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The Lord Bishop of Blackburn: My Lords, this is a highly technical and legal matter and, as I said, I was speaking from a brief. I understand that bringing together a series of school governing bodies into such an arrangement is prevented or that there is some doubt about whether that can be achieved. Perhaps the Minister, who spoke so cogently about this matter in Committee, will be able to help the noble Baroness. I assure her that I should not take up the time of the House if our people did not believe that that approach was necessary.

Lord Peston: My Lords, I and my friends in education would not cry ourselves to sleep tonight if these provisions were not in the Bill. I know—or, rather, I knew—of no one who wanted these provisions, other than the Government; I now discover that the Churches want them. We shall have a word on that in a moment.

When I first saw the Bill, it had not occurred to me that the provisions had anything to do with the replacement of schools. When reading Clause 10(1), it does not immediately leap to mind that it relates to school buildings and similar matters; it refers to "services", "facilities" and so on.

I read very carefully the remarks of my noble friend. I am not an expert on these technical economic matters but I do not see where the value added—the extra output—comes from in the PFI initiative. I have never understood that; and in this case I do not understand at

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all how resources can be there via the PFI that are not there via some other arrangement. Perhaps my noble friend can explain that.

On Amendment No. 26—the amendment of the noble Baronesses, Lady Sharp and Lady Walmsley—I stick to the view that schools exist to be schools. They exist to educate young people. Whatever else follows from that, if it cannot be demonstrated that the net gain is made available to the young people who are being educated, I have two questions. First, where does the net gain go if not to the young people who are being educated? Secondly, why are schools in that type of business if it is not for that purpose? I am completely at a loss in this regard; why is the answer to Amendment No. 26 that the provisions are already somewhere in the Bill because that is what schools exist for? If there is any doubt about that, it should be said very clearly that schools should not be engaged in any activities whatever that are not proper for schools. I regard schools as places that are to do with educating people, not with other matters.

This is no big deal. I was persuaded last time not to make a great song and dance about this matter. I do not believe that many people will get involved. However, if it turns out to be a big deal, I should at least like to be persuaded, first, how the net gain exists and, secondly, that the net gain is education.

Lord Brooke of Sutton Mandeville: My Lords, I rise to support my noble friend on the Front Bench on Amendments Nos. 24 and 27. The noble Lord, Lord McIntosh, will recall that this is the second occasion in three weeks on which we have discussed small business, of which we both have some experience.

When I looked at the earlier parts of the Bill, my mind went back to the remarkable series of films about St Trinian's and the cameo part played by Mr Richard Wattis as a civil servant in the Ministry of Education who had to deal with the school. I was reminded of the role that he played then when I thought of the innovation schemes coming into the department. Of course, in the St Trinian's films George Cole played a role of a spivvish nature which was a trailer for his later notable television series.

I was greatly relieved that in Committee the noble Lord, Lord McIntosh, said:

    "It will not be permitted for them"—

by that he meant the companies—

    "to have a general trading object".—[Official Report, 7/5/02; col. 1097.]

I looked for the explicit statement of that non-permission in the primary legislation and did not find it. But I acknowledge that it was implicit.

In these remarks I do not speak on what I would call the "defensive provisions" in these clauses—that is, the efforts of economic consolidation, about which the right reverend Prelate spoke. However, I say to the noble Lord, Lord Jones, who said that this clause was of its time, that simultaneously local authorities are being

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widely encouraged to become enablers rather than providers. The Bill seems to be going a little in the opposite direction.

I want to dwell on what I would call the "positive enterprise" aspects of the Bill, which I recognise to be a significant part. I echo what my noble friend said from the Front Bench about the amount of time involved. For more than a quarter of a century I was a trustee of a charity which had been going for more than 100 years. We had a very successful shop, as government are always encouraging that type of body—it was a museum—to do. But, due to carelessness within the engine room of the trust, arrangements were not made for the earning capacity of the trust in profit to be translated into a dividend back to the trust. One may say that that was a simple thing, but experienced trustees failed to realise that it was not occurring. We then had a profoundly long argument with the Inland Revenue, which proposed to tax us on all those profits rather than allowing them to be passed to the charity in an untaxed capacity as a dividend.

The amount of time that that renegotiation took is an ominous warning of what such a venture can lead people into. I certainly echo my noble friend—further allusion was made to it in the debate subsequently—in relation to the LEAs, which, in Clause 11, will need to have the skills to decide whether or not a school should be allowed to have such a company. It was said during the debate that they would not have the skill. However, if they have to acquire the skill, that will also require a heavy investment of time.

