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The Earl of Balfour: My Lords, when the noble Lord, Lord Sewel, introduced Schedule 3, a complicated schedule, I referred to the difference between elections for the European Parliament and for the Parliament at Westminster. For the European elections there are no polling agents. Almost at the end of the Report stage in your Lordships' House, I asked whether we would provide for parliamentary agents in this referendums Bill. In other words, would the referendums be like a Westminster election or more like a European election? With great respect to the Minister, he may have written to me and the letter may have gone astray, but I have had no answer to either of those questions.

Lord Forbes: My Lords, the Bill is about referendums in Scotland and Wales. It sounds innocuous, but enormous constitutional changes could take place as a result of the Bill. Not only will Scotland or Wales be affected, but the whole of the United Kingdom.

I deplore the fact that voters have not been given more time to consider the implications of what they will be voting for. I doubt whether anyone can foresee all the implications a "Yes" vote might bring about in the future. I have lived nearly all my life in Scotland, which I love. Like many others in your Lordships' House, I fought for the United Kingdom. I am determined that neither Scotland, nor Wales, nor the United Kingdom shall suffer from hasty legislation that has not been properly revised. For those reasons, I look on the Bill with grave concern as it leaves this House.

Lord Geraint: My Lords, I am sure that noble Lords will agree that we have listened to excellent speeches on both sides of the House today. But I think the time is up for talking; it is time for action. The issues of devolving power to the people of Scotland and Wales have been debated by them for the past 50 years.

Noble Lords may not be aware that the father of the noble Lord, Lord Williams of Mostyn, was the headmaster when I was at school. He talked then about devolving power to the people of Wales.

The time has come; and to all of those who are in favour of devolving power to the people of Wales and Scotland, let us go home for the Summer Recess and

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campaign for the "Yes" vote. Our parliament is long overdue and now we must make the right strike to ensure that we achieve it.

Lord Sewel: My Lords, I thank all noble Lords who have taken part in this Third Reading debate. I think that I can thank those noble Lords who directed such kind words to the Government Front Bench, but I reserve the right to look at Hansard tomorrow.

At Third Reading, it is interesting to observe how old friends--perhaps I should say bad apples--keep popping up. We have had the post-legislative referendum discussion. We have had the independence option. The noble Lord, Lord Renton, even managed to bring in the threshold question. We have examined those three issues in all genuineness, and reached conclusions in fair and proper debate. We have given good time to them. I believe that the matter has been subject to proper scrutiny.

Perhaps I may deal initially with the point raised by the noble Earl, Lord Balfour. My memory is that I have written to the noble Earl. I have certainly signed a letter. If he has not received it, I apologise. However, I clarify that there will be no polling agents. There are polling agents in parliamentary and European elections but that is not appropriate for a referendum. However, other safeguards are built into the system. When the noble Earl receives my letter, I hope that he will be content with the explanation that I offer.

I move on to the three old friends, or bad apples: why are we not having a post-legislative referendum; why do we not have the independence option on the ballot; and why do we not insist on a threshold? One answer to that series of questions is that in the manifesto we put our proposals before the people. The manifesto dealt with the issues of a post-legislative referendum, the idea of independence and thresholds. In the manifesto clear proposals were put before the people and the electorate endorsed those proposals. That is what we base this legislation on: the endorsement by the electorate of our manifesto proposals.

Some noble Lords may think that that is not good enough. I shall extend the argument. Why not a post-legislative referendum? If we look into the origins of the pre-legislative referendum we shall find that a major advocate of the pre-legislative referendum was a former Conservative Secretary of State for Scotland. He chided us about the level of popular support in Scotland for our proposals, and baited us that we would not have confidence to put those proposals before the public. We are doing just that. We shall give the people of Scotland the opportunity to make a decision on clear proposals outlined in the White Paper. For the vast majority of people a coherently written, comprehensive White Paper is more easily understood than a Bill. I believe that we are on sound grounds in going to the people of Scotland and the people of Wales and saying, "This is what we propose to do; this is the way we intend to go. We seek your endorsement." That, surely, is a sensible, commonsense way forward?

