Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum by the CBI (LGB 39)

1.  The CBI welcomes the Inquiry by the Transport, Local Government and the Regions Committee into the Draft Local Government Bill. This legislation is important to all businesses as major users and funders of local services, and increasingly as partners to local government. The legislation also directly affects and interests those firms delivering local services in contractual partnerships with local government.

2.  This submission focuses on:

—  ensuring the effective and fair operation of the Uniform Business Rate;

—  making good use of Business Improvement Districts to facilitate collaborative working between local government and local business communities;

—  using the opportunities through the proposed legislation to improve local authorities' ability to achieve Best Value.

3.  Improved legislation is only one element of what is required to deliver effective local governance, high quality local services and committed partnership working. Implementation will be crucial. This includes support for councils and other bodies to build capacity in making good use of the new opportunities.


NNDR should be retained as a separate stream of local government finance

4.  The nationally set and RPI-capped National Non Domestic Rate brings significant benefits to business and the whole economy by easing business planning. Since its introduction, relationships between business and local government have been improving. And because of how resource equalisation works, we suggest that simply returning the business rate to local control would not provide financial freedom for councils, except at the margins. Therefore, the CBI is a strong advocate of retaining the NNDR.

5.  However, the CBI opposes the draft Bill's intention to merge Revenue Support Grant and NNDR into a single stream. We object to the Bill's presumption that Business Rate revenue amounts to simply one aspect of "Government support" for local authorities. Revenue Support Grant constitutes Government support. Redistributed National Non-Domestic Rates represent a separate business contribution to local authorities' funding. This tax should be transparent, and should be clearly separated from revenue support. The effect of merging RSG and NNDR would be to lose sight of the Business Rate contribution to local government finance. This part of local government support is too often overlooked by the media and by local authorities themselves, with the result that the role business plays in supporting local authorities is considerably underestimated.

Business Improvement Districts need flexible legislation, business friendly guidance and a major collaborative effort on implementation to achieve some early wins

6.  The CBI supports the draft Bill's proposals for BIDs. The Government is right to use legislation to set the broad framework and indicate the details that will be addressed through guidance. Central and local government and the business community are now working together to get these details right in a good example of partnership working.

7.  The CBI believes that successful BIDs could serve a wide variety of purposes:

—  They could bring much-needed regeneration into business districts which are currently in a poor state, and which have a detrimental effect both on individual businesses and the image of the locality.

—  They could bring private sector expertise to bear on problems which affect businesses and the whole community.

—  They could greatly improve the relationship between the business community and the local authority, by building experience and confidence in partnership working.

8.  There are several challenges to establishing a successful BID:

—  BIDs must bring identifiably new money and improvements. The draft Bill recognises that BID revenue must be ringfenced and demonstrably used to fund new activity as opposed to existing services to the business community.

—  BIDs will have a higher potential by combining business and public sector funding. A "joined up" approach should aim to tap into regeneration funding etc.

—  Property owners have been involved in voluntary BID-style arrangements to date. Their involvement in schemes under this legislation should be encouraged. One mechanism could involve the proposal, on which rate payers are asked to vote, already including commitments from property owners and the public sector. The draft Bill would allow this and provides for wider flexibility on how BID revenue is raised. The Government needs to raise awareness of this and highlight the benefits.

—  Both the aims and the physical extent of the BID must be well defined. A BID proposition should be clear and offer tangible benefits to those being asked to vote.

—  The BID framework must be flexible enough to accommodate different models of BIDs by both area and circumstance.

—  BIDs must enjoy business confidence. We welcome the dual lock voting mechanism, whereby BID votes will not succeed unless a majority both of Business Rate payers and of total rateable value properties vote in favour. Care will still be required to ensure genuine support from firms of all sizes and from all areas within the BID.

—  BIDs should be business-led. This requirement will challenge many local business communities where capacity is limited. It also challenges local government to work in business-led partnership. The Coventry City Centre Company provides a powerful example of how this can be achieved and the resulting benefits.

—  If a number of nascent BIDs can be established and succeed, momentum will grow. The Government should provide seedcorn funding for initial BID proposals. And consideration is needed of how best to fund project development in the longer term.

—  BIDs are just one form of partnership. Other successful mechanisms, such as community projects organised by individual or small groups of employers, should not be displaced or jeopardised. And BIDs will not always be appropriate, eg in very deprived areas with a weak business presence.

