Robert
Neill: I rise on a genuine point of clarification. As I
understand it, if the effect of the variation is that the BRS supports
more than one third of the project cost, there must be a ballot. Is
that more than one third of the total project cost as revised? What
about a situation in which the variation might give rise to the BRS
supporting more than one third of the variation? Should there be a
ballot in those circumstances, if there is a shifting of the burden and
an increase in the burden? I can conceive of such a configuration,
depending on the rest of the
funding.
John
Healey: We are trying to provide for variations in the
business rate supplement. If there was a ballot on the project in the
first place, the position is straightforward. If a variation in the
business rate supplement meant that the business rate supplement was
bearing more than one third of the total project cost, that would bring
the revised BRS into the bracket of requiring a ballot. Those are the
circumstances that we have in
mind.
Dan
Rogerson: It is certainly reassuring to hear what the
Minister is saying about the matter. I just seek clarification again.
He has probably addressed this point, but I would like it to be
absolutely clear. I am talking about subsection (7)(b), which
begins: “the
document published for the purposes of subsection (2)(a) states that,
even though paragraph (a)...does not
apply”. This
relates to what he said about a situation in which the local authority
for some other reason decided that a ballot was necessary on the
original proposal. The provision is at the top of page 7. It concerns a
situation in which the local authority decided to go to a ballot even
though it did not have to on the original proposal. If it called for a
ballot on the original proposal, will it now automatically go to a
ballot in the event of a proposed variation, or does it again get to
decide whether that is necessary? I would like that to be addressed. If
it is automatic that a ballot at the beginning means a ballot on a
variation, that addresses the point, but if the local authority gets to
take a view for a second time, one could conceive of a situation in
which there had been a ballot that approved the proposal, but the
variation
meant that perhaps the original ballot— [Interruption.] I
hope that the Minister can understand the point that I am trying to
make. John
Healey: The hon. Gentleman will find by careful reading of
subsection (2)(c) alongside subsection (7)(b) that the provision means
that, irrespective of the reason for the ballot in relation to the
original project and BRS proposal—whether it was required under
the one third rule, or the local authority decided to hold a ballot
despite not being required to do so—a formal variation to the
BRS that was not anticipated and set out as a possibility in the
prospectus would follow the same procedure as the original
introduction. Therefore, the provisions are intended to say that if
there was a ballot on introducing the BRS and there is a significant
variation that was not covered in the prospectus, there should be a
ballot for the variation as
well.
5
pm
Mr.
Binley: The clause is particularly confusing. If a
variation demanding more money by way of the levy is refused by
business and the ballot goes against the local authority, who then
foots the bill, given that the project is under way, or could be under
way?
John
Healey: The variation may be a downward variation, because
the project economics may have changed. It may not be an upward
variation, but in the circumstances that the hon. Gentleman
anticipates, if the ballot went against the variation, that variation
could not be made. If there was then a project shortfall, there would
clearly be a challenge for the project sponsors and the project
authority to deal with it in a way that was different from the
variation of the BRS that they were proposing. There is not a single
answer to who might pick up the shortfall or how it could be dealt
with, as he will appreciate. The important thing for the purposes of
the Committee and the legislation is that if a ballot is held in order
to introduce a variation to the BRS and that ballot is not carried, the
variation cannot be put in place.
Mr.
Binley: I am most grateful for the Minister’s great
generosity. He mentioned that the local authority could have
overestimated the amount of money needed from business as a percentage
of the project. Is he therefore suggesting that, in certain
circumstances, business might get a dividend, a
repayment?
John
Healey: I would not necessarily describe it as a repayment
or a dividend, but the hon. Gentleman will appreciate that we have
built into the power to design and introduce a supplement certain
flexibilities for a local authority. It can introduce it at a lower
rate than the 2p maximum. It can introduce it and create the liability
for businesses that are above the threshold only, so it need not be
£50,000 plus, it could be £60,000 or £70,000. That
is a decision that local authorities could take. There is also the
flexibility to phase in the introduction, so the local authority might
choose to introduce it at a rate of 0.5p in year one and 1p in year
two. There is also flexibility in how to deal with the potential
liability of empty properties.
