of previous findings means that it is an iterative process. It does not stand alone—it is part of the whole range of clinical judgments being made, as the noble Baroness said. It demonstrates our continued commitment to reform all elements of health service provision. This is a very important means of informing the public about how their local hospitals are performing. We need to be sure that that assessment is independent and robust.
It is very important that all NHS care meets the very highest standards. That is why the same quality standards, backed up by monitoring and inspection by CHAI, will apply to all NHS care, regardless of the nature of the organisation providing it.
With this guarantee, there is no need to include a specific reference to quality in the criteria for authorisation as an NHSFT. Applicants must seek the approval of the Secretary of State, as we have discussed this evening. He will have to be satisfied that the care would be of an appropriate quality. The current NHS applicants must come within the category of three-star performance ratings. These are the best indications we have of a track record of good performance.
To take the noble Earl's point, this can be an unstable method, as the performance of some trusts changes year on year. When that occurs, the regulator will have to consider why the ratings have dropped, taking other information into account. He will have to exercise his discretion in determining whether the
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change was indicative of a breach of terms of authorisation. That will depend on how serious the change was. Clearly, a range of factors will be taken into account, and one has to be prepared sometimes to look at serious failure. We have built in that provision.
I should stress that the standard is, of course, a minimum. Under Clause 6(2)(e), the regulator must also be satisfied that,
"the applicant will be able to provide the … services",
protected under its authorisation. That clearly means being able to provide services to an appropriate standard.
We have common concern that quality thresholds are met. We believe that the three-star rating offers us the best and most appropriate position to start from. I hope that with those assurances the noble Earl will feel able to withdraw his amendment.
Earl Howe: I am grateful to both noble Baronesses who contributed to the debate, including the Minister for her reply.
I should explain to the noble Baroness, Lady Finlay, that the wording of my amendment was meant to reflect the fact that it is for the regulator to authorise foundation trust status. Therefore, if he is the referee or adjudicator, CHAI acts as the inspector. That is why both bodies are mentioned in my amendment; the one is not supposed to second guess the other.
I take note of the Minister's comments, and there may be little to separate us. Would she mind if I asked her a specific question? What is the precise linkage between the star rating system and foundation trust applications? I understood the star rating system to be proportional to the total number of hospitals, so that three-star status was intended to represent only a certain percentage of hospitals. By definition, it would be impossible for all trusts to achieve three stars, because there was an element of relativity in the assessment process. I may have misunderstood the system but, if that is so, and if all acute trusts become foundation trusts within a five-year span, how will that happen? It will be impossible for all trusts to achieve three-star status. I can only conclude that the star rating system will have to be modified so that the relative ingredient that I mentioned is removed.
Baroness Andrews: The first wave applications will all be required to have three-star status as a threshold. If the noble Earl considers how we have approached the whole business of raising standards in the NHS— in the document of that name—and the additional funding given to work with trusts, especially the weaker trusts that have not done very well, he will see that we are tailoring support to a range of trust performance, so that we can give the best and most appropriate support where it is needed. We intend every trust in the country to be as good as it can be, and an improvement programme is designed to achieve that. As for whether they will all get three-star status

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in due course, that is a question that I cannot answer at this point. I refer the noble Earl to the measures in place to have them achieve the highest standards.
Earl Howe: I have no quarrel with getting the lowest status hospitals up to the standards of the best. We all want that. However, either it is a requirement for three-star status to be achieved, or it is not. The Minister seems to be saying that the requirement will not be strict; if that is so, why is it strict now?
One aspect of the Bill that vitiates it is that staggering the entrance to foundation status will create a very unlevel playing field and the risk of a dog-eat-dog culture. It would be much better if there were a big bang solution rather than a gradual one, so I doubt whether the star rating system has as central a place in the process as the Government appear to want it to have.
We may return to the matter, but I am grateful to the Minister for her comments. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes Baroness Noakes moved Amendment No. 134:
Page 3, line 36, after "provide," insert—
''( ) the applicant has adequate financial controls and financial management procedures,"
The noble Baroness said: This amendment also relates to Clause 6(2). My noble friend Lord Howe has already said that the list in that subsection is largely an administrative one. The amendment probes another matter of substance, alongside the one to which he referred under the previous amendment.
The amendment would add another requirement that the regulator must be satisfied about the applicant's,
"financial controls and financial management procedures".
I hope that the Government would not dream of allowing a foundation trust to be created unless it had adequate procedures, so my amendment is in part a probing one. to discover how that will be done.
In the guide to foundation trusts, the Government said that applicants would be asked to submit an independent financial review, undertaken by the Department of Health. In a Written Answer, the Minister confirmed that accountants—including KPMG, that excellent firm, in which I have no financial interest—have carried out an exercise costing £1.1 million. If we add that to the money already being poured into applicant trusts, we begin to build up a picture of the application process as quite expensive.
Putting that issue on one side, we know who has been appointed, but we do not know what the accountants are being asked to do and what the Government will get for their money. Will the Minister say what the accountants' terms of reference are? Will they cover both financial controls and financial management procedures? Will the accountants' report be made public before the decision to confirm or deny foundation trust status? That is to say, will other people be allowed to see the strength of the finances of the applicants?
I hope that the Government see those requirements as straightforward matters that need to be demonstrated and that they will be able to accept the amendment. I beg to move.
Baroness Andrews: I can use the same arguments as I used in the previous debate, in respect of ensuring appropriate financial controls as a condition for authorisation. We believe that the application process includes sufficient checks to ensure that that is the case. As part of the application process, there will be a requirement for applicants to prepare a service development strategy, setting out their vision and plans, including costings and information on financing for the next five years. We have prepared guidance on what is required in seeking the Secretary of State's support, including details of what should be included in the service development strategy.
The noble Baroness asked specific questions about the independent health check. I cannot answer all her questions, but I can tell her that the aim is to provide an independent evidence-based review to ensure that the service, the systems and assumptions are robust and that the right management systems are in place. There will be an opportunity for applicants to address any issues that arise from that. Organisations will need to allocate dedicated resources to support that process. An action plan will be prepared detailing any shortcomings or areas of concern.
Given the hour I would prefer to write to the noble Baroness to answer the questions that she raised. I shall refer to the guidance and make that correspondence available to other Members of the Committee with similar interests. As has been said, the regulator has discretion over whether to authorise an applicant and would not do so where he was not satisfied with the financial arrangements. Under Clause 6(2)(f) he can impose any additional requirements on applicants which must be met prior to authorisation. If he had concerns about an applicant's finances, he could require further information from the applicant, or even require the applicant to take steps to improve their finances as a condition of authorisation. With those assurances and the promise to write to the noble Baroness, I hope that she will withdraw the amendment.
Baroness Noakes: I thank the Minister for that reply. She will be aware that she did not answer the questions that I asked although her reply was very interesting. I hope that she will publish the terms of reference, that she will confirm that the results of the work by the accountants will be made public and that she will comment in particular on whether or not financial controls and financial management procedures will be covered as I do not think that she mentioned that in relation to a service development strategy, although I may be wrong. Clearly, I cannot turn down the generous offer of a letter copied to all Members of the Committee who have an interest in financial issues. Therefore, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Davies of Oldham: I beg to move that the House do now resume. In moving that Motion, I suggest that the Committee begins again not before 8.32 p.m.
Moved accordingly, and, on Question, Motion agreed to.

