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Lord Bassam of Brighton: The noble Lord, Lord Hanningfield, has been motivated by the "fear factor" in moving this amendment. He is fearful of what the power might be used for at some point in the future.

Regulation 7 of the draft regulations indicates how we propose to use this power. We want to preserve the prohibition in present legislation on using credit arrangements for anything other than the acquisition of capital assets. Credit, like borrowing, should be used only to meet capital needs and not to pay for services and running costs.

At present, the restriction appears in primary legislation, but it is more appropriate to deal with it in regulations because then any necessary exemptions can be more flexibly introduced. I am sure that the noble Lord will see the advantages in that. The main exemption, as the draft regulations show, will be in relation to private finance initiative contracts. These are of a hybrid nature, providing both capital assets and services. The regulations will ensure that PFI contracts are not inhibited by this restriction on the use of credit arrangements for services.

It is also possible that the power in Clause 8(4) might be needed to prohibit kinds of credit transactions which were being used to avoid the controls under Part 1. In the 1980s, much ingenuity was shown by local authorities—my own included, at the better end of the market—in creating devices to get around the capital controls of the day. We need the flexibility to respond in future to any innovative schemes, as they might be described, that might emerge solely as a way round what is a sensible system of control. The power is there to deal with a situation in extremis, when there is a deliberate attempt to flout sensible and prudent regulations.

Baroness Hamwee: I hear what the Minister says about it being sensible to leave certain provisions to regulations because that allows flexibility for exemptions. However, it would be nice if Clause 8(4) referred to possible exemptions as well as restrictions.

Lord Hanningfield: I agree with the remarks of noble Baroness, Lady Hamwee. I accept the explanation from the Minister, but the clause takes wide powers for the Secretary of State, and although they may be spelled out in the regulations now, that would not stop even wider powers from being spelled out in future regulations. We are concerned about the wide powers given in the Bill.

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I accept the Minister's comments on the regulations. I have not studied them, but I shall do so and we may return to the clause at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hamwee moved Amendment No. 36:

    Page 4, line 31, at end insert—

"( ) Before making any regulations under subsection (3) or (4), the Secretary of State shall consult such representatives of local government as he considers appropriate, the Chartered Institute of Public Finance and Accountancy and the Audit Commission for Local Authorities and the National Health Service in England and Wales."

The noble Baroness said: The amendment applies to subsections (3) and (4) of Clause 8. Subsection (3) relates to regulations about how to calculate the cost of a credit arrangement and subsection (4) to the additional restrictions that we have just been discussing.

The amendment provides that, before any such regulations are made, the Secretary of State will consult representatives of local government, CIPFA and the Audit Commission. I hope we will be told that that would be the Secretary of State's intention and I hope that we can have it on the record as a commitment. I beg to move.

Lord Bassam of Brighton: The purpose of the amendment is plain. I am happy to confirm that it is our continuing intention to consult the Local Government Association, CIPFA and the Audit Commission because they are the parties we traditionally consult when dealing with capital finance matters and particular regulations. They have been closely involved in the preparation of the draft regulations, which include regulations relying on the powers in subsections (3) and (4).

We will continue to consult on the regulations as they are finalised, as we greatly value their contribution. It would be a foolish government which did not consult people with that level of expertise and seek their full co-operation with secondary legislation. We do not believe that there is a need to set out the statutory duty to consult in the legislation, as the system has worked perfectly well for many years, and we have benefited from that. I hope that with that assurance the noble Baroness, Lady Hamwee, will withdraw her amendment.

Baroness Hamwee: The Minister is happy, and I am happy to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 agreed to.

Clause 9 ["Capital receipt"]:

Baroness Hanham moved Amendment No. 37:

    Page 4, line 37, leave out subsection (2).

The noble Baroness said: In moving the amendment I shall speak also to Amendment No. 38. They relate to the vexed question of the use of capital receipts.

