Amendment of the Law

Richard Bacon Excerpts

Thursday 19th March 2015 Commons Chamber

[Mr Richard Bacon (South Norfolk) (Con)]

“Drest in a little brief authority,

Most ignorant of what he’s most assur’d,

His glassy essence, like an angry ape,

Plays such fantastic tricks before high heaven

As make the angels weep”—

When is the right hon. Gentleman going to get on with it?

[Ed Balls]

I don’t know. That was all Greek to me.

Let us stop wasting time with the ridiculous Liberal Democrats and return to the Chancellor’s Budget. The Chancellor claimed, first, that working people are better off than they were in 2010. How out of touch can you get? No wonder Conservative Back Benchers were so muted in the House of Commons yesterday. They know, as we know, the reality of people’s lives. Unlike the Chancellor, they hear it on the doorstep. They know that with wage growth stagnant over the past few years, energy bills rising, and 1.8 million zero-hours contracts, when the Chancellor says there is a recovery, most people say, “Where is the recovery for me? It is not a recovery for me, our family and our community.”

The Chancellor tried to invent a new measure of living standards yesterday. It was a flawed measure because it includes income to universities and charities, but, compared with the first quarter of 2010, in the first quarter of 2015 the Chancellor’s measure has not gone up; it has gone down. Even on his own measure, people are worse off than they were in 2010. We know from the independent Institute for Fiscal Studies and the Resolution Foundation that on more sensible measures confirmed by the IFS two weeks ago, household incomes are down compared with 2010, and wages after inflation are down by more than £1,600 a year since 2010. This is the first Parliament since the early 1920s when the average person in work will be worse off at the end of the Parliament than they were at the beginning. In answer to the famous Reagan question, “Are you better off than you were five years ago?”, the answer is a resounding no.

We welcome the action to help savers and increase thresholds, but where was the action to help working people? Why did the Chancellor not announce an ambition to raise the national minimum wage to £8 an hour? Why did he not commit to expanding free child care for working parents to 25 hours? Why not cut business rates for small companies? Why not ban exploitative zero-hours contracts? Why not repeat the bank bonus tax and have a compulsory starter job for our young people? Why not scrap his absurd married couples allowance, which he barely mentioned yesterday, because it goes to only a third of married couples, and instead use the money to cut the taxes of working people? That is what he should have done. That is what a Labour Budget will deliver.

The Chancellor’s second claim is that he is rebalancing the economy. We all remember his claim of

“a Britain carried aloft by the march of the makers”—[Official Report, 22 March 2011; Vol. 525, c. 966.]

but the independent Office for Budget Responsibility said yesterday that growth is still lower than was forecast in 2010. Growth is set to be slower this year and next year than last year. The OBR confirmed that the Chancellor is on course to miss his 2010 target to double exports to £1 trillion—off course by more than £600 billion, and business investment has been revised down this year. The OBR says that “the growth of potential productivity per hour remains below its historical average throughout the forecast” and that “actual hourly productivity growth has again been weaker than expected”. The only thing it has revised up is its forecast for net migration.

Why did the Chancellor not act to deal with the housing crisis by committing to build 200,000 more homes a year by 2020? Why did he not establish a proper British investment bank for small and medium-sized businesses? Why did he not take up our idea, now the subject of consensus across our country, and establish an independent national infrastructure commission to stop long-term decisions being kicked into the long grass? Why did he not go further and devolve powers, including the uplift on business rates, to all areas in our country, rather than just to some? Why did he not commit to securing Britain’s place in a reformed European Union?

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[Derek Twigg (Halton) (Lab)]

I congratulate the right hon. Member for Boston and Skegness (Mark Simmonds) on making a strong speech, but I have quite a few differences with it, as I shall explain. What we had yesterday was a Budget that does not meet the challenges of the future, as we are living in an increasingly uncertain world and this Budget does not provide a proper plan to deal with that.

The Business Secretary talked about memory. While we have already heard today that the Liberal Democrats backed the bedroom tax and supported an increase in tuition fees, we should remember, too, that they supported getting rid of the education maintenance allowance and agreed to scrap the Building Schools for the Future project, which affected many schools in my constituency. The Liberal Democrats’ greatest crime, however, is giving cover to the Tory Government to allow them to implement austerity, which has impacted disproportionately and negatively on constituencies such as mine. This gives the lie to the view that the recession and the financial crisis were Labour’s fault. We all know it was down to the banks, and we all know that when Labour left office in 2010 growth was up and unemployment was down. That is the reality.

This Government failed to keep their promises, failed to meet their target on reducing the deficit and failed on borrowing. Their austerity measures in the early part of this Parliament strangled the recovery that had started under the last Labour Government. I could go on about a number of measures, but we should never forget VAT policy, because a Tory Government always raise VAT.

Whatever gloss the Chancellor tried yesterday to put on his economic record and the prospects for the future, the fact remains that the recovery is fragile. The International Monetary Fund says that our real gross domestic product per head is below that of the US and well below that of Germany and France. The productivity problem has not been addressed by this Chancellor or this Government, and we have seen no sign yet that the large cash reserves held by businesses are being released for investment. That is another interesting sign. Many of the jobs created are, of course, insecure, temporary or fixed-hours-contract jobs. Insecurity presents a real problem; many of my constituents are finding that insecurity stops them planning for their future—whether it be in buying a house, picking a holiday or deciding on some of the most basic things in life.

This Government could have done much more on investment in infrastructure and capital projects, and I am sorry that the Chancellor did not say more about them yesterday, rather than making promises of jam tomorrow. Many road and rail projects that the Government have previously announced and trumpeted were planned or started under Labour. We need to do more on investing in our infrastructure. Given the cheap rates of borrowing available to the Government, they should have done more with investment, allowing them to provide many more quality jobs.

Lots of schemes could have been taken forward in every constituency. Let me mention the campaign to restore a lock and open up the Bridgewater canal to the Manchester Ship canal in Runcorn. This was a brilliant scheme put forward by the Runcorn locks restoration society, and it would also help Runcorn town centre. This is a typical example of where money could be found, and I hope that the next Government will do so.

Businesses, and especially small businesses, are still having problems borrowing money, which clearly is stunting further growth. The inability to get banks to lend to small businesses is one of the biggest failures of this Government. I am pleased that a Labour Government will do more to help small businesses. In particular, we will cut business rates for 1.5 million small businesses and then freeze them the following year. A Labour Government will do more.

Of course we have to attract businesses to constituencies such as mine. We do attract them. Halton council has done very well in that respect, but we need more help. Unemployment remains stubbornly high, particularly among the young, and there is a real problem with those not in employment, education or training with an above-average number of our young people in that category. The minimum wage will be important for providing better security, as well as helping people with their pay.

A couple of areas have not been dwelt on sufficiently in the debate so far. If this Government get back in, we will see cuts falling badly on local government, to which I shall return, and on defence, which has seen significant cuts already and no guarantees about the future. The police have been cut significantly, as well.

I find the way in which austerity cuts have been imposed on local government appalling. Local government has important responsibilities, not least for child protection and care and provision for the elderly, yet we have seen massive cuts. My local council, Halton, is considered to be a good and well-managed authority, but between 2010-11 and 2015-16 its Government grant will have been reduced by £46 million, or £365 per head. That is a substantial cut, and the £11 million reduction in next year’s grant represents a further cut of £87 for every man, woman and child. By contrast, the cuts per head in east Cheshire—which is in the Chancellor’s constituency—and West Oxfordshire will be £23 and £32 respectively. Scandalous, unfair cuts are hitting the most socially deprived areas in the country, and putting services in serious danger by lessening councils’ ability to fund and run them. The future Government must address that important issue.

Another big problem in Halton is housing, especially the supply of housing, including social housing, and the inability of young people to get on to the housing ladder. In response to the Chancellor’s announcement of Help to Buy ISAs, today’s edition of Inside Housing states:

“David Orr, chief executive of the National Housing Federation dismissed the move ‘as another short-term initiative for first-time buyers, not a Budget to end the housing crisis.’…The Chartered Institute of Housing has also criticised the move… ‘While the help to buy ISA may help some first time buyers to overcome barriers to home ownership, it fails to address the fundamental problem—that we are simply not building enough homes.”

[Mr Bacon]

Does the hon. Gentleman accept that the Budget also provides for a doubling of the number of housing zones, which do address the issue of supply?

[Derek Twigg]

As the hon. Gentleman will know, we have promised that if we win the election in a few weeks’ time, we will build 200,000 houses a year. That is a significant improvement on what the present Government have done. They simply have not done enough, and the fact is that there is a major problem with the supply of not just private but social housing. There are nearly 1,350 people on the housing waiting list in Halton, which is one of the smallest boroughs in the country, and the average waiting time is nine years. Housing represents a large part of all MPs’ casework, and a future Government must do something about it. I have already said what Labour will do.

The Chancellor did not say anything about the crisis in the NHS. We know that waiting time targets have been missed, that accident and emergency departments are crowded, and that access to GPs is a problem. We know that people are experiencing real difficulties as a result of waiting times, involving not just A and E services but some other procedures. We have clearly stated that we want to improve access, and to save and transform our NHS with a “time to care” fund worth £2.5 billion, which will pay for 20,000 more nurses, 8,000 more GPs, and a guarantee of cancer tests within one week. The NHS is a fundamental part of our society, and it is appalling that the Chancellor did not refer to it yesterday.

In Halton, the reality of what has happened under this Government—which the Chancellor failed to address yesterday—is that many people are in poverty and experiencing a cost-of-living crisis. People are unable to heat their homes properly, and there has been a massive increase in the use of food banks. Hundreds of families in Halton have suffered as a result of the bedroom tax. Many are struggling to find jobs, and, as I said earlier, a large number of those jobs are insecure and part time. Security is a key issue for my constituents and others, and it must be addressed.

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[Mr Richard Bacon (South Norfolk) (Con)]

I greatly welcome the Budget and particularly the announcements on housing. I make no apology for talking about housing in a debate opened by the Business Secretary. As the representative of the CBI said at the Homes for Britain rally in Methodist Central Hall earlier this week, housing is a business issue. If employees cannot find somewhere to live that is relatively near work, it affects the way they work, because they spend too long commuting. Housing is central to all our lives, so I welcome the measures the Government have taken on housing in the Budget.

The hon. Member for Halton (Derek Twigg), who, sadly, is not in his place, referred to the Chartered Institute of Housing’s comment on Help to Buy ISAs—that they would make no difference because they do not address the fundamental problem. I, too, have read that quote, but I thought it was slightly unfair, which is why I intervened on him. The Budget also addresses the supply side through the doubling of the number of housing zones, and I shall concentrate on that subject in my speech. It proposes to create 20 new housing zones which, according to the deputy mayor of London, Richard Blakeway, will provide a “framework for focused engagement” in particular geographical areas, create “planning certainty” and, most importantly, provide funding that is committed to essential infrastructure. I want to concentrate on that last aspect.