World Trade Organisation: Cancun
7.32 p.m.
Lord Dubsrose to ask Her Majesty's Government what action they propose to take following the outcome of the World Trade Organisation talks in Cancun.
The noble Lord said: My Lords, those present at Cancun said that the outcome was somewhere between a setback and a disaster. Clearly, the key issue is not to have a detailed post mortem but to move forward. However, unless we understand what went wrong at Cancun, it is not easy to see what the next steps should be.
Let me say at the outset that I am grateful to CAFOD, Oxfam and other development agencies for the help that they have given in providing me with background information for this debate. I should like to discuss the issues under four headings: agriculture, what are called the Singapore issues, the processes of the World Trade Organisation and how we move forward, particularly with reference to discussions that are due to take place in Geneva and terminate by the middle of December.
It is perfectly clear that agriculture was the most difficult and most important issue that faced the negotiations in Cancun. I give a few figures: 97 per cent of people in the developing world are engaged in agriculture yet large western subsidies to western agriculture undermine the livelihood of many people in poor countries. I give an example. Since 1994 the United States has doubled its subsidies rather than phasing them out as was agreed at Doha. As regards cotton, which I put under the broad heading of agriculture, the United States refused to tackle the problem of cotton subsidies. Twenty-five thousand United States farmers get 3 billion dollars a year in support yet 10 million people in Africa depend on the cultivation of cotton. Cotton is one of three cash crops for a large section of the rural population of west Africa.
As regards the CAP, European Union farmers get more subsidies in 12 days than the rich countries give in aid to Africa in a whole year. The average European Union cow gets in total 2.20 dollars' support per day. That is more than the income of half the world's population. As if that were not enough, European Union and United States' agricultural export subsidies amount to 60 times their aid to developing countries. It is quite clear that from the point of view of the future of the developing world, what we do about agriculture in the affluent West is crucial. Those are the issues that should have come up at Cancun and been dealt with before new issues were raised. The case for them is absolutely clear-cut.
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I turn to the new issues that were raised which come under the title of the Singapore issues. They concern investment and competition, transparency in government procurement and trade facilitation. As the Cancun discussions developed, the developing countries were faced with being asked to make concessions on the Singapore issues with nothing being given in return despite the fact that many people warned the EU that that would happen. Many people told the EU that it was not right to proceed with the Singapore issues in the way envisaged.
I fully understand that Pascal Lamy, the European Union trade commissioner, was mandated by the European Union to take the line he did but it was a pity that it was not until 14th September that he dropped his insistence on dealing with those issues. By then it was too late and the talks collapsed. It is very clear that by asking the developing countries to accept the Singapore issues, they were asked to make concessions before they got anything in return through the trade negotiations, particularly on agriculture. That surely was neither a sensible nor a principled and ethical way of proceeding. I know that the United Kingdom Government's position was not in favour of the Singapore issues being pushed. On the other hand, I wonder how robust we were in urging that that should be the case. I look forward to my noble friend's response. The issue was badly handled by the European Union and led directly to the breakdown of the talks.
My next point concerns the processes of the World Trade Organisation itself. There are 148 countries in the WTO. It was Pascal Lamy, the EU trade commissioner, who said that the organisation of the World Trade Organisation was medieval but suggested that neolithic might be a more apt way of describing it. It is difficult to organise 148 countries in terms of negotiations at the best of times, but the way they were handled was not very sensible. For example, the director-general has no power of initiative. On the first day of the discussions in Cancun the whole time was taken up with non-substantial matters such as the appointment of facilitators of the working group. That occurred at a time when 148 countries had a large number of representatives present to take part in urgent negotiations.
I also note that at least 300 parliamentarians were present. Normally I would welcome that but some people have put it to me that their presence made for less flexibility in the negotiations. Frankly, I do not think that is a point of great substance and I do not put it forward. What I am putting forward is that we have to look differently at the way in which the WTO organises itself. It was simply not satisfactory at Cancun.
But the most important part of this debate has to be how we move forward. It is absolutely crucial that progress is made, particularly if we bear in mind that the United States' elections are getting closer and therefore it will be harder to persuade Washington to make concessions given the electoral implications of some of the issues that I mentioned earlier, such as the cotton subsidies. The difficulty is that there may now