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The first matter that we want to probe is what exactly is meant by a "capital asset". The regulations address what is to be treated as a "capital receipt". I am not very clear on that matter, but no doubt the Minister will explain. Under the definition in subsection (2), if a capital asset is something that is acquired only by capital expenditure, what would be the position of assets acquired under leasing arrangements that were financed on the revenue account? For example, we might refer to the payment of a mortgage on the acquisition of a building. What definition of capital expenditure is used in that?

Does the phrase,

    "at the time of the disposal",

mean that the definition of capital expenditure could be changed by order so that the Government could catch assets that were not subject to these powers under the rules in force at the time when a local authority decided on an investment?

Will the Government publish draft regulations for subsection (3)? The answer is probably that they are here—in fact, now I look, I find that the answer is yes. However, I would be grateful if the Minister could give some further explanation of matters to be treated under Part 3 of the regulations. In what circumstances under subsection (3) would the Government decide that a capital receipt would not be a capital receipt? Questions are raised all along by the terminology of the Bill; it may be perfectly straightforward, but it does not look frightfully straightforward to me.

What is the purpose of subsection (3)(b)? Why would the Government want to say that something not properly classed as a capital receipt was a capital receipt? Again, I seek an explanation of the wording. What particular receipts are the Government thinking of? Are they those in the draft regulations under Part 3, or are there others to be considered? Would they include a legacy or a transfer from a local trust or business? That should be spelled out so that local authorities are clear about what is included in capital receipts that is over and beyond what they might receive from a housing source. I beg to move.

Baroness Maddock: I shall speak to Amendments Nos. 37 and 38, to which my noble friend Lady Hamwee has attached her name, and support the questions asked by the noble Baroness, Lady Hanham.

I have had a chance to glance briefly at the draft regulations, which refer mostly to matters relating to housing. We would all be very grateful if the Minister could clarify exactly what is involved. We support the noble Baroness, Lady Hanham, in her amendments, and await the Minister's further explanation.

Lord Rooker: The clause is an important part of the Bill. Amendment No. 37 relates to the clause, which deals with the definition of the term "capital receipts". The definition is essential and paves the way for the provisions on the use of capital receipts set out in Clauses 10 and 11. The amendment would remove subsection (2), which is a key element in the definition.

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Subsection (1) begins by defining a capital receipt as the sum received in respect of the disposal of a capital asset. Subsection (2) says that an asset is a capital asset if its acquisition would count as capital expenditure. That links the whole definition to that of capital expenditure in Clause 16, to which I shall come shortly. A similar approach is taken in the present legislation and has worked well since 1990. Its great advantage is that capital expenditure is a concept derived directly from standard accounting practice. We thereby minimise the need to create special statutory definitions. By deleting subsection (2), the amendment would sever the link between capital receipts and capital expenditure, making the definition unworkable.

Amendment No. 38 would remove subsection (3), which provides power to vary the definition by regulations. However, that power is essential, as I shall try to explain. Draft Regulations 8 to 11 illustrate how the power would be used. Draft Regulation 8 defines as a capital receipt the repayment to an authority of a loan or grant which it had made to another body for capital expenditure. That is important, because such a grant or loan would normally have been made out of the authority's capital resources. So, when it is repaid, we need to ensure the money goes to replenish those capital resources and can be used only for capital expenditure. The regulation achieves that result. A similar rule exists under present legislation.

Draft Regulations 9 and 10 also carry forward existing rules. They define as capital receipts, first, the proceeds of selling mortgage portfolios and, secondly, payments by tenants under shared ownership arrangements to increase their stake in their homes. Similar regulations had to be made under the present regime to remove technical doubts that such proceeds were capital receipts. That was necessary to clarify that they were subject to the housing "set-aside" requirement. Under the new system, the regulations will confirm that such sales proceeds are to come within the pooling arrangements in Clause 11.

Removing subsection (3) would prevent that from being done. It would also deprive authorities of the flexibility offered by draft Regulation 11, which exempts low-value sums from being treated as capital receipts. Again, that rule also applies under the present system. I hope that the Committee will be reassured in this early part of the debate on capital receipts, as that would make our debates on the other amendments more easily understood.

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