A number of endeavours have made an enormous difference over the past few years, in which the Government have engaged with the public and private sectors to provide a focused environment in which huge amounts of activity can occur. The most obvious example is the London Docklands development corporation, which transformed the docklands a generation ago. We can now see the extraordinary development that simply was not there 25 years ago. I have seen something similar in Northern Ireland, in the Laganside development, where the investment of £130 million of public money led to about £1 billion of investment from the private sector. This has transformed the nature of Belfast city centre completely.

The approach that has been adopted in the commercial sector can also be applied in the residential sector, and that is what housing zones are all about. I am pleased about the provision for them in the Budget. If we are to unlock finance for schemes in the residential space, the most important thing is to get rid of the blockages that are making that so difficult to achieve. We have to ask ourselves why housing supply does not rise to meet demand in the way that happens in most other markets. The truth is that people who would like to get involved in the housing market have very limited choices.

The volume house builders do a reasonably good job for the people who want to buy their product, but 75% of the people polled in a YouGov survey said that they did not want to buy the volume house builders’ product. In a well-functioning market, other providers would come in and the range of supply to meet that latent demand, which is not being satisfied, would naturally enter the market. That does not happen in the housing space, however, simply because it is so difficult to get into the market because of problems with access to land and access to finance. The Government’s proposals for housing zones start to address that, and I hope that their announcement in yesterday’s Budget will be the harbinger of a new direction that will solve the housing problem.

The hon. Member for Halton said earlier that Labour would build 200,000 houses if it got into government. I remember, half a generation ago, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), when he was Chancellor, appointing Kate Barker to undertake a review and subsequently announcing the building of 240,000 houses. Announcements do not actually make a difference, however, because it is not Governments or Oppositions who build houses. It is house builders who build houses, and if we took more notice of customers and their preferences, we would get more houses built.

[Meg Hillier]

The hon. Gentleman might have had a different experience in Norfolk, but in my constituency of Hackney South and Shoreditch, many of those “customers” are non-domiciled overseas landlords who never interact with the people who end up living in their homes. There is often a desire among those developers to get a quick, easy sale over a weekend in places such as Hong Kong and Dubai, rather than putting out to market properties that would benefit local people. Does the hon. Gentleman not agree that this really needs to be tackled?

[Mr Bacon]

The hon. Lady makes a valid point. I have listened to economists saying that this has not been a problem in London and that the wall of money that has come in to support investment was simply replacing investment that did not happen after the crash, but I am not sure that I agree with them. We see flats in London being exchanged time and again without anyone ever living in them, and there comes a point at which this becomes a moral issue. There is developed property with nobody living in it, and I think that we should be thinking first about our own people. That fundamentally describes the planning problem, and we need to decide how to do these things.

My Self-build and Custom Housebuilding Bill, which I am pleased to say is now going to become an Act, will give people in every area an opportunity to go to their local council and say, “Where is your register? I want to put my name down as someone who wants to acquire a serviced plot.” The council will have a statutory obligation to keep a register of such people and to have regard to it when drawing up its housing plans, whether for planning and housing, for regeneration or for the disposal of land. In visits overseas, I have seen that such space can also encompass housing for affordable rent through housing co-operatives as well as housing for private purchase. The point about serviced plots is key. This goes back to what I was saying about infrastructure and about removing the blockages to further development. This is about funding the essential infrastructure that is needed before further development can take place.

In the Government’s Budget last year, they announced the provision of £150 million towards serviced plots, and I interpret the creation of 20 housing zones that was announced yesterday as a further step in the right direction towards making the providing of the necessary infrastructure much easier. If a customer wants to come into the marketplace and take advantage of the opportunity to build a house that meets their own needs, the blockages that they meet can prove terminal. They might be trying to find a site, to acquire a piece of land or to obtain the necessary finance, for example. They might be told by the local authority to do an archaeological survey that they did not realise they would need, or a service supplier might tell them that the cost of supplying electricity or water, say, to the site would be prohibitive.

Going back to what Mr Blakeway, the deputy mayor of London, has said about planning certainty, removing all those blockages would create a focused environment in which we know that houses would be built. Housing zones are part of the way to make that happen. The underlying infrastructure being funded by the Government would create the possibility for much more housing being developed more quickly. There is also the possibility of recouping some of that cost through the tax revenues, including council tax revenues, that would flow once the housing was in place.

We need a housing market that works. We need to make the supply work in a way that it is currently not doing. We need to unlock the power of potential customers who do not yet have an opportunity to turn their latent demand into something real. The National Custom and Self-build Association commissioned Ipsos MORI to carry out a survey, which found that 1 million people would like to build their own dwelling or get someone to build it for them in the next 12 months, and that 7 million people would like to do that at some point in their lives. I hope that this Budget will be the harbinger of an important turn of direction towards emphasising the importance of getting underlying infrastructure in place so that the energy and vision of our own people can be deployed in providing the housing that we need.

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[Andrea Leadsom]

That is an extremely interesting question and the hon. Gentleman may well want to follow it up as the representative for his constituency. It is not something that I can answer at the Dispatch Box.

My hon. Friend the Member for Ealing Central and Acton (Angie Bray) welcomed the review of business rates and pointed out their importance, particularly for businesses in her constituency that are competing with online companies. She also pointed out the need for urgent action on superfast broadband for business, and welcomed the measures in the Budget.

The hon. Member for Birmingham, Selly Oak (Steve McCabe) welcomed the penny off a pint and the freeze in fuel duty, but said that the Chancellor ignored the NHS. In truth, the Government have chosen to protect the NHS through this tough period and have now committed to much greater support for mentally ill people. I would dearly love to hear the Opposition just once welcome this vital investment, which will do so much to help people struggling with poor mental health, rather than just ignoring it. My hon. Friend the Member for Northampton South (Mr Binley) told us about the choices that his grandmother gave us all—either earn more or spend less when in difficulty—and I am delighted to hear she would have been pleased with the Budget. I congratulate him on his long-standing support for small and medium-sized businesses and put on the record how much I have enjoyed being his constituency neighbour in the lovely country of Northamptonshire.

The hon. Member for Angus (Mr Weir) talked about the problem of the last bank in town, which I am very sympathetic to, but he might be reassured to know that I have held round tables, including with the Secretary of State for Business, Innovation and Skills, talking to banks about the need for smart ATMs that take in, as well as give out, cash and discussing improvements to post offices, including longer hours and upgrading security at counters for business banking, and we hope there will be a protocol for bank closures in the future. I am happy to talk to him separately about the matter. My hon. Friend the Member for North Dorset (Mr Walter), in his encore speech as a retiring Member, warmly supported the Budget and gave a considered assessment of the measures in it. It was an excellent swansong, and I wish him a successful and peaceful retirement.

[Mr Bacon]

Before my hon. Friend moves on entirely from the point about bank closures, will she accept that it is not just about protocol but about sharing resources, possibly between commercial banks and institutions such as the Post Office, so that instead of closures we have facilities that work for local people in very rural areas such as South Norfolk?

[Andrea Leadsom]

I agree absolutely with my hon. Friend and assure him that that is precisely the point that the Secretary of State and I have been taking up with the banks.

The right hon. Member for Knowsley (Mr Howarth) might recall that I had the privilege of standing as a candidate in 2005 for Knowsley South against Eddie O’Hara. I am delighted that he welcomed the Help to Buy ISA and urge him to promote it to his local first-time buyers. It will be flexible for those on low incomes and will give a Government contribution of up to £3,000 towards a deposit for a new home.

Financial Services (Banking Reform) Bill

Richard Bacon Excerpts

Monday 11th March 2013 Commons Chamber

[Stephen Barclay]

Of course that is not wrong. I said that the Bill is welcome, and that it is a positive response to the commission’s report. The focus on leverage and liquidity is absolutely right, and that is why I pay tribute to the work of central bankers and regulators. I am not sure that the hon. Gentleman was listening to my remarks. The danger is that we focus on the past and do not anticipate the future. There is a need for flexibility, and for that the Bill needs to tackle culture. The paradox is that individuals in banks are motivated by big bonuses, which drive their behaviour, yet when things go wrong, we do not have their corollary, which is big fines against individuals. That might be the sort of thing to grab people’s attention when they become aware of issues.

I am glad that the hon. Member for Nottingham East (Chris Leslie) is back in his place, because he missed addressing that point in his remarks—it is a shame he would not take interventions from me. Under his Government, the Financial Services and Markets Act 2000, probably the most-debated Act for many years, created a rulebook of more than 6,000 pages. He spoke about the need for more regulation and suggested that Conservative Members had failed because of the lack of regulation, yet we had 6,000 pages of it. The issue was that the regulation was not enforced.

It is even worse than that, because the hon. Gentleman actually allowed a regulatory regime that included things such as guaranteed bonuses. Not only would somebody get a bonus if they performed well, but they got a guaranteed bonus even when the bank collapsed. When the financial crisis hit in 2008, contractually the banks were signed up to guaranteed bonuses, so they were still doling out money under the enhanced regulatory regime to which he referred—true socialism in action.

It gets worse. There was a fines system that incentivised banks to profit from the wrongdoing of other banks. When a bank was subject to a regulatory fine, the money went not to the taxpayer in the form of funding good works or to customers of the bank affected, but to the other banks in the form of lower levies to the regulator. When a bank committed a wrongdoing, therefore, other banks in the sector profited. This is the regulatory regime on which we are now being lectured.

Let me give another example on structure: the collapse of RBS. After 10 months of the brightest minds in our Treasury—I am sure they are the brightest minds—looking at this issue, they still could not rely on the books. So untrustworthy was RBS’s auditing that the permanent secretary to the Treasury had to send for a letter of direction from the Chancellor saying, “I can’t rely on the books. It’s such a mess, Chancellor, you’ll have to give me a letter of direction.” We will not take any lectures from the Opposition, therefore, about their regulatory regime or the mess in which it has left our constituents, who are the ones footing the bill.

[Mr Richard Bacon (South Norfolk) (Con)]

It is a pleasure to listen to my hon. Friend, who, unlike many in the House—particularly in the Opposition, but also, I fear, on the Government Benches—as a former financial regulator actually knows what he is talking about, which is a dangerous thing here. In September 2007, when Northern Rock collapsed, the Treasury did not even know if it had the power to take it over, which was something of an indictment of thousands and thousands of pages of regulation. Does he agree that it might not be a coincidence that John Pierpont Morgan and Nathaniel Rothschild, the founders of two of the most successful banks in the 19th century—JP Morgan and NM Rothschild —had a considerable personal interest and stake at risk in those institutions if things went wrong?

[Stephen Barclay]

My hon. Friend is absolutely right, and he is right because, as I know from my time in banking, people in banks are usually aware of the problems, but there is a perverse incentive—a short-termism—that says, “If the rewards are delivered short term, but the risk is unlikely to crystallise”—

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[Stephen Barclay]

My hon. Friend is absolutely right. One-size-fits-all rules often capture the good but are insufficiently robust to deter the bad. Yes, the Bill is welcome and takes constructive steps forward, but we also need to see more measures from the Treasury on individual fines.

[Mr Bacon]

There are some people here who are not interested in the debate, but they can go away if they want to. I am grateful to my hon. Friend for giving way; I have now caught up with those on the Labour Front Bench in terms of interventions.

