Health and Social Care (Community Health and Standards) Bill

Public Bill Committee, 22 May 2003.

Standing Committee E

Health and Social Care (Community Health and Standards) Bill

John Hutton (Labour, Barrow and Furness)

I beg to move,

That—

(1) in addition to the sittings provided for by the Order of the Committee of 13th May 2003, the Committee shall meet on Wednesday 4th June at 8.55 am and 2.30 pm;

(2) in the Table in that Order, for the entries relating to the sitting on 22nd May at 2.30 pm and the sittings on 3rd June, there shall be substituted—

'22nd May (2.30 pm)

Clause 1, Schedule 1; Clause 2, Schedule 2; Clauses 3 to 25; Schedule 3; Clauses 26 to 32; Schedule 4; Clauses 33 to 35; new Clauses and new Schedules relating to Part 1.

—

3rd June (10.30 am)

Clause 1, Schedule 1; Clause 2, Schedule 2; Clauses 3 to 25; Schedule 3; Clauses 26 to 32; Schedule 4; Clauses 33 to 35; new Clauses and new Schedules relating to Part 1.

—

3rd June (4.30 pm)

Clause 1, Schedule 1; Clause 2, Schedule 2; Clauses 3 to 25; Schedule 3; Clauses 26 to 32; Schedule 4; Clauses 33 to 35; new Clauses and new Schedules relating to Part 1.

7 pm

4th June (8.55 am)

Clause 36; Schedule 5; Clause 37, Schedule 6; Clause 38, Schedule 7; Clauses 39 to 41; Clauses 43 to 65; Clauses 72 to 88; Clauses 99 to 105; Clauses 107 to 109; Clause 111; Clauses 113 to 128; Clauses 133 and 134; Schedule 8; Clauses 135 and 136.

—

4th June (2.30 pm)

Clause 36; Schedule 5; Clause 37, Schedule 6; Clause 38, Schedule 7; Clauses 39 to 41; Clauses 43 to 65; Clauses 72 to 88; Clauses 99 to 105; Clauses 107 to 109; Clause 111; Clauses 113 to 128; Clauses 133 and 134; Schedule 8; Clauses 135 and 136.

If hon. Members have had an opportunity to study the motion, they will have seen that it proposes, first, to extend the time that the Committee has to debate part 1 of the Bill. Instead of concluding our deliberations today at 5 o'clock, we propose delaying the closure of the debate on part 1 until the end of the two sittings of the Committee on Tuesday 3 June. Secondly, it proposes an additional two sittings for the following day, Wednesday 4 June. The Opposition requested that we have 10 Committee sittings to consider part 1, and that is what the programme motion provides.

I emphasise that it is our intention to ensure that Committee members have the fullest possible opportunity to examine part 1, as the radical proposals that it contains are controversial. It is necessary for the Committee to have the fullest opportunity to study all the provisions in part 1, and therefore it is important that the motion of the Programming Sub-Committee be supported today.

Dame Cheryl Gillan (Conservative, Chesham and Amersham)

I am grateful to the Minister for moving the motion. It was agreed that of the 20 sittings on this Bill, 10 would be

allocated to the clauses on foundation hospitals. I am disappointed that the Government did not stick to the first agreement, choosing another programme at a later stage. However, the Committee is grateful that the Minister has rectified that and has given us the 10 sittings that we originally requested.

I also wish to place on record that, depending on the progress that the Committee makes on scrutinising the Bill, I rely on the Government to revisit the programme if necessary. The Bill should have full scrutiny if at all possible, unlike so much legislation that passes through the House, large chunks of which remain unscrutinised by any Committee.

We have agreed to sit twice on a Wednesday in order to get the sittings that we originally requested, which the Government failed to give us in the initial programme motion, but that could cause timetabling conflicts. I am not making a party political point, but sitting on Tuesdays, Wednesdays and Thursdays can put tremendous strain on the Opposition, as the Under-Secretary and the Minister know, in preparing for a rapid roll-forward on complex legislation. On Wednesdays, there are many other activities in the House, not least Select Committee meetings and important evidence sessions, which may involve members of this Committee. Even more conflicts are being forced on Members of Parliament in order for them to fulfil their roles as scrutinisers of Government proposals for legislation.

Both Ministers will agree that concentrating the timetable into Tuesdays, Wednesdays and Thursdays creates problems. I hope that they will bear with us if, from time to time, some Conservative members of our eminent Committee have to leave to attend to other duties. However, I repeat that I am grateful to the Minister for reinstating the original agreement, and I support the programme motion.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

I shall start with a housekeeping matter. I and other hon. Members have had difficulty hearing some of the contributions, probably because the microphones need to be reset.

As regards the programme motion, we believe that at least six sittings are required to discuss part 2 of the Bill. I am still not clear why Wednesday sittings have been proposed. My understanding is that those sittings can be used to complete our discussions on part 1 if we do not make sufficient progress, even with the two extra sittings. I understand that if debate on part 1 finishes in good time, it may not be necessary to have additional Wednesday sittings. However, if it seems that discussions on part 2—to which the Government have tabled important additional amendments—will not be completed on time, the option still remains to sit on a further Wednesday, thus ensuring that the original six sittings proposed for part 2 are retained.

On four occasions we have said that our main requirement is to ensure that there is adequate scrutiny of part 2, particularly on the Commission for Social Care Inspection provisions, which follow the Commission for Healthcare Audit and Inspection provisions and which may be squeezed out. I hope that the Minister will assure us that, come what may,

there will be at least six sittings on part 2, preferably on Tuesdays or Thursdays.

John Hutton (Labour, Barrow and Furness)

I am grateful to the hon. Member for Chesham and Amersham (Mrs. Gillan) for her support for the programme motion. I do not want to take issue with any of her comments because I think that we should all like to make progress on consideration of the Bill.

As regards the comment from the hon. Member for Oxford, West and Abingdon (Dr. Harris), we have had discussions through the usual channels about the Committee's ability to make progress on part 1 and on the need to have extra sittings on a Wednesday. It would be preferable if we did not have to sit on an additional Wednesday; I am sure that Committee members would agree with that. The hon. Member for Chesham and Amersham made a fair point about members' having other commitments. She will know from experience that that also applies to Ministers.

We propose extra sittings for the week after the recess simply to ensure that there is no further encroachment on the time devoted to consideration of other parts of the Bill. I welcome the enthusiasm of the hon. Member for Oxford, West and Abingdon for even more Wednesday sittings. I do not think that there would be much support for that proposal from either side of the Committee. My responsibility is to ensure that the Committee has had the chance to consider the Bill properly, so we would not rule out the possibility of further sittings on Wednesdays, if the need arises.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

The Minister has misunderstood me. My enthusiasm is for at least six sittings on part 2 of the Bill, which deals with standards. As I understand it, the Government are not willing to push for further meetings after 19 June. Given that the recess will be over by then, the only option is to have additional Wednesday sittings. I simply wanted the Minister's assurance that the six sittings originally proposed and agreed for part 2 will be restored, even if that means sitting on a further Wednesday—unless, of course, we finish with part 2 in four sittings.

John Hutton (Labour, Barrow and Furness)

The programme motion will ensure that we have six sittings on the CHAI clauses. I am sure that everyone eagerly awaits the contribution of the hon. Member for Sutton and Cheam (Mr. Burstow) on those issues. The hon. Member for Oxford, West and Abingdon has made a fair point, and I am trying to meet him halfway. However, he is wrong on one point; the problem is not my reluctance to meet after 19 June. I have no flexibility on that matter, because the House has decided that the Committee must conclude its sittings by that date, and I am simply its humble servant.

Question put and agreed to.

Peter Atkinson (Conservative, Hexham)

I remind Committee members that, in our strange world, Tuesday 3 June is treated as a Monday, and that the Committee will sit at 10.30 am and 4.30 pm.

Clause 7 - Effect of authorisation

Simon Burns (Conservative, West Chelmsford)

I want to raise a brief technical point with the Minister because, as he will be aware, clause 7 gives authorisation to the bodies corporate, which are NHS trusts. Its subsections describe the legal authorisation for foundation trusts. If the need arose, is there a mechanism in the Bill, or in legislation generally—I suspect that it would need to be in the Bill—to reverse that process? Such a provision would be required in exceptional circumstances only, but there might conceivably be the odd instance when, for a variety of reasons, a foundation trust might no longer wish to continue as a foundation trust after a time or might become incapable of providing the services and health care that are required for it to remain as a foundation trust. The trust may, therefore, wish to revert to NHS trust status.

My understanding is that that process is irreversible—there is no reversal mechanism. Will the Minister confirm that and state whether it is wise not to provide such a mechanism for the few and, I suspect, exceptional circumstances in which a foundation trust would wish to revert to its former status?

Andrew Lansley (Conservative, South Cambridgeshire)

Before the Minister responds, it seems perfectly clear in clause 7 that all of the obligations and rights of an NHS trust or a public benefit corporation are continued after the point of authorisation, and that is fine. However, I do not understand—perhaps the Minister will enlighten me—what happens if, before the point of authorisation, the NHS trust or public benefit corporation has taken on contractual obligations that are inconsistent with the terms of its authorisation? What happens subsequently with such rights or obligations?

John Hutton (Labour, Barrow and Furness)

I will deal quickly with the point made by the hon. Member for West Chelmsford (Mr. Burns). Later parts of part 1, especially clauses 23 to 26, provide for the dissolution of NHS foundation trusts. It is not, therefore, a once-and-for-all process. We have envisaged circumstances in which it might be right to dissolve the NHS trusts, and clause 25 in particular sets out the procedures for doing that.

The hon. Member for South Cambridgeshire (Mr. Lansley) asked a characteristically intriguing question. I will need to take proper legal advice on that point. Therefore, because I do not want to detain the Committee unnecessarily, I shall write to the hon. Gentleman and copy my response to other members of the Committee. In general terms, the hon. Gentleman is right. The architecture that is proposed in clause 7 assumes the organisations' seamless transfer from NHS trust to NHS foundation trust status—there is no need for the dissolution of the NHS trusts, and there is no need for a transfer under the Transfer of Undertakings (Protection of Employment) Regulations 1981 because there is no transfer of an entity. It is a seamless process.

We have also extended that principle to the contractual liabilities of the trusts as they exist at the moment of authorisation. It is conceivable that the issue that the hon. Member for South Cambridgeshire highlighted could arise in, for example, the treatment of private patients. Providing such treatment would take applicants for NHS foundation trust status above the private cap below which they must operate under the provisions of clause 15. In those circumstances, the clause 15 cap would have to take precedence.

The hon. Gentleman raised a genuinely serious point, and I am happy to take further advice from legal sources in the Department and across Government, after which I shall write to the hon. Gentleman with a properly thought-out answer.

Question put and agreed to.

Clause 7 ordered to stand part of the Bill.

Clause 8 - Amendments of Constitution

Simon Burns (Conservative, West Chelmsford)

I beg to move amendment No. 267, in

clause 8, page 4, line 15, at end insert

'subject to the endorsement of those changes by a vote of the trust's members at which at least 50 per cent. of eligible members cast their ballots.'.

The clause deals with amendments to constitutional foundation trusts once they are up and running, and, as the Bill is currently drafted:

''An NHS foundation trust may make amendments of its constitution with the approval of the regulator.''

The purpose of this amendment, which is in many ways a probing amendment, is to find out the exact purpose of this clause. We want more information, and possibly, in some instances, some comforting words from the Minister. We want to ensure that changes to a constitution can be made only with the approval of the regulator, and subject to the endorsement of those changes by a vote of the trust's members at which at least 50 per cent. of eligible members cast their ballots. That is being suggested to ensure that the members will approve any changes.

The Bill is currently unclear as to how many people would be needed to propose changes to a constitution. Can anyone seek to make changes, and can non-constituents also make changes? I ask those questions—here I refer back to earlier debates on the Bill—because of the possibility, in certain circumstances, of a particular organisation, pressure group or group of constituents having very fixed views on aspects of health care. Might they have the potential to hijack the direction of a foundation trust by changing the constitution to have it dovetail with particular and possibly narrow views?

We are seeking to include in the Bill as broadly based a formula as possible to ensure that changes to a constitution must involve a significant number of board members. That would prevent the hijack of trusts by special interest groups, which everyone on the Committee will agree would be a very unsatisfactory and dangerous situation.

Jon Owen Jones (Labour/Co-operative, Cardiff Central)

I take the hon. Gentleman's point that this is a probing amendment, but surely the regulator is the safeguard necessary to ensure that a trust could not be hijacked. As the Bill proposes, amendments must, through the constitution, have the approval of the regulator. That is the safeguard. The Tory amendment seeks the safeguard of a 50 per cent. ballot. Unfortunately, in today's world, a 50 per cent. threshold can be a severe obstacle to change. The Tory party cannot seriously wish to constrain the ability and the flexibility of foundation trusts to make changes by imposing such a difficult hurdle.

Hazel Blears (Labour, Salford)

We covered a great deal of this ground in previous debates about the relationships between the minimum frameworks set out in schedule 1 and the rights of local organisations to come up with a constitution that is robust, vigorous and fully representative of the community. I should like to reinforce our commitment to ensuring that such constitutions are properly set out.

Clause 8 rightly provides for NHS foundation trusts to change their constitutions. My hon. Friend the Member for Cardiff, Central (Mr. Jones) has talked about the need for flexibility; the geographical areas to which foundation trusts provide their services may well change, so trusts would need to be able to vary the boundaries of their public constituencies. Also, new services may be taken on, in which case the partner organisations that are to be appointed under paragraph 12(2) of schedule 1 may need to vary or take on more PCT representatives, if they provide services in a different geographical area. In other words, we can certainly contemplate circumstances in which the constitutions might need to change.

Before any application is approved by the Secretary of State and by the independent regulator, we expect provision to be made for possible changes in the constitution, and related powers of the various constituent parts of the NHS foundation trust to be defined.

The hon. Member for West Chelmsford (Mr. Burns) raised an important point about the need to get the checks and balances right in this new form of democratic public benefit corporation, so that we know who has the power to introduce changes and how those changes can be endorsed. At this stage, we do not want to prescribe numbers in the Bill, or to be inflexible about how that change might come about. However, I am happy to record that we want the constitutions to contain robust provision for flexibility when circumstances change and to ensure, as the hon. Member for West Chelmsford said, that no special interest group can move changes to the constitution for its own sake.

Simon Burns (Conservative, West Chelmsford)

I am grateful to the Under-Secretary for her comments. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Simon Burns (Conservative, West Chelmsford)

I beg to move amendment No. 269, in

clause 8, page 4, line 16, leave out subsection (2).

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss the following:

Amendment No. 270, in

clause 10, page 4, line 32, leave out 'registrar of companies' and insert 'regulator'.

Amendment No. 271, in

clause 10, page 5, line 6, leave out subsection (4).

Amendment No. 272, in

clause 10, page 5, line 9, leave out 'registrar of companies' and insert 'regulator'.

Simon Burns (Conservative, West Chelmsford)

The amendment would remove clause 8(2) from the Bill, and specifies that all foundation trusts must send a copy of their constitution, with any amendments, to the registrar of companies. Why do the Government constantly refer to the registrar of companies for organisations that they seek to create in this Bill? They are not commercial companies but a public service with a changed format for the provision of that service. Why is it necessary to send the constitution to the registrar of companies, especially as foundation trusts are to be known as ''public benefit corporations'', rather than as ''companies''? Ministers have been emphatic in drawing the distinction and in making it plain that they do not see the trusts, in any shape or form, as companies.

Amendment No. 270 specifies that the constitution of foundation trusts should be sent, and consequently held, by the independent regulator rather than by the registrar of companies. Logically, in the context of what the Government seek to do and the definition and purpose of foundation trusts, that is a superior and more relevant way to proceed than to deal with the registrar of companies.

Members will appreciate that the other amendments are consequential; however, the explanatory notes—particularly with regard to amendment No. 271—would provide a worthwhile subsection were the previous amendments not to be passed. The explanatory notes specify that the register must be available for public access and require the registrar of companies to keep originals of documents on that register for 10 years, or for two years from the dissolution of an NHS foundation trust, so that they are available for inspection by people or bodies for whatever reason. I hope that Ministers find that both relevant and appealing.

John Hutton (Labour, Barrow and Furness)

Again, the hon. Gentleman has made a meal of that. Requiring the registrar of companies to keep details of NHS foundation trusts does not transform them to the status of companies in a way that would be understood under English company law.

The hon. Gentleman asked a fair and reasonable question; should information about foundation trusts be available through the registrar of companies or the independent regulator? There is common ground between us, and access to such information must be available at some point in the system.

Let me correct him on one of his opening remarks.

Perhaps it was shorthand for another point, but he said that the registrar of companies kept details about commercial organisations, and asked—as foundation trusts are not commercial organisations in that sense—why the registrar of companies should hold their particulars. That is not true, as I am sure he will concede after giving it a moment's thought. The registrar of companies also keeps details of not-for-profit organisations; there is no inconsistency on that point.

Simon Burns (Conservative, West Chelmsford)

The Minister is correct. I was using shorthand, which, on reflection, was probably a mistake. I used it because—as I hinted later on—there is great sensitivity about the idea of ''companies''; particularly on his side of the Committee and the House. The Secretary of State's speech early last year gave rise to confusion about companies. I used shorthand so as not to reopen that aspect of the debate with the amendment.

John Hutton (Labour, Barrow and Furness)

I am very grateful to the hon. Gentleman for not wanting to reopen that issue. However, this is a question that does not come down to principle but to common sense. What is the easiest way to facilitate the widest possible access to the relevant information? The choice is between the regulator and the registrar of companies. We opted for the registrar of companies for a variety of reasons. Most importantly, the registrar of companies is where most people look for information about organisations.

Some NHS foundations trusts, just like NHS trusts, will be free to enter into joint ventures with other providers and to set up companies themselves. If one wanted information about those organisations, one would not go to the regulator but to the registrar of companies. Rather than have people pursue information around the system, which is essentially what the amendment would require, we chose the option of having them go to just one point. The registrar of companies will hold the relevant details regardless of whether companies are set up by NHS trusts or NHS foundation trusts. It was simply a pragmatic decision, Mr. Atkinson, to keep all the information in one place. It is certainly not a back-door route into the argument to which the hon. Member alluded about whether foundation trusts are companies or not.

Gary Streeter (Conservative, South West Devon)

I accept that this is not some sort of back-door admission that the NHS foundation trusts will be companies. We have dealt with that issue. However, does the Minister agree that the registrar of companies keeps a record of companies that are limited by shares or by guarantee as well as of not-for-profit organisations but does not keep records of charitable trusts' trustees or partnership agreements? Has the Minister made the right pragmatic choice? Most people who want to find out more about these public benefit corporations, knowing that there is a regulator, might think that the regulator would be the first port of call to find out how to obtain copies of their constitutions. Perhaps the Minister would think about this matter again.

John Hutton (Labour, Barrow and Furness)

I am always happy to think again when serious points have been made, and I am happy to

think about that one. The hon. Member's point about charitable trusts and partnership arrangements is accurate; the registrar of companies does not retain such information. However, I do not understand the point of that observation; that does not impact upon the basic issue that we must resolve, which is where to seek information about an NHS foundation trust. Finding information about a charitable trust is a separate issue. As my hon. Friend the Under-Secretary has just reminded me, the NHS foundation trust will keep all the information as well, so there will be local access to it too.

This is not a huge issue; it is largely a debating point. The simple question that we had to resolve in the Bill was whether or not there should be one main portal of access to the information.

Andrew Lansley (Conservative, South Cambridgeshire)

The Minister did not use the argument that I expected, which was that it is possible for an organisation to be a public benefit corporation and not an NHS foundation trust, if only in so far as that corporation has been established to pursue an application to become an NHS foundation trust. In that case, it would be inappropriate for the regulator to keep the details of a public benefit corporation to which he has not given authorisation. I wonder, therefore, whether I am wrong.

John Hutton (Labour, Barrow and Furness)

I am grateful to the hon. Gentleman for making that helpful contribution. I will ask my officials why that was not in my notes, because it is a very effective point.

The hon. Gentleman and Committee members will know that that is an interim stage. I do not want a lengthy period between the establishment of the public benefit corporation and the authorisation for that corporation to act as an NHS foundation trust. There will be some time between the two, but that should not necessarily be lengthy. However, the hon. Gentleman is right; it would be inappropriate in those circumstances for the regulator to keep such details.

As usual, I have spoken for longer than I intended. The hon. Gentleman made a fair point and his hon. Friend the Member for South-West Devon asked me to have another look at it, and I will. However, on balance, I think that the right decision has been made.

Simon Burns (Conservative, West Chelmsford)

In the light of the Minister's assurances, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 ordered to stand part of the Bill.

Clause 9 - Variation of authorisation

Simon Burns (Conservative, West Chelmsford)

I beg to move amendment No. 139, in

clause 9, page 4, line 20, leave out 'is to' and insert 'must'.

Subsection (2) of clause 9 states:

''In deciding whether or not to vary an authorisation the regulator is to have regard (among other things) to—''

the overview and scrutiny committee of local authorities and the Commission for Patient and Public Involvement in Health. Both of those proposals are eminently reasonable.

