Local Government Bill

HL Deb 04 June 2003 vol 648 cc181-248GC

(Second Day)

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Lord Haskel) in the Chair.]

The Deputy Chairman of Committees (Lord Haskel)

Perhaps I may remind noble Lords that except in one important respect our proceedings will be exactly as in a normal Committee of the Whole House. We shall go through the Bill clause by clause; noble Lords will speak standing; all noble Lords are free to attend and participate; and the proceedings will be recorded in Hansard. The one difference is that the House has agreed that there shall be no Divisions in a Grand Committee. Any issue on which agreement cannot be reached should he considered again at the Report stage when, if necessary, a Division may be called. Unless, therefore, an amendment is likely to be agreed to, it should be withdrawn.

Perhaps I may also remind noble Lords that it is not necessary to touch the microphones when speaking. The engineer in the corner will switch them on and off as required.

Clause 10 [Non-money receipts]:

Baroness Hanham

moved Amendment No. 42: Page 5, line 16, leave out paragraph (b).

The noble Baroness said: In moving Amendment No. 42, I shall speak also to Clause 10 stand part. In our debate on the first day of Committee, I asked the Minister to clarify when a capital receipt was a capital receipt and when it was not. I believe that at the time he thought it a most uninvigorating question because it did not then receive a reply. But it was important. These clauses of the Bill are about just that. Because of their opaque nature, local authorities will be in considerable doubt as to what constitutes a capital receipt.

In Clause 10 we come across the concept of a non-money receipt. It is not helpfully described in subsection (1)(b) as being where, a local authority receives otherwise than in the form of money anything which, if received in that form, would be a capital receipt under that section".

Presumably, the repayment of loans, the disposal of mortgage portfolios and payments made to redeem landlord's share of a payment, which are described in the draft regulations and which we discussed briefly on the first day in Committee, qualify as money receipts.

There are as yet no other references as to what receipts are, and certainly none which describe non-money receipts.

So what do the Government have in mind in this context? A planning gain, for example? If that were to be one, there would be a considerable outcry as negotiated provisions are often crucial to a council achieving its strategic objective. It may be that that is not in the Government's mind, but it would he most helpful to have an answer.

It is important that the Government clarify their intentions over this subsection and its meaning and I ask the Minister to do so today, otherwise, we will once again be left to consider the, so far, non-regulation.

My comments on Clause 10 stand part continue the concerns I have outlined in the previous amendment regarding what are non-money receipts. However. this also gives me the opportunity to raise the question of why the Government feel it necessary to become embroiled in these matters, whatever they are.

What, if any, abuses have taken place which have brought these non-money receipts into focus, and under what circumstances would the Government feel it necessary to use the powers under subsection (2)(a) and (b)? In particular, what is the purpose of the power in subsection (2)(b), which allows the Government to fix the trigger date for deciding, when the deemed receipt is to be treated as taking place"?

Do the provisions mean that matters such as, for example, a contribution made by local companies to council activities—sponsorship, ongoing support for sport or facilities or the provision of play equipment—is where a council receives a partial non-money benefit? Could such assistance be caught in its entirety and be considered as a non-money benefit?

The Government must explain these provisions more clearly. It is interesting that there is not one word about this particular clause in the Explanatory Notes, which leads me to believe that either the authors of the Bill had not made up their minds as to what it meant or that the authors of the Explanatory Notes had no clue either. I beg to move.

Baroness Maddock

I have considerable support for the noble Baroness, Lady Hanham, in moving this amendment and I look: forward to hearing what the Minister has to say. I want to speak to Amendment No. 44 standing in my name and that of my noble friend Lady Hamwee. It ensures that any new regulations made by the Minister are subject to affirmative resolution by both Houses of Parliament.

The questions raised by the noble Baroness, Lady Hanham, explain why we have proposed the amendment. Certain matters are unclear, particularly planning gain. The noble Baroness, Lady Hanham, also indicated that the Explanatory Notes do not deal with this clause and I therefore hope that the Minister will be able to explain that.

A later amendment relating to the clause will also highlight some of our main issues of concern.

The Minister of State, Office of the Deputy Prime Minister (Lord Rooker)

I want to make two statements. The first is to answer the debate and the second is to answer the question I was asked on Monday. I shall also deal with Clause 10 stand part. I shall deal with things in order.

First, Clause 10 and Clause 9(3) are lifted wholesale from the 1989 Act of Parliament passed when the Tories were in power. We did not invent the drafting; much of it follows from what already exists. Therefore, the vicious criticism of the drafting of paragraph (b) amounted to an own goal. I have to defend the provision because it appears in the Bill. But there is a good reason for it. By and large, it has been shown to be effective and it has worked.

On Monday, the noble Baroness, Lady Hanham, asked about the meaning of the terms in Clause 9(2) and I undertook to look further into the issue she raised. It is easier to put the matter on the record—it might take a week to receive a letter but Hansard will be out tomorrow. That is not a criticism of my officials, it is the system.

The definition of "capital receipts" is crucial to our understanding of the debates on Clauses 9, 10 and 11. The noble Baroness, Lady Hanham, asked whether a capital asset is acquired only by capital expenditure and what would be the position of assets acquired under leasing arrangements financed on the revenue account. She gave an example of an asset acquired under a mortgage.

A reminder of the context may be helpful. We are dealing with the definition of "capital receipt". The starting point is Clause 9(1). That states that a capital receipt is, a sum received…in respect of the disposal by it of an interest in a capital asset".

Clause 9(2) goes on to state that, An asset is a capital asset…if at the time of the disposal, expenditure on the acquisition of the asset would be capital expenditure".

The key words in that respect are "would be". They make it clear that we are dealing with a notional situation. We must ask whether, if we were acquiring the asset now, the expenditure would rank as capital expenditure. If the answer is yes, the receipt is a capital receipt. That has nothing to do with the way in which the receipt was acquired in the first place and, in particular, nothing to do with the way in which it was financed.

That approach follows the wording of the equivalent provision in the 1989 Act and is familiar to local government practitioners. We are not therefore acting in a way unfamiliar to people who will deal with this legislation.

The noble Baroness, Lady Hanham, also asked about acquisitions under a mortgage. I should make it clear that that question would not arise for the local authority. It is forbidden to mortgage or charge its property as security for money borrowed and that prohibition is continued in the Bill in Clause 13(1).

The noble Baroness also asked about assets held under leases. The treatment of leases, both under accounting practice and local government capital controls, varies according to the nature of the lease. If the lease is effectively a way of paying for an asset over an extended period—in other words, a form of borrowing—the authority is taken to have acquired an asset at the beginning of the lease. In that case, there would be a capital receipt if the asset was subsequently disposed of.

However, if the lease is effectively the hiring of an asset, which at the end of the lease is returned to the lessor, the authority is taken to be paying for the service and no asset is acquired. If the asset is not owned by the authority, there cannot be a disposal so there cannot be the acquisition of a capital receipt. I realise that "verbalise" is not always convenient, but I hope that when one reads the answer tomorrow it will be a satisfactory explanation.

As regards the two amendments, Clause 10 is a necessary anti-avoidance measure to ensure that the controls on capital receipts in Clause 11 cannot be evaded by an authority agreeing to receive consideration otherwise than in the form of money. There are numerous ways in which that might be done. Clause 10(1) therefore addresses the problem by giving the Secretary of State power to apply Section 9 to non-money receipts; that is, to treat the receipts as though they were money.

