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Mr. Woolas:
We have four hours. In the spirit of consensus, I have brought a copy of the document with me for the hon. Member for North-East Bedfordshire to read, should he wish to take it away with him. It is
an important document and we are grateful to CIPFA for producing and monitoring it. The definitions in relation to accounting procedures, companies and entities that are contained in the SORP document capture a more appropriate relationship between an authority and its bodies than the part V definitions that I referred to earlier.
Michael Fabricant: There is only one thing that slightly concerns me. If we are going to broaden the definition of organisations that are owned by councils and, as the Minister said, organisations and councils can borrow, does he fear that the overall public sector borrowing requirement, taking into account council borrowings, might exceed Treasury and Bank of England guidelines?
Mr. Woolas: I am grateful to the hon. Gentleman for raising that point. My intention and belief is that the measures will have the opposite effect. Including in statute what the CIPFA code does will guarantee that public sector borrowing overall—and specifically borrowing in relation to local authorities—is more accurately defined. That will mean that the books can better reflect the liability that exists. I would not want any suggestion whatsoever that the Chancellor’s golden rules were being broken in any way, especially at the moment. Local authority organisations such as some of the limited liability partnerships—to give an example, as the hon. Gentleman requested in his previous intervention—are covered by what is currently in the code of practice.
The new clauses replace part V of the 1989 Act. They will ensure that an appropriate range of entities are covered by propriety controls. They will also provide a less bureaucratic regime for local government in considering the relationship authorities have with their entities—if I can use that term to capture all the bodies involved—for accounting, capital finance and propriety control purposes. Authorities will need to have regard only to a single definition of entities.
The new clauses confer on the Secretary of State a power to require, regulate or prohibit the taking of specified actions by an entity connected with a local authority. The power is wide enough to ensure that an entity should not undertake an activity that the parent authority could not itself undertake if the need arose to do so. That is an important point for the private sector. Where entities might be in a marketplace with other organisations, we seek to ensure a level playing field for competition. Our intention is to use the power to make an order to apply propriety controls to the wider range of entities covered by the SORP definitions. We intend to consult on the controls that should apply to such entities, recognising that, as with the present arrangements, it may be appropriate for differential controls to apply to entities depending on the precise relationship of the authority to the body.
Consistent with that, the provisions permit an order to differentiate the application of controls to entities of a particular description, enabling the propriety controls to operate on a tiered basis according to the degree of control that the authority has over the entity—in other words, so that the liability recognises the proportion of involvement in it. New clause 22(6) allows the description of that relationship to be
provided by a reference in a document. It is our intention to use that power to differentiate according to accounting definitions contained in the CIPFA SORP guidance.
An entity is considered to be connected with a local authority if financial information about the entity must be included in the authority’s statement of accounts for that year. This shows that the authority is able to derive benefits or to be exposed to the risk of potential losses arising from the relationship and it is these entities that we would wish to apply propriety controls to.
Under its obligations as a trustee, a local authority could be exposed to the risk of potential losses and therefore we wish to ensure that trusts can be brought within the provisions of new clause 22 should that be desirable. As a trust is a purely equitable obligation, it does not easily fall within the consideration of an entity, which is why we have made this provision. New clause 23 brings trusts within the scope of an order made under new clause 22.
The existing propriety controls ensure that entities that are significantly connected with a local authority are required to act transparently and in accordance with the standards of the authorities themselves. To ensure that we can replicate these controls, new clause 24 makes further provision about what propriety controls in an order made under new clause 22 might contain.
We recognise that there may be exceptional circumstances in which the application of the propriety controls might not be appropriate to individual or particular descriptions of entities. Therefore, new clause 25 provides that the Secretary of State in England, or Ministers in Wales, can direct that these may be exempted from an order made under new clause 22.
Other legislation relies on the definitions of “control”, “joint control” and “influence” in part V. Following the repeal of part V, new clause 26 will give the Secretary of State the power to define, for the purposes of other enactments, those definitions by order. Although that is a separate order-making power, we intend to use the definitions provided by the CIPFA SORP guidance. New clause 27 makes similar provision to new clause 26, but the power is conferred on Welsh Ministers to define definitions for other enactments that are the responsibility of the Welsh Assembly.
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New clause 28 will repeal part V of the 1989 Act. It will also allow any consequential amendments made to subordinate legislation to make reference to a definition contained in a document identified by the order, such as the CIPFA SORP. Amendments Nos. 114, 115, 117, 121 and 122 will make provision regarding the procedure for orders made under new clause 22, the extent of the repeal of part V of the 1989 Act, and the commencement of the provisions. Amendment No. 130 details the extent of the repeals made by the provision. New schedule 3 relates to the consequential amendments that are necessary due to the repeal of part V to ensure the competence of enactments.