However, I am concerned about the use of the words ''is to''. They are ambiguous, and I should like to toughen up the wording to ''must''. That would make clear that if there were variations of authorisation, the regulator ''must'' have regard to any recommendations that have been made to those two bodies, rather than ''is to'' have regard, which is a weaker and more lax instruction.

The use of the word ''must'' would impose an absolute duty, but if ''is to'' were used, some safeguards that one had assumed were implemented might not be—because of the variation of authorisation—particularly with regard to the provision of a trust's core services. One such example is the Royal College of Midwives. I am sure that Ministers are aware of a recent article in The Times concerning the provision of midwifery services throughout the country, and that maternity services are a core function of the NHS. The Under-Secretary of State for Health, the hon. Member for Tottenham (Mr. Lammy) is certainly aware of that, because he is quoted in Hansard of 7 May 2003 as making that point. The figures certainly back that up. Approximately 555,000 babies were delivered in England in the most recent year for which figures are available.

Peter Atkinson (Conservative, Hexham)

Order. The hon. Gentleman is confusing me on this amendment. How exactly does he think that this is relevant to amendment No. 139?

Simon Burns (Conservative, West Chelmsford)

I am sorry, Mr. Atkinson. What I was trying to do—inadequately as you rightly pointed out—is to give an example of a service that could be removed by a foundation trust. In my understanding, that would require a variation of authorisation. I suspect that a local authority overview and scrutiny committee would think that the withdrawal of maternity services from a foundation trust would not be in the local community's interest. The scrutiny committee would make its views known to the regulator. As clause 9 is drafted, if the regulator ''is to'' have regard, he can take the committee's views on board but not necessarily agree with them, and thus allow the withdrawal of a maternity service.

Amendment No. 139 proposes that the regulator ''must'' have regard. The word ''must'' would strengthen the hand of a local authority overview and scrutiny committee to allow it to ensure that such a service would not be removed from local health care provisions in a foundation trust. The example I cited may be common in foundation trusts, and the hand of overview and scrutiny committees must be strengthened to ensure that the regulator would not have this apparent widespread freedom to have regard to the views of the scrutiny committee rather than abiding by them.

George Young (Conservative, North West Hampshire)

I shall speak in favour of amendment No. 139 because it raises issues that may be more important than my hon. Friend the Member for West Chelmsford realised. This is the first point in part 1 of the Bill at which the involvement of local government and social services is mentioned, and it underlines the need for the regulator

to have regard to the views of local government. The Government are keen for good co-operation between health services and social services.

Concern has been expressed to the Select Committee on Health that when the concept of foundation care trusts is being developed, emphasis may be placed on acute services, and the needs of the wider health economy may be disregarded. The King's Fund posed the following question about foundation trusts:

''Has foundation trust status had any impact on relationships within the local health economy, particularly with respect to collaborative working, predominantly for the care of older or chronically ill patients?''

We have discovered that social services will not have a place, as of right, on primary care trusts; that is a matter for discretion. However, it is essential that foundation care trusts have regard to the needs of social services. If the route of foundation care trust were taken, there is a risk that loyalty to a popular local institution—namely the district general hospital—would be promoted, and other claims on the health economy disregarded. For example, there may be a focus on the reduction of waiting times for elective treatment—an issue that we all understand—but there may also be other priorities in the local health economy. Unless the regulator or someone else stands back and examines the broader picture, there is a risk that resources will not be applied as they are best needed.

If the focal point is the district general hospital, a community hospital that comes under the wing of a foundation trust may be sacrificed for the perceived interests of the DGH. I suspect that many constituencies have both DGHs and outpost hospitals. In my constituency, the DGHs are in Winchester and Basingstoke, but there is also a community hospital in Andover.

Andy Burnham (Labour/Co-operative, Leigh)

That is precisely the point. The new structures proposed by the Bill would help to represent the interests of outlying hospitals more than they are in existing NHS structures. Larger institutions have sometimes disregarded the interests of smaller hospitals.

Peter Atkinson (Conservative, Hexham)

Order. Before the right hon. Gentleman continues, I should say that we are probably moving away from the amendment to having a stand part debate. I am happy to have a ''stand part debate'' now, providing that other hon. Members do not seek a stand part debate at the end of this debate.

George Young (Conservative, North West Hampshire)

That is a most helpful suggestion, Mr. Atkinson. This is not the right point at which to debate the relationship between social services and foundation trusts. If your ruling is that we can have a stand part debate, I shall not say another word.

Peter Atkinson (Conservative, Hexham)

Order. The right hon. Gentleman may continue. However, I hope that other Committee members will not rise to speak when I put the question that the clause stand part of the Bill. We would then

have a stand part debate all over again. If the Committee wants to consider this a stand part debate, we shall have one now.

George Young (Conservative, North West Hampshire)

The signal has turned from amber to green. I am much obliged.

If, for the sake of argument, a foundation trust generates a surplus, which is one of its objectives, the needs of community-based care should not be set to one side and certainly should not be focused on the narrow needs of the district general hospital.

As social services would not be part of foundation trusts as of right, the only way in which they could be made part of them would be through the intermediation of the regulator. I am not sure that that is the best way in which to proceed. Perhaps the Minister will explain how the new concept in the NHS will not undo the good work done in breaking down the Berlin wall between health services and social services. The NHS has promoted closer relationships between primary care trusts and social services and has introduced joint budgeting and bed-blocking initiatives. I hope that the initiative will not undo that good work.

I am the custodian of the Select Committee on Health, although I am not a member of it. I will therefore conclude by reading from its report:

''The policy of Foundation Trusts does not necessarily mean that partnership between acute and community settings will be damaged, but we believe it does introduce the need for stronger safeguards to ensure continued co-operation between PCTs, Local Authorities, and other NHS organisations across the board, and a continuing emphasis on whole systems working.''

That is the assurance that I seek from the Minister.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

I support the points made by the right hon. Member for North-West Hampshire (Sir George Young) and thank him for his support for the theme that was raised earlier in the consideration of the Bill. This is indeed the first time that the words ''overview and scrutiny committees'' appear in the Bill. Of course, questions have been asked before about the danger of over-concentrating on the acute sector, on secondary care rather than on primary care and on the health side of health and social care rather than on social care itself.

We would support the amendment if it were to make the clause stronger, because the bodies listed—specifically the overview and scrutiny committees and the Commission for Patient and Public Involvement in Health, which are, presumably, informed by the views of patient forums, and particularly PCT patient forums, through their reports to the commission—must be taken into account. In that respect, the debate is similar to that on clause 6, during which I asked whether, in considering an authorisation rather than simply a variation of authorisation, the regulator must have regard to the views of local people.

The amendment lists a series of local bodies. The Minister said that the list was too long and would provide an individual veto to too many groups. It would be worrying if the Government could not reassure the Committee that authorisation could not be prevented in some circumstances, either by opposition to the proposed variation of authorisation

from an overview and scrutiny committee or through a properly formulated report to the regulator from the Commission for Patient and Public Involvement in Health.

If the Minister says that ''is to'' is sufficiently strong to ensure that there will not be a variation of authorisation if it is strongly opposed by those bodies, I ask again why that applies only to a variation of authorisation and not to the authorisation itself.

The Minister argued previously that paragraphs 7.10 and 7.11 of ''A Guide to NHS Foundation Trusts'' ensure that local bodies are consulted and that their opinions on authorisation must be taken into account. However, I should have thought that a variation to the authorisation is equivalent to the authorisation. As the Government have seen fit to ensure that there is a specific mention in primary legislation of the overview and scrutiny committee's opinion and the Commission for Patient and Public Involvement in Health in clause 9, I should be grateful if the Minister would explain why, at the very least, that was not required in clause 6.

I hope that the Minister will consider accepting the amendment. It will reassure those of us who understand the reasons given by the right hon. Member for North-West Hampshire why there is a danger of the entire health care system being led by the secondary care system. In planning a holistic health and social care system, hospitals' services especially should follow what is required by primary care and, indeed, the social care sector.

Andrew Murrison (Conservative, Westbury)

I support amendment No. 139. I am not sure that my hon. Friend the Member for West Chelmsford quite appreciated the hornets' nest that he would be stirring up in moving the amendment, but that has happened, and we are having a fruitful debate on it.

I, too, am concerned with the apparent preoccupation with acute care, which appears to be the main thrust of the Bill. I am also rather surprised by it, as I have said to Ministers before. Hitherto, they have shown a commendable interest in primary care. They were, in fact, steering our health service in the correct direction in so far as they were emphasising less the acute side of the service, which has certainly received most emphasis since 1948, and focusing more on social care and primary care.

I am somewhat surprised, frankly, that we have the Bill, and I am also surprised by its tone. The amendment proposed by my hon. Friend the Member for West Chelmsford would be a very small and incremental step in the right direction. There is little doubt that we focus heavily on the glamorous side of health care, especially hospitals. We tend to be less interested in community hospitals than the acute sector, despite the fact that the former probably add more to the sum total of human happiness, in many respects, than the latter.

I was very interested in the Community Care (Delayed Discharges etc.) Act 2003, which appeared to fracture the relationship between social services and the acute sector. I have a particular interest because,

some months before that, my ten-minute Bill appeared to suggest, in a probing manner, that fining might be a good idea in order to establish a more workable relationship between social services and the acute sector. The Government appeared to take that forward with a vengeance, and there is little doubt that there has been a strained relationship, or that a somewhat strained relationship is developing, between local government and the acute sector partly as a result of that. The amendment proposed by my hon. Friend the Member for West Chelmsford will go some small way to re-establishing the proper relationship that should exist between those two sectors. In truth, social services and the acute sector are one and the same thing as regards health care for our constituents. I commend my hon. Friend for suggesting this small, but significant, adjustment to the Bill. I am sure that it will be extremely fruitful, and I hope that the Committee will be minded to accept it.

Gary Streeter (Conservative, South West Devon)

I also commend my hon. Friend the Member for West Chelmsford for having spotted that important point. I support the amendment because I am increasingly concerned about the lack of co-operation and integration in different parts of the country—including the west country—between social services and acute hospitals.

This is an opportunity for us to make it clear in the Bill that we want the new foundation trusts to work closely with social services committees and to listen carefully to reports made to them, the regulator or the general public by any overview and scrutiny committees pursuant to the Local Government Act 2000. That is particularly relevant and important to elderly people, where there is often a gap between the care offered and the kind of co-operation and integration that should take place, largely because funding comes from different budgets—from different jam jars.

That situation may even get worse if foundation trusts are set up that are answerable to a new electorate, rather than to the electorate that puts in place a social services committee or an overview and scrutiny committee on a local authority.

I support the hon. Member for Oxford, West and Abingdon. This amendment would strengthen the provisions set out in clause 9 and ensure that the regulator must have regard to any report made by an overview and scrutiny committee. The best place for that injunction is not in clause 9, which deals with the variation of authorisation—I imagine that that would be a relatively infrequent activity—but in clause 6, because the initial authorisation is surely the most important document that will be published, certainly in the first few years of any new foundation trust. The regulator should have regard, at that stage, to any reports by an overview and scrutiny committee. I hope that the Government will think again.

It surprised me that subsection (2)(a) should appear so expressly in clause 9 but is not referred to at all in the previous clauses on the granting of initial authorisation. That is probably an oversight; these things can happen when drafting detailed, long and

complicated measures, and I hope that the Government will reconsider it.

It is important that, where possible, the Bill should send a signal from the centre to acute hospitals, foundation trusts, social services committees and local government that they should work together in a more integrated and co-ordinated way. This is an opportunity to make that very clear, and I hope that the Government will listen.

Jon Owen Jones (Labour/Co-operative, Cardiff Central)

I challenge the emerging consensus that there is an over-emphasis on acute care in this country. Often those arguments are advanced more strongly by people who have direct practice in primary care or social work, and those people are well represented in Parliament and on this Committee. This is not an argument against integration, but if it is true that there is an over-emphasis on acute care and hospital provision, why is it also true that there is clearly an undercapacity for acute care, and that a huge number of our constituents are waiting for acute care? The overwhelming majority of people who come to my surgery—and, I believe, other MPs' surgeries—with complaints about health care cannot access care in hospitals.

Gary Streeter (Conservative, South West Devon)

The hon. Gentleman makes an important point. However, constituents come to us and talk about the length of time that it can take to see a GP—it can take three or four days to secure a routine appointment—and to get sufficient help for elderly people in need of support from social services committees. There are issues about access to treatment across the board.

Peter Atkinson (Conservative, Hexham)

Order. Under my liberal regime we are having a wide-ranging debate, but the hon. Gentleman is going extremely wide of the clause. I should be grateful if he would bear that in mind.

Jon Owen Jones (Labour/Co-operative, Cardiff Central)

I accept your strictures, Mr. Atkinson, and I wish to see the Bill progress. However, hon. Members should understand that the view that acute care in this country receives too much attention is often propounded, but people should look at the evidence available before accepting it.

Andrew Lansley (Conservative, South Cambridgeshire)

I rise to speak to the clause, which I will not have a chance to do unless I speak to the amendment.

I join other hon. Members in believing that the hon. Member for Oxford, West and Abingdon makes a good point on the issues raised thus far. If there were to be a substantial change of services, consequent to an original authorisation, the Committee would need the assurance that the provisions in the Health and Social Care Act 2001 that relate to overview and scrutiny committees would be engaged in that process, even though they are not separately specified in the legislation.

I have concerns about the relationship with local government, and that is relevant to the point made by my right hon. Friend the Member for North-West Hampshire. When I tabled amendment No. 187, I did not recognise—because I had not then read that part

of the Bill—that paragraphs 106 and 107 to schedule 4 provide for the extension of the requirements for co-operation between NHS bodies and local authorities to include NHS foundation trusts. That statutory provision, contained in the Health Act 1999, will apply.

My right hon. Friend referred to the Select Committee's conclusions on local authorities and primary care trusts, and the arrangements between PCTs and foundation trusts. Those conclusions arose, in part, from evidence given to the Select Committee by Karen Bell, who is the chief executive of Huntingdonshire PCT. She is, quite reasonably, concerned that, although Huntingdonshire may not be the leading PCT for Addenbrooke's hospital—indeed, 97 per cent. of Hinchingbrooke hospital's purchasing is by Huntingdonshire PCT—there is still a substantial amount of purchasing at Addenbrooke's by Huntingdonshire PCT. The PCT is concerned that, as part of its responsibility for commissioning, it needs to have some representation.

I will not re-enter the debate that the Committee had on the representation of PCTs on foundation trust boards, but PCTs must have that link, otherwise they cannot properly fulfil their responsibilities.

We had a debate on Tuesday about the extent of consultation on the variation of authorisation. The Minister rightly said that the regulator must act reasonably and proportionately. That means that written representations can be made by the trust at any time. However, it is unclear whether the regulator may make a variation in an authorisation in circumstances in which the NHS foundation trust had not sought it. On the face of it, it seems that a variation in an authorisation should, in normal circumstances, be at the request of an NHS foundation trust, but that may not always be the case.

To the extent that the request is not always made by the trust, it may be made at the behest of the Secretary of State. That brings us back to the interpretation of the general duty of the regulator. If the regulator interprets his general duty differently on what the provision of a comprehensive health service requires, he might impose a variation in authorisations. Does the Minister therefore agree that there might be an imposed variation?

John Hutton (Labour, Barrow and Furness)

That was an interesting and wide-ranging debate, and it raised some important issues. We have already debated some of those issues, and I shall return to the wider themes that have been raised.

I shall, however, first speak to the amendment, because we have rather lost sight of what the hon. Member for West Chelmsford proposed to the Committee. Clause 9 (2) states:

''In deciding whether or not to vary an authorisation the regulator is to have regard (among other things) to''

any report made to him by the overview and scrutiny committees and by the Commission for Patient and Public Involvement in Health.

The amendment would replace the words ''is to'' with the word ''must''. Instead of saying that the regulator ''is to have regard'', it will say he ''must have

regard''. I do not want to get into party politics, but I ask everyone here what the difference is between saying that he ''is to have regard'' and that he ''must have regard''. If anyone can find a difference, I would be very interested to hear what it is.

Simon Burns (Conservative, West Chelmsford)

Accept the amendment, then.

John Hutton (Labour, Barrow and Furness)

There is no need to accept the amendment. The Bill as drafted requires the regulator to have regard to those two entities. With the greatest of respect to the hon. Member for West Chelmsford, there is nothing of substance in the amendment that he has raised. He did not refer to the difference between ''is to'' and ''must'' in his remarks at all—and rightly so, because there is no distinction.

The hon. Gentleman's desire for the regulator to ''have regard'' is already provided for in the Bill. He confused himself over a different point. He thought that his amendment would require the regulator to accept the views of the oversight and scrutiny committee. [Interruption.] He says no, but that is the case. In moving the amendment, he said that the regulator must abide by the oversight and scrutiny committee's reports. His amendment required the regulator to abide by that committee's decision. That is a complete misunderstanding of the role and responsibility of the oversight and scrutiny committee. The context is a situation in which a significant change in service is being proposed. The regulator would have to adjudicate and decide whether there should be a variation in the licence in that situation.

George Young (Conservative, North West Hampshire)

The Minister has avowed the argument that there is no difference between ''is to'' and ''must''. Why then, later in the same clause, does it say, ''The regulator must''? Is there any difference there?

John Hutton (Labour, Barrow and Furness)

There is not. [Interruption]. This is a very fine debating point. With great respect to the right hon. Gentleman, does it alter anything of substance in the clause? The answer is no, it does not.

Simon Burns (Conservative, West Chelmsford)

Given that subsection (3) uses the word ''must'', and given that the whole purpose of the amendment—among other things—is to remove any ambiguity, why do the Government not accept the amendment so that there will be consistency and no ambiguity?

John Hutton (Labour, Barrow and Furness)

Ambiguity could arise only if, for example, there were some judicial or legal challenge, and the advice that I have received from the Government's lawyers is that there is no difference between ''is to'' and ''must''. There is simply no ambiguity.

Jon Owen Jones (Labour/Co-operative, Cardiff Central)

This is a very interesting debate on definitions. I recall the former President of the United States arguing that the definition of ''is'' could be construed in different ways. Perhaps the Minister may like to reflect and reread what President Clinton said. That may help with the case being put forward by Conservative Members.

John Hutton (Labour, Barrow and Furness)

I hold the former President—

Simon Burns (Conservative, West Chelmsford)

Will the Minister give way?

John Hutton (Labour, Barrow and Furness)

I shall when I have dealt with my hon. Friend's point. I hold former President Clinton in the highest regard. He was a brilliant President. However, his competence and jurisdiction are limited. His pronouncements about the words ''is'' and ''must'' are unlikely to carry any weight in the courts of England, perhaps for perfectly understandable reasons.

Gary Streeter (Conservative, South West Devon)

The Minister will, of course, be aware that famous court cases in this country have gone as far as the House of Lords on the interpretation of ''the'', ''a'' or ''an'' in a statute. Picking up on my right hon. Friend's point, I note that clause 9(1) uses the words, ''The regulator may'', subsection (3) says ''The regulator must'', and subsection (2) uses the words ''the regulator is to''. Can the Minister not understand that in years to come, lawyers may engage in protracted and expensive cases, trying to work out whether a difference was intended in the use of those words? For the purpose of clarity, it would be worth having the word ''must'' in subsection (2), as is in subsection (3).

John Hutton (Labour, Barrow and Furness)

No. I repeat that there is no difference, in the legal sense, between ''is to'' and ''must''. If the hon. Gentleman is suggesting that lawyers will engage in expensive litigation to try to establish such a difference, of course I cannot rule that out, but it would be a complete and scandalous waste of money.

The hon. Gentleman's other point—that the introduction of ''may'' in subsection (1) casts some shadow over the words used in subsections (2) and (3)—is complete cobblers. It casts no doubt at all. The hon. Gentleman said that the three different words ''may'', ''is'' and ''must'' would add to the confusion over the meaning of clause 9. That—and this is a purely legal term—is cobblers. I doubt that there is extensive jurisprudence about that particular phrase, but everyone knows where I am coming from.

I shall now deal with the point made by hon. Member for West Chelmsford. The word ''may'' was deliberately chosen in clause 9(1) because we want to allow the regulator to have discretion whether to authorise a change in the terms of the licence. It is right that he should have such discretion, which is why we chose the word ''may''. In subsection 9(2), however, the regulator ''is to'' have regard to those two reports and must send a copy of any variation of the authorisation to the registrar of companies. We can dig over the bones of the subtlety between ''is to'' and ''must'' if the Committee really wants. However, I do not want to because it is not a substantive point.

Simon Burns (Conservative, West Chelmsford)

It is.

John Hutton (Labour, Barrow and Furness)

The hon. Gentleman said, ''It is,'' and we all know that that means he will request a vote. We all looked forward to it—although that is perhaps a slight exaggeration. We all enjoyed the debate about the inevitable amendment about converting ''may'' to ''shall''. Now there is the inevitable amendment about converting ''is to'' to ''must''.

Jim Dowd (Labour, Lewisham West)

Making so much of changing ''is to'' to ''must'' is utterly fatuous, given

that the Committee has nothing to say—there is certainly no amendment on the amendment paper to that effect—about something as vague as ''among other things'', which appears a little further on.