That deals with the independence option, as well. The basis of the referendum is not some glorified public opinion poll on various options. The basis of the

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referendum is the Government going to the people and saying, "These are our proposals. We seek your support; we seek your endorsement."

It would be completely wrong for the Government to include an independence option in the referendum because the Government could not, in all conscience, advocate the independence option as a way forward to the people of Scotland and the people of Wales. What we are seeking is endorsement of a specific line of policy. If the people of Scotland and the people of Wales wish to support independence, they have the opportunity to do so at general elections by voting for candidates committed to that course of action. The people have already spoken on that issue: they have turned away from the option of independence. We seek to put clear, devolution-based proposals to them.

The issue of thresholds was raised by the noble Lord, Lord Renton. We have maintained all along, from the earliest discussion on these proposals, that we think that fancy franchises and thresholds are a way of frustrating the democratic will of the people. We are not going to have this issue decided by people who are perhaps uninterested or apathetic and who are not prepared to turn out to vote. It is those who vote who count and it is they who will make the decision. We have made clear that the Government are committed to moving ahead with the legislation when it is endorsed by the electorate.

I take the point, of course, that government cannot commit Parliament. Parliament will be in the position, during consideration of the Bill, to take account of the full circumstances surrounding the result of the referendum. That is a proper matter for Parliament. But the Government have given the commitment that they will move forward on the basis of the outcome of the referendum.

Lord Renton: My Lords, before the noble Lord leaves that very important point, would he be so good as to say what minimum number of votes in favour the Government have in mind in order to justify this big change?

Lord Sewel: My Lords, no. We are going to the people of Scotland and the people of Wales to put our proposals before them. If we win, we will go ahead; if we do not win, we will not go ahead. It is as simple as that. It is for the people to decide.

In conclusion, we have rightly and properly scrutinised this legislation. It begins a process; it does not end the process. We have now virtually done our job. We hand the decision over to the people, and I hope that, as good democrats, we trust the people.

Lord Campbell of Alloway: My Lords, perhaps I may ask the noble Lord one question before he sits down. Does he give an assurance on behalf of the Government that they will introduce primary legislation to prohibit the Scottish parliament from varying taxes other than UK income tax? I think that everybody is entitled to know.

Lord Sewel: My Lords, the specific assurance that the noble Lord seeks is unnecessary because the powers

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of the parliament will be defined in the primary legislation setting it up and the only powers that it will have to vary tax will be the income tax powers as defined in the White Paper.

On Question, Bill passed, and returned to the Commons with amendments.

Local Government (Contracts) Bill

4.45 p.m.

The Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions (Baroness Hayman): My Lords, I beg to move that this Bill be now read a second time. The Government are committed to promoting opportunities for public-private partnerships because they offer the opportunity for increased value for money and innovation in the provision of the services that national and local government need. Mr. Malcolm Bates, chairman of the Pearl Group, has recently completed a rapid review of current private finance initiative and public-private partnership arrangements. His review was published on 23rd June. One of Mr. Bates's recommendations was to take speedy action to overcome the uncertainty over local authority powers to enter into public-private partnership contracts. The Bill aims to achieve that.

The Bill clarifies the powers of local authorities to enter into contracts for the provision or making available of assets or services. It also provides a "safe harbour" through a certification procedure to protect contractors and lenders from the possibility that a local authority may not have had power to enter into a contract or may have exercised its powers improperly.

Certain recent high profile cases have led contractors and banks to fear the financial consequences of a finding by the court that a contract with a local authority is unlawful, and therefore unenforceable, because the authority had no power to enter into it or because it exercised its power unlawfully. The contracts in question were bank guarantees, and in each case the consequence of the court's judgment was that the bank concerned had to finance the losses of companies set up to carry out work in connection with local authority functions. Because the contracts were found to be void, the private sector had no recourse to the authorities for compensation and so found itself saddled with bad debts.