In summary, of course I understand that pressures are coming from different parts of the system for such companies to be allowed. However, I am not convinced that the upside potential from the companies which can do it, and which go ahead and do it, will exceed the downside potential cost if inexperienced schools are allowed to use such powers and then meet with unfortunate consequences, which, I fear, only too clearly might be the case.

Lord Lucas: My Lords, one cannot serve both God and Mammon, but it appears that the trick is to make Mammon serve God and then one can square that particular circle.

What worries me about this type of arrangement is the liabilities that the directors or shadow directors of the companies will land themselves with. Limited liability is not what it used to be. One can find oneself getting into all sorts of hot water if one does things which are outside the proper way of trading or if one does not take proper care of a company in which one is a director or shadow director. Very few governors of schools really have the time properly to exercise the duties of a director. Although they may well be considered to be shadow directors, they may suddenly find themselves banned from being a director of other companies. They may find themselves liable for the company's debts.

I believe that, at the very least, clear guidance will have to come from somewhere—I do not see a provision for it in these clauses—as to exactly what the liabilities are, how they should be handled, and how, if a company

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is to be set up, those who may be considered to be shadow directors, must conduct themselves. Layer upon layer of company law now presses down on company directors. We cannot allow ordinary people who become governors of, for example, a Church primary school to be laid open to that type of liability without first giving them a great deal of guidance. Although I have not been sent a copy of a letter as I did not participate in the debate in Committee, I have not yet heard anything in Committee or from the Government today which leads me to think that we are looking after such governors in the way that we should.

Lord Baker of Dorking: My Lords, I believe that in this debate one should recognise that a great deal of entrepreneurial activity is taking place in the education system at various colleges. It is occurring in city technology colleges and in some of the new specialist schools. And it is certainly part and parcel of the Government's intention that it should take place in the new city academies. Such activity is happening in a whole variety of ways—sometimes on an individual school basis, sometimes through a group of teachers coming together, and sometimes through a school taking an active interest in promoting a particular part of the curriculum and selling it to others. Therefore, as my noble friend Lady Blatch said from the Front Bench, a great deal of activity is already taking place.

I believe that we must be persuaded—I hope that we shall be—that this extra step is taken for other reasons because the present arrangements are inadequate. I was interested to hear the speech of the right reverend Prelate the Bishop of Blackburn. I considered that he made a very persuasive case for PFI—rather more persuasive that any Ministers are prepared to make. I believe that a little touch of capitalism from the Church is to be seriously welcomed.

In effect, the right reverend Prelate said that the advice that he has received from governing bodies on how the Church arranges such matters is that this arrangement is necessary to ensure that the benefit of PFIs is spread widely in a clutch of schools. Basically that is what he said. I dealt with advice bodies for several years when I had responsibility for this matter and I was always very impressed with their professionalism. I would expect, and hope that the Minister will confirm, that the provision is necessary. If that is the case, then I believe that these clauses should remain part of the Bill. I have nothing against them in principle.

The noble Lord, Lord Peston, is against them in principle, as he made very clear in Committee. I remember what he said. I treasure every word that the noble Lord says; he is one of the few remaining spokesmen of old Labour in this House. He does not like profits and dividends, which this type of arrangement is likely to throw up. I say to the noble Lord, Lord Peston, that profits and dividends are a rather good thing as they make the world go round. So long as the profits and dividends flow back into the educational world, that will be another reason for welcoming these changes.

I hope that, in replying, the Minister will be able to say that, in one way or another, the present arrangements are inadequate along the lines set out by the right

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reverend Prelate the Bishop of Blackburn. If that is the case, I believe that the clauses should remain part of the Bill.

7 p.m.

Lord McIntosh of Haringey: My Lords, I shall introduce my remarks on this group of amendments by saying two things. First, although the noble Baronesses, Lady Blatch and Lady Sharp, have put their names to the same amendment, my recollection from the Committee stage is that they approached these clauses and proposals from very different points of view. The noble Baroness, Lady Blatch, as she confirmed today, was fundamentally in sympathy with the proposals for school companies and entrepreneurial activity, as the noble Lord, Lord Baker, called it. However, the noble Baroness, Lady Sharp, was deeply suspicious of the whole thing. She would not have called it a "capitalist plot", as my noble friend Lord Peston would have done, but she was getting close to it. Therefore, let us remember the different points of view which are coming together for the purpose of this group of amendments.

The second point that I must make at the outset is that this all arises because we have been extremely open in describing the proposals. After all, the speech which the noble Baroness, Lady Blatch, made in Committee arose because we had a 13-page policy statement on school companies. The noble Baroness made a very detailed criticism of that policy statement. I have no objection whatever to that. She subjected it to a fine-tooth comb textual analysis.