John Hutton (Labour, Barrow and Furness)

Yes, indeed. My hon. Friend has helped me out of a hole that I was digging for myself, and I am grateful to him for that. As my hon. Friend said, the hon. Member for West Chelmsford has not achieved the clarity that he wanted.

Let us move on to what, by common consent, is a more substantive issue—although my reading of the amendment and clause leads me to believe that Opposition Members have confused two separate things. Clause 9 deals with varying the terms of the authorisation should a significant service change be proposed. With great respect to Opposition Members, it is not about the wider issue of the relationship between secondary care, social care and other local government services. I absolutely agree that that co-operation is fundamental. To be fair to Opposition Members, they have repeatedly made the case that the Government have tried, not just through legislation, but through policy, resources and other action, to bring down the Berlin wall to which the right hon. Member for North-West Hampshire referred.

Although progress is being made, there is also confusion. The Bill concerns secondary care, but is not about prioritising those needs. The Government want to reform the structure and operation of the secondary care sector. The Bill is designed to do that, but not at the expense of other areas of health and social care. I take on board the comments from Opposition Members and from my hon. Friend the Member for Cardiff, Central. We all share a common interest—irrespective of party—in ensuring closer co-operation, because our constituents ultimately benefit if there is a seamless service between health and housing. Our common interest is to pursue that agenda. In proposing this legislation on hospitals, the Government have not sacrificed that agenda.

The hon. Member for South Cambridgeshire, who increasingly seems to be doing a better job than I am in defending the Government's case—perhaps he would like to come over here and help me out more formally with that—was right to draw attention to other parts of the Bill where co-operation between NHS foundation trusts and social care providers is built into the fabric of the legislation. The hon. Gentleman was right to refer to paragraphs 107 and 106 of schedule 4; he could also have referred to paragraph 23. I acknowledge that we have not yet reached schedule 4, but I look forward to that.

In several parts of the Bill, the Government have carried over the duty of co-operation and powers of flexibility in section 31 of the Health Act 1999 into the ambit of NHS foundation trusts. Therefore, all those advantages have been carried over into the Bill, and it cannot be fairly argued that because we have introduced legislation that deals with secondary care, we have forgotten the other areas of health and social care. With great respect, that is complete nonsense.

The Bill makes provision to ensure that under the Health Act 1999, NHS foundation trusts have the same legal obligations and legal powers as other parts of the NHS. We have included in the Bill the tools that NHS foundation trusts will need, and the legal duties that will need to bear on those, to do what the hon. Gentleman, other Conservative and Liberal Democrat members, and my hon. Friends, have asked.

To be fair, there is no substance in the argument that the amendment is necessary to require NHS foundation trusts to co-operate with social care providers in providing seamless care. That is expressly dealt with in other parts of the Bill.

Clause 9 provides for the much narrower issue of varying the terms of NHS foundation trusts' authorisation. The Bill is clear in that regard. The regulator is to have regard to the views of the oversight and scrutiny committee, not abide by them, as the hon. Member for West Chelmsford said. For the sake of completing the historical tour, may I ask who gave local authorities that competence and role in health care planning and strategic development? Was it the Conservative Party? [Hon. Members: ''No.''] Was it the Government? [Hon. Members: ''Yes.''] Thank you very much. The loyalists respond, even the rabble. A little bit of pantomime never does anyone any harm.

The Committee has taken a long time on this matter. I agree with the points made by Opposition Members and by my hon. Friend: We must ensure that there is proper co-operation between NHS foundation trusts and health and social care providers, and the Bill provides that. Amendment No. 139 has absolutely nothing to do with the issue. We must see all the issues in context. There is substantive policy, and we have addressed it. Amendment No. 139 is a million miles from the issue.

The hon. Member for South-West Devon raised a good point when he voiced his concern that something similar should be in clause 6—but it is. There is a duty to consult, and clause 6 is clear about how to make regulations for primary consultation. There will be consultation with local authorities on the establishment of NHS foundation trusts. My right hon. Friend the Secretary of State will ensure that the regulations extend to that.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

The Minister ought to recognise that that point was well made by the hon. Members for South-West Devon and for South Cambridgeshire, as well as by me. The issue is not consultation because, as the Minister said, that is provided for in clause 6 and in the guide. However, why does clause 6 not include the need to have regard to the views of the overview and scrutiny committee on authorisation? It is good that clause 9 states that the regulator must have regard for primary legislation—I understand what the Minister said about not giving a veto and not being required to abide by any views—but the fact that the regulator should have regard to the views of the overview and scrutiny committee should be included in clause 6.

John Hutton (Labour, Barrow and Furness)

The hon. Gentleman could have tabled an amendment to clause 6, but he did not. He cannot

do that now, because clause 6 has already been debated.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

I refer the Minister to the Committee's debate on 20 May, when an amendment, tabled in my name, to clause 6 was discussed. Amendment No. 246 said that the application should be

''endorsed by the relevant local authorities, primary care trusts, patients' forums and representatives from local staff side organisations;''.

In introducing that amendment, I made the point that the overview and scrutiny committee was the appropriate place for that to happen. The Minister said that that would represent a veto. Is it possible to compromise and use the language of clause 9 in clause 6?

John Hutton (Labour, Barrow and Furness)

We can return to that issue on Report or later in the Committee. I have not yet read the hon. Gentleman's speeches in Hansard, but I will do that over the weekend. Clearly I need to get out more.

The hon. Member for South Cambridgeshire asked whether the independent regulator could vary the terms of authorisation if a foundation trust did not want that to happen. The answer is yes, if it is necessary to do so. The obvious circumstance in which it could happen is that of failure of the foundation trust as set out in clause 23—and rightly so. The regulator should have the ultimate jurisdiction, and the Bill provides for that. It should be a rare occurrence: we do not expect the regulator to have to vary the terms of authorisation regularly, as it would imply that something was fundamentally wrong with the operation of an NHS foundation trust. The whole point of starting the process with our best performing hospitals is to avoid such a situation.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

I am keen to spare the Minister the pleasure, or burden, of reading the Committee's debate on clause 6. Why does the Minister feel that it is appropriate to insert in clause 9(2) that to vary authorisation,

''the regulator is to have regard (among other things) to

(a) any report or recommendation made to him by virtue of section 21(2)(f) of the Local Government Act 2002 (c.22) (overview and scrutiny committees),''

when he does not feel it necessary for the regulator, under clause 6, to have regard to such reports when authorising the original provision of services for an NHS foundation trust? If the Minister can answer that question, we will not need to return to it at a later stage.

John Hutton (Labour, Barrow and Furness)

It is clear from the way in which clause 6 has been constructed, given the regulator's wider public law duties, that he must have regard to the views expressed during the consultation process, and we intend that that will happen. The hon. Gentleman makes a fair point about the wording of clause 6(4). If it does not achieve our intended purpose, I am prepared to look at it again. I shall not exclude that possibility.

The independent regulator is not beyond the normal principles of administrative law. If, in the process of consultation, he disregards all the views expressed, the argument could be made that he has not considered those views properly, as he is required to do

as part of his statutory and wider public law duties. The hon. Gentleman's point is simply about the technical wording of the clause and not the substantive issue of principle. I agree with the hon. Gentleman that the Standing Committee is the stage at which we consider the technical wording of the Bill, and we are prepared to have another look at that. However, there is no substantial difference between his point of view, my point of view and the Bill. The wording is different; that is how it has been drafted by parliamentary counsel, but I am satisfied that the Bill delivers the policy that we have set out consistently in ''A Guide to NHS Foundation Trusts'' and in speeches that my right hon. Friend the Secretary of State for Health and other Ministers, including the Prime Minister, have made about foundation trusts.

The amendment adds nothing of substance to the Bill. The hon. Member for West Chelmsford disagrees, and I accept his right to do so, but there is no legal difference between ''is to'' and ''must''.

On the wider, more substantive, point, I have tried to explain to the Committee that I agree that we must ensure that NHS foundation trusts work in close collaboration with other social and health care providers. The Bill will do that, and nothing in clause 9, as it is currently worded, will affect that position.

Simon Burns (Conservative, West Chelmsford)

I have listened carefully to the Minister on the narrow issue of the specifics of amendment No. 139. I still think that clause 9 is inconsistent and gives rise to ambiguity. Subsection (1) contains the word ''may''; subsection (3) contains the word ''must'', and if the Minister's view, that ''is to'' is exactly the same as ''must'', is to be accepted, why, in his response to an intervention from my right hon. Friend the Member for North-West Hampshire, did he say that ambiguity will arise only if there are judicial proceedings? If that is the case, surely it is better to make the change at this point, given that the Minister said that it is a terribly minor matter. It is a sign of strength, not weakness, to accept Opposition amendments.

John Hutton (Labour, Barrow and Furness)

I am happy to accept Opposition amendments when they add something to the Bill; I will not accept Opposition amendments when they do not add anything to the Bill, and this amendment does not add anything to the Bill.

I did not say that ambiguity would arise because of judicial challenge. I do not believe that there is any ambiguity. Neither I, nor any Standing Committee, can draft a Bill that will stop lawyers challenging the wording of legislation. However, the wording is crystal clear.

Simon Burns (Conservative, West Chelmsford)

I understand the Minister's point about possible judicial proceedings: no one knows what will happen. Nevertheless, my bottom line is that there is some ambiguity.

If inserting the word ''must'' makes no change to the legislation, but would make it consistent, particularly with subsection (3), I do not understand the Government's reluctance to accept the amendment. It is a minor point on a narrow issue,

but it could have far-reaching implications, as it would make the Bill consistent. The Minister obviously will not budge, and he correctly anticipated my sedentary intervention earlier. I shall invite my hon. Friends, and others, to join me in pressing the amendment to a Division.

Andrew Lansley (Conservative, South Cambridgeshire)

I hope that I shall not impose on the Chairman's generosity in allowing this to be the equivalent of a clause stand part debate, as I shall not talk about the precise wording of the amendment.

My hon. Friend the Member for West Chelmsford raised an important point in his opening speech. He said that the Royal College of Midwives has concerns about whether a foundation trust that provides maternity services would be free to opt out of that provision, and how that would work.

Although we had a wide-ranging debate, the Minister did not pick up on every point, and this useful point should be clarified. I shall set it out as I understand it, and the Minister can tell me whether I am right.

I am going to use Addenbrooke's as an example, and I declare an interest in that 11 weeks ago my wife was the beneficiary of the maternity services of that hospital. Therefore I had a vested interest in the provision of maternity services at Addenbrooke's, and I still have a constituency responsibility. If Addenbrooke's were to consider opting out of offering maternity services—no one thinks for a minute that that is possible—it would be a significant change of services, subject to precisely this kind of variation. That would be the subject of scrutiny as provided for by sections 7 to 10 of the Health and Social Care Act 2001.

We discussed the regulator's duty to ensure the provision of comprehensive health services, and that provision is in the Bill to assure parties such as the Royal College of Midwives that a foundation trust could not stop providing maternity services. Such services remain part of the general duties that are laid on the regulator and on the Secretary of State under clause 3. In so far as maternity services were needed, they would be provided as part of the continuing comprehensive health service in England.

John Hutton (Labour, Barrow and Furness)

I am grateful to the hon. Gentleman for giving me a chance to confirm that point. NHS foundation trusts will not be free to withdraw unilaterally from providing NHS maternity services. Those services will be protected services under authorisation, and any change to them would require local consultation. The regulator's approval would also have to be sought.

In addition, in deciding whether to approve the terms of an authorisation change, the regulator would have to take into account the wording in clause 14(6), which requires him to have regard to the availability of similar services elsewhere in the locality. There is absolutely nothing in the Bill to give a foundation trust the freedom to pull out unilaterally of the provision of essential NHS services of its own volition.

Simon Burns (Conservative, West Chelmsford)

On reflection, I shall not detain the Committee on this matter any longer, because I would rather that this, and the whole question of local government involvement, were considered at a later stage of the proceedings. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Peter Atkinson (Conservative, Hexham)

Who would have thought that such a simple amendment could stimulate such debate?

Clause 9 ordered to stand part of the Bill.

Clause 10 - Register of NHS foundation trusts

Adrian Bailey (Labour/Co-operative, West Bromwich West)

I beg to move amendment No. 216, in

clause 10, page 4, line 41, at end insert—

'(f) a copy of a report on membership recruitment, detailing measures taken to promote actively membership among all qualifying groups, over the preceding 12 months,'.

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss the amendment No. 217, in

clause 10, page 4, line 41, at end insert—

'(g) a copy of a report on measures taken to provide information to members concerning the trust's activities, as determined from time to time by the regulator.'.

Adrian Bailey (Labour/Co-operative, West Bromwich West)

These are probing amendments. They seek to explore ministerial thinking on the role that the foundation trusts will have in promoting involvement in the local community. The amendments are based on my experience in the co-operative movement. In my previous employment I dealt with a vast range of co-operative and mutual organisations. Their rules were based on a standard template, but there were amazing variations in the ways in which they were interpreted and in the levels of public involvement that arose from them.

Some co-operative societies took their membership role seriously and were very active in promoting community participation over a range of activities. By and large, there was a relationship between the success of each society and the level of member involvement. Others allowed their membership involvement to atrophy and, to a certain extent, were run by what I can only describe as self-perpetuating oligarchies.

It is obvious that the Government do not want the latter to happen. It would interest me to know exactly how they will obtain the maximum level of participation, which is essential to success.

Inner-city areas have their own problems. My constituency, which is probably quite similar to that represented by the Under-Secretary, is characterised by an unusually high percentage of relatively low-income and elderly people, and an unusually low level of car ownership and mobility. These are obvious issues in terms of foundation hospital trust involvement with the local community. This group has a potentially high level of need, but is potentially inaccessible to the various mechanisms that the

hospital trusts will need to operate to promote membership involvement.

Similarly, 15 per cent. of my constituency comprises ethnic minority communities of varying origin. Many of them are elderly, first-generation immigrants with a lower than usual level of literacy. There are obvious barriers to communication between them and the hospital trust, although their need as a group may well be far higher than that of others in the community.

We have already discussed entryism and the running of these trusts by '' the sharp-elbowed middle classes''.

The most effective way of countering this is for hospital trusts to have a policy and to develop relationships with genuinely representative groups in the community that will promote membership from as wide a range as possible. I look forward to the Minister telling us what exactly will be expected of trusts in those areas.

Amendment No. 217 also draws on my experience in the co-operative movement, and on my personal experience. The hon. Member for Westbury (Dr. Murrison) spoke about district hospitals being at the glamorous end of the service. I am sure that the professionals involved believe that to be true; however, for a humble layperson such as I, hospitals can be quite frightening. I must confess that I have always regarded them as a rather uncomfortable reminder of my own mortality and have tried whenever possible to avoid using their services. I confine my involvement with them to that which is commensurate with my professional responsibilities.

Last year, however, I had to bow to the inevitable and go to my local district hospital at Sandwell—it was subsequently declared a three-star hospital, although it is not in the first wave of applications—for major hip surgery. I assure hon. Members that as one lies on one's bed, nuzzling one's oxygen mask and caressing one's morphine drip, one has time to reflect on the benefits of the NHS. One also marvels at the huge range of professional skills that are needed for an effective hospital service. If one is not directly involved, one tends to think solely of doctors and nurses. Of course, many other skilled professionals are involved; radiologists, anaesthetists, physiotherapists and many others.

Many nationalities are involved in running the health service; I counted eight different ethnic origins. It struck me that people knew very little about their local district hospital unless they were involved either as a patient or as a professional. The new foundation hospital trusts could provide a valuable educational role in disseminating such information.

There must also be a means of monitoring how well hospitals are working with primary care trusts. Every area has its own health needs. In my area, low birth weight is a concern, as is the higher than normal incidence of early death from cancer and from heart disease, which is typical of inner-city post-industrial areas. In the first instance, that should be dealt with by primary care trusts, but services must be dovetailed with local foundation hospitals. Providing information on how that is to be done is essential in formulating a

comprehensive, effective health-care policy in the community.

The amendments are designed to promote the involvement of everybody so that health-care policies are truly reflective of the local community.

Patsy Calton (Liberal Democrat, Cheadle)

I support the Government in taking great steps to engage hard-to-reach groups. The hon. Gentleman's amendments would ensure that trust membership would give such groups access opportunity, and they are therefore to be applauded.

Adrian Bailey (Labour/Co-operative, West Bromwich West)

I thank the hon. Lady for her kind words. The best way to ensure that inclusiveness results in the most effective policies is to ensure that appropriate information is available and that public awareness is raised about the running of hospitals. I hope that the amendments will achieve that.

Gareth Thomas (Labour, Harrow West)

I support the amendments of my hon. Friend the Member for West Bromwich, West (Mr. Bailey). One of the main attractions of foundation hospitals is that they offer direct democracy and truly put the ''public'' back into public ownership. Fundamental to the democratic elements of foundation hospitals will be a thriving, active and substantial membership.

I am tempted to look to my experience of local hospital issues and to reflect in particular on the experience of Mount Vernon hospital, which serves the northern part of my constituency. Had foundation hospitals existed in 1995, when the Conservative party did not oppose proposals to close the hospital's much loved and important accident and emergency unit, we would have been able to stop its closure by sweeping the board of directors out of office for having allowed such a horrendous proposal to have been introduced.

I am sorry, too, that foundation hospitals were not legislated for two years ago. Had they been, Hillingdon hospital NHS trust, which now controls the Mount Vernon site, might have had foundation status and could then have rejected outright the daft proposal introduced by Bedfordshire and Hertfordshire strategic health authority to move the cancer centre from the Mount Vernon site to the deepest, darkest corners of Hertfordshire. That would have spared my constituents much angst. However, I am delighted to say that there has been significant movement on that issue. The North West London strategic health authority is seriously considering whether the cancer centre can be retained to serve the needs of north London, perhaps as part of a wider cancer network. I welcome that.

Peter Atkinson (Conservative, Hexham)

Order. The hon. Gentleman is straying wide of the amendments. He sounds more like he is taking part in an Adjournment debate rather than in a debate on amendments. I should be grateful if he would concentrate his remarks on the amendments.

Gareth Thomas (Labour, Harrow West)

I am grateful for your strictures, Mr. Atkinson.

Chris Grayling (Conservative, Epsom and Ewell)

I fear that I might be straying by making this intervention. Does

the hon. Member for Harrow, West (Mr. Thomas) envisage that the Bill's provision will provide a vehicle for local people to overrule strategic decision making in the NHS?

Gareth Thomas (Labour, Harrow West)

I hope that in this case good sense will prevail. I am optimistic that a combination of good sense on the part of the strategic health authority and the power of local people's campaigning will achieve the result that the local community wants. In a case such as the one to which I have just referred, a thriving membership and active work by the local foundation hospital would not be necessary, because people would flock to join. Foundation hospitals generally need to take a much more active stance by recruiting a membership that reflects the community.

My hon. Friend the Member for West Bromwich, West mentioned the mutual sector's considerable experience of recruiting and servicing large memberships. I am sure that foundation hospitals can learn lessons from that experience. The point of the probing amendments is to stress that membership recruitment must not be optional. It must be taken as seriously as the other requirements of achieving foundation status.

Amendment No. 216 envisages that making the active promotion of membership recruitment a legal duty would help to lock the issue into the minds of the key players in foundation hospitals. Amendment No. 217 seeks to enable members to have access to the information they need in order to play a proper part in running their local hospitals. The amendments are probing amendments, and I look forward to my hon. Friend's response.

Chris Grayling (Conservative, Epsom and Ewell)

I am delighted to hear from the hon. Members for West Bromwich, West and for Harrow, West that the two amendments are intended to be probing. I hope that the Under-Secretary, in considering them—and those that follow in the name of her hon. Friend the Member for Ealing, North (Mr. Pound)—will ensure that foundation trusts do not end up being required to produce an endless stream of reports, many of which no one will ever read and will impose significant burdens of time and bureaucracy on their medical teams.

Hazel Blears (Labour, Salford)

I am delighted to welcome the points made by my hon. Friends the Members for West Bromwich, West and for Harrow, West. Both have extensive experience in the mutual movement, and I am sure that they can usefully and constructively inform our principles and practice in the matter. That will be crucial. My hon. Friend the Member for Harrow, West has, this year, done a magnificent job as president of the Co-operative Congress and has made a useful contribution.

By establishing NHS foundation trusts, the Government are trying to create a new system of democratic involvement. We are progressing from consultation and engagement into direct elections, and that is a significant move. We have made it clear that we want the process to be as inclusive as possible, and my hon. Friends the Members for West Bromwich,

West and for Harrow, West referred to hard-to-reach groups, as did the hon. Member for Cheadle. I sometimes take issue with that phrase; if we engage in relevant issues, people will respond. People are sometimes hard to reach because we do not speak a language that they understand or because the issues are not close to their concerns. However, if local people have a real stake in an issue, they will respond and will want to participate, even if there are difficulties with mobility or language. I accept the points about ensuring that we support people with transport and translation of material, and that everything is as accessible as possible.

That is why we are determined to learn from the various groups involved. We have mentioned the external reference group, which comprises people from mutuals, from the Economics Foundation, and people from universities who are experts in drawing different groups into public involvement. Moreover, we have the experience of the Oxford, Swindon and Gloucester Co-op, which has a magnificent record on increasing active membership and which has made great strides in recent years. We can learn from the Royal Society for the Protection of Birds and the National Trust, each of which has an active and thriving membership. We should not rule out help from any sector.