The principle that non-money receipts can be controlled in the same way as capital receipts is established in Clause 10(1). The precise technical details of the amount which the authority is to be treated as having received and the time when it is received is left to the regulations under Clause 10(2). These regulations reflect the existing system—we are not changing it.

Amendments Nos. 42 and 44 seek to limit the Secretary of State's power to make regulations about the treatment of non-money receipts. Non-money receipts take various forms. Local authorities may dispose of a capital asset and be paid not in cash but by being given some other asset, service or benefit. The simplest case is straightforward barter where one property is exchanged for another.

Amendment No. 42 would remove the Secretary of State's power to make regulations about certain non-money receipts—specifically, those receipts that the authority receives for reasons other than for the disposal of a capital asset; for example, a repayment for a loan the authority has made. If they were cash receipts, they would be treated as capital receipts. That is because they have been received in respect of capital expenditure; that is, the making of the original loan.

To continue the loan example, without the power to make these regulations an authority making the loan could receive a non-money repayment in the form of a service such as street cleaning. That would mean that authorities could use their capital assets—for example, by making a loan to a registered social landlord—in return for revenue funding. In other words, they could sell off much-needed housing stock artificially to reduce council tax because they are receiving a revenue service. That conflicts with the fundamental principle that authorities should not use capital resources to fund revenue expenditure.

As drafted, Clause 10 relies on the negative resolution procedure. That is consistent with the position under the present capital finance system, which depends heavily upon secondary legislation. Amendment No. 44 would make the power in Clause 10 subject to the affirmative resolution procedure. Without apology, I rest on the fact that the Delegated Powers and Regulatory Reform Committee, in its 16th report of 2nd April this year reporting on the Bill, did not recommend any change in the procedure for the Clause 10 powers. In view of that, I believe that the amendment is unnecessary.

In order to avoid upsetting the sensibilities of the members of that committee, I do not say that they agree with the Government. I say that if the committee disagrees with the Government, it is entitled to say so in its report. Where it chooses not to say so, and does not comment, I am entitled to say that it has not made a recommendation for change and therefore the negative procedure we have put in the Bill is held to be satisfactory. I am not misusing the wording of the committee in any way, shape or form. If its members want to change their rules, that is fine; it is up to them. Unless they report on a particular power in a Bill, I am entitled to consider that they are content with that power as set out. I dare say that that will cause me to receive a letter from the committee—but there you are!

3.45 p.m.

Lord Hanningfield

Perhaps I may clarify one issue and quote an example used in my authority. It has used capital expenditure to replace a great deal of street lighting. It has a limited term and will therefore have no end. The Government agreed to that. But here we have an example of an item which could be revenue or capital. It is an expensive, physical item, but needs replacing after 30 or 40 years. It is ultimately worthless, but that is down to capital expenditure. The Minister in his comments could have been excluding such expenditure, which has sometimes been considered as capital expenditure.

Lord Rooker

I thought that street lights were a capital asset. I am not a local government expert. In my view, the lights should be changed sooner than 30 or 40 years. I suspect that it is an old-fashioned authority that has such old street lighting. There will be a lot of glare in the sky from it, contrary to policy, causing light pollution particularly in rural areas.

In my view, it would be capital expenditure but the authority is replacing capital stock. It is not a question of selling it off. They are replacing capital stock from a loan and it would be further capital expenditure. It is like replacing the capital goods in one's home when they reach the end of their life. The fridge goes to Mr Meacher's fridge mountain and one buys another fridge. That was not meant in any derogatory fashion—it just popped out! It could be an iron but the fridge just popped out!

I want to make a general point on Clause 10 because of the stand-part Question. It must not be looked at in isolation. The clauses come as a package—Bills are always like this and we deal with the clauses one at a time. Clauses 9, 10 and 11 hang together. I have explained that Clause 9 defines the capital receipts as the sums received when property is sold. Clause 11 will allow rules to be made about the use of such sums and Clause 10 enables us to make regulations about property sales receipts which are in a non-money form.

When property is sold, the payment received usually takes the form of cash. But of course payment may be made in kind, as I have mentioned. One property might be bartered for another and no cash is used in the exchange. However, the present capital finance system has always recognised the need to deal with non-money receipts. 11 will be important under the new system in relation to housing receipts. As I shall explain, Clause 11 envisages that certain restrictions will be placed on the use of receipts from the sale of council housing property, but local authorities often dispose of housing land in return for non-money receipts; for example, in exchange for other property.

Major disposals could therefore fall outside the rules to be made under Clause 11, so non-money receipts must be brought within the definition of capital receipts. Clause 10 enables that to be done. Regulations will provide that where sale proceeds consist of property or other benefits, a cash value will be placed on whatever is received. The regulations will say how that cash value is to be determined. The authority will then be treated as obtaining a capital receipt of that amount. That is wholly consistent with the arrangements under the present system. People outside, such as treasurers in local authorities, understand how the system is working.

As under the present rules, an exception will be made where housing property is sold in exchange for housing nomination rights. It is a wholly exceptional case and that is fully understood by those in the system. Land or dwellings may be sold in exchange for nomination rights and it is considered to be quite normal. That exception is granted and will be continued.

I hope that, given the initial statement in answer to some of the points made on Monday, we will put this matter to bed. But if there are any further points, I shall do my best to answer them.

Lord Smith of Leigh

I want to clarify one point. A number of authorities, including my own, have facilitated the acquisition of sporting facilities by putting land into the deal. They may have acquired a share in the new facility or use in kind in the buildings. Is that caught up by the non-money receipts?

Lord Hanningfield

Before the Minister answers, perhaps I may add to that. We are looking to regenerate the centre of Basildon—something dear to the Minister's heart because it is in the Thames gateway. We are putting in land and will have capital receipts for housing and sports facilities. We would not therefore want to be caught up in a new regulation which would prevent that investment into the regeneration of Basildon.

Lord Rooker

As far as I am aware, there will not be a change in the rules. In other words, we are not changing that part of the present system for those facilities. If I am wrong, I will be corrected, but I have every reason to believe that I am right.

Baroness Hanham

I see lots of nodding from the advisers behind the Minister and I am grateful to him for putting that on the record. It will be understood that we will want to look at his answer and perhaps return to it.

The Minister said that everyone out there understands all of this. I will take his word for it but I want to give another example. Let us say that contractors, as part of a contract, agree to provide a new civic recycling centre. It is capital expenditure on the new centre and it is run by contractors. At the end of the contract, who owns the capital? Is it a non-money capital receipt by consideration if it goes back to the council or is it considered to be outside those regulations?

The trouble is that as regards many areas the Minister's explanation begins to raise many additional questions, particularly when the services of many councils are provided by contractors. There may be improvements to a swimming pool, for example, and capital input into a swimming centre. That will be run by the contractors and may or may not come back to the council afterwards.

We can go on looking at examples and the Minister will struggle to answer them all today.

Lord Rooker

That is a fair example because it takes us back to what we discussed on Monday. We are talking about a package because there is both capital and a service. It would depend on how the deal was set up. One assumes that if ultimately the property were owned by the council, the price paid originally would reflect that. If it were not ultimately to be owned by the council, the price would reflect that also.

I said on Monday that as regards PFI contracts, one could not separate out the capital and the service and the package would be the total. However, the price of the package would be dependent on its contents. That would be taken into account, subject to whatever deal the council has done on who will own the asset at the end of the life of the contract. That is covered by the answer I gave on Monday about not splitting PFI contracts. They are set up as a package.