I heard from 27 employees of Lloyds bank who were caught by the temporary ban on bonuses. Some of them were getting bonuses of only £2,000, so that was quite unfair. I think my hon. Friend the Member for Wycombe (Steve Baker) might have suggested that senior bankers and bank directors should be required to post personal bonds. Does my hon. Friend agree that that would go some way towards dealing with the problem?

[Stephen Barclay]

My hon. Friend is right. We have to introduce into the system a position in which those at the top who are getting the biggest rewards also face the biggest risks. Some colleagues have talked about criminal sanctions, but the burden of proof is such that it is often difficult for the prosecuting authorities to get sufficient evidence to make it an effective tool. I am not against that, but it is often not an effective tool in practice. We need to ask how we can get to a situation where we do not catch those on £2,000 bonuses and those who have done no wrong, and do not set in place a whole load of rules that fetter innovation or deter business, but where we do create a stick and a deterrent for those who have abused the system and know they are still on the hook for significant financial loss. Those are the people most motivated by big fines in the first place; we should have a correlation between the bonuses and the fines.

In conclusion, the Bill is constructive and welcome, but we need to hear much more from Treasury colleagues about individual accountability, not just structures.

Corporate Tax Avoidance

Richard Bacon Excerpts

Monday 7th January 2013 Commons Chamber

[Ian Swales]

I appreciate that intervention, because I know that the hon. Gentleman has great experience in this area. He goes further than I was proposing, but it is certainly a good idea.

Transparency and honesty are important. As we have seen recently with Starbucks, transparency can lead to consumer power influencing company behaviour. I hope that we will see more of that. Retail, business or government consumers who do not like the ethics or practices of a company do not have to deal with them, except perhaps in cases involving utilities.

HMRC must also be more transparent. Although it steadfastly claims that it does not do deals, Vodafone’s finance director told the City that its deal was worth £500 million a year. One lesson from that and other cases is that no high-level discussions with companies should take place without being minuted, and those minutes must be freely available to tax commissioners and the National Audit Office. The transparency must work both ways; we cannot go on operating through tinted windows.

[Mr Richard Bacon (South Norfolk) (Con)]

Does my hon. Friend not regard it as extraordinary that in the negotiations between HMRC and Goldman Sachs about some back payments that were due, no legal advisers were present and no minutes were taken?

[Ian Swales]

I thank the hon. Gentleman for that invention. As fellow members of the Public Accounts Committee, he and I have looked in detail at that case. He is right that such arrangements should not be made.

The UK should take a look at its own role and its relationship with tax havens such as the Isle of Man, the Channel Islands, the Cayman Islands, Gibraltar and so on, which the Secretary of State for Business, Innovation and Skills has described as sunny places for shady people. UK citizens deserve a full explanation from the Government of why they support those places as tax havens and what net benefit they bring to the UK.

It is also urgent that work takes place at EU level to ensure that companies cannot exploit sweetheart tax deals in countries such as the Netherlands and Luxembourg, aided by the free movement of goods, people and capital. It is time properly to enforce the 1997 EU code of conduct on business taxation. I am especially pleased to see you in the Chair, Madam Deputy Speaker, as that code was ratified under your chairmanship. It specifically highlights issues such as doing deals to give lower rates and tax incentives for activities that are isolated from the domestic economy of a given country. The OECD set up a forum on harmful tax practices at about the same time. Both initiatives highlighted the need for transparency. A race to the bottom helps nobody.

Next, the Government should consider disallowing some foreign interest payments for tax purposes. It is depressingly easy to move a chunk of capital to a low tax regime, then export all one’s profits via interest payments. Foreign interest should have to be specifically justified. When the loans were taken out, what was the purpose? Were they proportional to business need and are they now? Who is the lender? A related company deal needs particular scrutiny, especially as the capital may originally have been exported from the UK with no equivalent taxable interest coming back.

The Government should look at setting maximum royalty and management fees, and disallowing them as a deduction if they are disproportionate to profits. There should be an ability-to-pay test; such payments should not be allowed to wipe out UK profits, as we saw with Starbucks. The Government should work with international partners to disallow management fees and royalty, patent and copyright fees unless they go direct to the country where the relevant value was generated. Payments to tax havens could be automatically disallowed. When a company claims that rights have been sold to other countries, it needs to show that a full and fair price was paid. Of course, that would crystallise a big tax liability in the selling country. The United States would be especially enthusiastic about such a move, as it is one of the big losers from payments going to tax havens.

Because our tax systems are national, all movements of value across borders, including business transfers, need a price attached to them for tax purposes. The Government must also find a way to ensure that VAT is charged on all qualifying sales in the UK, whatever the country of origin. To go back to the point made by the hon. Member for Brighton, Pavilion (Caroline Lucas), we need much more specialist resource in HMRC. A department that brings in 100 times what it costs should not be treated like a normal cost centre; there must be many more invest-to-collect business cases to be made. Maximising our tax revenue is as much about enforcing the rules as about the rules themselves. In particular, a special unit is needed to look at everyone running an internet-based business selling to UK customers, starting with the biggest. It should look at where they are based, their business model and whether they abide by UK VAT and corporation tax rules. We need our rules and enforcement to be up to date with technological changes.

The tax system is way too complex; a whole industry has grown up to find creative ways to avoid tax. When will we see significant output and action from the Office of Tax Simplification? Surely we need radical ideas for cutting through the jungle of our tax system, not just the deletion of obscure, rarely used reliefs. Simplification is badly needed, yet we see even more complexity.

I talked earlier about consumer power. The UK Government are by far the biggest purchaser and grant-awarding body in this country. Is it right that Amazon can get more than £10 million of Government money for a new warehouse in Dunfermline when it is a Luxembourg-based retailer paying little corporation tax in this country, and apparently does not pay VAT on all its sales either? Is it right that Accenture, Capgemini and others win Government contracts when they are named as aggressive tax avoiders? Should HMRC itself have sold its buildings for leaseback to Mapeley, a Bermuda-based company? Is it not time that we recognised in financial assessments that most of the profits from private finance initiative and outsourcing contracts are now disappearing offshore?

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[Mr Richard Bacon (South Norfolk) (Con)]

It is a great pleasure to take part in this debate, and I commend my fellow member of the Public Accounts Committee the hon. Member for Redcar (Ian Swales), on bringing forward this debate. I was interested in his exchange with the hon. Member for Brighton, Pavilion (Caroline Lucas) on having a set of general anti-avoidance rules. Her view was that it is best to have a set of principles, because principles are less easy to bend than rules. I am not quite sure that I agree; whenever I hear anyone talking about principles, I hear the voice of Oscar Wilde saying, “If you don’t like my principles, I have others.” I fear that if there were a general anti-avoidance principle, as long as it were justiciable, which it would be, it would just create more work for lawyers. I do not think that there is a simple way round this, other than simplicity. I shall come on to that in a minute.

I do not normally take too much notice of the handouts for these debates, but I thought I would take a look at today’s, just in case. I was struck by the words at the beginning, under “points to make”:

“Tax evasion is morally wrong as it means that law-abiding people face higher taxes to make up for the lost revenue.”

Right there, in the first sentence, is the confusion that is so widespread that the difference between tax evasion and tax avoidance has almost disappeared—so much so that I wonder whether I was dreaming when I used to think that there was a clear division between the two. Of course, tax evasion is not just morally wrong; it is illegal. That is the central point. Tax avoidance is not illegal.

I shall quote from the National Audit Office report, “Tax avoidance: tackling marketed avoidance schemes”, which provides a handy definition. You drove through a lot of the legislation on this in the previous Administration, Madam Deputy Speaker, though you have probably forgotten much about this. The report says:

“HMRC’s working definition of tax avoidance is ‘using the tax law to get a tax advantage that Parliament never intended’. Unlike tax evasion which involves fraud or deliberate concealment, tax avoidance is not illegal. However, it often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage.”

That gives rise to the question: how can it be that tax avoidance has grown so much, and how can it be that we have the distinct impression—the Treasury might try to deny it, but I believe that there is evidence for it—that there has been simultaneously a cosying-up to a large number of bigger corporate taxpayers, and tightening of terms applying to, and greater aggression from HMRC towards, small businesses in our constituencies?

The best example of cosying-up that I can think of is the deal with Goldman Sachs. Some years ago, a number of investment banks—around 22 of them—came up with a scheme for avoiding national insurance contributions by ensuring that many of their highly paid employees were technically employed by a company registered in the British Virgin Islands. It was a very contrived scheme, and HMRC challenged it. Indeed, 21 of the 22 investment banks involved caved in eventually and paid the money due. One did not, and that was Goldman Sachs, which continued to pursue its position for many years until, in October 2005, HMRC wrote it a letter, warning it that unless it played ball, it would eventually be liable for all the interest due on the back payments as well.

The case continued for many years, and in 2009 there was an important Court of Appeal judgment that was favourable to HMRC, which made it all the more surprising when HMRC did not pursue the matter more vigorously. It came out in the PAC’s hearing on the subject that the permanent secretary for tax—the head of HMRC—was unaware of the warning that HMRC had issued in a letter to Goldman Sachs in October 2005 until I told him about it. That rather makes one worry about whether HMRC has the right skills in the right places. Indeed, that was the central burden of the National Audit Office report, “Core skills at HM Revenue & Customs”, published on 2 December as HC 1595.

The report makes pretty grim reading. It makes it clear that

“HMRC does not yet have a strategic and systematic approach to its investment in skills”,

and because HMRC is so decentralised, it cannot ensure that there is alignment, at a high level, of investment in skills with its business priorities. To quote the report:

“As well as having limited information on its investment in skills, HMRC does not, at the level of the organisation as a whole, know its current skills gaps or gain an early warning of future skills gaps.”

The report continues:

“there is no clear line of sight from HMRC’s Executive Committee to business areas that would enable the Executive Committee to evaluate whether business areas are delivering expected business benefits from their investment in skills”,

and

“Problems are slow to be resolved. Many of the points in this report were raised by HMRC’s own reviews in 2008 and 2009, but HMRC has not made the changes needed.”

The report goes on; I could quote much more, but I am trying to be brief. The issues that we face to do with corporate tax avoidance are fundamentally to do with complexity. The reason we have had an increase in tax avoidance is that we have had an increase in complexity. The only cure for that is much greater simplicity.

I mentioned earlier that I have seen evidence of a tightening of the attitude of HMRC towards small business customers. Recently, a bookkeeper came to see me in my surgery; he does the accounts and tax returns for a variety of small businesses, from corner shops to companies with a £10 million or £15 million turnover—everything from small manufacturers to fish and chip shops. He came to see me because he was concerned about the change in HMRC’s behaviour; it was becoming more and more aggressive. He had clients who had had to lay people off in order to pay tax bills, and with whom HMRC was not making the time-to-pay arrangements that are certainly made available to some larger companies. Vodafone’s is a classic case: although it had £10 billion on its balance sheet, it was given five years to pay the tax liability resulting from the dispute to which the hon. Member for Redcar referred.

I do not think that the solution that we saw in the case of Starbucks, which gave evidence to the PAC, is the right one. Starbucks made the bizarre announcement that it would pay £10 million in corporation tax in each of the next two years, whether or not it made a profit. That is not the way forward. As for the idea that companies should pay corporation tax because the mob has turned on them, the spotlight is on them, there is public relations attention on them, and they think they have to make an announcement and do something, that is a bizarre way of arranging our tax affairs. The way to do it is for companies to obey the law.

