Local Government Bill

Public Bill Committee, 28 January 2003.

Standing Committee A

Local Government Bill

Derek Conway (Conservative, Old Bexley and Sidcup)

I am sure that the Minister for Local Government and the Regions can think of no better way to mark his birthday than to be with us in Committee. I congratulate him and the hon. Member for Burton (Mrs. Dean) on a very special day. We will try to make it enjoyable for them.

Philip Hammond (Conservative, Runnymede and Weybridge)

On a point of order, Mr. Conway. You may have read speculation in the press about the possibility of a challenge by the Fire Brigades Union to the Government's proposal to bring forward in Committee an amendment repealing section 19 of the Fire Services Act 1947. I understand that the basis of that challenge would be that the Government failed to carry out the necessary adequate consultation before making legislative proposals.

One way to air the issues behind this particular legislative proposal adequately and thus perhaps to head off a judicial review challenge would be for adequate time to be provided in this Committee for the consideration of any proposed Government new clause. Have you had any approach from any members of the Committee about the possibility of reconvening the Programming Sub-Committee to ensure that adequate time is available to debate any such Government new clause? It would allow the Government to protect themselves against the charge of bringing forward measures that have not been adequately reviewed and considered.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Further to that point of order, Mr. Conway. I support what the hon. Member for Runnymede and Weybridge (Mr. Hammond) has said. The Programming Sub-Committee should meet to consider the point he makes. It is important that these matters are fully considered so that a judicial review can be headed off. May I further add that it would be helpful if the Government could table early any related new clauses so that they could be considered by the Committee and others outside it well before we debate them formally? While we suspect that the new clause will be simple, it should be before the House as early as possible.

Derek Conway (Conservative, Old Bexley and Sidcup)

Clearly what the courts do is not a matter for me in the Chair. However, I am sure that the usual channels will have noted what has been said. If there is request to reconvene the Programming Sub-Committee the Chair will co-operate with that.

Nick Raynsford (Labour, Greenwich and Woolwich)

Further to that point of order, Mr. Conway. First, may I thank you for your kind good wishes on this auspicious day? Secondly, as the Committee will be aware, the timetable for the Committee proceedings was announced in the full

knowledge that the Government intended to move the repeal of parts of section 19 of the Fire Brigades Act and that was certainly taken into account in the timetabling. The judicial proceedings, which we believe are unjustified and without merit, do not hinge on whether the Committee has sufficient time to debate the issue. I honestly do not believe that hon. Members' request for additional time to debate this would have any bearing on the judicial proceedings if they were to be countenanced.

Clause 4 - Imposition of borrowing limits

Derek Conway (Conservative, Old Bexley and Sidcup)

I remind the Committee that with this we are discussing the following amendments:

No. 28, in

clause 4, page 2, line 26, at end add

'and the allocation of a share in such aggregate limits to individual local authorities.'.

No. 7, in

clause 4, page 2, leave out from beginning of line 27 to end of line 2 on page 3 and insert—

'(2) No regulations may be made under this section unless—

(a) the Secretary of State has consulted such representatives of local government as appear to him to be appropriate;

(b) he has laid before each House of Parliament a report explaining the reasons why he considers it necessary that the regulations be made; and

(c) the report has been approved by resolutions of each House of Parliament.

(3) Sections 117(1) and (2) do not apply to regulations made under this section.'

No. 49, in

clause 4, page 2, line 27, leave out subsection (2).

No. 29, in

clause 4, page 2, line 28, leave out from 'authority' to end of line 29 and insert

'where he considers that the local authority has not, in setting a borrowing limit under section 3(1), had proper regard to the requirements of section 3(2).'.

No. 31, in

clause 4, page 2, line 31, at end insert—

'( ) A limit set under subsection (1) or (2) may not, in respect of any local authority, be set at a level less than the level of that local authority's borrowing on the date that the draft regulation is laid.'.

Philip Hammond (Conservative, Runnymede and Weybridge)

At this stage I shall not press the amendments. However, we will vote against the clause on stand part. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Derek Conway (Conservative, Old Bexley and Sidcup)

With this it will be convenient to discuss new clause 2—Imposition of borrowing limits (No. 2)—

'—.(1) The Secretary of State may by regulations set limits in relation to the borrowing of money by local authorities.

(2) The Secretary of State may only make regulations under subsection (1) if the Code for Fiscal Stability, as provided for in section 155 of the Finance Act 1998, would otherwise be breached in any way.

(3) Before the Secretary of State may make regulations under subsection (1), the Treasury must prepare and lay before Parliament a document which shall be subject to approval by a resolution of the House of Commons explaining how the Code for Fiscal Stability would otherwise be breached if limits were not set in relation to the borrowing of money by local authorities.

(4) It shall be the duty of the Comptroller and Auditor General to examine the Treasury's document published under subsection (3) and report to the House of Commons his findings.'.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

New clause 2 represents a much better approach than the Government's approach because it sets a much clearer description of the circumstances in which macro-economic reasons would trigger the Government's right to interfere in the borrowing of local authorities. As clause 4 stands, we do not know what those reasons might be, because subsection (1) says only that regulations will set guidelines for capping local authorities' borrowing for ''national economic reasons''.

''National economic reasons'' is a broad and vague term. We have had Ministers' assurances in the explanatory notes and in debates that that would be a long-stop and reserve power that would rarely be used, but we still do not know what the national economic reasons are. There has been no description or attempt to set criteria in debates, the explanatory notes or elsewhere, which seems odd. The term could cover many issues that are not necessarily relevant to borrowing. There may be economic reasons why the Government feel that they have to take some measures, but those economic reasons should be germane to the borrowing of local authorities.

That is why new clause 2 talks about the Government's own code for fiscal stability. It was provided for in the Finance Act 1998 and has been continually referred to in Budgets and pre-Budget reports. It sets out the objectives of fiscal policy and the rules by which those objectives will be met. In theory, they are binding on central Government, but, as Governments always do, they have given themselves an opt-out clause. However, the code is supposed to set the framework in which fiscal policy is to be delivered in the long term. For example, it requires the Treasury to make a long-term forecast of the fiscal position of UK plc and sets out whether the public finances are sustainable in different conditions. It has two rules that underpin the fiscal policy. There is the golden rule, which is that over the economic cycle the Government will borrow only to invest and not to fund current spending, and the sustainable investment rule, which relates to public sector net debt as a proportion of GDP.

My point is that the Government have an elaborate code and underpinning rules to direct their fiscal policy. A lot of analysis follows those rules, and it is logical that local authorities should fit into that framework. Their borrowing and fiscal actions must

be taken into account in the Government's determination of whether they are abiding by their rules and sticking to their code for fiscal stability.

New clause 2 would not use such broad, unspecified ''national economic reasons'' that do not relate to local authority borrowing, but instead take the Government's framework for fiscal policy and include local authorities' fiscal actions within it. I do not think that it is a particularly outrageous request from the Opposition for the Government to keep to their code for fiscal stability.

Philip Hammond (Conservative, Runnymede and Weybridge)

We are the Opposition.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman says that, but many people in the United Kingdom do not think that the Conservatives are a good Opposition and are instead looking to the Liberal Democrats to provide the opposition. I am grateful to him for giving me the chance to put that on the record.

The Government should accept new clause 2. It might mean that they have to treat local government with a little more respect. The Government's attitude to local authorities is that the Government should be able to set regulations when they decide that it is right, but they should treat local government with more respect and apply the same codes and rules to local government as they do to themselves. I therefore urge the Minister to reconsider.

Andrew Turner (Conservative, Isle of Wight)

I am interested in the hon. Gentleman's argument that the rules and codes that apply to the Government should also apply to local government. Will he accept that the money supply, for example, is within the control of the Government, so they should have some responsibility in respect of limiting local authority borrowing and expenditure?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

That is an interesting point, although we are in danger of going down the route of the debate that took place in the early 1980s between monetarists and neo-Keynesians about the real effects and causalities in respect of the money supply. I thought that that argument had been put to bed, and that most people did not believe that fiscal policy had a very big impact on the money supply but believed that monetary policy had by far the most significant effect. The hon. Gentleman may want to have a debate on macro-economic theory, but local authority borrowing and Government borrowing are a very small aspect of the overall money supply.

I was trying to say that the fiscal framework that is embedded in the code for stability takes all those issues into account. If the Government as a whole, local and central, stick by the code for fiscal stability, the theory is that there will not be the damaging side effects to which I think the hon. Gentleman alluded, so his point is covered whatever economic ideology he currently subscribes to.

I hope that the Minister will regard new clause 2 as helpful, because it specifically relates the Government's own policy to a point in the Bill at which it should be directed.

Philip Hammond (Conservative, Runnymede and Weybridge)

Yes, we are the Opposition and consistently so, unlike the Liberal Democrats, who

want to play at being an Opposition to the Government in England while at the same time propping up the Labour party in its minority Administrations in Scotland and Wales.

It is interesting to hear the hon. Gentleman dismiss so readily and easily the relevance of Government borrowing as a component of the money supply. That may be a warning that, if the Liberal Democrats were ever to get their hands anywhere near power, that component of the money supply would quickly run out of control.

I will comment on the Liberal Democrats' new clause 2, but I shall begin with clause 4 in general. This clause rumbles the Government. The original clause 4, which was in the draft Bill that went before the Select Committee on Transport, Local Government and the Regions, was an umbrella capital control power and perhaps more prescriptive than the existing situation. The much-quoted Mr. Travers told the Select Committee that

''the . . . legislation would indeed allow the Government to operate a very different capital control system, one similar to or even more controlled than the present one.''

The clause has two essential components. These are the ability of the Secretary of State by regulations to set limits for ''national economic reasons''—that rather curious term is undefined—and the power in subsection (2) to set by direction, without scrutiny, limits on the borrowing of individual authorities. In other words, the Government have retained power to get in at the front end to micro-manage and tell each authority what it can and cannot do. By virtue of having that reserve power to limit any authority's borrowing, the Government can in practice give authorities a clear steer about what they do and do not regard as acceptable in respect of their borrowing.

The Committee will remember that the Government resisted an amendment that would have limited their power under subsection (2) to cases in which the authority had not had sufficient regard to the specified codes of conduct and practice in setting its own borrowing limits. The Government have therefore made it clear that they want an unfettered discretionary power in dealing with individual local authorities to curb their activity and set limits for them.

The only legitimate area in which the Government should be concerned is the aggregate level of borrowing, because of the impact that that has on the overall fiscal and monetary macro-economic position.

The clause also raises more questions than it answers, because we have seen from the structure of subsection (1) that the Secretary of State, by regulations, would set borrowing limits for each authority. I therefore assume that an exhaustive list would be published of all authorities in the country, with a borrowing limit set for each. The purpose of that would not be the individual borrowing limits of each authority, but the macro-economic impact of the aggregate limit on borrowing by the local authority sector. However, the Minister has told us nothing

about how he would set the individual authority limits in such a situation.

How can Parliament be reassured that those limits will be set in an equitable way? Will the approach be based on a mechanical formula, with top-slicing of the self-imposed borrowing limits set under clause 3 by each authority, so that each authority would be limited to, for example, 75 or 80 per cent. of its borrowing limit?

I suspect, however, that the Minister will insist on retaining the micro-management power that will enable him to go down the list ticking off the good, the bad and the indifferent, and to set the limits according to ministerial whim. Let us hope that the limits are set on the Minister's birthday, when he might be in a good mood and might be expected to be generous to prudent authorities, rather than on one of his blacker days, when he might be tempted to display bias, the accusation of which must by now be so familiar to him that it is water off a duck's back.

Clause 4 introduces the curious notion of headroom and transfers between authorities, which we have not yet had the opportunity to debate. Having set debt caps on individual authorities, for the purpose of creating a limit on sectoral borrowing, the Government would then allow authorities to swap headroom, which, in effect, would create an internal market in borrowing capacity. Will the Minister comment on that?

I assume that it is envisaged that local authorities, for a limited period of time, would be able to sell their unused borrowing capacity to other authorities. That may sound slightly strange, but I know that that sort of thing has happened before. I was talking to a local authority a week or so ago, which had made a very nice turn in the 1980s and early 1990s by lending to Liverpool city council, when no other lender was willing to do so. Will the Minister explain how this internal market in debt capacity will work?

During a macro-economic crisis, in which the objective is to control total sectoral borrowing, is it sensible to envisage a system that imposes limits on individual local authorities, but then immediately opens up the opportunity for those authorities on whom the limit bites to acquire borrowing capacity from another authority—a prudent authority that has very low borrowing in relation to their ministerially set borrowing limit? There will be a tendency for the maximum borrowing limit set under the mechanism to become, through that transfer of headroom, a minimum borrowing level. Borrowing will tend to increase to the maximum permitted. That is perverse, because in a crisis where borrowing needs to be limited the objective would be to limit an individual authority's borrowing as the Minister directs—he has some discretion—and certainly not to encourage other authorities effectively to borrow or to allow borrowing against their unused capacity. I would be grateful if the Minister could clarify that point.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I have been closely following the hon. Gentleman's argument. I agree with him that the clause is fairly odious. Its one redeeming aspect is the ability to share unused borrowing capacity. It is the

only flexibility in the system, so I am surprised the hon. Gentleman speaks against it.

Philip Hammond (Conservative, Runnymede and Weybridge)

That depends how one views the use of the power under subsection (1). The Minister has told us that it would be used only in extremis in a national macro-economic emergency. In those circumstances it is curious to impose limits that almost certainly would not bite. There is a local authority sector debt. The Government seek to curb the growth of local authority borrowing—temporarily, I hope—for some external reason. If authorities on which the limit bites are able simply to acquire debt capacity from other authorities, the limit will not bite and the macro-economic objective will not have been achieved.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I may be misunderstanding the clause, but I thought that the limit set in subsection (1) was for the total of all local authorities' debt; and, therefore, if there was room within that limit that is where the arbitrage would take place.

Philip Hammond (Conservative, Runnymede and Weybridge)

We do not have a draft regulation because there is no suggestion that there will be any regulations under subsection (1). The Government rejected an amendment that sought to specify an aggregate limit and an allocation of that aggregate to individual local authorities. My understanding is that each local authority will be given a limit, but perhaps the Minister will correct me. If one sat down and did the arithmetic, that would produce an aggregate limit for local authority sector borrowing. But, given the ability to trade headroom, it is not clear that that would achieve the objective effectively, efficiently and quickly in the circumstances where it is right to use subsection (1)—that is, a serious monetary crisis. I look forward to the Minister's comments.

The general thrust of new clause 2 is similar to amendment No. 7, which requires the Government to define the national economic reasons. The Minister's courage clearly deserted him when he went to write ''crisis'' into the Bill. We have talked about a national economic crisis, but the Bill uses the word ''reasons'' instead.

I am not convinced that the code for fiscal stability has the relevance here on its own that the Liberal Democrats have written into new clause 2. I prefer the structure of amendment No. 7. I do not disagree with the hon. Gentleman's purposes, but the problem is that the test in subsections (2) and (3) of new clause 2 is that the code for fiscal stability would be breached if limits were not set in relation to the borrowing of money by local authorities. So many variables in terms of Government borrowing and fiscal activity would contribute to a breach of the code for fiscal stability that it would be a difficult test to satisfy that local authority borrowing had to be controlled in order not to do so. I suspect that it would never bite. Perhaps that is what the hon. Gentleman intends, and if so he will join us in voting against clause 4.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman suggests that it is the intention of new clause 2 to prevent any limit

biting on local authorities, even in the circumstances described, but it is not. The intention is to ensure that local authority borrowing is treated in the same way as other borrowing.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Gentleman clarifies the intention of the new clause, but the fact that it is being considered in a clause stand part debate suggests that parliamentary counsel views it as a wrecking proposal.

We are happy to reassert that we will vote against the clause and I hope that the hon. Gentleman will join us. Amendment No. 7 and new clause 2 attempt to highlight and reduce the odiousness of the clause, but it would be best to vote against it as it clearly signals the Government's determination to clutch at a reserve power, which is not compatible with genuine decentralisation; it is nothing to do with granting freedom and flexibility. As the hon. Member for Southport (Dr. Pugh) said at our last sitting, the test, which I shall apply throughout the Committee stage, is whether the Government propose to allow local authorities to do what the Government do not want them to do, rather than only what the Government want them to do. Do they propose to give local authorities partial freedom to do what the Government want them to do and to retain a reserve power to prevent them doing what the Government do not want them to do?

Chris Leslie (Labour, Shipley)

That is clear.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Gentleman is absolutely right. It is clear that it is the Government's intention to allow the local authorities freedom as long as they are doing what the Government want. When they think about doing what the Government do not want them to do, the reserve power is there to put them back on the Government-defined track. That is Government at their worst; dishonest about the purpose of the provision at the outset and shifty when rumbled. I hope that the Government will review the clause or, even better, at a later stage take into account at least the underlying intention of the amendments and properly scrutinise the regulations, for which there is no provision under subsections (1) and (2). If they do not do so, and unless the Minister makes a significant concession when he winds up the debate, I shall urge my hon. Friends to vote against the clause.

Nick Raynsford (Labour, Greenwich and Woolwich)

I shall do my utmost to retain my usual good humour, despite the monstrous travesties and hyperbole of the hon. Member for Runnymede and Weybridge, who sought to transform a modest safety net provision into a terrible, odious construct, which the Liberal Democrats find equally objectionable. I shall deal with both points of view.

New clause 2 is designed to replace clause 4(1), which would enable the Secretary of State to limit local authority borrowing if it was likely to exceed the nationally sustainable level. There are similarities between the new clause and amendment No. 7, which has been withdrawn, and links with the recommendation in paragraph 14 of the report on the draft Bill by the Transport, Local Government and the Regions Committee.

There should not be a statutory requirement for parliamentary approval before setting a national limit. If, in the unlikely hypothetical circumstances of a major financial crisis—we do not envisage such a crisis, especially while the economy continues to be as prudently managed as it is at present—it would not be appropriate for the Government to delay before taking the necessary corrective action. In any case, any action that the Government took in pursuance of their powers under clause 4(1) would be implementing policies on public expenditure that had already received parliamentary scrutiny. Nor do we believe that it is practical to specify in the Bill detailed methods for assessing national economic interests as new clause 2 proposes. We put in the reference to national economic interests in response to concerns voiced in the Select Committee to demonstrate our good will and that we will seek to use this measure only in those extreme circumstances.

Hon. Members will understand that one cannot anticipate the circumstances that may apply. Could anyone have imagined, other than in a Jeffrey Archer novel, the run of events that occurred at the time of this country's ejection from the exchange rate mechanism during the imprudent management of our affairs by Lord Lamont? Such circumstances could not have been anticipated—[Hon. Members: ''They were.'']—other than by someone with an extraordinary imagination. The total mismanagement of the economy and the extraordinary incompetence of senior members of the Government at that time are difficult to apprehend in today's more tranquil, rational and calm environment. But that happened. Therefore we should not anticipate that everything will continue for ever in the calm, measured, prudent form to which we are now accustomed thanks to the Government's good management of the economy.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am delighted that the Minister has spelled out to the Committee the folly of linking a currency inextricably to another currency that has a different set of underlying economic determinants. I hope that he will be casting his vote accordingly if and when the Prime Minister ever dares consult public opinion on making a yet more irrevocable link.

The Minister talked about the use of subsection (1) only in extremis; in serious national economic circumstances—a crisis.

Nick Raynsford (Labour, Greenwich and Woolwich)

Yes.

Philip Hammond (Conservative, Runnymede and Weybridge)

But the Bill does not say ''crisis'', as I mentioned earlier. It says ''national economic reasons''. Does the Minister have any advice, perhaps from counsel, that ''reasons'' means extreme or crisis reasons? The words that he has put into subsection (1) do not constrain the Government in any way.