Baroness Hanham

I do not want to come back on the Minister's reply. I am grateful to him for having gone to the trouble of putting it on the record and we will take it from there. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hanham

moved Amendment No. 43: Page 5, line 23, at end insert— ( ) No regulation may be made under this section in respect of a disposal the consideration for which is wholly in the form of housing nomination rights. ( ) Regulations under this section in respect of disposals consideration for which consists partly of money payable to the authority or consideration other than housing nomination rights and partly of housing nomination rights may not apply section 9 in respect of that part of the consideration which consists of housing nomination rights.

The noble Baroness said: The Minister touched on this matter, but as I am not about to be done out of my amendment I shall move it anyway.

The amendment is necessary to test again—it was originally moved in another place by my honourable friend Philip Hammond—the Government's intentions over non-money capital receipts. Following the debate in the Commons, the Minister, Nick Raynsford, wrote to Mr Hammond assuring him that the provisions under Clause 10 would not relate to housing nomination rights. He told my honourable friend that his amendment was not the right way of proceeding and that the matter would be better dealt with under the regulations—more regulations—in Clause 11.

On 7th March, he concluded that the regulations were not ready but that they would provide that when an authority's contribution to pooling was calculated any consideration in respect of housing nominations would be excluded.

The regulations have now been produced and it appears under Section 16(4)(a) that the matter is now covered. However, it would be helpful to have further reassurance on the matter in Hansard. Although the Minister gave a couple of sentences of reassurance in his previous reply, I would ask him specifically to address this amendment so that we can have it clear. The amendment gives the Minister an opportunity to do so.

Clause 10 deals with the disposal of non-money capital receipts. It states that the sales proceeds obtained both in cash and in non-monetary form, such as, presumably, housing nomination rights, be subject to the new highly controversial proposals for pooling.

We will come on to the whole question of pooling. The Minister has told me that housing nomination rights will be outside that, but I should be grateful to have that formally on the record. I beg to move.

Baroness Maddock

There was considerable discussion about this issue in another place. I realise that the regulations had not then been circulated and now that we have seen them the issue has become clearer. However, I hope that the Minister can say briefly how he sees the provision sitting in with overall government housing policy. I want to hear him say that in no way will councils which choose to provide their affordable housing in this way be penalised by anything in the Bill or the regulations. There was concern in another place and it would be helpful to hear a wider explanation.

Lord Rooker

For the avoidance of doubt. I do not believe that pooling is controversial. I put that on the record to start with. Pooling happens now and we shall come to a modest technical adjustment of pooling in the Bill.

Baroness Hanham

Perhaps I may say that there is pooling and pooling; and there is controversy and controversy.

Lord Rooker

In answer to the noble Baroness, Lady Maddock, we have no intention of operating the provision to penalise local authorities seeking to provide affordable Housing. Far from it. We want them to do more in that regard. And I accept the need for a further explanation in Hansard because when the Bill was debated in another place the draft regulations were not available.

As I said when we discussed the previous group of amendments, non-money receipts take various forms. In addition to receiving an asset, service or benefit, there is the further option to which I have just referred. It is of particular relevance to housing and it is the disposal of land in return for the right to nominate the occupiers of certain properties; typically to occupy some of the units to he built on the land sold.

Although it does not say so in the regulations and I would not know the answer off the top of my head, I presume that somewhere there must be a formula. When land is being disposed of as an asset for well under market value and there is a reason for that, I know that authorities need to come to government for sanctioning because during the past 12 months such instances have come across my desk and those of other Ministers. Nine times out of 10—or perhaps 10 times out of 10—the reason is because that is the value nominalists have put on, for instance, nomination rights.

We do not want to penalise local authorities for that. We want to take things away from the narrow, old-fashioned Treasury view of looking at a single transaction. One would obviously be receiving less than the value of the objects one was selling, if not the full market value for the land. To any customer, one is saying, "No, we will take less than the so-called market value because we are going to get something in exchange for that". That is, nomination rights. They would not otherwise be available on the open, unregulated market.

Under the present system, housing nomination rights are by regulations exempted from the set-aside requirement. That is an important provision that makes it possible for local authorities to pass land at a value well below its market value to registered social landlords so that development of social housing can take place and to reap the benefits in the form of nomination rights. We have no wish to end such sensible arrangements. They encourage good partnerships between local authorities and registered social landlords and are all part of a proper prudent financial process and a proper housing policy process of ensuring that assets are used to best effect to provide housing for people in need.

We accept the intention behind the amendment. We agree that the current exemption should continue under the new pooling arrangements. The right place to deal with such an exemption is secondary legislation rather than on the face of the Bill. That gives us greater flexibility and means that we can respond more easily to changes in circumstances, or to changes in local authority and registered social landlord practice.

Members of the Committee will have seen, in the draft regulations made available, that Regulation 16 indicates how we plan to deal with non-money receipts, and the question of housing nomination rights. The regulation is broadly modelled on the existing regulations in the current system. That requires an authority to place a realistic cash value on the benefit that it receives in return for its property. In the case of relevant housing revenue account disposals, the pooling regime would apply to that notional sum, just as though the authority had been paid in cash. For housing nomination rights, the notional capital receipt is nil, thus exempting housing nomination rights from pooling. It is important to put a value on the disposal if the value is not the market value; otherwise, you would get crazy finances. The notional capital receipt later converts to a nil amount so that an authority is not penalised.

Having put that explanation on the record, I hope that it assists the noble Baronesses opposite and local authorities, as it is a vital part of their activity.

4 p.m.

Baroness Hanham

I thank the Minister for that. I apologise for pursuing him to the extent of making him read out the whole of his explanation. It has been an important matter that has received a lot of attention in another place. The Minister's explanation, which is now on the record, will be nothing but helpful. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 44 not moved.]

Clause 10 agreed to.

Clause 11 [Use of capital receipts]:

Baroness Hanham

moved Amendment No. 45: Page 5, line 25, leave out subsection (1).

The noble Baroness said: I shall speak also to Amendment No. 47 and, briefly, on Amendment No. 50. As I said in my previous amendment, the Minister in another place advised my friend Philip Hammond that his amendments on housing nomination rights would be best dealt with under the regulations in Clause 11. Of course, they now have been. We have already discussed the fact that regulations now exist for housing nomination rights and also, more specifically, for the pooling arrangements for capital receipts. Amendment No. 45 will mean that these regulations would fall. As I am sure the Minister is quite aware, the amendment, if it were agreed, would blow the whole clause out of the water. Many would feel that to be a very good thing, since, in effect, the pooling proposals involve a confiscation of money raised by an authority from its disposal of assets.

The present rules require part of housing capital receipts to be set aside to complete debt redemption; that is to say, the payment of money borrowed to build the properties initially. It has been an onerous but just-about-understood requirement since capital charges have been paid over the years as with any borrowing. The main drawback has been that where money had to be set aside it was not available to provide for capital improvements to remaining properties. As a result, other means have had to be found—more often completely inadequate ones—to try to ensure that dwellings are in reasonable repair. I should think that any Members of the Committee with any involvement in local government could point the finger at many areas that have not had access to capital resources to ensure that the properties were kept in good repair.