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be a temptation for Washington, the EU and other rich western countries to say that a bilateral or regional approach might be the way forward given the breakdown at Cancun. I suggest that that is an undesirable way of proceeding. I say that for the following reason: a bilateral negotiation between the United States and a poor country or between the EU and a poor country tips the balance very much in favour of either the United States or the EU. It is an unfair way of negotiating because the developing countries simply do not have the necessary bargaining power. They are in a better position and can argue more effectively when allied with a number of other developing countries. Indeed, even regional negotiations would still tip the balance against the developing countries, although I note that that is the approach that the United States seems to want.
There are other ways forward. One suggestion is that we go back to the method used in the earlier Tokyo round; namely, that the 30 key countries—the rich countries—should get together and decide how they wish to move forward without demanding any reciprocal concessions from the smaller and poorer countries. Let us, the richer countries of the world, take it as a responsibility that we have to resolve the matter. Let us not spend our time trying to get concessions from some smaller countries, but say how we approach it in the light of Cancun. It worked in the Tokyo round and could work this time.
I welcome the fact that the British Government support a multilateral approach. I hope that they will persist in that and use all our influence on the other key countries. It is absolutely crucial that the United States and EU make a better agricultural offer, perhaps on the basis of the type of approach that I have mentioned. I also think it crucial to look again at the World Trade Organisation's processes and procedures. It simply is not good enough to build up the hopes of the poor countries of this world, and then see them dashed through cumbersome, bureaucratic and ineffective methods.
I wish to raise one other matter, that of EU trade policy. I have criticised the United States Government once or twice, so let me criticise the EU as well. There is a need for a thorough look at the way EU trade policy is developed. I do not think that the Cancun outcome reflects well on how the EU went into the discussions, as I have said. Some EU trade-policy discussions seem to take place in a less transparent manner than one would wish. The suspicion has been put to me that even the British Government had only a hazy idea of what the Commission was up to in developing its stance for Cancun. That is not desirable.
It is crucial that we make progress. The high-level talks in Geneva are an opportunity for making such progress and learning from Cancun. Above all, we need political will. I look to the British Government to persuade other EU countries and the United States that it is time to exercise that political will and provide the poor countries in the world with a fairer deal than they have got up to now.
7.42 p.m.
Lord Judd: My Lords, I am sure that we are all grateful to my noble friend for having introduced the debate, just as we are to the organisations that he mentioned for their assiduous monitoring of the situation. I am particularly glad that my noble friend the Leader of the House will reply to the debate. It is significant that the Leader of this House takes the issue as central to her own agenda. She brings a lot of ministerial experience to the debate.
From having listened to my noble friend Lord Dubs, I want to put some specific questions to my noble friend Lady Amos for when she replies. Will she reassure the House on exactly how we monitor the development of Commission policy in the European Union, and are we really satisfied that the policy totally reflects what we believe should be put forward? Secondly, will she also reassure the House on the matrix dimension of the development of policy in this country? When we are preparing for the likes of Cancun, how far do departments that have a very significant interest in what is happening have an opportunity to take part in devising the strategies that we will advocate? The Treasury speaks for itself and the Department of Trade and Industry is obvious, but the Department for Environment, Food and Rural Affairs and the Department for International Development are relevant, as are the Foreign Office and the Ministry of Defence in terms of international security.
Cancun is, of course, central to the issue of global stability and our fight against global terrorism. I have argued before in this House, and I am sure that I will argue again, that very often I reflect that the world is in a classic pre-revolutionary situation. We have the many millions of utterly deprived and excluded, but also some very bright and well-educated people around the world who may, in personal terms, not be materially badly off but feel excluded from access to the decision-making processes in the world. If we are to have stability and security, we have to address not only economic and social justice, but the redistribution of power. Cancun demonstrates that very clearly. Whose was the agenda at Cancun? Was it the agenda of the international community, or was it still, however refined and presented, the agenda of the powerful in the world, to which the rest were asked to respond or on which they were asked to comment?
The matter is very well illustrated by the difference between the Singapore issues and the agricultural issues to which my noble friend referred. The Singapore issues—competition, trade facilitation, investment, transparency in government procurement—are all very worthwhile objectives. However, they are not central to the agenda of poor countries desperately endeavouring to survive. For them, the contradiction in the subsidies to cotton or our own iniquitous common agricultural policy, the distortions that those introduce into their economies, and the punishment that they mete out to their own people are much higher priorities.

