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Mr. Raynsford: We have had a short and interesting debate. I am pleased to tell the hon. Member for Runnymede and Weybridge (Mr. Hammond) that the word "ambulatory" was inserted at the instigation of parliamentary counsel, who clearly understand the significance of these forms of Latin, which, I suspect, elude most Members. As the hon. Gentleman rightly pointed out, the need for further regulations was debated in Committee, and it is true that as a result of reflecting on the exchanges that we had in Committee, we felt that there was a case to clarify and to take beyond all reasonable doubt the fact that future editions of codes would be covered without the need for new regulations, which I feared might be necessary. I am grateful to the hon. Gentleman for highlighting the point in Committee, and I am pleased that he agrees with the approach that we have now adopted.

The right hon. Member for Wokingham (Mr. Redwood) raised the interesting question of the meaning of "have regard to". He will know as a former Secretary of State that a great deal of government is based on the concept of having regard to. He will know that the nuance of that phrase lies between the absolute

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requirement of a direction, which requires someone to do something, and the entire discretion to do whatever they wish. Clearly, it would not be appropriate for an authority to act without considering the message contained within the relevant guidance. It is generally understood good practice that when an authority that is subject to a duty to have regard to something chooses not to follow any specific advice, it must have good reasons for doing so. That is normally understood. It does not, however, require the authority in all circumstances to follow the guidance precisely to the letter if it has good reason for departing from it.

That is my understanding of the general framework, and I notice that the right hon. Member for Wokingham is nodding and probably has a similar understanding of the force of that particular phrase. It is certainly our wish that this guidance should be considered carefully by local authorities, not as a straitjacket but as helpful advice to ensure good administration. On that understanding, I hope that the hon. Member for Runnymede and Weybridge and his right hon. and hon. Friends can agree to the amendments. I am grateful for the support of the Liberal Democrats.

Lords amendment agreed to.

Clause 8

Control of Credit Arrangements

Lords amendment No. 2

Mr. Raynsford: I beg to move, That this House agrees with the Lords in the said amendment.

The amendment relates to clause 8, which deals with credit arrangements such as leasing and hire purchase contracts. The clause ensures that such transactions can be brought under the prudential limit and any national limit. The amendment removes the power in clause 8(4) to impose additional restrictions on credit arrangements. The only restriction that we had in mind was to stop the use of credit for anything other than acquiring capital assets. We now accept that accounting practice offers sufficient safeguards against such practices. Accordingly, clause 8(4) is unnecessary.

Mr. Hammond: Clause 8(4) gives a broad power to the Secretary of State to vary by regulations the restrictions on local authorities in relation to credit arrangements. Regulation 7 is the one that the Government have in mind for this case and it was laid in draft before the Commons Committee that considered the Bill. It is clear that the basic purpose is to exempt private finance initiative projects from the ban on credit arrangements that would otherwise prevent local authorities from using arrangements that are a hybrid of revenue and capital provision to circumvent the prudential code restrictions on borrowing or other credit arrangements.

In Committee, we moved an amendment calling for the deletion of clause 8(4) but the then Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister, the hon. Member for Shipley (Mr. Leslie), made an appearance at the Dispatch Box and vigorously resisted the deletion of the subsection. A pattern will emerge in our debates. It will become apparent to the

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Minister which of clauses that were vigorously defended were later abandoned. The Under-Secretary replied to the debates on them.

We argued that it was wrong to put a general catch-all subsection in a clause that specifies precise limitations. We lost the vote. We moved the same amendment in Committee in the other place and, once again, the Government rejected our proposal to delete clause 8(4). However, in time-honoured fashion, the Government moved the exact same amendment on Report. They usually try to rework Opposition amendments by changing a few words so that they can claim that they have at least contributed something. However, this amendment was rather concise and precise and it was not possible for the Government to create that smokescreen.

This case should provide us with some confidence in the system. We raise the issue once and one Minister tells us that we are talking rubbish and that it is essential for the future of democracy and civilised government as we know it that the provision remains in the Bill. We raise it a second time and a different Minister in another place says precisely the same thing. Then the Government realise that we were right all along. That tends to suggest that the system works even if the Ministers operating it are thick-skinned.

