Memorandum by Brighton and Hove City Council
(GRI 17)
SWEATING THE
EQUITY
Why dream up ever more clever deals designed
to get round outdated and cumbersome legislation, when some straightforward
thinking could save us all a lot of time and grief?
The theory should be simple: the Council, guided
by local priorities and in partnership with other sectors and
agencies, puts its assets into a deal. The outcome is a development—a
library, a stadium, housing, parks—which improves the area
alongside jobs, services and homes.
Instead, huge amounts of time and skills go
into finding ways to put together packages of land and money to
achieve local objectives. We are inundated by wheezes—dreamed
up locally, pushed by the RDA, trumpeted as the latest solution
in the trade press, or proposed by expensive consultants. The
government colludes in this wonderland approach, promising flexibilities
and freedoms for the right numbers in the boxes of public service
agreements. So what basic principles underlie the resource management
framework, and would it be more effective to rethink the structure
rather than tinker with the interior decoration?
I suggest that now is the time to re-examine
the reasons for this mini-industry. Some of the rules are UK based,
and some European. Behind it all sits the old shibboleths of pubic
expenditure; if we chop out the legislative undergrowth, we can
see that the old debate of the definition of the PSBR emerges.
Only by looking again at this problem will national and local
government be able to really use public assets for the public
good.
Much of the legislation is rooted in a different
era, and a different economic climate. In 1972, local government
was under fire for corruption and misuse of land. But there was
no debate that the Council was the monolithic service provider,
and guardian of the public purse. By 1989, governance was to be
reduced to administration and discretion reduced to an absolute
minimum. Today, authorities aspire to community leadership, facilitating
strong services and working with many partners to exploit our
assets for community value.
We can take some issues for granted. Everyone
wants high quality of design. Everyone from the Commission for
the Built Environment (CABE) to the Treasury Task Force has guidance
on the topic. Indeed, given the amount of wisdom on the subject,
it's amazing how many ugly buildings are still going up. Less
noisily, we are all seeking the best environmental solutions.
This ranges from recycling brownfield land, through the materials
used in the building to the transport solutions achieved through
the s106 agreement. Interestingly, there is less guidance around
on this topic, and indeed there are perverse incentives in the
system. The most notorious is the continuing tax inequity which
still makes it easier to work the numbers on open fields. And
we all want community involvement in our infrastructure projects,
from what it is we need to create to its use and management at
the end.
There is a solid strategic context for what
practitioners are trying to do in specific areas. Community strategies
are being devised, along with a plethora of neighbourhood strategies.
A sub-regional economic development strategy will sit alongside
the Local Plan, the Housing Strategy and other specific expectations.
The Council itself will have its capital strategy and asset management
plan. Of course, all these are expected to tie together and not
present in themselves any conflicts. In practice, they do have
tensions, not least because the government expectations of the
different strategies are not always consistent.
Let us assume that in our high performing local
authority, all these plans and performance indicators point in
the same direction and there is clear community will for specific
developments. Indeed, local activists in your most run-down area
are working on a co-operative to carry out property maintenance.
They have high hopes, lots of energy and talent. The only thing
lacking is the money. A package is needed, using some RDA money,
maybe a lottery grant, and private sector investment. This is
where the problems arise, where the legislation prevents innovative,
effective and comprehensible solutions tailored to those infrastructure
projects which will make a difference.
Four particular pieces of legislation get in
the way—the famous s123, the influenced company regulations,
the procurement and competition rules, and finally State Aid rules.
All of these in turn rest on the definition of the Public Sector
Borrowing Requirement. Let us look in more detail at each of these.
Section 123 of the Local Government Act 1972
in effect has required "best consideration" to be obtained
for any land the local authority wishes to sell. It is very welcome
news that the Government intends to issue a general consent, essentially
allowing disposal at less than best consideration without the
Secretary of State's consent. The new regime only gets two cheers,
however, as both timing and specifics remain vague.
Civil servants are saying that the general consent
will be restricted to a percentage of the value, so not more than
(say) half the market value can be foregone. There will also be
a cap on the market value of the asset itself. Those might seem
fair enough, although we will have to see the actual numbers before
we know how helpful it will be.