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The issue that goes alongside who owns the agenda, if we are talking about fairness, is the resources available in preparation and in the negotiations themselves, particularly when it comes to the small hours in the morning. Some of us who have participated in such negotiations know the game of brinkmanship right up to the last moment. Some of our delegations have immense resources at their disposal to handle that situation. Others dealing with desperately poor people in the world and their needs have virtually no such resources at their disposal to keep up with the game.
We are faced with the breakdown of Cancun. As my noble friend argued, we could see a threat to the commitment to multilateralism. I was recently in the States and heard people arguing that, in a sense, there had been emancipation and we could now get on with the job on a piecemeal basis, country by country or region by region. Divide and rule would, of course, be disastrous for the poor. We have to help the World Trade Organisation to overcome its difficulties and become more effective. Reform of the World Trade Organisation and its methods of operation is therefore crucial. My noble friend referred to that. It is not an either/or situation. That will take time.
In the meantime, there is the issue of will and commitment. If we want to see a stable world, we have to take the issue of power and justice very seriously. It is no good talking about level playing fields when, for many countries, the question is how one gets fit enough to be on the playing field and start playing. It is no good talking about environmental responsibility when we are telling people to do as we say and not as we do. It is no good being preoccupied, as we are, with migration and barriers that we must put up to the movement of people if we are not looking at what causes migration.
I simply argue that we must reform the World Trade Organisation. However, much more important in the immediate setting is a will to see justice for the poor.
Lord Davies of Oldham: My Lords, I am sorry to say that Back-Benchers have only four minutes each this evening.
7.47 p.m.
Lord Hannay of Chiswick: My Lords, it is good that the House is discussing the issue while the failure of Cancun is fresh in our minds. Let us be clear. The failure was a major setback which will damage all concerned, developed and developing countries alike, although I fear that developing countries, which are so much less well placed to ride out such setbacks, will be the more damaged. It could undermine the fabric of world trade rules, on the maintenance of and respect for which the prosperity of all of us depends. Let us not delude ourselves with talk of clouds with silver linings and possible simple ways back on to the high road that leads to freer and fairer world trade. It will take a good deal of statesmanship and much hard work to achieve that. Success is far from a foregone conclusion.
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I do not intend to dwell much on apportioning blame for the fiasco at Cancun. The air is already thick with the protagonists allocating blame to everyone but themselves. There are lessons to be learned, but playing the blame game does not get one very far, and it cuts across and undermines the effort to get back to the negotiating table and on with the matter in hand, which is bringing the Doha round of world trade negotiations to a successful conclusion, by which I mean a conclusion that brings clear, early and measurable benefits to the developing countries to which the round is dedicated.
I have just one complaint to air. Countries which invite large international gatherings of this sort and those who organise them must be prepared for them to overrun, and for the last days to be spent in a marathon of late-night meetings and efforts to reconcile conflicting positions, as the noble Lord, Lord Judd, said. There is no other way to come to closure. Cutting short negotiations prematurely and giving way to impatience is a recipe for failure. It must not be repeated.
Where do we go from here? One must clearly start with the problem of the developing countries, which came to Cancun in an angry and determined mood. They had, in my view, a good deal of justification for that anger. Previous trade rounds had failed to bring them benefits proportionate to those gained by the developed countries. They had watched paper concessions on the matters that really counted for them—trade in agriculture and in textiles—fail to materialise, and be finessed away by the developed countries. They had been on the receiving end of cheap, subsidised exports of agricultural goods which damaged their own domestic agriculture and their prospects of winning external markets. So they came to Cancun with their blood up. Unfortunately, most of the blood they shed at Cancun was their own, by setting back the cause of agricultural policy reform in the three key players—the European Union, the United States and Japan—and by delaying the date on which any concessions agreed in the Doha round begin to bite. However, that is no cause for satisfaction.
We should be thinking now—by we, I mean the European Union, since the United States will be hampered by the run-up to next year's presidential election—of some significant ways of demonstrating up front our commitment to ensuring that developing countries do benefit from this round: more funds and more expertise to help them participate effectively in negotiations; perhaps some unilateral moves to give them better access to our markets already; perhaps some proposals for the accelerated phasing-in of concessions in the round which particularly benefit developing countries. I hope that the noble Baroness the Leader of the House can address that.
Evidently, if this round is to succeed, the European Union will have to put more on the table with respect to agricultural trade than it did at Cancun. I am not one who criticises what the European Union offered at Cancun in that respect. The meeting was only a staging post on the way to a conclusion by the end of 2004. It is naive to suppose that all the cards would be played

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at Cancun, but now that alibi has gone. The next time, it will be the finishing post. The European Union needs now to dig deeper into its capacity and will to reform and to build on the foundations laid by the worthwhile decisions taken last summer. The de-coupling of subsidisation from the level of production should be taken further, and the scope that such de-coupling offers for further liberalising trade rules should be taken much further.
I note that there has been a good deal of complaint about the cumbersomeness of WTO procedures; the difficulty of reaching consensus in such large organisations; the need for slimming down and speeding up decision-making. I am sure that all those points are well taken, but it would surely be suicidal to try to solve all that as a prelude to, or even as part of, finishing the round. Do we really believe that developing countries, who have only just felt their strength, are going to see it diluted as part of a deal that gives them what they want on trade? Of course not. The sensible way to proceed is to give the WTO a remit to examine possible institutional reforms after the conclusion of this round, and not as part of it.
What, then, are the priorities for the two months which lie ahead before the WTO contracting parties meet again in December to try to put the train back on the rails? That is clearly too short a period for serious, substantive negotiations. However, I would hope that we could secure a political commitment at the highest level to completing the round by a date that is now more practical than the end of 2004. Could not the European Union lead the way when the heads of state and government next meet at the end of this week by pointing in that direction? It is important that the European Union should get on with giving a lead.
I hope that the noble Baroness the Leader of the House, when she replies to our short debate, can tell us something of the Government's thinking on the way ahead. I have been authorised to tell the House that Sub-Committee A of your Lordships' EU Select Committee will be debating its next major report on finding a way through the post-Cancun maze.
Britain has always played a prominent role. Now is the time not to weaken in that support, following what was probably the worst setback in recent decades.
7.53 p.m.
Lord Desai: My Lords, I would like briefly to take an opposite view to that of most people. While Cancun was a failure, it was a better failure than Seattle. The reason for that is that at Cancun, the developing countries found their bargaining muscle much better than was the case at Seattle. At Seattle, they were excluded from Green Room negotiations altogether and the US played a high-handed card in dismissing the concerns of developing countries.
At Cancun, a group of 21 or 22 developing countries emerged which was able to put together a coherent strategy. Those are the more industrialised of the developing countries—the larger developing countries such as China, India, Brazil, South Africa and so on. They were able to put forward a bargaining strategy
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whereby they would not accept that they had to make concessions until they received something back. The finest aspect of the WTO is that it is the only global institution where all countries bargain on an equal basis. It is much better than the UN, where there are permanent members and veto powers. It is much better than the IMF or the World Bank, where developed countries have the majority of the voting powers.
Therefore, I would be against any of the Tokyo round proposals that my noble friend Lord Dubs put forward. They are basically saying that developed countries will once again run the world. Those days are gone. I do not expect that developed countries meeting by themselves will make concessions that they do not make when developing countries are there bargaining with them.
It is important to note that we should not have expected very much out of Cancun, because only three or four weeks before it started, at a round-table meeting organised by the Commonwealth Business Council, where many Ministers and business leaders spoke, it was quite clear that insufficient preparations or concessions had been made even two or three weeks before Cancun was about to start. We were therefore expecting that even the modalities of further progress would be difficult to agree on at the end of Cancun.
Importantly, it has now been established that there are limits beyond which developing countries will not be pushed. However, among them, there is a division between the 21, who are more industrialised, and the poorer, more agricultural sub-Saharan African countries. It is very important that their interests, especially those affecting cotton subsidy, be regarded as important as those of the 21 that want better access to developed country markets because they have manufacturing exports to sell.
I agree with many noble Lords who have said that we need to look again at WTO procedures. However, we must not change the principle of one country, one vote. We must not have any permanent members or hierarchies. In as much as it is a bargaining forum, the strength that developing countries have is in numbers. It is very important that that strength be maintained.
What must ultimately happen is for WTO bargaining to become an all-year-round session. I know that there are new negotiations starting in December and that within a year we will have to arrive at a decision, but I do believe that negotiations ought to be permanently staged.
7.58 p.m.
Baroness Whitaker: My Lords, I have three, small points to add to this very timely debate. The first follows from the fact that it is also very much in the interests of all the citizens of Europe that subsidies and tariffs protecting European and other Western goods should disappear. Consumers in our part of the world are hit three times over. They pay the tax which cushions uneconomic production; they pay more than they need for goods which without protection would be uncompetitive; and they also pay for surpluses to be dumped on world markets. The Consumers'