Alistair Burt: I am grateful to the Minister for his explanation of the new clauses and amendments. I read them carefully when they were tabled and started to wonder about their purpose, which he helpfully clarified. I have some questions about the measures because I have been in touch with the Local Government Association. While it sees them as a replacement for existing clauses, it is worried about the wide-ranging powers that are being taken and wants clarification of several aspects of the powers.
What prompted the tabling of the new clauses? Have a series of problems been associated with the definitions of entities or the different forms of arm’s length bodies that are run by local authorities? Are we considering purely a series of drafting changes, or do the measures reflect concern that has been raised by auditors or others? Does the fact that the measures have been introduced reveal an underlying worry about the way in which the bodies have been working, or does the Minister believe that this is purely a tidying process?
I was interested by the Minister’s little exchange with my hon. Friend the Member for Lichfield (Michael Fabricant) about the public sector borrowing requirement. The Chancellor’s ability to move things off the balance sheet is legendary. There is no danger of golden rules or anything else being broken while the Chancellor remains in his post, or while he remains Chancellor when he becomes Prime Minister, as he undoubtedly will. His ability to shift things to ensure that he does not break the golden rule will no doubt continue. I am not quite sure whether the powers are needed in such circumstances. We have noted the nifty ability to change golden rules and doubt that that will change much under a future regime.
The new clauses will provide for the original powers, although the provisions have been redrafted. How often have the original powers needed to be used? There are two sorts of power: the power to prohibit or regulate under new clause 22, and the power to apply for consent under new clause 24. Has the Secretary of State used those powers, or have permissions been requested by local authorities? Have the powers been used often, or are they effectively nominal? I am trying to get to the heart of where the measures have come from. Have they arisen due to problems, are they designed to address anticipated problems, or are they purely drafting changes to accommodate the rise of entities in their different forms?
Let me ask a question about the entities themselves. How many are we talking about? Is there a growing trend of such entities in local authorities? To that extent, is the Minister expressing concern that the bodies are moving slightly outside the control of local authorities and the Government? Is there any evidence that the number of entities is growing significantly and that such controls are thus necessary? To what extent does the Minister think that the Government are carrying out an exercise in second-guessing?
Although we are considering a devolutionary Bill, we are discussing measures that give the Secretary of State powers that look significant on paper, even though the Government have the back-up position that the PSBR is relevant and that the Secretary of State must thus remain in control. However, if we are talking about the extent of risk taking among local authorities
and the Government, as we will on Third Reading and we did earlier in the debate, how does the Minister see the powers fitting in with that?
Andrew Stunell: I realise that we are running the serious risk of the Minister invoking his threat and reading the whole CIPFA document to us. However, does the hon. Gentleman agree that there is a sniff of control freakery in some of the new clauses? We need to understand the precise context in which they have been proposed.
Alistair Burt: This is not a plea for the Minister to read more of that enlightening document. The hon. Gentleman echoes the concerns that I raised at the start of my speech. As I said, and as the LGA has noted, the powers look very wide ranging on paper. We need to know the reasons behind the measures and whether they represent a change from previous legislation to reflect issues that have been raised with the Department by local authorities, which have led it to want changes.
When local authorities are inspected and audited, are these entities subject to the same audits and performance regulations, or are they subject to something quite separate and different? Finally, will there be any difference between the way in which entities that are trading and those that have become dormant will be dealt with? That last question is a bit technical, so the Minister might want to write to me about it.
The amendments are technical and we will not wish to press them to a Division.
Michael Fabricant: Do not tell the Minister that.
Alistair Burt: “Don’t tell him, Pike.” I will definitely conceal that we will not be pressing the measures to a Division.
My inquiry has been prompted by the need to know where the measures are coming from, given that they were not considered in Committee. If the Minister will give us that explanation and help out with several of the technical questions that I raised, Conservative Members will be grateful.
Mr. Neil Turner (Wigan) (Lab): The Minister might have inadvertently misled the House at the start of his speech. He indicated that, “You ain’t seen nothing yet,” came from a western, but it was actually said by Al Jolson in “The Jazz Singer”. I would not want the Minister to have to come back to the House to make an abject apology for that, and neither would I want him to reply in syncopation.
Michael Fabricant: Following that brilliant speech, I do not know whether I can do justice to the debate. However, I want to raise several issues, although I was broadly content with what the Minister said. I understand that there are organisations other than just public companies in the sense of plcs and limited companies. Indeed, the Minister even talked about limited partnerships, yet a limited partnership would have been an oxymoron—is that the right word?—a few years ago because partnerships usually have no limits on their liability.