Nick Raynsford (Labour, Greenwich and Woolwich)

If the hon. Gentleman feels that they do not constrain the Government he is not terribly experienced in the ways of the House. Anyone looking at the operation of these powers will question whether the national economic interest is such that it is necessary. That is a clear constraint because the Government have said that they will use these powers only for that purpose. I am not going to get

into textual analysis over whether ''national interests'' should be substituted with ''national crisis''; I feel that ''national interests'' is a better expression. I have already indicated that those are the circumstances where these exceptional powers might be used. I will turn to the code for fiscal responsibility in a moment.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Before the Minister was tempted into a debate on the European question, he said that one could not always envisage the circumstances, so he wanted to leave himself maximum flexibility. However, the code for fiscal stability allows for such flexibility. Paragraph 11 states:

''The Government may depart from its fiscal policy objectives and operating rules temporarily''.

The flexibility in the code for fiscal stability is why we put it into new clause 2. The only difference between our approaches is that the Minister always wants to distinguish between local government and central Government borrowing. He believes that central Government borrowing should always take precedence and no consideration should be given to local authority borrowing, which can be treated willy-nilly by Whitehall. We are trying to change that; that is why new clause 2 is proposed.

Derek Conway (Conservative, Old Bexley and Sidcup)

Before the Minister replies, I ask hon. Members to keep their interventions brief rather than making long speeches. The Committee system allows everyone to have their turn. It is quite warm in here, so if anyone wishes to remove their jacket that would be in order.

Nick Raynsford (Labour, Greenwich and Woolwich)

Thank you, Mr. Conway. I am delighted to hear the tributes of the hon. Member for Kingston and Surbiton to the code for fiscal responsibility and to the Chancellor's prudent management of the economy. We are delighted to agree with him on that. However, it lead me to suspect that Liberal Democrats are beginning to dream, in the memorable words of one of their former leaders, of going back to their constituencies to prepare for power, or perhaps it was the first shot in the hon. Gentleman's campaign for the deputy leadership of his party. I should not have such unworthy thoughts.

We are delighted that the hon. Gentleman welcomes the code for fiscal responsibility, but it would not be particularly helpful in this context. It lays down broad financial principles rather than dealing with the conditions that might apply in the extreme circumstances that I have described. I am also surprised that the new clause did not include any reference to the Audit Commission, which we would want to involve in consultations on any possible national limit, as it is the appropriate audit authority for local government. I hope that he will agree that the new clause is not useful.

As Members know, clause 4 gives the Government reserve powers to impose borrowing limits on authorities, which would override the affordable borrowing limits set by authorities under clause 3 in limited and exceptional circumstances. The first power is detailed in clause 4(1), which enables the Secretary of State to set borrowing limits for all authorities, but it can be exercised only for national economic reasons. As I said already, we inserted that in response to the

concerns expressed by the then Transport, Local Government and the Regions Committee. The clause reflects the policy of the White Paper ''Strong Local Leadership—Quality Public Services'' and the Welsh Assembly Government policy statement ''Freedom and Responsibility'', which is that the power should be used only if necessary to maintain public expenditure at nationally sustainable levels.

We hope that we will not need to set a national limit at the beginning of the system, but a sudden surge of borrowing could be prompted by the new prudential regime, which could create circumstances in which it could be felt necessary to do so. If we ever needed a national limit it would have to be imposed by regulations, on which we would fully consult local government. We will not draft regulations on a national limit unless and until they are required, but we are already discussing with local government representatives the possible general structure of such regulations, in case they are ever needed.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister just said that the creation of the prudential regime could lead to a surge of borrowing, which would require the imposition of limits. That suggests that he is looking at local authority borrowing in isolation and contemplating the use of the provision to impose limits because of aggregate local authority borrowing, rather than looking at the total macro-economic picture. Will he confirm that that is not true, and that limits would be imposed only if local authority borrowing were creating a problem as a component of the wider picture?

Nick Raynsford (Labour, Greenwich and Woolwich)

That is obviously implicit, because otherwise we would not have included the reference to the national economic interest. The hon. Gentleman is a thoughtful commentator on economic affairs, although at times he is a little obsessive on European issues—I did not rise to his challenge on that one—and I am sure that he will recognise that if local authorities, which account for a quarter of total public expenditure, were all borrowing large amounts simultaneously, they could have a disproportionate impact on overall national economic circumstances. I felt that it was right to mention that situation—but as I said, we do not envisage the circumstances meriting the imposition of a national limit at the beginning of the new system. I have said that we will consult local government, and we are already having preliminary discussions with local authorities to consider the type and general structure of regulations in case they are ever needed.

Clause 4(2) contains a second reserve power, which would enable the Secretary of State to set a limit on the borrowing of an individual authority. That could be used only for the purpose of ensuring that an authority does not borrow more than it can afford. Again, the power is a backstop that will be available only for extreme circumstances in which individual authorities are managing their affairs in such an imprudent way that, in the interests of their council tax payers and residents, Government intervention is necessary. There

have been a few highly publicised examples of irresponsible behaviour by one or two local authorities, which give the whole of local government a bad name, but I hope that we have established the fact that the Government want to work constructively with local authorities as a whole to ensure that those cases are dealt with expeditiously and do not recur.

In response to concerns expressed by local government, we have reflected in the Bill the policy in the White Paper and the policy statement. As I have said, the limit would be imposed by direction—in other words, a letter from the Secretary of State to the authority involved. That offers flexibility, enabling the limit to be tailored to the particular case, varied or removed quickly if circumstances change.

Clause 4(3) provides that any limits imposed by the Government, nationally or locally, can be different for different types of borrowing. We could therefore allow borrowing for certain purposes to be subject to less stringent constraints, or exempted from the limit entirely.

Philip Hammond (Conservative, Runnymede and Weybridge)

How does the Minister square that with the suggestion that limits under clause 4(1) are imposed only for macro-economic purposes, with regard to the aggregate level of local authority borrowing?

Nick Raynsford (Labour, Greenwich and Woolwich)

I am sure that the hon. Gentleman can envisage circumstances in which certain types of borrowing to promote national infrastructure, which is essential for economic development and prosperity, were regarded as overridingly important, and exemptions might be made as a result. Again, there is a degree of flexibility, which the hon. Member for Kingston and Surbiton rightly highlighted as important.

Flexibility is also important in relation to subsections (4) to (6). These deal with headroom, whereby authorities will be allowed the freedom to transfer borrowing capacity between themselves. Interestingly, the hon. Member for Runnymede and Weybridge asked whether there might be trading in headroom. We do not know whether there is any now. He may be aware that there is already a system whereby authorities can pass across unused borrowing limits within the current borrowing approval system. I do not know whether there is active trading. I think that it is mainly a question of voluntary agreements between local authorities whereby one exchanges this year's headroom in return for a transfer in the opposition direction in the coming year.

Such arrangements should continue to be available, because within the overall national limit, it would be perfectly reasonable for authorities to shift individual borrowing decisions provided that they did not breach the overall limit. That is where the headroom allows flexibility.

Andrew Turner (Conservative, Isle of Wight)

We certainly cannot blame the Government for not knowing the circumstances in which headroom may currently be traded. They cannot be expected to know everything. Indeed, it is better that they do not—but will the Minister help the Committee by telling us whether, where there is not a

reciprocal arrangement, the traded or transferred headroom might have a value that should have been taken account of by the transferring authority, and should therefore show up in some form of recompense to its ratepayers for the transferred value?

Nick Raynsford (Labour, Greenwich and Woolwich)

No; we are getting into the sort of detail that is best, and properly, left to local government. There should be flexibility so that if a local authority has, say, £3 million of spare borrowing capacity because it chooses not to borrow up to its set limit within the overall national limit, it can make that available to another authority. However, it should be left to local government to make such arrangements, without a national framework.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister says that he does not know whether trading in headroom goes on at the moment, but will he confirm that nothing in the Bill or the existing legislation prevents local authorities from obtaining monetary reward for releasing their headroom? Will he also explain how the transfer mechanism will work? Presumably, a local authority that transfers headroom will want to do so on a time-limited basis. Will the regulations provide for a specific structured form of releasing headroom for a period of time? If the borrowing authority defaults on returning the headroom—in other words, on reducing its debt on time—will the donor authority be penalised, or will it automatically be assumed to have reclaimed its headroom when it is contractually supposed to have done so?

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman asks two separate questions. The first is whether there is anything in the legislation to prevent trading in headroom. To the best of my knowledge, there is not. This simply enables the flexibility in the existing system that allows transfers of borrowing approvals between authorities to continue under the new system. If trading currently takes place—and I have told the Committee that I am not aware of any—there is no reason why that should not be extended under the new system.

The second question is about the auditing arrangements for keeping track of the process. The individual authority and its auditors will be responsible for ensuring that there are robust systems in place. The hon. Gentleman is correct to say that there will be a time factor, because borrowing approvals for authorities under the current system are limited for individual years, and under the new system, the authorities will set their own prudential limits for future years. They will therefore want to be satisfied about their capacity for future borrowing.

There will be a proper framework, but it will be determined at a local level rather than being set by the Government. I hope that hon. Members will not encourage the Government to become involved in that process, because that looks like the sort of micro-management that hon. Members complain about. That is very far from our intention.

Philip Hammond (Conservative, Runnymede and Weybridge)

I understand the point that the Minister made, and to some extent sympathise with it, but he cannot avoid being cast in that role. Subsection (5) states:

''The Secretary of State may by regulations make provision about the exercise of the right''

under subsection (4).

Therefore, the mechanism for the transfer of headroom must be defined in the regulations. If authority A were to transfer some headroom for a period of one year to authority B, would it be assumed that at the expiry of that one-year period, authority A had recovered that headroom, regardless of whether authority B had kept its side of the bargain and reduced its borrowing?

Nick Raynsford (Labour, Greenwich and Woolwich)

The whole purpose of the transfer of headroom is for authority A to make available its spare capacity for the current year to authority B in exchange for some benefit in a future year, such as making available an alternative degree of headroom. That agreement would need to be defined between the two authorities and confirmed by their auditors.

The hon. Gentleman is correct to say that there are regulation-making powers, and we will, after consultation with local government, set out broad parameters. We do not, however, intend to get into micro-management of that activity. The Government would not, and should not, be involved in that, because the overall effect would not be to increase total local government borrowing. As I said earlier, the arrangements are not dissimilar to those that exist under the present system for transfer of credit approvals.

The provisions are not odious, but are necessary as a prudent back-stop for a new system that will hugely extend the freedom available to local authorities. Local authorities will be able to borrow within a prudential framework, rather than being subject to borrowing control. They will take the decisions, and will be able to reflect their needs and circumstances by borrowing to meet those needs. That is a major advance, which local government welcomes.

I am sorry that the Opposition fail to recognise that that considerable extension of freedom to local government must be accompanied by limited safeguards to guard against extreme circumstances in which the exercise of those freedoms could create difficulties, either in terms of national economic management or the performance of a few local authorities. Those are no more than prudent safeguards, and I hope that hon. Members will not vote against them. If they do, I hope that the Committee will nevertheless confirm that clause 4 should stand part of the Bill.

Desmond Swayne (Conservative, New Forest West)

The clause is almost identical to the clause that appeared in the draft Bill, and it is that fact that has generated such strong representations to members of the Committee. I see from the agitated body language of many Government Members that they are as affected by those representations as we are. The answer proposed by my hon. Friend the Member for Runnymede and Weybridge is that we should vote against the clause. He is a wise man, but also a hard man in such respects.

I should like to offer the Minister an opportunity to try to draw the sting of the opposition that has been caused by the fact that the Bill contains that almost

unamended clause. The Minister described the ''prudent safeguards'' as being for extreme circumstances, and said that such provisions were unlikely to be used. Given the lack of anything in the Bill, would it not have been wise—indeed, he still has an opportunity to do this—to give the Committee an exposition of the extreme conditions in which the powers would be used.

The prudential tests that apply to borrowing will clearly not provide any great scope for increases in capital expenditure. Therefore the key to affordability for local authority capital investment will remain the level of Government funding for that. The Local Government Association pointed out that the debate takes place against the background of an expected paper from the Government on the future of Government support for local authority capital finance. I had not known that. Would it not be possible for the Minister to draw some of the sting of the opposition to the clause by sharing with the Committee some insight into the details of that expected Government paper on local authority capital finance?

Nick Raynsford (Labour, Greenwich and Woolwich)

Opposition Members' nice cop, nasty cop routine is a fascinating challenge to the normal stereotypes. I must tell the hon. Member for New Forest, West (Mr. Swayne) that I have already spelled out the extreme circumstances by describing the lamentable mismanagement of this country's economy by his noble Friend Lord Lamont a decade ago. I hope we will never return to that. As a prudent Government we have put these provisions in so that in the event of the country making a great mistake and ever again returning a Conservative Government there would at least be a safeguard.

Mr. Turner rose—

Mr. Hammond rose—

Nick Raynsford (Labour, Greenwich and Woolwich)

The ease with which one can get a rise out of the Opposition is extraordinary.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister may joke, but he has just said something very important. Is he ruling out the use of the power under section 4(1) for so long as his Government are in power?

Nick Raynsford (Labour, Greenwich and Woolwich)

No. I am saying that we do not at present envisage circumstances in which the power has to be used because the economy is being well and prudently managed. As a prudent Minister, I cannot possibly anticipate what is likely to happen in the foreseeable future if there were to be major upheavals in the world economy that affected this country. It is right that these powers should be there, but we do not envisage using them. We do not anticipate their need but we think it prudent to put them in the Bill.

Philip Hammond (Conservative, Runnymede and Weybridge)

Does the Minister regard a halving of the value of shares quoted on the London stock exchange over three years as being a serious economic circumstance?

Nick Raynsford (Labour, Greenwich and Woolwich)

It is a serious economic circumstance, but because the national finances have

been so well managed by the Chancellor, we are in a stronger position than almost any other country in the world to weather an international storm. The hon. Gentleman is well enough versed in the movements of stock exchanges to know that what is happening in London is not unique. He will see similar trends in Tokyo, New York and Frankfurt. But the British economy is more strongly placed to cope with that than almost any other economy in the world. We do not see a need to use these powers in the foreseeable future, but it is wise that they should be there.

The hon. Member for New Forest, West referred to drawing the sting out of the opposition. It may reflect my benign view of the world at the start of my 59th year, but it feels like a very minor prick by an irritating gnat.

Mr. Turner rose—

Nick Raynsford (Labour, Greenwich and Woolwich)

I give way to another hon. Gentleman.

Andrew Turner (Conservative, Isle of Wight)

I thought that the Minister was going to say another irritating gnat.

As the Minister is prepared to contemplate the possibility of a future Conservative Government, will he also contemplate whether his reassurances that the powers would be used only in circumstances that he might describe as a crisis would apply to a future Government? Is he legislating for his Government or for a future Government, who may have different views about the use of these powers?

Nick Raynsford (Labour, Greenwich and Woolwich)

I accept that, of course. I have already made it clear that we are legislating for the future, but in response to a question from the hon. Member for Runnymede and Weybridge I was happy to acknowledge that because of international factors such circumstances might arise in the lifetime of this Government. I am glad that I have given the hon. Member for Isle of Wight some comfort and that as a result of my remarks it is possible for him to contemplate a future Conservative Government. On that happy note, I urge the Committee to allow the clause to stand part of the Bill.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 15, Noes 8.

Clause 5 - Temporary borrowing

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 30, in

clause 5, page 3, line 8, after 'relates' insert

'and is reasonably expected to be received within that period.'.

This is a technical amendment. Clause 5 gives local authorities the power to make temporary borrowing arrangements for managing their in-year cash flow, which is a sensible provision. The limit for borrowing for such purposes is effectively any amount due to the authority within the period, which it has not yet received. A local authority's receivables at any given time will include sums of money that will in practice not be collected. Until the Minister tells us differently, I will assume that an in-year receivable will include housing revenue account arrears, council tax arrears from previous years and 100 per cent. of the council tax due in the current year. No authority collects 100 per cent. of its council tax and some have a lamentable record of collection.

If the clause is to achieve what it intends, the additional words in the amendment are required so that the limit would be set by reference to amounts receivable within the current period and reasonably expected to be received. For example, an authority that has historically collected 96 per cent. of the council tax due will be allowed to take into account only 96 per cent., not 100 per cent. That is a sensible way to approach borrowing for in-year cash-flow management purposes; it must be based on real, anticipated receipts, not nominally receivable amounts that in practice everyone understands will not be received in full. I hope that the Minister will accept the amendment or undertake to deal with the issue in another way.

John Pugh (Liberal Democrat, Southport)

I have a technical query. The Bill's aim is to achieve prudential management. I agree with Aristotle that prudence is difficult to define and circumstantial. As it is defined in the Bill, prudence is setting and keeping to an authorised limit. Conservative Members argued in a previous debate that prudence sometimes consists of keeping clear of that limit because capital programmes can go wrong, mistakes can occur and it is always as well to have something in reserve. However, in temporary and exceptional circumstances it might be prudent to exceed that authorised limit.

All of us, including CIPFA, accept that the Bill's goal is to attain long-term prudence. The amendment seeks a little precision in the authorised limit, which will be a firm, almost mathematical calculation, defined by a relationship between capital and revenue. The revenue base will include what is in the accounts and the money due, and we should consider what that means. Money due is not necessarily what the authority will get, but what it is legally entitled to.

My inquiry relates to the real world of local authority finance. Can money that may, for example, be subject to a negotiable bond be included, as well as

money due that is on the books? In circumstances in which a capital project has failed and a bond is to be negotiated, it will be contested in the court and arrive during the course of the year. Can a local authority reasonably include that as money due? Conversely, if there are contestable legal liabilities in the year, which the treasurer does not think will become due but which might do so, would they be included? I argue that they would not, because in the prevailing circumstances there is a strong element of over-programming, allowance for slippage and so on in local authorities. When financial issues hinge on legal issues that may be debated during the financial year, will the money be included in the money-due or the money-owed category?

Nick Raynsford (Labour, Greenwich and Woolwich)

Clause 5 is a welcome and flexible provision to enable authorities to borrow temporarily when faced with deficits in income due to late payment of items including council tax, for example. To meet urgent commitments such as salaries, local authorities need to borrow short-term. The clause ensures that the authorities' borrowing limits in clauses 3 or 4 are increased by payments due to them in the financial year that have not yet been received.

The amendment would add an unwelcome restriction. To increase the borrowing limit, the payment would not only have to be due but reasonably expected to be received in the current year. That would create two problems: first, the expression ''reasonably expected'' is vague and would add speculation to the process, possibly exposing the authority to a risk of litigation, particularly if litigious members of the public wanted to challenge the authority's financial management.

Secondly, there are timing difficulties. A payment becoming due in late March but not expected until early April, in the next financial year, would fall outside the provision, yet it is precisely in such a situation that the temporary borrowing capacity is crucial. The amendment is not helpful and it would not be welcomed by local government.

The hon. Member for Runnymede and Weybridge referred to local authorities having a lamentable record on council tax collection. However, the evidence is that local authorities are improving their collection rate, and we are seeing significant improvement throughout the country, even in the authority that, by universal agreement, had the most lamentable record. One and a half years ago, the London borough of Hackney had a collection rate of about 66 per cent., but I am told that it is now at 80 per cent. That is still far too low, but it is going in the right direction, which is a general trend in local government. I hope that the hon. Gentleman will give credit to local authorities for improving their collection rate.

Philip Hammond (Conservative, Runnymede and Weybridge)

I do not know what the Minister is waffling on about. I said that some local authorities have a lamentable council tax collection record. Frankly, I regard 80 per cent. as lamentable in the extreme, so there is not much to sing about in getting from 66 to 80 per cent. Other local authorities, including my own, have extremely good records, as

one would expect of a Conservative-controlled authority.

Nick Raynsford (Labour, Greenwich and Woolwich)

Like many other Labour authorities, my authority has an excellent collection rate, and we will not take any lessons from the Conservatives on that. I am sorry that I have got under the hon. Gentleman's skin this morning. I was making the point that in practice there has been demonstrable improvement in the collection rates, and even Hackney, which I openly said had a lamentable record, is improving. I do not deny that it has a long way to go, but it is moving in the right direction and should be welcomed.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Minister give way?