The elimination of debt redemption is being replaced by arrangements whereby the proportion of the receipt is handed over to the Government so that it can be used, not to help the local authority that has received it, but so that it can be "redistributed", as it is described in the Explanatory Notes, to other authorities with a "greater need" for new housing investment. Who is to decide whether there is a greater need but the Secretary of State—perhaps it will be regeneration projects in the South East? Practically every authority in the country is under intense pressure to provide new affordable housing. To take from some to give to others, when there is a need in both cases, seems complete madness.

Capital finance for housing has never been an easy matter. It was not an easy matter under the previous government; nor is it so under this Government. But for some years, it has been a balance of capital receipts and capital grants and borrowing. The proposals to play Robin Hood are unwelcome and should be rethought. In particular, the Government need to reconsider why an authority that is debt-free—like other Peers, I have been briefed on the issue by the capital receipts group—should have to hand over any of its capital receipts. There are around 34 such authorities across the country. They would wish any non-debt receipts to be retained and used for housing purposes. Indeed, they could be ring-fenced.

This is a particular point from a few authorities, but they, as others, have raised the question of the validity of the principle of these provisions. Although transitional arrangements for those 34 authorities were agreed in another place, they still do not address the main principle of the problem. For that reason, we believe that neither the regulations under Section 1 and in draft nor those in subsection (2)(b) should be agreed by the Committee. The Select Committee on the Bill recommended that the clause should be removed. I note that the Local Government Association is also against it. I beg to move.

Baroness Maddock

The Liberal Democrats have tabled an amendment in this group—Amendment No. 52. Let it suffice to say that the Minister and my colleagues and I will continue to disagree on what should be brought before the House for affirmative resolution. I shall speak to the other amendments moved by the noble Baroness, Lady Hanham.

The amendments, which concern capital receipts, seem to me and many others to be totally against the main freedoms given in the Bill, which many support. It is opposed by the LGA, which has already been cited, and councils across the whole political spectrum, not just one political party.

As the noble Baroness said, a group of authorities are debt-free. They see themselves as having been very prudent councils and they now feel very penalised. It seems strange to people that one should give with one hand and take back with the other. It is those councils that will lose out. Many feel that they will not benefit from the pooling of capital receipts because most are not in deprived areas. Having looked at the matter in more detail, only one council could be described as being in a deprived area and would therefore get the money. Nevertheless, many such authorities are in areas where house values are high, so there is a shortage of affordable housing, particularly for key workers. It is an issue that we have debated considerably in recent months.

The Government have argued that central government have funded the provision and helped local authorities to maintain their housing. Many of the local authorities that feel aggrieved have actually received negative housing subsidies for quite a long time. I think that all authorities, over the years, have invested substantial sums, not only in the provision of new housing, but in improving existing housing, and that that has been paid for by tenants. That was certainly the case during the years in which I was a councillor on a housing committee in Southampton.

In the Statements by the Deputy Prime Minister in July 2002 he specifically said that, tackling housing shortage is a national responsibility and we must all play our part—central and local government alike". Some of the authorities that will be affected by the clause feel that they have played their part. I hope that the Minister can assure us that nothing in the Bill will prevent local authorities from using capital receipts that they want to reinvest in housing. That issue was raised in another place.

It would be helpful if the Minister could explain how the pooled receipts would be distributed. We have not heard much about that. In that respect, perhaps it would be helpful if the Minister could try to define what the Government believe constitutes housing need and how they believe it will affect distribution, as they have not done that.

With effect from April 2004, we are changing the system of allocating funds for investment in housing at regional level so that it supports the new regional housing strategy. Regional housing boards will do that. It would be interesting if the Minister could explain—perhaps not today—how the system would fit in with this part of the Bill. I will raise further points when I move another related amendment that I have tabled.

Lord Rooker

During her speech, the noble Baroness, Lady Hanham, used the emotive term "confiscation". "Nationalisation" might be a better word. There is a little hit of socialism in New Labour. The provision is intended as a redistribution measure; it does not involve confiscation. Nevertheless, it has obviously wound up many people. It is amazing that, in response to all good deeds by the Government, those who benefit never say thanks, and those who pay whinge. I am afraid that that is part of the price that we pay for doing good deeds. At this stage it is not always apparent who will benefit. The inability to explain that is a difficulty for me at present.

In response to the final question of the noble Baroness, Lady Maddock, in all justice, I cannot say in detail how the housing boards and the regional strategy will work. The housing boards have been set up. We have not been prescriptive about the centre; they were more or less set out in community plans. They differ slightly in some regions, which is fine. They are all working on their first housing strategy, which they will provide to Ministers by July. Some strategies have been launched in draft form and are being consulted on at present. There will not be a "big bang" next year. We want a seamless change from one system to the other, so a lot of money will already be pre-allocated through the Housing Investment Programme and the Housing Corporation's Approved Development Programme. It will take a few years to change from one system to the other; we do not want a hiatus in the process. Nevertheless, we do not have a figure for how much money will be available, so unfortunately I cannot give it. Authorities that think they will lose cannot prove that that will happen. One does not automatically assume that debt-free authorities will receive nothing at all. That is a false assumption.

I shall deal with the central issues and put on record the formal response. I realise that the provision is controversial for some people, but it is only a technical adjustment of pooling. In many respects, pooling already exists. This is a technical extension of it. For those who check the dictionary, I accept that it is more than an adjustment; it is an extension.

This group of amendments, and the ones in the groups that follow, are concerned with the treatment of capital receipts, and with limiting the housing capital receipts that may be subject to pooling, or removing the power to pool housing capital receipts altogether. If the amendments were agreed, it would mean the end of the clause.

Amendment No. 45 would remove the Secretary of State's power to make regulations on the use of capital receipts. That would have very serious implications for the framework within which authorities manage their financial affairs. The Secretary of State could not, for example, specify that capital receipts could not be used to meet revenue expenditure. Frankly, I do not believe that that is the purpose of those who tabled the amendment. Instead, authorities could use capital receipts for any purpose. They could dispose of much-needed housing stock and use it to fund the day-to-day running of the authority. They could use capital assets for short-term purposes, to subsidise council tax levels, rather than investing them in public services.

At present, local authorities may use capital receipts only for new capital expenditure or for repaying debt. That system prevents authorities from disposing of assets and then using the proceeds to meet running costs. It is a fundamental principle that underpins the capital finance system in local government and it remains our policy.

We propose to make regulations to ensure that when authorities spend their capital receipts they do so only to fund capital expenditure and to secure increased capital investment. They will also be free to use the receipts instead to pay off old debts and credit liabilities. Those are sensible and responsible limitations which exist to prevent abuse of an authority's capital assets. We do not believe it is right to see authorities selling the family silver to meet ordinary day-to-day expenditure. That is the exact complaint that the late Harold Macmillan made against the government of the noble Baroness, Lady Thatcher. I am sorry to introduce those political notes in our debate.

4.15 p.m.

Baroness Hanham

I am glad that the Minister's memory is longer than mine.

Lord Rooker

That is the result of long years of opposition in another place—scarred years. All we had to do in those days was to use one Tory against another. We did not have the votes ourselves. The late Harold Macmillan was wonderful in talking about real people and the one-nation Tory, with the smashing up of the country by the then government. He had represented the North of the country. He knew about poverty and poor housing conditions, and he tried to do something about it. However, I digress.

Capital receipts also come in the form of loan repayments, which may have been financed by the authority through borrowing. The Chancellor's "golden rule" demands that such repayments be used only for capital investment. We achieve that by defining the repayment of capital loans and grants as a capital receipt and by requiring that it can he used only to fund further capital expenditure or to repay debt. Those amendments would prevent us from doing so.