We do not do this simply because it is the right thing to do. Hon. Members will recall the Wanless report on funding for the long-term future of the health service. In one of the report's scenarios, the public would be fully engaged in influencing health care, taking more responsibility for their own health and using technology to do so. Wanless saw that as the way to make our services much more responsive and to prevent the enormous rise in the cost of health care. Therefore, not only is it the right thing to do, it makes economic sense.

The amendments support the recommendation in the Select Committee on Health's report that foundation trusts should proactively attempt to extend registration to achieve real and representative community engagement. I agree with the Health Committee's sentiments and with the principles of the amendments tabled by my hon. Friend the Member for West Bromwich, West. The difficulty is that, as drafted, the amendments simply require reports to be presented; there is no corresponding duty on NHS foundation trusts to carry out active membership work. The effect desired by my hon. Friend would, therefore, not be achieved.

I am more than happy to consider these issues further and, if necessary, to make further proposals.

Adrian Bailey (Labour/Co-operative, West Bromwich West)

Those reassuring comments from the Under-Secretary go further than the amendment asks. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

"Question proposed, That the clause stand part of the Bill"

Andrew Lansley (Conservative, South Cambridgeshire)

I am sorry to impede progress, Mr. Atkinson, but it will only be for a moment. I simply want to ask the Minister a question about clause 10. Returns sent to Companies House include a whole series of financial information, and details of the

directors are contained in the annual report. It will not surprise the Minister to learn that the disclosure of directors' home addresses is a matter of importance in Cambridgeshire, because of the work of Huntingdon Life Sciences and all the issues that flow from it.

I am not going to dwell on all the problems associated with that. My question is simply this: will the disclosure requirements for directors' home addresses in relation to NHS foundation trusts be the same as for company directors, with the same exclusions as company directors, given that there are proposals—and others might be made—for work in other research facilities in the Cambridge area, some of which use animals? The question might arise in relation to the directors of an NHS foundation trust. What do the Government intend to do?

Hazel Blears (Labour, Salford)

The hon. Gentleman has raised an important point. Clearly the situation has caused a great deal of distress to many people. My understanding is that the names of the directors and an address where they can be contacted, which would not necessarily be their home address, would be required for the register. That will meet the requirements of public accountability, but at the same time will provide a degree of protection.

Question put and agreed to.

Clause 10, as amended, ordered to stand part of the Bill.

Clause 11 - Power of Secretary of State to give

George Young (Conservative, North West Hampshire)

We now come to financial matters. Clause 11 gives the Secretary of State powers to provide financial assistance to foundation trusts. It would be helpful at this stage if the Minister were to set out the framework for the debate on this part of the Bill, which is at the heart of the arrangements for foundation trusts. That would provide a framework in which to consider some of the other amendments.

The question that I want to pose on clause 11 is quite simple. The whole point of becoming an NHS foundation trust is to access capital through the prudential borrowing code and from the private sector. A foundation trust would no longer get its capital allocations from the Treasury; that is the whole point. Under clause 11, the Secretary of State may give financial assistance to any NHS foundation trust. Can the Minister explain how the regime will work?

It cannot be the case that trusts would continue to get the capital allocations that they would have received had they not become foundation trusts. I understand that that flow of capital would cease and that trusts would then turn to the private sector—the City—to borrow what they could. Against that background, we need to know in what circumstances the Secretary of State could continue to give financial assistance to foundation trusts. Presumably they cannot have their cake and eat it, in that they cannot

continue to get what they would have received in addition to whatever they can borrow from the City.

Andrew Murrison (Conservative, Westbury)

As the Minister will know, I have some first-hand experience of moneys being dished out to hospitals in trouble—or not being dished out to hospitals in trouble—as in the case of the Royal United hospital, Bath. I was somewhat surprised by the protective way in which the Minister has treated the public purse in respect of my local hospital. I am questioning the Minister because—given my experience and the experience that I suspect hospitals throughout the country have had—I am trying to get an idea of what circumstances the Minister can conceive of that would lead him to interfere in these new public benefit corporations to the extent of providing moneys from the public purse. How will that differ from the current arrangements, which, I have to say, work so poorly for my local hospital?

Andrew Lansley (Conservative, South Cambridgeshire)

I do not want to go on at length, but as clause 11 introduces the provisions on financial matters, it would be useful if the Minister could give us some indication of the nature of the capital regime within which NHS foundation trusts are going to operate before we discuss the borrowing powers and classification of capital as provided to NHS foundation trusts.

I confess that my understanding of this is perhaps less than that of other members of the Committee. I am aware that hospitals receive capital from the Exchequer through a range of sources: there are strategic capital schemes, through which, following the approval of a business case, the Department provides three-star trusts with discretionary capital for particular purposes; operational capital is allocated by way of a formula rather than by approval of specific projects; the access fund is the provision of funds to hospitals following the achievement of certain activity targets; and the Modernisation Agency provides modernisation funding.

For the year ahead, £1 million—a three-star reward, as it were—has been built in to the external capital provision for Addenbrooke's. However, I am not sure that that money can be relied on for subsequent years. I would leave the Committee this morning with a spring in my step if I knew that the Department planned to provide an equivalent additional bonus for three-star trusts for the years beyond 2003–04.

I do not for a minute suggest that the availability of those sources of capital means that there will not be any requirement for additional borrowing. As I understand it, the point of the system is that we should be able to put additional capacity in place. Reading about the capital available to Addenbrooke's for 2003–04, I found it interesting that its proposed allocation of £7.5 million to capital projects was related to capital bids from the trust for £22.5 million. Indeed, to those of us who have been in business, the idea that a growing organisation with a projected turnover of £230 million in the year ahead should be growing, modernising and improving with £7.5 million of capital expenditure a year does not seem feasible.

My hope is that we will discuss how trusts will be able to access capital above and beyond that which is available through Exchequer sources. Before we discuss other aspects of capital, it might be useful to understand whether each of the sources of capital available to existing NHS trusts will be available on the same or similar terms to NHS foundation trusts.

Gary Streeter (Conservative, South West Devon)

I endorse my hon. Friend's request that the Minister helpfully set out the funding arrangements for foundation trusts. It is fair to say that foundation trusts will stand or fall, succeed or fail, not on whether the democracy arrangements work, but on whether the funding arrangements work. As the Committee looks forward to clauses 12, 13 and beyond, I ask the Minister to help us. Will he say a word or two about public dividend capital, which is mentioned in clause 11(2)? To my shame, all I know is that it is a scheme that operates in NHS trusts. It would help the Committee to understand a complex area better, and would also help me in putting future questions to him, if the Minister were to give an introduction to the subject in his response to the debate.

Peter Atkinson (Conservative, Hexham)

I hear what the hon. Gentleman says. If it facilitates the Committee, I am happy to tolerate a wider-ranging debate on clause 11, provided that that is borne in mind and we do not repeat everything on clauses 12 and 13. Does that suit the Minister?

John Hutton (Labour, Barrow and Furness)

I am, as always, in your hands on such matters, Mr. Atkinson.

Clause 11 is about the Secretary of State's ability to make loans, grants and other sources of finance available to NHS foundation trusts. Other parts of the Bill relate to public dividend capital, for example. With great respect to the hon. Member for South-West Devon, I must tell him that it is probably best to discuss public dividend capital when we reach those parts of the Bill—he can, of course, translate that to mean that that will be when I have better and further notes. I spent most of the night going through the material on public dividend capital, but I am none the wiser for it. Therefore I look forward to the debate on clause 13.

May I correct one point? There will be a different regime for NHS foundation trusts' access to capital; the right hon. Member for North-West Hampshire was right about that. However, he was not right to say that NHS foundation trusts would have no access to public sector capital. I think that the hon. Member for South Cambridgeshire was developing those points, and I will say more about that subject shortly.

We should be clear that clause 11 simply replicates the existing provisions for NHS trusts regarding the Secretary of State's powers to make financial support available to NHS foundation trusts. I will explain in a moment why flexibility and parallel sets of powers are needed.

The right hon. Member for North-West Hampshire was right, in a general sense, to say that what we are doing with NHS foundation trusts is a break with the

past. For example, they will have access to wider sources of funding to support their capital programmes, including funding from the private sector. That freedom is not exercisable by NHS trusts, as I will explain in a moment.

In general, an NHS foundation trust's future access to capital will depend on its ability to service debt, not on centrally controlled capital allocations. As is clear from the Bill, the amount that trusts can borrow will be determined by a formula based on each NHS foundation trust's ability to repay associated principal and interest. That will be dealt with by the prudential borrowing code. The regulator will set up a formula on which those decisions will be made, which in turn will depend on the strength of projected cash flows.

Each NHS foundation trust will calculate its borrowing limit, which will be confirmed by the independent regulator and will appear in the trust's terms of authorisation. Against that borrowing limit, foundation trusts will be able to raise finance from Government and private lenders to build new facilities and improve existing ones. However, they will not be able to use protected assets—which we will come to later in the Bill—as security for that borrowing, because those assets are necessary to preserve the continuity of NHS services for the public.

The failure regime later in the Bill is designed specifically to ensure that if there is corporate failure on the part of a foundation trust, NHS patients will not be the losers. We need a regime to protect and preserve those assets. Foundation trusts will, however, be able to use non-protected assets as security for that borrowing. Most importantly, the most likely source of security will be the associated revenue streams that will go with the commissioning arrangements that are made with primary care trusts.

The right hon. Gentleman asked from whom trusts would be able to borrow and how much it would cost. I am not sure that in the immediate short-term future—the next three, four or five years, for example—the private sector will lend a huge amount directly to NHS foundation trusts. Initially we expect that most, if not all, new borrowing will be sourced from a new financing facility that the Department of Health is establishing. Therefore we must ensure that the Secretary of State has the power to make loans available to NHS foundation trusts. That is another reason why clause 11 is in the Bill.

We intend independent credit specialists acting on behalf of the Department to operate this financing facility on an arm's-length basis.

Loan applications from foundation trusts will be assessed using generally accepted credit analysis principles. The specialists will not be subject to direction by the Secretary of State in determining loan applications. The analysis will be based on credit worthiness—for example, whether the loan is likely to be repaid—and not on policy-based assessments of the loan purpose, which is current practice.

All new loans will be based on the repayment of principal and interest. It is envisaged that the financing facility will set interest rates for NHS foundation trusts. For protected businesses—that is, core NHS

services—the interest rates will be set at the prevailing national loans fund rate, which is very favourable. I think that it is 3.5 per cent, but someone will be able to confirm the figure shortly. The interest rates for non-protected businesses such as subsidiary interests of foundation trusts, or joint ventures, will be set at a level consistent with private sector borrowing rates. Foundation trusts will pay the prevailing private sector interest rates for borrowing that they draw from the private sector.

I hope that access to public capital has been dealt with in those remarks. I should also let the right hon. Gentleman know that, as announced in the House before Christmas, we have already made three-year allocations of the operational capital that the Department makes available to the NHS. That includes the 29 applicants that are proceeding to the second stage of foundation trust status. Allocations of operational capital have already been fed into the system from public sector routes.

Gary Streeter (Conservative, South West Devon)

Will the Minister give way?

John Hutton (Labour, Barrow and Furness)

In a second. Operational capital is about only a quarter of the capital requirements of that NHS trusts. Those allocations have already been made, and the Government will certainly not be withdrawing them from NHS foundation trusts.

Gary Streeter (Conservative, South West Devon)

The Minister has virtually answered my query in his last half sentence. Can he assure me that the Government do not intend to withdraw existing streams of capital to hospitals that will become foundation hospital trusts, either within the three-year allocation cycle or thereafter? Is the extra borrowing capacity provided for in the Bill intended to provide extra resources, or do the Government intend to save their own money, so to speak, in years to come?

John Hutton (Labour, Barrow and Furness)

I can speak only about the three years for which allocations have been made. As regards wider access to public capital per se, however, there are some obvious areas for concern. Among those important services and systems that glue the NHS together, the need to upgrade the information technology infrastructure in the national health service is a priority.

The operation of private finance initiatives in relation to NHS foundation trusts is another big issue. The Government want to ensure that sponsors and funders are left in no worse a position as a result of the introduction of the new legislation and the establishment of NHS foundation trusts. The Government are proposing that, in future, all Department of Health-approved NHS foundation trust PFI schemes will be under novation to the Secretary of State. PFI consortia will be in a direct primary contractual relationship with the Secretary of State. The Secretary of State will, in turn, appoint the NHS foundation trust—either as his agent or subcontractor—to perform the obligations arising under the contract on his behalf. There will, therefore, be no substantive change.

The question arises more widely about access to public money; for instance, for initiatives that might arise under national service frameworks or the need to

upgrade the information technology infrastructure of the NHS. In future, resources will be allocated mainly through the system by the new national tariff arrangements; that is true for NHS foundation trusts as well as those trusts that are not foundation trusts. If the Department requires NHS foundation trusts to procure a specific item—for example, in relation to a new initiative linked to implementation of a national service framework—the Department would have to fund it. Otherwise, the NHS foundation trust might not be in a position to participate.

The key point in relation to any central initiative such as this is that the relevant requirements should be set out in the terms of the authorisation, and I expect that they would be. If any public funds were made available for a central initiative such as information technology, NHS foundation trusts should have access to an equitable proportion of those funds. The Government intend that to be the case.

Andrew Lansley (Conservative, South Cambridgeshire)

The Minister has moved on to the relationship between the national tariff and the capital of NHS foundation trusts as distinct from non-foundation trusts. I thought that the Committee would deal with that matter later. My understanding is that the intention is to have a single national tariff. If, on the one hand, the tariff for NHS foundation trusts is designed to provide sufficient resources—not only to meet the costs of providing the service in revenue recurrent terms but to repay the capital costs of borrowing to support additional capacity—and, on the other hand, non-foundation trusts had not borrowed but had had their capacity provided by direct departmental capital grants, how does one equalise the national tariff? Will departmental capital grants to non-foundation trusts be capitalised on their balance sheets so that they have to repay the capital charge to the Department in the same way as foundation trusts would have to pay a private lender?

John Hutton (Labour, Barrow and Furness)

When we discuss the public dividend capital in clause 13, we need to deal with how capital is financed and how repayments are structured, because there is an overlap. The hon. Gentleman and I have a fundamental disagreement; namely, should there be a national tariff? He would prefer price competition among NHS providers to a national tariff.

Andrew Lansley (Conservative, South Cambridgeshire)

We are debating the Bill as it is, not as it might be.

John Hutton (Labour, Barrow and Furness)

There is nothing in the Bill about the national tariff. This clause is about financial flow arrangements. I should like it recorded in Hansard that the web site is a real peach. The hon. Gentleman should refer to it if he would like more information about financial flows.

Simon Burns (Conservative, West Chelmsford)

Is it more accurate than the No. 10 web site?

John Hutton (Labour, Barrow and Furness)

It is a good web site. It took me a while to access it, but it is well worth the effort, especially if one has trouble sleeping.

The national tariff is not designed to give an unfair advantage to one set of NHS trusts over another. The intention is to fix a standard price for similar

procedures. That is what the healthcare resources group definitions set is all about. When a tariff is set, there should be no unfair competition based on reducing NHS quality of care. We have been there and done that, and it is a really bad place to go. My hon. Friend the Member for Cardiff, Central has some concerns about this, but we want to encourage efficiency and productivity. A national tariff can do that, because if an NHS trust or an NHS foundation trust can provide a service at a lower cost than the national tariff price, it can keep the difference between the national tariff price and the service price under which it can operate. There is clearly an imperative on, and an incentive for, NHS foundation trusts to operate at an optimum level and to use the proceeds and the benefits of that productivity to reinvest their savings and efficiency in the provision of NHS health-care services.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

On a point of order, Mr. Atkinson. I share some of the concerns of the hon. Member for South Cambridgeshire, in that amendment No. 247 asks some of the questions that the Minister is answering. I do not wish to interrupt his flow, but I wish to seek advice from you about how to deal with the matters in amendment No. 247, because the Minister may repeat something he has already said. Although not too much time has been invested in this debate, I should be grateful if you guided members on how to structure debates on the next clause, given the Minister's extensive explanation, which, by his own admission, covers many of the issues in clauses 12 and 13.

Peter Atkinson (Conservative, Hexham)

These groups of amendments flow into one another, because they deal with financial matters. I said that I would be tolerant of a wider debate on clause 11, but that I would ask the Committee to keep to the subject when discussing clauses 12 and 13. When we come to amendment No. 247, the hon. Gentleman will be able to ask his chosen questions, but I shall insist that the debate is narrowly focused on that amendment.

John Hutton (Labour, Barrow and Furness)

I am grateful to you, Mr. Atkinson. If I strayed too widely, it was inadvertent, because I have not dealt with the hon. Gentleman's amendment No. 247. There is another argument that applies to that amendment, which I have not knowingly made yet.

Jon Owen Jones (Labour/Co-operative, Cardiff Central)

Having set a tariff, would a foundation trust that is more efficient than others in a particular set of operations—my right hon. Friend the Minister has explained that such a foundation trust would be able to keep the excess proceeds—be able to do more operations because it could do them more efficiently? If not, what incentive would there be for commissioning bodies to go to the most efficient provider, since the tariff is going to be the same regardless of which provider they choose?

John Hutton (Labour, Barrow and Furness)

I agree that, by common consent, there is a weakness and a fault in the current method of commissioning care in the NHS. Most commissioning is based on block contracts that are not activity-based. In the current system, there is no incentive to do more, because people do not get paid to do more. That is

ridiculous, and I am sure that many hon. Members will be surprised to learn that as a result, the available capacity in the NHS is not being fully utilised.

It is important for the health of any organisation—be it in the private or public sectors—that its financial arrangements encourage the utmost efficiency and productivity and provide incentives for other organisations to reach the same level. With the best will in the world, the existing financial flows within the NHS do not do that. In future, there will be a direct incentive for providers—NHS foundation trusts and non-NHS foundation trusts—to do more, because they will be paid for the work that they do, which will be at the national tariff rate, and will retain the surplus proceeds, if there are any. We will encourage the fullest possible utilisation of NHS capital assets.

My hon. Friend the Member for Cardiff, Central wants a system in place within the NHS where money flows in a way that encourages innovation, efficiency and productivity; that is what we are proposing. We can achieve it without replicating the deficiencies and defects of the internal market of the Conservative party, which was structured fundamentally on a system of competition based on those who could provide the lowest cost to the NHS. That type of market, based on price competition alone, is bad for the NHS; it does not place the right emphasis on quality, and we must achieve that. That is partly why we have included the Commission for Healthcare Audit and Inspection and the National Institute for Clinical Excellence in the Bill; not to mention clause 40, the new approach to setting national standards, the stronger and tougher inspection regime for, for example, non-NHS foundation trusts, and the annual CHAI inspections of quality and performance.

All these things are important. However, I say to all my hon. Friends that efforts to improve NHS efficiency will not be at the expense of the values and ethos of the public service itself. Those of us on the centre-left of British politics must learn a lesson from the past; if we leave it to the Conservative party to control the language of choice, diversity, plurality, efficiency and productivity, we have sold out the centre-left case in Britain. Those are not Tory words; they should be Labour words.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

The Minister has given an interesting perspective on the way in which the Government want to use what I am happy to call the internal market—under the terms that he has used—and the split between commissioning and providing. However, if money is to follow not only price but efficiency and activity, the implication is that it might flow from places that are less efficient and active to those that are more so in a way that does not happen at the moment due to the block contract.

My concern is about those providers that are unable to increase their efficiency or capacity because of factors beyond their control, such as supply of labour or capacity in the social care sector. They will lose funding that they do not lose at present, because of the greater flows. That will make their situation even worse because they will be less able to compete in the labour market. They will be less able to buy extra capacity because they will have lost the funds that they

had been accumulating in order to compete. That is our real problem with the beginnings of the operation of this flow.

John Hutton (Labour, Barrow and Furness)

That is precisely why we are not doing it with a big bang approach. We are starting with about 15 healthcare resources groups this year. There will be a gradual move to a wider application of the national tariff. On a point of clarification, the national tariff will encompass some of those regional cost pressures and differences that the hon. Gentleman mentioned; for example, the higher cost of labour in the south and south-east.

Chris Grayling (Conservative, Epsom and Ewell)

The Minister talked about the ability of foundation trusts to retain excess funds and invest them in improving patient service. It is clearly not his intention that non-foundation trusts can also retain that money to invest in patient service. How will he avoid the national tariff, by definition, imposing unfair competition between those who have the power to retain money and invest it and those who must return it to the Treasury?

John Hutton (Labour, Barrow and Furness)

That is why it will be a gradual process. It must be remembered that there will not be a full application of the national tariff system within our desired time frame for the establishment of NHS foundation trusts. We are alert to the issue that the hon. Gentleman mentioned, and there is a way through it.

I apologise, Mr. Atkinson; the discussion has been rather wider than I intended, but I hope that it has been useful. There is one important issue for the Committee. I know that it is not in the Bill, but the funding flows of the national health service and the arrangements that any Government make will determine to a large extent the issue that clause 11 addresses, which is one of borrowing and the ability to service debt.

