§ 2 pm
§ Mr.Mark Hoban (Fareham)
Coming just a week before the Budget, this is a timely debate. Next week the Chancellor will no doubt stress how prudent he has been, how low Government borrowing is and how he is satisfying his golden rule. Yet there is strong reason to believe that he has been able to achieve that only through sleight of hand, by relying on accounting wheezes that have led him to be dubbed the Enron Chancellor.
What is it about the Enron scandal that can be applied to the Chancellor? One of the central aspects of the Enron affair was that the transactions that the company entered into were structured in such a way that liabilities were kept off its balance sheet, so its debts were much greater than the balance sheet showed. The unravelling of those structures led to Enron's collapse and to the phrase "Enron accounting" passing into the English language. Debts were kept off the Enron balance sheet by carefully constructing transactions so that they followed the letter of United States accounting rules. Therefore, although the economic and commercial reality was that the liability or the debt was Enron's, the legal structure said that it belonged to another entity; the accounting reflected the legal form rather than the economic or commercial substance of the transaction.
It is relevant to note that because UK GAAP—generally accepted accounting practice—requires the substance of the transaction, and not its legal form, to be reported, it is commonly held that Enron could not happen here, at least not in company accounts. In that context I want to look at two areas of the Government's accounting: the treatment of the £21 billion of debt from Network Rail and the obligations placed on the private finance initiative.
I see the hon. Member for Yeovil (Mr. Laws), a former member of the Treasury Committee, here today. He did an admirable job of questioning the Government and their advisers on the accounting that lay behind Network Rail. I want to focus on the evidence presented to that Committee.
The Government's accounts are audited by the Comptroller and Auditor General, Sir John Bourn, and are prepared under UK GAAP. In Sir John's view the Strategic Rail Authority is a Government agency, with a significant equity interest in and a dominant influence over Network Rail, so Network Rail's debts should be included in the Government's accounts and, therefore, in their total debt. However, the calculation of Government debt to be used in next week's Budget and in the Red Book is based not on those figures but on a different set of figures prepared by the Office for National Statistics. Curiously, Network Rail's debt is excluded from those figures, because for this purpose it is treated as part of the private sector rather than the public sector. Why is that?
The ONS takes a more simplistic view of Network Rail's status than the National Audit Office. Its view is that, given that the majority of board members of Network Rail are drawn from the private sector, Network Rail must be part of the private sector and thus its debt is private sector debt. Therefore, this year's borrowing requirement is £21 billion lower than it 287WH would have been if the NAO's view had been applied to that transaction. The evidence from the Treasury Committee illustrates the simplicity of the argument used to justify treating Network Rail as part of the private sector.
When the Treasury Committee questioned ONS staff, the following exchange took place. The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) asked:If the selection panel had happened to appoint 11 consultants from St. Thomas's Hospital, who are employees of the NHS. would that have transferred Network Rail from the private sector to the public sector?Mr. Robin Lynch, the head of national accounts at the ONS, said:In the sense that they are members of the public sector, yes, it would.To clarify the point, the hon. Member for Newcastle upon Tyne, Central went on to ask:You have told me quite clearly that the reason Network Rail is in the private sector is that the people whom the selection panel appointed happen to be employed by the private sector, but if they had happened to pick 11 consultants from St Thomas's Hospital instead of 11 whoever they might have been, then it would have been in the public sector because the people would have been employed by the public sector?Mr. Lynch replied, "That is correct."
The selection panel, appointed by the Government, chose people to be part of the board of Network Rail. However, because those people are employed by the private sector, not the public sector, Network Rail is, for the purposes of the ONS, included in the private sector.
Using the opportunity presented by the rules to take a simplistic view of control, the Network Rail debt has been excluded from the Government's borrowing requirements. It appears that, for the purposes of the Government's accounts, the NAO considered the substance of the relationship between the Government and Network Rail, but for the purposes of Government statistics and therefore the Government's debt figures, the ONS focused on the form, not the substance, of the relationship. That is a clear echo of the way in which Enron prepared its accounts.
What makes the situation look worse is Sir John Bourn's answer to a question posed by the hon. Member for Yeovil. Sir John said of that case thatit is the first one to my knowledge where you have had the running together of these different ways of looking at the matter".This was the first instance in which the ONS and the NAO disagreed about the treatment of an item for inclusion in the Government's accounts. We can speculate as to why that difference occurred, but I believe that it arose because the Government wanted the debt off their balance sheet, so that their borrowing numbers were lower. Rather like the Enron situation, the debt presented to the public showed a lower figure than the true extent of the Government's liabilities.
The other issue that troubles me is the private finance initiative. First, let me say that I support the PFI. It was, of course, a Conservative idea to use private sector finance for projects that would historically have been funded by the public sector. The Institute for Fiscal Studies summed up well the rationale for using PFI when it said in its "Green Budget" for 2003:The only economic rationale for using the PFI is that it is hoped it will offer better value for money. Despite the fact that the private sector faces higher borrowing costs, these are expected to 288WH be offset by its greater operating efficiency. If this holds, the private contractor can provide a given standard of public service at a lower cost, which will, all other things remaining equal, lead to lower levels of public borrowing.The costs of PFI projects are paid by the taxpayer, often through a unitary charge, and cover the ongoing costs of the operation of the facility, such as maintenance and the staff who operate the facility, as well as payment for the use of the facility—a form of rent or lease payment—and for the capital elements of the project, which may be a hospital, school or road. Those payments can stretch over 30 years and are disclosed in the Red Book, but disclosure is only part of the issue.
Let me return to the components of the unitary payment made under PFI. As I said, the Government pay for the use of the facility. I characterised that as rent, but equally it could be seen as a payment to acquire an asset, in the same way that we may choose to buy a car through hire purchase. At the end of the day, the car ends up with us. If the payments made under PFI are a form of finance to purchase the facility, the asset—the school, hospital or road—should be shown on the Government's balance sheet, as, crucially, should the debt financing its acquisition.
The Government will argue that the PFI payments are correctly treated and should not be deemed to be the repayment of borrowings or a method of finance. That is principally because they argue that the risk of ownership of the assets remains with the PFI operator. As a consequence, the assets and related debts required to finance those assets should remain on the PFI operator's balance sheet, not on the Government's balance sheet. That is another example of off-balance sheet financing.
Risk plays a pivotal role in the accounting treatment of PFI projects: who bears the risk depends on whose balance sheet the asset and the related debt are held on. A distinct flavour of the debate on 29 January about the Public Accounts Committee reports was that the risks were not transferred to the operator and that the public sector stands behind all these projects. My hon. Friends the Members for Tatton (Mr. Osborne) and for South Norfolk (Mr. Bacon) made comments along that line. If they are right, the justification for keeping those liabilities off the Government's balance sheet would be fatally flawed and the debt should be added to the total of the Government's liabilities. Government borrowing would increase, increasing the ratio of public sector debt to national income; the annual increase in borrowing would also be higher.