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Association estimates the cost of the lack of fair market access to be over £1,000 per EU citizen per year.
That is not the only citizen interest to be damaged by subsidy. Subsidies for agriculture foster the overloading of croplands and in many places the topsoil is eroded. Everywhere, there can be more pollution from synthetic fertilisers and pesticides and the release of greenhouse gases. Our environment also suffers from subsidies.
So when we think about the interests of the voters in the European Union countries, we should think that while some of them are indeed farmers, all of them are consumers who stand to gain from the market access which would in turn free African fanners to enter our markets.
My question to my noble friend is, therefore: what efforts can our Government make to persuade their colleagues in France, Germany and elsewhere to give due weight to their own consumers' interests in comparison with that of their farmers?
The second point I make is that the emergence of Group 21, or however many it ends up as, under the influence of the distinguished and dynamic Brazilian Foreign Minister, Celso Amorim, while marking an improvement in equality of bargaining power between richer and poorer countries, risks marginalising those much poorer countries which are not included. South Africa and Egypt are, I believe, the only African countries in G21, and some might think that South Africa has to a degree jumped ship to join the richer non-Western group. It is the poorer—particularly sub-Saharan—countries, of course, whose economies could really be transformed by better market access. Can my noble friend use her good offices to ensure that the G21 Ministers remain open to the cause of the poorest countries?
Finally, as a subset of this point, NePAD has created a secretariat. Its purpose, of course, is to help African ownership of the development process by enabling peer reviews of the capacity of African states. But the purpose of the development is to lay the foundations for investment and thus economic growth. Investment and growth are both hampered if market access continues to elude the African producers. Could NePAD also develop a capacity for lobbying, so that it could intercede with G21 on behalf of its members? Or is the loose AU/ACP/LDC grouping up to the task? It that one of the capacities which Western assistance could help improve?
8.2 p.m.
Lord Elton: My Lords, the noble Lord, Lord Dubs, has done a great service to the House and the community in demonstrating the acute injustice represented by the present imbalance of trade in the world. The noble Lord, Lord Judd, has made it clear that this is an acutely dangerous situation. I rise only to remind your Lordships and myself of the context in which this takes place. Since I was a child, the world has changed from a challenging globe, much of which
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had yet to be discovered, to a small fragment floating in space, the whole of which can be sent in the form of a photograph for us to look at in one glance.
We used to comprise a collection of different people—almost different species—but it is becoming clear that we are one people and one species. Yet we are divided by astonishing differences of wealth. As the noble Lord, Lord Dubs, pointed out, an American cow has more spent on it than an African citizen consumes in one year. That is not acceptable. It is spiritually repulsive. It is sinful, in the view of the Christian community.
Furthermore, it is dangerous. The scene was set, quite appropriately, by the demolition of the Twin Towers. The inequalities which exist are so self-evidently unjust that any revolutionary, let alone one inspired by religious dogma, can say that those who wallow in surplus wealth should be dispossessed for the benefit of those who have nothing. Indeed, if one removes oneself from the argument and forgets one's own comfy residence and cushioned bank account, one finds it most difficult to distance oneself from that argument.
The Government returned to office with a clear commitment to doing something about this. However, they had not appreciated the difficulty of doing something. That is not merely the difficulty of the processes of the WTO, which has been expertly revealed by the noble Lord, Lord Hannay, and others, it is the political difficulty at home. If we are going to do something about it, it is going to cost us. If it is going to be effective, it is going to cost us to a degree that we will notice. That will lose governments votes when they propose it. I am pleased to see the noble Baroness, Lady Whitaker, shaking her head and no doubt in a later debate she will give us the magic key which shows how we can do something for free. With only 30 seconds to go, I cannot give way.
I ask the Government to look for friends in this. I cannot speak for my party, but there are many within it who would support such an approach. They would be prepared to recognise that there must be some cross for this country to bear. Responsible people must find a political formula which enables them not to slang it out on the hustings, paring away what we would give to the poor in this world, in order to get one party or the other into power.
In this regard, we all have a moral duty to the human race and I look to the right reverend Prelate for a nod of approval. I am pleased to see a shadow of a nod. With that comfort, I shall sit down.
8.6 p.m.
Lord Brennan: My Lords, we, the rich, have preached the gospel of globalisation for years. But it is not a gospel the poor will accept unless it has a tenet in it that includes justice. If we, the rich, chose the WTO to be our vehicle for expanding world trade, we must make that vehicle have a just base. It does not have that now. It is failing.
Three decisions are needed—two present and one future. First, there must be an agreement now about agriculture. Subsidies in the rich countries for farm