As I said, the overwhelming amount of resources for NHS foundation trusts will come from their commissioning arrangements with PCTs. The basis on which those commissioning arrangements are structured will have a direct impact on the level of borrowing of an NHS foundation trust, so there is a connection.

I say to the hon. Member for Oxford, West and Abingdon and the Committee that it is difficult to go down that road; I accept that. We are going to change the inertia in a system that does not provide incentives and, perversely, rewards the least productive parts of the national health service. However, we are not imposing some penal provision on NHS foundation trusts in the way that the hon. Gentleman has described. We are working with trusts through the additional resources, the extra support that CHAI is providing and the hospital improvement programme, about which my right hon. Friend the Secretary of State made a further announcement only a few weeks ago, with additional resources going to support those who are not performing to the extent that they should.

We want to bring the entire NHS up to an effective level of performance. That is our focus; we are not leaving behind those who are currently struggling with some of the problems that the hon. Gentleman

suggested. We seek to bring the NHS as a whole to a point at which it can benefit from the freedoms of the Bill and provide a better service to the public.

It is important that we do not run away from some of the difficult decisions that must be made. Let me be blunt; we should not have a system in which the least efficient and effective parts of the NHS are funded in the same way as the most efficient and effective. That is what we want to change, and we should change it. In addition, we should also make it clear to primary care trusts, as we have done, that they are free to commission from whatever provider is best in order to provide a service for their patients. That is also a very important point, because there is no better way to try to encourage stronger and better performance in the NHS than to make it clear to providers that there is no guarantee. We want to have a system that encourages good performance.

Jon Owen Jones (Labour/Co-operative, Cardiff Central)

I want to emphasise the Minister's point. Not only does the current system treat inefficient areas the same as efficient areas, but, in order to make efficiency gains, there are short-term costs and difficult decisions to make. In a system such as ours that equalises payments, the difficulties of short-term costs are emphasised because there is no gain after they have been taken.

John Hutton (Labour, Barrow and Furness)

Sometimes there is a need to invest to produce efficiency and more effective services. I accept that. I cannot deal with specifics if my hon. Friend has a particular case in mind. However, I can strongly make the case on the generality that the capital investment going into all parts of the NHS is rising significantly. In addition to our funding streams, there is the Treasury's invest-to-save budget scheme, which is designed to deal with some of the points that my hon. Friend and others have made. This has been a wide-ranging debate.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

I accept that it is vital that commissioners have the freedom to choose from whom they commission services, and realise that they have and can use that freedom. That is how we will get a more responsive NHS. Does the Minister accept that equity is involved? For example, a commissioner may wish to commission services locally—even at a less efficient rate—to ensure that there is equitable access for those who are unable to travel to where there is a more efficient provider. Although it may not be his preference, does he accept that an alternative way of solving that problem is to allow commissioners to raise revenue locally in a democratically accountable way? He could put it to the people that they must pay a premium if they want local services that may not be as efficient as those elsewhere. If he does not do that and cuts back on the availability of central funds—which will dampen the market that he wants—how will he solve the problem of equity that concerns all of us on the centre-left?

John Hutton (Labour, Barrow and Furness)

Welcome to the centre-left. We could debate this until the cows come home, Mr. Atkinson; as you represent Hexham, that subject is perhaps closer to your heart than it is to mine.

Peter Atkinson (Conservative, Hexham)

Sheep, actually.

John Hutton (Labour, Barrow and Furness)

Sheep, yes.

The hon. Gentleman is right to say that primary care trusts themselves should eventually have the freedom to take decisions at an operational level, because they are the commissioning bodies. We have emphasised to primary care trusts that they should be free to commission from those that provide the best service. Issues of equity and access will prey heavily on the minds of primary care trusts, and it is right that they should. The national tariff will operate as I have described; not as a barrier to access, but as a way to improve it. Together with the other reforms that we are introducing, the tariff will add into the system a direct incentive for local providers to do more.

A primary care trust may be faced with the difficulty, which is often faced in various parts of the country, that it cannot get a service that provides rapid access to deal with, for example, the problem of long waits because of local shortages. If that is the case, it is important that it is free to commission a service from other parts of the national health service, or from other providers, to ensure that local people get access to NHS-funded care more quickly. That is a separate issue from the one that the hon. Gentleman raised about somehow withdrawing support from local providers. It is not about that; it is about commissioning an additional service. However, it is also about allowing the local provider an opportunity to provide that additional service, since a direct financial incentive is available to them.

I have said previously to the hon. Gentleman that the difference between us is that he represents in this place a set of very deep and conservative attitudes about the national health service that places the interests of producers and providers above the needs and interests of the patients. That is not just my view; it is the view of many of his hon. Friends. I see what is written about him and his Front-Bench performances in ''Focus'' and other magazines, in which he is regularly attacked as being an old-style politician who is not prepared to embrace change. I know that he is trying to learn the language of reform and change, and I will provide some seminars and support for him if he wants to attend. However, he is gradually edging in our direction, which is welcome.

I hope that the right hon. Member for North-West Hampshire—who started this debate by asking about the sourcing of borrowing and capital for NHS foundation trusts—has had some answers. It seems a very long time ago since I started to respond to him, and I have no memory at all of what I said. I will look in Hansard to see whether I answered him. [Interruption.] I see that he wants to have another go at me, so I am happy to give way.

George Young (Conservative, North West Hampshire)

I was not proposing to interrupt the Minister; I wished to come back after he had finished.

John Hutton (Labour, Barrow and Furness)

I misinterpreted the right hon. Gentleman's intention. I do not wish to go on any longer; I have run out of material. This is probably a good point at which for me to stop.

Chris Grayling (Conservative, Epsom and Ewell)

I had not intended to make a significant contribution to this debate, which spread

wider than I anticipated. I shall save some points for the amendments that are to come, but I should like to deal with some of the Minister's remarks.

The Department of Health has been setting up the special funding facility in recent weeks. Is that facility being set up with public funds rather than being sourced from the private sector?

Mr. Hutton indicated assent.

Chris Grayling (Conservative, Epsom and Ewell)

I see that the Minister is nodding. If it is ring-fenced, with access decisions that are not in the gift of the Secretary of State, what is the Treasury's role in the distribution of that money? Is it genuinely an independent pot with an independent panel that has total freedom to allocate it to whoever it wants, or does some degree of control still rest with the Treasury?

Is there a limit on the total amount of that money? Is it simply an initial amount that is available now, or is it a fund that will be expanded as time goes by? Will it be entirely dedicated to foundation hospitals, and is it the sole source of public capital moneys that foundation hospitals can access? What criteria will those distributing the money use in their lending decisions? Will they be using some of the criteria that are set out in the clauses concerning the prudential code? Will they be looking at the creditworthiness of the trusts?

A private-sector lender to an independent organisation would make judgments and set repayment rates against accepted assessments of creditworthiness. International organisations such as Dun & Bradstreet and Standard & Poor's specialise in producing such ratings. Is similar information being used in the distribution of this money? Does the Minister envisage such ratings being used in those assessments in future?

As regards this money—and, more broadly, the total borrowings that NHS foundation trusts can take on—will these funds appear as part of the PSBR? Are they official public sector borrowings or will they be purely on the balance sheets of the foundation trusts themselves? What provision is being made for any new entrants to the marketplace under clause 5? On what basis will those organisations that are not currently NHS trusts have access to that money if they apply for foundation status? Inside what time frame does the Minister envisage those organisations being in a position to access the funds available, if indeed—[Interruption.]

Peter Atkinson (Conservative, Hexham)

Order. I am having difficulty following the hon. Gentleman. There are too many sedentary conversations going on.

Chris Grayling (Conservative, Epsom and Ewell)

The Chancellor of the Exchequer said recently that money borrowed by foundation trusts can only come out of the total pot of money available for borrowing in the NHS. Will the Minister clarify whether that money has been taken away from a general NHS capital pool? If it has, what proportion of that pool does it represent? Will the creation of this special funding facility impact on the availability of capital to non-foundation trusts in the coming financial year or in future financial years?

I intervened on the Minister to express anxiety that we would be creating a situation in which foundation trusts would be at an advantage, owing to their ability to retain funding, and that we would be creating a two-tier system. Will the national tariff be introduced before all hospitals become foundation hospitals? In what time frame does the Minister expect all hospitals to become foundation trusts? Will the Minister set the introduction of the national tariff in context against

the process of expanding foundation trust status to other hospitals? If that is the case, will the Minister tell us what provision he expects to make—

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

Standing Committee E

Clause 11 - Power of Secretary of State to give financial assistance

Chris Grayling (Conservative, Epsom and Ewell)

I welcome you back to our debate, Mr. Griffiths. I was midway through my remarks, and I have been scrabbling around in my notes to work out what I had asked the Minister, and he likewise. He plans to answer some of my questions in detail, so I shall not reiterate them now.

In concluding my remarks, I should like to touch on two issues to which I should be grateful for the Minster's response this afternoon. First, where will the allocation appear on the nation's accounts; both the new facility that he talked about this morning—which has been set up in his Department—and additional borrowing secured by foundation trusts from the private sector or other sources? Will it appear as part of the public sector borrowing requirement, or will it simply and only appear on the foundation trust's own balance sheets?

I touched on my second point as we were about to adjourn this morning. It concerns the impact of the national tariff's phased introduction on foundation and non-foundation trusts. Clearly, there is a risk. If a foundation trust can retain a surplus generated by producing its services at a lower cost than the national tariff, it will gain a specific benefit. It will be able to reinvest that money in additional services and improve its position relative to other trusts. Under the current rules, those trusts that are not entitled to foundation status must return any surplus generated in the same circumstances to the Treasury. Therefore, those trusts would be at a disadvantage. That highlights one of the reasons why my right hon. and hon. Friends and I had significant misgivings about the overall measure.

Andrew Lansley (Conservative, South Cambridgeshire)

My hon. Friend said that, currently, an NHS trust that generated a surplus on its activities would have to return the money to the Treasury. I am not sure that I understand the point in the way that he does. Would they not be able to carry over any surplus at the year end?

Chris Grayling (Conservative, Epsom and Ewell)

Not under the national tariff. The Minister made the point this morning that once the tariff is introduced, foundation trusts that can carry out services for a lower cost than the national tariff rate will be able to retain that difference as a profit

margin and reinvest it. However, my understanding—the Minister can correct me if I am wrong—is that a non-foundation trust will not have the same right. Therefore, it will not have the same incentive to reduce costs and become more efficient. It will not be able to generate additional funds in that way to enable it to invest in more and better services.

Andrew Lansley (Conservative, South Cambridgeshire)

I did not understand the matter that way, but there is no point in debating it because the Minister will tell us in a minute. There will be other issues, but I did not see this as the source of a disparity. I saw all trusts possibility being lower-cost providers and therefore generating surpluses that would be available for investment elsewhere.

Chris Grayling (Conservative, Epsom and Ewell)

I am sure that my hon. Friend will agree that if this were a general right for all trusts, it would not be something that would relate to foundation hospitals. It would be a matter of course for all trusts, regardless of their circumstances.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

This is a fundamental question, and it is easily answered. In order that we can make progress, I invite the hon. Gentleman, in his interesting and well-thought-through address, to request the Minister to deal with the question now. We can then make progress on some of the substantive matters.

Chris Grayling (Conservative, Epsom and Ewell)

I was about to conclude my remarks by saying that I hoped that the Minister could enlighten us on that. Our argument has always been that foundation status should be accorded to all hospitals. If foundation status is phased in, only a small number of hospitals will have foundation status at the start. Phasing in the national tariff will create distortions between hospital trusts. That cannot work to the advantage of patients. I should be grateful to the Minister for clarification on those points, and I hope that he will be able to enlighten us.

George Young (Conservative, North West Hampshire)

I am sure that the entire Committee was grateful to the Minister for setting the framework for this part of the Bill this morning. That will save time when we are dealing with subsequent clauses, in the sense that we now have the template within which we are operating.

I want to return to clause 11 and the question of grants. I am sure that my hon. Friend the Member for South-West Devon (Mr. Streeter) was right when he said that although foundation trusts are interested in pioneering a new form of social ownership, they are much more interested in whether they can be free of the shackles of the Treasury, access more capital and help to deliver a better local health service.

The Minister's comments on the national tariff were interesting, albeit somewhat tangential. As my hon. Friend the Member for South Cambridgeshire said, the level at which the national tariff is pitched will decide the extent to which foundation trusts can borrow, because it will determine the margin between their income and their expenditure. There is also the related issue—touched on by hon. Friend the Member for Epsom and Ewell (Chris Grayling), which I know the Minister wants to address—of what happens to the surplus in the hands of non-foundation trusts.

Returning specifically to clause 11, I repeat my question from some time ago; how will the grant regime differ when a NHS trust becomes a NHS foundation trust? The Minister made the point that we must keep that in perspective, given that the capital allocations are relatively small compared with the revenue. North Hampshire hospital's capital allocation for the current year is £2 million, whereas its revenue expenditure is in the region of £100 million.

I think that I heard the Minister say that operational capital is allocated three years in advance and will not be clawed back if the trust becomes a foundation trust. He went on to say, however, that that only accounted for some 25 per cent. of the capital allocation, leaving unanswered the question, to which I will return in a moment, of the other 75 per cent.

The Minister said that a foundation trust would continue to be eligible for a range of grants from his Department. He mentioned national initiatives for the national service framework and touched on an IT strategy. However, I, and directors of finance up and down the country, assume that foundation trusts will not continue to receive from the Department all the capital that they would have got had they not become foundation trusts. It would be helpful if there were some body language from the Minister that confirmed or denied that assertion.

I assume that foundation trusts will not receive the total flow of capital from the Department that they used to get, but will be invited to use the facilities under clause 12 to borrow from alternative sources. I know that financial directors up and down the country are asking that question because they are trying to work out whether they would be better off going down the foundation trust route, which would mean forgoing an element of capital but receiving more from the facilities that I will come to in a moment.

Chris Grayling (Conservative, Epsom and Ewell)

My right hon. Friend puts his finger on an important point. If foundation hospitals represent a genuine way to expand the capital available for foundation trusts, they will be able to enhance their services. If, however, the introduction of borrowing powers is simply an opportunity to replace money that currently comes from central Government, it will not generate improvements in patient care in the hospitals concerned.

George Young (Conservative, North West Hampshire)

The best way for the Minister to resolve the matter is to take the case of a typical hospital trust and tell us what would happen if it were to become a foundation trust, how much of its existing capital it would continue to receive and what proportion it would no longer receive but would be expected to get through the new route that is being opened up under this part of the Bill. If the Minister were able to do that, he would answer my hon. Friend's question and mine.

My final point is more fundamental. The original concept was that private borrowing in which the trust is engaged would not score against the departmental baseline, but would be incremental and increase the

total amount of capital invested in health. That battle was fought and lost. We now know that borrowing privately will score against the departmental total. I was slightly alarmed this morning when the Minister said that when the Bill is passed, he does not expect a huge amount to be lent from what I would term the ''private sector''; banks and the City. Instead, he described a new NHS financing facility. That would be the route down which trusts will go for capital.

The Minister explained that that would be kept at arm's length from the Department, and would be operated by independent credit specialists who would assess the loans using normal credit analysis. However, in response to my hon. Friend the Member for Epsom and Ewell, he then said that it would be funded by public expenditure; it would come from his Department. If that is the case, we have gone round in a complete circle.

As things stand, a non-foundation trust would get its capital from the Department. However, it seems that if such a trust went through the hoops to become a foundation trust, cleared the social ownership hurdle and the regulatory hurdle and was given a prudential borrowing limit, it would not go to the City for funding, which is what I thought would happen, but would go back to the Department. Having jumped all of those hurdles, the trust would get its money from the Minister. We seem to have travelled in a complete circle.

I hope that the Minister will disabuse me of that view, tell me that I have totally misunderstood what he said this morning and say that the situation is not as I described. However, if it were as I described, far from diminishing the regulatory burden, we would have substantially enhanced it. We must press the Minister a little more on how the new regime would work. There must be absolute clarity as to how that would benefit both the Department and the trust that goes round the course.

Andrew Lansley (Conservative, South Cambridgeshire)

The Minister gave a rather expansive response to the earlier stages of the debate, and I fear that in the course of doing so, some of my more detailed questions were lost, so I will return to them. They follow on directly from the point made by my right hon. Friend the Member for North-West Hampshire; in that context, we can apply the situation to a particular hospital. I know what the sources of capital are for Addenbrooke's NHS Trust by virtue of reading their board papers, which are public documents.

I want the Minister to help us, step by step, to understand the Exchequer contribution to NHS foundation trusts, because that is what clause 11 deals with. I referred to the contributions earlier, but I will go through those again to avoid any doubt.

First, I shall address the matter of operational capital. Again, to avoid doubt, I referred to the bids for capital inside the trust, compared with the capital available and was speaking about the operational capital. The bids for operational capital inside the trust are £22.5 million. The amount that is to be allocated—there is some overcommitment—is £7.5 million. The

block allocation to the trust for 2003–04 is around £6.9 million.

As the Minister told the Committee, those are three-year allocations. Therefore, we have allocations for 2003–04, 2004–05 and 2005–06, and we have heard that those would not be clawed back. However, what would happen after that? What would happen to the block allocation of operational capital after 2005–06? Would it continue to be made by the Department to an NHS foundation trust in the normal way, or would it become part of the trust's requirement for borrowing?

The Department has given certain approvals to the trust through its discretionary capital schemes, which are now called strategic capital schemes. I will not go through what those are, but there are several others in the pipeline. Would the discretionary capital schemes, or strategic capital schemes, continue? Would they continue to be funded directly by the Department, or would they become part of the capital investment for which the trust would need to secure support through the financing facility?

We know that there is a three-year access fund arrangement. The Minister might reasonably tell us that that is available for allocation by strategic health authorities. It might, or might not, follow the three-year programme, but presumably NHS foundation trusts would not be excluded from having the access fund made available to them during the three-year period. I hope that that is agreed. The same applies to modernisation funding. There are specific objectives—ministerial priorities, as it were—and if they apply across the NHS, foundation trusts will have access to those funds in the same way.

I asked a specific question about three-star trust status. In 2002–03, £1 million was delivered to the Addenbrooke's NHS trust because of its three-star status. We do not know if that status will give rise to another capital allocation of £1 million for 2003–04, or some different sum. We are now in the 2003–04 financial year, and we have to assume that the Addenbrooke's NHS trust's capital programme is not receiving such an allocation.

Chris Grayling (Conservative, Epsom and Ewell)

Another capital element of the trust to which my hon. Friend, the Member for South Cambridgeshire referred, and others with which we will come in contact over the next two to three years, is the national IT programme. The Minister's clarification would be appreciated as to how that will be handled in capital terms for foundation trust hospitals as, clearly, it will impact upon the balances of the Addenbrooke's NHS trust over that time.

Andrew Lansley (Conservative, South Cambridgeshire)

Yes. We could go into detail on the matter, but it is likely to form part of the modernisation funding stream to which I referred previously. The relevant document for the Addenbrooke's NHS trust states that

''In addition, the Trust hopes to obtain funding from the national IM&T programme, although this is yet to be confirmed.''

My hon. Friend the Member for Epsom and Ewell asked the question, but we do not know yet. My assumption is—if I am wrong I hope the Minister will

let us know—that in so far as the foundation trusts participate in the programme and incur capital expenditure, they will receive modernisation funding from the Department in the same way as other NHS bodies. Those are the questions that relate to the sources of Exchequer funding.

We have discussed the link to the national tariff, and the question is to what extent are NHS bodies going to be treated on a like footing. My hon. Friend the Member for West Chelmsford also touched on the matter. If the national tariff and the price that is paid by commissioning bodies to all NHS bodies are to be on an equal basis, they will in all cases include not only the costs of the provision of a service, but all the associated capital costs.

Section 3.7 of ''Reforming NHS Financial Flows: Introducing payments by results'' of October 2002 states:

''This initial set of tariff rates will be derived from 2001/02 NHS reference costs.''

Simply put, what will the tariffs be, based on those reference costs? In economic terms, will they be short-run incremental costs, not reflecting, therefore, the long-term cost of capital associated with the provision of particular services; or are they going to be on a long-run incremental cost basis? We may get on to the argument later, but I will not disguise my feeling that the tariffs have to be based on long-run incremental cost for NHS foundation trusts if they are to sustain the costs of borrowing capital to put additional capacity in place.

If they are all on the basis of long-run incremental costs, do they not, of necessity, involve a misallocation of resources, as, in some respects, commissioning bodies will be buying spare capacity? The Minister reminded us that we want to use up underused capacity; certainly not at the Addenbrooke's hospital, which has 98 per cent. occupancy levels, but we will leave that on one side. Surely underused capacity ought to be able to be offered by providers on the basis of their marginal cost, and should not be bought by commissioning bodies on a long-run incremental costs basis. The risk is that we will generate surpluses in less efficient and less popular locations in the NHS, using up their capacity and giving them surpluses that are unrelated to cost. Prices ought to be reflective of cost and there is a risk that, in this case, that will not be the case.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

We have had an interesting debate today. I suppose we ought to be grateful to the Minister for his exposition of the new flows of resources within the national health service.