Amendment No. 50 is similar to Amendment No. 45, except that it would remove the power to make regulations only with regard to one category of capital receipts; namely, non-housing receipts.

If we were to accept the amendment, only housing receipts would be subject to the requirements that I outlined earlier. Local authorities could use their non-housing receipts—for example, by selling off school buildings—to meet day-to-day revenue expenditure, to subsidise rent or council tax levels or to pay salaries. Again, we are being asked to support a breach of a core principle of local government finance. In this case, additionally, the amendment distinguishes between different types of receipt. There is no logic to that distinction and no reason to support it.

Amendment No. 47 would remove altogether the Secretary of State's power to make regulations to pool capital receipts. That would mean that pooling could not operate as it must if authorities are to have the resources that they need to meet our pressing housing priorities nationally. I remind the noble Baronesses that redistribution is a fundamental principle of housing capital finance, and these amendments would overturn it. We have always taken the view, as have other administrations, that it is right for a portion of the proceeds from the sale of council housing to be available for use in areas of greatest need. That is exactly what the current arrangements do, with the notable exception that they do not include the increasing number of debt-free authorities.

The present system works by requiring local authorities to set aside a portion of housing capital receipts, such as those from the sale or disposal of housing revenue account assets. That portion is 75 per cent of receipts from the sale of council dwellings and 50 per cent of receipts from other assets such as land. As the amounts set aside may be used only to repay debt or other credit liabilities, that then reduces the level of interest that they are required to pay. That, in turn, brings down the amount of revenue support for debt charges that authorities receive from central government by way of housing revenue account subsidies.

That frees up subsidy resources to support new borrowing by housing authorities generally. The amount of that new borrowing is determined as part of the annual Housing Investment Programme—the HIP round—taking account of the assessed priority for capital investment in each authority's area. The net effect is that the current set-aside mechanism allows us to redistribute spending power to where it is most needed at the time. I challenge anyone to say that that is a bad system.

Debt-free authorities do not have to set aside any portion of the capital receipts that they receive from right-to-buy sales. Those authorities have been effectively exempt from the redistribution system. They may use all of their receipts for whatever capital purpose they wish, regardless of their relative need to spend.

We do not accept that some authorities should routinely be able to spend significantly more than other authorities, regardless of the condition of their stock or their other housing needs, simply because they are debt-free and rich in receipts. They are rich in capital receipts primarily from right-to-buy sales. They have nothing to do with right-to-buy sales. Such sales do not occur because of good financial management by a local authority, but simply because people in that area decided to exercise their right to buy. The local authority does not make that decision; it cannot be the result of an authority's management of the sale of assets, such as a redundant school or other buildings, as part of the prudent financial approach with which local government is famed. Right-to-buy sales are wholly different, because they are outside the control of the council; the tenant has full control.

Some authorities happen to be debt-free because of good fortune, not good financial management. Some happen to have inherited assets. Others may have been remiss in meeting responsibilities in their area, so they simply have not incurred debt. Some authorities did nothing about transport services or providing school meals. They kept council tax levels down because they did not spend any money and did not provide services. I shall not name the councils concerned, as they have improved a lot in recent years, particularly as political control has changed. The suggestion that there is an absolute parallel between efficient management and debt-free status is inaccurate. In a nutshell, an authority is not necessarily good because it is debt-free. In the same way, an authority in debt is not therefore badly managed. There are other reasons why authorities are good, bad and excellent, which are wholly unconnected with their debt-free or debt-bearing status.

If we choose not to retain some form of redistribution, authorities with debt or lower capital receipts are denied a fair share of housing resources, even though their need for housing investment may be greater. I must ask those promoting the amendment, whether in Committee or on Report, to think about authorities in debt that might have housing need, rather than simply those without debt, which are the authorities that are crying at present.

Authorities under the control of all political parties are in debt; it is not a party matter. I shall not read out all the authorities in debt because it would take up time unnecessarily. For convenience, I shall name one from each party. If we choose not to retain some form of redistribution, authorities in debt, such as the Labour authority of Blackpool, the Liberal Democrat authority of Milton Keynes and the Conservative authority of Medway, are denied a fair share of the housing resources. I could mention other authorities that I have visited in the past where housing investment is needed. Therefore, one must look at the situation in the round, considering all authorities in need. Redistribution is a good thing. So it must be right for the proceeds of the sale of housing assets to be available for use in areas with the greatest need.

Without pooling, there are only three alternatives: higher tax, less investment by the most needy authorities or cuts in other programmes. Those are the consequences of abandoning pooling. I am not trying to make a challenge today, but if the matter comes back on Report, I will demand that those who promote such amendments say which of those alternatives they promote in their stead. That is the only fair way. The consequences for those authorities—I could list others—of moving such amendments would be very unfair.

The current provision for capital receipts applies to all other local authorities where a proportion of receipts must be set aside. We are ending that provision; instead there will be a pooling mechanism. If it is right that all other authorities in the country should be part of the pooling mechanism, there is no logical reason why debt-free authorities should not be, too.

We do not propose to pool 100 per cent of receipts. Our proposals are in line with the current arrangements, which I have already mentioned. Authorities will still be free to keep 25 per cent of receipts from right-to-buy sales and 50 per cent of receipts from other sales. We also propose to allow all authorities to retain all non-right-to-buy receipts used to provide affordable housing or to support regeneration schemes. That is wholly consistent with the general thrust of housing policy. It is a very good example of saying that the local decision is the one that counts. If an authority wants to fund affordable housing or regeneration schemes, there is a mechanism whereby it can get money from non-right-to-buy receipts.

It is of paramount importance that, in the longer term, all authorities should have access to the maximum funding to meet national housing priorities such as affordable housing and decent homes. The Government provide significant additional resources to help in that regard. Since 1997, the total amount provided to local authorities in England has increased two-and-a-half times, from just under £1 billion to £2.5 billion. But the arrangements proposed in Clause 11 and the draft regulations are central to our efforts to achieve the necessary investment while being fair to all authorities. Those areas that generate the most receipts will still retain significant amounts to use as they see fit. All authorities will be eligible to benefit from the resources available nationally on the basis of their needs.

We recognise that some authorities will need time to adjust to the new arrangements, where the national resources are shared equitably among all authorities. We have therefore decided to institute transitional funding for existing debt-free authorities, as those are the authorities most affected by pooling. Under the special arrangements, a proportion of the total resources expected to be pooled by debt-free authorities will be earmarked to them, in addition to any other resources that they may be allocated, provided that they use it for housing.

An authority with housing stock that is debt free when the new capital finance is introduced will receive up to a given percentage of its share of the total capital receipts, which we have estimated will be paid into the pool by debt-free authorities. That percentage will be 75 per cent in year one, 50 per cent in year two and 25 per cent in year three.

Clause 11 relies on the negative resolution procedure. That is consistent with the position under the present capital finance system, which, as I have said before, depends heavily on secondary legislation. I shall not repeat the point that I made, but the Delegated Powers and Regulatory Reform Committee made no comment on the power. Therefore, my earlier remarks apply equally to the amendment.

