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Lord Bassam of Brighton: Amendment No. 30 seeks to change Clause 5, which allows an authority's borrowing limits to be increased temporarily. Before

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addressing the amendment, it may be helpful if I explain how Clause 5 is meant to operate. Money owing to an authority does not always arrive on time. We all understand that. Even the most efficient authority—I am sure that Kensington and Chelsea is one of those—may face arrears of council tax or be paid late by a private sector partner. However, the authority must still pay staff salaries and other major bills on time. To meet those commitments, the authority will have no choice but to borrow until it receives the money it is owed. The loan may be needed only for a few days, but it could push total borrowing above the affordable limit that the authority has already set for itself under Clause 3.

Authorities must keep their borrowing limit under review. If it is prudent to do so, the limit may be increased at any time by the full council. However, a sudden cash crisis could require action before a full council meeting could be convened. Clause 5 therefore provides for an automatic temporary increase in the borrowing limit. That increase is equal to the amounts due to the authority in the financial year, but not yet received. The amendment would allow the borrowing limit to be increased only by the amount of an outstanding payment which could reasonably be expected to be received in the same financial year that it is due.

[The Sitting was suspended for a Division in the House from 6.21 p.m. to 6.31 p.m.]

6.30 p.m.

Lord Bassam of Brighton: Such a qualification would, however, introduce uncertainty into an assessment and in some cases make it impossible for the authority to borrow to cover a cash shortage. For example, suppose an authority is due to receive a large amount of money on 25th March and is relying upon that to pay staff salaries on 31st March. If the authority learns that the sum will not arrive until 2nd April, that sum will not be expected to be received in the same financial year that it was due. The authority would still need to borrow temporarily to pay its staff. The amendment would prevent the increase in the borrowing limit.

We must not confer an open-ended power to borrow for revenue purposes, but other components of the statutory and accounting structure for local government will stop that happening. Authorities are required by the Local Government Finance Act 1992 to set a council tax that will balance the council's revenue budget. They are also bound by accounting rules to make proper provision for bad and doubtful debts. When a debt is written off as bad or a provision is set up for doubtful debts, that is a charge on the revenue account. It will result in additional council tax being raised or other expenditure being displaced.

Authorities must take account of the need to make these changes when they set their council tax. If they underestimate they must make good the shortfall in the following year. One way or another, therefore, uncollectable debts will be covered by new income and the borrowing requirement will be removed.

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I am sure those of us who are familiar with local government finance will see that as a practical and sensible way to operate. I hope with those assurances that the noble Baroness will feel able to withdraw her amendment.

Baroness Hanham: I thank the Minister for that response. We broadly welcome what lies behind the clause. The problem that still hangs around over this is that if you are able to borrow in excess of what you are likely to receive, at some stage additional problems will stack up. I seek to limit the possibility of matters running over. The Minister has already suggested that the issue might go off until another financial year. However, if one cannot collect enough money in one year, there is no guarantee that one will be able to collect enough money in the second year to cover the borrowing from the first year, for which there is a shortfall.

I am not sure that I accept and am happy with the Minister's reply. I think that pensions should be built in for those who are not going to receive 100 per cent of what they expect to get. That must concern practically all local authorities, all of which will be able to look for temporary borrowing. I appreciate that this is temporary borrowing. For the moment I beg leave to withdraw the amendment, but I might return to it at another stage.

Amendment, by leave, withdrawn.

Clause 5 agreed to.

Clause 6 agreed to.

Clause 7 ["Credit arrangements"]:

Baroness Hamwee moved Amendment No. 31:

    Page 4, line 1, at end insert—

"( ) the transaction is related to a "private finance initiative" or a "public-private partnership""

The noble Baroness said: Clause 7(1) states that,

    "a local authority shall be taken to have entered into a credit arrangement".

Amendment No. 31 seeks to extend that arrangement to a,

    "'private finance initiative' or a 'public private partnership'".

That is not the most technical wording that one might find. Nevertheless, it enables some probing at this stage.

Amendment No. 32, standing in the name of the noble Lord, Lord Hanningfield, is more detailed about splitting liabilities into those which are on the balance sheet of a local authority and those where the liability is transferred to the private sector.

Amendment No. 31 simply gives the Minister an opportunity to explain why there is no reference to PFI or PPP. In Committee in another place, the Minister said:

    "The Government's intention is to rely as far as possible on current accounting practice to determine what does and does not count as a credit arrangement".—[Official Report, Commons Standing Committee A. 28/1/03; col. 111.]

Do those words "as far as possible" mean that we are into further regulations? Certainly, the words "as far as possible" need either retracting or explaining.

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Reference was made in another place to the recent Audit Commission report on PFI in schools. Among other things, the report said that,

    "government policy increasingly recognise that it is not possible to deliver strong public services that meet public expectations using a top-down, 'one-size-fits-all' solution, but that delivery needs to be via local choice and flexibility".

We agree with that. However, support for projects under the PFI seems inconsistent with the credit arrangements as dealt with in the Bill.

I am unclear how PFI and PPP would fit into the new regime. Will PFI still receive special treatment? Perhaps the Minister can explain how the regimes fit together. I beg to move.

Lord Bassam of Brighton: Amendment No. 31 seeks to change Clause 7(1), which deals with the definition of credit arrangements. The amendment is concerned with the treatment of contracts under the private finance initiative. The effect of the amendment is to classify all PFI and public-private partnership contracts as credit arrangements.