The amendments served to focus the Government clearly on the issues, and they have decided that not only the subsection but draft regulation 7 are unnecessary. We strongly support the view that local authority finances should follow generally accepted accounting practice and that it is unhelpful for the Secretary of State to have the power to impose, by regulation, additional restrictions over and above those that generally accepted accounting practice would dictate.

The Minister in the other place said that regulation 7 was unnecessary because of generally accepted accounting practice as it would ensure that credit transactions of the type of which the Government are so afeared would not be used for revenue items. That is fine; we have no problem with that. We have got what we wanted, but perhaps I have missed something. I am left asking the Minister, "What about PFI projects?"

6.45 pm

I understand that the original purpose of regulation 7 was to allow PFI projects to fall within the permitted category for credit arrangements. It was never clear to me quite what that would mean. It seemed to me at the time that the correct accounting procedure for a PFI project would be to distinguish the capital element of a PFI charge from the finance cost element and any service provision elements and that, in the absence of the regulation, there would be no difficulty in dealing with PFI projects. In a practice that is well understood to accountants and those who prepare business accounts all the time, the different components of a single charge would be analysed to their separate heads and dealt with accordingly.

As I read it, the Government's proposed regulation 7 would have exempted PFI projects from the restriction on credit arrangements. My understanding was that they were effectively to be given an advantage over other forms of arrangement and were to be allowed to go through without being treated as an entry against a

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borrowing limit in the full amount of the total cost of the PFI charges under the project. What is the position now that that draft regulation has been dropped?

Clause 8(2)(a) still provides that the cost of the arrangement—I take it that this would now include a PFI arrangement—is to be set against borrowing limits. It does not say anything about the capital element of the cost or the capital and finance charge element. It refers to

In a PFI transaction, my understanding is that that would be the total stream of payments to be made under the PFI arrangement. That is the wrong way to go about things from the standard accounting practice point of view if the stream of payments represents the provision of a capital asset, the financing charges for that capital asset and the provision of some revenue services that are being provided, such as building maintenance in a classic property PFI that would normally be a revenue charge for the account of the occupier.

Adopting the generally accepted accounting practice approach should mean that the cost of the arrangements should be apportioned between capital financing and revenue costs. However, my understanding is that, without the benefit of regulation 7, we are back to the position in which the whole PFI charge would be charged against the borrowing limit of the authority. That seems perverse. Does the Minister understand that to be the case? What does he understand regulation 7 would have done in such PFI arrangements?

The Minister who moved the amendment in the other place said that the Government had satisfied themselves that the regulation, and thus the power to make it, were not necessary because of generally accepted accounting practice and that the matter would be taken care of. He did not deal with the question whether clause 8(2)(a) will effectively intervene to disapply such accounting practice. The Government might be intending to use their powers under clause 8(3) to make further regulations that we have not yet seen to resolve the matter. They clearly could make powers under clause 8(3) to determine what would and would not count as the cost of a credit arrangement so that only part of PFI charge fell into the calculation of the cost of the credit arrangement. It would help the House to hear an explanation.

To summarise, the question is whether PFI projects are now to be treated as all other credit arrangements, whether that means that all costs will be applied against the borrowing limits and whether regulation 7 was designed to prevent the outcome that all PFI charges would be regarded as charges against borrowing limits. If the Minister is now relying on accounting practice to prevent avoidance, which would generally seem to be the correct approach, why will regulation 3 remain in the draft regulations—and as far as I am aware he has no intention of dropping it? It says:

In Committee, I drew attention to the similarities of leases and PFI arrangements and asked why the Government were exempting PFI but not leases. They are changing the arrangements for PFI by deleting the power to make regulation 7, so I ask again why leases should be treated differently and why the Minister

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cannot rely on generally accepted accounting practices to prevent any abuse of a lease mechanism to provide a covert route for financing revenue expenditure.

Of course I support the amendment because I moved it in Committee. However, I am puzzled about the Government's rationale for agreeing to it now and abandoning regulation 7 without addressing the issues dealt with by regulation 3. Given the effect of clause 8(2)(a), it is not clear that regulation 7 has become redundant for the purposes of avoiding an unfair treatment of costs under PFI schemes, unless the Minister's explanation is that he intends to make regulations under clause 8(3) to clarify the treatment of PFI charges.

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