I have no apology to make whatever for the redistributive effect, and the pooling effect on the debt-free authorities. I have listened to everyone who wants to speak to me on the matter with respect to authorities since it was first highlighted. It is one issue that I have questioned in the ODPM, and I am more than satisfied, and more than happy to defend the proposals in the Bill. They are fair. The provision has nothing to do with parties. I can find authorities under Labour and Lib-Dem control that will benefit. I suspect that that is also true of those under no overall control; I have not gone through the list of those, but I have met their representatives recently and it is clear that they have housing need. Birmingham is one of them now. That is not the one whose representatives I met; I was thinking of one in Northamptonshire.

I could not defend the passing of the amendments to those authorities, because it looks thoroughly selfish in the interests of housing. I do not accept that the authorities should claim the credit for the right-to-buy sales, because they do not manage those. They should not claim that it was their money that paid for the houses in the first place. Council housing is a national asset. I understand the vagaries of finance in different authorities—it varies from town to town and city to city. However, by arid large, it is a national programme. As I have freely said, it is not confiscation, but genuinely nationalising to share the resource up for the national kitty, based on those authorities with the greatest need.

In regionalising housing finance, and looking at the system that will come forward, clearly we are taking a much broader view across the region. I cannot give the amount of money. For some reason or another, as I went through the answer, I had a figure in my mind, but the amendments all got messed up again today—since we left on Monday, different amendments have been joined together. The noble Baroness is umm-ing and ah-ing, but I assure her that Amendments Nos. 45, 47, 50 and 52 were not in the same group when I left the Moses Room on Monday. Therefore, I had separate sets of speaking notes.

I tore up my original speaking notes, and threw away the authority list that was provided to me, I might add. I remember a figure of what the effect would be. I think that it was £750 million. That will be relevant to a later amendment, so I shall come to it in greater detail. We are not talking about a tiny sum of money; it is substantial. As I was asked the question, I thought that I should put as much on record as possible.

That is a rather long response, but the provisions are an important part of the Bill. I am not in any way critical of the amendments, but I have more than adequately made the case for the arrangements in the Bill.

4.30 p.m.

Baroness Hanham

I thank the Minister for his enormously detailed reply. Housing capital finance is probably one of the most arcane and difficult areas of local government finance with which to get to grips. One unfortunate aspect of the matter is the expectation raised by the provisions—on other amendments, we will come to the proposals for the annexation of the money—that there will be a change from money being set aside to pay debt to being pooled into a pot arid cast around as the Minister thinks fit. Perhaps that is an oversimplification. However, even Robin Hood's enemies who were stripped of their resources were not all that happy about how those were redistributed. Others may feel in the same position.

I want to make one thing clear. The Minister made a lot of political points, and I shall not join in those arguments particularly. The capital receipts group was only a small part of my amendment. I recognised within that that transitional arrangements had already been agreed in the Commons. That is what I said, and that will be in Hansard. Those transitional arrangements will relate only to any capital arrangements that take place after the passing of the Bill. They will not be retrospective, so the starting point will be the date of Royal Assent. That will not cheer anyone up all that much, but it may make an inroad.

I want to read very carefully what the Minister said about all the pooling arrangements. My gut feeling is that the provision is not the same little tweaking to the current capital housing finance regulations that the Minister suggests. It does not look like it in the Bill, and it does not sound like it from what the Minister said. I tend to look at an egg as I see it, and what I think that I see is the shape of the egg and the shape of the argument. What is inside tends to be a different matter. It would be better if I withdrew the amendment for the time being, but I have not the slightest doubt that we will return to it at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hanham

moved Amendment No. 46: Page 5, line 30, after "expenditure" insert— ( ) a trust established to improve amenities or services within the local authority area,

The noble Baroness said: The amendment moves us a little further down Clause 11. The purpose of the amendment is to probe reasons for the restrictive list of purposes to which a council may apply a capital receipt. Such powers are circumscribed at the moment by subsections (2)(a)(i) and (ii). The Minister referred to them in his previous reply. As the Bill is supposed to be about freedoms, do the Government consider that it should contain a few more freedoms and flexibilities?

I want to make a suggestion. What if a council had a civic trust specifically set up to improve the amenities of an area? Many councils have. Would that be permitted under the provisions? Would the Government want to prevent the creation of such trusts for, for example, conservation purposes, or improving street scenes or the environment? Would that not be a proper use of capital receipts? Would long-term improvement not be a sensible use of capital provision?

That is something to which my noble friend Lord Hanningfield alluded when he talked about street lights, but the point was rather subsumed in maintenance and councils' proper use of their money, either revenue or capital. There are cases in which the improvement of the street scene goes beyond street lamps. Some of it would require capital expenditure from capital receipts, and why not? I beg to move.

Lord Rooker

I can be brief on the amendment, I hope. I thought that the purpose of local authorities was to run services and improve amenities. I thought that that was what they collected their council tax for, and why they functioned. I am not quite sure why they need trusts set up to do that. However, if the idea behind the amendment is that the money put into the trust from the capital receipts would escape the pooling, I have to draw the Committee's attention to subsection (2)(b), because such money would still be required for pooling. The trust may be a great idea, but it would still be required for the pool.

Furthermore, giving money to a trust for capital purposes would also count as capital expenditure under subsection (2)(a)(i). Giving for revenue expenditure again would breach the principle in the case of a capital receipt. In other words, if a capital receipt is put into a trust for revenue services, that breaches the rules of local authority spending.

I am not sure what the purpose of the trust is. If the idea of the Central Office whiz-kid who dreamt this one up was to have a trust and avoid the pooling, I am sorry, but it will not avoid the pooling. It would not work anyway. If capital money goes into a trust for revenue, that would breach the rules in the first place.

Lord Hanningfield

Can I give an example to the Minister? It is not to do with housing in any way. In the East of England, we are going to have a big new art gallery. I have considered setting up a trust by selling some artworks owned by Essex County Council to invest in more contemporary art and sculpture. Therefore, we are selling capital assets to put in a trust, to buy more capital assets. One can do that under the present system, but one did not want to get caught up in some of the legislation, which looks to handicap trusts.

We are talking about something that benefits the community—about the setting up of a permanent long-term trust, with investments coming in, perhaps including individual contributions, to improve the quality of life in the eastern region. I gave the example because I thought that it could be caught up in the legislation and we would be prevented from doing it.

Lord Rooker

The noble Lord has raised a specific example on which, off the top of my head, I dare not comment. What I have said all along is that, if something is okay now, it should be okay when the Bill has been passed, but I cannot be certain of that. Selling paintings is not selling housing. It is not right-to-buy sales, but capital. On selling one set of paintings to buy another set of paintings, I do not have a clue.

Lord Hanningfield

The Minister will understand our concern, because the legislation refers to capital sales, which cover a wide spectrum. Therefore, one wants to make it absolutely clear that the legislation does not catch something that I am sure that he, too, would think desirable.

Lord Rooker

I shall have to take advice on that. I cannot give an answer on the buying and selling of paintings. One has to be careful. The value of the painting is what someone is prepared to pay for it. Local authorities going into the art market ought to be really careful about it—that is all that I can say.

Baroness Hanham

My noble friend Lord Hanningfield is a very good example of a Central Office whiz-kid. I am not sure that he will necessarily relish the description, but I shall tweak and tease him about it in future.

The matter is quite a good exam question. It is a test of what the rules, and possibly the regulations, which we are assured now that we will never see, will be all about and reflect. I leave the Minister sucking the end of his pen. He has failed the test so far, but no doubt he will be able to recover before Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 47 not moved.]