Nick Raynsford (Labour, Greenwich and Woolwich)

If the hon. Gentleman insists.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am sorry that the Minister is so churlish about giving way, but I want him to clarify something. Was I right in my assessment that a crude arrears of council tax or housing rents would be included in the amounts considered to be due in the period in calculating the borrowing limit? If so, the Government will be allowing local authorities cumulatively to borrow what they have failed to collect.

Nick Raynsford (Labour, Greenwich and Woolwich)

I was about to come on to the point about proper scrutiny and control of the use of the power to avoid abuse. Before I do so, I will refer to the contribution of the hon. Member for Southport. I understand his comments, but I hope that he will accept that we want to establish a flexible framework to assist local authorities to cope with the management of financial affairs without imposing unnecessarily restrictive provisions or too many details that could prove an obstacle to that flexibility.

John Pugh (Liberal Democrat, Southport)

Would it be reasonable for a local authority treasurer to take into account money to which he thinks that he has a fair, but not yet certain, legal title?

Nick Raynsford (Labour, Greenwich and Woolwich)

That would be a decision for that local authority, after being advised by the treasurer, and it would be subject to audit. I hope that the authority would take a sensible and prudent decision in those circumstances, rather than expecting an answer from the Minister. As the hon. Gentleman will recognise, we want to devolve greater power and decision making to local authorities. I know that he supports that objective.

On the safeguards, accounting principles applicable to local authorities require debts to be reviewed regularly and charges to be made to the revenue account for any that are considered bad or doubtful. The budgetary duty in turn requires the charges to be reflected in council tax. Therefore, a failure of the debtor to pay the council does not create an open-ended entitlement to borrow under the power. I accept that an authority might overestimate the extent to which it would collect council tax in one year and borrow under the power slightly more than it would reasonably be entitled to do because of that. However, that would be corrected in the following year, and the

borrowing would be kept under close and continuous monitoring through the framework that we want to see in place for the prudent management of local authorities' financial affairs.

Philip Hammond (Conservative, Runnymede and Weybridge)

I understand the Minister's comments, but there is no provision in the clause for estimating the percentage due to be collected. Let us take Hackney as an example. The Bill says that Hackney could borrow 100 per cent. of its due council tax receipts, even though experience tells it that it will collect only 80 per cent. I see nothing in the Bill to prevent that.

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman is making a mountain out of a molehill. This is not a long-term borrowing facility. It is a short-term facility to enable authorities to manage their cash flows. When a local authority takes such a decision, its chief finance officer will advise it as to what is prudent. Any chief finance officer aware of the history of Hackney's collection rate of council tax will not advise it to assume collection of 100 per cent. That would be extremely imprudent and I am sure that the auditors would have some robust comments to make on any such recommendation. I am confident that no such recommendation would be made. In the light of that explanation, I hope that the hon. Gentleman will not press his amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I did not table this amendment with any aggressive intention. It was simply to clarify the issue. My perception is that in attempting to shoot down the amendment the Minister has pointed to a number of problems. I am sure he is right that a prudent local authority would take all those considerations into account, but in addressing the last clause he has invited us to look at the case of the maverick imprudent local authority. He used Hackney as an example, at least in its past incarnations. But there is a concern that an authority could use the short-term borrowing provision to borrow money that in practice it was not going to receive during the period. In effect, it would then be using borrowing to finance revenue expenditure, which is not the Government's intention.

I take the Minister's point about prudent accounting practice requiring the writing off and charging to revenue accounts of uncollected amounts. In the local authority's accounts those amounts will be charged to a revenue account, but I take it that that does not mean that simply because an amount has been charged to a revenue account it is no longer collectable and enforceable against the debtor. I would expect a prudent local authority to charge to a revenue account an amount that had not been collected during the reasonable period in which it was supposed to be collected, but at the same time to continue to pursue the debtor. In that sense it would remain an amount due to the authority even though it had made appropriate provision for it in the revenue accounts.

The Minister said that the term ''reasonably expected'' was vague and incapable of precise interpretation. I frequently say in Committee that I am not a lawyer and I shall now say that I am not an accountant, but I would have thought that the term

''reasonably expected'' was the type of phrase that accountants regularly had to deal with in deciding how properly to treat an amount; whether it was reasonably expected to be received. That is not a telling charge against the amendment as drafted.

I accept, however, that the Minister has made a better argument in dealing with receipts at the year-end, where he is right that some receipts would not be received within the period. I merely hoped that the Minister would take on board the issue underlying the amendment and seek to deal with it in another way. He has not shown any sign of being persuaded that there is an issue to address. I am not going to press the amendment for various reasons, including the defect in relation to year-end that the Minister has pointed out, but I hope that he will consider tightening the clause before Report stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 5, as amended, ordered to stand part of the Bill.

Clause 6 - Protection of lenders

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Minister confirm that clause 6 merely reiterates the current state of the law following historic disasters that have befallen lenders?

Nick Raynsford (Labour, Greenwich and Woolwich)

I am pleased to give the assurance that the hon. Gentleman seeks and to reassure him that I will not get into a lengthy ramble through the delights of Allerdale, Hammersmith and Fulham, interest rate swaps and all the other arcane issues of local government finance. As he identifies, the provision provides a safe harbour as per existing arrangements.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.

Clause 7 - Credit arrangements

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I beg to move amendment No. 50, in

clause 7, page 3, line 22 at end insert—

'(c) the transaction is related to a 'private finance initiative' or a 'public-private partnership.'.

Derek Conway (Conservative, Old Bexley and Sidcup)

With this it will be convenient to discuss amendment No. 32, in

clause 7, page 3, line 36, at end add—

'( ) The Secretary of State shall lay regulations before Parliament within 30 days of the coming into force of this section providing for liabilities under Private Finance Initiative contracts to be apportioned so that, where appropriate, a part of those liabilities are to be treated as a credit arrangement.'.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Amendment No. 50 would ensure that, when the Government set the rules for credit arrangements for local authorities, PFIs and PPPs are on a level playing field with other credit arrangements. Having re-read the amendment, I can see that it may have one or two technical defects, which I am sure that the Minister will bring to the

Committee's attention and for which I apologise. If there are technical defects, perhaps he will explain how we can get the amendment right. The intention behind it was certainly to try to ensure a level playing field for local authorities as they consider the different options.

In the past, there has not been a level playing field. Many local authorities have been forced down the PFI route, in two main ways. First, PFI credits have been given special revenue support. The Government have encouraged local authorities to go down the PFI route by making extra money available on the revenue grant side. In addition, before the regime that is being put in place by the Bill, PFI borrowing was the only game in town for many authorities. They had no other option. In the past, therefore, PFI has been given special treatment.

As I have implied and the Minister will say, the Bill goes some way towards levelling the playing field. The prudential capital regime will give local authorities an alternative, but we do not yet know whether there will be a real level playing field. As far as we know, even under the Bill there may well still be some special treatment for PFI borrowing. Let me explain exactly what I mean.

First, as the hon. Member for New Forest, West said earlier, repeating a point made during our first sitting, we do not yet know what the revenue support regime for capital borrowings will be. The Minister said that we would know later this year, but my guess is that, when we receive that information, we will see that PFI borrowing will still receive special revenue support. He may want to take this opportunity to say that that will not be the case and that there will be a level playing field in respect of revenue support for all types of capital borrowing. If so, that will be news indeed, but I suspect that the discrimination in favour of PFI borrowing as opposed to other routes will remain.

Unless we make some reference to PFI and PPP in clause 7, there is a clear danger that PFI will benefit, because its arrangements apply not only to the purchase of capital assets, but to the related management services. There is a danger that PFI will again receive beneficial treatment.

The Liberal Democrats are not the only people suggesting that that is the wrong way to do things. The Government, in talking about capital investment and PPPs in chapter 4 of the White Paper, say:

''The capital finance system itself should be neutral as to the form of procurement adopted and should ensure that authorities' purchasing strategies are based solely on considerations of best value.''

Of course, the next paragraph contains a ''however''. It says that the Government still want to give special treatment to PFI, although they set out the principle that, in theory, there should be no difference in the way that capital and revenue regimes treat different forms of capital finance in respect of procurement.

The Audit Commission backed that up in a report that was published only last week. It considered the history of PFI in local authorities, particularly in respect of schools, and showed that PFI did not merit the special treatment that it was being given. Indeed,

the report recommended that we should move away from that system. It is particularly relevant to the debate because PFI in schools represents the largest proportion of PFI in local authorities. The report states:

''In England, schools account by value for one-third of the total local government PFI commitment and are the single biggest component.''

We should take the experience of PFI in schools and local authorities extremely seriously. Having looked at the history of PFI in schools and local authorities, the Audit Commission suggests that the PFI approach should be changed. It does not say that PFI should be abandoned. That is not the position of the Liberal Democrats either. The report says, however, that all procurement options should be treated in the same way by the financial regime.

Paragraph 66 of the report says:

''Although all procurement options are technically open to LEAs, the practical barrier is the lack of an even financial playing field. It is time to review this lack of parity, particularly in light of the imminent introduction of prudential borrowing guidelines for local authorities and the concerted efforts being made to introduce new forms of PPP.''

The report talks about opening up the option so that there is no discrimination. There we have it. The prime audit body for local authorities, as the Minister reminded us earlier, recommends that we should level up the playing field. While amendment No. 50 may not do that exactly, that is its intention.

This is an important debate, coming so soon after the Audit Commission's report, which referred directly to the clause. We have the chance to implement what it recommends for local authorities. I hope that the Under-Secretary will take the debate seriously. If he is not willing to accept the amendment because of its technical weaknesses, I hope that he can give us an assurance that, having considered the report and the debate, the Government will table amendments to ensure that the discrimination in the system in favour of the PFI is removed. Local authorities could then have the whole range of procurement options open to them in an even way and would not be forced down a particular route, which, as the report says, often may not be the best value for money.

Philip Hammond (Conservative, Runnymede and Weybridge)

Amendments No. 32 and 50 amendments seek to address the PFI exemption, if we can call it that, from the limits. Amendment No. 50 seeks to include all PFIs as credit arrangements. We have approached the issue in a slightly different way, but the intention is clearly the same. Amendment No. 32 is linked to amendment No. 36, to which we will come later. Amendment No. 36 would remove the power that the Secretary of State has under clause 8(4), which has been used to lay draft regulation 7(3)—the regulation that effectively exempts PFI contracts from this process.

We have sought to analyse what a PFI contract is and to identify the fact that often one part of it will effectively be the procurement of a capital asset and another will be the provision of a service. If we are to

see through the structures that are put in place and look at the fundamental transaction, we must see a PFI arrangement as being a credit arrangement for the provision of an asset and then a services contract on top of that. Amendment No. 32 seeks to identify the part of the liability that is akin to a credit arrangement for a capital asset, and to treat it as being on a level playing field with other credit arrangements in terms of borrowing limits. However, it would allow the part of the PFI contract that represents the fee for the provision of services to be treated as a separate matter outside the constraints of the capital borrowing regime.

The problem with the approach proposed by the Liberal Democrats is that, by including the whole of the PFI arrangement within the areas to be taken into account in calculating the use of borrowing limits, there would be a danger of catching something that should not be caught—the provision of a service. For example, in a PFI contract for a building, the capital cost of the building element should properly be caught, but the provision of maintenance and support and security services should not. That latter element should be treated as more akin to revenue expenditure.

We accept, as the hon. Member for Kingston and Surbiton suggested, that it is wrong for local authorities to be pushed into particular forms of transactions because of the arbitrary exclusion of PFI liabilities from the calculation, but we believe that the solution is to divide the PFI liabilities into two separate component parts and to take into account the part that is similar in nature to a capital transaction. Draft regulation 7(3) would exempt PFI from the restriction on the use of credit for the provision of services, but would not address the capital element that might exist in a PFI contract.

A further concern that should be addressed in considering the clause is the apparent assumption that all leases are equivalent to liabilities. On the face of it, a lease is a liability, but it is possible that the asset has an offsetting value. An example would be a local authority that has a 20-year lease on a building that it partly occupies itself, but partly rents to a major supermarket chain. The whole cost to the authority of that lease over time should not be treated as a net liability. It is a gross liability, but it is offset by a net asset, in terms of the rolled-up stream of income that will be generated from the part of the building that is sub-let. I am not sure that the arrangements proposed by the Under-Secretary cover that, because they seem to me to treat the lease of all assets, including buildings, as a future liability to be rolled up and capitalised at the outset.

I would also like the hon. Gentleman to address the way in which the Bill proposes to treat PFI deals. The proposal would not only mean that PFI deals would be excluded from the capital controls but also, in practice, allow the hypothecation of a revenue stream in preference to the general creditors of the local authority for the provision of that capital asset.

Great play has been made elsewhere of the continuation of the arrangements whereby all local authority debt ranks pari passu. However, by financing an asset such as a building through PFI,

and thus making payments for the use of that building—not repayment of debt as would be the case if the money had been borrowed, but the payment of a service fee under a PFI contract—that obligation is ranked ahead of payments to other unsecured creditors of the local authority. That is important because, as the hon. Member for Kingston and Surbiton pointed out in another context, it is driving local authorities towards entering into certain forms of transaction rather than others. We believe that the Government should be neutral about the form that the transactions take.

I look forward to hearing the Under-Secretary's detailed analysis of why the clause is necessary. Everyone recognises the significance of PFI transactions and the use to which local authorities can put them, but the Committee is concerned about local authorities being steered in the direction of one type of transaction rather than another that would possibly not be in their best interest, if it were not for an artificial incentive provided by the clause.

Chris Leslie (Labour, Shipley)

Amendments Nos. 32 and 50 would amend clause 7, which deals with the definition of credit arrangements. It should not be forgotten that there is also the context of the affordability test for the prudential borrowing regime. In both cases, the concern is with the treatment of contracts under the private finance initiative.

Amendment No. 32 seeks to ensure that such contracts are included in the definition, and amendment No. 50 would classify all public-private partnership contracts and PFIs as credit arrangements. The hon. Member for Kingston and Surbiton, in his usual modest way, did down the technical efficiency of his amendment No. 50, and it is true that terms in the amendment—PFI and PPP—would have to be defined, probably lengthening the Bill.

Putting that to one side, the amendments are unnecessary and at odds with the strategy of clause 7. The Government's intention is to rely as far as possible on current accounting practice to determine what does and does not count as a credit arrangement. In the case of PFI, that means that a contract will be treated as a credit arrangement only to the extent that it has to be shown on the local authority's balance sheet. There is a test related to that, and that in turn depends on the degree to which risk is transferred to the private sector partner. Such an approach gives authorities an incentive to achieve a significant level of risk transfer when negotiating such contracts, and it may mean that some issues relating to how PFI will be treated will have to be clarified, as under the present system, but that can be best done in regulations. There is no need to refer explicitly to PFI in the Bill.

The hon. Member for Kingston and Surbiton mentioned the Audit Commission and its study into PFI in particular schools. I understand that that survey related to 17 pathfinder projects, since when we have had a further 500 or so PFI arrangements for schools. A lot of lessons have been learned from the 17 projects and the Audit Commission report, and I am confident that the new PFI arrangements have responded to the points that were highlighted.

I also believe that the new prudential regime will not force authorities down one route or another. It will give them the opportunity to consider not only PFI but other capital financing arrangements, and I assure the Committee that the credit arrangement clauses, and the new prudential borrowing regime in general, are about giving more flexibility and choice to local authorities.

Philip Hammond (Conservative, Runnymede and Weybridge)

If I understand the Under-Secretary correctly, he is saying that amendment No. 32 is unnecessary because subsection (2) provides for the apportionment of the cost of the PFI contract as an item that is a liability on the balance sheet and an item that is not. If so, will he make that explicit and, perhaps by using an example, show how that will work?

Chris Leslie (Labour, Shipley)

This is the crux of the hon. Gentleman's argument in tabling the amendment. He seeks to split every PFI contract rigidly into the service and capital components. The best way to do that is to use the current accounting practice mechanism. Certainly in some cases when the balance sheet test is applied there are opportunities to have a separable component, such as when the service elements operate independently from the asset arrangements. I may be able to find specific examples at a later date. I am sure that the hon. Gentleman can think of some.

I do not believe that it is easy as simply drawing that line down the middle of a long-term contractual arrangement. Current accounting practices look at the treatment of the whole of the contract and the extent to which risk is transferred to the private sector. Obviously, if the liability remains in the whole on the local authority, it will be classed as on balance sheet. There are plenty of circumstances where the treatment would be off balance sheet if the risk and the liability were similarly transferred to the private sector. I do not believe that a rigid approach requiring the separation in every case is necessary.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am trying to follow the hon. Gentleman. I think that he is saying that it is not an apportionment but an either/or, based on an assessment of where the balance of the liability of the contract lies. Is he therefore saying—if he is, I confess that I have not understood this—that where a PFI contract relates primarily to the provision of the capital asset and, on current accounting practices, is deemed to be a liability that needs to be shown on the balance sheet, the whole of it is to be treated as a credit arrangement for the purposes of the clause?

Chris Leslie (Labour, Shipley)

That may well be the case. The point about the provisions that we have set out is to give flexibility so that current accounting practices can in some circumstances see a PFI arrangement as being on balance sheet and in others as off balance sheet. Many of those variables depend on who is bearing the variation in the profits or losses related to the property concerned. For example, does the purchaser have access to be benefits of the property and, similarly, to exposure to the risks inherent in those benefits? Does the purchaser—the local authority—have liability to make payments to cover the costs of the property?

Those are the issues that are considered in the balance sheet test. I believe that those accounting practices are the best ones to follow. They certainly ensure that each contract is treated on its merits.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I do not think that any member of the Committee will have problems with normal accounting practices being applied in the way that the Under-Secretary described. He will know, however, that the clause provides regulation-making powers to spell out some of the details. That may be appropriate in view of the flexibility involved. However, I want to direct him to the core of my remarks. Will those regulations be drawn in such a way that PFI approaches have no extra benefit compared with other procurement options?

Chris Leslie (Labour, Shipley)

Because we will not have the credit approval system under the new prudential borrowing regime, I do not believe that the current level of restriction will apply in future. We are in the process of drawing up the regulations in respect of the revenue provisions of capital. Those announcements will have to be made in due course. There are particularly good reasons in many cases to give an incentive for authorities to consider and look at PFI as a way of transferring risk, but also ensuring swifter delivery of a result that may be desirable for that area. In designing the arrangements, we do not want to exclude the possibility that we will want to look more favourably at supporting PFI arrangements.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Minister gave the clarification that I was about to seek. Is he therefore confirming that the Government are minded to give special treatment to PFI for local authorities in future?

Chris Leslie (Labour, Shipley)

That is not necessarily the case. As far as possible we want to leave it to local authorities to take decisions on the contracts that they wish to enter into. The purpose of the set of clauses is to let go of the central controlling arrangement and to allow local authorities wider choices and more options in borrowing to benefit local people. PFI is one option in achieving that aim. The Government may highlight the benefits and virtues of a particular route, but the route that the local authorities choose to take is a matter for them.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister talks about choice for local authorities. Could a local authority that was at its borrowing limit and therefore could not borrow to finance a project execute that same project by means of PFI? That is the litmus test of whether the system that the Government propose is biased in favour of PFI.

Chris Leslie (Labour, Shipley)

I understand the hon. Gentleman's point. The clause will ensure that where the liabilities rest on the local authority through a PFI contract, they should be treated as credit arrangements and in turn be subjected to the affordability test in terms of their financing, just as ordinary borrowing would be. If a PFI arrangement is to be regarded as on balance sheet it will have to come within the local authority's affordability envelope. However, there may be circumstances in which a PFI arrangement transfers risk and liability to the private sector and thus it may

be outwith the definition of a credit arrangement. In that situation the limit would not apply. I hope that is helpful.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister is trying to be helpful and I am genuinely trying to understand him. Is he saying that in accordance with good accounting practice there is never a circumstance in which it would be appropriate to treat a single transaction as being made up of more than one component, one part of which might be treated as a liability carried on the balance sheet, for example, and another part treated in another way? The assumption that that might sometimes be the case was the reason for tabling amendment No. 32.