A
number of factors provide flexibility for the local authority. We tend
to dwell on the limits to the supplement—the £50,000
rateable value threshold below which no business rate payer would be
liable, or the 2p maximum supplement—but the design and
introduction of the levy could be different, although within those
flexibilities and parameters. To return to the original question, it
may be that the variation will benefit the business rate payers that
are liable for the levy, although that benefit should perhaps not be
described as a dividend. There could be a variation to the threshold,
or the rate, or to something else within the flexibilities that local
authorities will have within the design of the legislation, which would
benefit the authorities concerned.
Subsection (2)
sets out the requirements of an authority in those circumstances.
Subsection (3) sets out what the document explaining the proposed
variation must specify. I hope that members of the Committee would
agree that the requirements to consult and the conditions that must be
met for the introduction of any variation to the BRS will give
businesses real confidence that a BRS will not be altered without
serious and due consultation. In practice, any local authority that
even contemplates a variation on an established BRS will examine the
case with the principal interest groups in its area, not least business
itself, before any formal consultation point is reached. We can
reasonably expect that any variation will not come as a surprise to
those businesses that are liable to pay a BRS, or to any groups with a
critical interest in the BRS and the project that it
supports.
Subsections
(7) to (11) cover the arrangements for ballots in case of variation. We
have dealt with the circumstances in which that would be necessary,
but the subsections capture them. Subsection (10) describes the
wording for any ballot, following the model of the original wording
proposed in the Bill.
Finally—
Mr.
Field: Normally when a parliamentarian says,
“Finally,” he is about 40 per cent. of the way through
his speech, so perhaps my intervening is not too much of an
imposition— [Interruption.] I am being
unfair to the Minister.
The logical
way of easing the pain on the variation is simply to add a certain
number of years to it. It would not mean additional money, and the
percentage would not be seen as being of a bigger pot; there would just
be a significant extension to the number of years that the BRS
operated. Does the Minister have any guidance on variation? Presumably,
if we extend the period of a scheme for which there is likely to be a
BRS from 20 years to 40 years, that takes it well outside the
realms of what was envisaged at the outset. Indeed, one envisages,
therefore, double the money going in to the BRS over that period. Does
the Minister intend to give any guidance, or does he have any thoughts
about variation? Would it necessarily mean the sum paid, or the
duration of the scheme? Does he feel that the pill could be sugared
more easily by adding to the duration—adding some years further
down the line—rather than by adding a surcharge, which would
make the whole scheme larger? Has he given any thought to how a
variation would operate? I appreciate that the Government have gone
into considerable detail to ensure proper re-consultation and a further
ballot, but, in practical terms, what will a variation
mean? John
Healey: We have given a lot of thought to how a variation
might operate and be required, but, in the legislation, we have tried
to frame a general approach whatever the precise details of the
proposed variation. I had not mentioned it, but the hon. Gentleman is
right that a variation might well be the length of the project to be
financed and, therefore, the length of the BRS term. I shall take the
Mayor’s proposal for a 24-year term for Crossrail, for instance.
In preparing for a business rate supplement, he might say, “We
proposed it for 24 years, there may be circumstances in which we would
have to extend it to 30, and the circumstances that might require us to
do so are X, Y, Z.” If that potential variation had been set out
in the prospectus, it would fall within the terms of the clause in the
way that I have explained. If the potential variation was not foreseen
or set out in the prospectus as I have explained, a fresh process of
consultation with the prospectus and the details would need to be
published.
If a ballot
was used for the BRS in the first place, that would of course be used
again. Also, if a variation would take the proportion of the project
funding over one third, a ballot would be required for that variation,
whether or not one was in place when the BRS was first introduced. On
that basis, I hope that hon. Members will be content for clause 10 to
stand part of the
Bill.
Robert
Neill: I am grateful to the Minister for his careful and
detailed explanation of the effect of the clause. I do not think that
there is a great deal of difference between us in what he is seeking to
achieve, but I will highlight the areas for concern flagged up in our
evidence sessions and elsewhere. I hope that the Minister will be able
to reassure us that the Government are alert to them.