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produce are grotesque. There is no moral basis for them. The example of what the United States has done with regard to cotton is such an obvious injustice as to make one deeply cynical about the entire process. That the subsidised farmers of a particular state are more important than 10 million people whose lives depend on this product is inexplicable. That agreement must come now.
Secondly, the developed world and we, the rich, must now accept that, whether it is the G22, the G90 or any other combination, the developing world has said, "We have had enough and, with our present unity and strength, we want change". Can we—the rich—justify dumping our excess produce world-wide without limit? Can we justify limiting access to our markets from the developing world? Can we really justify what is called "de-industrialising" the south, producing a type of economic serfdom? Clearly not. Therefore, the second decision is to accept the reality that the developing world will now seek to speak, at least morally, on equal terms.
The third decision is for the future. I do not accept that talk about reform of the WTO must wait. How can one expect the developing countries to come to terms now with there being no prospect of change in the WTO? It was Keynes who, in the Bretton Woods negotiations after the war, very perceptively anticipated that there might well be a need then, as there certainly is now, for a component to be designed in the world trade structure to protect and advance the interests of developing countries. There is no such structure now. There should be, and it should be offered for debate. It is an incentive for the developing world to come to terms with other matters.
In making those two present, and one future, decisions here in the rich West, I believe that the United Kingdom has a special role to play. The time has come to tell the United States, "You must change your attitude". First, this morning's article in the Guardian about the volte-face on supplying goods to South Africa for HIV/AIDS is unthinkable. Secondly, we must persuade the European Union to speak for its citizens, not for its Commission. That is a special task which I believe our Government can, and should, achieve if there is to be justice in world trade.
8.10 p.m.
Baroness Northover: My Lords, I, too, thank the noble Lord, Lord Dubs, for introducing this important debate. I congratulate the noble Baroness, Lady Amos, on her appointment as Leader in the Lords, even though the circumstances are so very sad. I am glad that she is keeping her active involvement in international development. I have just returned from a CPA visit to St Vincent and I can tell her that there, as elsewhere around the world, there is enormous admiration and respect for her. It is places like St Vincent that show the need for the WTO talks to succeed.
Trade protection from the EU for Caribbean banana producers, and, in due course, for sugar producers as well, has been removed as part of
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liberalising world trade. But that looks like hypocrisy when the EU itself is so reluctant to remove protection of its own agriculture. The danger is surely that if people are further impoverished the incentive to escape poverty through, in this case, dealing instead in drugs becomes far greater. Most, of course, do not even have that, albeit terrible, route to prosperity.
Cogent arguments are made that the developed countries' industries grew because they were protected and that the poorest countries must be able to protect their own industries or they will be unable to compete against countries such as China and India with their stronger infrastructure but low costs. Indeed, that must be looked at on an international level, and that is why the failure of the talks is so worrying. The real losers are the poorest countries. As we have heard, there is now a real danger of bilateral agreements, which are likely to benefit the stronger countries.
There was the encouraging emergence at Cancun of the new grouping of G21 or G22 developing countries, but it has been noted that that is as yet an untried grouping and that it did not contain the poorest countries.
As countries now seek to put the WTO talks back on track, can we expect further progress in the EU on farm subsidies? Why were the Singapore issues introduced, and is there any possibility that those might reappear on the agenda? Were the UK Government on the outside as the EU stance was prepared—perhaps because of other international issues? Is it likely that the US will co-operate in new talks or, as it has threatened, go it alone?
Both the US and the EU have made strong statements about the WTO's decision-making structure, indicating that the institution has become too unwieldy to deliver results. Will the US and the EU seek to change that structure and, if so, in what ways, or, instead, will they turn their attention increasingly to bilateral and regional efforts?
It has been said that the Mexican chairman pulled the plug on the talks and out went the bath water. We surely have to ensure that the baby does not go too. Whatever their flaws, it must be through international institutions, such as the WTO, that progress is made if weaker countries are not to lose out in trade to stronger ones. I look forward to hearing what progress the noble Baroness thinks can now be made.
8.14 p.m.
Baroness Rawlings: My Lords, first, I take the opportunity to add my congratulations to the noble Baroness, Lady Amos, on her appointment as Leader of the House, even as we have just heard, in such sad circumstances. I am pleased that she is still covering international development, which she does so well.
I, too, add my thanks to the noble Lord, Lord Dubs, for initiating this debate.
As we have heard from several speakers tonight, the main reasons for the failure at Cancun are complex and complicated. We welcome the comment in the Statement repeated to the House by the noble