[Mr Frank Field]

If Governments are inactive on this front, what action does the hon. Gentleman propose taxpayers should take, other than that mob action?

[Mr Bacon]

Governments should take notice when they see outside 100 Parliament street, the headquarters of HMRC, large crowds of riot police—there are photographs to that effect, which can easily be found on the web. When Governments see such a thing happening, they should sit up and take notice that the system is not working and that it is not fit for purpose. I understand the burden of the right hon. Gentleman’s question. I understand why people are so angry and feel that they need to do something. There are many people, including those who have given their lives and those who have fought overseas on behalf of this country, who probably would have had better equipment if more tax revenue had been collected—if more of the tax revenue that should have been paid was paid.

It is not always a case of the tax not being due. If HMRC does not have the resources in the right places to check whether the tax is due or not, it may indeed be that corporations are acting illegally, that what they are doing is evasion and that they are getting away with it. That is why it is so important that HMRC is able to have the right management information at the top level so that it can align its investments in skills and in people with its business priorities in a way that currently, as is clear from the NAO study, it is unable to do.

I believe that the solution to all this must be much greater simplicity, and I mean radically greater simplicity. The time for tinkering is over. It was Einstein, I think, who famously once said that the definition of insanity is to do the same thing over and over again and to expect different results. It is time that we got different results and we will get them only by taking different action.

[Several hon. Members]

rose—

--- Later in debate ---

[Karl MᶜCartney (Lincoln) (Con)]

I congratulate the hon. Member for Redcar (Ian Swales) on securing this Back-Bench debate on corporate tax avoidance. It is an important subject that has been dangerously blurred by some of our colleagues. I want to say at the outset that I find myself far more concerned about the way in which Government spend our money than about how they collect it. If spending were controlled, or had been—I give the example of the last Labour Government—the collection problem would be vastly reduced. I believe that my Government have taken such sentiments to heart and we are actively reducing spending to aid our country in difficult economic times.

I certainly think the approach of the Chairman of the Public Accounts Committee, the right hon. Member for Barking (Margaret Hodge), and others who have swallowed her line, misses two simple and quite fundamental points. First, the tax on shareholders is inseparable from company tax and is quite high. While companies are literally separate legal entities from their shareholders, they are in effect tax collection agencies for Governments to tax the profit stream which in effect belongs to their shareholders. That profit stream is not just taxed by the corporation tax payment on which all of this debate is focusing. In reality, the profit stream belongs to the shareholders and it is taxed not once by corporation tax, not twice by corporation tax and income tax, but three times, once as corporation tax, once as income tax on distribution, and finally with capital gains tax, or inheritance tax, on retentions as a proxy for the capital gain.

I have a sound mathematical example in my notes that might well lose some Opposition Members, so let me just outline that on £100 of pre-tax profit, with corporation tax and other taxes taken into account, the Government take £52.91 in tax paid. Some of this amount comes from income that can be deferred, but it is a tax that is ultimately not avoidable, other than perhaps by devices such as the trust of the right hon. Member for Barking for her shares in her family company, which one presumes is morally fine with the Opposition Members who have followed the debate so far and so must be okay. But that near £53 from £100 does not sound very low to me, especially given that the Government scrapped indexation relief on capital gains at a time when they are clearly targeting higher inflation. Perhaps more importantly though, what incentive is such a tax on profits to entrepreneurs? What encouragement do such figures give to those involved in setting up and driving forward young businesses, or those entrepreneurs thinking of taking that big first step into the world of small business and working for themselves?

Secondly, is it wrong for companies to avoid tax? Janan Ganesh in the Financial Times has written well on this particular issue, but I would draw hon. Members’ attention to one of his main and salient points for this debate with which I agree. The Starbucks precedent—and by association, one might say, any future pressure on Google, Amazon, and historically some of the mobile phone companies and indeed perhaps most notoriously the Guardian newspaper group—is a dangerous one. Tax should be a matter of law not moral persuasion. If any Government want Starbucks or any other corporation to pay more tax, let them pass an appropriate piece of legislation. Otherwise tax payment will become a matter of public image and impact, and I imagine that very little tax will be paid by the maker of the polystyrene cups, which we may never have heard of. Do we really want to travel down “The X Factor” road of choosing something, indeed policy setting in this country, making important decisions based on fickle public opinion on the hoof?

[Mr Bacon]

While my hon. Friend is right that it should be a matter for law, not for moral persuasion, PricewaterhouseCoopers’ request of the Government, in the consultation that took place last year, that they should do more to clarify what constitutes unacceptable tax avoidance versus what constitutes acceptable tax planning, places a burden on the Government to be clearer about their own intentions.

[Karl MᶜCartney]

My hon. Friend will be pleased to know that I agree with him. I will mention PricewaterhouseCoopers shortly.

The objective of business, any business, is not ostensibly to do good or to pursue corporate social responsibility; it is to do business and make money for the owners and/or shareholders. Directors of all small, medium, large and multinational companies have a fiduciary responsibility to maximise gains for that company’s owners, including minimising the tax paid. Any diversion of company management from that objective is wrong as a matter of law and dangerous as we move forward in the 21st century.

John Christensen of the campaign group Tax Justice Network made a true claim when he said that the figures highlight that tax avoidance by large businesses has become a “much bigger issue” over the past 10 years because of the “enhanced relationship” policy put in place. That policy was put in place by the then Labour Prime Minister, Tony Blair, and his then Chancellor and ultimately successor as Labour Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown).

The problem is perhaps exacerbated in that we have a very complicated tax system. The previous Labour Government did nothing to uncomplicate matters. In fact, they set up a whole new industry making it more complex. What we need as a country, and for us to remain an economic powerhouse on the world stage, is much greater tax simplicity and lower tax rates.

I am pleased that the Government are consulting on a general anti-abuse rule, the GAAR, targeted at artificial and abusive tax avoidance schemes, with a view to bringing forward legislation later this year. Echoing my earlier statement, Mary Monfries, head of tax policy and regulation at PricewaterhouseCoopers, has also been quoted in the media saying with regard to our tax system that “simplicity is key”. She described complexity as a

“key problem with the current tax model”,

adding that the GAAR should

“help to act as a disincentive”

against

“abusive, extreme tax avoidance arrangements”.

But I also believe that some of my colleagues are being disingenuous with the great British public in that the vast majority of multinationals mentioned are not breaking any laws and, as the Government make the law, it is their own and our fault if companies use the rules in place to minimise their tax. Our tax legislation is huge and very complex, so any shortcomings are down to Government failure to create and implement the right tax framework.

The multinational aspects of tax collection and avoidance can be solved only by international bodies working together. That will not be easy for any of my ministerial colleagues to achieve I am sure, but as for any avoidance by UK companies, we do not perhaps need this debate now, as the GAAR legislation will, we trust, come into force during the next tax year. Surely that is the mechanism to stop so-called unacceptable tax avoidance that the hon. Member for Redcar seeks to debate this evening. Many private sector individuals in business may view this debate and other pronouncements by some hon. Members as politicians just diverting public opinion away from their own shortcomings by encouraging media interest in the tax avoidance issue. As politicians we organise the rules and therefore as long as what the companies do is legal, morality surely does not come into it much. Google, The Guardian, Amazon and others are perhaps insulated in that they have little direct competition in the services they provide, so no incentive to make voluntary tax payments as they have avoided such sizeable payments for a number of years. But Starbucks is now paying reportedly quite sizeable sums of voluntary tax, not for moral reasons but to protect its brand and customer loyalty—that is, to protect its profits.

--- Later in debate ---

[Mr Nick Gibb (Bognor Regis and Littlehampton) (Con)]

I pay tribute to the work of the Public Accounts Committee, particularly its questioning of executives from Starbucks, Google and Amazon on 12 November. I will focus on just one of those companies: Amazon.

I preface my remarks by paying tribute to the brilliant service that Amazon provides. It has made buying books far simpler and cheaper for millions of consumers, myself included. The speed of delivery and its innovative logistics make it a company about which there is a huge amount to admire. The question, though, is: which company? The way in which Amazon is structured means that, when I buy a book from Amazon, I am in fact buying it from Amazon EU SARL, a Luxemburg company. The profit on the sale of a book belongs to this Luxemburg company, notwithstanding the fact that Amazon owns no warehouses in Luxemburg and that the book, if it is in English, will have been sent from one of Amazon’s eight warehouses in the UK. Amazon.co.uk Ltd, a UK company, is just the service company for the Luxembourg company, fulfilling a customer’s order on behalf of Amazon EU SARL. Therefore, although Amazon’s sales in the UK are in the billions of pounds, the sales income of the UK company is just £207 million.

The technical thing that the tax planners at Amazon are keen to avoid is creating what the tax authorities call a permanent establishment of the Luxembourg company in the UK. If the UK tax authorities perceive there to be such a permanent establishment, all the income of the Luxembourg company that relates to that permanent establishment would be taxable in the UK. When I drive up the M1 and see the huge Amazon buildings that package and dispatch millions of books a year, I cannot help thinking that they look pretty permanent, but technically they are not. There will have been great effort and attention to the detail of the documentation to ensure that the warehouses are the operation of the UK service company and that all Amazon’s property and activity in the UK relate to that service and not to the activities of the Luxembourg company.

[Mr Bacon]

When my hon. Friend sees those buildings, do they move slightly each time? Are they on wheels?

[Mr Gibb]

My hon. Friend makes a good point. Everyone knows that this structure is a legal fiction. All the real economic activity for the transaction of my book purchase takes place in the UK. Andrew Cecil, the director of public policy at Amazon, in his evidence to the Public Accounts Committee, said that Amazon.co.uk is the trading name of the Luxembourg company. Therefore, although it sounds as though I am buying my book from the UK company, in fact I am not. However, according to the e-mail that I received in December confirming a book order that I made, if I want further details on my statutory rights, I should contact Amazon.co.uk customer services at 2 to 4 Waverly Gate, Edinburgh. The trading name for the Luxembourg company therefore has premises in Edinburgh. Does that not sound like a permanent establishment of the Luxembourg company?

Oral Answers to Questions

Richard Bacon Excerpts

Tuesday 6th November 2012 Commons Chamber

[Mr Richard Bacon (South Norfolk) (Con)]

Has the Chief Secretary had a chance to look at the report by the National Self Build Association, “Lessons from International Self Build Housing Practices”, and does he agree that if we were to do more to help self-builders, we could help solve many of our housing problems, as well as increase local council tax revenue and stamp duty for the Treasury?

[Danny Alexander]

I have not had a chance to study that report, but, in the light of my hon. Friend’s question, I certainly will. He will know that the new national planning policy framework specifically encourages self-build, and many of the planning system reforms the coalition Government have pushed through will help self-builders to achieve their aspirations.