When we arrived today, we could have been forgiven for thinking that when we reached the stand part debate on clause 11, we would have a response from the Minister. The hon. Member for South Cambridgeshire asked many questions; he has asked them again, although he has added a few more, following the Minister's comments. I thought that we would have a response from the Minister to those issues, then a brief clause stand part debate, and then we would move on to the issue of capital in clause 12. I have tabled an amendment to clause 12 that must be

addressed, and other hon. Members have also tabled amendments to that clause.

I suppose we should be grateful to the Chairman for allowing a long discussion of the new approach to commissioning and the question of having a volume-led or activity-led approach, rather than a cost-based approach. However, if that was the plan, it would have been helpful had we realised how detailed the debate would be. As the Minister said, documents that many of us read last October are available on the web site, although he did not specify the web site address.

We would have benefited from knowing in advance that we might want to read—I see that some more documents have arrived on the Table since 2.30 pm—the 50-page document, ''Reforming NHS Financial Flows'' that was published in October 2002. It would have been helpful had that been provided for Members to re-read for this debate. We may also have wished to re-read the response document and the series of specific questions before this debate.

It is unfortunate that I was not alerted that we would have the opportunity—which I will certainly take—to address some of these interesting questions that the Minister has raised. In response to our debate this morning, a three-page document produced by the Department of Health was placed on the Table. It is entitled ''Information sheet No. XX'', which implies that it is very new. It gives us a little more information than we already have in these couple of hundred pages.

Nevertheless, the Minister has given us a valuable chance to question the Government about this matter. However, his contribution raised more questions than it answered. The first question is about the position of those who are able to retain the surplus. In my intervention on the hon. Member for Epsom and Ewell, I said that it might be possible to know the answer if the Minister clarified the position in a response to my intervention.

However, as hon. Members will be aware, in the document ''Specific Questions, Annexe C''—a response to the consultation produced last October, entitled ''Reforming NHS Financial Flows''—that is one of the key questions raised in the consultation. The answer is not entirely clear. Paragraph 20 on page 33 of annexe C of that document asks whether trusts will be allowed to keep a surplus as a reward for efficiency. Will there be rules governing how such surpluses should be split? What will be the rules governing retention of trust surpluses? If trusts are able to retain surpluses, will they be allowed to carry them over to the following year, or will they be received in the following year?

Those are interesting questions. In a debate on foundation trusts, one can double the number of questions by asking what is the case for foundation trusts and for non-foundation trusts. Since the Minister raised this question in the clause stand part debate, one would have thought an answer might be forthcoming. I am still hopeful.

However, the response given in the document is that the issues around how surpluses should be split, and

the mechanisms to be used in allowing trusts-PCTs to carry forward surpluses, are to be considered as part of a wider review of the trust financial regime and PCT financial framework. The trust will look at various things; break-even duties, brokerage, special assistance under the new financial flow system, risk management issues and possible medium-term roles for an NHS bank. It continues that the review was expected to report by September 2003.

That may give another place the opportunity to debate some of the questions that have been raised in our debate today, but before this Bill passes into law and becomes an Act.

I fear—unless the Minister is able to prejudge the response to that review—that that will not enable us to get answers today, nor will it enable us to consider how the establishment of foundation trusts relates to the answers given to those questions. Although we are grateful to the Minister for allowing us to question him and to hear his exposition, I suspect that he is being a little tantalising. I fear that he will be unable to answer some key questions, unless, for the first time in the recent history of the Department of Health, a review is able to report any time earlier than the indicated date. I fear, from the Minister's lack of response by way of intervention, that we are not going to get answers.

In that sense, it is hard to understand why we are having this debate on foundation trusts. Can the Minister say whether we will have an opportunity to come back to the matter in hand? I should have thought that that be addressed in his first comments on this section.

I have several specific questions to ask about the new financial flow. I was disappointed by the Minister's earlier response to one of my interventions. In his contribution, he said very little about how that would benefit patients directly, and very little about how quality would be levered up. It may come as a surprise to him to know that I believe there to be some merit in these new financial flows. It is important to allow the commissioning process to focus on something other than cost. Clearly, with the overwhelming focus on cost, there is no opportunity to consider some of the other things that are important, such as responsiveness, quality, getting capacity in quickly and flexibility for commissions.

I was trying to support the Minister when I said that I recognised that it was important that commissioning must be made more flexible and not just cost-driven. That was met with the response that it was well known that I supported the provider interest. I do not know where that came from; I question whether it was justified. It might have been good knockabout stuff, but I thought that we were having a serious, non-partisan debate about the potential benefits that might flow from the reforms to the commissioning process that the Government are proposing.

It was a bit of a cheek to answer what I thought was a reasonable question about equity with the rather partisan response that the approach that we have to commissioning, or to the health service, is

conservative, even with a small ''c''. I do not believe that to be the case, nor do I believe that this debate is an appropriate place for the Minister to make those allegations. If it were otherwise, I would be allowed to answer them.

The question is; how will this help the patient, and what are the potential perverse incentives that may flow from some of the proposals? I do not know whether the Minister recognises, as I do, that in any change like this there are risks of perverse incentives. There are questions that must be answered about what this will do for equity, for quality and for genuine patient choice, particularly for those patients who do not have the flexibility to follow contracts or financial flows around the country, and who rely on being treated in their local hospital where they can be visited by their family and where they have had continuity of care throughout their illness from existing providers.

The Minister said that the tariff would be derived from 2001–02 reference costs and, in response to something that I said, told us that there would be adjustments for projected cost inflation and local market forces factors; he made specific reference to the south and the south-east. Clearly, labour costs are higher there, but I worry that that will not be sufficient to compensate for the actual costs of delivering the capacity required to meet the needs of the health service.

In the Oxford Radcliffe hospitals trust—one of many—it is not that NHS nurses have to be paid more in wages or extra living costs, or that the trust has to arrange additional investment in childcare facilities in order to compete with other employers that do that better than the NHS. Up to three times over the odds has to be spent on agency nurses. That sort of cost pressure is vastly more than what the Minister described—I hope that I am not misquoting him—as ''some adjustments for local market forces factors''.

In my trust, the percentage increase in the cost of providing services has been huge because there are simply no nurses available locally, which is part of the reason why the trust has such a huge deficit. An approach that does not adequately compensate for that state of affairs, regardless of who is to blame, would spell even further disaster for a trust in such a position. Such hospitals are kept afloat by local commissioners, who are pretty much bound—at least in the short to medium term—to purchase services from them. Sadly, they must try to meet, as far as they can, the additional costs that that implies.

I should like the Minister to give an assurance that the position of those trusts will be recognised. Perhaps it is a clause 11 matter; perhaps there will be direct financial assistance to such trusts. I know that an announcement was made a few weeks ago about a pot of money taken from the NHS to be allocated by the Government. Providing local commissioning and purchasing flexibility is a step forward, but the Minister must accept that too large a centralised structure is a step backwards. It may be necessary, but it is not the brave new world of uniform improvement

in the devolution and decentralisation of commissioning decisions that the Minister proclaims.

The NHS Confederation's response of November 2002 to the financial flows document contains a paragraph on quality, which was not properly addressed in the original consultation document of October 2002. Indeed, ''Frequently asked questions'' is the shortest section in the document. There is very little in it about patient issues and quality. The NHS Confederation, which is as enthusiastic for reform as we are, recognises the following:

''There is no reason why a fixed price system should by itself create improvements in quality except where improvements may reduce costs.''

It also states, although I find the view regrettable, that:

''Experience suggests that reliance on external inspection will also fail to make sufficient impact''

on quality. I will be grateful if the Minister told us whether anything in the new arrangements would persuade me or the NHS Confederation, which will be running the system, that there will be a direct impact on quality from the financial flows alone. Will the Government set up and fund properly a system of audit available for local commissioners that does not rely on annual reports from the Commission for Healthcare Audit and Inspection or on other, more long-distance, means of measurement?

There are concerns about how emergency care will be treated under the tariff system and how complex, chronic disease will be managed. The Government say that they will start with elective surgery, and the healthcare resources groups that they have set up are mainly in the field of elective surgery. Simply starting with the low-hanging fruit does not explain how the system will be translated into the management of chronic disease and emergency care treatments. That will be much more difficult to cost. I am not sure that experience in elective surgery will help to do that. We must work out whether it will be possible to do that without creating distortions. The NHS Confederation in its response, under ''Designing a meaningless system'', says:

''There is a danger that the new system will become an accountants' and information specialists' 'anorak-fest' of impenetrable rules and massively overspecified detail with little connection to clinical practice and no chance of engaging clinicians.''

The confederation says that the system must be driven by a desire to improve clinical practice and patient outcomes rather than by an obsessive search for the perfect system. The Minister must address that, as he said very little about a desire to improve patient outcomes and a great deal that was in danger of straying into that anorak-fest.

The Minister may say that that does not sound like a positive response to the document, but one of the duties of Opposition politicians is to point out potential drawbacks; the Minister did not suggest any in his exposition. The fact that there may be drawbacks, distortions or perverse incentives is not an argument for not moving forward, but it is an argument for clearly addressing those problems in advance. I hope that the Minister does not think that because I have concerns about the impact of the proposals that I am against reform; on the contrary, I

believe that the proposals may be of some benefit. I hope that when I mention some potential perverse incentives, he will not consider, as he tends to do, that I have taken a negative or conservative—with a small or large ''c''—approach to his suggestions.

The NHS Confederation states:

''Creating a system that incentivises admission for conditions can and should be managed on an ambulatory basis. Payments and activity targets for conditions such as asthma, heart failure, and so on will need to be capped and even have penalties for high rates of admissions or rewards to incentivise admission reduction.''

That is clearly a potential perverse incentive to generate activity and the need for capacity to attract contracts.

The confederation states:

''Since the HRG price is significantly determined by length of stay, providers that can treat patients in less than the average time can make a profit. Experience in other systems suggests that this gives incentives to discharge early.''

That is a concern because incentives to discharge early already exist in the form of fines for delayed discharges. That will go against patients' best interests.

Andrew Lansley (Conservative, South Cambridgeshire)

The hon. Gentleman is taking the trouble to explore the issues associated with the introduction of the full tariff. I do not want to underestimate the difficulties, but this measure would be introduced alongside patient choice. Therefore, although I will explore the financial impediments to commissioning on the basis not only of cost to volume, but to quality, it is important to recognise that the roll-out of patient choice will in itself offer an opportunity to deliver quality.

The hon. Gentleman mentioned problems. However, some trusts are tackling the level of accident and emergency care and so on. For example, the Addenbrooke's trust is entering into further risk-sharing agreements with primary care trusts so that the risk is not simply associated with extra activity on the part of the hospital. Equally, those costs do not necessarily flow back to the PCT if the hospital simply takes on board everybody who comes to it.

Win Griffiths (Labour, Bridgend)

Order. Members must make short interventions.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

It is difficult to contain the scope of this debate within short interventions, as has been shown by the hon. Gentleman. Some of the questions that he asked generate yet more debate. Since the Minister did not stray into patient choice, I will not either, except to say that patient choice based on proper information would be a welcome introduction. Patient choice is often used as another term for better access, but better access is better access; it is not the same as patient choice. That is an important point. When the Secretary of State talks of patients wanting the choice of a good local provider, he means patients having access to a good local provider, and not their choosing between good local providers.

When I first asked how equity would be preserved within these financial flows, the Minister started off on one about producer interest and so on. However, this

is not a producer interest issue. The Committee will know that it is difficult enough to preserve equity within the existing system without introducing new systems. At first sight, the new systems might appear to be more equitable because of any advantage that foundation trusts will have over non-foundation trusts or those providers, regardless of their foundation status, in terms of labour costs and other costs.

What provisions is the Minister making to explore the impact on equity for those patients who are not in a position to go with the flow? It would not be fair to patients if they were made scapegoats for so-called poor performers. What provisions are in place to ensure that trusts that are classed as poor performers—for reasons beyond their control or because of bad management—preserve the resources needed to provide a decent service for those patients who are not in a position to move? I am referring to patients with chronic diseases and patients who require emergency care. Such patients cannot travel from Oxfordshire to Skegness, even if there is extra capacity there and their PCTs can negotiate the tariff to treat more patients quicker.

There is also the question of how the arrangements will apply to people with complex mental health problems, who need the social support that is achieved locally. It may not be appropriate for the Minister to answer all those questions, but I ask that when they are raised, he does not see them as coming from an anti-reform point of view, but as a constructive approach to addressing problems in the introduction and piloting—I am glad that the scheme has been piloted in 15 areas—of the new financial arrangements in the NHS.

Steve Pound (Labour, Ealing North)

Although I am anxious to avoid giving the impression of being helpful, I should like to take issue with one of the points that the hon. Member for Oxford, West and Abingdon raised.

Jim Dowd (Labour, Lewisham West)

Only one?

Steve Pound (Labour, Ealing North)

I will restrict myself to one.

There is a real danger in debates such as this of us assuming that, implicit and inherent in the starting structure of any national health service, is an increasing and stratified demand for agency nursing. Agency nurses are a significant factor in the cost of the NHS, and I entirely understand why the market forces factor contains in the index an element for the consideration of localised staff costs. However, I am desperately anxious to avoid us assuming that this will always be a problem in the national health service.

The problem is not that there are no nurses but that, in many cases, the hours available for those nurses to work did not suit the nurses, or adequate accommodation was not available, or the factors that the nurses took into consideration were not recognised.

I make no bones about admitting that I have a sentimental attachment to a health service run by Hattie Jacques and would be happy if that were the case now. On the other hand, I recognise that many aspects of the Bill are sensible and, given the Minister's reply, the idea of adjusted payments makes a lot of

sense to the untrained eye. It seems to be logical and sensible, as does the structure of the diagnosis-related groups and the various other mechanisms in this transparent method of payment.

Like all hon. Members, except possibly the hon. Member for Oxford, West and Abingdon, I have studied with great interest the research projects by La Trobe university, Melbourne, and the University of New South Wales, as well as the various analyses of experiences in Victoria and Denmark. In many ways, we are quite fortunate; the nasty work has been done for us. We know what the problems are.

I assure my right hon. Friend the Minister that even some of us on the troglodyte wing of the Labour party see a great deal of good in this method of payment. However, there are two issues that I want to raise. First, the mechanism is fine, but inevitably the argument will be about the amounts. The last major reorganisation of health care in my part of the world took place as long ago as April 2002, when the Ealing PCT was created.

Andrew Lansley (Conservative, South Cambridgeshire)

Clearly the hon. Gentleman has been following these matters carefully. Will he explain how he thinks the Department will deal with what is termed in Victoria as DRG creep, but for us might be termed HRG creep?

Steve Pound (Labour, Ealing North)

I should be delighted to. If the hon. Gentleman analyses the DRG creep to which he refers, he will see that the specific movement within the categories and the diagnosis-related groups was addressed in the first analysis. We now know how to structure the software to pick this up. If you look in the paper which was published in October last year, you will see, within the various categories, where that break took place and particularly in consultant related episodes, finished consultant episodes. All the work has been done for us, so we are now in the fortunate position of being able to say that this has been tried and tested and that we can now make use of them in a different context.

However, two specific issues arose with the last major organisation of health service provision in Ealing in April 2002. One of the problems with the establishment of the PCT—I should like the Minister to address this when he comes to reply—was the deficits that existed at the time. In the Ealing PCT we have a deficit of 3 per cent. based on 2003–04 figures, and that is about £8 million. All three PCTs in my area have a deficit. How can we avoid going into a foundation hospital system with an inherent deficit? That worries me, because if we are going to assume that there will be an element of deficit, as was the case with the PCTs, that could be extremely worrying.

Somebody mentioned certain areas of commissioning which would not be the province of the foundation trust, and I think IT was referred to, with those involved signing up to a national IT system. Can the Minister say whether this will be so or whether I misheard that? Will there, for example, be a national system for patient data storage and retrieval; maybe even for the analogue transmission of data such as x-rays? Will that be one for which money is given and

then retrieved, or will there be an element of local choice in IT?

John Hutton (Labour, Barrow and Furness)

Mr. Griffiths, you were not with us earlier today when we had this discussion. It does seem to me—other hon. Members may feel the same—that we have had a clause 10 stand part debate for clauses 11, 12 and 13, and I hope that that is your view, too.

I have arranged for two documents to be available on the Committee Table, one of which is a copy of the financial flows paper. The hon. Gentleman for Oxford, West and Abingdon asked about the web site address; it is www.doh.gov.uk/nhsfinancialreforms/financialflowsdec02guidance.htm, and I am sure that he will want to refer to that, too. The other paper is one that I have asked the officials to prepare, and I am grateful to them for having done it so quickly. It sets out by scheme an overall view of the NHS financial reforms and results, and I hope that that will help us.

Many hon. Members have asked about how the new financial flows arrangements will apply specifically to NHS foundation trusts. I wish to tell Members that I have asked for further briefing papers to be available to them as soon as possible, and I hope that I will be able to send them to Members of the Committee in time for our resuming after the recess.

This has been a high quality and well-informed debate. The hon. Member for Epsom and Ewell asked me about classification, and whether NHS foundation trusts' borrowing would be on or off-balance sheet. That is not actually a decision for Ministers to make; that is entirely a decision for the Office of National Statistics. It is not something that I am in a position to answer.

Chris Grayling (Conservative, Epsom and Ewell)

I accept that it is not the Minister's decision, but does he know the answer to the question? Has the decision been taken, or is it still to be taken by the Office of National Statistics?

John Hutton (Labour, Barrow and Furness)

The decision is still to be taken, so I will not be offering my views on that now.

A very important discussion then took place about the use of surpluses. I did make it clear in my opening remarks on clause 11 that we want NHS foundation trusts to be able to retain any surpluses under the new national tariff system that we are introducing. That is an important result for NHS foundation trusts.

It has been made clear in the papers forwarded to the Committee and Ministers' remarks that the Department is reviewing the question of the retention of surpluses for non-NHS foundation trusts. That is happening as we speak. I hope that the Committee will understand that my position is difficult. In respect of those trusts that are becoming NHS foundation trusts, we have not yet decided how the system will operate during the interim period. We want to examine that very carefully. We do not want to hold back progress across the NHS as a result of any changes we make to the flow of finances. I am sure that that important issue will bear on Ministers' minds, and my right hon. Friend the Secretary of State will look at it very carefully.

A very important part of the speech of the hon. Member for Oxford, West and Abingdon concerned a perfect system of distributing money in a publicly funded health care system. There is no perfect system. There are better systems than the one we have. For the reasons I outlined this morning, our system is a blunt tool. It does not reward the efficient and the effective, and it does not incentivise the right kinds of innovation and development that we all, with common consent, want to see in the NHS. We have a crude instrument, and the reforms we outline will be a significant improvement.

However, I emphasise a point that will provide a context for some of my later remarks. In developing our policy on NHS foundation trusts, we have been motivated essentially by two important considerations. One is a belief that, if we want the NHS to continue to improve and provide better patient services—the financial flows reforms and our proposals on NHS foundation trusts will help in that—we must devolve responsibility and decision. That must include responsibility and decision-making in financial matters. We must move away from the current position, particularly in respect of capital, where the available pot of money is rationed and people queue for a share of it.

I hope that, over time, the system will become a more commercial model. Although there will be greater disciplines, the system will retain its public service ethos and principles, and that is important. The system of distributing capital resources across the NHS will be more rational and utilitarian. We do not have such a system at the moment. The issues are closely related.

The hon. Member for Oxford, West and Abingdon and others were concerned about whether these reforms—not in the Bill but in terms of financial flows—would improve patient services. I believe passionately that they will.

Chris Grayling (Conservative, Epsom and Ewell)

Although I accept that the Minister cannot prejudge the work that is taking place in his Department, can he confirm that, under the current system, non-foundation trusts would have to return any surpluses they generated under the tariff system to the consolidated fund, to his Department or to the Treasury?

John Hutton (Labour, Barrow and Furness)

Broadly, at the moment they cannot retain those surplus assets. That is partly because of the application of the accounting arrangements by the Department. We are looking at that. I am not in a position to tell the Committee what the outcome of the review will be, other than to say that, in making all of these reforms and in moving as quickly as possible to foundation trust status for all parts of the acute sector—specialist and trust—we do not inadvertently hold back parts of the service.

We want to reach a point where everyone can take advantage of these new freedoms, because I am confident that that is the best way to sustain the improvements that have taken place in the NHS. I believe strongly that, in devolving responsibility for

planning, developing and delivering health care to clinicians and local people, we can take a forward step in improved quality care. The corollary is that financial reforms are necessary. Responsibility and decision-making on the use of capital resources currently rests with my hon. Friend, and that must be handed over to local providers. Even with that greater sense of freedom, there must be a broad framework of financial discipline, because no organisation can operate without a proper, prudential financial system.

We are not legislating for anarchy, or for a free-for-all; we are not legislating to create a situation in which the NHS goes bust. That would be the daftest thing we could create. The Bill does not do that. The Opposition wants to remove the provisions about borrowing limits and so on, and we will debate that later. However, there is a case to be made for that sort of framework.