How much higher? It is hard to say. It depends on how one separates the various components within the unitary charge. The increase could be as high as the net present value of the stream of future payments on PFI projects, which is some £62 billion at the latest calculation. The IFS has looked at it differently. It says:On the basis of deals signed so far, public sector net debt at the end of March 2006 would be 3.8 per cent. of national income higher if all the capital spending from PFI deals signed so far had been carried out using conventional finance.The impact of the decision as to whether PFI projects should be on the Government's balance sheet is significant, as it will have an impact on some of those key borrowing numbers that the Chancellor will present in his Budget next week.
289WH I wonder whether the accounting attractions of PFI mean that as many projects as possible will be pushed down this route regardless of whether it is in taxpayers' interests. The Government will cite the public sector comparator as the benchmark to ensure that that does not occur. However, during the debate on the PAC reports, my hon. Friend the Member for South Norfolk quoted an example from the redevelopment of the main MOD building in which the public sector comparator was —746.2 million and the PFI price was —746.1 million. The project met the benchmark by —100,000. That has a degree of accuracy about it that looks slightly spurious.
Indeed, when one looks below the headline number and tries to understand how the public sector comparator was reached, one finds that the Government incorporated various risk factors, as well as the cost of construction. The interaction of the risk factors and the costs could lead to that public sector comparator being, not quite any number that one would want, but certainly one from a range of values. A cynical observer might say that given the pressure to keep a lid on Government borrowings, the calculations of the public sector comparators are subject to reiteration until the right answer is obtained. The impression—perhaps exaggerated to make the point—is that if a project cannot be financed through PFI, it will not go ahead, because the Government will be loth to increase their borrowing above the number predicted by the Budget.
I hope that my concerns about PFI are clear. The accounting for these projects is dependent on the risk being borne by the operator, and who bears that risk is a matter of debate and discussion. The pressure to restrict Government borrowing adds extra pressure, implicit or otherwise, to ensure that the public sector comparator is worse value than the PFI project and therefore that more projects are financed off the Government's balance sheet. The inclusion of PFI or any element of PFI on the Government's balance sheet would significantly increase the level of Government debt.
As I said at the outset, I am broadly supportive of PFI as a concept, but there are growing doubts about how it is being used in practice. It is not surprising therefore that there are increasing calls for an inquiry into its use. Indeed, the Labour party conference supported a motion in favour of an inquiry into PFI back in October.
§ Mr. George Osborne (Tatton)
As I understand the Labour party constitution, the conference can mandate the Labour leadership, and I believe that it mandated the leadership to conduct an investigation into PFI. Does my hon. Friend know whether the Government—of course, they are a Labour Government—have conducted that investigation into PFI or contacted the NAO, as the conference also mandated them to do?
§ Mr. Hoban
My hon. Friend makes an important point, and I am sure that the Financial Secretary will enlighten us about what the Government have done about the conference's call to investigate PFI projects.
290WH What is the correct name for the Chancellor? Is it the Enron Chancellor, or the iron Chancellor? He has been able to present himself as the iron Chancellor because he is indeed the Enron Chancellor, too.
§ Mr. Richard Bacon (South Norfolk)
While my hon. Friend is on the subject of Enron, I want to make a point. He has made powerful points about PFI; has he considered that the recent tendency of companies to go into the market to raise finance for PFI projects has included a worrying trend of failure to disclose the financial model? That increases the cost of borrowing more than would otherwise be the case—of course, we accept that borrowing will be higher. Ratings agencies, such as Standard and Poor's, have drawn attention to the fact that the opaque nature—the black box, as they call it—of many deals is actually proving a limiting factor in the market.
My hon. Friend has raised an important issue. As he says, the opaqueness of the information supplied to credit rating agencies will lead to an increase in the interest rates paid on the debt. Clearly, because the debt is financed through payments made under the PFIcontract, the taxpayer must be losing out as a consequence of that opaqueness. The black box approach works against the interests of taxpayers, rather than in their favour.
By putting the Network Rail liabilities off the Government's balance sheet, the Chancellor has been able to portray himself as prudent and cautious. By significantly increasing the scope of PFI, he has reduced today's borrowings, but he has mortgaged future revenues to pay for today's public investment. If he chose to finance the projects in a conventional way, and that was taken together with the debt of Network Rail and other contingent liabilities, Government debt could be increased by as much as £100 billion. Indeed, this year's borrowing requirement would be not £20 billion, but at least £41 billion, which would include £21 billion extra for Network Rail and an additional amount to cover the capital element of the PFI contracts signed this year.
Roger Bootle of Capital Economics has adopted another approach and valued the additional liabilities incurred by the Government at some £25 billion. He focused primarily on contingent liabilities and treated the Network Rail debt as a contingent liability, rather than an actual liability of the Government.
As the range of estimates indicates, there is a lack of transparency surrounding the treatment of the liabilities and commitments to which the Government have signed up. My hon. Friend highlighted that point when he talked about the opaqueness of the financing arrangements in relation to credit rating agencies. In light of that, it is ironic that transparency is one of the Chancellor's much vaunted principles of public finance. He says that transparency is important to an understanding of public finance, yet the presentation of the Government's current and future liabilities is, rather like Enron's, somewhat opaque. It is time that the true extent of the Government's exposure to those liabilities is made known to taxpayers and markets, so that we can all judge once and for all whether the right hon. Gentleman is the iron Chancellor or the Enron Chancellor.
§ Sir George Young (North-West Hampshire)
I commend my hon. Friend the Member for Fareham (Mr. Hoban) on his speech on this important subject and on initiating the debate. I want to step back to consider briefly three strategic issues that arise from his contribution.
First, there is what I call the profile of the problem. Although the question of what is or is not public expenditure concerns all Governments—the Conservative Government certainly grappled with what were then called the Ryrie rules—the problem is much more serious for a new Labour Government. Under a traditional Conservative approach, the philosophy was to disengage, divest control totally and put an industry wholly in the private sector, where it was neither funded nor controlled by the Government. It flowed from that that there was no question of any expenditure by the industry in question scoring as public expenditure. Thus, we do not have such debates in relation to BT, BAA, water or electricity.
Likewise, the problem did not exist for an old, traditional Labour Government. They wanted to control, and they wanted to fund. They were not bothered about borrowing or taxing—those were badges of honour—and the subject of my hon. Friend's debate also did not arise. However, there is a problem with new Labour, because it wants to control, but it does not want to fund. It wants to boast about taking Railtrack back into public ownership, but it does not want the cost to appear on the balance sheet. Hence, we have the problems raised by my hon. Friend.