Tax Avoidance (Public Servants)

Richard Bacon Excerpts

Thursday 2nd February 2012 Commons Chamber

[Mr Richard Bacon (South Norfolk) (Con)]

May I say how much I welcome the Chief Secretary’s urgent review? There has been too much of this going on; there was certainly a similar case involving the chief operating officer of the Rural Payments Agency, who was appointed in an interim way under the previous Government, which should not have happened. May I invite the Chief Secretary, in the spirit of the coalition, to say whether he agrees with the former leader of the Conservative party, Michael Howard, who is now in another place, when he said:

“Special rules for special…groups breed anger and division. They blur the distinction between right and wrong. And they give the impression that some people are above the law”?

[Danny Alexander]

I am grateful for the hon. Gentleman’s support for the action I have taken. I was not aware of the example he gave in relation to the Rural Payments Agency. Of course, if other such cases still exist in other parts of Government, that is something the review I have instituted will bring out. I do agree with the statement the hon. Gentleman read out, which is why the Government have taken a series of strong steps—much greater steps, frankly, than the previous Government—to deal with tax avoidance and make sure that everyone pays their proper amount of tax.

Private Finance Initiative

Richard Bacon Excerpts

Thursday 23rd June 2011 Westminster Hall

[Mr Richard Bacon (South Norfolk) (Con)]

I join other hon. Members in congratulating my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on his tremendous campaign. It has been a marvellous example of leadership, which is built on his expertise, and we are all in his debt.

I have been watching the private finance initiative from my position on the Public Accounts Committee for many years. I always had a sneaky suspicion about it, without being able to put my finger on what that was, until I met an investment banker at a private event in 2003. He was a securitisation expert and had been involved in many PFI projects. He said: “I like the PFI. It’s a good source of income and is good for the business, but as a taxpayer it really pisses me off.” That rather woke me up. This was not a trade unionist complaining about costs being cut by worsening the terms and conditions of his members; it was a City fat cat getting fatter on the proceeds.

As a member of the Public Accounts Committee, I used to get invited to conferences on the PFI, when it was in its earlier heyday under new Labour. At those events, I met a group of people whom one can only really describe as theologians for the PFI. Rather like some Marxists, or even some Roman Catholics, there was no question to which they would not have an answer. It was a sort of self-containing system, at the root of which was the idea that the PFI was a competitive bidding process and that there was no possibility of its not being all sorted out and being in the best possible interests of clients—the public authorities involved. After all, it was a competitive, open-market process in which anyone could bid, and certain things would already be in the price. It was almost as if they were talking about the market for foreign exchange, or another perfect market. We know, of course, that because of the huge costs involved in bidding for a large project, the PFI has far more of the characteristics of an oligopoly. The Royal Institute of British Architects estimated, many years ago, that the cost of bidding for a PFI hospital was more than £11 million—probably significantly higher now. All those costs end up getting passed on to the client.

The other thing that these theologians would suggest was that it would not be possible for anything to go wrong, because it would not be possible to have an ill-informed or inexperienced client. There would be no question of there not being the right experience on the client side, or the right capacity or resources to manage a project after a contract had been signed. It was as if all must be for the best in the best of all possible worlds, because it could not be any other way. I continued, however, to be suspicious, and I continued to go to the conferences, becoming ruder and ruder until, I am pleased to say, they stopped inviting me. Customers paid £1,000 to attend and all I got out of it was a slap in the face with a wet haddock and a one-way ticket to Great Yarmouth, so I am glad that I am no longer invited.

I must congratulate the National Audit Office on something that recently opened my eyes. The NAO has produced more than 60 reports on the PFI in the past decade, and I have been pleading with it for years to do more synthesis. We have had analysis after analysis after analysis, and project after project, and in the office’s recent report, published in late April, there is more synthesis of some PFI issues. I had a light-bulb moment when I read on page 7 of the report, in a section about the skills, capacity and experience used in negotiating

“high margins on the changes in asset usage which are likely to occur over a long contract.”

I realised that the providers know full well that it is not possible to write a contract that is flexible enough to last for 25 to 30 years, and so they do two things. One is that they insure themselves by tying down every conceivable cost that might arise—every conceivable risk with its attached price. That process is enormously expensive, and it is reflected in the figure of £11 million that the Royal Institute of British Architects came up with. Although it is true, as my hon. Friend the Member for Hereford and South Herefordshire has said, that in rare instances people have lost a packet on projects, such as Jarvis, the National Physical Laboratory and the Joint Services Command and Staff College in Shrivenham—Laing had to sell its construction business after that—the contractors have a lot of people involved, and they do it well, insuring themselves on the downside pretty effectively, to ensure that they make money whatever happens.

The other light-bulb moment in my reading of the NAO report was when I came to:

“as major contractors seek to develop their income from the project”.

I thought to myself, “Hang on a minute. How do you develop your income from the contract? Okay, you might index the contract to protect yourself from inflation, but basically you have a contract and you provide services. It is predictable, and that is why you know what you’ll get going forward.” No. They know full well when they sign up that it is not possible for the public authority, particularly those in education and health, to write a contract that is flexible enough to last for 25 to 35 years. They ensure that all their risks are covered and then develop their income from the contract over time, as changes occur. One can also see a sudden shift. Just as the flagship Norfolk and Norwich hospital in my constituency was finished, the mood music suddenly changed towards much more primary, locally based care.

The contractors also do fancy financial engineering. The Norfolk and Norwich hospital was perhaps the locus classicus of that. The contractors added about £100 million in extra debt to the contract at the time of refinancing, thus accelerating their return from the project. The NAO produced a report specifically on that hospital, which stated that not only was the repayment period for the hospital extended from 34 years to 39 years—it is hard to see how that was in the interests of taxpayers—but the rate of return for the investors was accelerated from 18.9% to more than 60%, more than tripling it. If they can get all their money out that quickly, it means that it is not nearly as important, and there is not nearly the same incentive, to carry on managing the contract in the same way as before.

My hon. Friend the Member for Hereford and South Herefordshire made another important point when he said that we should not kid ourselves that it has all been plain sailing in the conventional procurement world. He has mentioned the British Library. One might also mention the Scottish Parliament and the Jubilee line extension. I was told that the cost overrun for the windows of Portcullis House—which, again, was a conventional procurement that the Public Accounts Committee looked at when it first opened years ago—was so huge that it would have been cheaper to have clad the exterior of Portcullis House with BMW 7 series cars. We should not be under any illusion that the conventional method has worked as well as it should.

The attempt to find a way to get projects delivered on budget, on time had a certain merit. My hon. Friend was absolutely right to point out that the hon. Member for Coventry North West (Mr Robinson) took this and ran with it. I talked to Lord Lamont, the former Chancellor of the Exchequer, at a dinner a couple of years ago. He said that he had asked the hon. Member for Coventry North West before the 1997 election, “How on earth are you going to finance all these grand promises in your manifesto?” He replied, “Oh, it’s simple—we’ll take your idea of the PFI and run with it.” Lord Lamont said, “But the rules won’t let you,” to which the hon. Member for Coventry North West replied, “Oh, we’ll ignore your stupid rules.” He was very candid about it, in fairness to him.

One of the things that I have regretted about the past few years of the PFI is that, in areas such as health and education, where it would have been fairly easy to do this, the Government did not insist on developing, at the same time, identical or nearly identical clusters and baskets of projects, so that we would then have had a proper way of comparing, over a period of years—three, five, seven and 12 years out—what had actually proved to be greater value for money.

[Mr Mark Spencer (Sherwood) (Con)]

Is my hon. Friend also aware that the issue extends to the emergency services? Nottinghamshire police find themselves in a situation whereby their vehicle fleet is PFI-ed, and it costs hundreds of pounds just to repair a puncture.

[Mr Bacon]

Yes, and of course, we cannot blame the private sector for protecting its downside and ensuring that it makes money rather than loses it. One of the most extraordinary things about all this is the naivety of many of the people in the civil service who have negotiated these projects over the years. They do not seem to understand that the private sector players are profit maximisers. If they have a chance to make money, they will, and if they have a chance to make more money, they will. A certain lack of commercial nous and capacity on the part of the public sector has coloured all this.

Turning to the proposals of my hon. Friend the Member for Hereford and South Herefordshire on steps to improve data, one of the things that have shocked me throughout is the difficulty in getting a view from 100,000 feet of what is going on. I have spent years on the PAC trying to get answers out of the Treasury and other authorities about what is going on, and only very recently has anything started to emerge that looks like a coherent picture. My hon. Friend is absolutely right that we need to think about a variety of different approaches to financing infrastructure. We need to make the PFI compete for business, if we are to use it at all in the future.

There is a paradox in relation to future proposals. The NAO report refers to the fact that there is a pipeline of £200 billion-worth of transport and energy infrastructure projects, and it is precisely for those sorts of enormous, long-term projects that a PFI-type structure might have more attractions to it. However, we have to be able to break down the different components. There is often absolutely no need to ascribe to the entire 35-year period of a project the risks that, in truth, only apply for the first few years, yet that is what many PFI lawyers have been able to get away with in many cases.

My hon. Friend’s campaign for a rebate is fascinating and has certainly caught the attention of the PFI industry. He has led the way on this. It is a remarkable testament to the fact that people in the industry know that things have been going wrong that so many of them have been prepared to co-operate. Interestingly, at the PAC hearing on the NAO report the other day, one of the witnesses, Graham Beazley-Long, from Innisfree, was asked whether it would be reasonable for equity gains to be shared with the taxpayer. He was perfectly prepared to discuss the matter. He said that the Treasury and Infrastructure UK

“would have a view on whether that pushed up the costs of capital”.

In other words, it was all just a negotiation and a certain return would be demanded by investors, and if the taxpayer wanted to pay that up in advance, they could get it back again. There is probably an element of truth in that, but my sense over the years is that the PFI industry, out of which a large number of people have made a great deal of money, has not been made to compete hard enough. There are a number of ways in which they could do that. We should have some conventional clusters that give us, as taxpayers, the ability to compare over the long term, and we should be much more innovative, as my hon. Friend has suggested—I hope that we hear more about his proposal for a national asset trust fund—in securing alternative methods for infrastructure finance, so that the PFI industry knows that it is not the only game in town.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

I rise to speak as another member of the Public Accounts Committee, which lays claim to having had a number of debates about the PFI, as has the Treasury Committee. I congratulate the hon. Member for Hereford and South Herefordshire (Jesse Norman) on securing this interesting and important debate about the PFI, which has been a key part of investment in this country for more than a decade, and how we make the way in which we invest in our infrastructure as a country work. I have a lot of sympathy with his concerns about whether the contracts have been done to the best of their availability and what we can do to improve them. There have been a number of debates and efforts to improve them, and I welcome the fact that he is saying that there is mixed picture on the PFI in terms of where it has delivered and that perhaps we can learn from where it has not delivered.

I want to set out some of my concerns about the hon. Gentleman’s proposals for the future. What really matters, given that a record 61 projects are currently being negotiated under the PFI, is how we can learn from what has happened. That has certainly been one of our key messages on the PAC, and I am sure that my fellow Committee members agree that we need to look at what we can learn and where we can make progress. One of the things that has surprised us on the PAC, as the hon. Member for South Norfolk (Mr Bacon) has mentioned, is the way in which negotiations on the PFI have taken place and the revelation from one of the major PFI companies that it has not been talking to the Government about the possibility of a rebate, which is an issue that the hon. Member for Hereford and South Herefordshire has raised, or about where contracts might be renegotiated.