The hon. Member for Oxford, West and Abingdon and others asked how these financial reforms will improve patient care in foundation trusts. I have dealt with that point. In relation to the point that was made about whether moving to HRG costing and the national tariff will somehow undermine quality, as my hon. Friend the Member for Ealing, North (Mr. Pound) made clear, in a very effective and well-informed contribution, that is not the case in other countries that have moved towards developing a system like this. We are able to learn from the experience of others; for example, Germany, the Scandinavian countries and Australia. There is no evidence from those countries to suggest that HRG tariffs result in deteriorating quality; in fact the opposite is the case. They have seen improvements in both choice and speed of delivery of care. We are now out of step with others on these reforms, and we should not delay any further in moving down that road.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

Surely the Minister must recognise that one of the broader questions, which may not be particularly detailed, is whether the creation of foundation trusts is creating not only a two-tier system, but a two-tier system that is more unfair than the sort of ''tierism'' that one gets from allowing different providers and a mixed market.

Will there be greater financial freedoms for foundation trusts than non-foundation trusts? That is particularly important, as the Government are not allowing any trust to have a financially free status—as we would—but are selecting them on the basis of the matters we have been talking about in the clauses to date. Does the Minister understand that it is extremely frustrating to my party—and, I would have thought, to some of Labour Members—not to know until the review is complete how great an advantage a foundation trust will have on retained surpluses compared with non-foundation trusts; at least in the interim period, until every hospital, as he sees it, is a foundation trust?

John Hutton (Labour, Barrow and Furness)

The hon. Gentleman is putting the cart before the horse by announcing the outcome of the review that is currently taking place. We have not come to a decision about that, so he should not jump

on that issue. It is true in other respects that NHS foundation trusts will have greater financial freedoms, including the ability to borrow from a wider range of sources, including the private sector. That is an important freedom, and our case in this regard is that it is justified by their financial performance to date. They are institutions with a proven track record, and they have earned the autonomy and the freedom that goes with it.

In relation to the use of surpluses, which was the recurrent theme of several hon. Members' questions, we have not come to a decision about what to do about non-NHS foundation trusts. That work is being done.

I was asked to provide more details about the new financial facility for lending to NHS foundation trusts and what, if any, were the limits to that capital financing. There will not be a finite pot determined by a fixed sum. The finance facility will have access to an amount equivalent to the total limit of NHS foundation trusts' aggregate borrowing, which will be determined by the regulator as he develops the prudential borrowing code. NHS foundation trusts will have access to the capital resources that are needed to allow them to borrow in accordance with the authorisation and the upper limit of borrowing set by the regulator.

Chris Grayling (Conservative, Epsom and Ewell)

If the Department is, as I assume, providing a financial facility that amounts to the total aggregated borrowing rights of the foundation trusts, is the Minister saying that there is a possibility that there will be no new money coming in from the private sector at all, and that this is basically just a different vehicle to provide public sector lending to the foundation hospitals?

John Hutton (Labour, Barrow and Furness)

I want to talk about the source of funding in a minute, because the hon. Gentleman's right hon. Friend the Member for North-West Hampshire (Sir George Young) asked me about the future source of strategic and other forms of capital available to NHS foundation trusts. Maybe I should combine both of those points now. We have made capital allocations for the next three years, including strategic capital allocations, to all NHS trusts, including those that have applied for NHS foundation trust status, and we will honour those strategic capital allocations.

There will be no clawback in relation to the capital allocations that have been announced. The Government will honour the commitments that those allocations reflect. However, in a time beyond the spending review settlement the new arrangements will mean that public money will be allocated on an ability-to-repay basis from either the financing facility to which I have just referred, or from the private sector, which has expressed an interest in financing foundation trusts. The Government expect that interest to grow over time.

This morning, I clearly stated that in the short-term the financing facility will provide most of the additional capital borrowing to meet the capital requirements of foundation trusts. However, we think that that position will change over time.

George Young (Conservative, North West Hampshire)

I think that the Minister said that the sum that could be bid for by the foundation trusts would be capped at the limit set by the regulator. Does that mean that the regulator—by using the criteria that we will come to—might be free to fix a sum that could be beyond what the Chancellor of the Exchequer or the Secretary of State felt that it was reasonable to spend on health, and would there be no constraint on the regulator in arriving at the figure that he felt was the prudential borrowing limit for the foundation trusts?

John Hutton (Labour, Barrow and Furness)

That is an important question. I could deal with it later when we come to the clause dealing with prudential borrowing, but it would be fairer to the right hon. Gentleman if I dealt with it now. Under clause 3, the Committee considered the regulator's duties. Clause 3 makes it clear that the regulator must take into account and apply his powers and functions in a way that is consistent with the Secretary of State's duties under sections 1 and 3 of the 1977 Act. That means that the regulator must have regard to the effect on the overall allocation of resources across the NHS of his drawing up of the prudential borrowing code. Therefore he will have to have regard to the overall amount of capital financing available in the NHS. The freedoms that we are giving to foundation trusts are a significant step forward. This is a different approach; it will be a more commercial approach to capital financing in the NHS. Ultimately, that will be a good discipline for the NHS.

Chris Grayling (Conservative, Epsom and Ewell)

We may be trespassing on the later stages. The Minister should think about this from the current time frame where the initial facility from the public sector will match up to the total gross borrowing powers of all the foundation trusts, and that total facility has to bear relation to the overall amount of capital financing available to the NHS. It does not take into account the extra ability of the private sector to provide additional resources to the NHS, nor does it take into account future investments against which borrowing might be secured. It would therefore appear to place a cap on the ability of the foundation hospitals to develop linked to the ability of the NHS to pay and not to the private sector to lend to them.

John Hutton (Labour, Barrow and Furness)

I am sure that the hon. Gentleman is aware of the agreement and the position that we have reached on capital borrowing and how it scores against the Department's capital budgets—and that includes private sector borrowing. All that has to be taken into account because that is how we intend to operate the prudential limit. It does not matter if the capital is from the private sector or public sector. It scores against the Department's balance sheet. That is also a factor that the regulator will have to consider.

My hon. Friend the Member for Ealing, North asked about deficits. That is an important point. We have asked applicant trusts to make a case where they believe historical deficits should be written off before they achieve foundation trust status. We will look at that on a case-by-case basis, but we are alert to the issue that he has raised. My right hon. Friend the Secretary of State is also considering whether there is

the possibility of a PCT deficit write-off as part of the application process.

The hon. Member for South Cambridgeshire asked about long or short-run average costings as part of the move to the new national tariff system. He probably knows what I am going to say because he has been carefully pursuing this with some of my officials. The tariff will cover all the costs of delivering a high quality service. Those costs will include the costs of staff, drugs, medical supplies and the running and maintaining of NHS buildings.

The assumptions underpinning the tariff will be the same as those reflected in allocations to primary care trusts. The inflation assumptions applied to the tariff will be the same as those that informed PCT allocations. We are trying to calculate the national tariff on a fair, open and transparent basis, attempting to reflect the costs of providing those services.

Andrew Lansley (Conservative, South Cambridgeshire)

To return to a point that was touched on briefly on Tuesday evening, will the Minister acknowledge that the national tariff system, with the costs constructed in that way, does not permit a trust with spare capacity to price it at marginal cost in order to use up that capacity, as distinct from having to charge their long-line average cost?

John Hutton (Labour, Barrow and Furness)

That may be true, but I do not know. I may need to come back to the hon. Gentleman on that matter.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

The Minister has not mentioned the way in which the independent sector will behave within the tariff arrangement. What is to stop that sector from charging less than the tariff, particularly for easy cases, leaving the NHS with the difficult cases. Some purchasers, desperate to find ways of obtaining capacity so that they are not labelled a failing commissioner by the Government, may be willing to pay that sector over national tariff for the NHS, allowing it to use the extra resources to compete in a way that the NHS is unable to respond to because it is constrained by the tariff? At some point, the Minister will have to clarify how there will be fairness in a market between the independent sector and the NHS with an NHS tariff arrangement.

John Hutton (Labour, Barrow and Furness)

I am not quite sure whether the hon. Gentleman is saying that the national tariff should not apply to private or independent sector providers, but that seems to be the logic of what he is saying. I am not sure if that would guarantee fairness in the context of a plurality of providers that we expect to provide services to NHS patients. The national tariff is the way to guarantee fairness across the system. I do not see how the introduction of the national tariff would introduce unfairness or give an unfair advantage to the private sector. It is certainly not how the private sector sees the introduction of the national tariff.

The hon. Gentleman makes a point in his intervention, but it is a very odd point for someone from his political wing to make. I am not sure what political wing he belongs to—he was on the centre left a moment ago, but that intervention would seem to indicate that he is on the centre right.

Win Griffiths (Labour, Bridgend)

Order. We are going down a path that is far beyond clause 11. There are later clauses where that particular nicety could be tackled. Therefore, we will carry on with the main debate.

John Hutton (Labour, Barrow and Furness)

I am grateful to you, Mr. Griffiths, for rescuing me from that divergence.

Andrew Lansley (Conservative, South Cambridgeshire)

We will not have another opportunity to examine the structure of the national tariff, which is part of the whole question of Exchequer funding of the NHS as a whole. The implication of the Minister's response to the hon. Member for Oxford, West and Abingdon was that the standard tariff would be applied to purchasing from the independent health sector.

Win Griffiths (Labour, Bridgend)

Order. Is the hon. Member asking this question in relation to the expenditure of an NHS foundation trust or in relation to grants being given by the NHS centrally? His reply will determine whether I shall rule him in order.

Andrew Lansley (Conservative, South Cambridgeshire)

My submission is that this relates to the financial assistance given by the Secretary of State to NHS foundation trusts. In this instance, the NHS foundation trust in question might be an independent provider who has become a public benefit corporation in order to become an NHS foundation trust.

Win Griffiths (Labour, Bridgend)

Does the hon. Member wish to pursue this matter in that circumstance?

Andrew Lansley (Conservative, South Cambridgeshire)

In that circumstance, the question is whether independent providers, who have, presumably, come into the NHS system to sell additional capacity that they are unable to sell privately, would be able to sell it at a marginal cost. The perversity of that system is that the NHS would insist on paying independent providers at a standard tariff, even though independent providers would be willing to charge marginal costs that may be below the standard tariff. Is the Minister seriously asserting that principle?

John Hutton (Labour, Barrow and Furness)

Clause 11 concerns grants and loans—the capital revenue side of the funding for NHS foundation trusts. However, the national tariff is not financial assistance. That question relates to revenue resourcing of the NHS.

The hon. Gentleman has raised the question of price competition several times, not only with regard to clause 11, but other clauses as well. That is essentially what he is arguing for: giving independent or NHS providers the opportunity to offer prices at a marginal cost. We will not do that. That is precisely what the national tariff prevents. The Opposition want to reintroduce price competition into the NHS. That is transparent from what the hon. Gentleman says, to which the hon. Member for Epsom and Ewell nodded in agreement. Fine. They are entitled to put that policy before the British people. However, we have been there before, and we know exactly what that leads to. It leads to the beggar-my-neighbour, dog-eat-dog culture that did so much damage to the NHS in the 1980s and 1990s.

There is a different way to promote productivity and efficiency in the NHS, and it is through the financial flows arrangements, coupled with the

national tariff, which I have suggested. There are incentives for providers to provide more efficient and productive services, and to use the surplus to re-invest in the provision of services. That is a powerful incentive to improve efficiency that does not exist at present.

Chris Grayling (Conservative, Epsom and Ewell)

Will the Minister give way?

John Hutton (Labour, Barrow and Furness)

I do not intend to give way again on those points. All of those questions on the national tariff go significantly wider than the terms of clause 11. I have tried to deal fully with the points that hon. Members have made.

However, I want to deal with one other question on clause 11 concerning the Secretary of State's ability to provide financial assistance through capital and grants to NHS foundation trusts for the national information management technology strategy. We are putting considerable investment into that strategy. Primary care trusts will ensure that any contractual arrangements that they enter into with NHS foundation trusts require the use of the national strategy. Therefore, capital will be provided to sustain the strategy.

Chris Grayling (Conservative, Epsom and Ewell)

The Minster will be aware that the Government recently announced that they plan to shelve the shared financial services programme, particularly the accounting and purchasing systems, which I understood would be a bolt-on to the national programme. I gather that, due to the need to allow foundation hospitals independence in decision-making, the Minister can confirm that there will be no further extension of such a step, and that foundation hospitals will be required to take on all other aspects of the national information management technology programme that are not being developed at present.

John Hutton (Labour, Barrow and Furness)

The hon. Gentleman is wrong. Ministers have not made any such announcement about shelving the shared financial services initiative. We made that clear when that false report appeared in newspapers. The hon. Gentleman follows ministerial announcements closely on our website, so I am surprised that he asked me that particular question. That story was false.

The debate has been interesting and wide-ranging, and I have nothing further to add to the issues that have been raised. I chastised myself after this morning's sitting for being so open in my opening remarks, and paving the way for what turned out to be a thorough scrutiny and investigation of the Government's financial plans. It is not often at the end of a debate that I can say that I feel thoroughly probed and scrutinised, but I feel that way at this moment. In the spirit of friendship across the divide, I should say that I am grateful to Conservative Members, and to my hon. Friend the Member for Ealing North, for exposing me to that invigorating cross-examination. I hope that I have provided at least some information that will throw some light on future proceedings. However, it is apparent that there is a substantial division of opinion between Labour and Conservative Members on how the distribution of resources through the NHS should be arranged.

Conservative Members clearly want to return to the time of open competition based on providing the lowest possible price for NHS services. We should not go down that road.

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.

Clause 12 - Prudential borrowing code

Chris Grayling (Conservative, Epsom and Ewell)

I beg to move amendment No. 273, in

clause 12, page 5, line 19, leave out subsection (2).

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss amendment No. 247, in

clause 12, page 5, line 21, at end insert

', and have regard to the impact of private borrowing by foundation trusts on NHS trusts' access to capital'.

Chris Grayling (Conservative, Epsom and Ewell)

Amendment No. 273 is a probing amendment designed to establish more clearly the Government's intended criteria for shaping the code and, in particular, what is meant in subsection (2) by:

''any generally accepted principles used by financial institutions to determine the amounts of loans to non-profit making organisations.''

Non-profit organisations are diverse and their financial structures differ. At one extreme, for example, is Standard Life, one of Europe's biggest insurance companies; at the other, a local sports club. Clearly, the financial structures within which both of those structures must work in order to secure borrowing are hugely different. Therefore, it would be valuable to understand precisely what the Government mean by ''generally accepted principles''. Why, indeed, is this subsection even necessary?

For a major lender lending to a non-profit organisation, the primary criterion is the ability to pay. The major lender will look at the nature and security of the income that the organisation receives. The nature of the membership of the organisation will also be considered because one issue that a lending organisation will inevitably consider is liability. We touched on that earlier in the debate, but the Minister has not yet dealt with it fully.

A borrower providing finance to a non-profit organisation will ultimately look at the security for that lending, which may be against assets. However, as we know, the core assets of a foundation trust cannot be used as security against lending. Therefore, an additional criterion that a lender will use to judge the security or otherwise of an organisation, its ability to repay and the fall-back if something goes wrong with its revenues, is the strength of the financial substance behind it. With a major limited company, the amount of money against which a lender will usually lend is related to the capital base of that organisation, which is the shareholding base. When Railtrack went into administration, the core value against which the administrator and creditors sought to take action was the money that the shareholders had invested. Ultimately, shareholders are the last group to lose

their money when something goes wrong. The capital that they have invested disappears. In the case of a non-profit organisation, there are no shareholders and no shareholder capital raised through a stock market issue. Therefore, where does the liability ultimately lie? Who ultimately pays the bill or loses their money if things go wrong?

If a typical, small non-profit organisation—the Minister's local Labour party association, for example—were to fall into major financial difficulties, in most circumstances, it is the members who carry the can. I suspect that his local association is not unusual in that respect. If members take on a property liability or fail to pay their tax on time and find that they run into cash flow problems, they are ultimately liable if the creditors come after them. Therefore, one of the generally accepted financial principles that financial institutions will use to determine the amounts of loans to non-profit organisations is whether the money can be recovered against the membership. However, in the case of a foundation trust, the membership consists of those who signed on the dotted line for £1.

With the Bill and the Government's drive towards creating foundation trusts, it is essential to understand what the liability is. Who carries the can? Who pays the bill if something goes wrong? Will the Secretary of State automatically step in, or are the individual members ultimately liable? When a non-profit-making organisation takes out a loan, one key criterion that the lender uses is, ''Where do I get the money from?'' Ultimately, the members are the ones who pay.

In framing the clause, what discussions did the Minister and his Department have with commercial organisations about the criteria that they use? Is the clause based on a substantial exchange of ideas and information? Is there a substantial basis for it? Has the Minister received guidance from the industry on what it would look for from foundation hospital trusts? Will he clarify whether such discussions have taken place?

May I anticipate slightly the issues that the hon. Member for Oxford, West and Abingdon will raise under amendment No. 247? That amendment raises a number of other questions; it is about the impact of borrowing by foundation trusts on the rest of the NHS. The Minister has clarified the fact that private borrowing by foundation trusts will not be able to increase the total amount of borrowing for the NHS. Of course that means that if a foundation trust secures private sector money, that will reduce the amount of public money that the Government have for spending on the health service, so arguably that is a way of cutting Government investment—replacing Government investment in the health service with private money.

I should be grateful if the Minister would address that issue. The provision that we are discussing risks constraining the freedom of foundation trusts to grow and develop their business. Let us suppose that a foundation trust decides to go to the private sector and borrow to buy a clinic. Let us say that the trust has been working closely with the private sector and

subcontracting work to a cataract clinic, and the parent company runs into difficulties and goes into administration. That asset is there on the shelf, waiting to be bought from the administrator. The foundation trust decides that it wants to borrow from the private sector, buy the clinic, expand its own capacity and continue to provide that service to patients. That is a perfectly realistic and reasonable scenario, and we certainly expect the freedoms that will be granted to foundation trusts to come into their own.

However, if my understanding of the current situation is correct, such a decision could not be taken without money being taken away from investment in other parts of the NHS. For the foundation trust to borrow the money to buy the clinic and continue providing its services to patients and develop those services, money would have to come off the borrowing available to another hospital elsewhere in the NHS. Surely that makes a mockery of the rationale for creating foundation hospitals. Surely the purpose of the exercise is to create freedoms that allow them to expand and develop their services. I do not see how such a constraint can permit foundation hospitals to have the freedom that they need to develop their services.

Inevitably, if a foundation hospital is in such a position, it will think of other ways of doing things. It might want to buy a new scanner. If it cannot borrow the additional amount without having an adverse effect on the NHS, it might look to lease the scanner. Will the borrowing code take into account classic off-balance-sheet debts, such as long-term leases? Will they have to be reflected in the total amount set out in the limit that each trust has, generated from the core code that the Government will develop? Or will off-balance-sheet financing, such as long leases, not have to be taken into account in the prudential borrowing code?

Lastly, has the prudential code already been developed? At the bottom of page 17, the guide states:

''The prudential code will be made available to applicants during the time period for submission of the initial applications.''

Last week the Government announced their first shortlist of applications for foundation status. One would therefore assume that the time period for submission of initial applications has passed. If so, and if the Government have fulfilled the undertaking that the prudential code would be made available to applicants, one would assume that the code has already been developed. If that is the case, can the Minister outline the shape of that code? If that is not the case, why does the guide say that the code would be made available? If the code has been developed, why does the clause say:

''The regulator must make a code''?

The regulator has not yet been appointed. I imagine that that person will not be appointed for several months, despite the fact that the job has been advertised. Could the Minister state whether the code has been developed, and if so, what it contains? I look forward to hearing his answer.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

I am grateful to the hon. Member for Epsom and Ewell for making my points for me. I do

not know if that is the start of a new trend. If it is, I do not mind, because he did it very well. I have nothing to add on the basis for the amendment—[Interruption.] Hon. Members should wait. If the Minister will be generous in allowing me to intervene to seek clarification of his answers, I will not repeat the points made by the hon. Member for Epsom and Ewell.

Some may feel that in proposing the amendment, we wish to limit the access of new providers in the market to private capital because of a fear that that would limit the ability of the rest of the NHS to borrow. That is not the case. We believe that the Chancellor of the Exchequer should not have been allowed to prevail, and that the loans should not count against departmental borrowing limits. If the Government had faith in prudential borrowing, there was no need for that to be the case. The consequence of the Chancellor's winning that battle with the Prime Minister and the Secretary of State for Health is that we are in what the hon. Member for Epsom and Ewell described as a zero-sum game. If that is the position, it should say so on the face of the Bill.

This is the point where we and the Conservatives may part company. I argue—as they do—that there is a restraint on the ability to borrow. However, I also argue that that is unfair. The Minister has said that the Government will honour capital allocations for the next three years, and that all trusts will be foundation trusts by the end of that period. If that is the entire allocation—and if there is not another allocation that will be diminished by borrowing in the meantime—the unfairness may not arise. However, if he cannot guarantee either that the honoured capital allocation is the maximum that could have been allocated against the Department of Health's limit, or that all trusts will have the same freedoms—and that they will all be restricted by the limit—there is unfairness between those that can take advantage of the limited freedoms, and those that cannot take advantage of those freedoms and will have their allocation restricted by virtue of the freedom given to new providers. That is the purpose of the amendment. I hope that the Minister will point out where I am wrong if there is not a problem or, if there is, explain how it can be addressed.