The amendment would be unworkable without defining the terms it uses. However, it is in any event unnecessary and at odds with the strategy of Clause 7. The intention is to rely as far as possible on accounting practice to determine what counts as a credit arrangement.

For the purposes of the prudential borrowing system, precise definitions are not so important. What is crucial is the long-term revenue implication of any contract being entered into. An authority will have to take account of the revenue impact of a transaction, whether it involves the traditional approach of borrowing to buy an asset or a more innovative approach using some form of public-private partnership. Either kind of commitment will have the effect of reducing the capacity for further affordable borrowing in future.

If there were ever a national limit in place in accordance with Clause 4(1), the concern would be the impact of any new contract in the national accounts. In the case of PFI, the intention is that a contract will be treated as a credit arrangement only to the extent that it has to be shown on the local authority's balance sheet. Only then is the authority undertaking something akin to borrowing. That in turn depends upon the degree to which risk is transferred to the private sector partner.

Such an approach gives authorities an incentive to achieve a significant level of risk-transfer when negotiating such contracts. It is consistent with the approach adopted under the present system. Some technical issues relating to PFI need to be clarified, as under the present system, but that can best be done in regulations. There is no need to refer to PFI explicitly in the Bill. I hope, with that assurance, the noble Baronesses will withdraw their amendment.

Baroness Hamwee: I shall withdraw the amendment today. I accept that the amendment is unworkable without definitions. At the start I offered that acknowledgement. I am not convinced by what the

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noble Lord has said that—although I hate the term—a level playing field is being created. Certainly, we should like to give the matter further thought and to hear the Minister's response to the next amendment. This may be a matter to which we shall want to return. For the moment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hanningfield moved Amendment No. 32:

    Page 4, line 15, at end insert—

"( ) The Secretary of State shall lay regulations before Parliament within 30 days of the coming into force of this section providing for liabilities under Private Finance Initiative contracts to be apportioned so that, where appropriate, a part of those liabilities are to be treated as a credit arrangement."

The noble Lord said: We have heard the Minister's response to the previous amendment, but this amendment further explores the whole issue.

While we welcome measures to free up local authority finance and to manage local priorities in a more flexible way, there seems to be a lack of clarity about how private finance initiatives will fit into these new arrangements, although I listened very carefully to the previous response. In tabling the amendment we seek to query why private finance initiatives are not treated like other credit arrangements and included in the borrowing ceilings calculated under the prudential regime.

In many cases, private finance initiatives consist of the procurement of some form of capital asset and the procurement of a managed service. Our concern is that despite that fact, the Government have chosen to put PFIs outside the definition of credit arrangements. The definition of a credit arrangement under the new legislation is far less prescriptive than the one that currently holds sway.

As I understand the situation, a contract under PFI is to be treated as a credit arrangement only to the extent that it will be shown on the local authority's balance sheet, as the Minister has just said. Can he assure us that this is a sufficiently prudent system of financial management? We believe that a more robust mechanism is needed to ensure that PFI contracts continue to be treated as a credit arrangement where appropriate. That can easily be achieved by separating out the component parts of a PFI arrangement. That means that contractual transactions within a PFI arrangement, which are similar to a credit arrangement, would be subjected to the limitations of the prudential borrowing regime. That part of a PFI concerned with the provision of service would naturally remain exempt from the controls.

As the Bill stands, local authorities will tend to adopt PFIs as a means of reinforcing that headroom within their prudential borrowing limit. For example, a local authority at its borrowing limit could legitimately enter into a PFI arrangement to finance a project that it was otherwise unable to afford. That does not necessarily represent the best choice for the local authority, the best way to provide quality services to the public or the most prudent form of financial management. We are concerned that in a Bill that

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claims to champion choice for local authorities, certain transactional methods are receiving preferential treatment from the Government. I beg to move.

6.45 p.m.

Lord Rooker: I hope that this explanation on Amendment No. 32, along with that given by my noble friend on the previous amendment, will satisfy the Committee that real, practical problems would result from Amendment No. 32. As the noble Lord said, the amendment is concerned with the treatment of contracts under the private finance initiative. It seeks to insert a new subsection requiring regulations to be made bringing part of the liabilities under a PFI contract within the definition of a credit arrangement.

The amendment seems to be based on the assumption that liabilities under a PFI contract can be easily separated into those relating to the capital asset and those relating to the associated services. But the essence of a PFI contract is that it is a package deal. The authority is paying for the use of an efficiently managed and maintained building. The asset and the services are inextricably linked. The charge cannot be apportioned between those elements.

Therefore, the whole value of the PFI contract must be taken into account. When calculating the affordable borrowing limit, the authority must consider all long-term revenue commitments including the full value of PFI deals as well as loans. If there is ever a national limit, that will take account not just of borrowing but of other contracts which score on the local authority's balance sheet. If a PFI deal scores in that way, then again its full value must be taken into account, not just some part of it. The required results are achieved by the legislation as already drafted and the amendment is unnecessary. I hope that, with those reassurances, the amendment will be withdrawn.

I am not so sure that the last couple of sentences which I have just uttered are relevant to the amendment. However, given that the noble Lord is the leader of an exemplary, good council—although not quite excellent—I wonder whether his treasurer or someone else could explain to him whether it would be easy and practicable to separate out the different elements of a PFI contract.

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