Mr Metter from the industry used the colourful phrase that he would not ask his investors to take a haircut, by which he meant that he did not feel that it was possible to look at a voluntary scheme. I would be interested to hear more from the hon. Gentleman about his negotiations with other contractors and whether he thinks there is more interest in some kind of voluntary scheme.

We all recognise that it is difficult to ask the private sector to renegotiate a contract that it has signed up to in good faith. That therefore calls into question some of the ways in which we might deal with some of the problems with PFI, particularly the way in which the initial decision to move to PFI was made, which is something that I want to address. We must also consider what it would mean if those contracts were renegotiated. I hope that the hon. Gentleman agrees that there is a real concern that, if any contract is renegotiated, especially if capital parts of a project have been completed, it is services that will actually get renegotiated. Many of us are concerned that the renegotiation of services could mean fewer services, particularly in public institutions such as hospitals. Renegotiating services could have a negative impact on many of our constituents.

More fundamentally, on the hon. Gentleman’s concerns about PFI, I hope that I can convince him that, rather than pursue a voluntary rebate—as I have said, it has transpired from our discussions with the industry that that is not what the Treasury has been doing and that the industry is not aware of such conversations—we should look at the tax status of these companies. I am sorry that he was not able to sit through the second half of our hearing, where we heard some frankly shocking evidence from Treasury officials about their approach to the situation. The issue is of particular importance to the PFI, because when a decision to go to the PFI is made, one of the value-for-money constructs is an assessment of the amount of tax that will be returned to the Exchequer through working with a private company in the UK over the course of the contract. It is set out clearly in the Green Book that the Government make an assessment not of the specific company’s tax take, but of the general tax take that can be expected from working with the private sector in the UK in order to build a project.

[Mr Bacon]

Was it not richly ironic that Revenue and Customs, of all bodies, outsourced its entire estate for all HMRC offices across the country to a PFI company that then took them offshore and based them in a tax haven in Bermuda?

[Stella Creasy]

One of the genuine delights about serving on the Public Accounts Committee with the hon. Gentleman is that he has such a wealth of knowledge and anecdotes that clearly illustrate the challenges that we are dealing with. He took part in the Committee’s session, so he will know that I have grave concerns that moving assets overseas to offshore tax havens has substantial consequences for our assessment of the value for money of PFIs. When the decision to go for a PFI project is taken, an assessment is made of the tax that we will get in return, but there is widespread evidence that many companies then move their assets overseas to offshore tax havens. In fact, the Treasury Committee took evidence showing that 91 PFI projects were owned by secondary market infrastructure funds, so we are losing money. One of the best examples of that problem is a body set up by HSBC. The HSBC Infrastructure Company Ltd, which manages a number of hospitals in this country, has made £38 million in profit from 33 PFI schemes, but it has paid just £100,000 in tax in the UK in the past six months.

--- Later in debate ---

[Neil Carmichael (Stroud) (Con)]

It is a great pleasure to be operating under your chairmanship, Mrs Main. It is a great thing that my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) has done in securing this very important debate, because he has raised a number of issues that have been challenged or discussed and, often, supported in useful ways.

The idea of securing a rebate is a good one. I know that the Treasury, in the form of Lord Sassoon, the Commercial Secretary to the Treasury, is busily doing just that—he is attempting to negotiate a rebate. I am not sure how well the negotiation is going, but it is clearly under way. So the concept of making savings, with of course the proviso that standards and services are not threatened, is well established. My hon. Friend the Member for Hereford and South Herefordshire is absolutely right to push this issue further up the agenda. I salute that.

There is a question about off-balance sheet expenditure. It is right that that issue should be carefully considered. In the context of the green investment bank, we have already done that. The funding for that is now measured to about £3 billion. When our deficit is going down, that bank will be able to raise more capital. There is the same sort of issue, although obviously better controlled by the present Government than the previous one, in connection with the PFI.

I want you to cast your mind back to the time before PFIs got started in this country. Can you remember those schools that were designed poorly, built badly and maintained with no attention to longevity? I have buildings in my constituency that could have been much better designed and of much better quality. Indeed, a building that was literally knocked up in 1956—frankly, it was a disgrace—was recently knocked down. It was put up by a local authority as a technical college, and I could see when I first arrived in Stroud that it should have been knocked down years before. We must remember that PFI schemes have improved the quality of buildings, and in many cases that has improved the quality of services.

[Mr Bacon]

If my hon. Friend were to visit St Thomas Aquinas grammar school and Wellington college in Belfast, he might disagree. Wellington college was built under the PFI, and halfway through negotiations on what should have been a quality building the contractors suddenly said, “Sorry, these are off. Here is your L-shaped school.” St Thomas Aquinas school was procured conventionally. The schools were the same size, the same capital was available for both, and they had the same number of pupils and were of the same socio-economic background, but St Thomas Aquinas school ended up a much better quality school. I have spent a lot of time in both schools and have seen the difference for myself.

[Neil Carmichael]

I thank my hon. Friend for making a good point; I shall answer it later in some detail.

I turn next to the history of the PFI. It goes back much further than 1992. The United States has been using PFI schemes for decades because it wanted private money to be used to provide public utilities, roads and so on. The PFI has a history in the US, in many parts of Europe and in most regions of the world. We have plenty of experience of it. There is much activity in that sector that we can draw upon in order to improve the way in which it works. That is the key point.

PFI schemes have recently become far too complicated. As was pointed out earlier, in many of the original schemes things were simply designed, built and then maintained. More recently, however, we have been throwing in services and all sorts of extras. As a result, the process has become complicated; indeed, many of us have used that word today. That is largely because we have confused the original concept of the PFI by adding on services and so on. There is nothing wrong with that, but it brings me to the fact that we must get the procurement systems right. To do that, we must specify much more clearly what is wanted. Local authorities have to learn to do that, as must the health service; it is a question of commissioning. My hon. Friend, who represents a beautiful Cornish seat—it is in Cornwall, is it not?

--- Later in debate ---

[Neil Carmichael]

Thank you for being so understanding, Mrs Main. This is such a complex subject that you have to marshal your thoughts clearly.

The discussion of procurement leads me to the next big issue—the competitiveness of the tendering process. One of the difficulties is that there are not often enough bidders. That is not surprising, because the bidding costs are sometimes far too high. We therefore need to think about the competitive process and the bidding issue together. I believe that the answer is to make the contractual arrangements and the contracts simpler and more adaptable. You cannot alter a system as complicated as this by looking at one part of it and making some changes, because that will have consequences further down the line, but I think that bidding costs are indeed too high, largely because contracts are too rigid and too few organisations are looking into that as a mechanism.

One or two Members have mentioned income streams. That is a really good point. Most schemes with strong income streams have worked rather well. Those with no proper measure of income or service have not worked so well. We need to divide the concept of the private finance initiative into those schemes with strong and reliable income streams and those mainly to do with service and operation. The difficulty is that we apply the strict definition of the private finance initiative to virtually everything, when we have a much more flexible phrase—public-private partnership. That is what we should be thinking about, so that we do not get ourselves tied up in knots.

[Mr Bacon]

I have tried to resist intervening on my hon. Friend to ask him whether he realises that he is talking unutterable rubbish. First, if you have more specifying, you are obviously going to increase the costs hugely. As for public-private partnerships, I would encourage him to look at the London Underground PPP, where the finance costs were £500 million higher because of the complexity of the scheme, and because the Chancellor of the day detested Ken Livingstone, the professional fees added another £500 million. You—one, Mrs Main—must be careful to distinguish between the different facets. My hon. Friend said that clinical operations cost more in some hospitals than others. Of course he is right, but that has absolutely nothing to do with the PFI.

[Neil Carmichael]

Thank you very much. [Laughter.] You know, it is always great when someone makes a point in opposition that proves the point that is being made. If you keep changing the specifications, you will increase the complexity, making it harder for those who are procuring to understand, and the bidding process just goes awry. The real problem is that various organisations have not specified clearly enough and have not stuck to the specifications as first announced. Therefore, there have been far too many changes, sometimes as late as just before contract signing. That is what I am getting at. It is totally unacceptable. It wastes huge amounts of money—millions of pounds—and it puts off other bidders because, of course, they think to themselves, “Where are we in this? It’s a movable feast.” That is not what we want. We need to bolt it down, and that is why I emphasised the importance of specification. It is a really important point, and my hon. Friend has just proved it. If you keep changing the specification, you will always end up having a problem with a contract of any description. That is where I stand on that issue.

Finally, I want to mention the ridiculous business about light bulbs, car parking at hospitals and so on—the sort of things that we must get away from. That is really important. It is what the Treasury and indeed any organisation involved in such a situation should be moving away from. It is not acceptable; it causes a huge number of problems. It is nonsense to argue that an income stream for a hospital will be the car park for the patients who turn up to it. That needs to be stated. We need to get a grip on what the hospital is actually for and apply the logic of the contract to that. That is the answer to the second point made by my hon. Friend.

In summary, PFI has a role to play, but we must be imaginative about making sure that it works better. If we are going to be spending more than £200 billion on our infrastructure alone in the next decade or so, we will have to appeal more effectively to the private sector to dip into its pocket. Properly modified, PFI can do that. That does not mean that we should not be looking at rebates, and it does not mean that we should not be concerned about what is on or off the balance sheet and so on. It does mean that we must apply value for money on the scheme and ensure that it works for those who need it.

--- Later in debate ---

[Stephen Barclay (North East Cambridgeshire) (Con)]

I am conscious that my hon. Friend the Member for Warrington South (David Mowat) wants to speak, so I shall try to limit my speech to half the time remaining.

In this debate and as a member of the Public Accounts Committee, I have heard about many of the things that have gone wrong in PFI, but I want to focus not on the past but on the future. I shall do so by discussing three areas: first, contract design, because 61 PFIs are being planned; secondly, contract management, because there is a big disparity between private sector and public sector expertise, and I do not get a sense that it is being addressed, so it will continue to lead to poor value for money; and thirdly, if time allows I would like to touch on the secondary market, in particular the greater role that insurers and pension funds could play in certain elements of PFI and the regulatory task force that the Treasury has set up. It will be interesting to see how that will interplay and report back to the House.

First, on contract design, my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) mentioned bundling. We had rather disturbing evidence from a Treasury official at the PAC last week, who suggested that bundling remained necessary because without it the design and construction would not take on board maintenance costs in future. I suggest that they can be decoupled. It is possible to design and put out to tender in such a way that the construction risk is assumed through the PFI if required, by buying in management expertise from the private sector. However, the tail, where there is certainty of revenue, which is particularly attractive to other forms of finance companies, can be decoupled. That will also avoid some of the complexity of contracts, which is where the opaque pricing structures often lie and the legal costs come in. I would welcome clarity on the extent to which the 61 pending PFIs will be bundled.

[Mr Bacon]

What is interesting is that the Treasury sounded more reluctant to see unbundling than David Metter of Innisfree, who gave examples of projects in Canada where unbundling appears to work perfectly well.

