HC Deb 29 March 1999 vol 328 cc832-40

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Mike Hall.]

10.1 pm

Mr. Phil Willis (Harrogate and Knaresborough)

I am grateful to you, Madam Speaker, for allowing me to raise the issue of trading credit approvals in this Adjournment debate. I realise that the subject might appear somewhat obscure, but the Minister's response tonight may well have a profound effect on any local authority involved in commercial trading operations and, more important, a significant impact on the economic well-being of 200 businesses in my constituency and the 4,500 men and women who depend on Harrogate's successful conference and exhibition business for their livelihoods. In addition, it may determine whether the current £110 million spent by business tourists within the Harrogate district continues, and whether the high level of private-sector investment that has resulted from the successful international conference business is sustained.

In his response, I hope that the Minister will address three specific points. First, will he clarify the Local Government and Housing Act 1989 in respect of the granting of supplementary credit approvals, including trading credit approvals? Secondly, will he clarify and make explicit the Government's policy in respect of local authority trading organisations? Thirdly, will he re-examine the application for a trading credit approval on behalf of Harrogate borough council?

Although I intend to concentrate on the case of Harrogate borough council's trading operation—the Harrogate international centre—I am aware that the debate has considerable significance for other local authorities with publicly owned conference and exhibition facilities. In towns such as Scarborough, Southport, Blackpool, Brighton, Eastbourne, Bournemouth and Torquay, the development of business tourism came as a direct result of the decline of the traditional holiday tourism market. In Harrogate, it was a response to the collapse of the traditional spa treatment market—a market from which the town of Harrogate derived much of its prosperity and developed its now splendid environment.

The arrival of much larger players—Birmingham's NEC, Manchester's G-MEX, Edinburgh's international centre, Glasgow's Scottish conference and exhibition centre and the Belfast waterfront—has presented new challenges to the smaller venues. Harrogate has risen to that challenge and today ranks as the third-largest conference and exhibition business in Britain outside London. Ten years ago, the business barely achieved break-even before financing costs, but it now achieves a trading surplus of more than £1 million per year, which is used partly to support council services and partly to finance reinvestment in the business.

However, the council has now reached the point where the future prosperity and survival of its conference business requires significant capital investment—about £9 million, of which £2 million can be found from accumulated profits within the borough council. The council needs to raise external funds of £6.6 million to allow reinvestment in catering and exhibition facilities. Failure to do that will inevitably have an impact on local jobs and businesses and will reduce the financial return to the council that is needed to underpin local services. For those reasons, Harrogate applied for a trading credit approval to borrow £6.6 million.

Trading credit approvals are not specifically defined in legislation: they are a form of supplementary credit approval issued under section 54 of the Local Government and Housing Act 1989. First issued in connection with the South Yorkshire supertram project, they are principally associated with regional airport development. KPMG, one of the world's largest accountancy firms, said in its advice to Harrogate borough council in 1997: we are aware of this type of credit approval being used for capital projects that can generate sufficient revenue stream to service debt financing obligations". The Local Government Association said, in a letter that I recently received, that it understands that Trading credit approvals are so termed because they were issued on the basis that associated borrowing costs would be met from income streams".

Indeed, such criteria for borrowing approvals make excellent sense. They follow the golden rule laid down by the Chancellor of the Exchequer that borrowing should be for capital investment and not revenue expenditure. They comply with the Treasury's proposals for resource accounting, and therefore do not add to the public sector borrowing requirement. They would allow local authorities to invest in trading operations that can provide an appropriate rate of return and that meet stringent but transparent tests.

However, obtaining either a supplementary credit approval or a trading credit approval depends entirely on the discretion of the Secretary of State, who may have regard, according to section 55(1) of the 1989 Act, to such factors as appear to him to be appropriate". Surely such a situation is unacceptable.

This year, four local authorities applied for a trading credit approval, and not one of them was successful. If, as for Harrogate, the reasons for refusal are somewhat spurious to say the least, what is the point of such a facility? Of course Governments should set strict guidelines for borrowing, but legislation that depends simply on the whims of the Secretary of State cannot be acceptable. I therefore ask the Minister to agree to examine the legislation and to make proposals that would allow, under clearly defined circumstances, local authorities access to borrowing for profitable trading operations.