What of the deals that fall outside the terms
of the general consent? These will still require specific approval,
and no criteria will be available to judge the likelihood of success.
Indeed, such an approach is specifically rejected on the basis
that every case is unique. This is a shame; if the government
seriously want to see assets used to achieve local and national
priorities, the route to consent should be simple and clearly
signposted, with criteria allowing us to estimate the chances
of success. Nobody, least of all private sector partners, are
going to put in large amounts of work to a site on the possibility
that Mr Prescott will see it their way.
The "best consideration" expectation
is, if anything, becoming more important in the new regime in
the Local Government Bill. The value of the Council's assets will
inform the prudential level of reserves required, which in turn
will have the potential to hit the revenue budget. It is connected
to the Asset Management Plan requirement to engineer the best
value out of the council's holdings. These calculations will need
careful working through by any Council looking to use its property
to further its regeneration ambitions, regardless of the Secretary
of State's position. Practitioners and advisers within central
government should be looking very carefully at the Bill for its
impact on Council's freedom or inclination to act.
The influenced company regulations arise from
the Local Government Act & Housing 1989. That's the one which
gave us the poll tax, the ring fenced HRA and other monuments
to the ambition to reduce local government to annual contract
administration. Buried in the minutiae of the new capital regime
it introduced are the ways in which a company's expenditure may
count against the borrowing approval issued to an authority (score),
therefore reducing its capacity to spend capital elsewhere. (There
appear to be no proposals to change these rules in the new Bill.)
Essentially, the capital expenditure of a company
scores if it is influenced by the Council; influence is determined
either by ownership of the company, or by the previous ownership
of the land it holds. This is complicated piece of legislation,
but, in summary, if the Council owns less than 19 per cent of
the company then it is not influenced. Over 19 per cent, and it
is, with the scoring impact of its capital investment hitting
the Council. If such a company owns land it obtained at less than
best consideration, then it may also be influenced.
This legislation has not stopped many innovative
partnerships enabling renewed private sector investment in infrastructure.
In some cases, this can be a direct commercial opportunity, or
in others it may allow the project to attract other funds (notably
from the Lottery). But it can be a major barrier to creating a
vehicle which will take on the hardest projects. Essentially the
structure requires the owners of the other 81 per cent of the
company to take the risks, and this may simply be too much for
any other agency or business to swallow. Certainly, our group
of social entrepreneurs creating their building co-op do not want
to suddenly become an influenced company because of the s123 waiver
on their first patch of development land.
This is complex law, but the finance changes
represent an opportunity to review these controls. There are plenty
of cases where a local authority might share the risks and the
management, and be willing to put in the land, but has no way
of raising the necessary capital without a successful commercial
partnership. Again, some clear guidance for relaxation of the
rules could be used, or in the spirit of central/local partnership,
the percentage increased to 49 per cent.
The procurement and competition rules take us
into the murkier water of European regulations. These regulations
primarily cause difficulties through their complexity, the expense
of compliance and their impact on community involvement. But they
can have more damaging effects. Imagine that our builders co-op
is now a growing social enterprise, self-financing from its commercial
activities. How can the Council ensure that this company gets
any of its property modernisation contracts? At this point the
competition requirements actively get in the way. Maybe our local
entrepreneurs wish to take on a bit of derelict land and improve
it for community use. Even if the Council has a waiver for s123,
and owns less than 19 per cent of the company, a tendering process
for the work is required. The bureaucracy and delays associated
with the process puts off even the most seasoned bureaucrat, let
alone a fledgling co-operative on a peripheral estate.
Government needs to be more proactive in working
with the European Union in addressing some of the applications
of the procurement rules in such situations. They are aimed at
ensuring that French businesses can clean all our streets, and
indeed that we can all work across the continent. They should
not be unduly restrictive of local ambitions to harness talent
and energy to transform local areas.
The infamous State Aid regulations are even
muddier water. Every civil servant who understands them expresses
surprise at the bafflement they cause. Yet I know no regeneration
practitioner, let alone hard pressed community activist, who feels
confident about their application. The objective of the State
Aid rules is to avoid distorting competition between different
companies across the European Union. There is a heated debate
developing about their role in the enlarged Union, when new states
join in 2006. Local practitioners may not have thought that their
aspirations are compromised by the (equally important) ambitions
of Cyprus or Malta, but this is exactly what is happening.