The concerns
relate to two things. I hinted at one in my intervention, although
perhaps I did not make it very clear. A variation of the BRS that does
not fall within the existing criteria for triggering a ballot could
still shift the burden of funding within the BRS scheme. For instance,
it could be proposed initially that a fifth of the costs of a
substantial scheme would be met by the BRS and the rest would come from
various other funding streams, but for reasons that arise, it could be
proposed to raise extra moneys by varying the length of the BRS or the
amount of the contribution within the parameters. That could increase
the BRS element from a fifth to a quarter, or to 30 per cent. That
would fall just short of the threshold for triggering a ballot, but it
would shift more of the percentage burden on to the BRS, perhaps
because another funding stream did not come forward or additional
unforeseen costs arose.
In such
circumstances, consultation must be undertaken, but the businesses have
no means of preventing the change. There is a danger that cost
overruns, whatever the cause, could easily be shunted on to business
without the need to go back to seek proportionate contributions from
other funding streams elsewhere. Will the Minister enlighten us as to
what safeguards the Government envisage to protect the BRS payer from
being disproportionately affected by variations that might change the
amount of funding?
I think that
the Minister is alert to my second point, because the Government flag
it up in their consultation document on the draft guidance. What is to
be done to meet businesses’ fear that variations might be used
as a way to make up for lazy or inefficient costing at the initial
stage, and how will the Government deal with the risk of cost overruns
occurring and being passed on disproportionately or wholly to
businesses through the BRS element of the scheme?
The Government
have issued some guidance. It is on page 18 of the consultation
document. It starts with the question of assessing project costs for
the one-third test. It is helpful as far as it goes, but it raises a
question that it does not answer. It recognises what is called, in
technical terms, “the optimism bias” in assessment of
costs. That is a wonderful phrase. I was not surprised to find it
defined, referred to and dealt with in a document emanating from the
Treasury. Some of us might think that the Treasury had optimism bias
for a number of years, but apparently it is in the Green
Book.
The document
says: “Optimism
bias is the demonstrated systematic tendency for appraisers to be
over-optimistic about key project parameters, arising particularly in
relation to: capital costs; works duration; operating costs; and
under-delivery of
benefits.” One
might say that that refers to the Olympics budget. However, in reality,
that is a fair and sensible point. The Green Book contains further
information, but the very fact that that reality has been flagged up
needs to be addressed carefully if businesses are not to feel that the
floodgates have been opened—so to speak—by variation. The
result could be a series of variations that salami slice further
contributions to make up for the failure to take proper account of that
optimism
bias. 5.15
pm
Mr.
Dunne: Does my hon. Friend agree that the NHS IT project
is a fine example of where optimism bias has coloured the delivery of a
project for close to a
decade?
Robert
Neill: My hon. Friend is absolutely right; that is
probably as good an example as one could come up with. It demonstrates
why it is important to put safeguards in
place.
John
Healey: Does the hon. Gentleman also appreciate that the
example cited by the hon. Member for Ludlow is entirely beyond the
permissible range of what could be relevant to a business rate
supplement?
Robert
Neill: I am deeply reassured by the Minister’s
point, as I am sure is everyone else.
With the best
will in the world, there is often a tendency for those drawing up
project costs in the public sector to be, for various reasons, unduly
optimistic about their appraisal. Interestingly, that is recognised in
paragraph 3.40 of the draft guidance defining acceptable project costs.
It makes the point that the
“authorities
should be mindful...and pay regard to the fact that the assessment
undertaken”— internally
and by themselves, in
the— “early
stage scoping and feasibility work may not accord with the perspective
of local businesses.”
Harking
back to an earlier debate, when the Minister mulls the matter over he
will appreciate that that is a very good reason why we should ensure
real buy-in by businesses into the delivery of the scheme. It will make
that unintended, but not infrequent, consequence less likely to occur.
I raise those caveats. I am not saying that we oppose the clause, but
underlying issues remain that I am not entirely convinced have been
taken on board. I hope he can reassure us a little that, one way or
another, they will
be.
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