An obsession with presentation is a second issue, which is peculiar to this Administration. There are two sides to the coin that we are debating—Government expenditure and Government income raised through taxes or borrowing. We have seen repeated announcements on public expenditure, including a sensational comprehensive spending review in which the same amount was counted three times. It was widely condemned at the time, but happily not repeated. On the other side of the coin are stealth taxes, and now we are seeing their brother—stealth borrowing. Stealth taxes avoided putting up headline tax rates, but achieved the same end by eroding allowances and by hitting indirect taxes and the council tax hard. That has been taken to extremes this month with the national insurance increase. The Government have nearly run out of runway on that.
Now there is stealth borrowing, which my hon. Friend described. The debt does not appear on the balance sheet, as far as the lender to the Government is concerned, but the Government are seen to be standing behind the transaction, as far as the contractor is concerned. I recently asked a contractor about Network Rail's credit rating. He replied that, initially, it was not that good. Now, the advice given to him by the professionals is that it is okay, because the Government would not let Network Rail go under. As my hon. Friend said, the action that secured that good credit rating does not appear as a Government liability.
My third point is that other UK institutions have been less fortunate than the Government when defining potential liabilities. For example, pension funds are applying new rules that oblige them to take a pessimistic 292WH view of their liabilities by crystallising them at a time when the stock market is low and by being obliged to increase employer and employee contributions.
The best parallel for the Government is what they are doing to local government. I do not know whether the Minister has had time to look at the Local Government Bill explanatory notes, but they deal with the local government borrowing regime. On clause 18, they say, regarding local authority companies:The present system ensures that authorities cannot evade the capital controls by operating through companies they own or influence. That broad principle will be preserved under the new system".That strikes me as a different regime from what my hon. Friend described. I refer to the note on clauses 7 and 8, covering credit arrangements:Credit arrangements (as defined in clause 7) will continue to be treated like borrowing under the new system ߪ The definition of credit arrangements is much simpler than under the present system, relying on the accounting concept of long-term liabilities".It appears that the Government have one rule for local government and a much more relaxed regime for central Government.
My final point is to ask what the point is in having rules—the sustained investment rule, the golden rule and the rest. They are there to convince the financial community that the Government are prudent, and to convince citizens that their Government are not overextending themselves. They are also there to establish the Administration's credibility. However, if one plays around with the figures, one may win the battle but lose the war. One may keep the figure within the limit that one has set oneself, but if that injures the rules, the trust sought in the first place becomes forfeit. The Administration's credit rating will be hit in the same way as if the figures put on the balance sheet had gone through the limits. Institutions such as the European Commission are now publicly questioning the management of our economy.
My message to the Government is that going through the procedures that we have just heard about is not worth the candle. Better to be upfront about it and to put the figures where they should be, as the financial community will come to exactly the same conclusion as it would have had the figures been concealed. It is not worth indulging in the charade that has been described to us this afternoon, and I hope that the Government bring it to a conclusion as soon as they reasonably can.
§ Mr. George Osborne (Tatton)
I join my right hon. Friend the Member for North-West Hampshire (Sir George Young) in congratulating my hon. Friend the Member for Fareham (Mr. Hoban) on securing this timely debate a week before the Budget. I also congratulate my hon. Friend on the convincing way in which he introduced the subject, covered all the bases and drew proper attention to the work of the Select Committee on the Treasury, which has been so important on this issue. He showed the extent to which some of the figures on which the Chancellor has built his economic forecasts are based on shifting sands.
In a sense, all Governments have unquantified liabilities. When I was a special adviser in the much-lamented Ministry of Agriculture, Fisheries and Food, 293WH we discovered that there was a link between BSE and human health, and within two weeks we had more than doubled the Department's spending, increasing it by £2 billion or £3 billion. We spent that money to prop up the British beef industry, which faced complete ruin. That was not a liability in law—there was no legal requirement to prop up part of the agricultural sector, but it was a requirement in practice, because the Government were not prepared politically to allow the farming industry to go to the wall. That was an unquantified liability for which we had to pay.
The foot and mouth crisis last year was also a good example of an unquantified off-balance sheet liability for the Government. They had not accounted for a foot and mouth crisis, but they had to bail out the farming industry again. A further example is that, after 11 September, they had to step in to prop up the airline industry for several weeks. It was impossible for the industry to obtain insurance, and the closure of UK airspace was bankrupting some airlines. Moreover, if, God forbid, there was a major terrorist incident in London, I have no doubt that the Government would step in to rebuild part of the city. Governments therefore have off-balance sheet unquantified liabilities, many of which will be unknown until they suddenly arise.
The difference, as my hon. Friend the Member for Fareham elucidated so well, is that the issues under discussion are quantified liabilities that we know about and that almost everyone believes should be on the Government's books. Among those who believe that are the Public Accounts Committee, of which I am a member, the Treasury Committee, of which I am not a member, and the Comptroller and Auditor General, as my hon. Friend mentioned.
Last month, the National Audit Office said that, unless at least one of those off-balance sheet liabilities is fully disclosed—namely the£21 billion owed by Network Rail—the Comptroller and Auditor General will not sign off the whole of Government accounts when they are first produced in two years' time. I suggest that that would be an embarrassment to the Treasury. It is certainly an embarrassment to the permanent secretaries of other Departments, such as the Department for Work and Pensions, when their accounts are qualified by the Comptroller and Auditor General. However, it would be a major embarrassment if the whole of Government accounts were qualified for that reason. Some have likened that to a company's auditor refusing to sign the "true and fair view" statement at the end of an annual financial statement.
I have had the pleasure of working with the Comptroller and Auditor General over the past couple of years. I read the other day in a newspaper report—I know that the Chancellor of the Exchequer is always assiduous in ensuring that his view is properly reflected in newspapers—that he is becoming increasingly irritated with the Comptroller and Auditor General. The report in The Daily Telegraph said:Mr. Brown is growing increasingly irritated with Sir John, who is 69 and has been Comptroller and Audit or General since 1988. The Chancellor is said to think he is 'going on for ever' but a spokesman for Sir John said he has 'no plans to retire.The Chancellor is famously frustrated by people who have no plans to retire. It is interesting that he is getting irritated by the Comptroller and Auditor General. 294WH However, as I am sure the Chancellor is aware, the Comptroller and Auditor General is beyond his grip; he is appointed by Parliament, and I am delighted that he has no plans to retire, because he is doing such an excellent job. It would be a tragedy if he retired before he had to sign off the whole of Government accounts.
Why does it matter whether these large off-balance sheet liabilities of the Government are off-balance sheet? Does it involve anything more than the political rough and tumble of fiddled figures? I suggest that it matters for three reasons. The first is the credibility of key economic indicators on borrowing and public debt. Off-balance sheet liabilities add up to more than £100 billion. There are £73 billion for private finance initiative contracts; £7.5 billion for public-private partnerships for the London underground and for the letters of comfort that have been issued in that regard; and £21 billion for Network Rail borrowing.