Baroness Maddock

moved Amendment No. 48: Page 5, line 33, at end insert— ( ) Regulations made under subsection (2)(b) may include only the following in relation to payments to the Secretary of State— (a) in relation to the disposal of dwellings, the maximum amount that can be specified is 25 per cent of the capital receipt: and (b) in relation to the disposal of any other asset, the maximum amount that can be specified is 15 per cent of the capital receipt.

The noble Baroness said: The amendment is tabled in my name and that of my noble friend Lady Hamwee. The Minister talked earlier about matters in Clause 11 being a technical extension of the present situation. The amendment attempts to make that rather less of an extension. It is in line with part of the draft regulations, in which the Government state that, in relation to the disposal of dwellings, the maximum amount of capital receipt that can be specified is 75 per cent, whereas we propose that it be 25 per cent that basically goes into the pool. In relation to the disposal of another asset, the Government's figure was 50 per cent, and we suggest 15 per cent.

We have had a series of amendments this afternoon, the first of which would have totally disabled the clause. Then we had various others to try to lessen the effects of the clause. Amendment No. 48 would not totally remove money to be pooled in the way explained very graphically by the Minister, but it would reduce the amount.

I do not intend to speak at great length; we have discussed the issues surrounding the clause rather a lot. The clause emphasises the fact that the Government still do not really trust local authorities. The Bill itself proposes a prudential capital regime, which people across the board think is a step in the right direction. However, the clause seems to many of us to go against that. The Government clearly did not want to give local authorities the freedom that they would have had under the old legislation in conjunction with the new, so they have brought in new measures, which the Minister described as a technical extension.

The new regime imposes quite a big restriction and penalties on local authorities that have managed their finances well. I agree with points made by the Minister. He said that simply because an authority is debt free, that does not mean that it manages its finances well. We could all agree with that; that is not the point of many of the arguments that we have used this afternoon. However, I am afraid that debt-free authorities might look at the legislation as it stands and question whether they will sell off land and housing—whether they will use their capital receipts—so that they can provide further housing.

I listened to the Minister, and I think that he reassured me—I will look at the report again—that if local authorities wanted to invest in housing, they would not be penalised. However, there is a fear that people may have a disincentive to manage their finances as well as in the past. The Minister probably does not need to reassure me again.

I believe that the amendment is a compromise between the Government's position and that of many people outside Parliament, with regard to the use of capital receipts. I do not expect that the Minister will take it up, but it is one answer to many of the criticisms made on the way in which the Government have proceeded on the issue. The real problem is whether the Government really believe that local authorities can be trusted. Our amendment would give them quite a bit more trust than the Government are prepared to do. I beg to move.

4.45 p.m.

Baroness Hanham

I tabled Amendment No. 49, which does not seek to do what the Liberal Democrat amendment suggests, although I have some sympathy with how they are trying to look at the issue. The draft regulations have recently been published. It is very clear from them that there will be 75 per cent attrition for housing and housing land. Both amendments try to ameliorate that position, but the Minister has already made it pretty clear that he is not in ameliorating mood. Between them, they might go quite a long way towards making the provisions more palatable, but I think that neither is the final word on the matter.

Lord Rooker

It is on Amendment No. 48 that the figure of £750 million comes in. People always want to know what the cost of an amendment would be. The Opposition tend not to want to know that; they simply want to use an amendment to make a point. I am very depressed to have to announce to the noble Baroness, Lady Maddock, that the amendment would mean that the money available nationally for redistribution to spend on housing would be reduced by £750 million—three quarters of £1 billion for what, in the 25 per cent and 15 per cent figures, look like small adjustments of the pooling percentages.

We are dealing with big money for what looks like a little bit of a fairer system. The money is from the sale of assets that taxpayers have funded through the years, one way or another, which would not be available to meet the most pressing needs. Given the politics and policies of the Liberal Democrats, I do not believe that they would genuinely want to support an amendment that would provide £750 million less for redistribution. True, the money would remain where it was, but it would be less available for redistribution to the authorities in greatest need.

Amendment No. 49 seeks to remove subsections (3) and (4). The provisions are intended to ensure that poolings apply only to housing capital receipts. Their removal would mean that the Secretary of State could extend pooling to all capital receipts. In some ways, the amendment would make sense only if it were consequential on Amendment No. 47, which turned up in a previous group.

The noble Lord, Lord Hanningfield, is back in his place. I am sorry; I turned my page over and did not go back, and I actually have the answer to his question. It is very important that the art gallery in southern Essex is not prevented because Rooker did not have answer. So long as the trust uses money for capital expenditure purposes, the Bill will allow that, as now. If it is capital for capital, there should be no difference. However, as I say, be careful of entering the art market.

Baroness Maddock

I thank the Minister for his reply. As I said, I did not expect that he would accept the amendment. He made much play of taxpayers funding housing and its being a national asset. In my last years in local government—the last years of Tory government—the amount of money spent nationally on housing diminished rapidly, and it did not increase under this Government in their early years because they stuck to the Tory spending plans. A lot of the money was from a long time ago. I question whether it is right for us to penalise people who are doing their best in present circumstances for what happened in the past.

The Government, particularly in recent weeks, have boasted about how much money they will put into housing, and especially how much extra money will go into the affordable housing communities plan in the South East. I put the figures that the Minister gave into that context, which makes them look rather different. I suspect that we shall return to the issue on Report.

Lord Rooker

I am speaking off the top of my head. I take the point that the noble Baroness makes. As she has said on more than one occasion, she now lives in the North. The figure of £750 million is not far short of what the Government plan to spend not in the South East, but in the market renewal pathfinder areas in the Midlands and the North, where there has been a collapse and we need to rebuild communities. The figure is £500 million to £600 million, or something of that order. It is a substantial amount of money, and £750 million is not to be sniffed at. One can make good use of £750 million.

Baroness Maddock

I hope that I did not give the Committee the impression that I sniffed at it. I was indicating that there was a bigger housing finance picture. Before the Minister gave his point of view, my next sentence was going to be about my intention to look in rather more detail at the finance before Report so that we could continue the debate at a later stage.

Another point that I made is that the matter is not only about finance. It is about giving local authorities the freedom in their own area to do what they think best there. We as a party—we make no bones about it; the Liberal Democrats have said it for years—would give a greater proportion to the local authorities, so that they could decide what they wanted to with it. We have been totally consistent about that. Having said that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 49 and 50 not moved.]

Baroness Hanham

moved Amendment No. 51: Page 5, line 41, leave out subsection (5).

The noble Baroness said: The purpose of the amendment is to probe what is meant by the power to allow the Government to set off a sum that a local authority is liable to pay them against a sum due to it from them. The Explanatory Notes are surprisingly silent on that point.

As the clause is written, it could, for example, mean that by virtue of subsection (3) a regulation could be laid requiring a local authority to pay all or part of its capital receipts to the Government. Although we are theoretically moving away from a specific grant regime, the clause might mean that the Government could declare that they would have paid a grant to that local authority but, because it was due under the subsection (1) regulation to pay a capital receipt, they would not then pay the grant.

If we read the provision correctly, is it not a possible licence for the Government to make their own decisions and—I would not use the word gerrymander hut, since we have had a political thrust every so often—to gerrymander? A government could alight on a receipt received by, say, Lancashire County Council and say "We'll have that under Clause 11(2)(b)". Let us say that the receipt was of £1 million. The Government could say under the power that they were liable to pay a grant of so much to Lancashire County Council under the settlement formula, but actually would net off £1 million and let the council keep the capital receipt that it would otherwise have had to hand over.