Small Business Rate Relief is unlikely to deliver the intended benefits. At a minimum, this scheme should be closely monitored and the Exchequer should fund its costs

  9.  The CBI recognises that small businesses need support to help them overcome particular obstacles. For example, we welcomed the Chancellor's endorsement of our recommendation that companies with profits of less than £10,000 should be excempt from Corporation Tax. However, we do not believe that the Small Business Rate Relief proposed here will give them noticeable medium-term gains. As the draft Bill recognises, Government research in 1995 found that "landlords tend to increase rents when rates fall". It is likely that the only real beneficiaries of this reform would be landlords. Therefore, if the Government is determined to press ahead, we recommend:

—  Extremely close monitoring of the impact on small firm profitability and rents, and a readiness to change direction if the relief is not providing the intended benefits.

—  Exchequer funding for the relief. Business taxation increased in the Budget and business property taxation is already high by international standards. Increasing the rate bills for 650,000 properties over the threshold by 2.5 per cent, in order to fund a highly questionable scheme, would damage competitiveness.

There are strong economic benefits from action to minimise the inevitable disruption caused by revaluations

10.  The CBI was pleased to have been involved in the review of experience of the 2000 Revaluation. We supported the conclusion that five yearly revaluations should continue, with effort going into helping businesses to prepare for the likely changes to their bills. We were strong advocates of a permanent Government commitment to having some sort of transitional scheme. Transitional relief is really a "necessary evil", required because of the fluctuations in the property market. By avoiding the need for an artificial debate about whether a scheme would be introduced, Government and business can make faster and earlier progress in discussions about the optimum scheme. However, we strongly recommend two changes to the draft Bill:

—  Primary legislation should not rule out the possibility of Exchequer support. We can see why the Government would prefer a self-financing scheme, but in practice, it may well prove too punitive as it has done in the past. The Government could indicate a strong presumption against Exchequer support in policy terms without legislating against it. Given the huge range of measures in the Bill where the Government gives itself flexibility, rigidity here is odd and potentially counter-productive to the economy and the Chancellor's freedom for manoeuvre.

—  The Government should make every effort to estimate losses on appeal accurately—there should be no scope for clawing back the money later. Current arrangements motivate the Government to make accurate estimates for losses on appeals—and indeed the estimates have been increasingly accurate. Business places a high value on the current RPI-cap on UBR increases between revaluations. Breaking with this principle, by allowing variations to compensate for under-estimating losses on appeals, would add uncertainty to business planning. It might also lead to a less robust exercise on estimating the losses. At worst, short term political issues could distort decision making, as arguably occurred in 1990. The rate poundage is not adjusted for other changes in the yield, eg extra revenue from new properties coming on stream. If a claw-back facility must be introduced, we suggest that it should also take account of these other factors and take effect at the following revaluation when the NNDR rate poundage needs to be re-set in any case.

11.  We welcome the proposed changes to the structure of the Valuation Tribunal Service. Both the Service and the Valuation Office Agency play vital roles and must be adequately resourced for the tasks they must undertake.


12.  The CBI supported the introduction of Best Value and corresponding changes, eg new roles for the Audit Commission. While there are many success stories in terms of service improvements, further improvements are needed in the approach of both local and central government.

Better handling of "Challenge" is crucial: giving voting rights to non-council members on scrutiny panels sends a good signal about the value of external input

13.  Better handling of "Challenge" is crucial, particularly to encourage more external input. It is worth encouraging more local people and business leaders to become involved in council decision making. Therefore the CBI supports the proposal to give voting rights to members of overview and scrutiny committees who are not council members

Councils should aim for Best Value in borrowing, trading and charges for services

14.  Business recognises the case for relaxing the rules on local authority powers to borrow, trade and charge for services. Undue restrictions can block Best Value approaches and culturally send an unhelpful message to local government about its authority and power.

15.  The CBI's main concern is to ensure that these new powers will be used wisely. This requires a combination of guidance and practical support, eg to spread good practice.

