§ Lords amendment No. 2
§ Mr. RaynsfordI beg to move, That this House agrees with the Lords in the said amendment.
The amendment relates to clause 8, which deals with credit arrangements such as leasing and hire purchase contracts. The clause ensures that such transactions can be brought under the prudential limit and any national limit. The amendment removes the power in clause 8(4) to impose additional restrictions on credit arrangements. The only restriction that we had in mind was to stop the use of credit for anything other than acquiring capital assets. We now accept that accounting practice offers sufficient safeguards against such practices. Accordingly, clause 8(4) is unnecessary.
§ Mr. HammondClause 8(4) gives a broad power to the Secretary of State to vary by regulations the restrictions on local authorities in relation to credit arrangements. Regulation 7 is the one that the Government have in mind for this case and it was laid in draft before the Commons Committee that considered the Bill. It is clear that the basic purpose is to exempt private finance initiative projects from the ban on credit arrangements that would otherwise prevent local authorities from using arrangements that are a hybrid of revenue and capital provision to circumvent the prudential code restrictions on borrowing or other credit arrangements.
In Committee, we moved an amendment calling for the deletion of clause 8(4) but the then Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister, the hon. Member for Shipley (Mr. Leslie), made an appearance at the Dispatch Box and vigorously resisted the deletion of the subsection. A pattern will emerge in our debates. It will become apparent to the 642 Minister which of clauses that were vigorously defended were later abandoned. The Under-Secretary replied to the debates on them.
We argued that it was wrong to put a general catch-all subsection in a clause that specifies precise limitations. We lost the vote. We moved the same amendment in Committee in the other place and, once again, the Government rejected our proposal to delete clause 8(4). However, in time-honoured fashion, the Government moved the exact same amendment on Report. They usually try to rework Opposition amendments by changing a few words so that they can claim that they have at least contributed something. However, this amendment was rather concise and Precise and it was not possible for the Government to create that smokescreen.
This case should provide us with some confidence in the system. We raise the issue once and one Minister tells us that we are talking rubbish and that it is essential for the future of democracy and civilised government as we know it that the provision remains in the Bill. We raise it a second time and a different Minister in another place says precisely the same thing. Then the Government realise that we were right all along. That tends to suggest that the system works even if the Ministers operating it are thick-skinned.
The amendments served to focus the Government clearly on the issues, and they have decided that not only the subsection but draft regulation 7 are unnecessary. We strongly support the view that local authority finances should follow generally accepted accounting practice and that it is unhelpful for the Secretary of State to have the power to impose, by regulation, additional restrictions over and above those that generally accepted accounting practice would dictate.
The Minister in the other place said that regulation 7 was unnecessary because of generally accepted accounting practice as it would ensure that credit transactions of the type of which the Government are so afeared would not be used for revenue items. That is fine; we have no problem with that. We have got what we wanted, but perhaps I have missed something. I am left asking the Minister, "What about PFI projects?"
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I understand that the original purpose of regulation 7 was to allow PFI projects to fall within the permitted category for credit arrangements. It was never clear to me quite what that would mean. It seemed to me at the time that the correct accounting procedure for a PFI project would be to distinguish the capital element of a PFI charge from the finance cost element and any service provision elements and that, in the absence of the regulation, there would be no difficulty in dealing with PFI projects. In a practice that is well understood to accountants and those who prepare business accounts all the time, the different components of a single charge would be analysed to their separate heads and dealt with accordingly.
As I read it, the Government's proposed regulation 7 would have exempted PFI projects from the restriction on credit arrangements. My understanding was that they were effectively to be given an advantage over other forms of arrangement and were to be allowed to go through without being treated as an entry against a 643 borrowing limit in the full amount of the total cost of the PFI charges under the project. What is the position now that that draft regulation has been dropped?
Clause 8(2)(a) still provides that the cost of the arrangement—I take it that this would now include a PFI arrangement—is to be set against borrowing limits. It does not say anything about the capital element of the cost or the capital and finance charge element. It refers to
the cost of the arrangement".In a PFI transaction, my understanding is that that would be the total stream of payments to be made under the PFI arrangement. That is the wrong way to go about things from the standard accounting practice point of view if the stream of payments represents the provision of a capital asset, the financing charges for that capital asset and the provision of some revenue services that are being provided, such as building maintenance in a classic property PFI that would normally be a revenue charge for the account of the occupier.Adopting the generally accepted accounting practice approach should mean that the cost of the arrangements should be apportioned between capital financing and revenue costs. However, my understanding is that, without the benefit of regulation 7, we are back to the position in which the whole PFI charge would be charged against the borrowing limit of the authority. That seems perverse. Does the Minister understand that to be the case? What does he understand regulation 7 would have done in such PFI arrangements?
The Minister who moved the amendment in the other place said that the Government had satisfied themselves that the regulation, and thus the power to make it, were not necessary because of generally accepted accounting practice and that the matter would be taken care of. He did not deal with the question whether clause 8(2)(a) will effectively intervene to disapply such accounting practice. The Government might be intending to use their powers under clause 8(3) to make further regulations that we have not yet seen to resolve the matter. They clearly could make powers under clause 8(3) to determine what would and would not count as the cost of a credit arrangement so that only part of PFI charge fell into the calculation of the cost of the credit arrangement. It would help the House to hear an explanation.
