Westminster Hall Sitting of 17 October 2001

Preamble
[SIR MICHAEL LORD in the Chair]

Equitable Life
Motion made, and Question proposed, That the sitting be now adjourned.—[Angela Smith.]
9.30 am
Richard Ottaway: It is a matter of profound disappointment that, yet again, Opposition Members must raise the matter of Equitable Life. The only occasion on which the Government have voluntarily made any pronouncement was when they launched their public inquiry, having previously said that they were content with the inquiry being conducted by the Financial Services Authority. The matter concerns not just a few hundred people but millions of policyholders who are suffering trauma and anxiety. The Government's lack of action and leadership is regrettable.
I welcome the FSA's report, but it was published only a little over two hours ago so there has been insufficient time to consider it fully. Why did it take this debate to flush it out? Why could it not have been published earlier? A preliminary flip through it suggests that it raises more questions than it answers. It is a narrow report on a limited period and, rightly, concentrates on improving regulation in the insurance sector. Its conclusions can be summarised by saying that at the end of 1999, when the FSA took over, the die was cast. Interestingly, the FSA was surprised by the outcome of the House of Lords decision that the regulators could have been more proactive.
I first raised the matter on 19 December 2000, and a brief recap may assist hon. Members During the 1950s, the Equitable started to sell with-profit pensions which gave policyholders a guaranteed annuity rate—more commonly known as a GAR. On retirement, an annuity must be purchased by the policyholder's 75th birthday. During the era of high interest rates in the 1970s and 1980s, GARs gave no cause for concern as the offered annuity rates were well below market rates.
Mr. John Greenway: I am grateful to my hon. Friend for giving way so soon.
I worked for Equitable Life from 1970 to 1972, and it may be helpful to our debate if I explain two aspects of the GAR at that time. First, the potential benefit for policyholders was significantly greater if they did not take the GAR, and very few policies were sold on the GAR figures. Secondly, at that time, Equitable Life lent money for house purchase at interest rates of 13 and 14 per cent. fixed for 25 years. When Lord Penrose examines the history of the problem, he will need to bear in mind the extent to which Equitable Life's ability to fund the GAR in the early days was clear from its own business.
Richard Ottaway: I am grateful for my hon. Friend's intervention, which shows his experience of the matter. I am sure that Lord Penrose will hang on his every word.
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Interest rates were higher in the 1970s and 1980s, but when they fell in the 1990s, the policies became a liability to the Equitable. About 90,000 policyholders were entitled to benefit from a GAR higher than the prevailing rate in the open market. That was an attractive proposition to the GAR policyholders, but not to other Equitable policyholders who had to pay for it.
The mistake that previous Equitable boards made was not to address the issue and not to save reserves for a rainy day. Instead, they took a different course of action. As the GAR policies began to mature, the Equitable offset the extra costs by paying a lower final bonus to policyholders with GARs than to those policyholders without GARs. GAR policyholders were, in effect, given a choice between exercising the right to a GAR—in which case the final bonus would be reduced—or relinquishing the guaranteed growth, purchasing an annuity at current market rates, and receiving the full bonus.
The Equitable was entitled to believe that that was the right approach. On 18 December 1998, the Treasury's director, consumer, investment and insurance directorate published a letter—it is in the FSA report—which it described as a "considered view" that endorsed that strategy. Referring to the guaranteed annuities, the directorate said:
"It would appear possible, depending on the particular circumstances relating to the contract, that any terminal bonus added at maturity may be somewhat lower than for contracts without such options and guarantees, and that this terminal bonus could in some case be applied at current annuity rates."
The advice was clear, easy to understand and confirmed the established practice that had sprung up over the past three or four years. Interestingly, if the FSA was surprised by the outcome of the court case, it clearly thought that the practice was acceptable.
The GAR policyholders, however, were not so enthusiastic. A group of them complained to the Personal Investment Authority ombudsman, who agreed to allow the case to be referred to the High Court. The policyholders lost in the High Court, but had a partial success in the Court of Appeal and an emphatic victory in the House or Lords. That has placed the future of the Equitable in a grave position. The Law Lords published their judgment on 20 July 2001. They found that the Equitable's actions had not been valid, and they obliged it to pay a full bonus to the GAR policyholders and to pay the guaranteed annuity on the whole sum.
As a result two different classes of policyholder have been created in the Equitable: those with guaranteed annuities, and those with annuities at market rates. Consequently, the non-GAR policyholders are funding those with GAR policies. The worst-case scenario liability is believed to be about £2.6 billion. To cover that cost, the Equitable froze its bonuses for seven months, which has raised £1.5 billion. It has also entered into an arrangement with the Halifax, whereby the Halifax is paying £500 million for the Equitable's operating assets. The Halifax will pay a further£500 million on two conditions: it will pay£250 million if the Equitable's compromised proposals are passed, and£250 million if the Equitable's sales force, which is transferred to the Halifax, meets certain performance

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targets. That leaves the Treasury with egg on its face, particularly with regard to the guidance document of 18 December 1998.
When prompted, the Treasury has put up what can best be described as the "Treasury defence": its guidance specifically indicates that any "charge" on policyholders needs to be consistent with the terms of the contract and how that contract has been presented to policyholders. That is a perfectly reasonable position, and was the view of the House of Lords, which reached the conclusion that the Equitable's contract did not provide for a reduction in the final bonus to the guaranteed policyholders.
The Treasury comes unstuck at that point. If five Law Lords can reach that conclusion after looking at the documents for a few days, why cannot the Treasury—with its army of advisers and all the time in the world—also reach the same conclusion? The Treasury must have read the contracts. If it did not, that is negligence beyond anyone's imagination. The guidance was suspended within hours of the Law Lords' judgment. Why? The Treasury argued that the guidance was right, and the FSA agreed with it. The Treasury, after reading the contracts, was satisfied with the Equitable's conduct. It is a regulator's role to reach such a conclusion. Unfortunately for the regulator, he or she got it wrong, and it is for that reason that I believe that the Treasury was negligent.
The Chancellor of the Exchequer has indicated that, in his view, the Government are not responsible. What is the point of setting up the Lord Penrose inquiry if the right hon. Gentleman has already prejudged the issue? The Treasury has argued in answer to questions tabled by me and by others that compensation is available only when a firm becomes insolvent. That is disingenuous; a cynic might say that it was a holding argument for the course of the general election.
In truth, Governments are liable to compensate those adversely affected by their negligent advice. No one else was in the position to, or was expected to, give that advice. The public look to the regulator to protect their interests, and in this instance there was a woeful failure. The Government got it wrong. Investors relied on their advice, and the Government must accept responsibility for that.
A number of bodies have conducted inquiries into the matter—so many that we will suffer inquiry fatigue by the time that they have all finished. They include the Institute of Actuaries, the Institute of Chartered Accountants, the Office of Fair Trading, the Treasury Committee, the FSA and Lord Penrose. Two ombudsmen have decided not to conduct inquiries.
I welcome any inquiry that sheds light on the failure of the regulatory authorities. The Treasury Select Committee rightly identified some of the key questions for Lord Penrose, especially the risky decision not to establish reserves in 1993. It wishes to ask why the insurance regulator did not address that point. The Minister has had the report from the FSA—which succeeded the Treasury as regulator in January 2000—on her desk for some time. In my view, the FSA has questions to answer. In a preliminary flip through the report this morning, I think I saw that it acknowledges that.
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The Equitable welcomed the deal that was made with the Halifax in February 2001, stating that the Equitable's prime objective was
"to strengthen the with-profits funds to the benefit of all members and it was important that policyholders would not be disadvantaged in the future."
Where was the FSA when that statement was made? Did it have any idea that the statement was ludicrous? Did it know that the reserves were so inadequate that a fall in the stock market could affect the situation? Only five months later, the Equitable slashed 16 per cent. off pension fund values.
If the FSA knew that the reserves were inadequate, why did it not speak up? If it did not know, why not? I have the answer. At Treasury questions on 19 July, I raised the point. The Chancellor ducked the issue, and left a junior Minister to answer; the Minister may find that she often experiences that. The managing director of the FSA's insurance section, Mr. John Tiner, wrote to me subsequently to say that he was satisfied with the Equitable's decisions. He wrote:
"The FSA has power s of intervention when it considers the Society is not acting with due regard to the interests of policy holders. Until the Equitable had completed its review and had some firm propositions to make, it is unclear what they (or we) could have told policy holders which would have put them in a better position to make a decision."
In other words, the FSA will not act unless it thinks that it can make things better. I call that the passive approach to regulation. I have news for Mr. Tiner and the FSA. I am unsure whether the Equitable has acted with due regard for some time. The same test was applied in the 1990s, when regulators could have intervened to make things better. The regulator—be it the Department of Trade and Industry, the Treasury or the FSA—is guilty as charged.
How do we make the charges stick, and how do we bring the Government to book? I hope that the inquiries will provide an answer. I am pleased to say that the FSA has concluded this morning that the regulatory approach is to be strengthened. I am interested to note that the Minister agrees with that, and I welcome her letter in which she says that she encourages the bringing forward of proposals by the end of November.
How does Parliament find out what happened? We have the parliamentary ombudsman, whose role is to decide whether there has been maladministration in government activity. However, he seems reluctant to carry out his duties in this instance. When I referred a complaint from a constituent of mine about Equitable Life, the ombudsman said that he would defer making a final decision until the FSA report became available. This summer, when the Government announced the Lord Penrose inquiry, the ombudsman announced that he had decided to await the outcome of that inquiry, and to consider further at that stage whether he might usefully intervene. That seems to be an example of bobbing, weaving and ducking the punches like a prize fighter at a boxing match.
Sir Gordon Downey, a former Parliamentary Commissioner on Standards, pointed out in a letter to The Times:
"Lord Penrose reports to Ministers, the parliamentary ombudsman, who has more powers than Lord Penrose, reports to Parliament. The very least he could do is to investigate whether or not there is a case to answer."

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The parliamentary ombudsman must recognise the essential distinction between the Executive and the legislature before Parliament concludes that he is too close to the Executive. He may well argue that there is a precedent in the Barlow Clowes affair. In my opinion, that was wrong as well. The issue is huge—as it big the as it gets—and the ombudsman must address it without delay.
The concept of saving for retirement is put into question by the Equitable Life situation, particularly the obligation to buy an annuity. In response to questions from myself and others, the Government have made it clear that they do not intend to change the present regime. In the last Budget, they recognised the anxiety that the issue has created but indicated that many of the ideas for reform would incur substantial costs running into hundreds of millions of pounds. In my view, if we can resolve the annuity issue for hundreds of millions of pounds, that is a small price to pay.
The recommendations of Dr. Oonagh McDonald's report deserve closer scrutiny by the Government than they have obviously had so far. There is much unrest concerning this matter, and it seems fair to point out that the Equitable situation would be largely alleviated if there were no obligation to buy an annuity and people had a wider freedom to choose how best to use their lifetime savings.
We have to question how much risk individuals can be expected to take in a pensions system that depends on fluctuating capital markets and income rates. The issue highlights the failure of the private sector to protect individuals against such risk and clearly demonstrates the need for a reappraisal of pensions policy. The Government's stakeholder pensions are simply a way of encouraging lower and middle income groups to begin making contributions to privately funded pension schemes. However, they carry the same market risks as those of the Equitable. If the retirement prospects of the knowledgeable professionals who took out Equitable Life policies could be damaged so unexpectedly, how reasonable is it to expect lower income groups to accept a similar degree of market risk? Investors will need unusually visionary minds when planning for their retirement. That is the exact opposite of what was intended, and will simply put people off making decisions about their retirement.
I conclude by addressing the position of the Equitable. I am extremely grateful for the advice and guidance that I received from policyholders throughout the country and from constituents. It would be an understatement to say that there is a wide range of views and opinions as to the way out. However, it seems that one or two essential principles have already become clearly established. The first is that 1 he past management of the Equitable has been woeful. What on earth did senior managers and directors think that they were doing in guaranteeing a rate of return when they had no idea of what the future held? No one in their right mind would guarantee high rates of return but, having done so, why did they not adopt an investment strategy to back it up? A prudent company would create reserves to back up the situation.
It is my opinion that pointing the finger at those who made those bad decisions is a fruitless exercise. I read reports in the newspapers that legal action may be commenced against past directors, but I believe that that
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is a complete waste of time. Even if, after years of litigation, such a course of action is successful, where does it get us? They are not rich people, and a few thousand pounds here or there will not make any difference whatever. Some say, "Let us sue the Equitable", but it is for the policyholders themselves to do that, and that would also be a pointless exercise.
There is now a new board. If the previous board did us any favours at all, it was by going quietly and ensuring a smooth transition to the present board under the chairmanship of Mr. Treeves. I must confess that I have never met Mr. Treeves, but I spoke to him on the telephone, when he had the courtesy to warn me of the 16 per cent. cut in policy values. Nevertheless, he seems to be determined to draw a line under the past and to push through the compromise agreement. All policyholders have now received a copy of the proposed compromise and details of the consultation exercise that is being carried out. Yet again, that has produced a plethora of comment and opinion, which leads to the second principle that I think is becoming accepted: that it is not a perfect world.
There are those who want to push the balance of the compromise this way or that, and to point the finger of blame at one group of people or another. Some want to delay while various opinions are sought, and so it continues. Even the legal opinions that have been obtained disagree with one another. The hard, cold, unrelenting truth is that, if the compromise does not go through, the policyholders' position will be much diminished. There is no doubt that the present board will resign, and that the sort of people whom we need to lead us out of the mire will not come forward. It is no surprise that a number of action groups have already recommended a yes vote. Whether or not the Government ultimately chip into the pot is irrelevant, as that would affect only the size of the pot and not its distribution. The lawyers will have a field day and everything will spiral downwards. I leave it to individuals to make their own choice, but no one should be unaware of the consequences of a no vote.
I regret the lack of leadership from the Government. Many people whom they employ, from civil servants to judges, are affected, including staff and employees of the House. It is the Government's approved pension scheme. Many staff in the House are policyholders, and it would be helpful if the Minister were to agree to meet their representatives to alleviate their concerns. If the Government can produce a solution to the Railtrack problem in a matter of weeks, why cannot they act in this case? The country is crying out for the Government to say something, and I mean no disrespect to the Minister when I say that it should be the Chancellor who is replying to this debate and not her. This is a profoundly serious matter that goes to the heart of our financial system and the security that it should be providing for all those who have served their nation well and are entitled to a peaceful retirement.
9.53 am
Mr.Barry Gardiner: I congratulate the hon. Member for Croydon, South (Richard Ottaway) on securing this extremely important debate. I was concerned by his somewhat partisan opening remarks, and trust that he will agree that hon. Members on both sides of the House have been most assiduous in

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questioning Ministers on the matter. He may also care to reflect that his remarks about the culpability of the Government as regulator, however true, reflect damningly not on this Government qua regulator alone, as he seemed to suggest, but on successive Governments who failed to spot or control one central problem with Equitable over the past two decades and more.
Today's Financial Services Authority report on Equitable is extremely candid, and I welcome it. It has been impossible in the two hours that have been available to read the report in its entirety, but I would like to draw attention to one section in the report, which is extremely pertinent to our debate, and which strikes at the nub of the problem that existed with Equitable Life. Paragraph 6.1.2 of the report refers to
"the need to maintain a strong solvency position that covers not only current conditions but can cushion adverse changes in the future."
That applies to any insurance company in a position such as that of Equitable. The paragraph continues:
"This is achieved by prudent valuation of the assets and liabilities, and the need to ensure that solvency can still be demonstrated in the event of a fall in equities and/or changes in interest rates."
The report adds:
"The weakness of a company with a low level of free assets can ostensibly be repaired by subordinated loans and accelerating the recognition of future profits by the use of implicit items and financial reinsurance agreements. Those latter features may be viewed as mortgaging the future to strengthen the present and, when in place concurrently with little or no free assets, render the company poorly placed to withstand a major financial shock.
The scale of Equitable Life's potential liability from the unmatched interest rate exposure, which it created when it wrote its GAR business, and the scale of the future profits it had already taken into account, combined to leave Equitable Life seriously exposed to any further financial shock."
That clearly explains, in three brief paragraphs, one of the fundamental problems that lay behind what went wrong at Equitable Life. For that reason, I want to discuss what the Government and regulators may be able to do in future to ensure that such situations do not recur.
The solvency margins that are required by the European Union are universally regarded within the financial community as a complete joke. If one considers the Independent Insurance Company and its recent collapse, it would have met the EU solvency margins four times over at the point of collapse. I recently had the opportunity to discuss solvency margins with Herr Kaulbach, the deputy financial services regulator in Germany, who also said that EU solvency margins were far too low. I found that surprising given that his boss as regulator in Bonn is Dr Müller, who wrote the famous Müller report, which stated that solvency margins were adequate in principle and in practice. However, the Government and the regulators must look again at the solvency margins applied within the EU, and change dramatically the way in which we regard the solvency of a company.
If we consider the north American model, actuaries in Canada adopt a dynamic capital adequacy testing model. That is a risk-based assessment of future trends and parameters, which is far better able to capture the
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risk exposure of a company and to ensure that its solvency margins are adequate to meet potential risks. When regulators in the United States introduced new risk-based assessment requirements in 1993–94, the histogram showed a dramatic fall in the number of insolvencies—the number was reduced by more than half in the years following the introduction of those models. I therefore urge the Government to consider extremely carefully how this aspect of financial services is regulated in this country and elsewhere in Europe. The FSA is moving in the right direction and is beginning to lead the change towards risk-based assessment, but I fear that in the rest of Europe it will not be able to take many people with it in the immediate future. Other countries are even further back in this respect than we are in the United Kingdom.
Moving on to the current circumstances at Equitable, I was most intrigued to hear the hon. Member for Croydon, South say that Mr. Treeves had had the courtesy to warn him ahead of time of the 16 per cent. cut in the value of funds. When I spoke recently to Mr. Treeves and the new chairman of the company, Mr. Charles Townsend, I challenged him about how some representatives of Equitable Life had, after the application of the market value adjuster to stop people flying from the company, said that no further penalty would be applied to members and that they had to be absolutely secret in company discussions about the 16 per cent. drop. I find it staggering that the directors of Equitable Life gave advance warning—
Richard Ottaway: Before the hon. Gentleman gets too carried away, it was done simultaneously, as the news was announced.
Mr. Gardiner: I am extremely glad to hear that the courtesy did not extend, as the hon. Gentleman suggested earlier, to prior warning of what had happened.
I shall pursue the point about the circumstances at the time. Representatives of Equitable Life Assurance company had suggested to members of the public that no further penalties would be applied to their fund. In such circumstances, there has been neglect on the part of the new board of Equitable Life, which must bear responsibility for misinformation being given to members of the public at the time. Although I appreciate the difficulty of negotiating a way forward for policyholders, I do net believe it acceptable for members of the public to be given misinformation by the company about the security of their position at a time when the company intended to slash 16 per cent. off policyholders' funds.
In my debate with Mr. Treeves and Mr. Townsend, I was further troubled by their acceptance that, because of the constraints on Equitable Life at the moment and being unable to take on new business, its future performance would be sub-optimal. We are discussing a company that accepts that its performance relative to the rest of the life assurance market will be substandard in future. It recognises that its performance will be substandard, and a huge question mark hangs over the company and its capacity to weather the storm and secure the agreement that is required. The directors have been clear that they are far from sure that the compromise will be accepted. It would be inconceivable