When Harrogate applied for a trading credit approval just over 12 months ago, it did so having exhausted every other avenue of financing for its new facilities. Revenue balances were considered, but rejected. Harrogate borough council is certainly not profligate. Its net budget was £15 million in 1991–92, and next year it will be £15.4 million—an increase of 2.5 per cent. in cash terms over eight years, but a real-terms reduction of 19 per cent. Reserves are at a minimum, prudent level and are insufficient to apply to a capital project.

A sale to the private sector was considered. In 1991–92, the business was marketed worldwide without success. Although great interest was shown in taking over the management and operational functions, the private sector was not prepared to take on the capital debts and invest in new facilities. Nor could the core objective that the business remained a key local economic development primer be guaranteed.

The reason why was perfectly clear, and is the reason why most conference and exhibition businesses remain in public ownership. Given the subsidies paid around the country to attract business, the financial returns on investment are low, and not adequate, given the risks, to justify investment on purely commercial grounds. However, they are more than adequate to meet long-term public sector borrowing costs. Independent experts have agreed that Harrogate's investment proposal is not appropriate for private commercial investment, although the catering business has recently been transferred to the private sector—to Crown Catering.

The private finance initiative was considered in some detail and subjected to an assessment by KPMG, which concluded: PFI does not offer a suitable solution for the procurement of the whole of the scheme…PFI does not appear to offer a realistic funding solution". The chief executive of the public private partnerships programme also concluded: Therefore, on balance, and in the light of the Council's likely commitment to underwrite the investment financed by the TCA, I would find it difficult to argue that, in this case, PFI would provide a best-value option".

Were European grants available? Harrogate is not an assisted area. Unique among conference venues, it has access only to one small source of European funds: Konver. Harrogate has been advised that, although there was an outside possibility of grant aid from Europe, that is now unlikely. In any event, the maximum possible was only ever going to be £500,000—not enough to finance the whole scheme.

What about capital challenge? That was considered but not taken forward because it was clear that the Government were seeking cross-service bids and the total UK allocation was very small. Perhaps a single regeneration bid would have been successful. Originally the subject of an informal bid in the first round, the proposal was rejected at the outline stage by the Government office for Yorkshire and Humberside.

Two other possibilities were considered before any application for a trading credit approval: the reallocation of resources within the capital programme and the sale of assets. Ironically, those were the very suggestions made by the Government when they denied Harrogate its request for trading credit approval. The briefest examination of the evidence presented to the Government reveals how absurd both those suggestions were.

The trading credit approval being sought was for £6.6 million. In contrast, Harrogate's total capital programme for next year amounts to just £4.7 million on housing and £3.5 million on general services. To reallocate £6.6 million from those figures would virtually wipe out existing spending plans and commitments, but the simple fact is that most of that money cannot be reallocated. About £2.3 million is from grants for specific projects which Harrogate has secured from the lottery and other bodies; £600,000 is match-funding to secure those grants; £3.2 million is ring-fenced by law for specific services, mostly housing, and that leaves just £2.1 million of spending over which the council has any degree of choice.

Even if the council had put all the £2.1 million towards its new exhibition hall, first, that sum is nowhere near the £6.6 million financing requirement, and secondly, it would involve the complete cancellation of essential or committed schemes including housing renovations, rural centre closed circuit television projects and public convenience refurbishment.

All those points were explained to the Government when the trading credit approval was requested. The Government had no questions about the figures and it is plain that the capital programme could not be reallocated to find the £6.6 million, so why do the Government, who had the information for over a year, persist with a suggestion that is illogical and impossible to achieve?

Further asset disposal is equally illogical. Since 1980, the council has had a proactive policy of asset disposal in line with Government policy. Over £35 million has been raised from asset disposal, with about half of the proceeds being applied to the debt on the existing conference centre. Although the council retains some assets, further disposal does not satisfy the commercial tests that must be applied before disposal can be justified and it would fall foul of the district auditor.

