Business Rate Supplements Bill

[back to previous text]

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.
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.
Previous Contents Continue
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2009
Prepared 28 January 2009