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that an independent financial adviser would advise an existing policyholder not to withdraw their funds now and place them elsewhere to avoid the sub-optimal performance that they admit will take place and the potential confusion and further claims on the company that may arise if the compromise deal does not go ahead.
I am sure that many other hon. Members want to participate in the debate. I could bring many more problems to the attention of the House, but I am sure that the issue will be revisited. On that note, I shall allow others to speak.
Several hon. Membersrose—
Mr. Frank Cook (in the Chair): Order. This is a vexed subject, which requires careful consideration and, in the Chair's view, a fair response from the Government. At the moment, three hon. Members are seeking my eye. I advise that we start wind-up speeches at 10.25 am, which gives us only 20 minutes. I ask hon. Members to bear that in mind and to make their comments clear and concise.
10.6 am
Mr. Michael Weir: The hon. Member for Croydon, South (Richard Ottaway) has given a succinct resumé of the history of Equitable Life. I do not propose to go into that, other than to say that the plethora of different regulators in the insurance industry over the past few years seems to be part of the problem. Equitable Life policyholders are being asked to consider the compromise proposal without having the full information about the regulator's role before them. They are entitled to that information before being asked to vote on the proposal.
The Government's lack of leadership and openness has led to great deal of suspicion—justified or otherwise—that there is something to hide. That is making Equitable Life policyholders reluctant to deal with the compromise proposal before all the information is in the public arena. The policyholders are entitled to that information. How many hon. Members have heard the remark, "Why should I bother with a pension if this is going to happen?" The situation at Equitable Life is leading to difficulties throughout the pension industry. There is a loss of confidence in pensions. That is a serious problem, especially when the Government are trying to promote stakeholder pensions.
I ask the Government to take on board a particular point. The hon. Member for Croydon, South mentioned briefly the Government's own employees. That matter was first brought to my attention not because of the guaranteed annuity rates but because of worries expressed by constituents within the NHS pension scheme. As the Minister will be aware, in Scotland—I presume that the same applies in England—many people in the NHS pension scheme paid additional voluntary contributions. The Government, through the NHS, were advising people in that scheme to invest AVCs within Equitable Life, and continued to do so even when the difficulties were apparent to them—at least they should have been apparent to them through the regulator.
A constituent told me that, in 1999, he attended a sales presentation given by representatives of Equitable Life that was organised by the NHS on its premises that
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encouraged NHS employees to purchase AVCs through Equitable Life. The Government, as regulator and as an employer, have difficulties. I appreciate that dual roles cause a difficulty for them, but many of their employees, particularly those in the NHS, are finding that their ultimate pensions will be worth a great deal less than they first believed. The Government must seriously examine the problem. It has been suggested that meetings should be held with representatives of pension schemes within the House, but the problem goes much further than that. Action must be taken to deal with the pensions of those who work in the NHS.
I reiterate the point that the matter goes far beyond Equitable Life. It has caused a drop in confidence in the other life assurance companies that are very important to the Scottish and United Kingdom economies. If the matter is not dealt with, that lack of confidence will have serious long-term effects for all of us who are looking for pensions, as it will on the Government at a time when they seek to establish stakeholder pensions. The issue is not going down well with the general public and a great deal of cynicism exists about pension provisions. Serious consequences will follow in future unless the issue is dealt with.
10.10 am
Mr. Jim Cousins: I will take your advice to be brief, Mr. Cook. I have only two points to make.
Mr. Frank Cook (in the Chair): Order. Please also accept my advice to speak up.
Mr. Cousins: I am always happy to accept your advice.
At the heart of the issue is the question of reserving policy. If we were to read the financial press for coverage of insurance companies, the question that arises time and again throughout the 1980s and 1990s is that of so-called orphan assets or free assets.
When the House deals with this issue, it should bear in mind that the issue of reserving policy, which caught the public eye and the attention of the press and the media during that period, was not lack of reserves but excess of reserves. That point must be borne clearly in mind when criticising the events of the past. When the technical issue of reserving policy ever caught public attention, the emphasis was always that life insurance providers were carrying excessive reserves.
Equitable Life's strong marketing point was precisely that it was pursuing a policy of not carrying excessive reserves. That is why so many people signed up for policies with the company. In talking about these issues, it is wise not to be too clever after the event. We now see that the central failure of Equitable Life was at the heart of its marketing strategy. Nobody could say that they were not aware of that.
However, it brings into question the issue—and I hope that the Government will address it in due course—of whether the Insurance Companies Act 1982, which established the role of appointed actuary within with-profits funds, did enough to strengthen the powers of the actuaries. It also brings into question whether some of those who had the responsibility of being

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appointed as actuaries were carrying out their duties in the best interests of policyholders. I hope that that serious underlying issue will not be overlooked.
I am a member of the Treasury Select Committee. As part of our inquiry, we were told that the Government Actuary's advice to the regulators, who were within government, was not to be made available to us. We were told that we could not cross-question the Government Actuary about the advice that he may have given to the regulators about Equitable Life's reserving policy. I hope, in the course of Lord Penrose's inquiry, that that advice will be made public. That would allow us to see what was the advice of the Government Actuary on the issue. I also hope that exposing better the advice of actuaries will be one of the main benefits that will flow out of this unfortunate affair.
The hon. Member for Angus (Mr. Weir) said that a great number of regulators were involved and, in form, that was the case. Fortunately or unfortunately, in all cases they were the same two people. There was continuity of personnel, even though the regulators switched institutions, and that will enable a proper examination to be made.
I want to emphasise the point made by the hon. Member for Angus that 40,000 people in the NHS pension scheme have additional voluntary contributions with Equitable Life and that the problem is very serious for them. Half of those people are in the with-profits fund and half are not. Half of the 40,000 went to Equitable Life as a result of transfers back into the NHS scheme, which was a product of mis-selling further on. The problem is serious and it must be addressed outside the terms of Lord Penrose's inquiry. I hope that the Government do not intend to overlook the problem by using the Penrose inquiry as an excuse.
Many people in the civil service pension scheme—for whom the Treasury was the source of advice on superannuation—also have AVCs with Equitable Life. I hope that the Minister will assure us that the issue of AVC policyholders, whether in the public sector, the Government sector or otherwise, will be addressed alongside the Penrose inquiry.
The hon. Member for Croydon, South (Richard Ottaway) said that the previous board of Equitable Life went quietly. One board member sought quietness on the board of Halifax, but I think that history will show that that was an odd place to seek it.
10.16 am
Mr. John Greenway: I do not want to detain hon. Members for long. It is fair to say that everyone who has had an association with Equitable Life in a professional or employment capacity is hugely disappointed by the way in which events have turned out. As I said in my intervention on my hon. Friend the Member for Croydon, South (Richard Ottaway), I worked for Equitable Life at its Epsom office for about two years in the early 1970s. I suspect that many colleagues are policyholders with Equitable Life, particularly Surrey Members who were serviced by the Epsom office at that time and subsequently. In those days, very few life offices wrote that type of business, and the two leading companies were Equitable Life and
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National Provident. I was headhunted by National Provident from Equitable Life, and subsequent to that I became an insurance broker.
Lord Penrose is right to go back to the early days, but I do not believe that the problems arose then, because at that time the guaranteed annuity rate, which is the cause of all the difficulties, was not considered to be particularly attractive. As I indicated in my intervention, it was common for people to be happy to borrow money for mortgages at a fixed interest rate of 13 per cent. or 14 per cent. for 25 years. There was a high interest rate policy for some time and under successive Governments. The guaranteed annuity rate was significantly less than that—I would guess that it was about 60 per cent. or 65 per cent.—so the open-market option was much more attractive.
Conditions changed in two ways. First, many other insurance companies entered the market and in the late 1970s and early 1980s successive Governments made investment in personal pensions much more attractive by increasing the amount of money that could be put into a policy. The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins), who is an active member of the all-party group on insurance and financial services of which I am the chairman, knows that the group takes a close interest in the matter. He is exactly right to say that Equitable Life pursued a different policy on reserving from other companies.
Many companies have had huge orphan fund problems. For example, Equity and Law recently made an arrangement with its policyholders, of which I am one, to make a payment whereby some of the orphan funds would go to the company. However, Equitable Life was always supposed to be ahead of the game. It was the top and most attractive company, and the one in which everyone ought to be recommended to place their business. I suspect that there were considerable pressures in Equitable Life to maintain that position. I also suspect that the inquiry will find that the slip into not making adequate reserves for a potential downturn in interest rates started about 20 to 25 years ago.
For now, I will merely address two simple points, because it will take a long time to absorb all of the contents of the report. We should have regard for the expectations of the policyholders. They were encouraged to join the mutual society by almost every financial journalist—and public sector workers were encouraged to join to take out various types of investment—and they had a right to expect that the company was properly managed. They also had a right to expect that supervision of the company was satisfactory. That point goes to the heart of the matter. My first reading of the document confirms to me what many hon. Members have suspected; under the prudential supervision of the Department of Trade and Industry and subsequently the Treasury—long before the Financial Services Authority was formed—that supervision was inadequate. The Government must address that issue now.
As my hon. Friend the Member for Croydon, South has stated, policyholders must now make a choice; as the hon. Member for Brent, North (Mr. Gardiner) said, they have been let down once with regard to the 16 per cent., and they cannot afford to be misled again. I suspect that they have no choice but to accept the offer, which has, I believe, been made in good faith. It would

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help them to come to that conclusion if, as several hon. Members have suggested, the Government were to indicate early on that if the inquiry by Lord Penrose pins some of the blame on regulatory failure by the Government, they will do the honourable thing by providing funds. That would reassure the policyholders that their policies will continue to provide the returns to which they are entitled.
10.21 am
Angela Watkinson: I will not repeat the many valid points raised in the debate, but I wish to refer to a comment made by the hon. Member for Brent, North (Mr. Gardiner) about the advisability of policyholders withdrawing their funds and transferring them elsewhere if the compromise scheme is unsatisfactory to them. That option is not available to many of my constituents who have contacted me with regard to the matter, as they are nearing retirement. Moreover, the transfer of funds by policyholders who are able to do that would exacerbate the problem for those who have no option but to remain in the scheme.
Mr. Gardiner: I accept that point, a policyholder who has less than about 10 years to go until retirement would be in an invidious position.
Angela Watkinson: These constituents of mine, some of whom are due to retire in less than five years, are facing a very different retirement from that which they had planned and paid for, and they are entirely dependent on the compromise scheme. It has been stated that legal opinion about that scheme is varied, and I urge the Government to clarify the position swiftly. That would alleviate the stress on the many people of ordinary means who have tried to provide for their retirement.
10.32 am
Dr. Vincent Cable: I congratulate the hon. Member for Croydon. South (Richard Ottaway) on focusing on the essential problem, which is the issue of government regulatory failure. It is not the job of hon. Members to be financial advisers to our constituents, or to look over the shoulder of the new management and to tell it how to run the company. However, it is our job to scrutinise the Government's actions and to examine the possibility of regulatory failure.
I will make two brief comments about the company and its current situation. I, like other hon. Members, have constituents coming to me with problems with regard to the situation, and it is important to point out to them that their losses can be separated into three different elements: first, the losses associated with the guaranteed annuity rate liabilities, although it is still unclear how open-ended they are—a figure of £6 million has been mooted, but it could be more than that—secondly, the losses that they are experiencing, along with everyone else in the life insurance industry, because of the falling value of the stock exchange; and, thirdly, the losses that they would incur if they chose to withdraw from the society—which are optional losses, as they could choose to participate in the conference rather than to withdraw from the society.
As for the conduct of the company, the hon. Member for Croydon, South was correct to stress that there would not be any great advantage in different groups of
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policyholders fighting one another in a mutual society. That is the road to mutual ruin and the enrichment of lawyers. However, there is certainly one category that merits detailed attention—that of the auditors' conduct. I find it impossible to understand why Ernst and Young gave the company a completely clean bill of health in 1999, after all the discussion that took place in the City during 1998–99. The regulators were discussing the matter and the memorandum that I produced before a debate in the House in June 1998, when the Department of Trade and Industry was advising about insolvency, also dealt with it. That action was utterly incomprehensible. If there were any possibility for litigation, I would have thought that it lies in that direction.
I return to the key issue, which is the role of the Government. The Government's prime responsibility in the matter now, whatever may have happened in the past, is to ensure that there is a transparent and expeditious process for examining whether there has been a regulatory failure. I agree with the hon. Member for Croydon, South that the present position is a mess. First, there is the Baird report, which appeared at 7.30 am—some of us have had a chance to glance at it. The Baird report was structurally flawed from the outset, because it was a report by the FSA about the FSA, and even if Mr. Baird is a man of enormous integrity, and I am sure that he is, the credibility of this report is bound to be questioned and it will have limited value.
Another basic problem with the Baird report lies in the way in which it has interpreted its own terms of reference. I read the original terms of reference, which state clearly that the report will describe the background and events leading up to the FSA's assumption of responsibility for the prudential regulation of Equitable Life on 1 January 1999. In fact, it has not done that. It seems to have interpreted its brief, in an extremely narrow way, to refer to the FSA's management of the affair after 1999. The report could have gone into the early history, but the FSA chose not to do so.
That responsibility has now fallen to the Penrose inquiry, which we hope will be definitive. It will certainly be very long—we understand that it will take until next summer. It is not clear that it will be entirely in the public domain; I hope the Minister will answer questions about that.
The big problem with the process—the hon. Member for Croydon, South dealt with this very well, but I will reinforce the point—is the way in which it has paralysed the parliamentary ombudsman. I have been writing to the ombudsman to ask him why he cannot get on with the job that Parliament has given him to do. The answer that he gives, in a letter written yesterday, is clear. He states:
"My decision not to begin an investigation at present was influenced by a consideration of the practical difficulties that will inevitably arise when two bodies attempt simultaneously to investigate matters which, while not identical, will involve a significant degree of overlap."
Why are two bodies conducting overlapping investigations? The answer is that the Government asked them to do so. The parliamentary ombudsman cannot get on with his job because of the structure of the process that the Government have set in train. That is unsatisfactory.

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What can we already say about the evidence of regulatory failure? There are three elements. First, there is the early history, covering the period of the early 1990s, when guaranteed annuities were being written extensively by Equitable Life. One could say that we are wise with hindsight about that practice, but other Members who are knowledgeable about the industry, such as the hon. Member for Ryedale (Mr. Greenway), know that the Equitable Life was unique in going so far out on a limb in writing guaranteed annuities on such a scale. It was already becoming apparent that a period of low inflation and low interest rates was upon us. Indeed, the Government of the day adopted the Maastricht targets, which precisely embodied that.
There must surely have been, at some point, an intervention from the Government Actuary advising on the structural soundness of that type of financing. It is important that the evidence of the exchanges between the Department of Trade and Industry, the Treasury and the Government Actuary is publicly revealed, so that we understand at what point it was clear to the financial community that the policies that Equitable Life were writing were unsustainable. That is one of the key elements in the story that has not yet been revealed.
Secondly, there is the Baird report itself. Obviously, I have not had an opportunity to read it in the few minutes that we have had access to it, but it is already clear in the conclusions that it reaches. Although it is put politely, there are some damning comments on the FSA's role. Section 6.6.1 of the report states:
"At the outset …'the prudential regulator'…addressed the issue of reserving for the guarantees in a resolute manner. There were, however, some particular issues which the prudential regulator missed or failed to follow up, with which we deal below."
Section 6.6.2 continues:
"In respect of this episode, we believe that if the prudential regulator had been more proactive and adopted a more challenging, carefully co-ordinated and researched approach, then it would have allowed itself more time and been better informed, to consider in conjunction with Equitable Life, how best to manage the consequences…of the judgment of the House of Lords."
The report goes on to describe poor levels of communication and co-ordination between the two arms of regulation. It is for the parliamentary ombudsman to judge whether there has been a regulatory failure, but prima facie, even the Baird report, with its restrictive mandate, seems to find serious faults.
I conclude by suggesting what should be the Government's role in future. The problem, as in the old Irish saying, is that we should probably have started from somewhere else, but I hope that the Minister will give us an assurance that the inquiry will proceed quickly and with the full co-operation of the Government. There should be no attempt to conceal documentation, which should be transparent and in the public domain so that the parliamentary ombudsman can get on with the job.
The hon. Members for Newcastle upon Tyne, Central (Mr. Cousins) and for Angus (Mr. Weir) and others raised the worrying matter of what the episode tells us about the state of the long-term private savings and pensions industry. For far too long in Britain there has
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been a conceit that whereas the benighted continentals have the problem of unfunded pensions, we do not because we have brilliant financial institutions that look after everyone's private occupational pensions. That illusion and conceit is crumbling rapidly, for several reasons: first, the compulsory annuity problem, which may be resolved as there are solutions available; secondly, the growing problem—it could even be called a crisis—in the with-profits sector. We are probably entering a long-term bear market in equities and many of the assumptions that underlie the growth of bonuses may prove to be fallacious. The confidence that previously existed in private pension provision has been further undermined by chronic and endemic mis-selling, which is undermining the entire structure. The Government must give us a clear lead on the matter of stakeholder pensions and on the future of private and occupational pensions in an environment where confidence has been severely damaged.
10.32 am
Mr. Christopher Chope: I warmly congratulate my hon. Friend the Member for Croydon, South (Mr. Ottaway) on securing the debate and on showing such a command of the complex issues that are involved. I hope that the Minister will answer his questions and those asked by other hon. Members in this important debate.
When my hon. Friend raised the issue on 19 December 2000, he secured from the Minister who responded a guarantee that there would be an inquiry; today he has initiated the debate and forced the Government to produce their FSA report. To judge by the Minister's body language and the words used in August when the Penrose inquiry reported, it was clear that the Government were toying with the idea of delaying publication of the FSA report until after Penrose. I am glad that they have now come clean and produced the report.
It is disappointing that we were given only two-and-a-half hours notice that the FSA report was being produced. If the Government could produce a report at 7 o'clock in the morning, why could they not do so at 7 o'clock the previous evening, so that people had a chance to read it? I was amazed to discover from representatives of Equitable Life yesterday evening that they were told only at 5.30 pm that the report would be published this morning, and that they could look at it on a website at that time. That is thoroughly unsatisfactory; we are grateful to have the report, but it is a pity that the Minister did not make a greater effort to produce it a few hours earlier so that we had more time to read it.
I hope that the Government will be prepared to use their time to allow a fuller debate of the issues raised by the report. It is no good saying that we will not have a further debate until Penrose has reported. Policyholders must decide in the next few weeks whether to accept the compromise, and they are entitled to the benefit of a Government response on the subject. I am pleased that the Minister is attending the Treasury Committee on 30 October, but that is not enough, and the Government should provide us with a proper debate.
Much of the debate has been about possible regulatory failure. The first question is whether there has been such a failure? The report, especially chapters 5 and