To summarise, the question is whether PFI projects are now to be treated as all other credit arrangements, whether that means that all costs will be applied against the borrowing limits and whether regulation 7 was designed to prevent the outcome that all PFI charges would be regarded as charges against borrowing limits. If the Minister is now relying on accounting practice to prevent avoidance, which would generally seem to be the correct approach, why will regulation 3 remain in the draft regulations— and as far as I am aware he has no intention of dropping it? It says:
A lease which, apart from this regulation, would not be a credit arrangement shall be treated as falling within section 7(2)(a)".In Committee, I drew attention to the similarities of leases and PFI arrangements and asked why the Government were exempting PFI but not leases. They are changing the arrangements for PFI by deleting the power to make regulation 7, so I ask again why leases should be treated differently and why the Minister 644 cannot rely on generally accepted accounting practices to prevent any abuse of a lease mechanism to provide a covert route for financing revenue expenditure.Of course I support the amendment because I moved it in Committee. However, I am puzzled about the Government's rationale for agreeing to it now and abandoning regulation 7 without addressing the issues dealt with by regulation 3. Given the effect of clause 8(2)(a), it is not clear that regulation 7 has become redundant for the purposes of avoiding an unfair treatment of costs under PFI schemes, unless the Minister's explanation is that he intends to make regulations under clause 8(3) to clarify the treatment of PFI charges.
§ Matthew GreenWe have discovered a new Tory tactic: they say, "If you score a victory, milk it." However, to take things a bit more seriously, we welcome the removal of clause 8(4). It would have given the Secretary of State apparently wide-ranging powers, although I know the Minister said that they were unlikely to be used in such a way. We welcome the amendment because there are too many occasions on which the Secretary of State accrues powers and too few occasions when such powers are removed, so this is a rare and welcome occasion.
§ Mr. RaynsfordI am delighted that there is broad support for the amendment, which simply reflects our growing appreciation of worries that were voiced during the passage of the Bill in both Houses about clause 8(4) and the scope for achieving by other means the policy objectives for which we had framed the provision. Our overall objective has been to maintain the prohibition on using credit for anything other than the acquisition of capital assets. Long-term credit such as borrowing should be used only to meet capital needs and not to pay for running costs. Such a restriction has existed since 1990 and currently exists in primary legislation, but it has given rise to technical difficulties. We therefore concluded that a rule could be dealt with more flexibly in regulations, so we drafted clause 8(4) to give us the power to make such regulations. However, the debates in this House and the Grand Committee in the other place convinced us that there were genuine concerns about the measure because it was drafted in broad terms and could conceivably have been used in ways that were different from what we intended.
Of course, we have tried to base the capital regime in the Bill on accounting principles as much as possible. We therefore checked whether modern accounting practice might offer a sufficient safeguard against the use of credit for revenue purposes. After careful consideration, we concluded that there was such an accounting safeguard. An authority that received a form of service and had the fees deferred for several years would be required to make a charge to revenue during those years, so there would be no perverse incentive to acquire services on credit. That means that regulation 7 may be deleted from the draft capital finance regulations, and as the power to make such a regulation is no longer needed, clause 8(4) may be removed.
I shall now address the other issues raised by the hon. Member for Runnymede and Weybridge (Mr. Hammond). I make it clear that private finance initiative projects will follow accounting practice. If the deals are 645 off balance sheet, they will not score as credit, and, conversely, if they are on balance sheet, they will score as credit—that is the key distinction.
The issue was debated in detail for some time in the other place at the instigation of Lord Hanningfield. Our understanding is that accounting practice is highly relevant to PFI and that we can achieve everything necessary by using regulation 5 in the draft capital finance regulations, which deals with PFI contracts, by implication, and other forms of long-term credit. Its effect is that for the purpose of the new capital finance system, such transactions should be treated in accordance with proper accounting practice. If a contract has to be recognised on a local authority's balance sheet, it must be treated exactly like borrowing and count against the borrowing limits that apply to the authority. If it does not fall to be recognised on the balance sheet, it will not score as a credit agreement and, therefore, will not count against an authority's borrowing limits.
§ Mr. HammondThe Minister has partly addressed my worry, but I was concerned that there seemed to be an all-or-nothing approach: a PFI charge must count either wholly against a borrowing limit or not at all. I am not an accountant—I usually stand up to say that I am not a lawyer—but it is likely that in a complex PFI deal, part of the charge would fall to be treated as a balance sheet item to finance a capital asset and part would fall to be treated as a revenue item. Does the Minister acknowledge that that could be proper practice?
§ Mr. RaynsfordI am in the same position as the hon. Gentleman because I am not an accountant. I have to ask for advice on such matters and I am told that PFI revenue costs are treated as part of the total package, which is what accounting practice requires. Revenue and capital costs cannot be split up in a proper PFI deal.
§ Mr. HammondIs the Minister concerned that that will create a perverse incentive not to do PFI deals and that such deals will become less attractive to local authorities, which would go against the grain of what the Chancellor has tried to encourage? Was the purpose of regulation 7, which will not be made, to exempt PFI transactions from counting against borrowing limits altogether because that appeared to be the case?
§ Mr. RaynsfordNo. As I have already explained, the purpose of regulation 7 was to provide a safeguard against the possible perverse treatment of expenditure for revenue purposes under the capital framework, which would not be appropriate. There are separate rulings on PFI and I have spelled out my understanding of the treatment of PFI projects. I do not believe that there will be a perverse incentive not to undertake PFI projects, although if a local authority undertakes a PFI project that falls on balance sheet, it will have to take account of the obvious consequences for its finances, which is right and proper.
The hon. Member for Runnymede and Weybridge also asked about regulation 3, which relates to leases. We conclude that the regulation will not be needed, so it 646 will be deleted. Accountancy practice supplies all that is required to provide necessary safeguards. With those assurances, I hope that the House will support the amendment.
§ Lords amendment agreed to.
§ Lords amendments Nos. 4 and 5 agreed to.