Chris Leslie (Labour, Shipley)

No, I am not saying that. In some contracts there may be separable components in respect of service elements operating independently from the asset arrangements. I draw the hon. Gentleman's attention to accounting practice FRS 5, application note F, which has a section about the circumstances in which contracts might be regarded as separable.

The hon. Gentleman made two points about leases and asked whether a lease's sub-lease could offset the liability. I am not entirely clear about that, although I suspect that the balance sheet test would also apply, and in some circumstances they too could be separable. If I am wrong, I shall write to the hon. Gentleman about it.

As to the hypothecation of a revenue stream with preference for a particular creditor, I would regard those as unusual circumstances where the council had more, rather than less, liability under that arrangement. The issue would rest on the level of risk transfer that was undertaken in respect of the person providing the contract. It would depend on what would happen if there were a default and on who would first bear the cost of remedying that default. If the hon. Gentleman wishes to pursue the issue, I will write to him.

I hope that the hon. Gentleman will accept my reassurances about the clause and withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I have listened carefully to the Minister and think that perhaps a little light is being shed on the matter. I liked the fact that the Minister appeared to be saying that what is proposed follows good accounting practice, and if a liability has to be carried on the balance sheet under good accounting practice it should be treated as a credit arrangement for the purposes of looking at compliance with borrowing limits. That seems to be sensible. However, I am not sure why the provisions are in the Bill; I thought that its general architecture supported the idea that accounting practices will prevail unless it is specified to the contrary. If we are all so keen to follow good accounting practices, I wonder why the Secretary of State needs powers to define something in subsection (2)(b), for example, rather than leaving it to accounting practice to ensure that things are treated as they should be.

The Minister has persuaded me that amendment No. 32 is probably unnecessary. I shall leave it to the

hon. Member for Kingston and Surbiton to talk about amendment No. 50. The Minister has not persuaded me that clause 7 is necessary. In demolishing the argument for amendment No. 32 he also demolished the argument for clause 7, as he made a good case for relying on standard accounting practice.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I agree with the hon. Gentleman that this has been a useful debate and that the Under-Secretary has been helpful in explaining some of the Government's thinking on the matter. However, I am disturbed by some of his remarks, as it seems to be the Government's intention to retain bias towards PFI in the system. The Under-Secretary was not explicit, but he said that when the Government eventually publish their thinking on revenue support for capital finance in local authorities they may decide to give extra support for PFI borrowing. Many people outside the House will be concerned that the Government are taking that route, despite the evidence from the Audit Commission and others.

The Under-Secretary referred to the first 17 schools, but the report, which is very authoritative, considers the matter in detail. It looks at the PFI experiments and new school buildings across the piece, comparing PFI with more traditional options. Although the conclusion omits the fact that as the experience of using PFI in schools continues, lessons will be learned and the practice will improve, its recommendations are clear: it wants barriers and restrictions to other forms of borrowing removed so that there is a level playing field. The thrust of the Minister's remarks was that the Government would not adopt that proposal. While the hon. Member for Runnymede and Weybridge was speaking, I read the notes on regulation 7, which state that

''the Government still wishes to encourage the use of Private Finance Initiative contracts, where they represent best value. PFI contracts are credit arrangements which provide the authority not only with a capital asset but also with associated services.''

That suggests that the Government are keen to give PFI special treatment. I accept that amendment No. 50 would not get rid of that special treatment, but this has been a useful debate to tease out the latest Government thinking on the matter. I will not divide the Committee on the amendment, as we will return to the issue. It worries many people, especially when the Government are not following the Audit Commission's recommendations. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Philip Hammond (Conservative, Runnymede and Weybridge)

Two issues remain outstanding. While the hon. Member for Kingston and Surbiton was speaking, I was looking at the notes to regulation 3, which slightly undermine the Minister's remarks. It is disappointing, Mr. Conway, that the Minister does not have the explanatory notes to his own regulations. I will be happy to give him a copy when I have finished referring to them. The thrust of what he was saying is that standard accounting practice should determine how the capital controls

provisions are implemented. The notes to regulation 3 specify that all property leases will be included

''within the definition of 'credit arrangements' ''.

They continue:

''although many leases would be caught automatically by''

the test of proper accounting practices,

''not all have to be shown in the balance sheet. The regulation therefore ensures that leases of any kind are taken into account for the purposes of the authority's prudential limit [clause 3] and any limits that might be imposed by the Government [clause 4]''.

Given that the general thrust is to go with the flow of proper accounting practices, the Minister will have to explain why in his draft regulation he proposes to include all property leases within the scope of credit arrangements. That only highlights the issue we have been debating, because it will create a perverse incentive to organise the supply of operational buildings by way of PFI contracts that may not otherwise be in the local authority's best interests.

Bear in mind, Mr. Conway, that typically an operational building will have a long life, and even a prudent authority might question whether it wants a lease of 20 or 25 years chewing up a chunk of its borrowing limit. If it were to enter a PFI-type transaction, as I understand the Minister, that might not fall to be counted against that borrowing limit. We need an explanation from the Minister as to why property liabilities have been determined by the draft regulation to be counted always as a credit arrangement.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman may have a point, if I have understood him correctly. Is he saying that with the new regulations the leases to which he refers will be treated differently from the way they were treated previously and therefore the incentive to use PFI for the provision of buildings will increase?

Philip Hammond (Conservative, Runnymede and Weybridge)

That must be the import of the notes. They say:

''although many leases would be caught automatically . . . not all have to be shown in the balance sheet''.

It is for the Minister to tell us how this proposed treatment relates to the current treatment. It would be useful to the Committee if he could clarify that. My interpretation is that this is a decision by the Government to ensure that all property leases are included as credit arrangements.

I raise the second issue in the spirit of a Committee scrutinising the fine detail of a Bill. Local authorities unhappy about the controls imposed on them might not thank me for raising the question whether a loophole is inadvertently being created, but it is our duty as Committee members to look for anything that may have slipped past the Minister's eagle eyes.

If the Government's intention through the clause and the inclusion of credit arrangements is to avoid creating an alternative to borrowing against the prudential limit, is the Minister sure that he has not inadvertently created a loophole in subsection (3)(b)? It excludes from the definition of a qualifying liability

''a liability in respect of which the date for performance is less than 12 months after the date on which the transaction giving rise to the liability is entered into''.

I invite the Under-Secretary to consider the transaction for the leasing of an asset such as a motor vehicle over three years. If I understand subsection (3)(b) correctly, the liability for borrowing purposes will be taken to be only the second and third years' payments under the credit arrangement, not the first year's payments. Let us say that the vehicle is a refuse collection vehicle and the authority borrowed to buy it—if there are any local authorities that still collect their own refuse. The whole of the borrowing cost would fall to be counted against the borrowing limit.

I believe that a creative local authority treasurer might be able to use the exclusion—I understand the reason for it—of the portion of the liability that falls due in the current period. That would generally be treated differently on the balance sheet, but it potentially opens up a loophole, and I should be grateful for the Under-Secretary's observations.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The great thing about a clause stand part debate is that it is a process and we can catch up on ourselves. Since I last spoke, I have been studying more carefully some of the regulations that apply to the clause, and I have noticed—perhaps I should have noticed earlier—that regulation 7(3), which is in draft form, clearly specifies that private finance initiatives will be treated differently. Although the explanatory notes say that the exemption is currently in operation, regulation 7(3) continues it, which confirms the fear that I expressed earlier that the clause and the regulations created by it will embed the bias towards PFIs.

Many of us share that concern. We openly agree that flexible credit arrangements and a range of options for local authorities are needed. Those freedoms are needed, but if they involve a residual control or a residual direction where there is a clear financial benefit as between one option and another, the Government are not giving local authorities real, meaningful freedoms and they are going against the experience and analysis of bodies such as the Audit Commission.

I hope that the Under-Secretary will say that the Government will go away and reconsider that point. I hope that they will admit that the prudential capital regime that they are establishing is not sufficient to level the playing field and that they are indeed deliberately retaining the discretion to benefit PFI.

Chris Leslie (Labour, Shipley)

The hon. Member for Runnymede and Weybridge raised a number of specific points. He smiled at the fact that there was no notice of them and that that was an interesting way of putting the Minister on his mettle. As I try to answer those points, he may well be proved right, but I will try my best to give him answers.

First, however, let me put the clause in context. As I have said, it deals with credit arrangements, a term that has been used since 1990. It may be helpful if I say something about the history. Before 1990, more basic capital finance controls were in force. These regulated capital expenditure financed by borrowing, but

authorities found other ways to access capital assets, and many authorities obtained buildings and other property by leasing. Another popular device was the so-called deferred purchase agreement, a sort of hire-purchase scheme for buildings. At that time, those transactions were outside the capital controls. Therefore, when the present capital finance system was introduced in 1990, one of the main aims was to place borrowing and other sorts of credit on an equal footing, and that was done effectively, although in a highly complex way.

Leasing and all other forms of long-term credit are now covered by the term ''credit agreement'', and any authority entering into a credit agreement must work out the total amount that it will pay throughout the whole contract. The lump sum is then treated notionally as if it were being borrowed now and so, as with actual borrowing, the credit arrangement is controlled by the number of credit approvals issued to the authority by the Government.

The experience of the 1980s shows that we cannot regulate borrowing alone. Authorities' financial performance is generally far more responsible and professional than in those days, and it is that achievement that makes it right for us to offer them the new freedoms contained in the Bill. However, if we focus only on borrowing, we will undermine the safeguards provided for in clauses 3 and 4. The references in those clauses to borrowing limits must therefore be extended to cover credit as well.

Clause 7 sets the scene for that, by preserving the idea of a credit arrangement, but greatly simplifies the definition. We have taken that simplification still further since the Bill was first issued for consultation. That was possible because the local government accounting framework has itself become more robust since 1990, and any transaction with the same effect as borrowing will generally be treated in the accounts as if it were borrowing. That means that we can safely dispense with the cumbersome definitions contained in the 1990 legislation and instead can rely mainly on accounting concepts.

A credit arrangement is therefore defined in clause 7(2) and 7(3) as a transaction giving rise to a long-term liability in accordance with proper practices. ''Long term'' means 12 months or more, and the expression ''proper practices'' has the meaning given in clause 21(2).

The hon. Member for Runnymede and Weybridge raised several specific points. With regard to leases, he highlighted concerns about the notes on regulation 3. It is true that there are specific regulations covering leases, but those should be put in the context of the other regulations. The hon. Member for Kingston and Surbiton, on closer scrutiny, discovered that paragraph (3) of regulation 7 provides for specific accounting arrangements with regard to PFI, and I believe that those go some way towards answering the point made by the hon. Member for Runnymede and Weybridge. He might regard those arrangements as PFI, but we view them as leasing.

Philip Hammond (Conservative, Runnymede and Weybridge)

Paragraph (3) of regulation 7 deals specifically with the prohibition on borrowing to

finance revenue expenditure on service provision, and allows a PFI contract even if it might otherwise be treated as borrowing for those purposes. That regulation does not address the need to include a specific provision in regulation 3 stating that a lease of a property should always be treated as a liability, regardless of whether good accounting practice would require it to be treated as such. That cross cuts to the earlier question that I put to the Minister for Local Government and the Regions and to which he replied, about a situation in which a local authority had a liability under a lease, but also had an offsetting income stream, if, for example, part of the property was sub-let. It appears to me that regulation 3 automatically requires that the liability be treated against the authority's capital borrowing limits. That would not necessarily accord with good accounting practice.

Chris Leslie (Labour, Shipley)

No. I endeavoured to explain earlier that that was not the case. Some property leases may not necessarily score as on the balance sheet, but we do wish the system to cover all leases, as it does now, to avoid any perverse incentives that might arise and lead a local authority to think that leasing was a worthwhile activity over and above the other areas that were proper for it to undertake. The only test that we want to see is the value-for-money test, which is included. That is why we have covered all leases in the regulations.

The hon. Gentleman also asked whether a loophole might exist in regulation 7(3)(b) about, for example, the purchasing of a vehicle juxtaposed with the borrowing of a vehicle. Regulations will ensure that short leases that are expected to be renewed will be treated as long-term leases. Indeed, parallel provisions in regulation 6, which concerns options, work to close down loopholes and the treatment of various undertakings that might try to circumvent issues in another way.

Philip Hammond (Conservative, Runnymede and Weybridge)

I can see how the Under-Secretary might want to use the options provisions to deal with bogus short leases that are in fact longer leases, but I ask him to consider the situation of a genuinely short lease on an asset with a three-year life. My understanding is that if it is borrowed for, 100 per cent. of its costs would be treated against the borrowing limit. If it is obtained under a credit arrangement, only two thirds of its cost will be treated against the borrowing limit. Is that correct?

Chris Leslie (Labour, Shipley)

The hon. Gentleman needs to see the provisions in the context of their purpose, which relates to the prudential borrowing regime and the affordability limits and tests as set out in clauses 3 and 4. It would be wrong to calculate the consumption of credit in that way. The calculations under the code, perhaps because of affordability or for national economic management reasons, will pick up all the revenue consequences of the arrangement. The fact that all the revenue consequences will be covered in the calculation of the affordability limit provides a safeguard and ensures that the affordability test and arrangements in clauses 3 and 4 will operate properly.

The hon. Member for Kingston and Surbiton asked why the PFI provisions under draft regulation 7(3) are needed. They are included to ensure that the accounting practices and balance sheet tests can be regarded properly. When we come to clause 16 on capital expenditure, we will debate the various ways in which generally accepted accounting practice may vary from local authority accounting practices. That will help elaborate on some of the issues for the hon. Gentleman. The regulations are needed for a common-sense treatment of private finance initiative arrangements under the normal accounting practices test in the Bill.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am sorry to press the Under-Secretary, but the impact of regulation 7(3) is that PFI services for schools can be paid for through a credit arrangement while services from a normal procurement route cannot. There is a clear financial differentiation and benefit given to PFI. The hon. Gentleman has not admitted or justified that.

Chris Leslie (Labour, Shipley)

The hon. Gentleman should take a step back from looking at the details of one particular contract. Ordinary borrowing arrangements would simply provide the asset for the authority and would be accounted for in the normal way, but the PFI mechanism, depending on its components and balance of risk, has a reflection on whether it accounts on or off the balance sheet. The regulations ensure restrictions on the nature of the credit arrangements that can be entered into by ensuring proper boundaries and limits. That also encapsulates some forms of PFI arrangements and classes them fairly in circumstances in which they are defined as credit arrangements and count towards the affordability limit. Those are set out, and there will be opportunities in debating a later clause to consider the definitions of accounting practice. If the hon. Gentleman has any specific points, I undertake to find answers then.

I hope that the Committee will regard the clause as robust and necessary in ensuring that credit arrangements are part of the prudential borrowing regime. I commend clause 7 to the Committee.

Question put and agreed to.

Clause 7 ordered to stand part of the Bill.

Clause 8 - Control of credit arrangements

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 33, in

clause 8, page 4, line 3, leave out 'cost of' and insert

'capital value of the assets made available under.'.

Derek Conway (Conservative, Old Bexley and Sidcup)

With this it will be convenient to discuss the following amendments:

No. 34, in

clause 8, page 4, line 5, leave out 'cost of' and insert

'capital value of any additional assets made available under the arrangement as a result of'.

No. 35, in

clause 8, page 4, line 7, leave out from second 'the' to 'and' in line 8 and insert

'capital value of an asset'.

Philip Hammond (Conservative, Runnymede and Weybridge)

Amendment No. 33 is designed to probe the Government's proposals. Clause 8(2) says that, in applying the borrowing limits,

''for the purposes of subsection (1) . . . entry into a credit arrangement shall be treated as the borrowing of an amount of money equal to the cost of the arrangement''.

Amendment No. 34 would delete the words

''cost of''

and insert the words

''capital value of the assets made available under the arrangement''.

I expect that the Minister's response will be that the Bill will work as the amendment suggests. If so, we need only an explanation of precisely how.

The cost of the arrangement should not be treated as the equivalent of the borrowing costs. When a local authority borrows £1 million, we do not treat it as having borrowed the £1 million plus the interest to be paid over the lifetime of the loan. We treat it as having borrowed simply the capital amount. Similarly, if a local authority chooses to enter into a credit arrangement instead of borrowing, we should treat the equivalent sum to be set against the borrowing limit as the capital value of the assets to be acquired or used under the credit arrangement. That should be self-evident.

The provisions in subsection (3), which allow the Secretary of State to define by regulations the calculation of the cost of a credit arrangement, may mean that the provision in subsection (2)—that the cost will equal the cost of the arrangement—is undermined. We already have draft regulations before us, which I am afraid do not help me in trying to get to the bottom of the matter. Regulation 5 says that, for the purposes of clause 8(2),

''the cost of a credit arrangement or variation of a credit arrangement shall be the amount of the liability in respect of that arrangement or variation which is shown, in accordance with proper practices, in the authority's accounts.''

My question to the Minister will undoubtedly ask him to draw on the detailed briefing on accounting standards that he will have had in preparation for the Committee. Will he say whether the amount that would fall under draft regulation 5 to be treated as the cost is only the amount equivalent to the capital value of the asset and excludes the amount that is akin to a debt service cost if the asset or use of the asset were financed by conventional borrowing? If so, I suspect that my amendment is redundant, but it means that the Bill is extraordinarily obtuse. Subsection (2)(a) is specific and will appear clear to the layman—that the amount is to be

''treated as the borrowing of an amount of money equal to the cost of the arrangement''.

The clause then gives the Secretary of State the power by regulation to redefine the cost of the arrangement.

It would be better if it were explicit in the Bill that the amount of money to be taken into account is equivalent to the capital assets made available under the arrangement. I shall be content to thunder against the obscurity of the drafting rather than the substance if the Minister confirms that the amendment is redundant, because the provision I have sought is in fact provided for under draft regulation 5.

Andrew Turner (Conservative, Isle of Wight)

I, too, was mystified by the meaning of ''cost'' in the clause, largely for the reasons set out by my hon. Friend the Member for Runnymede and Weybridge. I was also slightly concerned by his alternative definition of the capital value of the assets made available, but I shall return to that in a moment.

The cost of the arrangement could have the meaning set out by my hon. Friend: the aggregate borrowing, plus the cost of interest and other repayments, plus the fees involved in setting up the arrangement; or it could refer merely to the fees in setting up the arrangement. I, too, would like to hear from the Minister which of those definitions he intends should be covered by ''cost'' on the three occasions on which it occurs in the clause.

My hon. Friend's alternative proposal suggests that borrowing by local authorities is designed to create an asset. On many occasions borrowing by local authorities is designed to pay for a liability, not to create an asset and certainly not necessarily to create an asset of a value equivalent to the amount of money borrowed.

Let me give you an example, Mr. Conway. If a local authority borrows money to build a house on a piece of reclaimed land, it is more than likely that the value of the house on the open market will be less than the aggregate cost of building the house and reclaiming the land. In other words, the asset's value is not equivalent to the sum borrowed, let alone the sum borrowed, plus the interest paid, plus the costs of the arrangement.

A second example might be for the construction of an ice rink, swimming pool or other facility. As many of us who have served on local authorities know, ice rinks, swimming pools and other facilities have huge maintenance costs. Sometimes local authorities have to pay the private sector to take these wretched facilities off their hands because the maintenance costs are so great. It cannot therefore be construed that the capital value of the asset made available under the arrangements is equivalent to the cost of making the arrangement or the value of the sum borrowed.

Then there is the cost of a coastal protection measure. A coastal protection measure has no intrinsic or asset value. It only has a value in terms of the amount of money spent on it. I would like to ask the Minister, in responding to the amendment, to clarify what is meant by ''cost'', which is the thrust of the amendment. I have been a little critical of my hon. Friend's alternative, but perhaps the Minister could do what my hon. Friend has valiantly tried to do. I believe an amendment is required.

Chris Leslie (Labour, Shipley)

What a pleasure it was to hear the hon. Member for Isle of Wight try to help the hon. Member for Runnymede and Weybridge. In many ways, he said what I was about to say about the amendments and the phrase

''capital value of the assets''.