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6, suggests strongly that there has. The second question is that if there was a failure, was it caused by the negligence of one or more of the regulators? The parliamentary ombudsman should be getting to grips with that issue straight away. If a regulator was negligent, will policyholders who suffered loss as a result receive compensation? The Minister seems to have answered that question already in a written answer to the hon. Member for Brent, North (Mr. Gardiner) on 15 October. He asked if the Government
"will establish a scheme to compensate policyholders of Equitable Life for losses sustained by them as a result of regulatory failure."
The Minister replied:
"We have no plans to do so."
I am sure that I am not alone in finding that answer contemptible and an insult to policyholders. If a regulator has been negligent, it—or, in other words, the Government—should be open and forthcoming in meeting claims for compensation flowing from that negligence.
I tried to find out whether Lord Penrose would investigate allegations of maladministration by the regulators, but the Minister, in response to a specific question, merely referred me to the terms of reference of the Penrose inquiry, adding:
"The scope of the inquiry being conducted by Lord Penrose is a matter for him, subject to his terms of reference."—[Official Report, 15 October 2001; Vol. 372, c. 850–51W.]
That makes me rather suspicious. Many hon. Members have referred cases from constituents to the parliamentary ombudsman, and he should now investigate those issues. As has already been mentioned, he has written to a number of hon. Members during the past few weeks to explain why he should not investigate at the moment. I hope that he will reconsider in the light of today's report, which shows a prima facie case of maladministration. Indeed, he said in February that it would be helpful to read the Financial Services Authority report. He said that it
"may serve to indicate those areas, if any, which warrant further scrutiny by the Ombudsman."
He was right; the FSA report indicates areas that warrant further scrutiny, which I hope that he will get on with straight away.
The problems of Equitable Life affect millions of people, and I must declare as an interest that my wife is a policyholder, although I am not. The former commissioner, Sir Gordon Downey, has argued that the ombudsman should undertake an inquiry now, and his arguments are persuasive. The Penrose inquiry will investigate matters going back 30 or 40 years, or perhaps even longer; the parliamentary ombudsman can investigate only issues that do not fall foul of the 12-month time bar. He could concentrate on the most recent events, which are highlighted in the report before us today.
There is insufficient time to deal with all the issues that have been raised by policyholders, but I hope that the Minister will bring pressure to bear through the regulator to ensure that policyholders receive proper information to enable them to assess whether the compromise proposals are in their interests. They are still waiting to see the financial results up to 30 June, but they should have much more up-to-date information, particularly in light of the dramatic reduction in values that was announced on 16 July.
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The Minister will know that her predecessor said in the debate last December:
"The FSA is concerned that material changes to the expectations of Equitable Life policyholders are seen in context, and that policyholders should not rush to take precipitate action. The FSA has advised Equitable's customers to remember that the society remains solvent and that their existing policies are still valid."—[Official Report, Westminster Hall, 19 December 2000; Vol. 360, c. 13WH.]
There are many policyholders who, in the light of that advice, did not rush to sell their policies. They now find that, as the new chairman of Equitable Life has admitted, those who withdrew their money before 16 July took a disproportionately larger share of the fund than they were entitled to. Policyholders must not be let down again. They need proper information on which to base their judgment. That should come from the regulator to the individual investment advisers. It is not for us as Members to give that advice, but we can legitimately ask that the framework to make that advice available be established quickly.
I should like now to refer briefly to one or two parts of the report. The Treasury is trying to suggest, and the Minister may be party to this, that it is a "not me guy" situation and that the Treasury was not involved. The report makes it plain that in January 1998 the Treasury took responsibility from the Department of Trade and Industry for the prudent regulation of insurance companies, and from 1 January 1999 it contracted out that role to the FSA but did not surrender or abandon it. That is why the comments in the report about what the Treasury knew and the action that it should have taken but did not take are particularly pertinent.
Those who have had a chance to read the report will know that in August 1998 there was widespread awareness of the problems facing Equitable Life policyholders and memorandums were flying round the Treasury and other parties. Presciently paragraph 5.6.2 states that one of the Treasury memorandums noted that that was
"an example of an issue on which we will need to work closely together to ensure a seamless regulatory approach."
That was in autumn 1998. If the Treasury had followed its own advice, I doubt whether policyholders, particularly those who joined after that, would have been in their current mess.
There are a number of other damning indictments of Treasury involvement. It is clear from paragraph 5.7 and the following paragraphs that the Treasury was aware that the policies being issued by Equitable Life and the related advertising were not accurate. It knew that back in 1998 although nothing was done about it. Indeed, when the matter was raised in 1999 there seemed to be some doubt as to how anyone found out about it originally.
The suggestion running throughout the report is that the Treasury was slow on the uptake and that it did not investigate and take a hands-on approach when it should have done. As a result, policyholders have been let down. There is clear evidence that the Treasury needs to allow the parliamentary ombudsman to investigate these issues on an independent basis. I hope that it will not stand in the way of that. I look forward to hearing what the Minister has to say.
10.43 am
The Economic Secretary to the Treasury (Ruth Kelly): I congratulate the hon. Member for Croydon, South (Richard Ottaway) on securing this debate. He set out the background to these events clearly and I do not intend to repeat them. I express at the outset my deepest sympathy for all those Equitable Life policyholders, including those who have taken out additional voluntary contributions, who have been affected by recent events. I fully understand the distress and anger that they feel. I should also like to say at the outset that it is not the Treasury that advises people in the public sector about what policies they should take out. It would be inappropriate for the people who provide policy advice on financial services to do so. It is their employers who take that responsibility.
The House will know that I announced on 30 August that the Government had established an independent inquiry under Lord Penrose into events at Equitable Life. Equitable Life indeed raises important issues, many of which have been raised today. The issues deserve full consideration by an independent inquiry, which will consider what lessons can be drawn for the conduct, administration and regulation of life assurance business.
Lord Penrose's terms of reference are:
"To inquire into the circumstances leading to the current position of the Equitable Life Assurance Society, taking account of relevant life market background; to identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; and to give a report thereon to Treasury Ministers.
Those terms of reference will enable Lord Penrose to consider events at Equitable Life from all angles. By virtue of its wide-ranging remit, Lord Penrose's inquiry will be able to look back as far as necessary to establish the origin and development of problems. It can look in detail at the actions not only of the Financial Services Authority but of the society and all other key players. He can investigate issues that have a bearing on the subject, regardless of where and when they arose. It is important that all the lessons are learned from what has happened. The inquiry will allow us to achieve that.
I have written to Lord Penrose today, enclosing a copy of the FSA report into Equitable Life, published by the Treasury this morning. I have taken the opportunity to publish that report as early as possible and in time for Members to consider the information in front of them before our debate.
In line with its terms of reference, the FSA's report analyses the conduct of business and prudential supervision from January 1999 until the society closed to new business in December 2000. The report provides a helpful contribution to investigating problems at Equitable Life, but it is not—and could not have been—a full picture of events. I would like to thank Mr. Baird, who conducted the inquiry, for his report and all the useful research that it contains. The review could not look back more than two years out of a total of more than 40. Nor could it investigate the roles of all involved, the deep-rooted nature of the problems or the actions of Equitable Life itself. Mr. Ronnie Baird and his team at the FSA had no access to documents held by Equitable Life or its advisers. Nor could the inquiry conduct interviews with any of the board members, staff or professional advisers. As such, it was unable to examine events as they unfolded.
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Problems at Equitable Life clearly date back many years. As the report makes clear, the seeds were sown as far back as the 1950s when the first guaranteed annuity policies were sold. A full explanation will have to wait for Lord Penrose's review and report. In my letter to Lord Penrose, I made it clear that the Government recognise that the FSA report will provide a valuable input to his inquiry, but he cannot, of course, be bound by it or its recommendations. He will wish to form his own views on the basis of the evidence that he gathers.
Although we expect that Lord Penrose will wish to investigate events of recent years, including those that took place after Equitable Life closed to new business—a period that the FSA report was not asked to cover—he will also be free to go back as far as he thinks necessary.
In his reply to my letter, Lord Penrose says of the FSA report:
"As you rightly observe, it covers a relatively short period and is narrower in focus than the Inquiry I have been asked to undertake. In particular, my Inquiry will have to look more deeply than the review team have been able to at the activities of the Society, its directors and managers in relation to the classes of business that are of primary interest. This difference of focus is bound to be reflected in the conclusions I shall reach."
He continues:
"Nevertheless, the narrative of the evidence collected by the review team, and the comments made in the report, provide a valuable insight into the culture and workings of the regulatory authorities over the period. The report will help focus lines of enquiry extending over the longer period I shall have to address, even though it cannot, of course, confine the scope of my Inquiry."
The Penrose inquiry will look into the circumstances leading to the current situation at the Equitable. It will not comment or offer advice on the merits of any compromise deal proposed to Equitable Life policyholders and nor will it review past judicial decisions in relation to Equitable, or pre-judge future decisions which will be rightly taken by the courts. I very much hope that interested parties will co-operate fully with Lord Penrose's inquiry in its current non-statutory form, but I have made it clear that if Lord Penrose considers that there is a failure of co-operation, I will not hesitate to put the report on to a statutory footing.
Lord Penrose began to work full time on his inquiry as soon as it was announced at the end of August. He is determined to complete his report as soon as possible. Hon. Members have made clear today the importance of that. I agree with them. Lord Penrose will be able to consider some of the detailed issues that have been raised today, including the role of the appointed actuary. I shall today also issue a consultation paper setting out proposals for the situation where an appointed actuary will have to report information to the FSA. This will form part of any potential review of the role of the appointed actuary, which is also considered in the Baird report.
The FSA report makes several recommendations about the regulation of life insurance. In particular, it has called for improved solvency and disclosure standards to ensure the prudential framework for life assurance adequately reflects the nature, direction or scale of business. Under the new regime—which will come into force at the end of November—created by the Financial Services and Markets Act 2000, that will be the responsibility of the FSA. Some of the recommendations will necessarily involve consultation with the industry and I am anxious that the FSA should take it forward as a matter of urgency.

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The report also makes several extremely important recommendations on strengthening the regulatory approach—the culture, processes and tools of the FSA—to ensure that it achieves the "role, style and approach" envisaged for the FSA as a single integrated regulator. In particular, it recommends that the FSA should take a more proactive approach to regulating the insurance industry to ensure that the interests of customers are properly protected; that it should take action to break down all remaining barriers to internal communication and co-ordination, to achieve the full benefits envisaged when the FSA was established; and that it should improve its use of risk-assessment techniques. My hon. Friend the Member for Brent, North (Mr. Gardiner) pointed out some reforms that will be taken forward in this area I am sure that he is aware that the FSA is considering insolvency standards in that area.
The proposals are core ones. The Government expected that, for example, brigading conduct of business regulation and prudential supervision into one organisation would create opportunities for an integrated approach, even in advance of the enactment and implementation of the Financial Services and Markets Act. From N2—the end of November this year—the Act will be implemented in full. The transition period will be over and we expect all the benefits to exist. The FSA report is clear that the benefits of an integrated proactive, risk-based regulator will be substantial. Accordingly, I have today written to the chairman of the FSA, Howard Davies, asking him to pursue vigorously the recommendations contained in the report, particularly those relating to the problems of poor communication.
Given the importance of those issues to delivering the benefits of the new approach, I have asked him to provide me with a full report by 20 November, covering the action taken to implement the recommendations. That does not mean that we were wrong to establish the Financial Services Authority. On the contrary, the FSA's report shows that the Government were right to make reform of the existing framework of financial regulation a priority on taking office, and that the situation at Equitable would have been worse without a single regulator in place over the past two years.
The FSA report that we published today is only a partial picture. We set up the Penrose inquiry to provide us with a far wider perspective, not to apportion blame but to learn lessons and ensure that the mistakes of the past are not repeated.
Mr. Chope: If the report will not apportion blame and is only partial, how can the Minister already have prejudged whether the Treasury will in any circumstances pay compensation to policyholders?
Ruth Kelly: I have looked at some issues with regard to the use of public money. In particular, when I announced the public inquiry by Lord Penrose, I said that we had considered the use of public money to inject funds into a lifeboat for Equitable Life and had specifically ruled that out as an option. We do not think that that is the appropriate way forward; rather, we should learn all the lessons from the Equitable Life
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situation to minimise the risk of such a scenario happening again. That is how the terms of the Penrose inquiry were drawn up.
I will not stand here today and prejudge the outcome of Lord Penrose's review. Several hon. Members have questioned the independence of Lord Penrose, but I wish to underline that the reason why we cannot say specifically what he is looking at or how the review is developing is precisely the independence of that review.
Richard Ottaway: If Lord Penrose finds that there has been a regulatory failure, the Government must be liable. Is not the right approach for the Government to say that they have an open mind on whether compensation should be paid, rather than to rule it out at this stage?
Ruth Kelly: I certainly would not pre-judge any recommendations that Lord Penrose will make. It is open to him to pursue the lines of inquiry that he sees fit.
Mr. Gardiner: I am grateful to the Minister for her comments, because I believe that we can take some solace from her words. It would be imprudent to set any course or to put in words anything that might influence the inquiry to reach one conclusion or another. However, I listened to the Minister's words carefully and think that they are well judged.
Ruth Kelly: I thank my hon. Friend for those comments. It is absolutely clear that an independent report was necessary in the public interest, and that is exactly why we decided to set up the Penrose inquiry. I expect Lord Penrose to report as soon as he thinks that he is able to, which I hope will be some time next year.
Mr. Cousins: I welcome what the Minister said about strengthening the role of the appointed actuary; that is a fundamental point. However, will Lord Penrose be able to review the role of the Government Actuary in the advice that was given on the Equitable Life situation?
Ruth Kelly: Action has already been taken as regards the Government Actuary's department, and actuaries responsible for life insurance have been fully incorporated into the FSA. Clearly, it is a benefit of a seamless and integrated regulator that they should be. Lord Penrose will be able to review any actions that he wishes to within his terms of reference. Of course, that could include the role of the actuaries.
Given the importance of the issues, I stand ready to brief the House as events unfold. I have offered to appear before the Treasury Committee and shall do so shortly.
Mr. Frank Cook (in the Chair): This has been a splendid debate, displaying exemplary standards of preparation, delivery, candour, regard and mutual respect. However, we are compelled by the rules to move on to the next topic for consideration, which is the London Underground. I ask right hon. and hon. Members to leave the Chamber quietly so that we can get on with our business.

London Underground
11 am
Harry Cohen: I thank Mr. Speaker for granting me this debate on the London Underground. I want to concentrate on future investment and funding plans and the Government's proposed public-private partnership.
I received a letter from Mr. Double, the director of the City Remembrancer's Office in the City Corporation. He wrote:
"You will already be aware of the importance the City attaches to an efficient rail network servicing London. In the City Corporation's view, there is undoubtedly a need to improve the rail transport system and in particular to modernise the London Underground, including the Central Line. The Corporation's strong interest in the Crossrail project, which should do much to improve transport in the capital, also reflects this concern."
He asked me to bring his remarks to the attention of the House. I support his sentiments strongly on improving the Central line, upon which my constituency depends, and Crossrail. We need new capacity; Crossrail would provide that, and relieve overcrowding. There should be extra investment above what the Government now propose.
The Government have pledged £13 billion of new investment over the next 15 years, which is welcome, but a similar pledge was made before the 1997 election. It is disappointing that so little progress has been made. In their first term, the Government set up the Greater London Authority and the office of the London Mayor, but the court case this summer showed that the Government have been in control all along. More progress should have been made. The Government have said that they put £1 billion more into London Underground in their first term. That is true, but £2 billion went on the extra cost of the Jubilee line extension, so the rest of the infrastructure suffered during that first term.
There has been serious decline. Figures obtained by the hon. Member for Carshalton and Wallington (Tom Brake) for signal and points failures and track failures show a 35 per cent. increase for 2000–01 in comparison to 1999–2000. There were nearly 1,280 hours of delays in a 12-week period from January, showing the deterioration in the tube.
An article on the front page of today's edition of The Guardian states that anticipated investment has been cut by 30 per cent. The report states that when my right hon. Friend the Deputy Prime Minister was Secretary of State, he indicated that a grant of £775 million could be expected for the tube in this financial year, but that ended up as only £520 million. That did not really make an impact on the decline that I have mentioned, and it was against that background that the Government proposed their version of a public-private partnership. I feel that the Government are showing inflexibility, which is a matter for concern. It is also regrettable that they have fallen into dispute with the Mayor and his Transport Commissioner Bob Kiley.
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I want to talk about the Secretary of State's press aide Jo Moore. Her 11 September bad taste e-mail—

"It is now a very good day to get out anything we want to bury"
rightly has been criticised. The Home Secretary called it "extraordinarily stupid" and the Secretary of State for International Development described it as "cynical". However, it was the only serious breach of the Prime Minister's invocation that we stand shoulder to shoulder with the United States in moral outrage about the events of 11 September. She has apologised, there has been an official reprimand and, in my view, she should be encouraged to find alternative employment.
That incident overshadowed another issue that came to light; an official effort to denigrate Bob Kiley. Mr. Evans, an honourable civil servant, was removed from his post. He is said to have lost the confidence of my right hon. Friend the Secretary of State for Transport, Local Government and the Regions when he refused to be involved in political briefing to vilify Mr. Kiley. Members of the Labour party, trade unionists and Londoners do not want backbiting and spitefulness. They want consensus and co-operation with the Mayor. The Mayor was elected to do the job and, in due course, he and Mr. Kiley will have to take a degree of responsibility for the tube. The Secretary of State should apologise for that campaign of vilification against Mr. Kiley.
If Mr. Kiley were so useless, why, at the beginning of May, did the Prime Minister ask him to take charge of the negotiations with the PPP bidder? Vilification was not a good approach for the Government to take, and it should be abandoned. If the Government want to criticise Bob Kiley, Ministers need only look at Ian Williams' article in Tribune on 27 July. He points out the problems with the New York system, but also states:
"So what is the good news? First, the system is cheap with a flat fare of around £1 regardless of distance. Ridership is way up and the system is perceptibly better policed and clean than it was before. Air conditioning helps on the trains as well."
I wish we had air conditioning on our trains.
"There is investment in rolling stock and in upgrading stations. And, for all its faults, it is a 24-hour system as befits a world city. What capitalist secret could Kiley bring from New York? Simple. Money works and more money works harder. New York's recipe for success is simply a return to pre-Margaret Thatcher days: a low flat fare with intermodal transfers and lots of national government money…And of course, there is private finance. However, instead of dirtying the money through the hands of financial intermediaries, New York Transit Authority raised $5 billion in bonds at preferential rates for the current capital plan and even got half a billion from New York City bond flotations. The transit authority takes the money and uses it."
That is a statement of what could be done in London. I am concerned by value for money, accountability and effectiveness of investment.
This is the first opportunity to raise in the House a report released in the summer by Deloitte & Touche. It compared, for value for money purposes, the PPP proposals with the normal public sector financing approach. London Underground sought to stop both its publication and its progress to the National Audit Office. However, Mr. Justice Sullivan allowed its publication on 31 July. He stated:

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"Once the PPP agreements have been concluded, the horse will have bolted. If Deloittes are right, it will be a very expensive bolting. It is only right that their view about the V[alue] F[or] M[oney] condition should be placed in the public arena, together with all the other views, so that the electorate may be assisted in making its choice in due course."
I shall provide the Chamber the headings of the executive summaries in the report:
"Neither the 30 year nor the seven-and-a-half year comparison provides a satisfactory basis for establishing—value for money. Highly material adjustments to the—public sector comparator—are judgmental, volatile or statistically simplistic…Some of the statistical analysis is arbitrary and could be mis-interpreted by the reader…Selection of preferred bidders too early in the process could lead to a materially adverse impact on—value for money. The financial advantages of selecting—a specific contractor as the…preferred bidder depend upon judgmental adjustments…Public sector bond financing has been largely dismissed."
Mr. Edward Davey: I am grateful to the hon. Gentleman for giving way. He is making a very serious speech, and I am worried that not enough of his London Labour colleagues—with the exception of the hon. Member for Brent, North (Mr. Gardiner)—are present to hear his remarks. Having read Deloitte & Touche's report, does the hon. Member for Leyton and Wanstead believe that the Public Accounts Committee, with the support of the National Audit Office, should conduct an urgent inquiry into the public-private partnership for London?
Harry Cohen: Yes, I support that proposal. As for my London colleagues, I know that they will read the account of this debate avidly.
In his article of 26 August, Will Hutton of The Observer refers to the "mendacious gerrymander" exposed by the Deloitte & Touche report. Will Hutton is a director of the Industrial Society, and in the past has spoken in favour of proper public-private partnership as a means of investment. His excellent summary refers to "four dodges" which I want to read into the record:
"Dodge One: Everybody recognises that there would be substantial efficiency savings of around 20 per cent if LU were offered the same framework as the private contractors—the guarantee of a high subsidy over years and the capacity to raise external finance freely as investment needs dictated.
The Government cannot accept this, thus the concept of 'reputational externality' has been introduced—out of thin air. This is the imputed £700 million cost LU must bear because it assumed that as a public organisation it is bound to fail to deliver and raise the financing costs of the public sector generally."
Mr. Barry Gardiner: I recall clearly the article to which my hon. Friend refers, but does he accept that the journalist concerned is making a mendacious point? When looking at a public sector comparator, one must remember that any cost overruns would be borne by the taxpayer rather than the public sector. In assessing the private finance method and the
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public sector comparator, one must make a financial assessment of the quantum of that risk. It is absolutely legitimate to try to put a price on that risk.
Harry Cohen: I will come to the point about private sector risk-taking, but as Will Hutton says, it was not right to state that the public sector comparator would cost £2.5 billion more.
Mr. John Horam: The hon. Gentleman is making a very interesting speech. I, too, am sorry that—excluding Ministers—he is supported by only one of his colleagues, the hon. Member for Brent, North (Mr. Gardiner).
Tom Brake: He is opposed by his colleague.
Mr. Horam: Indeed. Does the hon. Gentleman agree that, in addition to more Labour Members, a Treasury Minister should also be present in the Chamber? It is clear that the real villain of the piece is the Chancellor of the Exchequer, who has controlled the situation from the beginning and continues to do so. That is why London is still suffering.
Harry Cohen: I hear the hon. Gentleman's point, and I shall refer to the Chancellor.
The article by Will Hutton continued:
"Dodge Two: London Underground is such an organisational no-hoper and bound to manage any investment programme so disastrously as a public enterprise that there will be problems for passengers. LU's estimates of the 'performance adjustment' have bounced around between £460 m and £1.34 bn, finally settling on £1.17 bn. But this is not a real but an imputed cost, subject to political exigency.
Dodge Three: London Underground, because it is a public organisation, has no capacity to learn from its mistakes, but instead is condemned to repeat them on the same or even greater scale. Thus because there have been major cost overruns, such as building the Jubilee line, it is forced to assume it can never improve its systems to do better as it is in the public sector and thus is organisationally stupid. Cost: £1.576 bn.
Dodge Four: As no private sector organisation ever makes mistakes it is assumed that the private contractors will deliver what they promise to budget and there will be no upward renegotiation of a contract—ever. This report cannot be read without a mounting sense of incredulity and anger. It is hard to see how the National Audit Office can accept the spurious reasoning."
He added that to lift the performance of the London tube, it would need to be run by an innovative and creative organisation managing an integrated system, and that that is not what the PPP could deliver.
I received a reply from the Minister in July about the comparator. He said:
"We will make this judgment guided by the results of the robust public sector comparator that London Underground has constructed."
Alongside the Will Hutton article, the Minister's response gives a new definition to the word robust. What is the total investment proposed, and what are its components? When I asked staff of the London Underground at the Labour party conference, they were vague. They talked of £900 million a month being introduced, but the total figure, or who was paying what, was not clear. At the party conference, the Chancellor said:

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"And on London Underground we plan to invest not less public money but more, an extra £13 billion of public funds, the biggest public investment programme in the history of the Underground. And it is precisely because we are determined to avoid a repeat of the unacceptable extra costs of the Jubilee Line's delays and overruns—nearly £2 billion paid unnecessarily by the public sector to the private sector—that we are requiring that the private sector accepts its responsibilities, tied in to a proper partnership to raise capacity, improve safety, enhance reliability, and ensure that the £13 billion we invest delivers the best public service and protects public interest."
The Minister's July reply quoted the £13 billion figure and said that an estimated 20 per cent. of finance for these plans would be provided by the private sector with the remainder coming from London Underground fares and Government grants. Is the Chancellor right? Will the public be putting in £13 billion? If that is the case, what will the private sector invest? Will it be a greater total? What is the amount expected from fares? Can we have some clarity on the total amount?
Mr. Eric Pickles: I am sorry to interrupt the hon. Gentleman's fascinating speech. He mentioned the Labour party conference, but did he attend the question-and-answer session at which the Secretary of State promised that if independent evidence were produced to suggest that PPP did not offer value for money, PPP would not go ahead? Does the hon. Gentleman consider that the Deloitte report provides that evidence?
Harry Cohen: The Secretary of State did say that, and repeated it to the London group of Labour Members.
I would like the Minister to tell me what the total investment will be. What will be the input from the private infracos? What is their rate of return and what is it based on? Are they spending public money? If so, why should they get a rate of return at all? Or should not that rate be much less than if they were putting in their own money? Will they be getting their return before they have invested anything, or before they have invested the full amount? The Government have said that they will impose penalties on them if they do not perform, but will those penalties be paid for by public money? We need some answers.
Will the arrangement be comparable to that for the Isle of Skye bridge? That was the subject of a good article by Ian Aitken, again in Tribune, which is well worth reading; I recommend it to hon. Members. The islanders have to pay £5.70 each way to cross the bridge. He said that that was doubly outrageous given that £25 million of the cost of the bridge was shelled out by the taxpayer and only £500,000 came from the PFI consortium, which is now pocketing more than £3 million a year in revenues. I am worried that we will have that kind of set-up with the private infrastructure companies in London Underground; that is why we need to see the figures.
What are the implications of the Railtrack collapse? The language coming from the Government is of the private sector taking the risk, but the infracos will surely demand more cash and more profit, which will mean less value for money and perhaps none at all. The contracts are for 30 years with reviews after seven and a half years.
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What will happen at those reviews? Have the Government burned their bridges in terms of other options, so that if the infracos want substantially higher prices there will he no option but to pay them?
A process of perverse output accounting is taking place, although I am in favour of a degree of output accounting. In July, I asked a parliamentary question about London Underground's private finance initiative contracts. Following my hon. Friend the Minister's response—about more than £1 billion of investment in facilities such as the British transport police station at West Ham and better ticketing services—there was a footnote:
"The investment value is not the actual amount the private sector is investing in London Transport. Instead it is London Transport's estimate of what investment in PFI projects would have cost had they done the investment themselves."—[Official Report, 13 July 2001; Vol. 371, c. 655W.]
That is not the same thing as the actual amount that the private sector is investing. That form of accounting has serious implications, because it disguises the actual level of private sector investment and is, potentially, a fraud on the public. If it were applied to the PPP, the rate of return could end up being paid on money that was not actually invested. That is unacceptable. Will the public be given a clear understanding of what the private sector actually invests, and will there be proper accounts?
It is right to mention the Jubilee line extension at this point. The Chancellor described the £2 billion cost overrun on that project as a mistake that must not be repeated. LUL, which was presumably responsible for the extension and the cost overrun, has been put in charge of the current contract negotiations without any assistance from the Government or any other outside expertise. If the Government are saying that it was to blame for the Jubilee line cost overrun, it is strange to give it the chance to make similar mistakes.
Mr. Gardiner: It strikes me as odd, given that my hon. Friend agrees that LUL was poor in its performance in negotiating the contract for the Jubilee line extension and criticises the fact that it has been put in charge of negotiations on this occasion, that he should now want it to run the whole system.
Harry Cohen: I do not. The Minister outlined LUL's position on the Jubilee line overrun and said that it was not attributable to quality estimating. He said that significant risks and programme changes, such as those occurring as a result of the collapse of a tunnel—the project was using a new Austrian tunnelling method—at the concurrent Heathrow Express project, were the major contributors to the cost overruns.
If something similar happened again—a collapse of a tunnel, for example, with big implications for the infrastructure of the underground—I do not believe that the contractors, the infrastructure companies, would take the risk. That was a major tunnelling collapse, which had international implications. If that happened again, would the contractors of similar projects take risks? I do not believe it.
We need to see what is in the contracts. Will they mention risks specifically, or only generally? In that case, companies might accept liability, or they might not. Will there be absolute, unlimited requirements in

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the contracts, and can the public see them? Bob Kiley said that the risks will not be transferred wholesale, and that contracts will not cover risks concerning track, tunnels and signals. What if the water table rises, which in London it could, and causes damage? That would probably not be covered either. What will the contracts say about the potential cost of risks? Are there going to be fixed prices, or will the infrastructure companies simply be able to raise their prices should the risk materialise?
The Observer on 4 March mentioned the likelihood of "constant contractual disputes". London Underground had not even completed an inventory of the assets that it was going to pass over, implying a weak position for post-contract negotiations. Is the Minister satisfied that the contract will be absolutely watertight this time?
On safety, the international engineering consultant Parsons Brinckerhoff has produced a report on safety standards. Its findings included:
"We conclude…that LUL's Standards, in their current form, are inappropriate and inadequate to serve as an effective management control mechanism to protect the public interest in performance-based PPP contracts with privately owned Infracos."
It added that "Subject Committees" would be present
"to oversee changes to the mandatory Category 1 standards. However, all other standards will be…susceptible to change by the Infracos",
and, effectively, will be "self-regulating." The infracos can change them themselves.
The report, referring to disputes about standards, says that each standard
"could potentially become the basis of a PPP variation order, with consequent demands by the Infracos for increased compensation, risk mitigation, and relief from the PPP performance regime…As the contract allows the Infracos a degree of self-regulation, the Standards Regime could soon fall into disrepute and become unmanageable as a contractual oversight mechanism."
A further point is:
"The three different Infracos are under no obligation to cooperate and LUL could end up with three different sets of Category 2 standards controlling working methods."
That is a pretty damning verdict, as it states how difficult it will be for that management tool to ensure proper safety.
The railway inspectorate's report was due to be published in March, and then in July; it has since been put off again. The inspectorate made a statement saying that London Underground and new companies would have to jump a significant hurdle before a final version of the safety case could be accepted. I understand that the inspectorate has written its report, but it seems to have been suppressed and delayed. Can the Minister tell us where it is and when we are going to see it?
On PPP contracts, my right hon. Friend the Secretary of State told a group of London Labour Members that he would take independent advice—it would be
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interesting to know who will give that advice—on the outcome of the London Underground infrastructure company negotiations. He would then make his decision, for which he would be held accountable, and then release whatever documentation he could. That sounds reasonable, but it is not.
Tom Brake: Does the hon. Gentleman consider that advice from PricewaterhouseCoopers would be independent if that was where the advice was sought?
Harry Cohen: I would not want to cast a slur on PricewaterhouseCoopers and I do not know who will be chosen, but the Government should announce who it is to be. If the hon. Gentleman has a point to make about PricewaterhouseCoopers, he can make it during his speech and I will listen with interest.
The matter is complex and all aspects should be in the public domain before contracts are signed and irrevocable commitments are made. When the contracts have been signed, it will be too late for proper prior scrutiny, and Parliament will have been treated as a rubber stamp. Londoners want to know all the implications and to be satisfied that value for money will be achieved; they want to know that much-needed investment will not be wasted. There is already talk of station shopping malls taking priority over tracks and signalling. We must see the details before they are agreed to. The Select Committee on Transport recommended publication of the contracts before the decision was made.
In July, the Minister told me in reply to a written question:
"I understand that London Underground intends to publish the contracts once negotiations have been completed and will make available information on performance."—[Official Report, 18 July 2001; Vol. 371, c. 195W.]
Does that mean that contracts will be published before they are signed and agreed to by the Secretary of State? Perhaps the Minister will clarify what he said in his answer to me.
Unified management is much needed. A briefing to Labour Members in July stated:
"There will be no privatisation of the Tube. London Underground must always own and run the Tube. Nobody wants to repeat the mistakes of rail privatisation. There is a defined role for the private sector in making the investment happen. But the public sector must always be in charge."
I welcomed those comments, but there will be a split—it will not be the same as that with Railtrack—under the PPP between the operation of services and maintenance. Also, the tube will not be under public control between 1 am and 5 am when it is handed over to the infrastructure companies. There is a danger that the infracos will drive policy in their own interests, swallow cash and insist on priorities that may not be the same as

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London Underground's priorities. They may be able to ignore the Mayor and Londoners' wishes. What relationship will the companies have with Transport for London and the Mayor? When will London Underground become part of Transport for London? At the recent meeting with London Underground, doubts were raised about who is to run the business for the public sector. It was suggested that the business may be leaderless. When will the necessary appointments be made?
The Minister has been helpful and has given me some good and open answers, but many unanswered questions and too much uncertainty remains. That is deeply destabilising. There is great potential for the matter to go wrong with spectacular cost for years to come. Sir Cameron Mackintosh stated in the Evening Standard on 3 September that
"The Underground has taken over from the Dome as the nation's fiasco."
I do not believe that, but we do not want the matter to reach that stage, and serious concerns exist. For example, the TUC stated:
"PPP is deeply flawed and it cannot deliver the safe, affordable and quality tube system that all those who live, work and travel in London deserve.… We call on the Government not to close off dialogue but to urgently discuss the way ahead with the Mayor's Transport Commissioner, trade unions and other key partners."
The executive group of London Labour Members stated:
"We regret the Government's announcement … to impose the modified public private partnership for the tube.
While supporting the role of the private sector in construction works, and welcoming the £13 billion investment which will follow, we believe that Londoners must be satisfied that Bob Kiley's concerns over safety have been met. We recognise that the Government has attempted to meet these concerns, but we believe the proposals remain flawed.
We therefore urge both sides to re-open negotiations immediately in order to resolve the outstanding issues of safety and maintenance."
In his article in Tribune on 13 July, Ian Aitken said:
"The reality behind the whole controversy is that there would be no question of pursuing anything so bizarre as the Government's Heath Robinson scheme for the Tube if it were not for Gordon Brown's unhealthy obsession with the Treasury's rules for public borrowing. These rules assert, quite arbitrarily, that borrowing by public institutions like the nationalised industries counts toward the dreaded public sector borrowing requirement, and is therefore a bad thing. Borrowing by private institutions, on the other hand, does not, even if the money is raised from exactly the same lenders. It is therefore a good thing.
This is frankly bonkers."
Mr. John Wilkinson: Why have Her Majesty's Government gone against the evidence not just of the London transport commissioner, but of the Select Committee, Labour Members, the TUC and others; particularly in light of the Railtrack fiasco, which showed that providing public money to a private operator did not provide a solution? How will the PPP proposal for the underground differ?
Harry Cohen: There are significant differences between the London Underground PPP and the Railtrack one, but it falls to the Minister to respond to the general thrust of the hon. Gentleman's point.
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In his letter to me of 6 July, Bob Kiley said:
"My negotiations … concluded that the current procurement could not be structured to guarantee that new trains would be delivered, that stated investment programs would be carried out, or that maintenance would proceed under standards acceptable to LUL. The only solution was for the bidders to provide LUL with control of core management functions. The bidders could not accept this, leaving no solution within the PPP structure.
The way forward … is to drop the current procurement and take up a safer, quicker and more economic system, bringing massive private-sector participation to clearly defined projects. We can bring new trains and fully repaired tracks to London years ahead of the timescale currently envisaged by PPP. It is a shame that so much time and money has been expended to date on the fruitless negotiations around PPP rather than in progressing a detailed investment programme."
I urge greater Government flexibility. Private sector involvement and finance is acceptable, but must be under the full control of the public sector. London Underground is a public service, not a profit-making conduit. The proposed version of the PPP seems to contain many flaws. The Mayor will eventually have to take over responsibility for the tube. He was elected to do so. It makes no sense—including from a Labour party-political perspective—to tie his hands behind his back. We should be at ease with local democracy on matters such as the running of the tube. Even at this late stage, I urge a radical rethink.
11.38 am
Mr. John Wilkinson: We are all most grateful to the hon. Member for Leyton and Wanstead (Harry Cohen) for, above all, his honesty, his candour and his willingness to face unpleasant realities. One such unpleasant reality has been demonstrated today, as the Jubilee line is closed from Waterloo northbound to Finchley Road. My constituents face such impediments daily. The frustrations of Londoners are legion, and hardly anything creates more frustration than the Government's total failure to modernise the underground system.
The Mayor's transport strategy put the alleviation of traffic congestion, especially in inner London, at the top of his list of priorities, and we are to have road-user charges, with all the pain and grief that they will impose. If he and the Government were to put the modernisation of the underground at the top of the list, Londoners and London's businesses would be most grateful. I appreciate everything that the hon. Gentleman said. The division of responsibilities, which is inherent in the operating companies and London Underground under the PPP model, is fatally, fundamentally and totally flawed. There has to be a clear chain of command from those who operate the service to those who have management responsibilities to those at a political level within the GLA who have the responsibility of laying down policy. If t hat model is pursued, the modernisation of the London underground is possible.
It is not necessarily a question of private sector involvement. What is necessary is effective political leadership from the Mayoralty, and support for the Mayoralty from Her Majesty's Government, instead of the consistent effort of Her Majesty's Government to undermine the Mayoralty for party-political reasons and out of sheer spite. The Government should have the magnanimity to acknowledge that the Mayor may be correct in choosing a professional to be transport

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commissioner for London—most Londoners believe that he is correct in that judgment—and that the transport commissioner for London requires and deserves the support, at the very least, of Her Majesty's Government.
The Department for Transport, Local Government and the Regions seems to be more interested in looking into "Old Moore's Almanac" than listening to the voice of Londoners as expressed through the GLA and the Mayor. I am pleased that my party in its manifesto made it clear that it was unacceptable for the Government to maintain the division that they propose between the operating companies and London Underground.
I want to concentrate on the need for investment in the system, which the hon. Gentleman mentioned at the beginning of his speech, and to identify areas of investment that would benefit my constituents in northwest London and help the regeneration of London's economy by improving the transport system within the capital. Setting in place appropriate underground links to the fifth terminal at Heathrow should be at the top of the list.
The downturn in air transport is a temporary, understandable and tragic phenomenon, the causes of which we all understand. Civil air transport and its support is a matter of critical importance for the capital's economy. The fifth terminal at Heathrow must be built, and a Piccadilly line extension constructed. The Heathrow Express line must be extended also and, most important of all, Crossrail should get the go-ahead. The initiation of the Crossrail project from Reading and Heathrow out to the north-east and to Stansted, and down from Aylesbury, through Paddington and out of Stratford, would do more than almost any other project to revitalise public transport in London and free up the capital from the congestion that bedevils it today. That should be a priority for Her Majesty's Government, using public money. The City of London has said that it is possible for private finance to be obtained, which may be the case. However, London Underground should take the lead in supporting the Crossrail project.
There are also minor projects of particular importance to the west London economy. The Croxley link would extend the Metropolitan line beyond Northwood in my constituency up to Watford junction. At present, it is impossible for passengers coming from north-west London on the tube to go beyond the end of the tube at Watford. They then face a long journey on foot, by public transport or by taxi, to get to Watford junction and the railway network to the north-west and beyond. A small stretch of track is required, but the amelioration of transport problems in north-west London would be remarkable.
Likewise, it is necessary for a much better rail connection to be put in place between north-west London and Heathrow. A first step would be an extension of the tube from Ruislip Gardens on the Central line to Uxbridge and, I hope, beyond Uxbridge down to Heathrow. That, too, would be invaluable.
To set the proposals in perspective, the Government are minded to spend hundreds of millions of pounds to extend the channel link, under its second phase, eventually as far as St. Pancras. The current link to Waterloo may be slow, but it serves a part of London that is an equally important catchment area from the
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point of view of passengers. Now that the Jubilee line goes from north-west London all the way to Waterloo, there is no great problem for passengers in north and north-west London to reach Waterloo, the terminus. The money that is to be allocated to the second stage of the channel tunnel link would be much better spent on Crossrail and the improvements that I outlined. Again I thank the hon. Member for Leyton and Wanstead for his candour and for the service that he has done the House in obtaining this morning's debate.
Mr. Frank Cook (in the Chair): Order. I remind the House that in this slot on a Wednesday morning, we aim to start the winding-up speeches at 12 noon. I hope that those hon. Members seeking to catch my eye will bear that in mind.
11.46 am
Sir Sydney Chapman: congratulate the hon. Member for Leyton and Wanstead (Harry Cohen) on introducing this important debate for Londoners this morning. I welcome the new Minister and hope that he enjoys his poisoned chalice. I have particular affection for him because, as he will recall, we used to pair in what I now regard as the good old parliamentary days when the pairing system worked.
More than two thirds of Londoners now say that they receive poor value for money in using the London Underground. More than half the people who use the underground say that they receive a poor and unacceptable level of service. There is overcrowding and congestion, too many trains are terminated early and there are too many delays and breakdowns. As a London Member of Parliament, I have never received so many complaints as I have about London Transport, and London Underground in particular, over the past two years.
My constituency is at the end of the Northern line, which has been dubbed the misery line; although, in fairness, it now has new rolling stock that was ordered and built before 1997. Several of my constituents live near the end of the Piccadilly line, where the problem of the early termination of services at Arnos Grove, instead of Cockfosters, is especially prevalent.
The modernisation of London Underground requires a large and rapid investment, as we all know. However, sadly, that is the exact opposite of what is happening at the moment, as the front-page report in today's edition of The Guardian, to which the hon. Member for Leyton and Wanstead referred, spells out.
Despite what the Secretary of State said in the summer, Government support for London Underground has not substantially increased. According to The Guardian report, investment has been cut by 30 per cent. The Secretary of State claims the doubling of the grant, to £520 million, this year. I make two points. First, last year's investment by the Government of £267 million was a rock-bottom low, so it was a pretty low base from which to start. Secondly, I calculate that London Underground will be lucky if it receives only £400 million of that £520 million.
The Government have wasted the past four years and failed to deal with the urgent issues facing London Underground, which must either remain in the public