Following that detailed analysis, which is supported by KPMG and the public-private partnerships programme—the 4Ps—and not challenged by the civil servants, it was clear that a trading credit approval was the only way forward. Local authorities do not enter lightly into commercial operations. They know only too well that the cost of failure has to be paid by poorer local services. However, Harrogate and other local authorities involved in the business and holiday tourism market know that a failure to invest results in a spiral of decline for their communities.

Harrogate's position as conference and exhibition centre owner is unusual. The dependence of the town's economy and the borough council's finances on the conference and exhibition business is unique because of the scale of the conference business compared to the size of the council.

The Government recognise in their wider economic policies that particular local circumstances warrant extraordinary action. The Government have rightly recognised Birmingham's dependence on the Longbridge car plant and are prepared to support that business with public money. The dependence of Harrogate's economy on the conference business is at least equal to Birmingham's dependence on Longbridge, yet, while the Government are apparently prepared to support Birmingham's economy with cash, they are not prepared to allow Harrogate to borrow what is, in public expenditure terms, a tiny sum to meet its requirements.

The Government have now given local authority-owned airports freedom to borrow commercially. Why cannot similar freedoms be given in respect of conference and exhibition businesses, especially if individual borrowing is subject to specific vetting by the Department of the Environment, Transport and the Regions? There is an inherent contradiction in general Government policy that requires local authorities to achieve best value and annual efficiency savings of 2 per cent. while specific policies prevent capital investment that is often essential for improving efficiency.

The Government's promotion of the use of the PFI is entirely unrealistic for the wide range of small and medium investment requirements of small local authorities. High start-up and financing costs and the artificial nature of risk transfer ensure that any attempt at private finance will conflict with the need to achieve best value. The PH may be appropriate for £50 million-plus investment schemes but Ministers will be aware that the cost effectiveness of even those schemes is widely questioned by finance professionals and independent academic research.

Harrogate borough council's approach to working with the private sector is pragmatic and entirely business driven. Hence the use of the private sector for construction work and the repair and maintenance of roads and buildings, and recently the transfer of the Harrogate international centre's entire catering operation.

It is about time that the Government came clean on this issue. If they are opposed to the provision of services direct by the public sector and direct public investment as a matter of policy, irrespective of business and financial arguments, let them say so. We shall all know then exactly where we stand. A clear political stance on this issue will at least help us to explain to local businesses and to workers whose jobs are being put at risk why the council is being prevented from making a commercially sound investment that would support local business and jobs.

If the Government do not have an ideological or policy reason that goes against local authority trading operations, surely the appropriate and selective use of trading credit approvals makes good sense. Harrogate wants to borrow its own money. It does not ask for a penny of Government grant support. It does not seek to burden council tax payers with additional revenue costs. It will pay for what it wants within the business plan. Like any other successful business, it wishes to invest to sustain jobs and businesses into the next millennium.

On behalf of all my constituents, I plead with the Government to reconsider Harrogate borough council's application for a trading credit approval.

10.17 pm
The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Mr. Alan Meale)

Before congratulating the hon. Member for Harrogate and Knaresborough (Mr. Willis), Madam Speaker, I congratulate you. Some of us have early nights and get home, but when we are involved in Adjournment debates we realise that you are here all the time. It is nice to put that on the record.

I congratulate the hon. Member for Harrogate and Knaresborough (Mr. Willis) on securing an Adjournment debate on a very important subject. Since entering this place the hon. Gentleman has never missed an opportunity to fight with vigour the cause of his constituency. I pay tribute to him for that.

The hon. Gentleman has explained well the circumstances surrounding Harrogate borough council's application for trading credit approvals for capital investment in a new exhibition hall and hospitality facility for the Harrogate international centre. I shall undoubtedly disappoint him at the outset when I say that the Department rarely gives extra credit approvals. One of the main reasons for that is that the 1999–2000 budgets in the Department are identified from within specific funding programmes. There is only £4.5 million for local authority airports and only £1 million for ports in total. More generally, the importance that the Government attach to capital investment by local authorities is evidenced by the announcement made last summer by my right hon. Friend the Chancellor of the Exchequer in his statement on the economic and fiscal strategy report.