The amendments relate to clause 8, which is mainly about the calculation of the cost of credit arrangements. It enables the details of what is inevitably a somewhat technical procedure to be covered in regulations, and we have provided the Committee with copies of the draft regulations.

As the hon. Member for Runnymede and Weybridge pointed out, regulation 5 indicates what we have in mind. The cost of the credit arrangement is to be decided as far as possible by accounting practice, rather than by special rules devised by us. It will normally depend on the amount of the long-term liability under the new contract as shown in the accounts. That will reflect the value of the payments that the authority is committing itself to make over the life of the contract. A broadly similar effect is achieved under the present system, but only with extremely complex rules and formulas in the legislation. The present principle is sound, but we hope to achieve the same result much more simply through reliance on accounting concepts.

Amendments Nos. 33, 34 and 35 suggest an alternative way of calculating the cost of a credit arrangement, by reference to the capital value of the assets made available under it. I accept the amendments in the spirit in which they were intended—as probing amendments designed to tease out what the Government mean. I will not seek to demolish them on technical grounds.

Philip Hammond (Conservative, Runnymede and Weybridge)

Go on, try.

Chris Leslie (Labour, Shipley)

Most of the demolition job was done by the hon. Member for Isle of Wight, who speculated on the definition of costs and mentioned what would happen if the borrowing cost were different from the capital value of the asset. As anyone who has a mortgage knows, certainly from the experience of negative equity under a previous Administration, the amount borrowed will not necessarily equal the value of the asset.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Under-Secretary's point is irrelevant. The Bill refers to

''the cost of the arrangement''.

In a credit arrangement, that will be the value of the asset, the cost of the asset, plus the servicing costs over the life of the arrangement. The fact that the asset may have a declining value will not affect the payments that have to be made under the credit arrangement. I am trying to get at whether it is appropriate that the element of the credit arrangement that is tantamount to the debt service cost should be included in the capital value in the case of a credit arrangement, although it is not included where the local authority borrows and purchases the asset. In that case, only the amount of borrowing, not the stream of debt service costs, will count against the borrowing limit.

Chris Leslie (Labour, Shipley)

I take the hon. Gentleman's query seriously, but my concern, which must be considered in the context of the prudential borrowing regime and the affordability test, relates primarily to the affordability of such contracts. The most direct way of assessing that is to consider what the authority will pay. There is not necessarily a close link between asset value and the amount that the authority will pay. I think that the amendments confuse asset value with that liability set up to represent the credit arrangements. Values may rise in relation to the market, or decline, but the financial obligation at the outset to undertake the payments is not necessarily affected by those market changes. The example given by the hon. Member for Isle of Wight was interesting, although I would not necessarily describe ice rinks as ''wretched facilities''. In my youth, I had a soft spot for the occasional visit to Bradford ice rink—[Interruption.] Although the ice was not very thick at the time, I never fell through it.

I believe that the provisions in the clause, and the arrangements that define the cost of an asset, are sound. It would be wrong to look at the capital value of the asset in a similar way as described by the hon. Member for Isle of Wight. I urge the hon. Gentleman to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

We have not got very far. I would dispute what the Under-Secretary said. The phrase I used in the amendment is the

''capital value of the assets made available under''

the arrangement. I entirely agree that the capital value of the assets might go up or down over time. However, the capital value of the assets when the arrangement is entered into jolly well better be equivalent to the amount that the authority is committing itself to paying over a period. The Minister for Local Government and the Regions shakes his head, but I should have thought it would very ''unprudential'' of a local authority to enter into a credit arrangement in respect of an asset if that credit arrangement contemplated payments based on a value of the asset that was higher than its value when the arrangement was entered into. I would not expect a local authority to borrow a sum of money to purchase an asset at more than its value at the time when it purchased it.

In focusing on value as against cost, we have perhaps missed the critically important issue. I am asking the Under-Secretary to compare two ways of financing a transaction. Take the purchase of an asset with a five-year life and a zero anticipated value at the end of that life. As I understand it, if the local authority borrows £1,000 to buy that asset its borrowing limit is debited with £1,000 only, not £1,000 plus the interest payments that it will make over each of the five years of the life of that arrangement. Only the capital costs will be taken into account. The debt service costs will not hit the authority's borrowing limit.

If the authority enters into a credit arrangement, a leasing arrangement for that asset over the five-year period, the amount to be debited to its borrowing limit will be the total payments to be made to the provider of that asset over the life of that credit arrangement. If

this is an asset with a zero value at the end of the five-year period, the amount to be paid over the life of the credit arrangement will be the capital cost of the asset on day one, plus the interest charge that the provider will levy throughout. That seems to create a situation where if the local authority borrows and buys the asset the charge is £1,000, but if it enters into a credit arrangement the charge against borrowing limits will be £1,050 or £1,100, whatever the interest rate being charged.

That seems a most bizarre way to approach a credit arrangement. It is effectively to roll up the finance cost with the capital costs of the asset provided and treat it all as if it were akin to money that would be borrowed if an authority purchased something outright. That is the key issue, which the Under-Secretary has not addressed. As with earlier issues that we have discussed, that would steer local authorities away from credit arrangements towards straightforward borrowing. The whole of thrust of what the Government say they are trying to do and what the Opposition want to achieve is removing artificial incentives or disincentives to local authorities to

enter into one type of transaction or another and to give them the freedom to look at the range of options available to them and to decide which is most appropriate.

Chris Leslie (Labour, Shipley)

I can only seek to explain as far as I can the specifics of the point that the hon. Gentleman has now raised, which is slightly different from the amendments. [Interruption.] I cannot be sure what was intended by the amendments. My understanding is that there is a level-playing-field treatment of the cost of a credit arrangement to borrowing, insofar as the prudential regime test examines the revenue obligations that fall on an authority in making those payments, whether by normal borrowing arrangements or by credit agreement. Given that servicing costs are excluded from the cost of a credit arrangement, we are looking at the proportion of that credit agreement that falls on the authority's revenue commitments in one year—

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 A

Local Government Bill

Win Griffiths (Labour, Bridgend)

Before we continue our proceedings I have an official announcement to make. Several of the amendments that appear starred on today's Notice Paper appear in the name of the official Opposition, when they were in fact tabled by the Liberal Democrats, who no doubt aspire to that position. The Clerk has sent the appropriate corrections to the printers, but in order that everyone knows precisely who has tabled what, a full blue marshalled list will be produced for tomorrow. I appeal to hon. Members to check that list and to draw the Clerk's attention to any further corrections. We hope that none will be necessary, but one never knows.Clause 8 Control of Credit Arrangements

Clause 8 - Control of Credit Arrangements

Win Griffiths (Labour, Bridgend)

I remind the Committee that with this we are taking the following amendments:

No. 34, in

clause 8, page 4, line 5, leave out 'cost of' and insert

'capital value of any additional assets made available under the arrangement as a result of'.

No. 35, in

clause 8, page 4, line 7, leave out from second 'the' to 'and' in line 8 and insert

'capital value of an asset'.

Chris Leslie (Labour, Shipley)

As I recall, I was addressing the remaining issues raised by the hon. Member for Runnymede and Weybridge (Mr. Hammond). He asked whether the word ''cost'', as the term used in clause 8(2), includes the financing costs of the arrangement, and as I said, it will not.

Accounting practices require assets to be recognised in the balance sheet initially at cost. For an asset acquired under a credit arrangement they will require the cost to be set at a value roughly equal to the amount that would have been paid up front. That may not be the same as the capital value, because the authority may have ownership of the asset only for a limited period, such as a lease. The wording in the clause follows accounting practices and ensures that financing costs are not included in the opening cost figure. The effect is that, in the case of traditional borrowing, interest costs do not score as part of the

cost, and in the case of a lease, service costs do not score either. In other words, there is a level playing field, which, I think, is the assurance that the hon. Gentleman sought.

What is captured in credit agreements will be basically the same as under the present system, except that it will rely largely on accounting definitions, rather than achieving the same effect through complex statutory definitions, as under the present system. I hope that that explanation is helpful, and I urge the hon. Gentleman to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

That is exactly what I intend to do. The Under-Secretary has gone some way to reassure me that the Bill, combined with the regulations and the codes of proper accounting practices, will deliver the desired result.

As I have said in Standing Committees many hundreds of times, and will no doubt say many more hundreds of times, we would always prefer the Bill to be more explicit about such provisions. However, we all agree that it is best, wherever possible, to following standard accounting practices and to have the minimum number of departures from them. My interpretation of the Bill would have given more scope for such departures, but the Under-Secretary reassures me. I shall read his remarks carefully and allow others, who know much more about these matters than I do, to do so too. We want to make sure that we are satisfied, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 36, in

clause 8, page 4, line 10, leave out subsection (4).

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss the following amendments:

No. 57, in

clause 8, page 4, line 11, at end insert—

'(5) Before making any regulations under subsection (3) or (4), the Secretary of State must consult the Chartered Institute of Public Finance and Accountancy and the Comptroller and Auditor General.'.

No. 58, in

clause 9, page 4, line 32, at end add—

'(5) Before making any regulations under subsection (3), the Secretary of State must consult the Chartered Institute of Public Finance and Accountancy and the Comptroller and Auditor General.'.

Philip Hammond (Conservative, Runnymede and Weybridge)

I shall speak briefly to amendment No. 36. Amendments Nos. 57 and 58 stand in the name of the Liberal Democrats, and no doubt the hon. Member for Kingston and Surbiton (Mr. Davey) will say something about them.

Subsection (4) is the antithesis of freedom and flexibility—we find such subsections in many clauses—saying that after everything else has been settled:

''The Secretary of State may by regulations impose additional restrictions on the power of a local authority to enter into or vary credit arrangements.''

A lot of hard work has gone into determining how credit arrangements will be regulated, but at the end of the clause a subsection tells us that the whole thing was a waste of time because, whatever is in the Bill, the Secretary of State retains total and unfettered power to make additional regulations to undo or add to those arrangements. That means that the Government will effectively have the power to steer local authorities, by regulation, between different types of transaction.

More insidious than the Government's ability to make regulations or to use the provisions in the Bill is their implied power to exert their will to determine the behaviour of local authorities. There is no transparency in that. At least if the Government make a regulation, we will have the opportunity in this place to discuss it and, to some extent, to scrutinise it, and the world will be aware of it. However, if the Government merely contact local authorities, as they quite properly do all the time in their day-to-day dealings with them, to draw their attention to the fact that something that they propose to do would be frowned upon in Whitehall and that the Secretary of State has the reserve power under subsection (4), they will be able to influence, in a way that is not transparent, the behaviour of bodies that should be publicly accountable. As a matter of general principle, we should prefer such catch-all powers not to be included in a clause such as this.

This issue is not merely theoretical; the Under-Secretary has already circulated draft regulation 7, which is to be laid under the powers given in subsection (4). The effect of that regulation is highly controversial and significant because it will exclude public finance initiative contracts from the prohibition on the use of credit for services, which will be dealt with in secondary legislation. Whatever we think about that regulation is not the point; the point is that the power could be used to do something equally significant by secondary legislation, so I should prefer subsection (4) to be removed from the Bill.

For some strange reason, it says in my notes that the Liberal Democrats would also like that to happen. It is because they have signed the amendment, which is always a pretty fair indication of support. [Interruption.] As the Minister for Local Government and the Regions observes, perhaps that is not so apparent in the case of the Liberal Democrats. On this occasion, we will take them at face value, and I look forward to hearing what the hon. Member for Kingston and Surbiton has to say about amendments Nos. 57 and 58.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I signed my name to the amendment tabled by the hon. Gentleman because it is right, as he demonstrated in his remarks. In this Bill and many others the Government legislate in detail, setting out all the powers that they want to give themselves, and we have long, detailed debates about them. Then we get to the end of a clause, a part or the whole Bill, and we find that the Government have a catch-all, get-out clause that enables them to do anything that they want, thus negating all the time and effort that we have spent

scrutinising the legislation. It is bad practice. Other Governments have done it, but that does not make it right. If the Government want to ensure that the powers that they take are properly scrutinised by a democratic body, they should not allow such catch-all provisions to be inserted into legislation.

If the Government set out for the Committee why they want the powers, perhaps we can judge them in detail. Then, on Report, rather than have a catch-all subsection, we could put the Government's intentions on the face of the Bill. Perhaps they already have in mind some instances when they would need more regulatory powers for credit arrangements. Let us have those in the Bill; let us not make local authorities second-guess what new regulation the Minister will next come up with.

On amendments Nos. 57 and 58, the Government often take the power to regulate, saying that they are not sure how the regulations will turn out. The Bill should place a statutory requirement on the Government to consult other people outside this place. The Chartered Institute of Public Finance and Accountancy is already mentioned in regulations and would be a sensible organisation to consult on the regulations under discussion. We also want to add that the Comptroller and Auditor General must be consulted.

This morning, the Minister suggested that our proposal was rather odd and asked why we did not include the Audit Commission, and I can understand why he made that suggestion. I mean no disregard to Sir Andrew Foster and his team at the commission, but the CAG is used to dealing with such definitions with respect to central Government accounting, and is therefore the correct person. If the Minister accepts the principle, but is against the inclusion of the CAG, we will be more than happy for him to table an amendment to ensure consultation with CIPFA and the Audit Commission. That is not the issue of principle for us; the key issue is consultation.

My hon. Friend the Member for Southport (Dr. Pugh) wishes to make some additional remarks on the subject, so I will not take any more of the Committee's time save to say that in this clause and clause 9, to which we have tabled amendment No. 58, it is right that the Government should not have unfettered powers and that they should have to consult.

John Pugh (Liberal Democrat, Southport)

I will speak primarily to amendment No. 58. Hon. Members will already have noted that the Bill contains two catch-all clauses against which amendments Nos. 57 and 58 are directed—clauses 8(4) and 9(3). One allows the Government to vary credit arrangements in whatever way they wish. The other appears to allow them to define capital receipts however they will.

A cynic might suggest that that is an attempt to put a provision in legislation that will allow the Government to ride roughshod over local authority autonomy and to micromanage local authority affairs. A cynic might suggest that, but the Government will undoubtedly tell us that those are simply necessary provisions included for technical reasons to reserve to the Government powers that may be required to cope

with unexpected loopholes, and unanticipated events of the sort that Committee members relish in bringing to their attention. I suppose that the Government could grudgingly say that Opposition Members are expecting two incompatible things—they expect the Government to specify every available loophole, while they seem to be trying to deny the Government any power to manoeuvre should all the loopholes not be anticipated.

Amendments Nos. 57 and 58 begrudgingly acknowledge that the Government will have some sort of reserve power and try to ensure that they act for the right reasons in the right way. The amendments do not deny Governments powers outright that they may have to cater for to deal with loopholes that even this Committee cannot dream up.

The amendments suggest that there should be consultation between CIPFA and the Comptroller and Auditor General and organisations of such ilk, basically because that would to some extent alloy the paranoia of local government about what the Government's intentions here might be; or rather, not paranoia but justified suspicion and concern on the part of local government, because it has from time to time been sorely abused by central Government and it is being tinkered with all the time.

Accepting the involvement of an organisation such as CIPFA, which has the confidence of local authorities and the Government and a grasp of the realities of local authority finance that exceeds that of the National Audit Office and other such bodies, could be a good way to persuade local government to take the leap of faith for which the Minister asks time and again.

The Minister's intentions have been clear—he has signalled them from the beginning of the passage of this legislation—and accepting amendments Nos. 57 and 58 will make people think not simply that the Minister has those intentions but that he sincerely believes in them and is prepared to put one or two guarantees down.

Desmond Swayne (Conservative, New Forest West)

I do not think that this will take long. The enormity of what the Government are trying to get away with in this catch-all subsection at the end of the clause is so obvious that it does not take a great deal to expose it. Indeed, I noticed in the past few moments as we have been discussing it that even Labour Committee members, whose noses have hitherto been buried in the Bill and the briefings that they have been receiving from third parties, have begun to perk up and listen to the proceedings.

Any Bill that this Government propose always contains an Attila the Hun clause. There are several contenders in the Bill and clause 8 is certainly one of them. The Government will be able to do whatever they like and make whatever arrangements they care to. If they think that they are going to get a free run on the clause, the Minister will have to do two things. First, he will have to explain exactly the situations in which the powers will be used and how. Secondly, and more importantly, if he can articulate those situations

and the circumstances, he needs to say why he is not able to put them on the face of the Bill but has to reserve the powers in such a catch-all way.

Andrew Turner (Conservative, Isle of Wight)

I echo the remarks of my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond). I listened with some care to the remarks of the hon. Members for Kingston and Surbiton and for Stockport—[Interruption.] I apologise; it was the hon. Member for Southport—which is much sunnier than Stockport as it is further from Manchester—who said that the powers would enable the Government to vary capital arrangements in clause 9 and credit arrangements in clause 8 ''however they will''. Of course, they do not; the powers enable the Secretary of State to impose additional restrictions. That is what is so curious about what the Government put forward as a liberalising measure—the Secretary of State will have free range to restrict the freedom of manoeuvre of local authorities.

In other recent Bills and Acts of Parliament, such as the Education Act 2002—I served on the Committee that considered that legislation—the Government have been much more generous in their interpretation of the word ''liberalising''. In the 2002 Act, they interpreted the word to allow the Secretary of State to vary any enactment—not to impose additional restrictions, but to vary either by the imposition or the reduction of restrictions. It is extraordinary that the definition of ''liberalising'' in Sanctuary buildings seems to be entirely different from the definition that is accepted in the old Admiralty building. I wonder why. What is it about the people who write local government law that makes them even more restrictive than those who write education law?

Lest the Committee should misunderstand me, I am not praising the 2000 Act unduly highly, because it gave the Secretary of State powers to restrict schools' freedom of manoeuvre. Even when they wanted the freedom to innovate, the Secretary of State had to say yes or no, but at least he had the opportunity to remove the restrictions imposed by regulation. That is not at all apparent in these measures.

I am surprised, but glad, that the hon. Member for Kingston and Surbiton has put his name to amendment No. 36, but I should have thought that he could do better with regard to amendments Nos. 57 and 58. Perhaps he will tell me that the Secretary of State has to consult local authorities over his intention to make such amendments as are provided for here, and that it is not necessary to include that in the Bill. That may be the case, but could not the hon. Gentleman have retained the words ''impose additional restrictions'' while perhaps adding ''or remove existing restrictions'' at the end? That would have been a liberalising measure, but clearly that is too liberal for the Government and too liberal even for the Liberal Democrats.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Conservatives did not table anything.

Andrew Turner (Conservative, Isle of Wight)

The hon. Gentleman forgets that he put his name to the proposal that we tabled, and I very much hope that our amendment goes through.

Paul Goodman (Conservative, Wycombe)

Might I be of assistance to the Minister? If I understand correctly the argument put by my hon. Friend the Member for Runnymede and Weybridge and the hon. Member for Kingston and Surbiton, they are making the case that the clause sets out a series of instructions, which are intended to be fairly precise, regarding credit arrangements, and that subsection (4) is essentially a catch-all measure that uses the vague expression ''additional restrictions''. On the face of it, that appears to be a very broad form of words. I am sure that the hon. Gentleman and my hon. Friend were correct to say that more information on those additional restrictions should be in the Bill.

Perhaps the Minister will come some way towards reassuring my hon. Friend and the Liberal Democrat spokesman—although, of course, I cannot speak for him—by telling us more about what those additional restrictions might be. What are they? Under what circumstances would they be exercised? What scrutiny might they be open to? So doing might do a little to satisfy me and my hon. Friends, although I remain a little sceptical about that.

Chris Leslie (Labour, Shipley)

Amendment No. 36 would remove clause 8(4), which enables regulations to be made to impose restrictions on the power to enter into credit arrangements. In the draft regulations that we have made available to the Committee—this addresses many points raised by Opposition Members—regulation 7 gives ample indication of how we propose to use the power. Primarily, we want to preserve the prohibition in current legislation on using credit arrangements for purposes other than the acquisition of capital assets. The important point is that credit, like borrowing, should be used to meet capital needs, not to pay for services and running costs. We seek to impose such restrictions through subsection (4).