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sector or be run by the private sector. Public-private partnership will achieve the worst of both worlds. The body that owns the assets must run the operations; the recent history of the running of public transport has taught us that lesson. Someone has to be held to account, but poor performance by the public part of the industry will be blamed on the private sector, and vice versa.
Complete privatisation would work if it was backed up by a good and unambiguous contract, but Londoners have made their choice. Parliament has established a Mayor, a new Greater London Authority, and Transport for London to run London Underground. My party accepts that. However, if I correctly judge the feelings of my constituents—which I think I do—they do not much care whether London Underground is in the public or the private sector. They want a safe, reliable and clean service with fares that are good value for money.
The Government must sort out their problems by joining up their policy with regard to public transport in London and by getting on with the job of providing a decent service to Londoners.
11.51 am
Mr. Mark Field: I endorse the comments of my hon. Friend the Member for Chipping Barnet (Sir S. Chapman).
The subject under discussion is a Treasury-related matter, and I have some sympathy for the Minister. I am also aware that there are many bodies and individuals in place—such as the Mayor, Mr. Kiley and the Greater London Authority—which means that hon. Members are yet another layer of politicians involved in dealing with the problem; perhaps we interfere with it more than we help. However, our voices must be heard. My constituency contains the largest number of tube stations, most of which are stations of destination rather than departure.
Fundamental issues are at stake. Before 1 May 1997, the tube was not in a fantastic state, and it is important that my party acknowledges that. However, matters have only got worse since then. It appears that there is no strategy. In the Government's first term, the Deputy Prime Minister was the Secretary of State with responsibility for Transport. He constantly said that he wanted an integrated transport policy but did not do much about achieving it. The present Secretary of State lacks any credibility. An article in today's edition of The Guardian suggested that there was a cancer of cynicism in his Department; it will be difficult to cure, and I was concerned to read about the misleading statements that have been made.
London's infrastructure is falling apart; that is true with regard to not only the tube but the health and education services. A fundamental rethink is required and I hope that the debate can help to identify the problems. However, it is now up to the Treasury and the Department for Transport, Local Government and the Regions to try to make a difference.
I am particularly concerned about the matter because London—by which I mean my constituency and the other 74 London-related constituencies—earns much of
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the nation's wealth. However, despite the massive amount of wealth that London brings into the country, Londoners have to live with third world infrastructure, and there is no real strategy to improve it. The situation that Londoners have to put up with is unacceptable, especially when one considers the amount of money that is being pumped into other devolved regions, particularly Scotland. It is high time that the Chancellor—who, of course, does not represent his constituents in this place on many of these infrastructure-related matters—was made aware of that, because it is entirely unacceptable. There will be a massive political backlash—particularly because 55 out of the 74 London Members of Parliament are on the Government Benches—as this fact continues to be exposed.
I am also concerned about Crossrail, and I agree with the remarks of the hon. Member for Leyton and Wanstead (Harry C, then). It is important that that is introduced; again, the Conservative Government put a stop to the proposals that were made in 1992–93. One of my greatest concerns is that any sign of an economic downturn in London will take the edge off demand for the transport infrastructure. The reductions may be only marginal—a 5 or 10 per cent. fall in numbers—but that might give the impression that things are not as bad as they have been in the past two or three years. That might be used as an excuse—the Treasury is considering paring off a lot of its financial commitments—for putting things on the backburner. That is particularly likely in the case of Crossrail, but it could also happen with some of the necessary investment in London Underground.
I appreciate that much of the matter is in the hands of Mr. Livingstone and Mr. Kiley, but the plans for a congestion charge, which affect my constituency more than virtually any other in the country, were predicated on the idea that there would be a demonstrable improvement in public transport. Since Mr. Livingstone's election, he has made it quite clear that the underground requires a decade or more of investment before such improvement can be achieved. He is absolutely right to identify that as the time frame. There will be no quick fix on the underground and it requires long-term investment. That investment must start now, because things are likely to get worse before they get better. If we do not have a strategy in place, things will go from bad to worse.
All of the emphasis is now on bus transport. This may be the only instance of the integrated policy to which the late, lamented Secretary of State for the Department of the Environment, Transport and the Regions—the Deputy Prime Minister—referred. We cannot simply rely on buses. We can introduce bus lanes and improve bus services, but the idea that that can happen before January 2003, which—although I expect it to change—is still the expected start date for the congestion charge, will not prove realistic.
Bob Kiley was brought over from New York at great expense. Clearly, he has experience in this area, notwithstanding the rubbishing that one or two Government Ministers and advisers have tried to give him. He must be given the tools to do the job. I like to think that I speak on behalf of all 13 of the Conservative London Members of Parliament in saying that.

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The whole issue of PPP and PFI-related projects is up in the air after the fiasco of Railtrack. I do not think that City financial institutions, other investors or even the employees of any of those future companies will feel that this is a sensible way forward. As a result, we must look to the Treasury to make a firm, and long overdue, commitment to the investment that is required. It has been required for more than a decade, although my party would obviously have to accept some responsibility for that.
The crying shame is that we have wasted four and a half years. Nothing has been achieved. There has been parroting of various slogans, but no real strategy has been put in place. This has been an interesting debate. London Members of Parliament should, in a sense, get off the stage, because we need to get the core decisions made in Government and then give Mr. Livingstone and Mr. Kiley the opportunity to get on and do the job.
11.59 am
Tom Brake: I welcome the opportunity to have this topical debate and, like other Members, I feel very sorry for the Minister. I understand why he has such a grim and determined expression on his face.
It is worth recapping what has happened in the past four years under London Underground and Government management. The hon. Member for Leyton and Wanstead (Mr. Cohen) quoted from parliamentary answers that I obtained, which reveal a significant deterioration in services. Statistics reveal the extent of train delays of 15 minutes or more. Several lines have experienced significant increases in such delays over recent years. Significant increases in the length of time that people have to wait in queues for tickets are also occurring. Under the present management and the present Government, services are definitely deteriorating.
London Underground has spent £300,000 of our money on an advertising campaign. "Publicly run, privately built" was its slogan, which sounded suspiciously like a Labour party slogan to me. That campaign has now stopped and, "The quickest line to improvement" is its latest slogan. The advertising shows a pound sign at the end of the tunnel; precisely what the consortia will be interested in.
In response to the front page of today's edition of The Guardian, will the Minister place in the Library all correspondence between his Department and London Underground on the 2001–02 budget? Members can then judge for themselves whether the figure was nothing more than a bargaining ploy by the Government or a firm figure on which the Government have subsequently reneged. Will the Minister also confirm what safety imperatives will be cancelled or delayed as a result of the £30 million cut in the safety budget mentioned in The Guardian article?
What has been the Government's approach? They resorted to smear tactics in attacking Bob Kiley and we have received no apology from any Government spin doctor for that attack. Presumably the same Government spin doctors are currently spinning against London Underground because it made public its concerns about the proposed cut. It takes a peculiar spin on the Government's part to fall out both with Transport for London and with their own appointees, London Underground.
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Some dubious claims have been made about the value for money of PPP. The Deputy Prime Minister stated in December 1999:
"PPP is the right choice. It would save £4.5 billion".—[Official Report, 8 December 1999; Vol. 340, c. 847.]
The Minister for London spoke about
"generating massive efficiencies in the tube investment programme over 15 years."—[Official Report, 8 December 1999; Vol. 340, c. 930.]
However, we know from the report of the highly reputable Deloitte & Touche—a report that the Government tried but failed to suppress—that no value for money could be demonstrated in the first seven and a half years of the contract.
Does the Minister still anticipate a saving in the order of £4.5 billion, or anything remotely close to it? Following the Railtrack debacle, is he confident that £3 billion of private sector efficiencies can be achieved? Does he believe that PPP will generate the supposedly massive efficiency savings in the tube investment programme? Do the terms of the PPP contracts include specific figures on how little money winning bidders have to invest in London Underground? A proper amount should be stipulated as a minimum requirement for delivery.
A crucial issue is who will validate whether PPP represents value for money. At the Labour party conference, the Transport Secretary said that he would take his own independent advice. That is why I intervened on the hon. Member for Leyton and Wanstead to ask whether he thought that PricewaterhouseCoopers would be independent. That company has been adjusting the public sector comparator and making the bond issue look much worse than I, and others, think it is. One must question whether it is capable of giving independent, impartial advice to Ministers on whether public-private partnership represents value for money. Will the Minister confirm whether PricewaterhouseCoopers will be the independent advise?
There is so much uncertainty about whether PPP represents value for money that it is necessary, as other hon. Members have said, for bodies that are clearly independent of the Government, London Underground and PricewaterhouseCoopers to examine the question. It is for that reason that my hon. Friend the Member for Newbury (Mr. Rendel) will later today present a letter on our behalf to the new Chairman of the Public Accounts Committee, who is due to be elected today. The letter will ask the PAC to examine the issue as a matter of urgency and to put pressure on the National Audit Office to consider PPP before, rather than after, contracts are signed. It will be no consolation to Londoners if, as the Transport Secretary said,
"I will be held accountable for the decision and I will make it public and people can criticise me if they feel I have made the wrong decision."
That's all right, then. If PPP fails and the NAO finds that it does not represent value for money, we can all criticise the Transport Secretary. However, we would still have to live with PPP for the next 30 years.
There is one final reason why PPP should be stopped in its tracks. Many hon. Members have referred to it; Railtrack. The Transport Secretary said on Monday:

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"It was a company in crisis and came to the Government with a begging bowl month after month. It begged for taxpayers' money while handing out dividends to shareholders."
He also said:
"the Government are not here to fund the shareholders of private companies."‑[Official Report, 15 October 2001; Vol. 372, c. 959.]
I can envisage a situation a few years hence—as I am sure can other hon. Members—in which the Transport Secretary's successor comes to the House to say similar things about the PPP project.
Finally, I ask the Minister to convey to the Secretary of State the following message. He had the courage to pull the plug on Railtrack. Will he now take decisive action against the Chancellor's pet project, PPP, and put it out of its misery?
12.7 pm
Mr. Eric Pickles: I congratulate the hon. Member for Leyton and Wanstead (Harry Cohen) on what has been a timely and fortuitous debate on London Underground. He and several Members referred to Crossrail, and I should declare an interest. Crossrail will start about 300 yards from my bedroom window and, if it proves to be noisy, hon. Members should be sure that I will regularly report that back to them.
My hon. Friend the Member for Ruislip-Northwood (Mr. Wilkinson) was right to talk about the need for a clear line of command for safety and investment. He was also right to point out that Mr. Kiley deserves our support. My hon. Friend the Member for Chipping Barnet (Sir S. Chapman) spoke about the deteriorating reliability of the underground and about particular problems on the Northern and Piccadilly lines, and I support his comments.
My hon. Friend the Member for Cities of London and Westminster (Mr. Field) said that the network was not in a particularly good state when the Government came to power, at which point I saw the Minister scribbling away. However, he should remember that since the war, the only bumper time for the London underground was in the first two years of Mr. Major's Government. The facts speak for themselves. However, that level of public investment was unsustainable and there has been a gradual downturn in investment since then. Most of the London underground is 150 years old. More worryingly, we should also realise that no one has a real idea of the state of the tunnels on the underground, a fact that Mr. Kiley candidly volunteered to me in a meeting a couple of weeks ago.
Capacity on the underground is severely limited. There is much talk about shifts from the road to the underground, but there is virtually no capacity for significant increase. My hon. Friend the Member for Cities of London and Westminster rightly talked about a possible world recession, but this is none the less an ideal time to press ahead with improvements in the rail network and the underground. That might give us a few valuable years of breathing space to get those projects under way before there is an inevitable increase in capacity.
The hon. Member for Carshalton and Wallington (Tom Brake) talked about the new displays on the underground that show a pound at the end of the tunnel,
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representing valuable investment money floating away from the underground. They demonstrate more honesty than the spin doctors.
Thanks to The Guardian, we now know that despite the Government's promises a few weeks ago—they trumpeted a vast increase in the money available for the underground—their so-called increase actually represents a 30 per cent. decrease. I find myself in a position that I would not have believed any Conservative spokesman would be in; I am almost tempted to table an early-day motion demanding the return of the Deputy Prime Minister to his former transport role.
Mr. Field: It is not that bad.
Mr. Pickles: I think it is. Messages should be sent to Ukraine, where I understand the Deputy Prime Minister is in negotiations—
Mr. Field: For political asylum?
Mr. Pickles: I am sure that it is not for that. The Deputy Prime Minister should return immediately because he had the clout. We know from talking to London Underground officials that firm promises were made for £775 million of investment. They were shocked to find that a press release from the present Secretary of State claimed that they would receive considerably less—30 per cent.—and that that sum was heralded as some kind of triumph. The cut means a £30 million cut in safety improvement, a £16 million cut in the maintenance of lifts and escalators, a £72 million cut in the upkeep of stations and a £34 million cut in infrastructure. The backlog of repairs and maintenance now stands at the princely sum of £1.2 billion. There is a paradox in that because the amount of money put aside to set up the PPP—perhaps the Minister would give us the exact figure; we are certainly talking about hundreds of millions of pounds—would otherwise be available for improvements.
We need a clear grasp of how important the underground is in terms of moving passengers about. The City of London has a 92 per cent. commuter intake, larger than any other city in the world. The underground carries 3 million passengers a day, roughly the equivalent of the railway network for the whole of the United Kingdom. However, it is old and outmoded. As the hon. Member for Carshalton and Wallington said, the number of signals passed at danger increases as funding for the rail network decreases. Punctuality is decreasing. There s a suggestion—I hope that the Minister will refute it—that we are seeing before and after shots; that the Government are following a deliberate policy of running down investment in the underground to show clearly some great benefit after PPP comes in. If that were the case, it would be a scandal. The Minister is scowling, and I am sure that he will refute that argument.
It needs to be stated clearly that, even with PPP, the money generated by fares will not be sufficient to guarantee improvements to the infrastructure. It will not even be sufficient to deal with the basic safety

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requirements. The success of the underground will be determined by the level of state subsidy. That will play a significant part because of the way in which the PPP is structured; there is no getting away from it. The Government could do to the underground what they did to Railtrack; turn off the resources and make the company go bust. Those people who are thinking of investing in PPP will have the image of a Secretary of State deliberately destroying a company very much in their minds before they make that investment.
The hon. Member for Leyton and Wanstead was particularly courageous to refer, as did Opposition Members, to the regrettable and unfortunate incident involving the Secretary of State's spin doctor. The hon. Gentleman was quite right; she should go. The staged apology yesterday was ill-timed and ill-considered—particularly in its failure to address the families of those who died—and made matters considerably worse. My principal concern is not only that the disgusting e-mail was sent; what seems to be for gotten is that the Government acted on it. The various consultation documents that they later suggested should be put out were, indeed, put out.
Mr. Edward Davey: Is the hon. Gentleman not even more concerned about the way in which the director of communications at the Department was treated—we are told—by the Secretary of State himself?
Mr. Pickles: That relates directly to the underground. We must remember that the way in which Mr. Evans was dealt with was connected to the Parsons Brinckerhoff report about safety on the underground. Ms Moore saw a possibility that the report might be regarded as unfavourable and thought it appropriate to send out information about Mr. Kiley, an honoured and dedicated public servant. That should not surprise us. This is the woman who saw the destruction of the twin towers as a good way to get out bad news about councillors' pensions and who tried to deny and defer information on the safety of the railway's.
Mr. Wilkinson: My hon. Friend is making an important constitutional point. Has it not always been the tradition that Her Majesty's Ministers are answerable personally for the conduct of public servants in their Department? It is a preposterous notion that a public servant should appear on television to try to exculpate herself. The Secretary of State himself must take responsibility, and he ought to resign.
Mr. Pickles: Indeed. I have called for the Secretary of State to resign. He does not seem to realise the seriousness of the situation. The Opposition parties have stopped the normal criticism of Government to offer support in these difficult times. There is an obligation on the Government to keep their own house in order and to accept responsibility for that despicable e-mail. It certainly leaves us all with a bad taste in our mouths, which is not good as we move on to the next stage—trying to ensure that sufficient investment goes into London Underground. I am afraid that the Secretary of State has been looked upon, weighed in the balance and found wanting on this important issue.
12.20 pm
The Parliamentary Under-Secretary of State for Transport, Local Government and the Regions (Mr. David Jamieson): First, I congratulate my hon. Friend the Member for Leyton and Wanstead (Mr. Cohen) on securing this important debate. A number of hon. Members have commiserated with me on my task. I can assure them that I am pleased to have this job and to respond to the debate. The hon. Member for Carshalton and Wallington (Tom Brake) said that I had a grim expression on my face. I can assure him that it was a happy expression; any grim expression may have been in anticipation of what he had to say.
I congratulate my hon. Friend on the sensible and courteous manner in which he conducted the debate and on his characteristically robust presentation. I also congratulate him on his perseverance, both in tabling questions to me and the Department and in writing to the Department. He has been a serious player. I congratulate him on the way in which he has robustly taken up matters on behalf of his constituents. That may not always be convenient or comfortable for the Government, but it is important that people do as he has done.
I agree with my hon. Friend right from the outset. He says that we want an underground system that gives value for money and accountability. We want something else, too. His constituents and those who use the tube—I use it regularly, both in my ministerial capacity and privately—want it to be safe, clean and reliable. That is what we will deliver. I hope that my praise for my hon. Friend has done less damage than his praise for me. I cannot cover all the points in the time available. However, as always, if there are points that he or others feel we have not covered sufficiently I shall be happy to deal with them in writing.
A number of hon. Members referred to one of the Department's press officers. My hon. Friend quite rightly said that she should be condemned. It was also right for her to apologise yesterday. This debate, however, and the ongoing debate, should be about the issues and not about the personalities. I intend to move on to the issues. Before I attempt to answer some of the points in the debate, it is important to set my response in context.
I welcome the debate today. London Underground is a vital national asset. The hon. Member for Brentwood and Ongar (Mr. Pickles) gave some of the figures. We need to get a clear grasp of the value of the underground, which carries 3 million passengers a day and is essential for the functioning of London as one of the great cities of the world. But for too long, London Underground has suffered from a lack of investment. It struggles to run a 21st century service with old and outdated equipment.
We recognised those problems when we first came to power. It was clear that to make the fundamental changes needed to secure the long-term future of the tube would take time. But the underground's needs were urgent. Some may have forgotten—those involved in trying to make the improvements to the tube need to remember—that the previous Government's spending plans would have seen investment fall to £160 million and beyond that to zero. We reversed those cuts.