I then sent the noble Baroness a five-page letter, a copy of which—I am sorry to say—did not reach the noble Baroness, Lady Sharp. It was certainly intended to; indeed, my file copy was marked to the effect that a copy would be sent to the noble Baroness at the same time. Now the noble Baroness, Lady Blatch, has subjected my letter to a detailed textual analysis, which lasted 15 minutes. Well, that is what legislative scrutiny is for. I cannot have, I do not have, and, indeed, I shall never have, any criticism of the noble Baroness for doing so. It is because we have tried to be as helpful as we possibly can in our explanation of these proposals that this degree of detailed analysis has arisen.

Perhaps I may try to deal with as many of the points raised by the noble Baroness as I can. I was not able to deal with them on the first occasion, because, as she said, I did not have notice of them. However, at least I have the letter in front of me this evening, and I shall now try to interpret my own letter.

The noble Baroness started by saying that schools might not have the time to form companies, and questioned whether they would produce time-saving benefits. There are two points to consider here. The first is why we must have companies, and why they can do things that other organisations are unable to do. The fundamental answer to that became clear in Committee. Although individual schools can form companies, groups of schools cannot do so. There is no way in which they can commit each other to the kinds of activities that a company can undertake. It also became clear in

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Committee that the powers are simply a useful enabling device, which is not essential for all of these joint arrangements. Nevertheless, they can be helpful.

There are very few things in life for which a company is essential. Indeed, this could be achieved through a partnership rather than incorporation. The advantages of having incorporation in a company are, first, that it allows limitation of liability. I listened to the remarks made by the noble Lord, Lord Lucas, but the restrictions on the limitations of liability under the Companies Act mean that you have to go to very considerable neglect, or even fraud, to become personally liable under that legislation. Secondly, a company is simple, transparent, and every one knows what it does. The Companies Act applies, and there is an existing legislative framework—you do not have to invent it all from scratch. Forming a company may not be essential, but it can be most helpful for schools that want to do so. I cannot see why anyone should want to deny schools this freedom.

As regards the examples given of schools combining to purchase jointly without this power, that is perhaps a possibility. But what about those from whom they are purchasing? Surely the people from whom they are purchasing will want there to be someone against whom there is some come back, so to speak. We have already observed that the local education authority has to pick up the tab if things go wrong. The existing power to have a school that takes the lead or employs a bursar means that the school is acting as agent for other schools. That is not the framework for joint decision. It does not give an individual school the protection of limited liability that the company arrangement would provide. As I say, suppliers are likely to be reluctant to give savings on a bulk order where they have to be content with a contract with several individual schools rather than with one company that represents all of them.

The fundamental point about this part of the argument is that a company is the easiest way for several schools to act together because it is on a template that already exists, and which has existed for many years. It is applicable only where there is more than one school that wants to act jointly in this way. The costs referred to are the costs of setting up, but they are really quite minimal and will become even lighter at later stages when the company is established.

The noble Baroness, Lady Blatch, had a whole series of questions about the supervising authority and about what I described in my letter as the "light touch". However, she did not quote my comments on what a supervising authority might do:

    "it may direct the company to provide it with information on the company's finances, management and contracts; it may direct a governing body which is a member of the company to reduce its involvement in the management of the company; and it may direct a governing body, which is a member of the company to resign as a member of the company".

The latter are not constant day-to-day interventions in a company, but they are the necessary protection for the local authority. That is why I stated in my letter that a supervising authority needs to have,

    "evidence for its decision, and will be bound by the general duty on LEAs to act reasonably".

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It will not be second-guessing every decision of the company, but it will have the powers to come in and act if anything appears to be going wrong—just as happens now with its powers to suspend a school's delegated budget. Incidentally, the noble Baroness, Lady Blatch, used the phrase "cost free". I never said that it was cost free; I said that the costs are minimal because of the existing template.

The noble Baroness queried the mention in my letter of purchasing companies joining together,

    "to buy only what their members would normally buy".

Such restrictions will have to appear in regulation, and they will have to be imposed on local education authorities in their two roles: first, as approving the company in the first place; and, secondly, as acting as the supervising authority.

As regards the section in my letter headed "Bureaucracy", I said that there is no requirement for the LEA to be involved other than in the role of supervising authority, but I stated that that would apply once the schools have the permission of their local education authority to form or join companies. Those are the two significant roles. As to the role of the Secretary of State, I should remind the House that the Secretary of State only becomes involved when we reach Clause 12, which deals with the PFI on which the right reverend Prelate and the national society were so eloquent. I agree with every word that the right reverend Prelate said in that respect. But, to return to the question of whether or not it is a purchasing company, a "service providing company", or a PFI, I should point out that all of these things are voluntary; nothing is forced on any school.