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Baroness on 17th September that the breakdown of the talks was not the end of the Doha trade round but that,
"we were closer to agreement at the end of the Cancun conference than we were at the beginning".—[Official Report, 17/9/03; col. 939.]
However, it left most developing countries concerned and frustrated. It is now 26 days down the road from that Statement and I feel that, although it is early days, the Unstarred Question of the noble Lord, Lord Dubs, is an important one to which the noble Baroness could give the House a more detailed reply. It is especially timely as the first negotiating meeting, a committee on agriculture, was meant to take place last week from 6th to 9th October. Can the noble Baroness confirm that the meeting took place and whether any of our officials attended, and comment on the discussion?
We last heard that Her Majesty's Government were in discussion on how best to take the process forward. Have they decided to support the IMF/World Bank initiative, which aims, among other things, to look at trade issues as part of a development programme, linking it to the priorities of developing countries? If so, can she explain what will be our "substantial input" into it as mentioned in the Statement? When is that initiative planned to start? Will it be before or after the General Council meeting in Geneva on 15th December?
The final ministerial statement from Cancun instructs all 148 members, all with a veto, to continue talks taking fully into account all the views expressed in the conference. There appears to be uncertainty, however, about what that means and about what texts would be acceptable to members. What discussions are planned to iron out that uncertainty, which could only further delay discussions? What conclusions has the noble Baroness, Lady Amos, drawn from the news that countries such as Costa Rica, Peru and Colombia have decided to leave the G21? What are the views of Her Majesty's Government on the US regarding their explicit announcement that they too will move forward bilaterally?
In the light of those disturbing plans and a prior statement by the African Union's Commissioner for Trade, Industry and Economic Affairs, Vijay Makhan, that African countries should consider quitting the WTO if it does not deliver, do Her Majesty's Government have any plans to discuss that with members of NePAD, as mentioned by the noble Baroness, Lady Whitaker? Perhaps the WTO structure, as mentioned by the noble Lord, Lord Brennan, needs to be revisited.
Finally, can the noble Baroness the Leader of the House keep noble Lords informed on a regular basis in the run up to the December meeting? There is no more time for rhetoric and missed opportunities, as my noble friend Lord Elton eloquently said. We on these Benches want to see bold changes and the restoration of impetus to help try to solve these critical issues concerning multilateral trade and the Singapore issues, all of which have such a significant impact on rural poverty.
8.18 p.m.
Baroness Amos: My Lords, I am grateful to my noble friend Lord Dubs for securing this debate on an issue of vital significance for developing countries. I agree with the noble Lord, Lord Elton, that the level of inequality in the world cannot persist indefinitely. Reform of the trade rules was a key element of delivering greater equality.
It is a bitter disappointment to the Government that the Cancun ministerial meeting failed to reach agreement. Fortunately, before Cancun there was a breakthrough with agreement on a solution to the longstanding difficulty of helping developing countries without pharmaceutical manufacturing capacity to access more affordable medicine. But at Cancun we failed to deliver outcomes on the Government's three priorities: agriculture, market access for non-agricultural goods, and special and differential treatment for developing countries. As a result, the current imbalances and inequalities within the multilateral trading system will persist to the disadvantage of the world's poor.
Although it is tempting to dwell on the result of Cancun, it is more important to focus on how we go forward. I agree with the noble Lord, Lord Hannay, who said that we should not play the blame game. I also agree with him that Cancun was a staging post. The January 2005 deadline for the conclusion of the Doha round of trade negotiations now seems unachievable, but we must still focus on working for progress.
The agreement reached in late August on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and public health was a significant step forward. The agreement enables developing countries with no or insufficient domestic manufacturing capacity to import generic copies of patented drugs, thereby increasing opportunities to access medicines at a more affordable price. The deal has been welcomed by several developing and least developed countries and shows that the WTO can reach agreement on a difficult issue with their interests in mind.
The noble Baroness, Lady Rawlings, my noble friends Lord Brennan, Lord Dubs and Lord Desai, and the noble Lord, Lord Hannay, all mentioned the WTO's procedures. The failure at Cancun was caused by real differences in positions that were not effectively tackled by the WTO process in the time available. Although some of the WTO's processes need to be improved, I must tell noble Lords that when I was at Cancun talking to representatives of developing countries' Governments, they all welcomed the greater transparency that they saw at Cancun, although they were not sure that that would be reflected in the meeting's outcome. I agree with the noble Lord, Lord Hannay, that the developing countries were determined—although I do not think that they were not necessarily angry—at the meeting.
As my noble friend Lord Dubs pointed out, agriculture was at the forefront of the list of issues for developing countries. The current highly distorted system in which richer countries—here I include the

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more advanced developing countries—subsidise their producers and deny access to their markets through prohibitive import duties must be addressed. That disadvantages both developed country consumers and producers in developing countries.
However, the EU has made some progress on reducing trade-distorting domestic agricultural subsidies. The deal agreed by EU agriculture Ministers on 26th June this year marks an historic shift in the EU's agricultural policy. The decoupling of subsidies from production should connect European farmers much more closely to the market and have a real impact on reducing excessive production, which produces dumping and harms developing countries.
To the noble Baroness, Lady Northover, who mentioned sugar in particular and also discussed the banana regime, I say that that there are proposals for reform of other EU commodity regimes, including sugar and cotton. Those have been tabled since Cancun and discussions are about to begin. The noble Baroness may recall that the UK Government argued strongly for support for Caribbean banana producers. It is as a result of that that we achieved the phasing out over time of the special treatment for Caribbean bananas. We will work with the Commission and other member states to advance the agenda, especially on cotton and sugar, in the spirit of the Doha agenda.
The EU's June reforms were only ever going to address one element of the agriculture debate: trade-distorting domestic subsidies. The other two key aspects—market access and export subsidies—could and should have been addressed at Cancun. Regrettably, those discussions never really started and we must work to get back on track, as without all three, the real benefits to developing countries cannot be achieved.
Non-agricultural market access is also high on our agenda. Seventy per cent of world trade is in non-agricutural products, so there is the potential for big gains in liberalising there for the benefit of both developing and developed countries. Some progress was made in Cancun for industrial groups. We must continue to work with the Commission to look seriously at areas of particular concern, such as textiles and clothing.
In Cancun, and indeed before, Benin, Burkina Faso, Chad and Mali made a clear and powerful case in the WTO about the need to address the plight of the West African cotton farmers suffering as a result of the low world cotton prices. They argued for both the early removal of production and export subsidies on cotton, as well as compensation for all less developed countries until subsidies are phased out. Due to their efforts, their initiative gained considerable support at Cancun and will no doubt maintain its momentum over the coming months until the issue can be resolved in the ongoing negotiations. We welcome their efforts to use the WTO to meet their trade and development needs. We have provided 50,000 euros in technical assistance to help them to promote their case in the WTO.
My noble friend Lord Judd asked whose agenda it was at Cancun. My noble friend Lord Brennan said that we needed to accept the reality of developing
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countries speaking on equal terms. Cancun saw the emergence of strengthened developing country groupings, though their interests are far from identical, as my noble friend Lord Desai made clear. The G20, made up predominantly of South American and Asian countries—although, as my noble friend Lady Whitaker mentioned, it also includes South Africa—coalesced around the issue of agricultural liberalisation, and the alliance of the WTO's poorer members, the G90, displayed cohesiveness at the negotiating table. Many countries set aside the differences in their national positions for the sake of a stronger united voice. But if those alliances are to become credible negotiating partners, they and we must engage to explore where the negotiating flexibilities lie on both sides.
My noble friend Lord Judd and the noble Lord, Lord Hannay, asked about the resources available. Increasing the trade-related capacity of developing countries is a key area where we can add value. We have committed since 1998 over £160 million to trade-related capacity building. The money is designed to help developing countries, particularly in Africa, to develop their own trade policies, to participate properly in trade negotiations and then to capture the potential gains from trade.
As I was asked by the noble Baroness, Lady Rawlings, what happens next? The noble Baroness particularly asked about the World Bank and IMF initiative. A plan was announced by the World Bank and IMF to work more closely with the WTO, with a view to helping developing countries with adjustment problems if, for example, they have to lower their tariff barriers. We welcome that as a means to help the poorest countries implement, and benefit from, the commitments they make as the Doha agenda proceeds.
There has been much talk and speculation since Cancun about whether countries will retreat into bilateral deals and shy away from the multilateral system. My noble friends Lord Dubs and Lord Judd raised that issue. That would be a grave mistake. I agree with my noble friend Lord Desai that developing countries stand to get a better deal through multilateral negotiations in the WTO, where they make up two-thirds of the membership and can bargain on an equal basis. They cannot do that through a multitude of regional and bilateral agreements with bigger economic players. That approach also risks marginalising the poorest, excluding those countries, particularly the least developed, whose economy holds little interest for the big trading blocs. A strong, rules-based multilateral system is the best way of ensuring that the interests of the weakest economies are secured.
My noble friend Lord Dubs said that,
"developing countries were faced with being asked to make concessions on the Singapore issues with nothing being given in return".
That was not the case. I cannot agree with my noble friend that the EU position led to a breakdown in the talks. The Singapore issues were not a priority for the Government. My right honourable friend Patricia