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An additional £365 million of funding for London Underground was made available in March 1998. Another £517 million over two years was announced in July 1999. In our first term as a whole, the Government provided the underground with almost £1 billion more in grant than the Tories planned. It is important to get those figures on the record. We are providing another £520 million of grant this year, almost double the amount available last year. We will continue to provide the additional resources needed to keep the underground from getting worse and to make a start on the vital improvements needed.
Mr. Pickles: Does the Minister think that it was wrong that a senior London Underground manager told the Evening Standard that the Government were resorting to old-fashioned hypocrisy by announcing with a fanfare that they were doubling the money this year?
Mr. Jamieson: The old-fashioned hypocrisy may be coming from the Opposition, not the Government. I shall come to funding in a moment.
It is clear that even Government grant year on year could never be enough to achieve the faster, cleaner and more reliable service that the constituents of the hon. Member for Leyton and Wanstead want. We cannot build a better system by just throwing money at the problem, whether that money comes from taxpayers or from issuing bonds. The tube needs new life and a new structure to ensure that the money that we put in is well spent and delivers the service that we want.
It has been suggested that the Government are taking a dogmatic approach to the matter, but that is not the case. The tube modernisation plans are not the creation of an official hidden away in an obscure corner of the Treasury; they are the result of a huge amount of careful thought by expert advisers and, most important, by the people in London Underground, who really know how the tube works. They know the system inside out and know the real problems.
The Government ruled out privatisation at an early stage, contrary to some claims. We passionately believe in quality public services; it is often forgotten that we looked at all the options for the best way to modernise the tube. When the Deputy Prime Minister announced our approach, he published a document setting out the options we considered, including the use of bonds, a
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trust and a joint venture. The tube runs intensive services and the operation of the tube lines need to be coordinated, with signals, trains and stations managed together in real time. That is why we insisted on keeping all aspects of the tube operation firmly in the public sector.
It was necessary to change the management of the investment to upgrade the infrastructure and to avoid past problems of projects being late and over budget. My hon. Friend the Member for Leyton and Wanstead referred to the Jubilee line being over budget and out of control. We had to avoid such mistakes because we wanted to ensure that the money that went in would provide the service and give the value that passengers wanted. We needed a new solution to help to fix that infrastructure.
The underground needs a new way to manage investment, to ensure that improvements are carried out on time and, most important, on budget, and to ensure that essential maintenance work is not overlooked.
My hon. Friend mentioned the £2 billion overrun—as he called it—of the Jubilee line extension, which we do not want to be replicated in the future. I am glad that he asked a proper question about private profits from the infracos. Those companies will make a profit only if they deliver a punctual, quality service that provides value for money according to the contract negotiated with London Underground. If they do so, and meet the new high standards, they will be able to make a profit as private companies.
My hon. Friend the Member for Leyton and Wanstead asked about the railway inspectorate. A report is expected shortly, certainly before Christmas; we hope it will be next month. My hon. Friend asked whether the contracts would be in the public domain; we have put the criteria that we are using to draw up the contracts in the public domain, but my hon. Friend will appreciate that much of the commercially confidential material cannot be released. There have been comments from various sources about the £775 million; that was an expectation of London Underground, which said in its press release yesterday:
"It is not unusual for us to receive less than we ask for."
I have been allowed very little time to respond to the many important issues raised by today's debate. There are many matters that Members will want to take further. If they would care to indicate them in correspondence or otherwise, I should be happy to take them forward. This is an important debate about a matter of great substance. I am glad that we have had an opportunity to air some of the issues today.

Grantham Hospital
12.30 pm
Mr. Quentin Davies: I am grateful to both you and Mr. Speaker for giving me this debate, Mr. Winterton. It is an opportunity— [Interruption.]
Mr. Nicholas Winterton (in the Chair): Order. Will those leaving the Chamber please be quiet and leave quickly?
Mr. Davies: These new debates have provided an opportunity to bring to the attention of both the House and the Government a matter of the greatest concern to myself, my right hon. and learned Friend the Member for Sleaford and North Hykeham (Mr. Hogg), my hon. Friend the Member for Newark (Patrick Mercer), who would be here but for his being away with a defence committee, and to all our constituents, including the mayor of Grantham.
The debate concerns the future of a general hospital, Grantham hospital, which has served the people of Grantham and its surrounding areas, including Newark, Sleaford and many villages, for generations. Until 1998, the hospital had a full range of services including paediatrics, gynaecology and obstetrics. With your knowledge of the health service, Mr. Winterton, you will be the first to agree that those are three important specialties in any general hospital.
The paediatric facility had been supplied for many years by a contract with the Queens medical centre in Nottingham. That worked perfectly well, providing a full range of paediatric services including neo-natal back-up to the obstetrics service. In the summer of 1998, Lincolnshire health authority decided to set up a new ambulatory paediatrics service in Lincolnshire. It announced to the Queens medical centre that in future all it would be required to deliver on its contract would be the neo-natal back-up for' emergency deliveries, which are, of course, exceedingly rare in the course of a year, requiring the immediate attention of a paediatrician. Lincolnshire health authority must have known that that would result in the Queens medical centre saying that it could no longer go on supplying paediatricians to be used once or twice a month. It was a ridiculous suggestion and the Queens medical centre was unable to renew the contract.
Lincolnshire health authority deliberately made no alternative provision. As a result, the viability of the obstetrics department was undermined, which provided the health authority with a wonderful excuse to withdraw gynaecology and obstetrics consultants from Grantham hospital. I use the word "excuse" advisedly. It was clear at the time that they knew the consequences of what they were doing. We found that out in the most dramatic fashion when, at a meeting of the health authority, which was supposedly going to take a decision on the future of the specialties in Grantham hospital, it was discovered that Lincolnshire health authority had already spent money on expanding the maternity facilities in Lincoln before the decision had been made. That was a clear breach of due process to which I drew attention at the time. Had we had the funds, we would certainly have pursued the matter
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under judicial review. What is more, the Government, who knew perfectly well what was going on, did not intervene, as they should have done, at this clear breach of due process. It is obvious that they were complicit in the manoeuvre whereby those vital specialists were removed from Grantham hospital. That caused great concern and agitation in Grantham and its surrounding towns and villages. In all, 100,000 people depended on the facilities in Grantham hospital.
Several proposals were made to save those services. I should like to pay tribute to Mr. Voght, one of the consultant gynaecologists and obstetricians in Grantham hospital, who produced several proposals under which it would have been possible for consultant gynaecologists and obstetricians to continue to operate in the hospital, but the Government rejected them all.
Of course, I immediately took the issue up with a series of Ministers. First, I contacted the then Secretary of State for Health, the right hon. Member for Holborn and St. Pancras (Mr. Dobson). I had meetings with him both privately and accompanied by my right hon. and learned Friend and by the then hon. Member for Newark. I took a deputation of local citizens, including many interested groups and local authority leaders of all three parties, to see the right hon. Member for Holborn and St. Pancras on 1 September 1998, when we received a promise that the royal colleges would be instructed to look at the matter and to make urgent proposals on the future of maternity services in Grantham hospital.
The right hon. Member for Holborn and St. Pancras was then replaced as Secretary of State by the right hon. Member for Darlington (Mr. Milburn), who continued to maintain that promise. I pursued him on several occasions—for example, in February and April 1999—and was always told that the report was about to appear. It never has, and it has now been revealed by the Minister for Public Health, who is not here today because she is on maternity leave, that the promise has been—to use her words, which I believe are in the new spin-doctor language—"overtaken by events". In other words, the promise has been breached.
From spring 1999, the right hon. Member for Darlington, who evidently had little taste for the issue and was perhaps deeply embarrassed by it, decided to pass the whole matter over to his deputy, the Minister for Public Health, who has displayed in her handling of the matter a lack of interest and commitment and a lackadaisical and disorganised approach to her work such as I have not previously witnessed in my dealings with Ministers in Governments of either party. On one occasion, she took a year to respond to one of my letters. I eventually received a grovelling written apology from the permanent secretary and chief executive of the national health service, Mr. Nigel Crisp, apologising for the behaviour of his Minister: a pretty extraordinary state of affairs. Her letter, which I am happy to make available to anyone who wishes it, is dated 16 May 2000. That gives a flavour of the way in which we have been treated by the Government.
Naturally, I continued to pursue the matter. I arranged a meeting with the Minister for Public Health on 1 March 2001, when I received her assurance that she would institute an inquiry into the future of maternity services in Grantham, apart and aside from any national investigations or inquiries relating to royal colleges about the future of maternity services in the national

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health service, because she accepted that the matter of Grantham was of sufficient urgency. I recorded that in a letter to her dated 9 April. I received no written confirmation from her of the promise or of any moves to set up the inquiry. My secretary and research assistant pursued her office and on 10 May received a promise that we would definitely hear something from her before the dissolution of Parliament. We did not. One may ask why the Government did not wish to give me a discouraging response on the eve of the election campaign, but I will leave that open to speculation.
I finally received a reply to my letter of 9 April on 20 September, which represented a considerable improvement in the hon. Lady's performance. The delay in her dealing with her correspondence has evidently come down from 12 months to six months, so I suppose that we should be grateful for that. The letter said that the original promise that I was given by the right hon. Member for Holborn and St. Pancras had been, to repeat her phrase, "overtaken by events" and that her own undertaking on 1 March no longer applied. The letter was full of gobbledegook saying that there would be all sorts of studies of all kinds of maternity and obstetric issues in the national health service and that over the long term the future of Grantham hospital would have to be considered in the light of those. I have no time to quote the letter, but I will make it available to the press and any other interested party. It makes depressing, but revealing, reading.
This is a history of avoidance and evasion of fundamental responsibility and of trying to fob off the people of Grantham. However, the really vital issue that we should be focusing on today is the actual consequence of removing those facilities from Grantham hospital.
I am afraid that the consequence has been what was predicted by myself and many others, including the general practitioners of Grantham to a man and to a woman, Mr. Voght and other doctors and specialists in Grantham hospital: a whole series of tragedies. We have lost lives. Babies have died. Children have died who quite evidently would not have done had the proper facilities, such as are usually expected to be present in a general hospital worthy of the name, still been in place.
The nearest obstetric, gynaecology and 24-hour paediatric facilities are now located in general hospitals all more than an hour away by road. One is on the other side of Nottingham, one on the other side of Lincoln and another on the other side of Boston. That is the position that we face. We now have a series of calls on the ambulance service to take emergency cases to those three hospitals. Imagine what it is like to have a haemorrhage and be on a bumpy road in an ambulance hoping to get to a general hospital in time.
It is always difficult to be certain in each individual case whether a fatality would have occurred had the facilities still been available in Grantham, but there are a number of cases in which there is little doubt. One is that of a poor little three-year-old called Tyler Foster. In March 2000 he was sent to three hospitals before he died. He was first admitted to Grantham, but because there was no paediatrician there he was shipped to Boston. Having gone 30 miles to the east he was then shipped 30 miles to the west, to Nottingham, where he
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died of meningitis. Usually, if that is diagnosed in time and treated with antibiotics, the prognosis is favourable. He was sent to three different departments in search of the paediatricians who should have been present in Grantham, and would have been before 1998.
Another case was that of Olivia Gonzales in October 2000. She was born with a blood incompatibility and rapidly developed jaundice. Again, the proper facilities were not there and she died from a condition the outcome of which, in the general medical view, is usually satisfactory as long as it is treated in time. By the time she got to Lincoln hospital, it was too late.
Just a week ago was the case of Georgia Adelle Sewards, which I will dwell on for a second, as it was so recent. I have been authorised by her grandmother to read from the tragic letter that I have received. It is dated 15 October 2001.
"Last Thursday, my daughter Keely had a stillborn baby after only being 22 weeks pregnant. She started bleeding on Monday and it took 4 doctors to see her before she was admitted to Lincoln Hospital where the baby was still born in the early hours of Thursday morning."
She had been taken from Grantham to Lincoln.
"Had Grantham been open I am sure that she would have been referred there straight away or if she hadn't, I would have took her there myself…No words can express the heartache this has caused the whole family. The lack of facilities at Grantham could have made a difference I feel sure. Surely no amount of money is worth the cost of human life, even one so young."
Mr. Douglas Hogg: Will my hon. Friend accept my congratulations on having secured this Adjournment debate? My constituents who live in Sleaford and in the adjoining villages around Grantham and Sleaford would endorse the criticisms and anxieties that he has expressed on behalf of his own constituents in Grantham.
Mr. Davies: I am grateful to my right hon. and learned Friend, who has spoken well this morning. His constituents and mine look to us, above anything else that we do in this House at the present time in national or even international politics, to try to ensure that those essential facilities are restored to Grantham hospital.
There have been fatalities. I asked for a public inquiry into the case of Olivia Gonzales, but of course, the Government have not given it to me. Perhaps they would be embarrassed about what it would reveal. Many others have demanded public inquiries into fatalities. Even in cases where people have survived, the situation that has be m revealed is utterly unacceptable. One poor lady—I have been unable to contact her, so do not have consent to use her name, but the Government know about the case—had a haemorrhage in Bracebridge Heath, in my right hon. and learned Friend's constituency, in an ambulance rushing to Lincoln county hospital. She survived, but she could easily have not.
I shall read another account, from The Journal of 22 October 1999, which is just one of many that have been published in that Grantham paper:
"A pregnant woman's life was saved at Grantham Hospital when an ambulance crew decided she would not survive a 30-mile blue light trip to Lincoln.
The unnamed woman was bleeding heavily when the ambulance heading for Lincoln County Hospital obstetrics unit turned round to go to Grantham accident and emergency.

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Following a life-saving operation last Wednesday, the woman was detained overnight and then transferred to Lincoln…
'A general surgeon agreed to perform a life-saving operation.'
Normally, any emergency operation on a pregnant woman would be carried out by a consultant gynaecologist and obstetrician."
We should pay tribute to that general surgeon, who was prepared to take the personal professional risk of intervening in a case that was beyond his specialty. Thank God he did—he saved somebody's life. However, he was put in that position by the decision to take away those consultants from Grantham hospital. Let no one be in any doubt about that.
I am authorised to quote from the following letter, which I received from a constituent of mine on 23 March:
"On 17 February this year, I gay,: birth to my third baby…Unfortunately, he was very poorly and grossly anaemic with a condition known as 'chronic foetal maternal transfusion'. So pale, cold and lifeless he could not support himself and would have collapsed without an immediate blood transfusion. Due to the lack of services at Grantham we had to be rushed to Lincoln county hospital. The journey to Lincoln was very stressful and upsetting—not to mention uncomfortable for a newly delivered mum. It was very bumpy in the ambulance for all of us. Also traumatic having the siren blue lights going with my new-born in such a lifeless state. More than once three of us had to hold the baby's incubator steady as it was jolted about inside the speeding vehicle."
If that is not a graphic description of the situation in Grantham hospital, I do not know what is. I am authorised to mention the name of the lady concerned—it is Jayne Saunders.
I think that I have said enough to give a sense of the dramatic importance of this issue to the lives of people in Grantham now, and to the birth of future generations. Everyone in Grantham who expects to have a child at some time is extremely concerned about the absence of proper facilities. Every woman can legitimately be worried about the absence of gynaecological consultants. All manner of complications can emerge through the use of general surgery and accident and emergency facilities that have no gynaecological specialists or paediatricians. Women and children account for more than half the human race. How can a general hospital that is deprived of those essential facilities be called a general hospital?
This appalling situation has been made even worse by the Government's history of prevarication, equivocation and simple delay in even addressing the matter. They have tried every possible bureaucratic subterfuge to get rid of me, delay matters, find excuses and evade their responsibility. That cannot go on, which is why I have initiated today's debate. The Government must decide now whether they are going to bring back those consultants to Grantham hospital, or take the terrible responsibility for the consequences of not doing so.
12.48 pm
The Parliamentary Under-Secretary of State for Health (Ms Hazel Blears): I, too, congratulate the hon. Member for Grantham and Stamford (Mr. Davies) on securing today's extremely important debate on the future of Grantham and District hospital. My ministerial colleagues and I are aware of local concerns
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about the current and future level of services provided by the hospital. We are all aware of the passion and commitment of the hon. Gentleman and the right hon. and learned Member for Sleaford and North Hykeham (Mr. Hogg) on their constituents' behalf. It is clear that these issues are of great concern to the entire community, and I understand how strongly the hon. Gentleman feels about the level of health services for his constituents.
Changes to those services have been the subject of considerable debate for a long time. The initial changes were introduced for reasons of clinical safety, and I intend to talk about them in a little more detail in order to set the future context for some of them.
Mr. Davies: The Government have made that contention—falsely—before. Before she falls into a trap of her own bureaucrats' making, I should tell the hon. Lady that there were no complaints whatever about the viability of services in Grantham hospital as they existed until summer 1998. There were no complaints from the royal colleges; nor did anyone else suggest that it was unsafe to continue with the existing structure. A decision was taken to change the structure and remove the consultants, and our problems derived from that.
Ms Blears: I understand that that is the hon. Gentleman's view of the situation. Rather than fall into a bureaucratic trap, I assure him that I am familiar with similar circumstances relating to accreditation, training, throughput and volume, the views of the royal colleges about those issues and how often they conflict with the perceived needs of communities. I understand the difficulties of drawing balances. Those are difficult issues for communities. Governments and clinicians to resolve.
As the hon. Gentleman stated, he has pursued this matter for a long time. I am aware that he had a meeting with the former Secretary of State, my right hon. Friend the Member for Holborn and St. Pancras (Mr. Dobson), who said that the Grantham area needed a substantial hospital to meet the needs of local people and take advantage of technology changes and new services developing that may make it easier to provide higher quality services in future. That commitment existed then and exists now. There is no threat to the future of Grantham hospital as a district general hospital in that community.
The hon. Gentleman outlined the issue in depth and detail, and his intimate knowledge of it enables him to take us quickly through the history of the services. It is a long and complex history and, sadly for many people, the hospital will always be associated with the terrible events of the early 1990s relating to Beverly Allitt and the consequent review of paediatric services. At that time, a number of clinical concerns were expressed about the safety of paediatric services at the hospital—limited scope for clinical experience; low work load; professional isolation; and limited capacity to deal with complex problems. It is not true to say that those matters came out of thin air, they happened as a result of concerns about paediatric quality following the dreadful events related to Beverly Allitt.
Mr. Davies: This is getting worse. The hon. Lady is taking refuge in complete irrelevance. I already