Those are real liabilities, because if Network Rail could not honour its debts, the Government would have to step in. If the public-private partnerships in the London underground failed, the bidding companies have letters of comfort that they could call on. If the Government are locked into payments on a PFI project, they will not let it fail, and the Public Accounts Committee has seen several instances of that. The Royal Armouries museum in Leeds, which we examined in some detail, is a very good example. The effect of £100 billion off-balance sheet liability would be considerable if it was disclosed by the Government. I am assured by my hon. Friend the shadow Chief Secretary to the Treasury that net debt would rise from about 30 per cent. to more than 40 per cent. if off-balance sheet liabilities were on the books. That is significant when we judge how the Chancellor is managing the economy and public debt.
The second reason is that it is important to know where a Government's true responsibilities lie. The Select Committee on Transport, of which I am a member, has looked at Network Rail and found that there are huge problems with it. There are no proper financial controls, and it is managed by a committee of more than 100 people. It is difficult to manage a Cabinet committee of 20 people, yet Network Rail has more than 100 people, representing the stakeholders in the rail industry, running it. Its running costs are £6 billion more than expected, and they are stopping the improvements to track and the upgrades that we were promised.
The buck stops with the Government. A press notice from the National Audit Office gave the view of Sir John Bourn, the Comptroller and Auditor General. It said:The Government is effectively providing security for the providers of debt finance to Network Rail and is acting as the lender of last resort in the event of financial difficulties. Therefore the Government is the party bearing the risk that would normally be borne by equity capital.It is important in a democracy to know where responsibilities lie. If Network Rail went belly up, the Government would have to step in. We should know that in advance, and we should know what the Secretary for State for Transport is doing about Network Rail.
The third reason, which was touched on by my hon. Friend the Member for Fareham, is PFI. It is important to have proper off-balance sheet accounting, because otherwise the nature of PFI will be distorted. When PFI 295WH was originally conceived under a Conservative Government, it was intended to be a means of bringing private sector innovation into the public sector. It was intended to be a means of incentivising risk and of transferring the risk of delivery from the public sector to the private sector. That was how the scheme was devised. However, a public authority, be it a Government Department or a council, will not now go down the PFI route for any of those reasons. Public authorities will choose PFI because they know that that is the only way that they can get their projects past the Treasury, and the Treasury can relax because the projects will not appear on its books.
§ Mr. Hoban
On that point, I have been told in conversations with members of my local education authority about the need for a new secondary school to cope with demand in an area of rapidly growing population. They have been advised that they would not be able to get the funding from the Government for a new school: PFI money would be required to build it. That example illustrates my hon. Friend's point.
§ Mr. Osborne
My hon. Friend is absolutely right.
Everyone knows that, for spending Departments and local authorities alike, the only game in town is PFI. The trouble is that they go down the PFI route not because they want the benefits of PFI nor because their projects are necessarily suited to PFI. They do not want to bring in private sector innovation, and in their heart of hearts they do not really want to transfer risk. They do not have the emotional commitment to PFI projects, which, as the Public Accounts Committee knows, is necessary to make them work.
As my hon. Friend said, such bodies use PFI because it is the only way to get a project completed. The result is that many drawbacks of PFI are being ignored. Many projects unsuitable for that route are being carried out under PFI, and that is having a hugely distorting effect on the PFI scheme. As someone who supports the scheme, I think that that is a tragedy.
The Government's off-balance sheet accounting ruses have had an effect. They are designed to do only one thing, which is to make the Chancellor's management of the economy look more prudent than it is. As I said, it undermines the credibility of key economic data. It hides the true extent of the Government's responsibilities, and it distorts PFI projects. It is the economic equivalent of dressing mutton as lamb. The problem is that the taxpayer is paying a very high price.
§ Mr. David Laws (Yeovil)
I am pleased to take part in this important debate. I add my congratulations to those expressed by other hon. Members to the hon. Member for Fareham (Mr. Hoban) on securing a debate and on choosing this subject—and on having the good fortune to raise it only a week before the Budget. It is anticipated that the Government will continue to have problems with public sector borrowing, which makes the subject particularly topical.
I also congratulate the hon. Member for Fareham on identifying the two salient issues that we need to consider today—accounting for PFI transactions and the recent accounting changes for Network Rail, and the 296WH wider implications of that for other public sector entities such as foundation hospitals, a problem that may arise in the coming months. I also welcome the comments of other Members, including those of the right hon. Member for North-West Hampshire (Sir George Young), who said that the issue is becoming increasingly important because the traditional boundaries between the private and public sectors are becoming blurred. That point was raised in correspondence by Sir John Kingman of the Statistics Commission when trying to bring to a conclusion the unsatisfactory accounting issues surrounding the debate between the Office for National Statistics and the NAO over Network Rail.
I congratulate the hon. Member for Tatton (Mr. Osborne) on bringing out the three salient issues that we need to address. The first is whether the Government's accounts are credible in their treatment of many items. The second, in respect of entities such as Network Rail, are the blurred responsibilities that arise as a result of the Government's attempts to keep some of those bodies in the public sector but at arm's length for accounting purposes. Last are the important questions that he raised about whether PFI is securing better value for money for parts of the public sector, or whether it is being used simply to massage particular debts off the balance sheet of Government and local government.
I want to cover those three issues. We need first to deal with the accessibility and accuracy of Government information in respect of off-balance sheet liabilities and the implications for Government borrowing. The second is how the Government are accounting for the achievement of value for money by the PFI scheme for different parts of the public sector. The third is the question of the Government's honesty and transparency about the debts of entities such as Network Rail.
Sitting suspended for a Division in the House.
§ Mr. Laws
First, I want to cover the accessibility and accuracy of information on the Government's off-balance sheet liabilities. Each year, particularly under this Government, and as we shall witness next week when we receive the documents, the Budget bundle has become larger and the Red Book has increased not only in cost but in size. Unfortunately, that does not necessarily mean that the information is more accessible or that all we need is included.
Will the Minister consider how information on off-balance sheet liability is displayed in the Red Book in relation not only to PFI transactions but to contingent liabilities? She will be aware that the Treasury Committee's recent report on the classification of Network Rail recommended that contingent liabilities should be reported in the Red Book. At present, they are disclosed annually in the Consolidated Fund and national loans fund account supplementary statements—documents that are not widely read, either in this place or outside it. They are usually released to the House on the last sitting day before Christmas, which is a time not best designed for them to catch the eye.
297WH Perhaps that did not matter so much when off-balance sheet liabilities were not as significant as they are today, but, because of the Government's increasing use of such contingent liabilities, it is more important that they be reported, not merely in musty Government documents that are rarely looked at —[Interruption.] I am surprised that the Minister laughs. I do not think that many Members of Parliament have read the documents.
§ The Financial Secretary to the Treasury (Ruth Kelly)
I am sure that the hon. Gentleman has.
