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EDUCATION AND EMPLOYMENT COMMITTEE
Ordered,
That Mr. Don Foster be discharged from the Education and Employment Committee and Mr. Phil Willis be added to the Committee.--[Mr. Mike Hall.]
29 Mar 1999 : Column 831
Madam Speaker: No, I have not received such a request. Had I been informed that a statement was to be made, it would have appeared on the annunciator as soon as I became aware of it.
Trading Credit Approvals
Motion made, and Question proposed, That this House do now adjourn.--[Mr. Mike Hall.]
10.1 pm
Mr. Phil Willis (Harrogate and Knaresborough): I am grateful to you, Madam Speaker, for allowing me to raise the issue of trading credit approvals in this Adjournment debate. I realise that the subject might appear somewhat obscure, but the Minister's response tonight may well have a profound effect on any local authority involved in commercial trading operations and, more important, a significant impact on the economic well-being of 200 businesses in my constituency and the 4,500 men and women who depend on Harrogate's successful conference and exhibition business for their livelihoods. In addition, it may determine whether the current £110 million spent by business tourists within the Harrogate district continues, and whether the high level of private-sector investment that has resulted from the successful international conference business is sustained.
In his response, I hope that the Minister will address three specific points. First, will he clarify the Local Government and Housing Act 1989 in respect of the granting of supplementary credit approvals, including trading credit approvals? Secondly, will he clarify and make explicit the Government's policy in respect of local authority trading organisations? Thirdly, will he re-examine the application for a trading credit approval on behalf of Harrogate borough council?
Although I intend to concentrate on the case of Harrogate borough council's trading operation--the Harrogate international centre--I am aware that the debate has considerable significance for other local authorities with publicly owned conference and exhibition facilities. In towns such as Scarborough, Southport, Blackpool, Brighton, Eastbourne, Bournemouth and Torquay, the development of business tourism came as a direct result of the decline of the traditional holiday tourism market. In Harrogate, it was a response to the collapse of the traditional spa treatment market--a market from which the town of Harrogate derived much of its prosperity and developed its now splendid environment.
The arrival of much larger players--Birmingham's NEC, Manchester's G-MEX, Edinburgh's international centre, Glasgow's Scottish conference and exhibition centre and the Belfast waterfront--has presented new challenges to the smaller venues. Harrogate has risen to that challenge and today ranks as the third-largest conference and exhibition business in Britain outside London. Ten years ago, the business barely achieved break-even before financing costs, but it now achieves a trading surplus of more than £1 million per year, which is used partly to support council services and partly to finance reinvestment in the business.
However, the council has now reached the point where the future prosperity and survival of its conference business requires significant capital investment--about £9 million, of which £2 million can be found from accumulated profits within the borough council. The council needs to raise external funds of £6.6 million to allow reinvestment in catering and exhibition facilities. Failure to do that will inevitably have an impact on local jobs and businesses and will reduce the financial return
to the council that is needed to underpin local services. For those reasons, Harrogate applied for a trading credit approval to borrow £6.6 million.
Trading credit approvals are not specifically defined in legislation: they are a form of supplementary credit approval issued under section 54 of the Local Government and Housing Act 1989. First issued in connection with the South Yorkshire supertram project, they are principally associated with regional airport development. KPMG, one of the world's largest accountancy firms, said in its advice to Harrogate borough council in 1997:
However, obtaining either a supplementary credit approval or a trading credit approval depends entirely on the discretion of the Secretary of State, who may have regard, according to section 55(1) of the 1989 Act,
This year, four local authorities applied for a trading credit approval, and not one of them was successful. If, as for Harrogate, the reasons for refusal are somewhat spurious to say the least, what is the point of such a facility? Of course Governments should set strict guidelines for borrowing, but legislation that depends simply on the whims of the Secretary of State cannot be acceptable. I therefore ask the Minister to agree to examine the legislation and to make proposals that would allow, under clearly defined circumstances, local authorities access to borrowing for profitable trading operations.
When Harrogate applied for a trading credit approval just over 12 months ago, it did so having exhausted every other avenue of financing for its new facilities. Revenue balances were considered, but rejected. Harrogate borough council is certainly not profligate. Its net budget was £15 million in 1991-92, and next year it will be £15.4 million--an increase of 2.5 per cent. in cash terms over eight years, but a real-terms reduction of 19 per cent. Reserves are at a minimum, prudent level and are insufficient to apply to a capital project.
A sale to the private sector was considered. In1991-92, the business was marketed worldwide without success. Although great interest was shown in taking over the management and operational functions, the private sector was not prepared to take on the capital debts and
invest in new facilities. Nor could the core objective that the business remained a key local economic development primer be guaranteed.
The reason why was perfectly clear, and is the reason why most conference and exhibition businesses remain in public ownership. Given the subsidies paid around the country to attract business, the financial returns on investment are low, and not adequate, given the risks, to justify investment on purely commercial grounds. However, they are more than adequate to meet long-term public sector borrowing costs. Independent experts have agreed that Harrogate's investment proposal is not appropriate for private commercial investment, although the catering business has recently been transferred to the private sector--to Crown Catering.
The private finance initiative was considered in some detail and subjected to an assessment by KPMG, which concluded:
What about capital challenge? That was considered but not taken forward because it was clear that the Government were seeking cross-service bids and the total UK allocation was very small. Perhaps a single regeneration bid would have been successful. Originally the subject of an informal bid in the first round, the proposal was rejected at the outline stage by the Government office for Yorkshire and Humberside.