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Hewitt and I made that clear. However, the EU was given a negotiating mandate that included the Singapore issues and it agreed to drop two of those issues in the course of the negotiations. It is really important that we do not engage in a blame culture here.
As the final ministerial statement from Cancun urges, we must now build on those areas of movement made in Mexico. For the European Union, that means accepting that, despite our continuing commitment to encourage and facilitate direct investment in developing countries, WTO agreements on investment and competition are off the EU's agenda. We believe that negotiations on trade facilitation and transparency in government procurement have much to offer all WTO members and we will continue to urge other WTO members to agree to move to active negotiations on these.
The noble Baroness, Lady Rawlings, asked about the agriculture meeting. It did take place and we were present. My noble friend Lord Judd asked me about the development of policy in the UK. There is complete agreement across government departments on the priorities for Cancun. Indeed, the ministerial team and officials reflected that.
NePAD, which was raised by my noble friend Lady Whitaker and the noble Baroness, Lady Rawlings, is a mandated initiative of the African union. It is not a vehicle for lobbying on trade issues. However, we are already supporting existing groups that are best placed to provide a strong voice for Africa in lobbying on trade issues, especially the African group at the WTO.
I will write to those noble Lords if I have not been able to answer specific questions in the time available. In conclusion, all WTO members need to reflect on the lessons learnt at Cancun and commit to renewing political impetus to the round. Many noble Lords mentioned the importance of political will. Senior officials meeting in Geneva on 15th December must take action to move towards a successful and timely conclusion of the negotiations. All 148 WTO member governments have a responsibility to ensure that the officials are mandated to make the tough decisions to progress the range of issues that matter most to developing countries.

Health and Social Care (Community Health and Standards) Bill
8.34 p.m.
House again in Committee on Clause 6.
Baroness Barker 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
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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

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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 Noakes Baroness Noakes moved 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

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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
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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 Lord Clement-Jones moved Amendment No. 143:
After Clause 7, insert the following new clause—
"PILOT SCHEMES

(1) The first seven NHS foundation trusts to be authorized under section 6 shall be known as "NHS foundation trust pilot schemes".

(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) The criteria against which the independent evaluation will assess the pilot schemes shall be—

(a) the quality and effectiveness of the health care services provided by the pilot schemes;

(b) any changes to the range of services provided or patients treated by the pilot schemes since they were established;

(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;

(d) the impact of the pilot schemes on the speed and equality of patient access to NHS services;

(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;

(f) the success of the pilot schemes in promoting greater innovation in the delivery of healthcare services; and

(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) The results of the independent evaluation will be published in a report, which will be laid before Parliament by the Secretary of State.

(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) 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.
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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

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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 Noakes Baroness Noakes moved 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.
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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

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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 Noakes Baroness Noakes moved 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
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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

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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 Noakes Baroness Noakes moved 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
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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.

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

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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.
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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.

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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 Noakesmoved 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
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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

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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
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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 Noakesmoved 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,

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"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
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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.

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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 Noakesmoved 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.
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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

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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

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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
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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

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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 Noakes Baroness Noakes moved 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
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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

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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 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

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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.
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[Amendment No. 162 not moved.]
Earl Howe Earl Howe moved 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.

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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
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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

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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
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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.

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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 Barker Baroness Barker moved 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
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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

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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
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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

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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.
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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

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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.
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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 Noakes Baroness Noakes moved 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

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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
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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 Baroness Noakes moved Amendment No. 176:
Page 8, line 13, leave out subsections (2) and (3) and insert—

"(2) The trust shall have no constraints on its right to borrow except as outlined in subsection (3).

(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

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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
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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

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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
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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 Noakes Baroness Noakes moved 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

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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
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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.

  Northern Ireland: Dangerous and Exotic Animals
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  North/South Implementation Bodies; Final Accounts
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