§ Mr. Howard Flight (Arundel and South Downs)
As the hon. Gentleman will have noted, there was no reference in the Consolidated Fund document to Network Rail or any matters that we have discussed, because there was no up-to-date information when it was published.
§ Mr. Laws
I agree with the hon. Gentleman. I hope that the Minister reconsiders the matter, even though the Government's response to the Select Committee report appeared to reject the proposal that a summary of contingent liability should be included in the Red Book. I am reminded that that was a unanimous recommendation by an all-party Committee with a Labour majority.
If the Government's fiscal rules matter as much as the Chancellor suggests, and if it is important that we monitor the debt-to-GDP ratio in the way that he has suggested is fundamental to his fiscal rules, how we report our debts and liabilities is important. The Government should take issues such as PFI and contingent liabilities much more seriously in their Budget documents, rather than relying on people seeing documents that are inaccessible and issued at an inconvenient time.
The second issue has been touched on in relation to PFI by a number of speakers, including the hon. Member for Tatton. If PFI is genuinely being used to transfer risk in a way that represents better value for money for the taxpayer, any sensible person should welcome it. However, there has been a concern for some time that Governments and public sector entities have sought to use PFI not because it represents better value for money but simply to get debt and Government liabilities off the balance sheet.
The Institute for Fiscal Studies covered the issue in some detail in its "Green Budget" before the 2002 Budget. In particular, the IFS looked at the proportion of capital spending in all Departments and public sector entities accounted for by PFI. It found vast differences between the former Department of the hon. Member for Tatton, the Ministry of Agriculture, Fisheries and Food, which at that stage was funding no capital 298WH expenditure through PFI, and local government, which just over a year ago was funding about 38 per cent. of its capital expenditure through PFI.
The IFS asked itself whether the excessive use of PFI by local authorities compared with Departments reflected a peculiarity of local government expenditure that made the use of PFI preferable or whether it simply reflected the fact that capital constraints on local government may be more serious and effective than those on some Departments.
The IFS, in its "Green Budget", gave this summing up:The aim of meeting the Chancellor's fiscal rules should not produce an incentive to pursue PFI investment for 'balance sheet' reasons—the golden rule explicitly allows borrowing for investment".So, there is still scope, even under this Government's fiscal rules, to expand public sector investment without breaking the golden rule. If we are finding that particular public sector entities are using PFI simply to get debt off the balance sheet, because the alternative is not practical, we may be getting bad value for Government money as deals are being skewed to deliver PFI solutions when the alternative of conventional public sector debt could be cheaper.
I have been approached several times by people from local government in the Somerset area and close by, who have expressed their concern about some PFI transactions in which they have been involved. They have formed the impression that the Government and those responsible for policing PFI transactions have been determined to ensure that the public sector comparator results in the PFI solution being chosen, even if, in their view, it is of dubious value for money compared with conventional finance.
The third issue is Government honesty and transparency in classifying new entities, particularly in respect of Network Rail. Perhaps we shall see the mirror image of that problem with foundation hospitals, because the Chancellor seems to be leading the ONS to a different solution from the one it was led to in the case of Network Rail. Commentators in the City and elsewhere were universally scornful of the ONS decision to classify Network Rail as outside the public sector. The hon. Member for Fareham was right to draw attention to the extraordinary exchanges that took place in the Treasury Committee hearings, in particular between the hon. Member for Newcastle upon Tyne, Central (Mr.Cousins) and officials appearing before the Committee, who were asked why the ONS had decided to classify Network Rail in that way. Essentially, it came down to the fact that the board of directors were chosen as individuals who could be regarded as representing the private sector or household sector, rather than the public sector, even though it is clear that the entity that stands behind the debts taken on by Network Rail can only be the taxpayer. The taxpayer is assuming that risk.
Many members of the Treasury Committee, representing all parties, shared the frustrations that were clearly experienced by the Statistics Commission during the tussle between the ONS and the NAO over the classification issue. I draw the Minister's attention to a letter from Sir John Kingman of the Statistics Commission to Sir Andrew Turnbull at the end of November 2002, in which Sir John says: 299WHAs you know, the Statistics Commission has been concerned for some time about the need for greater transparency over Network Rail. We believe that Parliament and the public should have access to clear, simple and consistent information.Sir John goes on to refer, as the right hon. Member for North-West Hampshire did earlier, to the issue's growing significance for the Government:In modern society the boundaries between the public and private sectors are complex and the rules and criteria, which served in simpler times, may not now be sufficient to provide the full picture.The hon. Member for Fareham rightly picked up on the substantive point raised by Sir John Bourn when he appeared before the Treasury Committee. Sir John noted the proud UK accountancy tradition of giving primacy to substance over form, and it is clear that the NAO has done so in dealing with Network Rail, because it sees the company's debts as essentially public sector liabilities for which the taxpayer ultimately bears the risk.
§ Mr. Osborne
Although it pains me to say so, is not the Chancellor right and the Secretary of State for Health wrong about foundation hospitals? How they will be set up means that any debts they run up will be Government debts. The Treasury therefore has a legitimate interest in having some control over them. If they were set up differently, it would be a different story.
§ Mr. Laws
The hon. Gentleman makes an excellent point, but he tempts me on to the final page of my speech. If I may, I shall return to the issue in a moment.
Sir John Bourn's key point was that public sector accounting must put substance before form. The ONS, whether or not it has correctly interpreted European accounting standards, has come up with a solution that seems to satisfy the Government and may satisfy the technicalities of the relevant European regulations, but is completely out of keeping with the tradition of putting substance before form. The proposed solution gives the impression that what are essentially public sector debts, public sector liabilities and contingent liabilities are off the public sector balance sheet when, clearly, they should be on it.
As the Minister knows, the Select Committee report raised several other serious issues as regards Network Rail, not least how advice was sought from particular individuals about the company's classification. I return to the point that it was particularly unwise of ONS officials to take "independent" accounting advice on the issue from the head of accountancy at the Department for Transport. When such transactions are considered for other public sector entities, I hope that the Government ensure that the accounting advice offered to the ONS and others is genuinely independent of Departments with a clear interest in the conclusions to be reached.
To return to the point raised by the hon. Member for Tatton, it seems that there could be a rerun of the Network Rail issue in the context of foundation hospitals. Given the elegant way in which the Government managed to move Network Rail off the public sector balance sheet, one can imagine how easy it would be to set up similar structures for foundation hospitals. A series of individuals could then come forth from the private sector. Indeed, they might even be public sector workers acting in a private capacity, 300WH judging by the exchanges in the Select Committee. Suddenly, a proportion of NHS capital expenditure for foundation hospitals would miraculously disappear from the public sector balance sheet.