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister says that regulation 7 gives an adequate indication of how the Government intend to use the power, but, of course, that power is permissive. We all understand what regulation 7 would do—we have already had a debate on that, so I shall not go into it again—but I presume that he is not offering to limit the Secretary of State's power under subsection (4). The concern being expressed from all parties on this side of the Committee is that the Secretary of State effectively would have unlimited power to do anything, which might be different from what draft regulation 7 intends.

Chris Leslie (Labour, Shipley)

I am not proposing to say that that is the only purpose for which we would use the provision. In the world of accounting, apparently, things change incrementally but fairly regularly. From time to time, it is required that the regulations governing those arrangements should also change. Rather than simply put everything in primary legislation when aspects of accounting need to change, we seek through the simplification process represented by clauses 7 and 8 to use the provision as a means to ensure a certain degree of flexibility in how the rules govern those accounting arrangements. We see our main purpose as prohibiting the use of credit,

as we would with borrowing, to pay for services and running costs—the consumption of that money.

The restrictions appear in primary legislation, but it is more appropriate to deal with them in regulations, simply because exemptions may be more flexibly introduced.

John Pugh (Liberal Democrat, Southport)

The Minister uses the word ''flexibility''. What is the difference between a clause that allows unlimited flexibility and a catch-all clause? Does what he has just said to an extent justify the accusation made about a particular clause—that it is in fact a catch-all? Although he would prefer not to use that term, there is no semantic difference between what he is saying and what we are saying about that particular clause, is there?

Chris Leslie (Labour, Shipley)

I simply draw the hon. Gentleman's attention to the subsection, which is clear about what it intends to do. The main exemption, as the draft regulation shows, will be in relation to private finance initiative contracts, which are hybrid. They provide capital assets and services, and the regulations will ensure that PFI contracts are not inhibited by the restriction on the use of credit arrangements.

To elaborate on the issues set out in draft regulation 7 and the accompanying commentary, I should say that PFI contracts will not automatically count as credit arrangements under the new system—that will happen only when they score on the authority's balance sheet. If they do, however, the regulation will provide the necessary safeguard. That is the purpose for seeking to foresee how the subsection might be used in such circumstances.

Amendments Nos. 57 and 58 would require specific consultation with CIPFA, the Comptroller and Auditor General and the National Audit Office. I believe that they are unnecessary. The Government will, of course, fully consult all relevant bodies as appropriate whenever we make such changes. Indeed, that is one of the reasonable requirements that fall on those in government.

Andrew Turner (Conservative, Isle of Wight)

Does ''all relevant bodies'' include not only all local authority associations and bodies purporting to represent local authorities, but all local authorities themselves?

Chris Leslie (Labour, Shipley)

It could well do. That is precisely the point that I am highlighting in suggesting that the Committee reject those amendments. To define two particular persons or bodies as a limited list rather than perhaps allow for wider consultation is a topsy-turvy way to consult. There are plenty of provisions throughout the Bill and throughout other legislation relating to where consultations would be appropriate and reasonable. I do not believe that it is necessary in drawing up good statute to specify every single consultee at every single opportunity. For those reasons, I urge the Committee to reject the amendments.

Andrew Turner (Conservative, Isle of Wight)

The Minister appears to be saying that it is not necessary to specify two consultees, on the ground that that might imply that other consultees or classes of consultee need not be consulted. Yet at the same time he is refusing to say that every local

authority, for example, shall be consulted. He says that they may be consulted or that it may be appropriate to consult them, but he is not saying that they will be consulted. That leaves a huge gap into which all manner of consultation arrangements may fall, none of which is satisfactory to local authorities.

Chris Leslie (Labour, Shipley)

I understand the sentiments behind the hon. Gentleman's point. We do not know what circumstances may arise, so I cannot say what issues may require in-depth consultation and what may simply require consultation with representative bodies, such as the Local Government Association. That may suffice in certain circumstances. All that I am saying is that it is wrong in principle to specify a definitive list of consultees to the exclusion of others. That sends a message that some consultees are more important than others, which is not good for harmony and good will in the local government community. There are good reasons why such a specifically bureaucratic provision is not required in this clause, and I urge the hon. Member for Runnymede and Weybridge to withdraw his amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Under-Secretary has not addressed the central point, which is that the subsection gives more power, not less, to the Secretary of State. We have seen this trend in Bill after Bill during Standing Committee scrutiny, and unless and until the arrangements for scrutinising and debating regulations are improved, so that the increasing part of our body of law which is dealt with in secondary legislation is properly scrutinised, we will have to go on resisting the Government's inclination to include more and more sweeping regulation-making powers in Bills. I must therefore urge my hon. Friends to vote for the amendment.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 14.

Clause 9 - Capital Receipts

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 2, in

clause 9, page 4, line 20, leave out subsection (3).

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss amendment

No. 37, in

clause 9, page 4, line 25, after 'provision' insert

'in relation to a local authority which is not debt-free at the time of the receipt'.

Philip Hammond (Conservative, Runnymede and Weybridge)

I shall endeavour to be brief so that we can make some progress. Amendment No. 2 would leave out subsection (3), which is the usual nonsense that I have noticed creeping into Bills. First, it makes substantive provisions and then it gives the Secretary of State God-like powers to determine that something that is black will be treated as if it were white, and something that is white will be treated as if it were black.

I noticed such a provision in the Employment Bill last year, and here I see it again with almost exactly the same structure. Paragraph (a) says that black is white, if the Secretary of State says so, and paragraph (b) says that, on the other hand, white is black, if the Secretary of State says so. Clearly, that is not an acceptable way to proceed, and although Ministers, after some time in office, no doubt start to perceive themselves as having God-like characteristics, reversing definitions is a step too far.

I suspect that we have no argument with the use of those powers in draft regulations 9 and 10, but that does not detract from the fact that the Secretary of State will have sweeping powers to define something as being something that it patently and palpably is not.

I have a more substantive concern about draft regulation 8, which concerns the treatment of repaid loans and grants. That regulation depends on the assumption, which is clearly fallacious, that all loans and grants are made from borrowed money. On the loans and grants that are to be repaid to an authority, the notes on the regulation say:

''If it could be used for revenue purposes, the authority would, in effect, be paying its running costs with borrowed money, contrary to the 'golden rule'.

With a tortuous argument, one could just about propose that interpretation where the original loan or grant had been made from borrowed money, but where that is not so, there is simply no case for what the Government propose in draft regulation 8.

I would be grateful if the Under-Secretary could specifically make a case in equity for requiring a local authority that originally made a loan or grant out of its own resources, without borrowing, to treat the repayment as if it were a capital receipt. I invite him to consider how the argument in support of draft regulation 8 is framed in the explanatory notes, which implicitly assume that all such expenditure will originally have been financed by borrowing.

Amendment No. 37 is an alternative—proposing, at the very least, to make a change if the Under-Secretary is not prepared to delete subsection (3). It would simply make the subsection inapplicable to debt-free authorities. There is a cogent argument that when an authority is debt-free, it is unnecessary and burdensome for the Secretary of State to have wide powers to treat a receipt as a capital receipt, with all the consequences arising from clauses 10 and 11—joys yet to come. It seems entirely reasonable that debt-free authorities should be excluded from the hazard of the

Secretary of State using these sweeping powers to define things as something that they are not, and to include their receipts from the repayment of loans and grants as capital receipts.

Valerie Davey (Labour, Bristol West)

I rise very briefly because I know that my hon. Friend the Member for Guildford (Sue Doughty) wants to say a little more about the amendments.

The Liberal Democrats support the two amendments, although it was remiss of me to forget to sign up to them. What the hon. Member for Runnymede and Weybridge has said is exactly right. Subsection (3) seeks to do something rather odd and is one more example of the Government's taking unnecessary regulatory powers to themselves, and amendment No. 37 would free debt-free authorities from some of the controls and powers that the Government seek. I shall not speak at length on amendment No. 37 because in many ways it looks forward to the debates that we shall have on clause 11.

Sue Doughty (Liberal Democrat, Guildford)

On Second Reading, I was concerned that the Minister almost implied that there was something wrong with debt-free authorities; that they were not prudent or sensible, that they did not seem to be using their money in the wisest way, and that the Government knew best. In reality, different types of councils, whether Barking and Dagenham or Stevenage, or my own councils of Guildford and Waverley, each had reasons why they chose to become debt-free. One was that they had no other way of managing their housing finance.

The Government seem to think that spending power should be redistributed from richer authorities to poorer authorities, yet the need for housing can be as great in a richer authority as in a poorer authority because of the economic nature of the area. Housing in Surrey is hugely expensive, and people pay up to six and a half times their salary to buy a modest house, compared with three and a half in other parts of the country. Such people will not be able to buy their own homes and the cost of rented housing is commensurately higher too.

Waverley council submitted a memorandum to the Select Committee. It had to consider the need for affordable housing because its finances could not meet that need. The council's housing need register had more than 1,300 families and single people. Council housing associations had 580 households that needed to transfer to another home because of overcrowding or other reasons, and 400 households were homeless or at risk.

Some Labour Members may be surprised that Surrey has homeless people. As in other parts of the country, people become homeless not because they are feckless but because of the cost of living. In 2002, the average house price was about £220,000, and it is now £270,000. Public sector earnings among the lower paid have not gone up to meet those costs and never will. Therefore, in order to use its money in the best possible way, the council decided to focus on becoming debt-free and not to spend on areas

outside housing in order to obtain the necessary leverage.

In the four years that it took Waverley council to achieve debt-free status, the borrowing forgone was about £4.2 million, yet the benefits of that will be lost if the Government proceed with the Bill. Therefore, we support the amendments. We need a recognition of why local authorities have had to go debt-free and we should trust well-run local government to understand its finances and to manage them appropriately.

Nick Raynsford (Labour, Greenwich and Woolwich)

We come now to the part of the Bill dealing with capital receipts. There are three clauses, the first two of which relate to definitions and the third of which is the substantive policy. Clause 9, the first definitional clause, starts by stating that a capital receipt is a sum received when an authority disposes of a capital asset. Clause 9(3) enables us to amend that basic definition by regulations to include or exclude specified items. Draft regulations 8 to 11 illustrate how that power would be used. The hon. Member for Runnymede and Weybridge said that he had no objection to the approaches adopted in regulations 9 and 10, but he objected to regulation 8, and asked me to give further explanation of it.

The explanatory memorandum on regulation 8 makes it perfectly clear that the making of these loans and grants will have counted as capital expenditure for the authority when they were made, so clearly this is capital. If then the authority receives—

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Minister give way?

Nick Raynsford (Labour, Greenwich and Woolwich)

I shall give way in a moment. I am trying to answer the point that the hon. Gentleman raised.

When the authority receives the repayment, possibly from a registered social landlord—one of the most likely circumstances—it is important that it should be treated as a capital receipt. That is both logical and natural. In many cases it will have also been the subject of borrowing, but it is not the fact that it was the subject of borrowing that is fundamental. The sum will have been treated as capital when the loan was originally made, so the receipt of the return is naturally and properly treated as capital. I am sorry if the hon. Gentleman does not agree with that, but perhaps he can now explain why not.

Philip Hammond (Conservative, Runnymede and Weybridge)

Perhaps the Minister can explain why proper accounting practice will not cover the point that he raises. He seems to retreat into saying that this has to be defined as a capital asset because it was capital expenditure when the loan was made. I should have thought that that sat as an asset in normal accounting practice, and on disposal would be treated in the way that the Minister wants. Why is it necessary to have what I call the black and white power of the Secretary of State to define something differently from what it is?

Nick Raynsford (Labour, Greenwich and Woolwich)

On the contrary, the important thing is to ensure that there is clarity and that there is not scope for those who want to try to wriggle out of

the obligations to treat the receipt differently and to pretend that it is revenue and use it for such purpose. As we shall discuss in due course—I shall relish this debate—many debt-free authorities raise the banner and say that they want to use their capital receipts for housing purposes, but when one looks at their patterns of expenditure a number of them have not been doing that; they have been using them for other purposes. In practice, they have found attractive the possibility of subsidising other council services, or indeed the council tax, by shifting money away from housing to other purposes.

If one believes that there is a serious housing problem in many parts of the south-east—I agree wholeheartedly with the hon. Member for Guildford; her area is no exception.

Valerie Davey (Labour, Bristol West)

Will the Minister give way?

Nick Raynsford (Labour, Greenwich and Woolwich)

I cannot answer all the points simultaneously. I am speaking about the issue raised by the hon. Lady and I shall give way in a moment. If one believes passionately, as she does, that housing is important and that the money should be concentrated on that, it is right that it should go there. If mechanisms to enable authorities to redefine capital receipts in the way that I have just indicated and apply them to other purposes are allowed, the principle that we need to maximise resources going into housing, which I certainly support, is undermined.

Valerie Davey (Labour, Bristol West)

I will not stray into the debate that we are likely to have because you would rule me out of order, Mr. Griffiths, but is not the answer to the Minister's point that, rather than going for this pooling regime, for which clause 9 sets the scene, the Government should restrict the use of housing receipts for housing investment? If that is his concern, that is the solution.

Nick Raynsford (Labour, Greenwich and Woolwich)

As the hon. Gentleman will discover when we get there, that is the effect of what we are doing. We are probably not quite as far apart as he thinks, but we shall come to that later. I shall not test your patience, Mr. Griffiths, by entering into that debate now.

I was saying that it was right that these sums should be treated as capital and that the Secretary of State should have the power in clause 9(3) to make regulations for these purposes.

Philip Hammond (Conservative, Runnymede and Weybridge)

I go back to the explanatory notes, from which the Minister quoted selectively. If he casts his eye over the last sentence on regulation 8, he will see that it says of the receipt from the repayment of a grant or a loan:

''If it could be used for revenue purposes, the authority would, in effect, be paying its running costs with borrowed money, contrary to the 'golden rule'.''

That would be the case only if the original capital expenditure on that grant or loan were made out of borrowed money. Does it not give the game away that the Department's thinking is focused on authorities that are in debt and that the circumstances of debt-free authorities are ignored?

Nick Raynsford (Labour, Greenwich and Woolwich)

Quite the contrary. The hon. Gentleman makes my case for me by highlighting a

passage—which I would have been perfectly happy to quote, but did not—that illustrates exactly the problem of the risk of leakage of capital from housing investment to other purposes. I made the point that the vast majority of such sums would be the product of borrowing initially, but it is not fundamental that they are the product of borrowing. It is fundamental, however, that the sum was capital when it was made available as a loan to another body, usually a registered social landlord, and it should be treated as capital when the debt is repaid.

Amendment No. 2 would remove the regulation-making power completely, whereas amendment No. 37 would limit the power by making it impossible for the definition of capital receipts to be used in relation to debt-free authorities. The amendments are clearly designed to make it impossible for the Secretary of State to fine-tune the system to take account of needs and changing circumstances.

As I have pointed out, draft regulations 9 and 10 merely continue the existing rules, so I shall say no more about that as both matters are accepted as capital receipts under the current regime. Removing clause 9(3) would also deprive authorities of the flexibility offered by draft regulation 11, which exempts low-value sums from being treated as capital receipts. I cannot imagine that that flexibility is unwelcome to local government, so I hope that Members realise that pressing their amendment would mean trying to remove a useful additional flexibility that the regulations provide.

The provisions need to apply to all authorities, whether they are debt free or not. The hon. Member for Guildford suggested that I had implied on Second Reading that there was something wrong with debt-free authorities. I did not. I made the point that there was no justification for treating debt-free authorities on a different basis from other authorities. We believe in a proper and fair system that treats all authorities on a par and does not give particular advantages and benefits to authorities simply because they are in the position of being debt free, for whatever reason.

I also made the point that some authorities were debt free because they were fortunate enough to inherit a housing stock—in many cases in new towns built by a new town development corporation—and the Government probably paid the entire debt. Therefore, such authorities had a unique advantage compared to others. Certain authorities may have chosen to be debt free for particular reasons—some because they have not invested to meet needs in their areas that different authorities thought important.

All that I was trying to say was that it would be wrong to assume that there was something uniquely virtuous about debt-free authorities. We believe that they should be treated on a par with other authorities and that the system should be a fair one that treats all authorities alike. We do not accept the amendment, and I invite hon. Members to withdraw it. If they do not, I shall invite my hon. Friends to ensure that it is not accepted.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am in some difficulty, because the Minister has not convinced me by any stretch of the

imagination, but he is right in one thing that he says. Subsection (3) has been used as the vehicle for three perfectly sensible draft regulations—9, 10 and 11—but I would have preferred them to have been enabled via a provision in the Bill that was not so wide ranging and counter-intuitive as subsection (3). The substantive issue behind regulation 8 and the broader issues that we have been debating will be debated again—and, I suspect, once more after that—as we deal with the next couple of clauses, so we shall have plenty of opportunity to show the Government our feelings on these matters.

Before we move to the next stage of the Bill, perhaps I may consider how we might address the Minister's perfectly proper requirement for regulations 9, 10 and 11 while also addressing our concerns about the broad powers in subsection (3). That is the best way to proceed. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Philip Hammond (Conservative, Runnymede and Weybridge)

I shall be brief, as I have only one issue to raise with the Minister. Subsection (4) would provide or create the possibility of a timing gap between when a receipt is deemed to have been received by the authority and its actual receipt by that authority. There cannot be a person in the Room who is not aware that when we reach clause 11 we shall be considering the great sequestration clause and the Government's attempt to take a large proportion of those receipts. They cannot take what has not been received, however, and my concern is that there is the potential under subsection (4) for a receipt to be deemed to have been received by an authority just because it has become payable to it, even though there may be a substantial timing difference. Thus, the Secretary of State may demand his pound of flesh.

What is worse, Members will see when they study clause 11 in detail that the question is not even one of a shoot-out between the Secretary of State and the local authority. The Secretary of State will simply be able to withhold other sums payable by him, matching the sums that he will be entitled to receive under the clause. How does the Minister propose to ensure that local authorities are not put in unreasonable difficulty?

Nick Raynsford (Labour, Greenwich and Woolwich)

I must disappoint the hon. Gentleman by reassuring him that we are discussing perfectly sensible and practical measures rather than what he has described during an extraordinary flight of fancy that produced an apocalyptic vision. He began by saying that Ministers were taking God-like powers, and he described a perfectly sensible provision for making regulations to fine-tune the treatment of capital receipts as a power to make white black. Now we are hearing about shoot-outs. That is all very interesting and dramatic, but it is rather a long way from reality.

I say to the hon. Gentleman in the nicest possible way that he has been going on for much of our proceedings about the importance of ensuring that

proper accounting practice is followed. Proper, modern accounting practice says that capital receipts should be treated as received when they fall due. That is the only reason for introducing the provision—to ensure compatibility with modern accounting procedures. I hope that he does not object to that and agrees that the clause should stand part of the Bill.

Philip Hammond (Conservative, Runnymede and Weybridge)

I accept what the Minister says—that would be the proper way to treat a capital receipt in accounting terms when it fell to be received—but can he give us any comfort by saying that he is prepared to ensure that circumstances do not arise in which an amount payable to the Secretary of State by virtue of clause 11 could fall to be paid over or set off against an amount due from the Secretary of State to the local authority before that authority had received the cash in question?

Nick Raynsford (Labour, Greenwich and Woolwich)

We do not think that that will happen in practice, because in large transactions involving land and property the receipt normally comes in immediately. However, we shall take the hon. Gentleman's anxiety into account in framing the pooling regime. It is not our intention that an authority should be penalised by being required to make a payment to the Secretary of State before it is in a position to do so. With that reassurance, I hope that the hon. Gentleman will agree that the clause should stand part of the Bill.

Question put and agreed to.

Clause 9 ordered to stand part of the Bill.

Clause 10 - Non-money receipts

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 38, in

clause 10, page 5, line 2, at end add—

'( )(a) No regulation may be made under this section in respect of a disposal the consideration for which is wholly in the form of housing nomination rights.

(b) Regulations under this section in respect of disposals consideration for which consist partly of money payable to the authority or consideration other than housing nomination rights and partly of housing nomination rights may not apply section 9 in respect of that part of the consideration which consists of housing nomination rights.'.