Those cases did not involve new principles of law and concerned arrangements quite different from the great majority of local authority contracts, but the views expressed by the courts on them have resulted in a commonly held perception that providing finance for local authority contracts, particularly long-term partnership contracts, poses an unacceptable level of risk. That is a perception we must overcome if public-private partnerships are to work successfully in local government. We want to act quickly to dispel any doubts there may be in the minds of potential backers of local authority schemes, including public-private

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partnership schemes. The Bill aims to achieve that. It clarifies local authority powers. It also protects contractors and banks if things go wrong when they have been relying on an assurance by an authority that the authority has been acting within its powers.

It is the innovative features of public-private partnership schemes, compared to more traditional procurement contracts, that are perceived as likely to give rise to questions about the existence or exercise of local authority powers. The Bill will concentrate the minds of local authorities on this issue when they enter into contracts. It should reduce the chances of local authorities acting outside their powers.

The Bill does not disturb the fundamentals of existing legislation with respect to local authority powers. It does nothing to alter the scope for contracts to be challenged under public law. The court will have the same powers to review the exercise of a local authority's discretion to enter into a contract. It is essential to leave in place such powers for the protection of the local tax payer. For the same reason, the Bill does nothing to undermine the long-standing powers of the auditor to question the lawfulness of local authority conduct or expenditure.

I now come to the specific provisions of the Bill. Clause 1 makes it clear that a statutory function of a local authority confers power to enter into a contract for the provision of assets or services for the purposes of, or in connection with, the discharge of that function. The Bill is here not extending authorities' powers but making explicit what was already implicit. It covers contracts which are for the purposes of, or connected with, the discharge of a function, such as providing education or social services or leisure facilities. The Bill does not affect the exercise of an authority's implied or subsidiary powers, but an authority will no longer need to rely on those, including Section 111 of the Local Government Act 1972, in order to enter into those sorts of contract.

The Bill does not change the law which regulates the power of local authorities to delegate their functions. Part II of the Deregulation and Contracting Out Act 1994 empowers a Minister to make an order to allow an authority to contract out the exercise of a function. One such order is being prepared in connection with highways functions, because delegation in that area is necessary to underpin an effective PPP project. Contracts in other service areas seem less likely to entail delegation, but government departments could consider making similar orders, if necessary, in relation to other local authority functions.

The Bill provides a "safe harbour" to protect contractors and lenders from the possibility that a local authority may not have had power to enter into a contract or may have exercised its powers improperly. To achieve that, Clauses 2 and 3 introduce a certification procedure for contracts of a description then specified in Clause 4. In essence, they are contracts for five years or more involving the provision of services. The issue of a certificate (but not its content) has to have the consent of other parties to the contract because the legal rights of all parties are affected by the certificate in ways that I shall now describe.

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Unlike the certification procedure under the recently enacted National Health Service (Private Finance) Act, the large number of authorities within the scope of this Bill makes it impracticable for Ministers to certify contracts individually. Also, such intervention by Ministers would weaken local authorities' responsibilities and their accountability, which is not a path that we would wish to take.

The effect of Clause 2 is that no one (including the authority, the contractor, and any other party to the contract) may argue in private law proceedings that a certified contract is unenforceable because the local authority did not have the power to enter into it or used its powers improperly. However, Clause 5 preserves the right of local tax payers or the authority's external auditor to challenge certified contracts under public law; that is, in judicial review and audit-related proceedings. Where there is a judicial review the court already has the discretion to allow a contract to continue if that is in the public interest. Clause 5(3) gives the court an equivalent discretion in audit-related proceedings. To meet the case where the court determines that a contract is to be set aside, the Bill provides for the enforceability of special terms agreed between the parties with that possibility in mind.

It would be open to the parties to agree a range of different discharge terms. Clause 6 provides that the enforceability of discharge terms would be unaffected by the setting aside of the certified contract. The aim of discharge terms would be to make provision for compensation and for dealing with the assets made available under the certified contract. Clause 6 also safeguards discharge terms by providing that they shall have effect as if the authority had power to agree them and used its power properly. Clause 6 makes clear the authority's power to agree discharge terms and that the enforceability of terms is unaffected by the setting aside of the main contract.