That is a tempting approach, and it would no doubt meet the standards applied by the ONS to Network Rail if one went about it in the right way, but in this instance we find the Chancellor of the Exchequer on the opposite side of the argument. Instead of being happy to facilitate the process of moving debt off the balance sheet, as we discussed in the context of Network Rail, he seems determined to block the efforts of the Secretary of State for Health, who wants to give foundation hospitals more flexibility in terms of their funding, rather than relying on central Government controls and insisting that borrowing be reported in the public sector.
It was interesting to see the chief economic adviser to the Treasury give evidence to the Treasury Committee on the Budget recently. He made patently clear the Government's view that foundation hospitals are in substance part of the public sector, and that therefore their debt must count against the Government's fiscal rules and against the growth and stability pact. It is extraordinary that the Government expect us to believe in two different models of public sector debt accountability for two potentially different organisations.
Returning to the point that the hon. Member for Tatton made, I have some sympathy for the Secretary of State for Health in this debate. For too many years. Governments of all parties have been overinclined to micro-manage such things as public borrowing and local organisations from Whitehall, instead of giving local bodies greater flexibility to set their own priorities and determine the debt that they can take on. Perhaps that is one reason for local authorities being so dependent on PFI, which accounts for 38 per cent. of their capital expenditure. One does not find such dependence in countries where local and regional government can borrow locally.
§ Mr. Osborne
That trend began under Lloyd George, a Liberal Chancellor, with his national insurance scheme.
§ Mr. Laws
I take responsibility for many things, but not for all the policies that Lloyd George pursued. He had some extremely good policies, but he went off track during the latter part of his career, just as the Conservative party has in some respects gone off track recently.
The argument between the Chancellor and the Secretary of State for Health is ongoing, as is shown by the revelation that Treasury officials have written to the ONS for clarification of its views on foundation hospitals. I hope that the ONS has written back. Perhaps the Minister can update us on the reply and say whether the ONS sides with the Treasury or with the Secretary of State for Health. I hope that through that debate we can consider how to give local authorities and other public sector entities more power to raise capital within overall prudential guidelines that take into account their assets. and not fall back on the centralised control over capital expenditure that has adversely affected the country for so long and has pushed local government into, potentially, quite expensive PFI borrowing.
301WH We are looking for additional transparency and information from the Government on those important issues, and more consistent accounting rules between such entities as foundation hospitals and Network Rail. I hope that the Minister sheds light on the important issue that the hon. Member for Fareham has raised in today's timely debate.
§ 3.7 pm
§ Mr. Howard Flight (Arundel and South Downs)
May I add my congratulations to my hon. Friend the Member for Fareham (Mr. Hoban) on securing this important debate? I praise the excellent contributions from my right hon. Friend the Member for North-West Hampshire (Sir George Young), my hon. Friend the Member for Tatton (Mr. Osborne) and the hon. Member for Yeovil (Mr. Laws). I also apologise to the Financial Secretary, who might have other things on her mind, but who now has a fair barrage of arguments to answer.
The Government would be wise not to duck the issues on such crucial territory. There is no case to argue for greater transparency in the private sector, to which Higgs and the accounting reforms refer, when the public sector and the Government could do with a great deal more transparency in relation to such crucial matters. As my hon. Friend the Member for Fareham pointed out, Enron accounting is the exploitation of accounting rules to structure transactions so as to keep liabilities off-balance sheet, rather than showing the true substance. That is the essence of Sir John Bourn's point.
At the end of the day, the accounting rules, which are debatable, must be dealt with. However, I suggest that one way to ensure transparency and integrity would be for the Red Book to set out clearly the total off-balance sheet liabilities. That way, although the Chancellor could pretend that the figures were as he reported them and not off-balance sheet, what was off-balance sheet would be made absolutely clear. The people who buy Government gilts, and those who are looking to Government credit and borrowing ratios could judge for themselves.
As my hon. Friend the Member for Tatton pointed out, the Opposition do not oppose PFI. We believe that, in most cases, the private sector does things better than the public sector. Our objection is to the Government's prostituting of the PFI principle. PFI exists, as has been argued, to get things done better in the private sector when it pertains, but it has been used to force public sector investment off-balance sheet as much as possible.
We have referred to some £100 billion in total off-balance sheet, and arrived at that figure by considering the three areas, which, as has emerged from the debate, are quite separate. First, allowing for new PFI deals made this year, and for the fact that the figures in note 19 of the Red Book cover only 25 years, whereas PFI contracts are typically for 30 years, the current total liabilities for PFI are about £115 billion. The Government could negotiate a sum with a bank to remove those liabilities at their current value if they so wished, discounted, arguably, at today's interest rates. Too high a rate of interest would give a total of some £75 billion.
302WH Secondly, there is Network Rail's £21 billion liability, to which I shall refer later. Thirdly, there are the PPP deals—the new category of PFI. One often concludes that the Government want to privatise fully, and PPP deals are the nearest that they can get to doing that. However, such deals are deeply flawed because the principle of PFI is to transfer the operating risk as far as possible. With PPP deals such as that for the tube, there is no fundamental transfer of risk when the funds can be raised only on the back of Government letters of comfort or guarantee. When I last looked at the issue, the tube guarantees on money drawn amounted to £4 billion. That figure will rise to £15 billion throughout the whole phase of the tube.
§ Mr. Flight
Perhaps the Minister can show me another time where it is on-balance sheet. I will be delighted if she is right, but it was certainly not on-balance sheet when the deal was signed.
One can argue the figures in several ways. As has been said, Roger Bootle examined the capital figures for PFI, although they are not quite what he thought they were. Some £100 billion is now off-balance sheet. Since 1996, finance for the total PFI liabilities has approximately doubled.
I shall make some specific points about PFI. My hon. Friend the Member for Fareham mentioned Sir John Bourn's criticism that PFI rules dictate that, on principle, accounting should be on-balance sheet when the Government acquire a major property through a hire purchase arrangement that is analogous to a financial lease. However, there is something called the 90 per cent. guideline, which has served as a way of keeping it off-balance sheet. At the very least, the rules should be clarified, and I am pleased to note that the Accounting Standards Board is in the process of doing that. I understand that that will result in the need for several PFI deals to come on-balance sheet.
The joke of the public sector comparator has already been mentioned. Last year, I made the point that using a 6 per cent. discount rate was nonsense given prevailing rates of interest. I was interested to note that the rate had been reduced by 3.5 per cent. That news was slipped out over Christmas, but I thought that the point had at least been acknowledged. When I read further, however, I found that even more latitude had been given to those involved to use in whichever alliances they wanted to use it. The truth is therefore that there is no meaningful public sector comparator. Although I admit that it is difficult to achieve objectively, it is lacking in transparency and integrity to claim that there is a process when it does not exist in reality.