It is necessary to look at regulation 16 in connection with this. For some reason, the regulations do not run in a chronological sequence through the Bill so regulation 16 is made under the powers given to the Secretary of State in clause 10. The explanatory notes make it clear that the intention of the clause is to provide that where a local authority makes a disposal in kind, it shall be treated as having made a disposal for money, the money being the equivalent value of the consideration in kind. If a disposal is made under value, it will be treated as having been made for money at the full value.

That bites most obviously and immediately where local authorities quite properly dispose of land to a registered social landlord at an undervalue and receive in exchange nomination rights in respect of the housing that will be built on that land. If I

understand the Bill correctly, such a disposal will give rise to a notional receipt by the authority, which will be subject to the Government's levying regime under clause 11. That seems wholly inappropriate and contrary to Government policy.

Mr. Raynsford indicated assent.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister nods his heads, so that is not what will happen in practice. That is the essence of the concern. It seems sensible to have the reserve power against avoidance by creating non-money receipts to avoid paying the levy. I am an out and out opponent of the levy, but I am also a proponent of the theory that if we are to have law, it must not have any loopholes. Somehow we need to get sales at undervalue of housing land to registered social landlords out of this trap.

Nick Raynsford (Labour, Greenwich and Woolwich)

After the apocalyptic visions of the previous debate, I can tell the hon. Member that he has put his finger on an extremely important issue that has given us some pause for thought. I hope that I can explain why we are proceeding in this way and why his amendment is neither necessary nor helpful. We entirely agree that there must a reserve power to cover avoidance; otherwise the system simply would not work. We equally recognise that there is currently an important provision that makes it possible for local authorities to pass land at a value well below its market value to registered social landlords in order to enable development to take place and to get the benefit in the form of nomination rights. We have no wish to cut across such sensible arrangements, which are all part of the proper process of ensuring that assets are used to best effect to provide housing for people in need.

Under the present system, housing nomination rights are exempted by regulations from the set-aside requirement. We have to find a way forward, but the broad exemption proposed by the amendment would not be satisfactory because it could invite attempts at evasion of the pooling rules. The right place for dealing with this is in the regulations where it is possible to target a relaxation more precisely. The regulations do not at present include any provision of this kind. I want to make it clear to the Committee that this is a first draft and that we are looking sympathetically at options involving nomination rights that would continue to encourage good partnerships between local authorities and registered social landlords.

Philip Hammond (Conservative, Runnymede and Weybridge)

It is not just that regulation 16 does not include such a provision, because the explanatory notes on it use the example of housing nomination rights to show how an authority would have to calculate an equivalent monetary value. The notes say:

''For example, an authority might sell vacant HRA land to the private sector in return for rights to nominate tenants to some of the dwellings to be developed on the site. In such a case, the authority must work out what it would have received if the sale had been for cash and apply the pooling percentage to that amount.''

Until very recently, the Department not only missed the point but specifically intended that housing nomination rights as consideration should be captured. Will the Minister tell us what caused the change and when it occurred?

Nick Raynsford (Labour, Greenwich and Woolwich)

The Department has rightly been working on two principles. First, authorities should be aware of the value of any land that they pass across and should have an idea of how much they are giving as subsidy. Secondly, we have been keen to ensure that the new regime should not be subverted by arrangements always to seek nomination rights rather than a cash receipt or other consideration in order to evade the provisions of the subsequent clause. That is why the regulation is as currently drafted but, as I told the Committee, we are conscious of potential damage to good partnership arrangements between local authorities and registered social landlords in order to provide affordable housing in areas in which it is most needed.

We intend to revisit the matter to provide the comfort that the hon. Gentleman wants to ensure that such partnerships may continue while covering ourselves against the risk of evasion. We are not in a position to identify precisely how we will achieve that, but it is our intention. Given that assurance, I hope that the hon. Gentleman will withdraw the amendment.

Robert Syms (Conservative, Poole)

I have a worry. I served on North Wiltshire district council and Wiltshire county council for several years. There are times, especially in rural areas, when it is extremely difficult to provide local services. In such circumstances, it is not unusual for parish, district and county councils to put resources together to make such a provision.

The county council owned bits of land that it sometimes put into a deal, although not for a receipt but for the provision of a local service that it deemed to be a good thing for the local community. I would be worried about the value of such land that the Government would presume.

If there are no unitary authorities, it is sensible for tiers of local government to work together, which is sometimes the only way for provision to be made, given authorities' sparse resources. A community centre or a leisure centre could be provided by a town or district council because of the gift or sale of land at a reduced rate by a county council that had county farms or a bit of land at the edge of a school. I hope that the Minister appreciates our worries that the Government's possible intervention might make it more difficult for authorities to be creative when making provision for the people whom all authorities are trying to serve, albeit at various tiers.

Nick Raynsford (Labour, Greenwich and Woolwich)

I shall resume a speech that was otherwise rapidly reaching its end. I agree wholeheartedly that it is right to encourage creative relationships among different tiers of government and voluntary organisations for the provision of housing. We do not intend to cut across that. As the hon. Member for Runnymede and Weybridge said, there is a need to balance that against a loophole that would make the capital receipts pooling arrangement non-viable. I am committed to exploring ways of trying to deal with that problem in a way that does not cut across good, sensible partnership arrangements that deliver affordable housing where it is needed through the kind of arrangement that the hon. Member for Poole (Mr. Syms) described.

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friend the Member for Poole has raised an important point. I was looking at the narrow point about transfers to registered social landlords and thinking specifically about housing. My hon. Friend's point was about the wider issue, which, if we defined it, would be the use by a local authority of an asset that it holds for its own purposes, but which would be injected into some other partnership. If the Minister is to resolve this problem, he must find a way for such a transaction not to be treated as a disposal. Perhaps the answer would be for the local authority to grant long leases at nominal rents and premiums, or something along those lines. That issue must be resolved.

I was concerned to hear the Minister use the word ''evasion'' in what turned out to be the false closing of his speech. He talked about wanting to make sure that whatever method he put in place to ensure that the arrangements whereby local authorities dispose of land in exchange for housing nomination rights, it would not be used as a vehicle for the evasion of capital receipts pooling.

The term ''pooling regime'' is bizarre; there is nothing in the Bill about it. In fact, it is a levy by the Secretary of State on local authorities. There is, however, no reference to pooling anywhere. I wonder whether the Minister's words are carefully chosen and whether he intended to imply that some level of disposals for housing nomination rights would be acceptable. The example that he gave, however, referred to a local authority's always disposing of its assets for nomination rights, rather than for cash, and he described that as evasion. [Interruption.] I think that if he reads the record he will find that he did. That description implies that there will be a quantitative limit on the ability of local authorities to carry out such transactions.

I take what the Minister said as I think it was intended—as a genuine recognition that regulation 16 as it is drafted is not right and that the power under clause 10 must be used differently. It would be appropriate to withdraw the amendment, but will the Minister assure the Committee that before Report he will come back with a revised draft regulation? It would not be satisfactory if we left a bad, sweeping power in clause 10. That would be an example of precisely the thing about which we are concerned—a badly drafted regulation has been recognised in a ministerial assertion, but there is no remedy in sight. We would, in any case, need to have a substantive debate about that issue some months down the line after a new regulation is drafted. I hope that the Minister will be able to reassure the Committee.

Nick Raynsford (Labour, Greenwich and Woolwich)

I cannot give the hon. Gentleman an absolute guarantee that we will be able to produce revised regulations in time for Report stage, but that is only because of the considerable number of other pressures under which we are working. I undertake to write to the hon. Gentleman, setting out our thoughts on how we might address this conundrum and I will copy that letter to all Committee members. I hope that the hon. Gentleman will accept that as an indication of our good faith.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the Minister, but the key thing is that having flagged up our concern, which the Minister has effectively acknowledged is legitimate in the context of the regulation as it is drafted, we need to see how the Government intend to use the power before the parliamentary passage of the Bill has finished. If that cannot be done before Report Stage, it should be done before the Bill is considered in the other place, so that we have the opportunity to debate it during the parliamentary progress of the Bill, rather than during a debate on a statutory instrument.

Valerie Davey (Labour, Bristol West)

I have been listening closely to the hon. Gentleman's remarks. He has done the Committee a great service by bringing the matters to the Minister's attention. The Minister has responded positively.

With respect to overall housing policy, much of which is contained elsewhere in the Bill, the Government are effectively giving large subsidies to councils that are transferring their stock to registered social landlords. It appears that the Government were going the other way.

Is the hon. Member for Runnymede and Weybridge concerned, as I am, that there may be a lack of consistency in the policy? When the Government draft the regulations, about which he teased out information, they should bear that in mind and ensure that authorities that seek to promote registered social housing in that way are not disadvantaged but, if anything, encouraged.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Gentleman is right. In fairness to the Minister, he has implicitly recognised that draft regulation 16 cuts across the intention of Government policy. For that reason, he has indicated that he will consider redrafting it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Philip Hammond (Conservative, Runnymede and Weybridge)

I have a very quick question, which is less important but not entirely redundant as a result of what the Minister said. Would the Minister clarify whether the powers under clause 10 can be used retrospectively—I know that that is an emotive term—to catch disposals and non-monetary receipts for which a local authority had contracted prior to the legislation coming into force? I see that all the members of the Minister's support services have carefully averted their eyes. If he cannot get the answer that he needs at this moment, perhaps he would be kind enough to write to me.

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman asks a good question. Let me say right away that it is not our intention that the provision should have retrospective effect, as I shall make clear in the debate on the next clause. On the specific issue as to whether, technically, there might be a problem, I shall seek further advice and write to the hon. Gentleman.

Robert Syms (Conservative, Poole)

I have just one further small point. Sometimes, when a county council decides that it has a surplus school in a village, it is not entirely clear who actually owns it. Many schools were set up by local

charities that may have predated the county council or were provided by local landowners, so there is often endless debate as to what can be done with an asset or whether it is legitimate for the county council to sell it. I hope that the Minister takes that into account before he drafts the policy.

Nick Raynsford (Labour, Greenwich and Woolwich)

I remind the hon. Gentleman that county councils are not housing authorities. It is unlikely that they would have an asset of that nature that could be treated as a housing capital receipt and, therefore, the provisions are not likely to apply.

Question put and agreed to.

Clause 10 ordered to stand part of the Bill.

Clause 11 - Use of capital receipts

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 66, in

clause 11, page 5, line 4, at beginning insert

'Subject as provided in subsection (2)'.

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss the following amendments:

No. 59, in

clause 11, page 5, line 4, leave out from 'State' to end of line 5 and insert

'shall not in any circumstances interfere in the use of capital receipts by local authorities.'.

No. 69, in

clause 11, page 5, line 4, after 'use' insert 'by a local authority'.

No. 70, in

clause 11, page 5, line 5, leave out 'a' and insert 'that'.

No. 60, in

clause 11, page 5, line 6, leave out subsection (2).

No. 61, in

clause 11, page 5, line 6, leave out from beginning to end of line 22.

No. 67, in

clause 11, page 5, line 6, leave out 'in particular'.

No. 51, in

clause 11, page 5, line 7, leave out from beginning to end of line 10.

No. 62, in

clause 11, page 5, line 11, leave out from beginning to end of line 12.

No. 3, in

clause 11, page 5, line 11, leave out from 'requiring' to 'of' and insert

'such amount as the Secretary of State shall specify, being not more than 20 per cent.'.

No. 40, in

clause 11, page 5, line 12, at end insert—

'(c) make provision requiring an amount not exceeding sixty per cent. of a capital receipt to be used only to meet capital expenditure in connection with the local authority's functions under part II of the Housing Act 1985 (provision of housing).'.

No. 63, in

clause 11, page 5, line 12, at end insert—

'(2A) Regulations made under subsection (2)(b) may only include the following in relation to payments to the Secretary of State—

(a) in relation to the disposal of dwellings, the maximum amount that can be specified is 25 per cent. of the capital receipt; and

(b) in relation to the disposal of any other asset, the maximum amount that can be specified is 15 per cent. of the capital receipt.'.

No. 39, in

clause 11, page 5, line 14, after '2(b)', insert 'and 2(c)'.

No. 25, in

clause 11, page 5, line 15, after 'of', insert 'an interest in'.

No. 41, in

clause 11, page 5, line 20, leave out subsection (5).

Philip Hammond (Conservative, Runnymede and Weybridge)

This is one of the most important clauses in the Bill. The large number of amendments that have been tabled bear witness to the intensity of interest in it. They have all been grouped together, which is perhaps inevitable if a clause is relatively short and has a focused purpose.

I think of this clause as the expropriation clause. It drives a coach and horses through the Government's claim that the Bill is about giving freedoms to local authorities. The Transport, Local Government and the Regions Committee said clearly that it should be deleted from the Bill. It is another piece of the Government's plan to siphon off resources from good, prudent councils and hand them to Labour-controlled councils, including the odd basket case.

The power in subsection (2)(a) allows the Secretary of State to direct the use of non-housing receipts for purposes of either capital expenditure or debt reduction. Draft regulation 17 is permissive in that it allows either. Would the Minister confirm that the intention is that the Secretary of State should be able to specify by regulations to either subsection (2)(a)(i) or subsection (2)(a)(ii) and that it is merely an expression of his current generosity of mind that the draft regulation allows either debt reduction or capital expenditure?

The power in subsection (2)(b) is the power to sequester housing receipts from local authorities. In the terminology of the guff that the Government put out and Ministers repeat at the Dispatch Box, that is called redistribution. There is nothing in the Bill about redistribution. It mentions an amount equal to a part or a whole of a receipt being payable to the Secretary of State. That is sequestration by any other name. The redistribution will be entirely at the discretion of the Secretary of State at a later stage. The Minister might like to comment on a report that the Minister for Housing and Planning said—outside of Parliament—that of the 34 debt-free authorities that make up the capital receipts group, only one, Barking and Dagenham, is an authority likely to be considered to be in housing need by the Government. There is likely to be a wholesale redistribution away from that group of authorities to another, more favoured, group.

I shall spell out how I understand that the provision will work. The Minister will have the pleasure of correcting me if I am wrong in saying that 75 per cent. of right-to-buy receipts will be sequestered by the Secretary of State. Of other housing receipts, including large-scale voluntary transfer receipts, 75 per cent. will be sequestered after taking into account certain allowances that give local authorities an opportunity to reinvest part of the proceeds in housing and urban

regeneration before the Secretary of State takes his cut. If that scenario is right, I cannot square it with the comments that the Minister made in the last debate, when he told the hon. Member for Kingston and Surbiton that when we came to this debate we would see that clause 11 would not remove the funding that local authorities might wish to reinvest in housing within their areas. If the source of that funding is right-to-buy receipts, the proposal, together with the draft regulations, would remove 75 per cent. of it from the authority and give it to the Secretary of State to be used in his absolute discretion.

Some of the amendments are alternatives to each other, and some seek to probe the Government's reasoning behind the drafting. Our initial reaction is to oppose the provisions of the clause, especially subsection (2)(b). However, we are realists and, in order to move forward, we think that it is worth exploring what the Government are trying to achieve and what their objections to the present system are, in order to establish whether there is any scope for compromise. Unless the Minister demonstrates a willingness to alter his position, we shall vote against the clause on stand part, because the suggestion that the Secretary of State can take one community's assets and move them elsewhere in the country is wrong in principle. Money raised from the sale of council houses should stay in the community and be spent according to locally determined priorities for housing and urban regeneration.

The Opposition do not accept the argument that borrowing, supported by central Government, has necessarily funded the provision and upkeep of authorities' housing stock. Some authorities have received negative housing subsidy for decades, and all authorities, whether they originally received housing subsidy or not, will have invested substantial amounts of their own tenants' money and, in some cases, council tax or, before that, ratepayers' money in that housing stock. The proceeds of sale of those housing assets should be reinvested locally and should not become part of a national resource, to be directed around the country on the Secretary of State's whim.

Brian Iddon (Labour, Bolton South East)

In affluent areas such as the south and south-east, where the Government in the past have invested in housing and the price of housing has gone up to what I consider, from a northern perspective, to be astronomical levels, is it not fair that the Government should have a share in that extra money to reinvest in housing in other parts of the country where there is greater need?

Philip Hammond (Conservative, Runnymede and Weybridge)

No. If the hon. Gentleman thinks it through, he will realise that, if the values of housing units have gone up, that gives rise to precisely the problem that hon. Members representing those high-pressure areas of the country face every day. Fire fighters, to take a topical case, teachers or social workers, who are effectively paid on national salary scales, do not stand a chance of being able to buy a property. Therefore, people in other parts of the country that do not suffer the same house price pressures who could expect to get on the housing

ladder and buy a property are forced to look to the social housing sector. The need for additional social housing goes much further up the income scale in parts of the south-east that are suffering from high house-price pressures than in other parts of the country. There is a real need in such areas to ensure not simply that people are decently housed, but, increasingly, that the public services, which the Government talk about and talk about, can be delivered.

I assure the hon. Gentleman that if he comes to Surrey, or even to the constituency of the hon. Member for Kingston and Surbiton, he will find that it is increasingly difficult, if not impossible, to recruit the appropriate people to staff those services, because they cannot afford to live in the area if they have to buy market housing.

Brian Iddon (Labour, Bolton South East)

I am following the hon. Gentleman's argument with interest and I have sympathy with some of the things that he is saying, but can he say, hand on heart, that all the money being caught by local authorities from right-to-buy sales and other capital sales is being reinvested in housing and not in other areas of local authority expenditure?

Philip Hammond (Conservative, Runnymede and Weybridge)

I cannot, and I know that this will be one of the main thrusts of the Minister's argument—his trump card. I want to go a little deeper into the issue.

First, it is right that local communities that have contributed to the value of the housing asset over the years should be able to decide how the receipts will be spent. In most cases the historical investment will be a small part of the total investment over the life of the asset, most of which will have been contributed by tenants or local council tax payers. However, let me address head on the performance of some authorities in reinvesting their receipts in housing.

I intended to come to this question later, but I shall put it to the Minister now. Has he analysed properly and rigorously the extent to which the total cost indicators imposed by the Government constrain housing authorities in high, cost-pressure parts of the country from reinvesting in affordable housing? I do not claim to be an expert on the subject, but it seems to me that, because of the high pressures of land costs, it is difficult for local authorities in certain areas to reinvest in affordable housing, unless they are doing so off the back of planning obligations that will effectively allow them to access land at less than market rates. I wonder whether the Minister has taken full cognisance of the fact that that will be a constraint on the activities of local authorities that receive capital and cannot reinvest in affordable housing as much as they wish.

Although the power given to the Secretary of State under the Bill would apply to all authorities, it will have a disproportionate impact on those that are debt-free. That is because the current regime—I recall it well, as early in the previous Parliament I sat on the Committee in which the Minister introduced the regime for set-aside—requires 75 per cent. of receipts from the sale of council houses to be set aside, but debt-free authorities have complete freedom over how

they use capital receipts. Clearly, the shock to the system will be considerable for debt-free authorities and negligible or non-existent for indebted authorities. The latter will simply find that the 75 per cent. ceases to be a notional entry in their accounts and goes off as tax paid to the Secretary of State. The disproportionate way in which the measure will affect debt-free authorities is an important point to be considered.

The amendments are designed to probe the Government on key questions, and to determine whether the Government are motivated by the claimed failure of local authorities to invest in housing, as the Minister said on Second Reading, and, if so, what role cost constraints play in that failure to reinvest; or whether the Government are simply determined to get their hands on the money and use it for their purposes and to suit the geographical priorities determined by the Secretary of State. In relation to the former, our amendments include suggestions that will adequately address the Government's concern about ensuring that the receipts are recycled into housing in the local areas concerned. However, there may have to be adjustments to the cost control regime to achieve that.

There is a special question that relates to new towns, which the Minister mentioned earlier, but I think that that issue is almost exclusively Labour party grief. I do not think that any members of the Committee represent new towns; at least, if there are, they have not been vocal in putting the case for new towns. If I am wrong, I look forward to hearing from them in the near future. The Minister's point about the transfer of assets in relation to new towns completely ignores the fact that those so-called assets, often system-built housing that is now 30 or 35 years old, have been accruing vast maintenance liabilities throughout their life. They will require substantial investment, both in relation to housing units and supporting infrastructure, if their lives are to be extended long into this century.