It is possible that discharge terms may be challenged on the ground that they do not simply provide for compensation or for dealing with the assets made available under the certified contract. Also, of course, the parties may not have agreed any discharge terms. Clause 7 provides that in either of those events, where a certified contract has been set aside, the contractor shall, nevertheless, be compensated as if the local authority had repudiated the contract. This provision is an ultimate long-stop, and the parties to a certified contract would be most unlikely to need to fall back upon it.

There are several other provisions in the Bill to which I should like to draw the attention of the House. Clause 1(2) confirms that, where a third party funds a contractor, the authority may enter into a separate contract with the financier, who could be a direct lender to the contractor or a person involved in other forms of finance, for example, bond issues. Such a contract might also include an arrangement whereby the financier would be able to nominate a replacement contractor if, for example, the original one became insolvent. The protection afforded by the certification procedure and discharge terms are extended to contracts with financiers.

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In England and Wales, the Bill will apply to all bodies covered by Part IV of the Local Government and Housing Act 1989 and to probation committees and the receiver for the Metropolitan Police district. It will also apply to Scottish local authorities as defined in the Local Government (Scotland) Act 1973.

The Bill confers powers to make regulations. In particular, there are powers to regulate the certification procedure, which I have already explained, dealing with matters such as signature and the issue of copies, and power to make regulations about the kind of contract that can be certified under the Bill.

Clause 9 amends the Justices of the Peace Act 1997, so that revenue grants may be made to local authorities to meet payments under partnership contracts in respect of magistrates' courts. For technical reasons, the capital finance rules currently classify such payments as capital expenditure.

The details of the Bill reflect discussions and close working relationships with interested parties, including the Local Government Association, the public-private partnerships programme, and lawyers representing banks and contractors. Consultations have continued, following the Bill's introduction in another place. A consultation paper was issued on 16th June. Should the results of the consultations prompt the Government to bring forward further amendments, it will be done at Committee stage in your Lordships' House. There will then be a third round of consultations on the details of the secondary legislation, once the broad coverage of the regulations is established.

This is a short Bill, albeit a technical one. I hope that I have managed to explain its provisions clearly. We aim for it to be in force by November. Speed is important in this matter. Although there are provisions in the Bill which will allow it to bite on contracts entered into at any time after 12th June, it is probable that many contractors and banks would prefer to see the Bill in force and consider its provisions as enacted by Parliament before entering into a long-term contract which could be certified under the Bill. I beg to move.

Moved, That the Bill be now read a second time.--(Baroness Hayman.)

4.58 p.m.

Lord Bowness: My Lords, I thank the Minister for her explanation of the Bill. Local government Bills are described as either technical or simple, but they are usually complicated. While this Bill has relatively simple objectives, it is, nevertheless, confusing in some aspects.

Let me say straight away that we on these Benches support the general thrust of this measure and would wish to see it come onto the statute book within the timescale that the Minister indicated. There is no doubt that it has been brought about by the need to ensure that PFIs are not to fail because of private sector doubts that a local authority has the legal capacity and the power to

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enter into the contract or the partnership deal. I am certain that the doubts were brought about by the Hammersmith and Fulham cases surrounding the authorities trading in the money market (the swaps cases) and the losses that banks and others suffered as a result of the contracts proving to be ultra vires; and, indeed, by other high profile cases that were referred to when this matter was debated in the other place.

I hope that the Minister will be able to give the House comfort that, notwithstanding the passage of this Bill, such cases are now not to become possible under this legislation. I understand that that is the case, but an assurance on the record would be very welcome.

The previous government started PFI and encouraged it. There were problems in some directions, which has always been acknowledged. However, it was an initiative which has been of--and still has the potential to bring--enormous benefit to the public sector. Indeed, I say to the noble Baroness that it has become so popular that certain prominent members of the Labour Party now claim it to have been an original Labour Party idea. If that is true, they must have been very unpopular with many of their colleagues in the country, particularly those in local authorities, because it was seen as an extension of privatisation.