Two other possibilities were considered before any application for a trading credit approval: the reallocation of resources within the capital programme and the sale of assets. Ironically, those were the very suggestions made by the Government when they denied Harrogate its request for trading credit approval. The briefest examination of the evidence presented to the Government reveals how absurd both those suggestions were.
The trading credit approval being sought was for £6.6 million. In contrast, Harrogate's total capital programme for next year amounts to just £4.7 millionon housing and £3.5 million on general services. To reallocate £6.6 million from those figures would virtually wipe out existing spending plans and commitments, but the simple fact is that most of that money cannot be reallocated. About £2.3 million is from grants for specific projects which Harrogate has secured from the lottery and other bodies; £600,000 is match-funding to secure those grants; £3.2 million is ring-fenced by law for specific services, mostly housing, and that leaves just £2.1 million of spending over which the council has any degree of choice.
Even if the council had put all the £2.1 million towards its new exhibition hall, first, that sum is nowhere near the £6.6 million financing requirement, and secondly, it would involve the complete cancellation of essential or committed schemes including housing renovations, rural centre closed circuit television projects and public convenience refurbishment.
All those points were explained to the Government when the trading credit approval was requested. The Government had no questions about the figures and it is plain that the capital programme could not be reallocated to find the £6.6 million, so why do the Government, who had the information for over a year, persist with a suggestion that is illogical and impossible to achieve?
Further asset disposal is equally illogical. Since 1980, the council has had a proactive policy of asset disposal in line with Government policy. Over £35 million has been raised from asset disposal, with about half of the proceeds being applied to the debt on the existing conference centre. Although the council retains some assets, further disposal does not satisfy the commercial tests that must be applied before disposal can be justified and it would fall foul of the district auditor.
Following that detailed analysis, which is supported by KPMG and the public-private partnerships programme--the 4Ps--and not challenged by the civil servants, it was clear that a trading credit approval was the only way forward. Local authorities do not enter lightly into commercial operations. They know only too well that the cost of failure has to be paid by poorer local services. However, Harrogate and other local authorities involved in the business and holiday tourism market know that a failure to invest results in a spiral of decline for their communities.
Harrogate's position as conference and exhibition centre owner is unusual. The dependence of the town's economy and the borough council's finances on the conference and exhibition business is unique because of the scale of the conference business compared to the size of the council.
The Government recognise in their wider economic policies that particular local circumstances warrant extraordinary action. The Government have rightly recognised Birmingham's dependence on the Longbridge car plant and are prepared to support that business with public money. The dependence of Harrogate's economy on the conference business is at least equal to Birmingham's dependence on Longbridge, yet, while the Government are apparently prepared to support Birmingham's economy with cash, they are not prepared to allow Harrogate to borrow what is, in public expenditure terms, a tiny sum to meet its requirements.
The Government have now given local authority-owned airports freedom to borrow commercially. Why cannot similar freedoms be given in respect of conference and exhibition businesses, especially if individual borrowing is subject to specific vetting by the Department of the Environment, Transport and the Regions? There is an inherent contradiction in general Government policy that requires local authorities to achieve best value and annual efficiency savings of 2 per cent. while specific policies prevent capital investment that is often essential for improving efficiency.
The Government's promotion of the use of the PFI is entirely unrealistic for the wide range of smalland medium investment requirements of small
local authorities. High start-up and financing costs and the artificial nature of risk transfer ensure that any attempt at private finance will conflict with the need to achieve best value. The PFI may be appropriate for£50 million-plus investment schemes but Ministers will be aware that the cost effectiveness of even those schemes is widely questioned by finance professionals and independent academic research.
Harrogate borough council's approach to working with the private sector is pragmatic and entirely business driven. Hence the use of the private sector for construction work and the repair and maintenance of roads and buildings, and recently the transfer of the Harrogate international centre's entire catering operation.
It is about time that the Government came clean on this issue. If they are opposed to the provision of services direct by the public sector and direct public investment as a matter of policy, irrespective of business and financial arguments, let them say so. We shall all know then exactly where we stand. A clear political stance on this issue will at least help us to explain to local businesses and to workers whose jobs are being put at risk why the council is being prevented from making a commercially sound investment that would support local business and jobs.
"we are aware of this type of credit approval being used for capital projects that can generate sufficient revenue stream to service debt financing obligations".
The Local Government Association said, in a letter that I recently received, that it understands that
"Trading credit approvals are so termed because they were issued on the basis that associated borrowing costs would be met from income streams".
Indeed, such criteria for borrowing approvals make excellent sense. They follow the golden rule laid down by the Chancellor of the Exchequer that borrowing should be for capital investment and not revenue expenditure. They comply with the Treasury's proposals for resource accounting, and therefore do not add to the publicsector borrowing requirement. They would allow local authorities to invest in trading operations that can provide an appropriate rate of return and that meet stringent but transparent tests.
"to such factors as appear to him to be appropriate".
Surely such a situation is unacceptable.
"PFI does not offer a suitable solution for the procurement of the whole of the scheme . . . PFI does not appear to offer a realistic funding solution".
The chief executive of the public private partnerships programme also concluded:
"Therefore, on balance, and in the light of the Council's likely commitment to underwrite the investment financed by the TCA, I would find it difficult to argue that, in this case, PFI would provide a best-value option".
Were European grants available? Harrogate is not an assisted area. Unique among conference venues, it has access only to one small source of European funds: Konver. Harrogate has been advised that, although there was an outside possibility of grant aid from Europe, that is now unlikely. In any event, the maximum possible was only ever going to be £500,000--not enough to finance the whole scheme.
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