The noble Baroness asked me about schools that are under suspension. In my letter, I said that,

    "if a budget were only suspended for a short period, leaving the company may not be necessary . . . [but] if a budget were suspended for a long time it may be better for the school to withdraw from the company".

The issue of a possible take-over seemed to worry a number of noble Lords. We are talking about private companies. There is no market in their shares, and, therefore, no possibility of a hostile take-over. A take-over could take place only if a majority of the school company members agreed to sell their shares to a third party. Under what circumstances could that happen, unless it were to the benefit of the schools? Frankly, I cannot imagine it happening. However, under company law I suppose that we have to allow for the possibility that it might happen. But, fundamentally, if there is no market value for the shares, the opportunity for a take-over and for anything that gets away from the education system—which, I suspect, is the fear behind this—is minimal, if it exists.

The noble Baroness asked about the,

    "market scan of alternative broker/provider organisations".

I too find that jargon horrible. Where that exists, it is felt that at present there are not the powers to complete plans, as the North Romford School Improvement Consortium feels. That is why that consortium supports this.

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On the issue of dedicated staffing resources, I have to reiterate what I hope was made clear in Committee, that a company cannot employ a head teacher; he or she has to be employed by a governing body. No teacher can be obliged or even bullied into moving to work for a company. Only if the activities of a company are complementary to the activities of the schools, for example educational activities—I agree with my noble friend Lord Peston—would the transfer of staff arise. The idea of employing a bursar who may otherwise be called a manager of a company does not appear to me to be so extraordinary.

I believe I have answered the question that the noble Baroness, Lady Blatch, raised about the ability of the Secretary of State to be involved in the operation of companies. There is no provision for that in Clauses 10 and 11; only in relation to Clause 12, when we come to the PFI option for school companies, could the matter arise.

I turn to the specific amendments of the noble Baroness, Lady Sharp. On Amendment No. 25 she rightly described the different purposes of school companies to purchase goods and services together or to deliver services. I believe that she was worried about the idea of regulations providing for a company limited by shares and that that may go wider. I recognise the strength of those concerns, which have been expressed twice, so I am willing to return at Third Reading with amendments that will require companies to be limited either by shares or by guarantee, which would be the normal situation, and we shall bring forward an amendment requiring regulations to be made limiting who can join companies. I hope that we have made it clear what the regulations were to do, but we shall make it even clearer by putting that purpose on the face of the Bill.

Amendment No. 26 is a relatively limited issue. If, under the amendments that we shall bring forward and under regulations, outsiders are to join in—they may be printers or, horrors, marketing people—surely they would want to be involved on a profit-sharing basis. The profits would have to be shared fairly and the role of the schools would have to be protected in the way in which the profits were shared. But one may lose the opportunity to acquire willing and useful partners if there was not a possibility that they could take a share in the profit. However, the fundamental principle must be, as my noble friend Lord Peston rightly said, that there must be a net gain from such an activity to the young people in the schools concerned.

Amendment No. 28 has been dealt with. It concerns the role of the Secretary of State. The amendment would have some funny implications, like a requirement for the Secretary of State when she invests to seek external approval for any borrowing, and it is difficult to know what that external approval may be. I believe that through this debate it has become clear enough what is the role of the Secretary of State and that both the Government and the Churches believe that the existing powers are not suitable for those purposes.

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I apologise for the time taken to reply but it was a long and complicated debate. I hope that the amendments will not be pressed.

7.15 p.m.

Baroness Blatch: My Lords, I am grateful for the detail with which the noble Lord has responded to the amendment. He may heave a sigh of relief when I tell him that this morning the amendments were to form three groups and I suggested that we have a portmanteau debate on the whole subject of companies so as to deal with them in one fell swoop. Taking that into account I believe that we have done well to achieve all that in an hour.

I want to read what the noble Lord has said. This subject is complicated and we have a number of concerns about it. I do not expect an answer immediately, but I would like to know about the case in point put by the right reverend Prelate. What is the company to which he referred? Who are the members? Given that the bodies will be national bodies, who will pick up the liability should the company fail? Clearly, it cannot be the local education authorities. Although the right reverend Prelate talked about small primary schools, he used the word "involving" and did not say that they would become company members. Is it intended that they should become part of the company in penny packages? Where a school has been refurbished or a capital programme has taken place, should that school for that purpose become a company member?

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