We on this side welcome the fact that PFI is now to be encouraged as much by this Government as by the previous one. I hope that the relatively new enthusiasm will continue to spread despite the original hostility in some quarters. We also welcome the fact that the protection given to the party contracting with the local authority and for allied contractors does not in any way diminish the opportunity for challenge by judicial review and audit, the challenges under public law referred to by the Minister in her introduction. That is an important protection.

However, there is one matter upon which I should be grateful if the Minister could throw some light. It seems to me--if I am wrong I shall be pleased for the Minister to point out where I am wrong--that one issue remained unresolved during the progress of the Bill through the other place. On a number of occasions the Minister of State was asked whether, in the event that a certified contract was found by the courts to be unlawful, there could be any challenge to the discharge terms. She was later asked whether there should be a specific provision to the effect that, before setting aside a contract, the court should have to consider the consequences for the parties arising from the discharge terms.

In Standing Committee B on 1st July the Minister said:

    "I keep receiving notes and, as this is open government, members of the Committee should know what they are saying to me. The latest note says that discharge clauses can, indeed, be challenged and that clause 7 establishes a fall-back position. Another note says that the clause does not empower courts to set aside contracts. It allows them to continue in audit review by bringing in discretion in judicial review to refuse to give what has been applied for".--[Official Report, Commons, Standing Committee B, 1/7/97; col. 37.]

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I remain somewhat confused on reading that and submit that the position is still far from clear. The Minister based her rejection of the requested amendment to give effect to that specific provision on Clause 5(3) which requires the court to act as it would upon judicial review and to take into account all the circumstances. The problem nevertheless of the discharge terms which may be unreasonable remains unaddressed.

Indeed, the answer seems to indicate that, if in determining that the contract was unlawful the discharge terms were so unreasonable, the contract should nevertheless continue. I do not believe that that can be what was intended and I certainly do not believe that it is desirable. The position on the face of the Bill as it stands--it may not be what was intended--is still not clear. As the Minister explained, Clause 6 reads,

    "No determination or order made in relation to a certified contract on an application for judicial review, or an audit review, shall affect the enforceability of any relevant discharge terms relating to the contract".
Clause 7 in part--I need not trouble the House with the whole clause--reads,

    "Subsection (2) applies where the result of a determination or order made by a court on an application for judicial review or an audit review is that a certified contract does not have effect, and there are no relevant discharge terms having effect between the local authority and a person who is a party to the contract. That person shall be entitled to be paid by the local authority such sums",
and so forth. Clause 7(3) goes on to say,

    "For the purposes of this section there are no relevant discharge terms having effect between a local authority and a person who is a party to a contract if no such terms have been agreed, or the result of a determination or order made by a court is that any such terms which have been agreed do not have effect".

I suggest that on the face of it there is a conflict. I am sure that the best legal brains have been brought to bear on this subject but clarity and certainty would be helpful and are needed for the members and officers of local authorities. It would be disastrous for the Bill and PFI initiatives--and unhelpful at the least--if there were to be a succession of cases in relation to the enforceability of discharge terms.

The Wednesbury rules on reasonableness continue to apply. Some legal authorities are saying that even if the Bill ensures that local authorities cannot escape from their obligations to third parties, they cannot escape the Wednesbury rules. All the risk is then with the council. If that is the case, who will be paying? Will it be the council tax payer or, in extreme circumstances, the members or the officers? Thus, we need to ensure that one difficulty over making PFI work is not replaced by another.

As I said to the Minister--it may be hard to believe in the light of the questions I raise--we on this side welcome the Bill. We welcome the fact that PFI is so high up the Government's agenda, as we welcome all instances where our arguments have prevailed. We look forward to hearing from the Minister either this evening or, indeed, in Committee clarification on the points which I believe are of concern and perhaps threaten the success of the initiative set out in the Bill.

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