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mentioned that the Beverly Allitt case resulted in a contract being placed with Queens medical centre to provide paediatric care and facilities. That worked extremely well and satisfactorily, there was no problem and the royal colleges were happy with it. The Government, or the health authority on the Government's instruction, pulled the rug from under that structure. Returning to what happened in the 1960s and 1970s is irrelevant. In the limited time that we have, we must focus on the central issue: will the Government bring back those consultants or not?
Ms Blears: It is important to explain that it was not a matter in which, in the hon. Gentleman's words, the Government were "complicit in the manoeuvre." The proposals arose from a set of circumstances that raised genuine clinical concerns about safety. After the service had been taken over by the Queens medical centre, concerns surfaced again about low volume and throughput that had significant implications for medical training and the safety of those services. The paediatric service was withdrawn in August 1998 and at that time the community health council did not object, so it was not a matter placed before Ministers. The ambulatory service was developed and the local community health council gave its full support to that model; there was therefore no need for any further decision to be made.
Those changes to paediatrics raised concerns about the sustainability of clinically safe obstetric and gynaecology services and it was considered that, without a 24-hour consultant-led paediatric service, the delivery of high-risk babies would be clinically unsafe. That was made clear in the original consultation on the changes in paediatrics.
In respect of the proposals on obstetrics and gynaecology, the community health council objected to them and there remains an outstanding reference to Ministers about the objection, which needs to be formally decided upon. A midwife delivery unit was then established that has now been formally evaluated by the NHS office and Nottingham university. It is important to reassure local women that delivery results at the midwife unit are extremely satisfactory: some 91 per cent. of people are satisfied with the service. There is no evidence of increased mortality at the midwife-led unit. It is important to have that on record because local people and their families would be concerned at the prospect of lower clinical standards. Standards in the midwifery unit are satisfactory and clinicians who thought that standards might deteriorate have publicly acknowledged that that is not so.
My ministerial colleagues have established a review to consider whether the midwifery unit can begin to expand its activities geographically and in terms of the sort of pregnant women it can take under its auspices. The unit has been recognised as doing excellent work and may be able to do more work for local people.
It is important to respond to the hon. Gentleman's point about the royal colleges' review. My ministerial colleague's letter to him stated that it had been overtaken by events, but that was not to avoid dealing with the issue. A number of national reviews of maternity services are taking place to try to ensure that we provide the best high-quality and consistent service
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throughout the country. There is to be huge investment, as the hon. Gentleman knows from the extra finance that was announced this week for maternity services. The national service framework for children, which will include maternity services, is trying to set top-quality standards. We want to examine Grantham in the context of that national review so that there is a prospect of providing high-quality services for local people.
I understand the hon. Gentleman's frustration that the national review, the work force review and the national service framework may sound like NHS gobbledegook, but we are making a genuine attempt to put in place, for the first time, a national entitlement for everyone, wherever they are in the country, to receive high standards of care. It would be easy to make decisions about Grantham now outside the context of that wider review. However, keeping the objection open, which the community health council has lodged, means that a decision will have to be made. Making a decision about Grantham in the wider context of the national review is harder in many ways than reaching an immediate decision on the basis of information that we have now. The re view may come up with further information that enables us to examine the situation in Grantham more closely in the future.
Mr. Davies: I do not underestimate the capacity of the review to provide further excuses for more delays by the Government. The hon. Lady now has three minutes in which to answer my questions. Will she make a decision? Will she deal with the formal objection? If she does not intend to do so today, when will she give us an answer? Will it be after the next election?
Ms Blears: I understand that the review group hopes to report by the end of the year and to send reports on its national consideration to Ministers by April 2002. That is the framework to which we are working.
It is right that I should refer to specific cases raised by the hon. Gentleman. I did not intend to do so, but as he has raised them, it is important to comment on them. The two cases of which I am aware—Tyler Foster and Olivia Gonzales—are tragic. It is important to say that Tyler Foster had meningitis and, as many people know, meningitis can deteriorate dramatically quickly. Tyler was transferred to Pilgrim hospital, Boston and then to the paediatric intensive care unit at Queen's medical centre, Nottingham. There have never been paediatric intensive care facilities at Grantham, so the transfer would have had to be made in any event. I also understand that the has been a full report on that case and that there is no evidence that, had he been transferred to the paediatric intensive care unit sooner, the outcome would have been any different.
Mr. Davies: May I point out the geography of Lincolnshire? Boston is 30 miles in one direction, Nottingham is 30 miles in another direction. The poor child was sent in one direction and then 60 miles in the opposite direction.
Ms Blears: In the case of Olivia Gonzales, the transfers took plate as they would have done in any event. There is no evidence that the unfortunate death of that child could have been avoided by the existence of a

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consultant-led service. The hon. Gentleman said that it is very difficult to decide in individual cases where the provision of services would be.
In relation to the current reviews, the national review and the decisions to be made in Grantham in that context, it would be inappropriate and wasteful now to hold a separate public inquiry. However, it is important that the objection from the community health council remains. Ministers will have to take a decision about Grantham, but it will be better informed, in relation to the work currently being done on maternity services. The hon. Gentleman has raised some important issues about the connection between paediatrics and obstetrics. Those issues need to be closely examined and I am grateful to him for bringing them to our attention.

National Lottery
1 pm
Mr. Conn Challen: I am grateful for the opportunity for this debate, which comes at an opportune time.
Someone once said that if life was fair, Elvis would be alive and all his impersonators would be dead. I am reminded of that remark as I make my first Adjournment debate speech, on the subject of the national lottery. Perhaps it is a philosophical question whether something called a lottery should be expected to be fair; you pays your money and you takes your chances. The trouble is, I cannot let the matter pass as easily as that. Some constituencies contribute more than their fair share in the purchase of lottery tickets and scratch cards, compared with what they get back in lottery grants to their local good causes. Let me not beat about the bush; mine is such a constituency.
Since the inception of the national lottery, my constituency has spent well over £40 million on it and currently ranks at 253rd out of 659 on that score. However, where are we when it comes to getting money for good causes? According to Library figures, to the end of June this year we came 654th out of 659 constituencies for grants to good causes. However, mine is by no means the worst case and I am pleased to see in the Chamber one or two hon. Members who represent other such constituencies. The lowest-ranked recipient is Denton and Reddish, which ranked 255th in the purchasing of tickets. Poor old Hayes and Harlington was in the top 50 payers but came second from bottom in what it got out of the lottery.
By June this year, Morley and Rothwell had received just £814,000 in the whole of the six years since the lottery started. The average for a constituency was £14,086,000 nationally. Of course, the average is somewhat inflated by the fact that some constituencies contain locations such as city centres where applicants for geographically widespread awards are based. Alternatively, they may have nationally prestigious and widely acclaimed projects within their borders, such as the dome in Greenwich and Woolwich, which came top of the list with more than £672 million. However, even if we removed that factor from our reckoning, I doubt very much whether it would result in a ratio better than 10 to 1 between the average awards and those given to the bottom dozen or so.
I am pleased that the Government announced, earlier in the year, that they intended to tackle that appalling deficit in the worst-off areas by creating a £150 million fund called "communities first", which, starting next April, will channel money to areas that are deprived or that have received less than their fair share of lottery funds. What constitutes an area for the purpose of this scheme is yet to be announced. Will it be a county, a city, a constituency or a district? If communities are being considered, in my view only one definition of an area will suffice£a constituency.
In a city the size of Leeds, of which my constituency is a part, there are many communities, some of them fiercely proud of their local traditions and identities. It would be wrong to lump them all together, so this is my first plea: if we are interested in communities first, let us ensure that the communities first fund tackles its remit at the lowest possible level—that of the constituency.

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However, I do not want to focus entirely on the new fund. If it receives all our attention, we may, by default, miss out on all the other lottery funding streams, yet still imagine that our problem has been solved. The whole ethos has to change. With the declining sales in lottery tickets, it is clear that fewer large awards will be made. The emphasis now is on many smaller awards. In that sense, therefore, it is even more unlikely that we at the bottom will be able to catch up.
I come now to some of the obstacles that are placed in the way of successful applications. A highly respected charity in my constituency has been turned down for grants on four occasions. The most recent disappointment was with regard to its application to the community fund's poverty and disadvantage programme to tackle issues on one of the most problematic housing estates in my constituency. The charity employs professional fundraisers. Their applications are not made lightly or without very serious attention to detail. It seems that the fundraisers have been refused because of some missing details. If that is the case, why were they not asked to fill in the alleged gaps rather than being refused and told to start all over again?
Another reason for the charity being turned down was that its board was not considered representative enough of the community. That was despite the fact that the charity's board was necessarily constituted to reflect the institutional arrangements with some of its key funding bodies, such as the local authority, which meant that such arrangements would be difficult to alter. I am not a fan of the phrase "politically correct", but there seems to have been a politically correct pretext for turning down bids that had not been exercised thoughtfully.
Since being elected to Parliament in June, I have been campaigning in my constituency to raise awareness of our poor record in receiving grants. I have no doubt that if we applied for more money, we would receive more money. However, we must first develop our capacity to make good applications. I visited one local charity that desperately needed to improve its accommodation. The only person who was really interested in performing the role of applicant was the charity's septuagenarian secretary. Unfortunately, he died before a successful bid could be made. The organisation has since folded, even though it served many local people and provided a heart for the community.
The problem is that organisations need capacity building before they can do anything and those in deprived areas are most likely to lack capacity. There may be no easy access to the services of solicitors, accountants or other professionals who could help such organisations with complex applications. Volunteers in the community who have such skills may already be overstretched. Has any research been commissioned into the matter?
I come now to my second plea. If we seriously want to ensure that lottery money goes to the areas that have missed out on it before, we must analyse why that has happened, learn the lessons and take active steps to remedy the problem. Such steps must include providing training as well as having lottery funding officials
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meeting groups and assisting them. At a meeting in my constituency, they did just that. It was useful to have experts on hand to answer specific questions. We must ensure that that happens regularly. It should not have to be the local Member of Parliament who initiates such activity. We must also ask whether enough time is given to the application appraisal process. What is the average time given to reading, checking and analysing applications? Is it 20 minutes or half an hour? In some cases, the process may be too summary. What I have sought so far might help the problem, but I know that only marginal improvements can be made to our local success rate. Turning the tanker around will take a long time and, after six years, that is too long a time to wait.
I come now to my third plea. A ring-fenced sum from the communities first fund should be reserved for the bottom dozen or so constituencies, which have received less than 10 per cent. of the average amount given nationally to constituencies. Even if that ring-fenced sum were aimed at ensuring that each of the constituencies received only £1 million each, thereby doubling what they had received in the previous six years, it would still be less than 10 per cent. of the entire value of the communities first fund.
Mr. Kevin Hughes: I am grateful to my hon. Friend for allowing me to intervene. As he knows, my constituency—like his own—has received less than £1 million, although it has paid into the lottery a great deal more than that. His idea of targeted funding is excellent, but is he not being a little too modest? Is he aware that other targeted funding such as "Brass for Barnsley" was more than £3 million? Perhaps we should have funding along the lines of "Money for Morley" and "Dosh for Doncaster". That should be more than £1 million. It would bring us up to at least half the average, which would be a huge increase in our constituencies.
Mr. Challen: My proposal may be a little modest, although later we shall find out how modest the Minister believes it is. Those of us at the bottom of the heap have to raise the profile of our constituencies, but we must do it in a way that does not upset people further up the ladder who may not want to be overtaken in the stakes. The exact sum must be right, but I am grateful that such a debate has been opened.
The situation demonstrates how little we have received. It is like asking for a new crumb to match the crumb that we haw already received. Nevertheless, that would go a long way towards alleviating the problem that I fully anticipate will continue throughout next year. Unless we take a radical step, those of us at the bottom will stay at the bottom and will not notice a change in our fortunes. That would be a real scandal.
My proposal is called "top slicing". It is a familiar, justifiable concept and I hope that the Minister will consider it on its merits. After all, it is merely a small refinement to the principle that has been admitted: that the distribution of national lottery money to good causes has not worked fairly. It is a great shame that we could not just have kept our original £40 million. The money that has been drained from my constituency over the past six years to subsidise other areas could have been better spent on renewing my local communities.

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However, I am pleased for the other areas. The lottery is probably the least efficient form of charity invented. More often than not, it hurts poorer pockets disproportionately. However, even though we have not been able to fulfil our pledge to ensure that it is run on a not-for-profit basis, the lottery has brought benefits to many communities that otherwise would not have received them.
My campaign to bring more lottery cash into Morley, Middleton and Rothwell will continue. It would be wrong to make a plea for assistance if local people did not get their act together and submit good, well-thought-out applications. The principle of fairness implies that we should not receive something for nothing. It also implies that we should not expect to receive nothing from something, or in our case, £40 million plus.
1.13 pm
The Minister for Sport (Mr. Richard Caborn): I congratulate my hon. Friend the Member for Morley and Rothwell (Mr. Challen) on securing the debate. It is his first Adjournment debate and I am sure that hon. Members agree that he has put his case extremely well this morning. I want first to clear up one or two misconceptions. I understand my hon. Friend's frustration on behalf of his constituents at not receiving the level of national lottery awards that has been made from the ticket sales. I must point out, however, that 50 per cent. of the lottery money goes straight back into prize money, so no constituency will receive more money than half its ticket sales.
Money is awarded by lottery distributors according to need. Many people do not realise that those in the better-off constituencies buy most of the tickets. I did not know that before I came to my present job in the Department. So, in a sense, there is a redistribution of wealth in some respects. The Government are aware that some areas have done better from the lottery than others. Some of the steps that we hive taken since we came into power have shown that we are committed to achieving a fairer spread by direct distribution to ensure that all parts of the country benefit.
We have tried to refine the distribution of moneys for good causes. Further refinement includes, as my hon. Friend said, the announcement made by my right hon. Friend the Secretary of State for Culture, Media and Sport earlier this year, in the summer, that £150 million would be targeted on schemes to be delivered by the community fund and the new opportunities fund in areas that are deprived and have received less lottery money than elsewhere.
We asked the community fund and the NOF to select the areas to be targeted under the new scheme on the basis of two criteria—deprivation and having received less lottery money. We have not specified whether they should select on the basis of county, city, constituency or district. My hon. Friend forcibly made his case for the constituency. We have not directed them in that, and we shall find out what emerges from that consultation. We hope that targeting will effectively tackle pockets of deprivation at the local level.
Coming from south Yorkshire, I understand my hon. Friend's anxiety about targeting with reference to Barnsley. The Government had discussions with
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coalfield communities because we believed that we had a responsibility to them in trying to restructure their economies. Lottery distribution was cited in 1997 as an aspect that was not being used as effectively as it should be. The then Secretary of State, my Friend the right hon. Member for Islington, South and Finsbury (Mr. Smith), took that on board and proposed a scheme in the coalfield communities, and the priorities initiative was established.
Andrew Bennett: Precisely when will the new money be allocated? My hon. Friend the Minister says that he has referred the matter to those bodies to make up their minds. When will they tell him how that will be done?
Mr. Caborn: I hope in the next few weeks. As my hon. Friend knows, my right hon. Friend the Secretary of State has been preoccupied with handling bereavements following 11 September; indeed, she is in New York today and flies back this evening. Several decisions would have been made had she had more time in the Department; that is one of them. I assure my hon. Friend that that will happen in weeks, rather than months.
The priority area initiatives were established by the community fund in England and, as my hon. Friend the Member for Doncaster, North (Mr. Hughes) said, "Brass for Barnsley" was the first manifestation of that, back in April 1999, for an initial period of 12 months. He is absolutely right to say that it identified £3 million from the regional grants budget to be available as funding for Barnsley over the three years to 2002. Regionally based community fund officers worked in partnership with local development agencies to increase the funding given by the board to local voluntary community organisations in Barnsley in the metropolitan borough. That was successful: all £3 million was distributed in the first year of operation. That was commendable, because one of the criticisms that was rightly made of the fund was that a lot of bureaucracy was involved and that the money was not reaching the areas that it should.
Bit by bit we have refined the process. Almost 41 per cent. of lottery funds now go to much smaller schemes, rather than to the big ones that have to some extent distorted the figures to which my hon. Friend refers.
Mr. Kevin Hughes: Does my hon. Friend believe that targeting initiatives such as "Brass for Barnsley" would be better targeted at less well-off constituencies, in order to put some money into such constituencies? I have not done an analysis, but I suspect that if he or his Department were to do so, he would probably find out that the constituencies at the bottom end in this case are at the bottom end of the deprivation stakes, too.
Mr. Caborn: I do not know whether that is true. We must see this in the context of the lottery being one of the funding mechanisms to address some of the structural weaknesses of the coalfield communities. It was not standalone funding. GDP per head in Barnsley is around 62 per cent. relative to the average of the European regions. Doncaster is not down at that level. That figure is from memory, but I ask my hon. Friend to reflect that Barnsley is probably one of the poorest

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constituencies in the country. That was accelerated by the closure of the pits and consequent effect on the local economy.
My hon. Friend mentioned a charity that had had its application for an award turned down four times. I am sure that he will understand that it is not my place to comment on particular applications. That is the responsibility not of the Government but of the lottery distributors. However, I am concerned if that has been taking place without good reasons being given. Distributors take decisions independently of Ministers and concerns about specific cases should be taken up with them. If my hon. Friend approaches the various lottery distributors I am sure that he will get a full answer.
We are concerned to make the application process as straightforward as possible and for lottery distributors to work with applicants in a supportive way. That was certainly the recommendation of the quality, efficiency and standards team whom we asked to carry out an independent study of the applications process. Distributors welcomed that report and agreed to take forward its recommendations. My hon. Friend also mentioned capacity building, which is another area that needs further attention. I agree that capacity building is important and we are increasingly seeing distributors providing that kind of support, such as in the Barnsley scheme that has been mentioned. It is clear that professional support helps the lottery funds get to where they are needed.
Andrew Bennett: Does my hon. Friend accept that part of the problem with capacity building is that the people who are paid the money come from outside the areas that we are talking about? The money goes off to Cheltenham or some such area where those consultants come from, rather than going to the disadvantaged areas of the country.
Mr. Caborn: I do not know whether that is true. We put in professional community fund officers in the Barnsley area. I shall look at that. In terms of their salaries, the answer is yes, but in terms of the money coming in, I do not think that the £3 million went out of Barnsley. I think that it was invested in Barnsley. The question I would ask is, when one brings in that professionalism, does one get a better quality decision, and does the money get to where it should quicker than it would do normally? This is about cutting through some of the bureaucracy. I am open to that type of discussion and I want to see that debate taking place. I want to make sure that lottery money gets to the areas that really need it.
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Some of the criticism has been justified. There has been too much bureaucracy and we should move that out of the way, get things focused and spend money effectively. As my hon. Friend may know, Sheffield Hallam university, on behalf of the DCMS and the lottery distributors, undertook a study of professional services to the lottery on the building up of capacity so that it is not always necessary to rely on outside forces, but there is capacity building inside those communities. That brings in agencies like the local authorities and other voluntary agencies to ensure that they understand how lottery applications can be framed and be successful. A number of recommendations have been made and the Department is taking them forward and hoping to build the type of capacity that my hon. Friend described.
In some quarters there is an argument about—and, indeed, some frustration about—the amount of money being held. The figure bandied around in the press is something like £3 billion, which apparently remains unspent by the distributors. In reality, almost all the money has already been committed to projects. Grants are usually paid out over a period of time according to when recipients need them. Distributors have assured us that we can expect their balances to fall dramatically over the next two or three years as more projects draw down their grants at d more awards are made. We attach a high priority to ensuring that that happens.
The lottery has brought enormous benefits to this country, as my hon. Friend acknowledged. I hope that we shall continue to refine the system and address the genuine anomalies. In the next few weeks we shall announce the new £150 million fund, which will start to address some of those problems. It is an ongoing debate and our actions over the past three or four years have helped to refine the system and make distribution fairer.
Andrew Bennett: All we need is a simple wind-up in which the Minister says that he will give us the money.
Mr. Caborn: As my hon. Friend knows, if I could come here and say Mat, I would—but it is not so simple, as he also knows. My genuine response is that we will try to iron out the anomalies and make the distribution as fair as possible. We have taken several fundamental steps with the distribution of the lottery, which is fairer than it was four years ago. There is still further to go, which is why we shall continue to refine the system to make it even fairer.
Mr. Nicholas Winterton (in the Chair): I thank the Minister for his response. We can now move on to our final debate, introduced by the hon. Member for Blaby (Mr. Robathan).

