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Lord Dixon-Smith moved Amendment No. 16:

Page 4, line 5, at end insert--
("( ) Any additional costs falling on an authority as a consequence of this section shall be included as an addition to the authority's Standard Spending Assessment in the subsequent financial year.")

The noble Lord said: My Lords, Amendment No. 16 seeks to ensure that the costs of the best value system incurred by local authorities are recognised for the purposes of calculating their revenue support grant through their standard spending assessment. We have pressed the Minister on the issue of the cost of the best value system. I accept that from the point of view of public expenditure overall there is not a problem. We can be reasonably confident that the savings which accrue as a result of the best value system will in fact

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be greater than the costs. Therefore, from the point of public expenditure as a whole the sum of expenditure will not increase. That is fine when one calculates at the national level. But I am concerned about what will happen at the local authority level. There is no doubt that when best value is introduced in every authority costs will increase.

In a Written Answer, the Minister said that it was not a matter of concern. However, at the individual authority level it should be a matter of concern. The Minister also said in the Written Answer that the Government expected that as a result of the onset of the best value system they would be able to build in to the revenue support grant system a 2 per cent efficiency factor. We have all been used to efficiency factors in the past. They have been built in for a long time and, by golly, we have complained about them too. They do in fact drive efficiency. But a 2 per cent efficiency factor built in as a result of best value, which one has to assume might be in addition to other efficiency factors that are already in existence, implies a 2 per cent reduction annually in government funding. That is one adverse result at the local authority level. But the authority might experience a 1 per cent increase in costs as well because it has to administer the whole of this system. That would have a 3 per cent effect on the local authority's budget at the local level, and so would cause a great deal of difficulty.

From the public expenditure point of view, the system can do nothing but good. If one looks at the issue of local government expenditure in overall terms, again the system can do nothing but good. But at the individual authority level the effect might be perverse unless all these costs are properly taken into account in the revenue support grant system. The Minister could answer my point quite easily by giving me a sufficient assurance that that is what will happen. I beg to move.

Baroness Hamwee: My Lords, I too am concerned about the assumption that efficiency savings will be adequate to fund the best value work. Earlier today we dealt with the best value criteria. They cover not only economy and efficiency. We have talked about effectiveness meaning each authority achieving its objectives. Achieving certain of its objectives, though they may be worthy and be what the community would support, may carry a cost. The best value duty in Clause 3 recognises the different criteria. I shall be interested to hear what the Minister has to say on this amendment.

Lord Whitty: My Lords, I understand the concern in local government circles that the best value system will introduce costs, at least initially. However, it is not our assessment--I do not think it is local government's assessment either--that the costs would be disproportionate to the efficiency savings or that special provisions in the financial regime, which in general we are trying to move to a non-earmarked system, should be specifically earmarked for best value reviews and the introduction of best value systems.

The kind of efficiency gains that we are looking for--it does not have a direct read-across to the level of central government finance but is nevertheless 2 per cent--offers more than enough scope for any

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up-front costs that are needed to introduce the best value regime. After that the regime should, as well as delivering non-financial benefits, be more than paid for by that. It is true that some costs will be entirely within the control of the individual authority. However, as I explained at an earlier stage, we are already taking steps to ensure that resources are made available to meet the costs of audit and inspection. My colleagues in another place have given a number of assurances that we intend to ensure that authorities are not financially penalised by that aspect of the best value framework. For instance, we have already explained that additional funding to meet the cost of inspections will come from the revenue support grant or from a direct grant to the Audit Commission to meet those costs. In so far as there is a differential impact between local authorities on costs over which they have no control, noble Lords already have that assurance.

As for reviews, reviews should be conducted in any case as part of the management system. What matters is that they produce the plans to deliver the continuous improvements so that we have a more efficient delivery of the objectives. Therefore, I do not think there is a need for a specific new grant to cover the cost of those reviews.

In many ways this amendment runs counter to the spirit of the best value ethos. I hope that on reflection the noble Lord will not pursue it.

Lord Dixon-Smith: My Lords, I am grateful to the Minister for that reply which goes some way towards meeting the points that I raised. I shall study with great care exactly what he said. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hamwee moved Amendment No. 17:

Page 4, line 10, at end insert--
("( ) Nothing in such an order shall restrict the term of any contract let by an authority to perform any of its functions.")

The noble Baroness said: My Lords, Amendment No. 17 proposes that nothing in an order made under Clause 5 covering best value reviews,

    "shall restrict the term of any contract let by an authority to perform any of its functions". I have tabled the amendment in order to seek an assurance from the Minister. Can he confirm that the five-yearly reviews will not mean that contracts cannot be let by authorities for more than five years if an authority considers that to be appropriate in the case of a particular contract. Some functions of an authority require considerable investment, both by the authority and by the contractors. For instance, dealing with waste and waste disposal are capital intensive functions. Contracts need to be structured on a fairly long-term basis.

A particular authority has drawn to my attention its concern about the continuing inherent tension between the Bill's requirement for regular periodic reviews of an authority's functions, and the benefits in some circumstances of letting contracts over a significant period of time in order to attain wider policy objectives.

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Waste collection, as I mentioned, is one area that concerns the authority. IT procurement is another, where letting a contract for a longer period improves value for money. Contracts are usually let for at least five years and, I understand, in the case of this particular authority possibly much longer.

I am assured that most of the contracts in question include a requirement for a year-on-year quality improvement. In that sense, these services have in effect been "best valued" as part of the letting of the contract. If they have to be re-let under the terms of a best value review, as the Minister will well understand, the council will be likely to incur a heavy financial penalty for breaking the contract.

Those who have raised the point with me are not clear as to who would be responsible for paying the compensation claim. I am fairly clear that it would be the authority. I am not concerned only about contracts that may be in existence or which may be brought into existence in the future, but about each authority's ability to plan for the long term. I beg to move.

8.30 p.m.

Baroness Farrington of Ribbleton: My Lords, I hope that I can reassure the noble Baroness, Lady Hamwee, that the amendment is unnecessary. As I have explained on previous occasions, our intention is that best value authorities should fundamentally review all functions over a five-year period to ensure that continuous improvements to all services are made. Reviews will involve challenging the way in which, and the level at which, the function is being exercised, comparing performance with other authorities and bodies, consulting local communities and assessing competitiveness.

The noble Baroness also raised an important issue relating to the review of service contracts. Whether a service is reviewed every year or every five years should not affect the term of the contract. Authorities are well aware of the need to build in appropriate flexibility to ensure that their arrangements secure continuous improvement and can be adapted to meet changing local and national priorities. To do otherwise would not achieve best value.

Orders made under Clause (5)(2) allow the Secretary of State to specify the time period within which best value authorities have to review all their functions. Such orders cannot in themselves restrict the term of any contract let by an authority. I do not believe that the amendment would work in quite the way that the noble Baroness intends; but I can in any case assure her that it is unnecessary, and I urge her to withdraw it.

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