[Stephen Barclay]

My hon. Friend is absolutely right. It is helpful for the Minister to look at that example as a benchmark.

Secondly, although I am conscious of time, I want to cover the public sector comparator. Hon. Members have touched on the fact that it has often been flawed, because the PFI was a way of taking deals off the balance sheet and it was the only show in town, but there have been other imperatives. There was a regulatory imperative—not to mention, with a lot of marginal seats in the north-west, a political imperative—to go ahead with the Manchester incinerator, even though it was, at 350 base points, over and above the 300 threshold that the Treasury had at the time. Likewise, there was a defence imperative to go ahead with the air tanker contract, which was appalling value. The existing fleet was falling apart and there was no fall-back position, so there was a defence need for that contract to go ahead. It would be interesting to get from the Minister a sense of the extent to which guidance has changed to guard against some of those risks, and how we as a House get visibility of whether a viable fall-back position has been developed for some of those 61 contracts.

Thirdly, specifically on defence, the response in the Treasury minute of December 2010 is a little ambiguous. It says:

“The Government does not agree with the Committee’s conclusion…on the applicability of PFI to Defence, but agrees with the Committee’s recommendation.”

It will be interesting to see how guidance on defence PFIs will be refined.

I welcome the appointment of David Pitchford in connection with the major projects defence review. That will be useful in addressing some of the problems we see with these contracts, such as their long-term nature and the increased costs.

Public Accounts Committee

Richard Bacon Excerpts

Thursday 16th December 2010 Commons Chamber

[Mr Richard Bacon (South Norfolk) (Con)]

It is a great pleasure to follow the right hon. Member for Barking (Margaret Hodge), the new elected Chair of our Committee. I congratulate her on the way in which she has fulfilled and is fulfilling her office. It is a great pleasure to serve under her leadership. Her predecessor was something of a stern headmaster, and although her style is slightly less stentorian—I looked up Stentor, and he was a Greek herald with a booming voice and it is hard to think of anyone in this House with a more booming voice than my hon. Friend the Member for Gainsborough (Mr Leigh)—she has already shown that she is no soft touch. She has shown her teeth on a number of occasions and she chairs the Committee with great aplomb. You might expect me to say that, Mr Deputy Speaker, but ask yourself which Conservative is likely to be able to resist serving under a strong woman whose first name is Margaret.

I want to say how much of a pleasure it is to have so much new blood on the Committee. It was a bit of a shock for me and the hon. Member for Great Grimsby (Austin Mitchell) to realise that we were the only members of the Committee who had served in the last Parliament and there is a great cast of new active keen members who are working very hard and contributing their new and varied experience.

Let me start by endorsing something that the Chair of the Committee just said. The problems will not go away because there has been a change in Administration. I have been looking at the problems that Government face through the lens of the Public Accounts Committee for the past nine years—I have been wrestling with these problems— and it staggers me that the problems are so generic and are repeated so much. In my relatively brief speech, I want to focus on a number of different reports and then on one issue in detail.

I shall look first at some reports that show structural improvements in the way that we are working with the National Audit Office and secondly at some that show welcome improvement in a particular area—financial management. I shall look thirdly at some reports that show the areas where there are still serious issues, one of which would be almost hilariously bad if it were not so serious because it involves public money, and fourthly at a couple of reports that are particularly important to how we might work in future. Finally, I shall look at one report in detail.

The first three reports I want to discuss signal something quite important. They are the 52nd report of 2008-09 on reducing health care associated infection and the 26th and 19th reports of 2009-10 on improving stroke care and improving dementia services respectively. The 52nd report was the third time since 2000 that the Committee looked at hospital-acquired infections and there has clearly been significant change in that time. The Committee considered it first in 2000 and again in 2004, when there had quite shockingly been a dramatic decline. The NAO published its report in 2004 and we took evidence on it later, and that catapulted hospital-acquired infection up the agenda. Everyone will remember what a strong issue it became during the 2005 general election and it has been an important one ever since. It continues to be important for hospitals, but it will remain so only if they know that they are under scrutiny. That is why I was so pleased that we took evidence on it again in 2009. The report shows that there has been significant progress, particularly regarding the two infections that are the subject of national targets—MRSA and clostridium difficile—but that there have not been those measurable reductions in other avoidable infections that were not targeted. Clearly, progress is made in areas we scrutinise, but more needs to be done.

By returning briefly to an issue, as we did in our 26th report on stroke, we were able to demonstrate that there had been considerable improvement. Our report stated:

“We welcome the demonstrable improvements in stroke care which the Department of Health…has achieved since our first report”,

but noted that there are still further steps to take. I firmly believe that the Committee should, as a matter of routine, return to issues much more regularly. We also did that with our interim report on dementia, which showed that although the then Government said that dementia would be a national priority, they did not walk their talk in the way that they did with cancer and coronary heart disease.

The financial management reports that caught my eye are the 46th report of 2008-09 on financial management in the Home Office and the third report of 2009-10 on financial management in the Foreign and Commonwealth Office. Let us remember that almost the first act of Sir David Normington on becoming the permanent secretary at the Home Office a few years ago was to sign an unaudited and unauditable set of accounts merely so that they could be presented to Parliament. As we said at the time, that was a very unenviable position to be in and it certainly was not his fault. Our report shows that there has been considerable improvement in financial management at the Home Office and that it needs to sustain that momentum by incorporating strong financial management as standard across its business. We have identified areas in which further progress is needed, but we should stop to note the considerable improvement since the chaos of a few years ago.

Similarly, with the FCO, it was a delight to see the permanent secretary turn up with two chartered accountants and to be able to say in our report:

“The Committee is pleased to note that the Department has acted upon previous recommendations”.

That is relevant to what the Chair of the Committee said a moment ago, and I wish that more Departments would do the same. In contrast, however, our 25th report of 2009-10 on the FCO’s estate management showed that it has a lot further to go in that area. We commented that its

“new Estates Director currently does not have the information he needs to do his job.”

The lack of correct information in Government Departments is a theme that we constantly come across and the NAO has rightly focused a suite of its work specifically on estate management because the Government are such a big property owner. There is still a great deal more to do in that area to improve the quality of management within Government. It is not common to find qualified chartered surveyors and qualified chartered quantity surveyors in charge of a Department’s estates in the way that we would expect, and are now getting, with financial managers in relation to financial management in Departments. That is something that the Government should focus on.

I turn to less successful areas, notably the private finance initiative project to deliver the multi-role tanker—the future strategic tanker aircraft—which should never have been set up in that form. Paragraph 1 of our report states:

“The use of PFI to deliver a vital military capability like FSTA was inappropriate.”

It is rather depressing that after years of identifying projects where the use of PFI was inappropriate, and saying that certain types of project should never be subject to PFI—for example, the Libra project to supply computer systems for magistrates courts—it is still being used in situations in which it is wholly unsuitable. I was looking at the questions put by our Edinburgh colleague, the right hon. Member for Stirling (Mrs McGuire). At question 187, she asked the permanent secretary whether, notwithstanding the pressure he was under, there was any justification for the fact that when the Ministry of Defence

“went into a project, that they did not know what it looked like, would sound like, would turn out like, had no indication of the costs of the subcontractors.”

The permanent secretary replied:

“I am certainly not arguing in favour of the approach that was taken…All I am trying to do is to offer a little bit of mitigation for that failure by reference to the operating conditions at the time.”

I think what Sir Bill probably meant by

“operating conditions at the time”

was the previous Prime Minister, who when he was Chancellor of the Exchequer said that we would do it under PFI, or it would not happen. We need to be slightly more honest with ourselves about what is and is not appropriate, and to have more open debate about it. The project was scandalously managed and cost much more than it should. It has taken much longer than it should, and it was inappropriate in the first place.

The Chair referred to the aircraft carrier project, which is similar. We looked at that only this week with the new permanent secretary at the Ministry of Defence, as we did at the beginning of the year in our 2009 major projects report. What staggers me is that only seven months after signing the contract, the MOD took a decision that would increase the costs, not because of project management failure or management ineptitude—it was purely a decision to delay. Decisions were taken that increased the cost by £908 million—or so they thought when we reported on the matter in our 23rd report, in the 2009-10 Session, HC 338. It turns out that the figure was not £908 million; it was £650 million more than that. It was £1.5 billion extra, on top of the original cost, purely because of the decision to delay. I agree completely with our Chair. The permanent secretary at the time should have said, “Affordability is such an important component that if you want me to do it, you should require me to do it by issuing a direction.” I am sorry that was not done.

Our report on the National Offender Management Service highlighted a significant issue relating to the management of the civil service and the way that civil servants are placed on projects. Our recommendation 5 notes that

“the Senior Responsible Owner did not have the right experience for the role.”

Who put that person in that job, when she did not have the right project management experience? If we set people up to fail, we cannot be surprised if that is exactly what happens.

I should like to refer to several other reports, but I shall concentrate on the report on the Rural Payments Agency, which illustrates some deep issues in the relationship between Ministers and civil servants that are as important for the future as they were in the past. I shall remind the House of the facts in the RPA debacle. It involved the single payment system. Various methods were available, but the Government chose to implement the most complicated system on offer with the shortest available timetable. That process was certain to increase both the total number of claimants and the total land area claimed, while the agency had not properly completed the essential digital mapping exercise—refusing to recognise that it was flawed—and was using a computer system that had not been fully tested, and which was anyway not up to the job. It used an approach that split the work into separate tasks performed in different parts of the country, which made it impossible to track the progress of individual claims. It cancelled the parts of the system that would have provided management with information about what was going on and scrapped the contingency plan that would have at least enabled the agency to make part-payments. Furthermore, the RPA sacked its most experienced staff and replaced them with unskilled temporary agency workers who were required to work unsocial hours on the minimum wage. One is tempted to ask, what could possibly have gone wrong? But the fact is that, as we all know, it did go wrong.

To say that the single payment scheme was convoluted was an understatement. Indeed, Dr James Jones of the Royal Agricultural College in Cirencester told our sister Committee, the Environment, Food and Rural Affairs Committee:

“This has been highly confusing conceptually even at the highest levels of those responsible for creating the scheme rules at EU, Member State and regional level: most of the difficulties experienced in implementing the Single Payment Scheme stem back to internal contradictions that arise because

(a) entitlement is based on past occupation of specific parcels of agricultural land but is then not linked to that land;

(b) payment is related to occupation of ‘agricultural land’ but does not require agricultural production; and

(c) most of the cross-compliance and other conditions relate to production but the Single Payment was not a production-based subsidy.”

And that was just for starters. One still had to decide which of the three possible years one would start the scheme in, whether to incorporate funding for the dairy sector into the scheme, and the crucial question of the method that would be used to calculate payments. That offered possibilities of quite byzantine complexity.

The main choice was whether to use as a reference point the payments that individual farmers had received in the past under the old common agricultural policy schemes—known as the historic approach—or whether to average out all payments among farmers in a state or region, which was known as the flat-rate approach. Member states could also apply a mixed model under which they were allowed to apply different calculations in different parts of their territory. It was this that enabled the Administrations in Scotland, Wales and Northern Ireland to use a different system from that used in England.