I was reassured when the Minister said that one of the main objects of this group of new clauses was to ensure that the public sector borrowing requirement
could be more closely monitored, although I have to agree with my hon. Friend the Member for North-East Bedfordshire (Alistair Burt) that the goalposts for the economic cycle frequently move to ensure that the golden rule is never breached. Sadly, there are no explanatory notes to the Bill. I understand why, and I am not condemning the Government for it, but it does not make things any easier. I guess that it is a compliment to the civil servants, in that it shows how helpful explanatory notes are when they do produce them.
Subsection (5) of new clause 22 says that an order under the new clause may make provision in relation to
“every entity connected with a local authority”,
although it does not actually say “owned by” the local authority. Subsection (7) carries on from that because it says, in marvellously unclear English:
“For the purposes of this section an entity (‘E’) is ‘connected with’ a local authority at any time if—
(a) it is an entity other than the local authority; and
(b) according to proper practices in force at that time, financial information about E must be included in the local authority’s statement of accounts for the financial year in which that time falls.”
I guess that “E” must be the name of a particular entity at that time. It is the phrase “connected with” that I do not understand. The Minister’s explanation was perfectly logical, but the new clause does not seem to make any sense. Subsection (8), which contains some definitions, says that
“‘entity’ means any entity, whether or not a legal person”,
but it says nothing about its being owned by the authority.
In Lichfield—I always find myself mentioning Lichfield because it is such a beautiful place—we have a new theatre called the Lichfield Garrick. That would certainly be an entity because it is owned by the authority and, quite rightly and properly, its debt—because all theatres need subsidy and it is a particularly good theatre and it is good that it is subsidised—relates to the debt of the council. However, I wonder whether the wording of new clause 22 would cover other entities, not just those that are owned by local authorities. Why does the new clause refer to every entity as that which is “connected with”? Why are the words “connected with” used?
Robert Neill (Bromley and Chislehurst) (Con): Will my hon. Friend give way?
Michael Fabricant: My hon. Friend is a lawyer, so perhaps he will tell me whether “connected with” has some legal meaning. Does “connected with” mean “owned by”?
Robert Neill:
I now regret asking my hon. Friend to give way. Perhaps he could help me or ask the Minister to help me. Is not my hon. Friend’s confusion added to by the fact that “connection” is referred to throughout the Bill, which I agree is separate from ownership as far as any of us can see? It does not necessarily involve shareholding because, as I understand it, it does not have to be a legal person. To make things worse, the heading of new clause 22 refers to “Entities controlled...by local authorities”. It is the juxtaposition in the same
context of “controlled”, “connected” and “owned” that is perplexing. I hope that the Minister can clarify that for us.
Michael Fabricant: That is an important point. I am rather alarmed that my hon. Friend, who is a barrister or a solicitor—
Robert Neill: I never did this sort of work.
Michael Fabricant: At least not without payment.
It is fascinating that the heading of new clause 22 “Entities controlled...by local authorities” implies ownership, but “connected with” does not, and could mean anything. Does that mean that any sort of association will be audited, and would that also apply to the public sector debt? If it did, the golden rule would be burst overnight.
Alison Seabeck (Plymouth, Devonport) (Lab): Perhaps the hon. Gentleman could ask the Minister whether there is a legal definition of “connected”?
Madam Deputy Speaker: Order. I think that the hon. Member will have the opportunity to ask the Minister directly.
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Michael Fabricant: The hon. Member for Plymouth, Devonport (Alison Seabeck) raises an interesting point, so yes, I will ask the Minister, as my hon. Friend the Member for Bromley and Chislehurst (Robert Neill) seemed unable to answer me; I was quite shocked. [Interruption.] Fifteen guineas?
Does “connected with” mean, in law, owned by? If it does not mean owned by—and I suspect that it does not—what is the boundary that controls whether an entity falls within the ambit of new clause 22? The Minister was very clear in his explanation. He used the words “owned by”, and we all understand what that means. That would mean having a 51 per cent. share or more in an organisation if shares were issued, or however else ownership is defined. Why, for the sake of clear English, is not the word “ownership” used, and what is the difference between “connected with” and owned by?
Robert Neill: I shall be very brief. First, I assure my hon. Friend that if he wants a definition of “fraudulent”, “homicidal” or anything of that sort, I will do my best to oblige him, but “connection” is not an area in which I hold myself out as having any expertise, so I hope that the Minister can help us.
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