Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Memoranda

Memorandum by Brighton and Hove City Council (GRI 17)


  Why dream up ever more clever deals designed to get round outdated and cumbersome legislation, when some straightforward thinking could save us all a lot of time and grief?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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Prepared 28 October 2002