16.  Two points are key. Firstly, councils should be required to achieve Best Value when using these powers. In particular, they should apply rigorous challenge in assessing whether and how to borrow, trade and charge for services. This entails, for example, assessing whether such action would make the best use of managerial and financial capacity and whether direct action by the council would really be more effective than action by another organisation. Effective community leadership, for example, does not simply require direct action but involves encouraging others to plug gaps in service provision and to lead renewal initiatives.

17.  And secondly, the powers should not be communicated or seen as an escape route from having to do business with or rely on the private sector. Too often, public private partnerships, particularly PFI projects, are claimed to be "the only game in town" even though PFI capital spending over the period 1997-2000 accounted for 9 per cent of publicly sponsored capital spending in local government. And too often, the rationale for allowing councils to borrow, trade and charge for services is expressed simplistically in terms of "if the private sector can do this, local government should also be able to do so."

18.  Discussions during the Best Value Review made it clear that all parties—local authorities, employees and trade unions, the private and voluntary sector—tended to feel that "the playing field was tilted against them". We need to move away from this unhelpful climate towards one where all parties are confident that they have a legitimate role which is respected so long as their contribution genuinely achieves Best Value.

19.  This partly requires the exchange of good practice and its results. Leading councils are using existing freedoms and the Best Value regime to deliver high quality and cost effective services to their citizens. For example, service quality in Liverpool had been traditionally poor and council tax high. The decision of the City Council to transform services to meet rising customer expectations, coupled with an openness to work with the private sector to combine increased investment in key services with culture change and innovation, has yielded impressive results. £105 million has been taken from the council's cost base in three years, 72 per cent of Key Performance Indicators are moving upwards and the council tax has not been increased for three years and cut by 3 per cent in 2002-03.

20.  The challenge to improve local services is immense, and we would like to see the new freedoms being used to develop new models and ways of working. Initiatives such as the Strategic Services Delivery Taskforce should help here. We recommend some specific steps in each of the areas to promote good handling of the powers to trade and to charge for services.

The power to trade

21.  The judgement to proceed with a trading scheme should be based upon an objectively evaluated value for money study (including a business plan and a volume sensitivity analysis to assess the risk to the public purse). The "challenge" exercise should be verifiable through external audit and inspection. In the interests of public scrutiny and transparency, the accounts for trading operations should be:

—  Signed off by the council's Chief Finance Officer and external auditor and be held separately from the council's annual budget.

—  Technically correct and comply with Generally Accepted Accounting Practice (GAAP).

—  Included in an Annual Trading Report (above a reasonable de minimus level), based on requirements under the Companies Act.

Power to charge for services

22.  Councils in England and Wales already raise £6bn a year from charges (1999 figures, excluding housing rents) but few have a systematic, organised way of looking at the relationship between what charging policies and achieving overall priorities. Prudent use of charging can develop services. But councils will need to make sure decisions to charge businesses for services do not damage the competitiveness of the local economy.

Staff should transfer consistently when local authorities outsource work. Generally, good employment should be at the heart of good procurement within Best Value

23.  The CBI has been pleased to play a central role in improving the handling of workforce issues in Best Value. Whoever is delivering public services must have good people management skills. Significant progress is already being achieved under Best Value, which represents a shift away from the worst CCT excesses of "bargain basement shopping at the expense of service quality and employees' terms and conditions".

24.  The CBI advocated statutory force within local government for the Cabinet Office Statement of Practice on Staff Transfers and the Treasury annex on pensions. We welcome the intention to legislate. This will make it clear that staff should transfer consistently when the local authorities outsource work and subsequently when contracts change hands. It must be supported with practical advice on handling the staff transfer process and by ongoing efforts to raise awareness of the requirements and good practice.

25.  It is misleading to identify the staff transfer issue under the headline of the "2 tier workforce", where the debate relates to the terms and conditions of new starters. The CBI welcomes the Government's intention to introduce a Code of Practice requiring contractors to recruit new starters delivering council services on fair and reasonable terms and conditions. There needs to be enough flexibility in the Code to allow good employers to adopt effective approaches to recruitment and retention, which make sense in individual circumstances. But the Code must stamp out remaining problems associated with CCT (lowest price tendering and a failure to check the viability of bids). We stress the important role of local authority clients in genuinely aiming for best value and scrutinising the employment expertise and approach of bidders. We have recommended that the policies on staff transfers, recruitment of new starters and other aspects of good employment practice should be branded as a "Respect for People" strand within Best Value.

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