In that statement, my right hon. Friend announced new measures for the modernisation and improvement of Britain's infrastructure and public sector, including a near doubling of net public sector investment over the next three years. Since then, my Department has published a White Paper, "Modern Local Government—In Touch with the People", setting out our detailed proposals for a long-term capital investment framework for improving the system of capital allocations. It also gives local authorities greater freedom as well as encouraging better local authority asset management, thereby ensuring that spending is conducted in the most efficient, fair and effective way.

The hon. Gentleman will know that the Government are committed to sound economic strategies and to spending no more than we can afford. That means prudent policies that meet our fiscal rules and maximise the value of local government investment within public spending constraints.

Under present arrangements, a local authority's borrowing for capital spending is limited to the amount of credit approvals issued by the Government, as the hon. Gentleman acknowledged. Basic credit approvals are issued each year to local authorities for capital expenditure for all purposes. In addition, supplementary credit approvals may be made available through specific programmes focused on Departments' particular policies.

The total amount of provision for credit approvals made available each year is for individual Departments to determine, within the limits of their overall budgets and in accordance with their spending plans. Departments have announced their capital provision for 1999–2000, as well as provisional figures for the next two years, in accordance with the comprehensive spending review.

As I said, my Department has no plans to make provision for trading credit approvals—

Mr. Paul Tyler (North Cornwall)

I am sorry that I have not precisely followed the Minister's argument, but I understood that as the public sector borrowing requirement does not provide a cap or ceiling on the amount of money that can be made available for such purposes, it should not be necessary for Departments to have ceilings.

Mr. Meale

That is a factor, within the constraints in the budget, the design and plan of which is for a three-year spending programme. We want to stick to our programme.

My Department has no plans to make provision for trading credit approvals for the period of the comprehensive spending review, other than a small amount for specific transport schemes. In the past, such credit approvals have been issued to only a small number of authorities for investment in transport schemes such as railway lines, tunnels or ports, which generate fares, tolls or some other form of revenue stream. That is because trading credit approvals do not receive revenue support from central Government, so the scheme must generate sufficient operating revenues to pay financing costs.

That is the position with regard to planned expenditure. It is also open to local authorities to apply for extra credit approvals, as the hon. Member for Harrogate and Knaresborough pointed out, which Ministers may issue at any time, taking account of factors that seem to them to be appropriate. My Department receives numerous requests for such increased borrowing for a wide variety of purposes. However, because of pressures on public finances, the hon. Gentleman will not be surprised to hear me say that additional credit approvals—

Mr. Willis

Four were received last year.

Mr. Meale

If the hon. Gentleman waits a little longer, I may finish the explanation. Additional credit approvals, including trading credit approvals, outside existing programmes can be given only in the most exceptional circumstances.

The hon. Gentleman suggested that issuing a trading credit approval would have no impact on central Government resources. As I explained, trading credit approvals are different from other supplementary credit approvals in that they do not attract central Government revenue support for the revenue costs of borrowing. Because of that, it is a fairly common misconception that trading credit approvals are in some way free, and that Ministers are being perverse if they refuse to grant them.

Trading credit approvals, like all other credit approvals, other than those issued in connection with the private finance initiative, count as public spending. Additional trading credit approvals therefore lead to additional public spending. Any extra amounts would have to be found from within the relevant Department's expenditure limit.

In other words, outside identified expenditure programmes, additional trading credit approvals could be given only by taking resources from some other programme. Before my Department agreed to such a transfer, we would need to be fully convinced that it was for a purpose more pressing, especially from the national perspective, than our other expenditure priorities.