PFI has worked better in some areas than in others. It has worked well in hospitals and prisons, but has been a disaster in information technology. Others have raised the issue of the ridiculous legal costs that are being incurred in many PFI contracts, especially in the Treasury and the Ministry of Defence. As my hon. Friend the Member for Fareham said, there are criticisms that monolined bond documents do not contain all the information that they should; the professional costs and other legal charges involved have 303WH been admitted. In three years' time, when we are back in power, we will have a considerable economic mess to sort out in respect of PFI.
I want to complete the story of Network Rail, because there will be whole of Government accounts next year. Sir John Bourn has agreed that, this year, the Strategic Rail Authority and Network Rail accounts will be consolidated into the SRA accounts, and that there will be notes about contingent liabilities in the Department for Transport accounts. Next year, the SRA and Network Rail will be consolidated into whole of Government account figures. However, there is no agreement that they will still be included in the Red Book figures. Technically, it turns on whether the SRA and Network Rail accounts are consolidated into the Department for Transport accounts. Sir John Bourn feels passionately that they should be so consolidated under accounting standards FRS 2 and 5. As has been said, the principle is that the Government clearly have a controlling equity interest. If, as is expected, Sir John Bourn wins his accounting argument, it will blow out of the water the arguments advanced by the ONS and Len Cook—to which the hon. Member for Yeovil referred— that the directors really control the business even though the NAO regards that as mythology. Sir John has made it clear that he will not sign off the accounts if he does not believe that the accounting standards have been upheld.
I had a lengthy discussion with the NAO on foundation hospitals. My understanding is that, if a foundation hospital has the power to raise money without Government guarantee or letter of comfort and it is structured to run its own affairs, there is a perfectly proper argument that it should not be on-balance sheet. The NAO's rulings are common sense. If a public sector entity acting on an independent basis raises money without Government guarantee and it gets into trouble, it will take the administration route like the public sector. It is perfectly right and justified that it should not be on-balance sheet. However, with Network Rail, the Government have tried to have their cake and eat it and have been universally condemned.
I understand that the Government are committed to addressing unfunded public sector employee pension liabilities under FRS 17. On the basis of their valuation, that will show an unfunded liability of about £400 billion, which will be in next year's whole of Government accounts. I will be pleased if the Financial Secretary can confirm that that information will be available.
My colleagues have put all the key points and so I close by simply saying that this is, in essence, about transparency and integrity. There will be arguments about accounting rules, but if the information about the contingent liabilities on the PFI deals that the Government have entered into is easily available—be that in full clear notes in the Red Book rather than in the balance sheet—everyone can read it and come to their own conclusions. If the Chancellor does not make that information available and then forces as much as possible off-balance sheet, he will be presenting figures with a lack of integrity that will return to haunt him.
§ Mr. Bill O'Brien (in the Chair)
Because of the time taken for the Division, this debate can continue until about 3.40.
§ The Financial Secretary to the Treasury (Ruth Kelly)
I congratulate the hon. Member for Fareham (Mr. Hoban) on securing the debate. I listened with interest to various contributions, but I found some of the charges against the Government extraordinary, and some of the proposed remedies fringed on the absurd. One suggestion was to abandon independent accounting standards, which are widely regarded as being at the forefront of international best practice and accepted as such within the private sector. Other suggestions contradict the findings of the Comptroller and Auditor General.
Having said that, I am pleased to be given the opportunity to dispel some of the myths that have developed about the robustness of Government accounts. I am pleased that the hon. Member for Arundel and South Downs (Mr. Flight) recognised the role that accounting standards have to play in this area. The United Kingdom is one of the few countries in the world where the Government are required by statute to report their liabilities, assets and all other key financial information in the same way as companies are expected to do.
The Government Resources and Accounts Act 2000 requires the accounts of Departments and those for the whole of Government, as and when they are developed. to comply with UK generally accepted accounting practice, or GAAP. adapted only as necessary to reflect the public sector context. That follows the commitment made by the Government in the code for fiscal stability in 1998 to follow best practice accounting methods, and an even earlier commitment by the previous Administration to adopt a resource accounting and budgeting approach for the planning and accounting of the costs of resources consumed by Government.
It is also worth stressing that the Government are working hard further to improve their standards of accounting and accountability through the development of whole of Government accounts. That is a complex task that will take a number of years to complete. The publication of the whole of Government accounts will be an important landmark in fulfilling the commitments in the code for fiscal stability. For the first time, we will have GAAP-based accounts for the whole of the public sector on a consolidated basis. Whole of Government accounts will set a new standard in transparency in governmental financial reporting. On current plans, we aim to publish whole of Government accounts for 2005–06, with a consolidated central Government account being published for 2003–04 as an interim stage, again on a GAAP basis.
The plain fact is that Government accounts must comply with GAAP and the accounting standards developed by the Accounting Standards Board. Enron was, of course, supposed to comply with US GAAP and often did not. In the UK, any adaptations from GAAP are required to pass a number of important hurdles. First, the Government are required by statute to take advice from an independent advisory board—the Financial Reporting Advisory Board. The board's terms of reference require it to aim to ensure that the Government's accounting guidance follows GAAP and that any departures or modifications are fully explained and justified. Under the chairmanship of Elwyn Eilledge from the private sector, the board's membership 305WH represents a range of key interests, including the Accounting Standards Board and the National Audit Office. The FRAB reports annually to Parliament on its activities and can highlight any instances of the Treasury not following its advice. To date, that situation has not arisen.
Secondly, all Government accounts are audited by the independent Comptroller and Auditor General on Parliament's behalf. The CAG can and does qualify his audit opinion on the accounts of a Government body if he feels that the accounting guidance has not been complied with, or if in his opinion the accounts do not represent a true and fair view. In his general report for 2001–02, the CAG welcomed the significant improvement in the truth and fairness of departmental accounts, as represented by the results for 2001–02. A number of departmental resource accounts still have an audit qualification, but the Government are working hard to secure further improvements in the quality of accounts for 2002–03 and future years. It is important to bear all those considerations in mind.
§ Mr. Flight
Will the Minister confirm that one objective of whole of Government accounts is that what is shown in such accounts should essentially be the same as what is shown in the Red Book?
§ Ruth Kelly
No, they are compiled on different bases. I shall come in due course to precisely how the national accounts are calculated. To answer a previous question asked by the hon. Gentleman, I can confirm that they will show public sector pension liabilities in their fullest form, so he can be reassured on that point.
Let me deal with some of the points raised in the debate. I accept that accounting for PFI, PPPs and other complex transactions has often been controversial, but I do not accept that PFI and PPPs exist simply to move transactions off-balance sheet. That is not the case. The key question in considering any PFI project is whether it represents value for money. Balance sheet issues are irrelevant to that decision.
PFI transactions are accounted for in accordance with their substance. In accounting terms, that substance is determined by following the overriding principles set out in FRS 5, as developed by the independent Accounting Standards Board. The Government follow application note F to FRS 5 in accounting for PFI, supplemented by the Treasury taskforce technical note, which the Treasury discussed and cleared with the ASB. As a result, we have seen a number of significant PFI transactions in which the assets are on the public sector balance sheet—indeed, that is increasingly the case. All the major English prisons, most road schemes and the tube PPP are on-balance sheet.