Renewable Energy
1.26 pm
Mr. Andrew Robathan (Blaby): To great fanfares on 1 October, the Parliamentary Secretary, Cabinet Office, the hon. Member for Shipley (Mr. Leslie) announced that all electricity at 10 Downing street and two main Cabinet Office buildings was being generated from renewable energy sources. He said:
"The very heart of government is now being powered by electricity from renewable sources. This is an important step towards the greening of government. It is also highly symbolic".
As hon. Members know, the Government's target is to produce 5 per cent. of their electricity from renewable energy sources by the end of 2003 and 10 per cent. by the year 2010. At the same time, their target is to double the use of combined heat and power to 10 GW by 2010.
Those are laudable targets, which ill who care about climate change would like to see achieved. Unfortunately, the Government also chose to introduce new electricity trading arrangements which are having a serious impact on renewable energy and the combined heat and power industry. Both consequences were entirely unintended, although they we re predicted by the Royal Society for the Protection of Birds, which said:
"NETA will have an adverse effect on the development of renewable energy".
The Association of Electricity Producers also said:
"Renewable energy schemes will be at a considerable disadvantage in a market which favours plant with a larger and more predictable output".
In March Alcan wrote to the then Minister for Energy, the hon. Member for Neath (Mr. Hain), stating:
"NETA would be damaging to small players and this would persist".
It pointed out that there was a bias in NETA against small generators, encompassing most renewable and CHP generators.
I should say at the outset that I am an unpaid vice-president of the Combined Heat and Power Association, and vice-chairman of PARSEG—the parliamentary group on renewable and sustainable energy. My only pecuniary interest, which does not yet exist but is proposed for the future, is that I want to put my money where my mouth is and install a wind generator on my farm in Leicestershire. My wife is somewhat less keen, but I hope that I will be able to persuade her of its merits.
NETA was launched in March this year and replaced the pool system. In essence, NETA is about forward trading and is designed as a step forward in the liberalisation of the market—hopefully to the benefit of consumers. NETA was introduced by Ofgem, at the instigation of the Government. It has been followed by and probably contributed to—if it did not actually cause—a 10 per cent. reduction in electricity prices. I applaud that, although reducing prizes might have the unintended consequence that it would not discourage the unnecessary and profligate use of energy and the world's resources.
In August, Ofgem published a "Review of the initial impact of NETA on smaller generators". From that came the startling conclusion that
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"the data confirms that wind power is unpredictable".
On the radio this morning Callum McCarthy, the chief executive of Ofgem, said that unpredictable supplies were less valuable than predictable supplies of energy, which is a more worrying conclusion to draw than that wind does not blow at the same speed all the time. Unfortunately, he has taken that view further because NETA, which was formulated by Ofgem under his guidance, requires predictable and constant energy output and penalises unpredictable energy producers.
The renewable energy sector was the genesis of today's debate—specifically a conversation I had three weeks ago with a small wind energy producer in Leicestershire. The unpredictability of supply from his two 25 kW turbines meant that his contract with Powergen was cancelled in April. In other words, it is no longer cost-effective to run his wind generators, a fact that is mirrored throughout the country. Large wind farms are seeing a 27 per cent. reduction in the price of their electricity, while other renewable prices are down by 26 per cent. The renewable energy price is being artificially depressed by NETA; far from encouraging renewables, they are being discouraged.
As another example, a report from the Tyndall Centre for Climate Change Research, partly funded by the Department of Trade and Industry, found that the imbalance penalties imposed by NETA outweighed the payments made for supplying energy. It suggested that a 10 MW wind farm would have had a net negative unit value of minus 0.41p per kW hour. That means that the farm makes a loss just by producing and selling electricity, not even taking into account any costs involved in setting it up. Indeed, experience shows that some wind generators are finding it easier to stop producing electricity and that turbines are being switched off.
Last year, as in 1999, renewables provided only 2.8 per cent. of the electricity generated in the United Kingdom. Besides wind, other energy sources such as solar power are similarly intermittent, and there must be a great deal of encouragement for renewable energy if we are to rise from 2.8 per cent. last year to 5 per cent. of electricity production by the end of 2003. It is interesting that electricity generation by renewables was nearly 2 per cent. in 1990 and, notwithstanding the non-fossil fuel obligation, was only 2.8 per cent. 10 years later. The renewables obligation is coming, but it is not yet clear how effective that will be. On 6 March, the Prime Minister announced an additional £100 million for the development of renewables, but we do not yet know how that will be spent. All the good intentions do not seem to be leading to greater capacity for renewable energy, largely because of NETA.
If we examine combined heat and power, which according to the Government's climate change strategy has
"the potential to deliver the single largest contribution to cutting CO2 emissions in the short to medium term, at a net benefit to the UK economy",
we can see that matters are even worse. I have heard the CHP industry described recently as "in meltdown". Power exports from CHP generators have fallen by more than 60 per cent. and British Sugar has cancelled two major 70 MW CHP schemes, which was a £100 million investment. Slough Heat and Power, a

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small local producer, is considering writing off £60 million of investment because of the impact of NETA. That would lead to 70,000 tonnes a year of additional landfill waste, which the company is currently turning into fuel. To quote the Minister for the Environment,
"the CHP industry is in crisis".
The problems facing CHP are not due only to NETA, but relate to the fall in electricity prices as a consequence of NETA and the unprecedented rise in gas prices. Moreover, CHP labours under the need to pay climate change levy on exports of power from CHP producers. The Combined Heat and Power Association was promised exemption from the levy but achieved only partial exemption. As almost everyone, including the Government, believes that combined heat and power is an efficient use of energy and leads to the reduction of carbon emissions into the atmosphere and therefore a reduction of climate change, it seems ludicrous to impose the climate change levy on the export of CHP-produced energy.
Furthermore, I understand that the levy is producing only £33 million a year in revenue, which is small beer compared to the £100 million investment that British Sugar has now not made, for instance. Exempting CHP from the climate change levy could be done quickly and easily, perhaps in the Chancellor's autumn statement—assuming that he is going to make one.
It is also currently intended that CHP should be subject to the renewables obligation, and that would cost CHP producers a further £100 million a year. Many people will argue that CHP should be treated as a renewable source—a complicated argument, which I do
not wish to pursue here—but it does seem perverse to ask CHP to fund the renewables obligation. The whole purpose of that obligation is to encourage environmentally friendly forms of electricity and to discourage carbon release into the atmosphere, which causes climate change. It seems to me that CHP is an efficient, environmentally friendly use of electricity that does not release extra carbon into the atmosphere.
NETA was set up by Ofgem. To say that the arrangements are complicated is a gross understatement—I would describe them as arcane in their complexity. This makes it all the more difficult for small operators and generators to find their way around them. Candidly, I suspect that there are few people in the House of Commons who understand these arrangements. I do not know whether the Minister wants to intervene to explain them—apparently not.
I am not sure that I would put myself among those who understand the arrangements, but I do understand the consequences. The unintended consequences of NETA are that the renewable energy and CHP industries are being severely undermined, and the result will be that the Government's laudable targets on renewable and CHP generation are not met. Indeed, Callum McCarthy seems in his pronouncements specifically to exclude any consideration of renewable energy. He seems to take the view that his sole intention is to organise the arrangements so that reliable and cheap electricity is provided.
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I come to this debate more in sorrow than in anger, and I do not believe that this issue is party political. I want the Government to succeed in these targets for the good of the world's climate, but I see little likelihood of it happening. The Government gave Ofgem the task of creating these arrangements and the stipulation, as I understand it, that renewable energy and CHP should be encouraged and certainly not penalised—but that has not happened. It is now up to the Government to rectify the arrangements. This needs to be done urgently because it is easy to destroy something quickly, but much more difficult to set up viable renewable and CHP industries. The damage is being done now and the Government need to react quickly, not with another review that will report in a couple of years' time.
We should contrast what is happening here with the announcement on Monday in the United States of America that the environmental protection agency, at President Bush's behest, has set up a new compact to promote CHP with various partners. The Bush Administration have been criticised for their attitude to environmental matters, but they have obviously got it right regarding what the statement refers to as
"reducing air pollution and fuel consumption and leading the way towards a cleaner future".
I want to see the Government follow up their fine words with two swift actions. First, I suggest that both CHP and renewables should be taken out of NETA and given some special status—perhaps some transitional arrangements while electricity trading arrangements are again revised. Secondly, CHP exports should be exempt from the climate change levy.
I would like to wind up this debate with some quotations—the first from the Labour party manifesto issued earlier this year. On page 13 it states:
"We are putting an obligation on electricity companies to deliver 10 per cent. of the UK's electricity from renewable sources by 2010 with a doubling of combined heat and power. We will consider setting further targets for renewables".
Those are fine words; I, too, want to see those obligations met. Nick Goodall is chairman of the Confederation of Renewable Energy Associations and is also the chief executive of the British Wind Energy Association. At the end of August, in response to the review of initial it impact conducted by Ofgem's chief executive, Callum McCarthy, he said:
"OFGEM have today verified long held concerns that NETA is incompatible with the UK renewables and CHP targets and is also contrary to the widely expected outcome of the Government's energy review that the use of renewables will increase well beyond the 10 per cent. target in the longer term. The NETA process is damaging existing renewable energy projects and sending out the wrong signals to industry."
At the beginning of the debate, I quoted a Minister who said that the Government's commitment to green energy was symbolic. What is being symbolised? I hope that I have illustrated that on this issue the left hand of the Government h is no idea what the right hand is doing. That gives the lie to the Government's claim that they have an holistic approach. I hope that the Minister for Industry and Energy will explain not only that he understands the problems, but that he is taking action to put things right for the long-term benefit of this country and the world's environment.
The Minister for Industry and Energy (Mr. Brian Wilson): I thank the hon. Member for Blaby (Mr. Robathan) for his choice of subject and for the way in which he introduced the debate. I recognise his work as vice-chairman of PARSEG, a highly successful and valued parliamentary group on renewable and sustainable energy. I welcome the fact that he has focused attention on these genuine and urgent matters in an Adjournment debate. We agree on the fundamental fact that it is a big issue, which, as he said, is largely non-party political. It is al so an issue that the Government are interested in addressing; we have commitments and targets, and it is therefore entirely in our interests to ensure that nothing inadvertent happens to prevent our achieving those targets. I recognise the hon. Gentleman's genuine concerns and the need for an urgent response. I hope that I shall make some progress in responding today.
Although I have come to the issue only recently, I have a long-standing record of supporting renewable technologies, so I have no interest in paying lip service to targets if events on the ground are running contrary to their fulfilment. If there is such a problem we must tackle it. Any inconsistency of approach will be picked up quickly by investors who will not make the investment and commitment that we will need in the renewable sector if the targets are to be achieved. The issue is how we maintain our renewables targets. How do we advance; how do we send out powerful messages about the Government's commitment to renewables while also recognising that there are certain forces at work, one of which may be neater in some of its operations but may have a counter-productive effect? I do not reject the contention that such a problem exists.
In response to the Ofgem report to which the hon. Gentleman referred, I intend shortly to issue my own consultation document which will contain proposals specifically aimed at addressing the concerns of the smaller generator community. This debate is timely; NETA has been introduced and we have received Ofgem's assessment of the impact of NETA on smaller generators. I am about to respond to Ofgem and consultations will be held on that basis. That might sound as if there will be a long, bureaucratic process, but I assure hon. Members that the process will be rapid. Ofgem reported quickly on the first few months of operation. We will respond quickly with our views about what has to be done, and await the generators' response. The process will be concluded within the next two or three months, and there will be some kind of outcome, and whether or not it is exactly what the hon. Member or I want, we shall reach conclusions on the debate in a reasonable time. I am keen to advance the development of NETA in an open and inclusive way, but I am also totally committed to renewables. We must somehow synthesise those two objectives and make them compatible.
The hon. Gentleman asked about the Prime Minister's announcement of £100 million for renewables. That figure comes from a separate performance and innovation unit report on the future of renewables. The allocation of that money to individual firms will be announced shortly. I am sure that the hon. Gentleman will become aware of that. Consultation has taken place and the allocation of the money, which is additional to other investment in renewables, will be
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announced shortly. The hon. Gentleman fairly recognised that a lot of money and commitment is being put into renewables, but we must ensure that the end product is as we intend it to be.
The new electricity trading arrangements, which have come to be known as NETA, made significant changes to the operation of the electricity market in England and Wales. Two Ofgem reports on the working of the arrangements over their first three months have made us better informed on NETA's performance and issues arising from it. It has been suggested—even in the context of this debate—that NETA was a disaster that had not produced positive results.
Mr. Robathan indicated dissent.
Mr. Wilson: The hon. Gentleman suggests that he does not think so.
In fact, NETA has been a success in its own terms. The introduction of a more efficient regime into a more transparent, inclusive and efficient pricing system has meant that wholesale electricity prices are up to 25 per cent. lower than the artificially high prices that existed under the pool arrangements. NETA has delivered quite spectacular results in a short time. Although it does not negate the argument made by the hon. Member for Blaby, I can say that the price reduction for renewables has been about 17 per cent., which is less than the overall reduction achieved under NETA.
Mr. Robathan: My figures, which may be out of date, suggest that the position is the other way around, but I accept that the figures may change by the day. I certainly do not criticise NETA in general, merely in specific ways.
Mr. Wilson: The figures may change by the end of the debate if I receive another piece of paper, but I do not expect that to happen. The figure on renewables is lower than that for overall price reduction. I do not mean to quibble over that. The impact on renewables, which are produced by smaller producers and have higher relative capital costs, is clearly proportionately greater than is the case for larger generators.
NETA's role allows market signals to set electricity prices. It is also vital that NETA delivers security of supply. Ofgem's report on the first three months of the operation of NETA shows the rapid emergence of a strong and liquid forward market, and all that contributes to reliable longer-term price signals for investors to use in planning new generation. NETA's development will secure our longer-term aims for encouraging a move towards a more cost-reflective and efficient system, within which the benefits of embedded generation and renewables are recognised. In the longer term, there will also be benefits for renewables.
As the hon. Gentleman said, it was always predicted in some quarters that NETA would damage both renewables and the smaller generator industry in general. That is why my predecessor, my right hon. Friend the Member for Neath (Peter Hain)—now the Minister for Europe—asked Ofgem to complete a report on the impact of NETA over the first two months of operation. That report was based on the experience of 40 companies and organisations, including some

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renewable generators. Even that small sample should tell us how the predicted problems were working out in reality. The Ofgem report, which does not contain anything contradictory to what the hon. Gentleman said, states that the volume of trade in renewables is slowing down only slightly. Although the same volume of renewables is sold at market, prices have dropped substantially. I hope that improved future contract terms will address that problem.
The renewables contracts that were traded in the first two months of NETA were negotiated before 27 March, and I expect them to contain a speculative element, but as NETA settles down and the industry gains trading experience, future contract prices may stabilise. The report stated that in NETA's early days, sharp price hikes had occurred when trying to balance the market. That would have a greater impact on small generators. As the market has matured, the price spread has narrowed, and the balance and settlement system has been modified in the light of earlier experiences. The cost of balancing is now half of what it was. We should continue to reduce volatility, and ensure that electricity prices are cost reflective.
There were concerns that renewables would suffer when we moved to the NETA market because they are less predictable. The Ofgem report analysed the predictability of generating technology, and found that wind power was the only one judged to be less predictable. It is not a remarkable discovery that wind power is a less predictable technology, but it is interesting that it is alone in that.
The report also showed that consolidation services, which could group smaller generators into portfolios of predictable and less predictable generation, had not yet emerged in the market. That, possibly, is a partial solution. I do not deny that the issue exists, but we can take evolutionary steps to address the problem. In my response to the Ofgem report, I will reflect the hon. Gentleman's concerns—and mine.
The hon. Member for Blaby mentioned combined heat and power. I recognise the urgency of that matter; in addition to my departmental work, I spoke on the subject at a couple of meetings in Brighton at my party's conference, once for the Combined Heat and Power Association and once for GEC Alsthom. It was useful to hear straight from the coalface about the urgent problems that affect CHP. There is no point in proudly announcing targets for CHP if, as is the case now, something unexpected is happening on the ground.
As the hon. Member for Blaby acknowledged, it is not NETA but a combination of high gas prices and falling electricity prices that is the primary cause of CHP's problems, although NETA is a factor in falling electricity prices. We have done much on CHP, introducing, for example, the climate change levy exemption for good quality CHP used on site or sold direct to other users. CHP is a key option for energy-intensive industries that want to negotiate an 80 per cent. reduction in CCL.
About £70 million has been made available this financial year for enhanced capital allowance. We have offered tax incentives to companies investing in CHP, and have exempted electricity generating plant
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machinery in CHP schemes from business rates. The energy efficiency fund under the climate change levy is to be administered by the carbon trust, and CHP schemes are expected to benefit from it. A lot has been done in support of CHP. It has enjoyed a period of expansion, much interest from industry, investment and proposed investment, but if the reality is that people are now walking away from it, I have to treat that seriously. Indeed, the economic difficulties faced by CHP were highlighted by the findings in Ofgem's report on NETA and the smaller generators.
As a holding statement, I can say that my Department, working with industry and other Departments to address those difficulties, is collaborating with the Department for the Environment, Food and Rural Affairs—the lead Department in the development of the Government's CHP strategy. The strategy, which I hope will be published soon, will address both existing measures to support CHP and new measures to encourage development. High gas prices are a large part of the problem, and we have a three-point strategy to address that. We are pressing for greater competition in Europe, improving the function of the home market, and taking action against anti-competitive behaviour.
I accept that the problems of CHP are urgent and have to be considered closely if we are to continue to issue targets. At the moment, they are not in tune with events unfolding in le CHP industry. I recognise that major companies that had made major commitments to CHP have now reversed those decisions. In particular, I am aware of the British Sugar decision to cancel its investment. I assure, he hon. Gentleman that I am aware of all those matters, and he does us all a service by drawing our attention to them.
As with CHP, the future of renewables is not only dependent on how NETA works, although that is important. I have formed a co-ordinating committee with Callum McCarthy by to advise on the implementation of the recommendations of the embedded generation working group, which reported in June. That group identified a whole range of actions designed to improve the incentives for distribution companies to ease the connection of all small generation, including renewables. I am determined to see those actions implemented as soon as is practicable.
The renewables obligation underpins much of the discussion because it is the practical embodiment of our commitment to renewables. Shortly, I will be introducing to the House a draft order to implement the renewables obligation. That will oblige licensed electricity suppliers to provide a specified proportion of electricity from renewable sources in future. That will be the prime mechanism through which we will increase the uptake of renewable energy between now and 2010, and beyond. The renewables obligation aims to produce a secure market as far ahead as at least 2027. Our interim aim is that 10 percent, of licensed electricity sales will be generated from renewables by 2010.

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I do not dissent from the thrust of what the hon. Member for Blaby has said. The extent to which NETA has been the direct source of problems is clearly a matter of degree, particularly in the case of combined heat and power, as many other factors are at work. NETA has delivered considerable successes in other ways, but I have no interest in denying or concealing the fact that there are problems for wind energy and CHP. I am very anxious to address those problems. One of my main
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obligations is to deliver on the Government's renewables targets, and to send out strong, consistent signals that we want to help to stimulate the renewables markets. If perceived, or real, problems stand in the way of those aims, I share the hon. Gentleman's wish to remove them and to give a clear commitment to the future of renewables and CHP.
It being Two o'clock, the motion for the Adjournment of the sitting lapsed, without Question put.