As I am sure the hon. Gentleman will understand, my Department's budgets are always stretched, and there is no shortage of projects that Ministers could fund if the resources were available. Another reason why Ministers must be cautious about the issue of additional credit approvals is that increased borrowing means an extra burden on the local authority. That is because trading credit approvals are not supported by revenue payments from central Government. The whole burden of the debt falls on the local authority—in this respect, the local citizen. We would therefore need to be fully convinced on the self-financing aspects of any scheme funded through the trading credit approval route.

Indeed, if the authority could not afford the loan, it would help nobody for the Government, further down the line, to find that they were faced with the dilemma of either pouring more national resources into a rescue measure or writing off the initial investment, leaving the authority to cope with mounting debt. That would help nobody, least of all the local authority. In such circumstances and whatever was decided, either the national or the local taxpayer might have reason to feel justifiably aggrieved if we went about our business in that way.

A further question needs to be addressed in assessing the merits of applications for extra credit approvals—that of precedent. As the hon. Member for Harrogate and Knaresborough will no doubt appreciate, every local authority making such an application is, naturally, able to make arguments for why it thinks that it should receive assistance and to point to circumstances that it considers to be exceptional. Although the circumstances of particular cases may vary, they are all similar in that they represent opportunities or unavoidable expenditures which authorities face outside their planned programmes.

My Department often hears the argument from local authorities that funding their proposal would cost peanuts in the overall scheme of things. Indeed, they cannot understand the Government's hesitation in that regard, but, although many cases may have merits, it may be extremely difficult for my Department in particular to determine whether any one of those applications for expenditure is more pressing than another. Clearly, helping them all would have a significant impact on public expenditure.

I have said that additional credit approvals, including trading credit approvals, could be given only exceptionally. As all requests for additional resources are looked at on their merits, it is not possible to have rigid criteria for assessing applications. However, together with the considerations that I have mentioned, we take into account whether national or Government policy objectives could be seriously impaired or whether an authority appears to be in imminent danger of failing to deliver effective statutory services.

In that respect, we have had a number of discussions over the past two or three weeks in this place, in particular on the Local Government Bill. The debate amply showed that there are circumstances—whatever the political persuasions of local authorities—where there may be a risk of failure to deliver essential services to our citizens. In that regard, we must always be hesitant about emptying the bank—those services would be more difficult to afford.

Whatever the circumstances, the arguments for giving any additional support would need to be very compelling indeed. All applications for additional credit approvals must be viewed in the general context that I have described. In the case of Harrogate's application for trading credit approvals for upgrading the Harrogate international centre, I can tell the House and the hon. Gentleman that Ministers met the authority, as he described, and considered written reports and other evidence, as well as the arguments in the case. That included the helpful report of the public-private partnerships programme—the 4Ps to which the hon. Gentleman referred—on a possible public-private partnership approach.

As the hon. Gentleman knows, after weighing all the circumstances of the case, we concluded that the project was not sufficiently exceptional to divert departmental resources from other spending priorities and that a trading credit approval should not be given. I understand that the council proposes to proceed with the upgrading of the conference centre in a phased programme funded by other resources, including usable capital receipts. I hope that that may be assisted by the decision taken last summer to allow the whole of the capital receipts from the sale of council-owned assets, other than council houses, to be used to fund investment rather than to repay debt.

May I expand on some of the issues that have been raised in relation to our decision? The conference centre has been compared with local authority airports, which it cannot be in this case. Controls in respect of airports, tunnels and other such structural items are very different from those in respect of whether a local authority should fund and employ people in an international business centre. The relationship in that case has a different set of priorities.

The Government hope in future to relax the restrictions placed on a number of airport companies, particularly small ones, which now operate on a full commercial basis. To qualify for the removal of borrowing controls, the hon. Gentleman's local airport company, Leeds-Bradford, and the other three local authority airport companies concerned have had to demonstrate a track record of consistent profitability and a strong balance sheet with the prospect of positive cash flows, which has not been the case in respect of the Harrogate international centre. In those cases, my understanding is—

The motion having been made after Ten o'clock, and the debate having continued for half an hour, MADAM SPEAKER adjourned the House without Question put, pursuant to the Standing Order.

Adjourned at twenty-nine minutes to Eleven o'clock.