In considering the appropriateness of accounting for PFI, I again draw right hon. and hon. Members' attention to the CAG's general report for 2001–02, which was published recently. It makes it clear that where the CAG—who, let us remember, is independent— 306WHconsiders that the liabilities arising from financing arrangements are not correctly reflected in the financial statements of the bodies that he audits then he will qualify his opinion and report to Parliament accordingly. He has not yet had the need to do so.
§ Mr. Hoban
Will the Minister recognise that the CAG's report also stated:Notwithstanding the guidance on accounting for PFI programmes ߪ the National Audit Office has noted some apparent inconsistencies in accounting treatments applied to projects in different parts of the public sector. This may have an impact on Whole of Government Accounts incorporating the local authority and health sectors"?She paints a rosy picture of the application of accounting standards and guidance, but will she recognise that there are many grey areas, and that the CAG has highlighted the way in which those standards have been applied inappropriately in some areas?
§ Ruth Kelly
No. I do not think that the CAG said that standards have been applied inappropriately; he said that there is room for increased sophistication in how particular assets are classified, for example. The ASB is considering how a more sophisticated approach could be applied in future. Hon. Members have accused the Government of using PFI as a tool for moving things off-balance sheet. I would say that the use of the public sector comparator and the discount rate that applies are completely irrelevant to the accounting treatment of a PFI project. The comparator is used purely to determine whether a PFI project provides value for money.
§ Mr. Osborne
I am not sure that the Minister believes what she is saying. She knows that PFI is the only game in town, as evidenced by the 121 PFI contracts that the Public Accounts Committee has considered and the words of the permanent secretaries from spending Departments. All those to whom we have spoken say that if one wants a project to get past the Treasury, that is what one has to go for. I fear that either she has not looked at what the spending Departments are doing, or she is just reading what Treasury civil servants put in front of her.
§ Ruth Kelly
I am certainly not doing that. I have looked at the comprehensive NAO report on PFI procurement, which shows that PFI revolutionised public sector capital procurement—before PFI, 70 per cent. of projects were late and 73 per cent. over budget, but under PFI the situation was dramatically reversed: 76 per cent. of projects were on time and 78 per cent. within budget. What is more, where projects were not delivered on time the private rather than the public sector bore the cost.
Let me turn to contingent liabilities, the other major matter that has been discussed. Another myth that has grown up is that the Government are trying somehow to 307WH hide contingent liabilities off the balance sheet. Again, let me point out that the Government follow independent accounting standards—in this case, FRS 12 in particular—in judging whether a liability is contingent.
§ Ruth Kelly
I shall come to the accounting treatment of Network Rail after I have developed my argument on contingent liabilities. Under FRS 12, a liability is contingent if it is dependent on uncertain future events, cannot be estimated with sufficient reliability or is likely not to be called. If a liability satisfies that definition, it will be treated as contingent and so will not score as expenditure or borrowing.
Exactly the same treatment would apply in the private sector. Again, the treatment is subject to independent audit by the CAG. I should also stress that the Government adopt full transparency in disclosing contingent liabilities. They are fully disclosed in the notes to departmental resource accounts. In addition, Departments report contingent liabilities to Parliament if statute requires it or, if they are non-statutory, when they are over £100,000 or outside the normal course of business.
As the hon. Gentleman has already told us, a list of contingent liabilities reported to Parliament can be found in the annual supplementary statement to the Consolidated Fund and national loans fund accounts. He claims that nobody reads those, but I suggest that if he makes his case coherently, people will start to do so with more interest. Comprehensive information on contingent liabilities will be published in the whole of Government accounts. I suggest that he wait patiently for the development of those accounts.
§ Ruth Kelly
I shall not comment on when the interim central Government accounts will be in place. When they have been developed for the current financial year, they will be the best source for anybody seeking a consolidated picture.
I turn to Network Rail. A lot has been said about it, not least in the Treasury Committee report published in January. It is important to remember when considering Network Rail that we are dealing with two different regimes, the GAAP-based accounts, prepared by Departments and other central bodies, and the national accounts, which are compiled by the independent ONS, following international rules for the compilation of economic statistics. We are required by EU regulation to use national accounts for economic statistics reported to the European Commission.
The CAG and the national statistician specified in their joint statement last October the different bases on which they had reached their different judgments about the classification of Network Rail. That statement made it clear that the financial statements of central 308WH Government bodies and the national accounts are prepared for different purposes and under different sources of guidance.
It is not the case that the Government and the CAG are somehow taking different positions. On a GAAF' basis, Network Rail is consolidated into the accounts of the Strategic Rail Authority. In 2003–04, the SRA will be consolidated into central Government accounts,. That is entirely consistent with the CAG's view. It would be wrong for the Government somehow to override the decision of the ONS. As the Government made clear in their response to the Treasury Committee report, it would be inappropriate for the Government to seek to align the different positions of the CAG and the national statistician. The Treasury will work with the ONS to ensure that the whole of Government accounts include a full and transparent reconciliation with relevant national accounts data.
In the remaining minutes I will address a few of the issues that have been raised in this debate. The right hon. Member for North-West Hampshire (Sir George Young) argued that there is a different regime operating for central Government and for local government. He believes that central Government are seeking to control local government in a way that has not happened before. However, I would argue that it is not a case of imposing one rule for local government and another for central Government. The aim is to make both GAAP-compliant. The aim of the accounting treatment should be to bring it up to what is considered to be international best practice.
Foundation hospitals have also been raised. I shall not today make an announcement on their treatment to the hon. Member for Yeovil (Mr. Laws). However, the ONS is looking at the classification of foundation hospitals for national accounts purposes. No decision has yet been reached. The Treasury is also looking at their classification for the whole of Government accounts. I assure the hon. Gentleman that we will look at the substance, not the form, of the arrangements in deciding their classification, as we have on other issues.
This has been a valuable debate. I am glad that at least the odd Member has recognised the role of accounting standards. The Government are at the forefront of international best practice in applying them. We are certainly not in the business of hiding liabilities, or of indulging in dubious accounting practices. Our commitment to best practice accounting is perhaps most clearly demonstrated by my response to the remarks of the hon. Member for Arundel and South Downs. The Government will, from this year onwards, recognise a total provision of £350 million for unfunded public sector pension scheme liabilities, in line with the Accounting Standards Board FRS 17. In that respect, the Government will be ahead of private sector practices.
§ Ruth Kelly
I should have said billion.
In summary, the approach that we have taken will ensure that our accounting for Government activities remains amongst the best in the world. That has to be in the interests, not only of Government and Parliament but of the millions of taxpayers and citizens whom we represent.