I shall talk about the substantive amendments, and will not bother making reference to those that are simply consequential or paving amendments. Amendments Nos. 69 and 70 would amend subsection (1) to assert the Secretary of State's power to regulate the use of capital receipts, and to make it clear that it is a power to regulate the use of capital receipts by the authority receiving them—in other words, excluding the possibility of removing those receipts from the authority, in line with the compromise approach that we seek. There would be a constraint on the use of receipts, but the receipt would remain with the receiving authority.

Let me deal with the Liberal Democrat amendments Nos. 59 to 61. It was clever of the hon. Member for Kingston and Surbiton to table separate amendments whose aggregate effect would be to prevent clause 11 from standing part of the Bill. A clause that ended up saying that the Secretary of State

''shall not . . . interfere in the use of capital receipts by local authorities''

would probably not be worth including. It might have been more honest of the hon. Gentleman not to table

the amendments but to speak against the clause in the stand part debate. Taken together, the amendments are a resounding no to clause 11.

Amendment No. 67 is a slightly technical probing amendment. It would leave out the words ''in particular'' in subsection (2), which states:

''Regulations under subsection (1) may, in particular . . . make provision requiring an amount equal to the whole or any part of a capital receipt to be used only to meet . . . capital expenditure, or . . . debts or other liabilities . . . make provision requiring an amount equal to the whole or any part of a capital receipt to be paid to the Secretary of State.''

In other words, subsection (2) sets out two particular uses of the regulation-making power under subsection (1).

It is not clear to me, as a non-lawyer, whether the phrase ''in particular'' narrows the scope of subsection (1), or merely gives examples of the uses to which the regulation-making power under that subsection might be put. Will the Minister clarify whether the phrase ''in particular'' limits the power to only those matters described in subsection (2)(a) and (b)?

Amendment No. 62 is the meat and drink of the debate. It would leave out subsection (2)(b), which gives the Secretary of State the power to require that

''an amount equal to the whole or any part of a capital receipt . . . be paid to the Secretary of State.''

We know that the Secretary of State intends to use that power to require 75 per cent. of right-to-buy receipts and 50 per cent. of other receipts to be paid to him as a tax.

Jon Cruddas (Labour, Dagenham)

Has the hon. Gentleman any estimate of the prospective redistribution that the Government's proposal will amount to? At the moment, we lack figures; we have no estimates of the scale of the redistribution.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister is probably in a better position than I am to give such figures—he nods knowingly—but it is probably relevant to consider only the 34 debt-free authorities, because the other authorities would be in the same position anyway. We are talking about some £100 million per annum in respect of the 34 debt-free authorities, including Barking and Dagenham, which is by far the largest. Its figure would be about £12 million per annum.

To put that in context, the national figure for all authorities would be about £1.6 billion per annum, so we are talking about a small proportion of the total. With regard to meeting national housing need, it is a relatively insignificant sum, especially if one considers that part of it will presumably be recycled to the authorities that pay the tax, certainly to Barking and Dagenham. However, it is a very significant sum for individual authorities, many of which are quite small. The hon. Member for Guildford spoke about Waverley, which is a small authority. My local authority, Runnymede, is debt-free and a very small authority.

Nick Raynsford (Labour, Greenwich and Woolwich)

For the sake of clarity, I should point out that our figures show that, if all the amendments were accepted, they would reduce the amount of money available for redistribution to spend on housing nationally by more than £1 billion a year.

Even if we were to limit it to those that are simply restricting the amounts that can be pooled, that would result in a reduction of more than £800 million, and merely exempting debt-free authorities would still cost some £120 million. Those are substantial sums of money, which would have a dramatic effect on the overall housing programme.

Philip Hammond (Conservative, Runnymede and Weybridge)

The relevant figure is the last one that the Minister quoted—the £120 million. To discuss any other figure is to confuse the issue, given that local authorities are required to set aside—[Interruption.] It is my amendment, and, if the Minister does not mind, I will say that I am fairly pleased with my off-the-cuff estimate of £100 million, if the Minister's own departmental resources have come up with £120 million. I believe that that figure is within an acceptable margin of estimating error, given that I am on the hoof in a Standing Committee.

Valerie Davey (Labour, Bristol West)

The Minister gave us some interesting figures, and suggests that the money would not be available for housing investment. Does the hon. Gentleman understand that to mean, as I do, that the money could still be used for housing investment, but that it would be up to the local authorities that were selling those assets to decide how they wanted to invest them?

Philip Hammond (Conservative, Runnymede and Weybridge)

Yes. In tabling the amendments I have deliberately sought to suggest ways of reaching a compromise on that matter. This is not just a party political debate. The Minister will be aware that some of his Labour colleagues who supported the capital receipts group are concerned about the matter. They hope that it will be possible to find a compromise that will delight no one but that everyone will be able to tolerate.

It has generally been accepted by Labour Members to whom I have spoken that the most likely form of compromise acceptable to the authorities concerned, and that might also appeal to the Minister, would be to ring-fence a proportion of those receipts for housing use within the authorities that had received them. In a spirit of compromise, our amendment No. 40 seeks to do precisely that. However, on the basis of the interventions that the Minister has made so far, I am not optimistic that he will seek a compromise—although I hope that I shall be proved wrong.

Desmond Swayne (Conservative, New Forest West)

It is his birthday.

Philip Hammond (Conservative, Runnymede and Weybridge)

As my hon. Friend reminds me, it is the Minister's birthday. That may turn out to be a happy coincidence of timing for the many people in local authority areas in the south-east who are in work and in relatively well paid jobs, but who are unable to get themselves on to the housing ladder with the housing market as it is at present. Those people desperately need to see more resources invested in affordable housing in their areas.

The Liberal Democrats have indicated their support for amendment No. 62, which would delete subsection (2)(b), and we will want to vote on that amendment. If there was any equity in the world, and if the results of votes in this place depended on the

force of the arguments, we would be confident of winning that vote. However, since there is not much equity in the world, and certainly not in the way in which this place works, and since it will be apparent to anyone with only a passing acquaintance of this place that the outcome of votes has nothing to do with the validity of the arguments put in favour or against, we have sought to find a compromise. That is the point that we have reached in tabling amendments Nos. 3 and 40, as the hon. Gentleman helpfully suggested.

Amendment No. 3 would limit the amount of tax for national redistribution that the Secretary of State could levy under subsection (2)(b) to 20 per cent.

It is a big concession in principle to suggest that the Secretary of State should have any right to sequester those receipts. Leaving aside our attempt at a practical compromise, let us consider the Minister's argument logically. He said that many of the housing assets were originally financed by central grant or by borrowing supported by central funding. There is a grain of truth in that in some cases, but not all. It may be equitable for some sort of a levy on housing receipts, which goes back to the central pot in recognition of the original seed corn that was invested. The Minister's Department is in a better position than I am to make detailed estimates, but even the most superficial analysis shows that the huge ongoing investment over many decades in much of the council housing stock has been a charge on rent payers, local ratepayers and council tax payers.

The measure is not about redistribution and pooling between authorities, but about the Treasury taking a levy. Nothing in the Bill guarantees that that levy will be recycled into expenditure on housing that would not otherwise have been made. The Treasury will spend the funds on housing that it would have to have funded anyway because of pressures in the system.

Amendment No. 40 would set aside a further 60 per cent. of the capital receipt—after the 20 per cent. taken by the Secretary of State—for housing reinvestment within the recipient authority area. That is a big compromise on the principle that local authorities and communities should decide how to spend the receipts, but it is our attempt at a compromise or consensus to which the Government can agree. It is far from giving the freedom and flexibility that the Government talk about in connection with the Bill, but it is a less bad outcome if the national levy is 20 per cent., 60 per cent. is ring-fenced for housing in the recipient authority and 20 per cent. is a free capital receipt for debt-free authorities to spend as they wish.

I have already raised the issue of total cost indicators and their constraints on recipient authorities in spending the 60 per cent. I hope that the Minister will address the matter in due course.

A similar effect to that of the amendments could be achieved by changing the regulations, extending them to allowances that local authorities can set against a receipt before they calculate the levy payable to the Secretary of State. Thus, spending on affordable housing and urban regeneration could be set against

right-to-buy receipts before calculating the Secretary of State's take. I suspect that if the Minister is in a mood to compromise, it will be on the regulations rather than on the Bill. Conservative Members will listen carefully to him if he is inclined to take that route. Although we would prefer the changes to be in the Bill, we could live with changes to the regulations if they are on the same lines. That would be a sensible compromise.

I hope that the Government will not blindly pursue their two principal targets: first, debt-free authorities, who will have their freedom of the past five years in respect of their capital receipts dramatically removed—from a bureaucratic point of view, that might be seen as order and sanity restored with Whitehall triumphant and in control of how the capital receipts are spent—and, secondly, the right to buy.

We have already seen that the Deputy Prime Minister is gunning for the right to buy. His behaviour is based on the wholly fallacious assertion that the right to buy reduces the availability of affordable housing to rent. The right to buy does not have that effect—indeed, if receipts are properly recycled the right to buy can increase the availability of affordable housing to rent. Although it reduces the total stock, the stock is irrelevant: what matters to people in need of housing is their chance of getting a house. Having a huge stock of houses occupied in perpetuity by people who may no longer be in need—they may be in very much less need than some people on housing waiting lists—or on particularly low incomes is not an effective or efficient system. However, the Government persist in continually reasserting the fallacy. I will not go further down that route now, but we may have an opportunity later to discuss the ins and outs of housing finance and how expanding the right to buy will increase the number of available lettings of affordable houses, which is what we all want to achieve.

Finally, amendment No. 63, tabled by the Liberal Democrats, is essentially a variant on amendment No. 3, but the principle is the same. The amendment offers a compromise percentage figure restricting the Secretary of State's powers under subsection (2)(b). I am sure that the hon. Member for Kingston and Surbiton would agree that that is an imperfect solution, but it is better than the Government's proposal.

Amendment No. 41 is different and stands distinct from the other amendments in the group. It would delete subsection (5), which states that the Secretary of State may set off any amounts receivable by him under clause 11 against any amounts payable by him to a local authority. That seems a rather Big Brother approach. In the real world, people do not have statutorily enshrined set-off powers. Many commercial contracts, and certainly property-related contracts and transactions, which is what we are talking about, specifically exclude a power of set-off. Yet the Government, who have been spouting repeatedly—in the circumstances, I had better not say, ''at some length''—about the need to mirror ordinary accounting practice and, by implication, standard

practices in the commercial world, would give themselves this power of set-off.

I have already voiced one concern about that in relation to clause 10, namely, that there may be deemed to be receipts that have not actually been received in cash, but which the Secretary of State—not through malice, but just because there is a machine running somewhere—will automatically set off against payments due to be made to the local authority. Subsection (5) should be removed and the Government should not seek a specific statutory provision to deal with the way in which debtors and creditors behave towards each other in relation to the making and timing of payments. That is wholly unnecessary and goes against the grain of the Minister's suggestion that the new regime will mimic the real world as far as reasonably possible.

Valerie Davey (Labour, Bristol West)

I shall not detain the Committee for too long, for the simple reason that the hon. Member for Runnymede and Weybridge made a very long speech, I agreed with much of it, and I support many of his amendments, just as he supports many of the Liberal Democrat amendments. Furthermore, my hon. Friend the Member for Guildford wants to catch your eye, Mr. Griffiths, and the Minister is itching to reply to the debate—I know that because he has a ''Focus'' leaflet in his folder. It is always reassuring to know that he is about to quote some Liberal Democrat wisdom, but perhaps I can set out the party's official position first.

The background to the clause is that the Government still do not trust local authorities and do not want to give them any freedom. The Bill proposes the prudential capital regime, which is a good thing and a step in the right direction. However, in introducing it the Government saw that some controls over capital receipts would have to be relaxed—those controls could not be implemented in the same old way, because that might give local authorities more freedom over how they used their capital receipts. The Government could not have that, so they had to invent a new mechanism for clawing back and redistributing the money. Indeed, as the hon. Member for Runnymede and Weybridge said, they have gone further by introducing an extra levy on debt-free authorities. So, when we hear the Government's rhetoric about how the Bill frees local authorities, let us remember that the clause imposes some very big restrictions as well as an extra punitive levy on authorities that manage their finances well.

The hon. Gentleman put his finger on it when he talked about the Treasury, which is, of course, behind that measure. It cannot stand the idea that some public sector body somewhere will have some money because it managed its affairs properly. The Treasury does not want to give such bodies any freedom; it wants to grab the money and bring it back to the centre. That is clear to Liberal Democrat Members.

Jon Cruddas (Labour, Dagenham)

Does the hon. Gentleman not concede that the fuller picture—we will presumably get it later this month, when we have the communities plan and the like—will not preclude the possibility of additionality? That is true even of debt-free councils, such as Barking and Dagenham, which enjoys a

certain exceptionalism in this debate? Using that as an illustration winds things up while precluding the possibility of painting the fuller picture. There are opportunities as well as tensions for certain authorities.

Valerie Davey (Labour, Bristol West)

The hon. Gentleman makes a fair point, and I was coming to it. The Government are expected to announce in the near future how they will spend all the money that was earmarked for housing in last July's spending review. That money will be welcome if, as we hope, the Government make the right decisions when allocating it. However, that makes our point stronger. If they are going to give money to authorities that need housing investment, especially for affordable and social housing, why do they need extra provisions to take money from councils?

As we have heard, people are worried because councils in the south-east and London get huge receipts. They believe that that is unfair because councils in the north of England do not have the same advantage when investing in social housing. However, as the hon. Member for Runnymede and Weybridge said, councils in the south-east and London face huge costs in providing affordable housing and land is very expensive. The fact that their receipts are high mirrors and balances the fact that affordable housing provision is expensive. There is a self-regulating mechanism, but the Government do not want it to operate. They want to interfere, as is so often the case.

Jon Cruddas (Labour, Dagenham)

To take that a bit further, the Government are presumably not ignorant of the pressures in the south-east, which relate primarily to key workers. We have seen press reports about their plans for regenerating the Thames gateway and their creative approach to housing in the area, which will involve strong proportionality in terms of social housing. That means that the issue is centre stage politically and economically. If the hon. Gentleman concedes that the proposals in the Bill will not preclude additionality from also being part of the fuller picture, is there not a case for saying that the issues are being wound up for what I acknowledge are politically expedient reasons? The proposals will allow a much more creative approach to confronting issues in the south-east, some of which are experienced by my community, the hon. Gentleman's and those of many of his colleagues.

Valerie Davey (Labour, Bristol West)

I believe that the hon. Gentleman represents an area whose council will be hit by the measures. I understand that he is in a difficult position. I have already accepted that when the communities plan is announced there may be money for his and other areas—and, I hope, for my area, if we are lucky—but that is not the point. As the hon. Member for Runnymede and Weybridge said, many of the assets have been built up over many years through management of the money of tenants and local taxpayers and by debt-free authorities running their affairs prudently over a long period.

It seems bizarre that the Government should implement the new system now. If their rhetoric

about freedom and flexibility is to reach its logical conclusion, such authorities should be encouraged. That brings me to a major point that the hon. Gentleman did not touch on: creation of incentives in the system. For this reason I am sceptical as to whether some of the Minister's figures will be realised. Will debt-free local authorities faced with this legislation encourage the sell-off of housing or housing land? No. They will not try to promote such selling as they might have done in the past because they will see that money going out of their area.

These provisions will create an incentive against good and efficient management of capital assets. We may see a paralysis in the management of capital assets by the local authorities most affected, and those whom the Government hope will receive money from the redistribution mechanism might not receive any, so both sides will lose. Rather than a win-win situation there will be a lose-lose situation. That cannot be a sensible way to proceed.

So whatever is written in the ''Focus'' leaflet that the Minister is going to wow us with, my friends who edited that leaflet will not necessarily have focused on the wider picture.

Philip Hammond (Conservative, Runnymede and Weybridge)

This is a pre-emptive rebuttal.

Valerie Davey (Labour, Bristol West)

There are so many accusations of pre-emptive rebuttal. I am not sure whether I want to go down the pre-emptive route, as the Government seem to.

On the incentive point, as the hon. Member for Runnymede and Weybridge and I start to analyse the mechanism the Government are promoting, it begins to fall apart, so it is not surprising that there has been great opposition to it outside the Committee. We have heard speeches in the Chamber opposing the proposals from Conservative and Liberal Democrat Members, and on Second Reading from the Labour Benches. The Local Government Association, with Labour, Conservative and Liberal Democrat councils, have opposed them.

Jon Cruddas (Labour, Dagenham)

Will the hon. Gentleman give way on that point?

Valerie Davey (Labour, Bristol West)

I will give way in a moment. The Capital Receipts Group has a number of debt-free councils opposed to the measures. In the Government's analysis of respondents to the draft Local Government Bill, 134 respondents wrote to the Government to say that it constituted a bad set of proposals. There is widespread opposition to them from people who have analysed them. They fear that it will not be a good move either for local government or for housing investment.

Jon Cruddas (Labour, Dagenham)

Did the hon. Gentleman say that Labour within the LGA was opposed to the proposals? My understanding is that the Labour group did not vote on the issue because it was a redistributive issue, but the majority composed of Liberal Democrats and Conservatives produced the subsequent LGA position.

Valerie Davey (Labour, Bristol West)

I cannot give the hon. Gentleman a full answer on that point—perhaps the hon. Member for

Runnymede and Weybridge will do so—but it strikes me as a way of trying to evade responsibility. The Labour group on the LGA is very powerful and it could have changed the LGA's line if it had chosen to do so. Instead, it has allowed the LGA to be in outright opposition to this clause, and I think that it was right to do so.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Gentleman is absolutely right. It is worth placing on record that the LGA is a Labour-controlled organisation—the majority of its membership is Labour. The LGA has rejected clause 11.

Valerie Davey (Labour, Bristol West)

I have to correct the hon. Gentleman on one point. I do not believe that there is a Labour majority on the LGA, although Labour clearly has more votes than any other party at the moment. I give way to the Minister, who may correct us with some exact information.

Nick Raynsford (Labour, Greenwich and Woolwich)

I hope that I can cast a bit of light on this. I understand that, for obvious reasons, the LGA does not normally comment on matters that involve the distribution of resources between authorities. The Liberal Democrats and the Conservatives in the LGA supported the view that was carried, but the Labour group did not support it. That was an unfortunate example of a political division within the LGA on a matter of distribution. Such things would normally be avoided. That is the information that we have on what happened.

Valerie Davey (Labour, Bristol West)

We are in danger of getting away from the point, and arguing over who voted for what and when. I understand that the Labour group in the LGA was not in outright opposition to this clause and that there was disagreement within the group.

I want to deal with these amendments—in particular, with amendment No. 62. The hon. Member for Runnymede and Weybridge quoted from a brief from the Capital Receipts Group, which regards this as the key amendment. The amendment would delete clause 11(2)(b), thus removing the power of the Secretary of State to receive and then redistribute receipts. When one considers this matter and acknowledges, as the hon. Gentleman did, that it especially penalises debt-free authorities, one begins to see that the amounts involved are relatively small. For debt-free authorities, the amounts are extremely small in the context of overall housing budgets—especially when one considers the amount of money involved in the communities plan. It is therefore even more bizarre that the Government have decided to push this provision through, in the face of opposition both in Parliament and in the local government family. It is a sledgehammer to crack a nut, it creates disincentives, and it is a bad precedent for the Government's approach to low-debt and debt-free councils.

I hope that the Committee will support amendment No. 62, which I intend to press to a Division. The amendment would right the most odious part of this clause.

Philip Hammond (Conservative, Runnymede and Weybridge)

It is my amendment.

Valerie Davey (Labour, Bristol West)

The hon. Gentleman says that it is his amendment, but I believe that my name is at the top of it. Look at the amendment paper.

The rest of the debate is in Hansard.