Some State Aid is clear, and the route to getting
the European Commission to agree the Aid is obvious. If any part
of your area qualifies for Regional Selective Assistance, or you
have industries in key sectors, or you have Objective One status,
then you are more likely to know where you are.
The application of the rules becomes less clear
for anyone else—such as our local development company. It
would be good practice to devise a package to work with this enterprise
to develop a patch of wasteland for housing and a new public open
space, incorporating some playing fields. Imagine that the company
has grown enough to have some operating capital it wishes to put
into the pot, the Council has got its s123 waiver, and Sport England
will put some money into new pitches. Now the State Aid rules
will kick in, saying that the lottery money and the cheap land
constitute aid, with a value over the de minimis limit.
At this point an exemption is needed. It is not easy to work out
how to apply for an exemption, and the DTI guidelines are very
clear that at least two months are needed for a decision. By now
your community activists have given up in disgust.
Equally put off by these rules are commercial
businesses looking to work with the statutory agencies and local
people to achieve shared objectives. These might be to create
much needed office space in run-down buildings, or to create workshops
to nurture creative industries. Either way, the application of
the state aid rules make the waiving of s123, the use of SRB or
other RDA money or other ways of matching their investment increasingly
difficult.
When you discuss all this with colleagues in
Brussels, they are bewildered by the problem seen from this end
of the telescope. They quite rightly point out that the State
Aid regulations are a direct consequence of the Maastricht Treaty
and are aimed at equality of treatment. They add that it does
not seem to be a problem for other countries in the Union, and
suggest that you discuss the issue with Whitehall. This is strange
given the message from some parts of Whitehall that the difficulties
practitioners experience is down to European limitations, and
we should all lobby for a change in the State Aid system.
The PIP decision has caused a lot of headscratching,
as civil servants realise the impact of these rules on regeneration.
They are taking a twin track approach, as Lord Falconer told the
DLTR Select Committee. Part of this involves lobbying the EU,
so we won't hold our breath. The more immediately fruitful role
is to build up the number of "permissions"—exemptions—that
regeneratation bodies can use. So far six new ones have been granted
for various types of scheme applying to work carried out with
the RDAs, Economic Partnerships and some community groups. It's
a step in the right direction, but it remains complicated and
offputting.
So these rules operate together to create a
complex trap. The lack of transparency on s123, further pushed
by the prudential rules, make it harder to use assets to underpin
public/private partnerships. If you get round this, you must make
sure that the disposal has not made the buying company's expenditure
undermine the Council's position. The company must also be able
to attract private investment and/or charitable giving. Having
got that far, the company must compete across the Union. And,
finally, being a private company, assistance to it counts as State
Aid unless it sits within carefully defined categories.
So is there any simple route through this Gordian
knot? One that could actually enable us to get on with the job
of regeneration and economic development, work with local communities
to deliver their priorities, and use our assets wisely to achieve
agreed local priorities? How do our European colleagues apparently
"get away" with the investment they have been able to
achieve?
This apparent paradox leads us to look at different
European understandings of public sector finance. Elsewhere in
the Union, the costs of public sector investment in infrastructure
are accounted for within a different framework. The General Government
Financial Deficit excludes net borrowing by the public sector
for investment purposes from the measure of debt. It is the most
widely used internationally comparable measure, and has been used
for the criteria on "excessive deficits" in national
budgets within the Maastricht Treaty. The TUC commented several
years ago that "if revenue-generating projects that cover
the costs of the intitial investment were not counted against
government borrowing then this would remove some of the unfair
and unnecessary constraints on direct public spending".
So the final step must be to ask Gordon Brown
to reopen the thinking on what constitutes public spending when
it represents investment in infrastructure for regeneration and
economic development objectives. In 1997, his mantra of prudence
led him to stick firmly to the definitions he inherited. He has
now famously loosened the pursestrings, although adhering firmly
to his views on the public private divide. If he could open this
door, then many possiblities emerge.
It would remove the red tape and circumlocutions
imposed upon us by the intersecting legislation I have described.
This would really enable us to realise assets for the good of
our communities. It might even remove key blocks and so help those
communities to realise their dreams.
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