But there was a further twist within the mixed model. Even within one region of its territory, such as England, a member state could calculate single payments using a part-historic and part-flat rate approach. Under such a “hybrid” system, payments would be calculated partially by taking the available money within a region and splitting it among farmers on the basis of a flat-rate entitlement, and partially by taking account of the old subsidy that a farmer had received historically under the common agricultural policy schemes.

That was not all. Member states could choose a hybrid scheme and leave it at that, which was known as a static hybrid, but if they wished, member states could choose a hybrid scheme and then vary it as time went on, so that over the years the proportion based on the historic subsidy payment declined and the proportion based on the flat rate increased. This was known as a dynamic hybrid.

The permanent secretary of the Department for Environment, Food and Rural Affairs, Dame Helen Ghosh, made it very clear that this was not the Schleswig-Holstein question. Members may recall that that was the question of which Lord Palmerston, a former Prime Minister, said that there were only three people who ever understood it: one of them died, one of them went mad and one of them forgot what the question was. But it was undoubtedly byzantine in its complexity. It prompts the question, what did DEFRA and the Rural Payments Agency actually think about all this? Well, funnily enough, it was very clear what they thought about it.

According to evidence from George Dunn, the chief executive of the Tenant Farmers Association, which he gave to the EFRA Committee, Bill Duncan, who was head of the central scheme management unit at the Rural Payments Agency, said that if the RPA were to choose something other than a simple historic or a simple regional average system it would be a “nightmare” to administer. That is what the senior Rural Payments Agency official thought. David Hunter, who was the director of European Union and international policy in DEFRA, said it would be “madness.” That is what the senior DEFRA official thought.

Yet Dame Helen Ghosh, the permanent secretary of DEFRA, giving evidence to our Committee, in answer to a question from David Curry, then a Member of the House and a member of the PAC, and of course a former Agriculture Minister, told our Committee:

“Ministers were being told it was possible when it was not in fact possible.”

The full quote is as follows, and I think it is quite illuminating:

“The capacity of the organisation to advise ministers—and I think we put them right—and indeed the connection between the policy and operations in the Department”—

I think she actually meant the lack of a proper connection between the policy and the operations—

“meant that ministers were being told it was possible when it was not in fact possible.”

The quote continues:

“The point I am making is that had ministers at the time been told it was effectively impossible—and I think it is very difficult to discuss counter-factuals—they may have made a different decision, had they known the difficulty”.

In other words, the senior official in the RPA with specific responsibility for the management of the scheme, Bill Duncan, thought the route that they were choosing would be a “nightmare” to administer; the senior DEFRA official with direct management responsibility for the oversight of the scheme, David Hunter, thought the route that they were choosing would be madness; but Ministers were being told that it was quite deliverable. As Dame Helen said,

“ministers were being told that it was possible when it was not in fact possible.”

Why? It is the job of the neutral civil service to ensure that Ministers are in full possession of all relevant facts before making a decision, so we could blame the civil service for that debacle.

On the other hand, and in actuality, the Minister at the time was absolutely determined to go down a dynamic hybrid route come what may, so we could blame the Minister, and perhaps we should. The Minister should have been told, however, “It cannot be done.” He should also have been told, “If you want me to do this, Minister, you are going to have to issue a direction to me to do it, because it cannot be done in a way that is economic, effective and efficient.” Why did they do it? In the end, they did it because Ministers told them to, and they were not prepared to stand up to Ministers in the interest of taxpayers, as they should have.

What is the lesson? It is quite rightly true that civil servants respond to what they believe to be a Minister’s priorities, but it is also essential for Ministers to be aware of the consequences of their decisions, and for civil servants to stand up to them and to make sure that they are aware of those consequences. I should like to think that the best civil servants do that, but I fear that it does not happen now as much as it did a generation ago. I am not making a party political point, however, because that was a criticism in the 1980s under the Thatcher Governments and subsequently; it has been a criticism of the previous Administration; and, for all I know, it will become a criticism of the current Administration. It is absolutely essential, however, for Ministers and their advisers to understand the consequences of what they do and the impact of those decisions on large-scale—often world-scale—organisations.

The right hon. Member for Greenwich and Woolwich (Mr Raynsford), in evidence to the Public Administration Committee, made the point very clearly, stating that

“there has to be an understanding on the part of the politician about the impact of political decisions on the ability to manage organisations. I am critical of a failing of some of the leaders of this Government and previous governments who have believed that essentially political decisions could be taken without a proper appraisal of the impact on the running of a department.”

--- Later in debate ---

[Mrs McGuire]

I am speaking purely of the report that was in front of us, but I accept that there may have been other approaches. I was using the point as an illustration, not a comparison.

[Mr Bacon]

I fully accept the right hon. Lady’s point, whether it was meant as an illustration or a comparison. Another interesting facet of the academies programme, which Lord Adonis pointed out to the Committee in a seminar, was that after a relatively short period it was he, as the Minister, who held the collective memory in the Department. All the civil servants who advised him on the programme had been there for less time than him. What does that tell us about how the civil service manages its people?

[Mrs McGuire]

The hon. Gentleman highlights a recurring concern among Committee members, which is that the tendency to move civil servants around the system so often means that the collective memory is not built up. That was illustrated beautifully in yesterday’s discussions with the people from the MOD. Even in a programme of intermediate length, there had been God knows how many senior responsible officers. That leaves no opportunity to build up the collective memory.

I will take your comments to heart, Mr Deputy Speaker, and will not speak for too much time. However, I wish to highlight one other report that I found outrageous, which was on health inequalities and life expectancy. As the Committee said, the issue of health inequalities is not new. A J Cronin wrote about it in his stories about Dr Finlay and Dr Cameron. We all know about these issues. Although it was officially identified in 1997, our progress in dealing with this problem, which has been staring us in the face, is depressing. There are issues with the approach of general practitioners to those who suffer health disadvantages.

I hope that the new Government will look at the report carefully, because as they reform and change the NHS, they must consider whether they can deal with the inequalities in health across the country, or whether they will reinforce them. For the record, that is one report on which I received positive feedback from people outside this House who are in public health. A colleague in the Scottish Parliament said that it was one of the best reports he had read on the issue.

I will conclude by looking briefly to the future. Parliamentary scrutiny of the taxpayer’s pound will be more challenging. As more services are devolved to commissioning GP practices and thousands of schools, the scale of the audit trail will be breathtaking and value-for-money analyses will be even more complex. I hope that the Minister gives us an understanding of who will be responsible for the spend. Can we expect it to still be the departmental accounting officer, when he or she will have no control once the money leaves the Department? Will we invite school governors and managers, partners in general practices, and chief executives of voluntary organisations to appear before us? This is a question for us all: who carries the can when public money is involved and who pays the price if it all goes wrong? It is bad enough at the moment, when few heads appear to roll even when things go spectacularly wrong. What will it be like when thousands of people are ostensibly responsible for signing taxpayers’ cheques? A taxpayer’s pound is a taxpayer’s pound, whoever spends it. The PAC, along with the NAO and the Government, will have to consider quickly how we will manage our work to ensure that there is still public accountability and that value for money is still identified.

--- Later in debate ---

[Stephen Barclay (North East Cambridgeshire) (Con)]

I am conscious that time is short and a number of colleagues wish to speak, so I shall abridge my remarks accordingly. However, I would like first to endorse the comments of my hon. Friend the Member for South Norfolk (Mr Bacon) and other members of the Committee, in paying tribute to the stewardship of the right hon. Member for Barking (Margaret Hodge). I would like also to thank the National Audit Office, which serves members of the Committee tremendously well.

It sometimes feels as though, as members of the Public Accounts Committee, we are getting a glimpse into the cosseted world of the television studio interviewer. We can climb on a pedestal and enjoy the clear view of hindsight. We have the safety harness of asking questions rather than giving answers. We can look at issues in isolation, rather than being distracted, as decision makers are, by many competing challenges. Yet in the short period in which I have been a member of the Committee, the same issues have kept appearing, with the ticking frequency of a metronome—a lack of accountability; poor data quality; insufficient testing of pilots; inadequate project change controls; and a mismatch of management skill sets. What binds many reports is unnecessary complexity, which invariably adds cost and masks inefficiency.

However, in this, the annual debate on the Public Accounts Committee, it is right to step down from the comfort of our perch and set out some solutions to the challenges that we face. In particular, I want to touch on five areas, subject to the time available. We need to clarify the letters of direction signed by accounting officers on their appointment and make such letters Department-specific. We need to improve the transparency of the information given to Parliament by ensuring that the NAO has unfettered access to National Rail, the BBC and the Bank of England. We need to redefine the role of senior responsible owners, to ensure that the current gap between skills and requirements is addressed. We need to introduce greater standardisation of the data presented by Departments to Committees, to facilitate better benchmarking across Government. We also need to embrace different mechanisms—some of that is already happening—so that we not only hold those making decisions to account, but look at different forums and opportunities to learn lessons.

I do not put forward those suggestions in the belief that they are in any way revolutionary. Nor do I believe, given that not even the brightest of our Sir Humphreys have managed to solve them—indeed, the Public Accounts Committee has been in existence since 1836—that my proposals are a panacea. They are simply some areas in which the Committee can start to change the direction of travel in a practical way.

I want to give the House an example to illustrate the first of those points, and perhaps the Treasury can take this away as an action for today. It relates to the letters sent to permanent secretaries. The letter dated 13 October 2010 appointing Martin Donnelly as permanent secretary of the Department for Business, Innovation and Skills makes reference to “RfRl, 2, and 3”, without defining what these are, and to section 5(6) of the Government Resources and Accounts Act 2000, to section 5(7) of that Act, and to chapter 3 of the “Managing Public Money” document. It also requires him to look at the Treasury handbook on “Regularity, Propriety and Value for Money”. I suggest to the Treasury that a new permanent secretary taking over the reins of a Department has better things to do than read those documents.

We saw in the evidence from Sir Bill Jeffrey that there had been a discussion about why he had not sought a letter of direction, when signing the contracts for the aircraft carriers, on the ground of affordability. There was a lack of clarity there, and that was in conflict with the letter that the Committee had received from Sir Nicholas Macpherson. So it is clear that there are issues there.

[Mr Bacon]

Will my hon. Friend give way?

[Stephen Barclay]

I will not, because other colleagues need to speak. In fact, I have time to discuss only this one issue, and I will not talk about the other four. I hope that the Treasury will conduct a review of the letters that go to permanent secretaries, so that they can at least be made Department-specific and self-contained as stand-alone documents. At the moment, they are unclear, and that gives rise to the kind of confusion that we saw in relation to Sir Bill Jeffrey and others.

Economic Affairs and Work and Pensions

Richard Bacon Excerpts

Tuesday 8th June 2010 Commons Chamber

[Mr Darling]

My right hon. Friend is right. No doubt there will be another occasion to revisit the lend-lease arrangements that the then Government entered into in the 1940s, although I commend to the House Lord Robert Skidelsky’s excellent third volume on Keynes, which deals with this matter quite extensively. Some people thought that we got a pretty bad deal in 1943, but there you are.

[Mr Richard Bacon (South Norfolk) (Con)]

rose—

[Matthew Hancock]

rose—