Steve McCabe (Labour, Birmingham, Hall Green)

I want to make four brief points about the amendments. This represents some of the central anxieties felt by those of us who support the general principle of the Bill. I hope that amendment No. 273 will not be accepted. Subsection (2) contains the essential safeguard that stops foundation trusts running up excessive debts and going bust. We do not want that to happen. We do not want the past experience with other trusts to be replicated, so I hope that we will reject the idea.

Amendment No. 247 raises a point that has been touched on several times today. We want to know whether there is extra borrowing capacity as a result of these proposals or whether the extra that the trusts can borrow comes off the NHS total. If it does, it suggests that there could be a preference for those trusts at the

expense of other parts of the NHS. That is a pretty central anxiety for a great many of us. It would be helpful if the Minister could be clear as possible about the status of the code. Some of the chief executives who responded to the initial proposals raised doubts about the financial proposals. They were keen to see what the code would contain. Finally, will long-term leasing be taken into account in the prudential borrowing code?

George Young (Conservative, North West Hampshire)

To follow up the point developed by the hon. Member for Birmingham, Hall Green (Mr. McCabe), I must observe that the Minister is caught between a rock and a hard place. If he agrees with his hon. Friend and says that despite the heroic work envisaged in the Bill no extra money would go to foundation trusts, he must then confront the chief executives of the foundation trusts, who will ask what is the point of it all. In replying to that question, he must disappoint either his hon. Friend or the chief executives of the foundation trusts.

I should like to raise a different point, which builds upon what my hon. Friend said. Subsection (2) refers to

''generally accepted principles used by financial institutions to determine the amounts of loans to non-profit making organisations.''

I hope that the Minister can be open about the amount of work that has already been done by his Department. Although formally this is a matter for the regulator to decide, much of the work has already been done by the Department. It would be helpful if he could confirm that the process is roughly as follows. A foundation trust will look at what is called its pre-cash flow, which is any surplus that it has on its income over its expenditure plus its depreciation allowance. That is then fed into a number of equations.

Many hospitals in the south-east have no surplus. The North Hampshire Hospitals NHS trust runs at a deficit. The question of using that part of the pre-cash flow to determine the prudential borrowing limit is rather academic. Many hospital trusts have only their depreciation allowance. Which of the formulae that have been explored by the Department will be recommended? The amount that a trust can borrow varies substantially according to which benchmarked ratio one chooses. One of the ratios is the debt service cover ratio—the number of times that the debt, which is the interest plus principal, can be serviced by the pre-cash flow.

If one applied that ratio to the North Hampshire Hospitals trust it could borrow about £12 million. Its depreciation allowance would withstand that sort of debt. That allows a ratio of two. In other words, the pre-cash flow has to be twice the interest and the principle.

The Department are considering other ratios, such as debt to net revenue, which is the percentage cost of servicing the debt—principal and interest—as a percentage of the total revenue of the trust. I understand that the figure being considered is 4 per cent. If that figure were applied to the North Hampshire Hospitals trust, it could borrow £28 million, as opposed to £12 million if it used the

debt service cover ratio. The amount that can be borrowed therefore varies widely. The third ratio, which is being considered under the prudential capital code, is the interest cover ratio—ICR. That applies to the number of times that the interest could be serviced by the pre-cash flow. The ratio being considered for that is three. Under that formula, the hospital in my constituency could borrow £21 million.

It is clear that the trusts have got some way round the course in applying, and I would have thought that the Department must have some idea which of the ratios it is likely to recommend to the regulator. Without that sort of information, it will be difficult for a trust to know whether it is worth applying to be a foundation trust. A trust could make a rough guess at what it might get if it did not apply to be a foundation trust, but it needs to know how much it could borrow if it applied and was successful. In the case of the hospital that I have mentioned, that could be anything between £12 million and £28 million. That could not be borrowed every year, of course, because the pre-cash flow would have to service the debt incurred in year 1, and could not be applied to fresh debt in year 2.

Chris Grayling (Conservative, Epsom and Ewell)

In the commercial world, there are two other factors that could affect the borrowing powers of a trust. The first is whether it has assets beyond its core assets—some trusts will be much better endowed than others. Secondly, borrowing against assets to secure new treatment services, such as new clinics, will generate additional revenue and affect the formulae. However, under the rigidity of the Government's proposals, neither of those would be permissible.

George Young (Conservative, North West Hampshire)

My hon. Friend is right to say that a trust cannot use regulated assets as security, although those would normally be taken into account by a financial institution. Regulated assets are expressly precluded by the Bill.

I hope that the Minister will be open and indicate to the Committee which of the ratios his Department are working on, to give some guidance to trusts on how much they might be able to borrow were they to become foundation trusts.

Andrew Lansley (Conservative, South Cambridgeshire)

I am interested to hear what my right hon. Friend has to say, and I shall not attempt to add too much to it, except by contributing one thought. As I understand it—the Minister will correct me if I am wrong—the issue that my right hon. Friend did not take into account is the interest that must be paid on public dividend capital. The limit will be applied on the total indebtedness of the trust; it is not a limit on additional borrowing, but on total borrowing. Within that limit on total borrowing, the existing public dividend capital will be netted off.

I do not know the circumstances of the hospital in my right hon. Friend's constituency, but if it were a new hospital and the Government had paid a large amount of capital to build it, it would have correspondingly on its balance sheet public dividend capital alongside the interest charge against it. The headroom for borrowing might be modest. The extent

to which borrowing could occur would, as my hon. Friend the Member for Epsom and Ewell suggested, be more a question of the extent to which the project concerned would give rise to additional capacity, which would in turn give rise to additional revenue to service the debt.

Chris Grayling (Conservative, Epsom and Ewell)

In some cases, one would expect applicants for foundation status to be trusts that have just built new hospitals using PFI. The question would therefore arise whether PFI liabilities, which might take a variety of forms, would also appear and be taken into account within the prudential code, as they should.

Andrew Lansley (Conservative, South Cambridgeshire)

The same principle applies, and we are not speculating about that, given that the ''Guide to NHS Foundation Trusts'' says:

''prudential limits would apply to the total indebtedness of the NHS Foundation Trust as a group, i.e. all borrowing both public and private across the structure.''

Clearly, it includes the PFI borrowing that is already in place.

Chris Grayling (Conservative, Epsom and Ewell)

One of the issues in recent times has been that the Government have not declared PFI debt as national debt, so it is off-balance-sheet. None the less, the debt of all the foundation trusts would have to be taken into account within the prudential code, which would mean that all of it could not be put on the national balance sheet.

Andrew Lansley (Conservative, South Cambridgeshire)

My hon. Friend uses the term ''balance sheet'' in a particular sense, which I would not do for such a purpose. We tend to say, ''Is it on the balance- sheet?'' meaning, ''Is it in the national Exchequer accounts?'' PFI does not appear in the Exchequer accounts. However, it does appear on the balance sheet of the trust, and we are trying to resolve what is the prudential limit on total indebtedness of a trust, including the PFI money? If we are wrong, the Minister will put us right, but I think that that is the question.

I shall track that point. It means that if an NHS trust is becoming an NHS foundation trust, but—contrary to the scenario that I have just painted—it has old buildings with high maintenance costs and the like that are accruing to undermine its revenue position, the incentive to borrow, and the availability of borrowing, would be high.

That is not an idle scenario. I have spoken about Addenbrooke's trust, but in my constituency there is also the Papworth Hospital NHS trust, which in 1997–98 was one of the hospitals that sought to go down the PFI route. When the Government were elected in 1997, they said that they would not have many people pursuing PFI status, but a small number would be in the fast-track system. Papworth lost out for the simple reason that in those circumstances, the ''PFI-ability''—if I can put it like that—is dependent on the ability of the private financier to generate efficiency savings on ancillary, not medical, services and to contribute to the financing of the project, thereby relieving the burden on the hospital itself to pay. The Papworth trust was not ''PFI-able'' to the extent of some others, because the trust had already delivered every conceivable efficiency saving that it possibly

could on all its non-medical services, and quite a few on its medical services.

I painted that scenario to demonstrate that I can see where such arguments are coming from. If there is not a route for PFI, for somewhere such as Papworth there is at least a route to capital, which will enable it to do its job of rebuilding the hospital, wherever it chooses to go. It will need to be rebuilt and it will be a big project. At the moment that project is sitting in the queue for borrowing from the NHS, to which the Minister referred.

A big sum will be required, so while I understand why we want trusts to become foundation trusts and to have access to NHS borrowing, I do not see how the way in which they will get into the queue to have their big project financed in the future will be different from what happens now. Let us suppose that the Department of Health has a limit on its overall budgets, including its overall capital budget, and Papworth comes in—a point that was raised by the hon. Member for Birmingham, Hall Green. I am saying that from the perspective of a hospital that says, ''Right. We have not been able to get our project, but we have become an NHS foundation trust and, lo and behold, we get our project.'' Other things being equal, that must mean that there are other projects that will not receive the same capital. They may be less necessary, but that is neither here nor there.

That brings me to PFI. There are three things that I want to be sure about. The first is that before we discuss public dividend capital, we are clear that it is part of the total indebtedness of the trust. We are dealing with something that bears directly upon the borrowing limit. Secondly, the private finance initiative is counted towards the borrowing limit, but it is not going to be managed in the same way. Therefore, a trust looking to undertake future capacity building might still choose to go down the PFI route.

We should ask whether the additional capital activity will form part of the borrowing limit if the finance in question is not loaned to the trust but is capital raised by the private partner. If it is not borrowed by the trust, clearly it will not form part of the borrowing. It is true that many foundation trusts will choose to make their capital investment, although Papworth will not. At others, such as Addenbrooke's, the elected care and medical genetics centre that is on its way as a PFI project will not form part of the borrowing limit. So long as that is clear, it is fine.

We then have to ask about the freedoms. I am surprised that the guide to NHS foundation trusts says, at paragraph 5.22, that

''An NHS Foundation Trust will continue to be able to procure capital schemes using the Private Finance Initiative process, subject to the same degree of oversight as applies under the current arrangements.''

Is no freedom to be offered to the foundation trusts to undertake PFI projects according to their own discretion, or will they be left under the same regime as at present? How will becoming a foundation trust benefit a new hospital that wants to add further capacity through the PFI route?

Finally, I come to the relationship between the borrowing code and the commissioning bodies. So far as I can see, we have at best a three-year forward programme of expenditure, and service level agreements that will probably happen on a yearly basis. There are some indicative relationships with commissioning bodies. If one is going to undertake capital investment, not on a PFI basis but using the financing facility from the Department of Health, one will probably still be doing it on a 25-year basis. The calculations will certainly be done on that basis.

How will that serviceability relate long-term borrowing to short-term commissioning? Will the assumptions about the serviceability of debt not, in practice, track back to the strategic health authority's deciding on the configuration of services? Only if the SHA agrees that the future configuration of services will be consistent with commissioning bodies' buying those services long-term can that debt be serviced effectively. My worry is that we talk about capital freedoms but that when we look closely, the issues still track back to decisions that are made at strategic level by the relevant SHA or the Department of Health.

John Hutton (Labour, Barrow and Furness)

I shall deal with the amendments first, and then with the wider points that have been raised. Amendment No. 247, tabled by the hon. Member for Oxford, West and Abingdon, requires the regulator to have regard to the impact of NHS trusts' access to capital. That point is already reflected in the Bill; we covered that ground many times in our debates on clause 3.

I assume that amendment No. 273, which would remove the requirement to have regard to generally accepted principles in the setting of a prudential borrowing code, is a probing amendment—

Chris Grayling (Conservative, Epsom and Ewell)

I said so.

John Hutton (Labour, Barrow and Furness)

I am sorry. I did not recall the hon. Gentleman's having said so but I am delighted that he did, because it would have been daft for the Committee to consider such a proposal. As my hon. Friend the Member for Birmingham, Hall Green made clear, it is right that the Bill should set out the general principles on which the code should based. A strong case can be made for leaving the clause as it stands.

I shall now deal with some of the points raised in the debate, which naturally went into some of the underlying arguments. The right hon. Member for North-West Hampshire made a telling and well informed contribution to the debate, as did the hon. Members for South Cambridgeshire and for Epsom and Ewell. The question arose of who had been consulted on the principles for the prudential borrowing code. Wide consultations have taken place with the major banks engaged in the health sector in the United Kingdom, and the relevant major credit rating agencies have been involved, as have been the non-executive and financial directors of the prospective foundation trusts.

The discussions have been widespread, and I am glad that the right hon. Member for North-West Hampshire is aware of the details; I am happy to share them with the Committee. However, I have a dilemma in responding to the right hon. Gentleman. He is

effectively asking me to tell the Committee what the prudential borrowing code will say about the ratio that should be applied to the code. He knows that we have had wide-ranging discussions with all the foundation trust applicants about the shape of the prudential borrowing code; for instance, he mentioned service cover ratios, debt service to revenue ratios and interest cover ratios. Those were all discussed with the applicants during the consultation process.

All that I can say is that, under the Bill, it is the job of the regulator to promulgate the eventual code. However, it is unlikely that only one of those ratios will be selected. They are all likely to form part of departmental recommendations to the regulator, and it is worth noting that, currently, no financier relies on only one of them. All use a range of ratios, and we are likely to suggest that to the regulator.

The hon. Member for Epsom and Ewell spoke about long leases. Essentially, he is inviting me to tell the Committee in detail what accounting rules will apply to NHS foundation trusts. It is difficult for me to do so. A live debate is continuing on that issue, and it will cover the full range of accounting procedures, including the treatment of long-term leases. I cannot second-guess what the outcome will be for the accounting rules for NHS foundation trusts.

Chris Grayling (Conservative, Epsom and Ewell)

It is difficult to escape the conclusion that the measure is being rushed through. I referred to a footnote on paragraph 5.17 of the guide, which states:

''The Prudential Code will be made available to applicants during the time period for submission of initial applications.''

We already have a shortlist of hospitals, and we are not expecting the regulator to be in place for some months, yet the Minister cannot give us details of the basis on which the decision will be made. Either it is a rushed bodged job, or the Minister is not giving the Committee the information that it has a right to expect.

John Hutton (Labour, Barrow and Furness)

It is certainly not a rushed bodged job. The code has not been finalised. As soon as it is, it will be published; it will be in the public domain. It is the job of the regulator. The post has not yet been established by Act of Parliament. The final publication of the prudential borrowing code will have to await that event. However, we are discussing with applicants for foundation trust status some of the general principles that are likely to apply, which is sensible; but they know, as I hope that the Committee knows, that no decisions have been made about the details of the code. That is the basis on which the discussions are taking place. I am not withholding information from the Committee, as I hope all hon. Members understand. That is not what I do.

Steve McCabe (Labour, Birmingham, Hall Green)

For the sake of clarity, is my right hon. Friend saying that some preliminary work is going ahead on the code, but when the regulator is appointed, the Department will have the option either to go along with that work or, conceivably, to tear it up and start again?

John Hutton (Labour, Barrow and Furness)

It is clearly the regulator's responsibility under the Bill to decide how to set the code. As hon. Members would expect, my officials are having discussions with both applicants, and we will obviously have discussions with the regulator when the regulator is appointed. We are advertising that post as we speak. Once the shadow regulator has been established, those discussions will continue. That is a sensible and prudent way to do things. It should not be seen as contributing in any sense to the description that the hon. Member for Epsom and Ewell attached to the process. It is not a bodged or rushed job.

With the greatest respect, which I hope I always show Opposition Members, they are asking me to decide things that are not within my remit, because I am not the regulator. It will not be the job of Ministers to determine the accounting rules either. They are perfectly fair, reasonable and legitimate questions, but sadly it is not within my remit to provide the level of detail for which I am asked.

The impact of private finance deals will be as the hon. Member for South Cambridgeshire described. The total amount of borrowing that underpins PFI deals will not score against the individual trust's prudential borrowing limit. Of course, that is not the case; it is not borrowing that money. Ultimately, it affects the borrowing limit that the regulator will set in relation to the trust, because it is financed through cash flows and the revenue that the trust receives for providing the services to the local primary care trust.

If someone applies for a mortgage, the lender—the building society—will want to know the level of their indebtedness from credit cards, other mortgages, alimony, divorce settlement payments or whatever, because that affects their ability to finance the debt. Exactly the same principle will apply to the way in which the prudential borrowing limit is set. Obviously, with regard to large-scale PFI deals—some involve hundreds of millions of pounds—it would be unfair and inappropriate for all that to score against an individual trust's borrowing limit immediately. That would quite often mean that it could never borrow anything else, which is clearly not our objective.

There has been another rehash of the argument about how all that scores against the Department's overall capital expenditure limits. The Conservative party has had some merriment with that. Ultimately, it comes down to one fundamental issue. I do not want to go through the whole argument again, because my feeling is that we have heard it on at least three occasions already. I take it from what is proposed, and from later amendments, that the Conservatives approach this issue from the proposition that no borrowing limit should be applied or, if they believe that a limit should be applied, they will have cobbled together some bizarre formula of their own to reflect it.

It is worth bearing in mind the points that I made in the previous debate, on clause 11. Of course, there must be some prudential approach to borrowing; otherwise, we might encourage financial failure, which is in no one's best interests. That is a basic point, but it needs to be made. We have tried, in drafting the legislation and in the way in which we intend to

distribute capital resources across the NHS, to ensure that one part is not robbing Peter to pay Paul. I concede that that is a difficult balance to get right, but we have tried very hard to do that. We have set out on numerous occasions, not least on Second Reading, how we feel that that is being done.

My final point on this matter is the obvious one. Perhaps this will be construed as a partisan point, but I hope not; it is worth making. We had exactly the same debate when the Conservative party established NHS trusts in the 1990 legislation. That party imposed a borrowing limit on NHS trusts, and it did so precisely because it accepted the logic of the argument that we are advancing. It is not possible within the concept, as we understand it, of a public service—we keep talking about a public service—to have the situation that the hon. Member for Epsom and Ewell proposes.

The hon. Gentleman has made fun of the rules and procedures that we have established, but his views are not borne out by a proper analysis of the Bill and do not take into account Ministers' repeated explanations about the way in which the rules will operate.

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

It was not clear from what the Minister said whether he was approaching the end of his remarks. I did not speak for long, nor did I repeat the points made by the hon. Member for Epsom and Ewell, but I asked a specific question. I believe that similar remarks were addressed to the Minister by the hon. Member for Birmingham, Hall Green.

What is the position about taking from Peter to pay Paul within the overall limit, as the Minister puts it? If not all trusts are in this position by the end of the three-year capital allocation, will there be an impact or will there be an impact anyway, because the three-year capital allocation is not the sum total and more will be set against?

The Minister must forgive me if he did not understand my questions. I tried to put them clearly and I should be happy to give further clarification if he requires it.

John Hutton (Labour, Barrow and Furness)

It is my view that I answered that point repeatedly in the earlier debate. The hon. Gentleman knows the overall position. There will not be a total capital limit available to NHS foundation trusts or to NHS trusts other than that covered by the Department's expenditure limit. I have made that clear repeatedly. It takes us back to the points that I made in relation to clause 3 and the duties that the Bill imposes on the regulator. It is not a beggar-my-neighbour approach, and I have tried repeatedly to make that point.

Eventually we come down to the basics here. Some perfectly reasonable questions have been asked about the way in which the rules will apply in detail. I have tried, within the limitations placed on me, to answer them as fairly as I can. There are some that I cannot answer, because they relate to decisions that the regulator or others must take. Of course we are in discussions with the applicants for foundation trust status to see how the rules might look and what the implications would be of determining prudential

borrowing limits for individual trusts. It is an important and delicate stage of the process. However, it is not fair to describe it as botched or rushed. It is important that those general principles are set out. We intend that the formulation of the code is transferred to the regulator. It will not be Ministers' job to determine it.

We are trying to be even-handed and to create a regime that contains additional financial flexibilities for foundation trusts, not only in relation to borrowing but also in the retention and use of revenue. Those are significant financial gains for NHS foundation trusts. Others will not, at this stage, be able to use those financial freedoms, because in the first wave not all acute trusts will become foundation trusts. That is axiomatic.

George Young (Conservative, North West Hampshire)

I am sorry to press the Minister, but it goes to the heart of the question posed by the hon. Member for Birmingham, Hall Green. If there are, as the Minister says, some gains for the foundation trusts, will there be some losses for the non-foundation trusts?

John Hutton (Labour, Barrow and Furness)

No, I do not think that that will be so. Crucially, the principal financial gain that we are talking about is the opportunity to avoid the bureaucracy of the current financial arrangements in the NHS and the requirement for every individual capital decision to involve someone higher up the chain saying yes. There will be financial freedoms over borrowing, which we have explored in some detail, but all those freedoms must operate within the overall settlement and framework that have been established for foundation trusts in the wider NHS.

George Young (Conservative, North West Hampshire)

If a foundation trust uses those freedoms and thereby borrows more than it would previously have been able to do, does that mean that a non-foundation trust will get less?

The rest of the debate is in Hansard.