The power could be applied selectively under the Bill, allowing favoured councils to benefit from capital receipts, while unfavoured ones—whether politically or for any other reason—would have payments to them docked. That surely is not satisfactory. There is already enough messing about in the small print of the annual financial settlement. It would allow a government to have a pretext for squeezing authorities, a power that—however much we might wish otherwise—they might be tempted to use politically.

If the Government intend to use the power—the Minister must make it clear how and when it would be used—it must be done openly. Every authority should get its due under the settlement, and then the Government should be required to claw back each capital receipt openly and justify it in each case, if that is what the ultimate decision of Parliament should be. The power under the subsection would allow the Government, in effect, to confiscate a capital receipt even if their action was under challenge in the courts. The amendment would block what is thus a potential route to selective action. I beg to move.

Lord Rooker

I can dispose of the amendment quite quickly. Subsection (5) is simply an administrative measure to ensure that we do not have checks and payments going in two different directions, one from the local authority to the Government, and one from the Government to the local authority. That is its only purpose. It is a sensible measure that does not affect the overall resources available to any local authority, so all the talk of favoured authorities does not apply. What the noble Baroness suggests could not happen. The provision is purely an administrative measure to make sure that money is not flowing two ways when it can simply be netted off.

Baroness Hanham

The whole paragraph is about the use of capital receipts. Is the expectation that a local authority due to pay more than 75 per cent of its capital receipts would do so, but that the Government would net off some other capital issue—not capital receipts, but perhaps housing improvement programme money? I do not think that the provision is as clear as the Minister says. The Government will pass capital receipts to other authorities, but they will not pass them back to the ones that they have taken them from. So what other money is involved in this cheque that is not going backwards and forwards? That is the burden of the question.

5 p.m.

Lord Rooker

I cannot answer the detail of that question but the resources of a particular authority will not be altered by the measure that we are discussing. Wherever the receipts come from and whatever the pooling arrangements may be, the resources of a particular authority will not be altered by the provision in subsection (5). It is purely an administrative measure. It is not even, as it were, central to policy. If it were not included, money would flow in two directions: money that the Government may pay to an authority and money that the Government expect to receive from an authority. It simply does not make sense for cheques to flow in two directions. As I say, the resources of a particular authority remain unaltered but the provision may result in someone saving the postage required in sending a cheque.

Baroness Hanham

I shall not pursue the matter but I still think that it depends which moneys are involved here. Confusion may arise with regard to other forms of capital flowing to an authority. I refer to money that cannot be considered as revenue and, therefore, must be capital but which is not a capital receipt as that would flow in the other direction. As I say, I shall not take the matter further but perhaps the Minister for his own satisfaction will consider it further at some stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 52 not moved.]

Clause 11 agreed to.

Clause 12 [Power to invest]:

[Amendment No. 53 not moved.]

Clause 12 agreed to.

Clause 13 [Security for money borrowed etc]:

Baroness Hamwee

moved Amendment No. 54: Page 6, line 8, leave out subsections (1) and (2).

The noble Baroness said: In moving Amendment No. 54, I wish to speak also to Amendment No. 55. These amendments seek to remove the prohibition on charging property as security for borrowing and to allow charging on any asset of a local authority.

Under Clause 6, lenders are protected in that they are not required to inquire whether an authority has power to borrow. I tabled these amendments to inquire whether it is not inconsistent not to allow lenders to have the protection of being able to enforce security. I appreciate that in the world that we are talking about having no security may be less important than when an individual or a company with limited liability and perhaps few assets borrows as local authorities tend to have quite a lot of money. But is it in the best interests of council tax payers to have this prohibition? It might be argued that that is the very point of it but I should be interested to understand the Government's attitude here. This again is a centralising provision. It does not allow the local authority to take its own decision as to whether or not it is appropriate to give security for money borrowed. I beg to move.

Baroness Maddock

There was considerable discussion about this issue in another place. Clause 13 retains the principle that all local authority debt is deemed to be secured on the totality of the assets and revenue streams of the local authority. Questions were asked in another place about whether the Government had carried out an analysis of the impact of the total cost of borrowing if any changes occurred in the financial arrangements that I described in my opening remarks. We still believe that the Government should examine other options. There are lessons to be learnt from PFI and from the experience of other countries where lower tiers of government have wider freedoms than the tier that we are discussing. Will the Minister indicate whether, given the discussion that took place in another place, the Government's mind is still totally closed to a wider consideration of the matter?

Lord Bassam of Brighton

As both noble Baronesses said and clearly understand, Clause 13 makes provision about the security that local authorities are to offer for the money they borrow.

Amendments Nos. 54 and 55 would remove the long-standing ban on the mortgaging of local authority property. I understand that the ban goes back to 1933. Therefore, I believe that one could make the valid argument that it has worked well for—

Baroness Maddock

I think that that precisely makes my point. If a regime has been in place that long, is it not time that we considered something else?

Lord Bassam of Brighton

The Government constantly consider such matters. However, I make the simple point that the ban has worked well since 1933 and we see no reason to change it. We do not think that that is necessary.

Authorities will still be able to borrow from the Government via the Public Works Loan Board (PWLB), which never seeks such security. In accordance with Clause 13(3), a local authority's borrowing will continue to be secured on its entire revenue income and that is all that is ever necessary. Such security should also be perfectly adequate if authorities choose to borrow in the market. The fact that authorities can occasionally get loans from the private sector on favourable terms compared with the Public Works Loan Board demonstrates that it is not necessary for them to mortgage their assets to do so. And in any event the potential for private sector lenders to seize authorities' property would pose an unacceptable threat to services. I am sure that that is not at the forefront of Liberal Democrat thinking.

As I say, we do not consider that the amendment is necessary. The noble Baroness, Lady Maddock, asked whether any work had been done to assess the impact of removing the ban. No systematic work has been carried out but some thought obviously has been given to the matter. We see no benefits or savings being gained if local authorities were allowed what might be described as the additional flexibility that the two noble Baronesses have tried to recommend. They have said nothing which convinces us to change our mind. We believe that we have the measure right and that the current system works very well indeed. I hope that with those reassurances the noble Baroness will withdraw the amendment.

Baroness Hamwee

After a few years in your Lordships' House one becomes accustomed to seeing a Minister read the words, "Nothing that the noble Baronesses have said today has convinced us".

Lord Bassam of Brighton

That was not in the brief.

Baroness Hamwee

The Minister makes the point that the Public Works Loan Board does not seek security. However, it could not do so because, as the Minister explained, there has been a ban on doing so since 1933. Of course we are not suggesting that services should be prejudiced. However, we ask whether it is appropriate that this should be a matter for central control. We believe that it is not. Local authorities may well not want to go down that route. However, the Minister did not, for instance, suggest that borrowing might become more expensive to those who do not offer security. It is very difficult to judge the position. I have not written, "Nothing the Minister has said has convinced me", although it may be written in invisible ink. I hear what the Minister says and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 55 not moved.]

Lord Hanningfield

moved Amendment No. 56: Page 6, line 19, leave out "two" and insert "three

The noble Lord said: We are concerned that these provisions do not allow local authorities sufficient flexibility to repay, or possibly challenge, a debt before the intervention of the High Court and the appointment of a receiver.

Will the Minister assure us that two months will allow sufficient time for local authorities to raise the necessary sums or challenge the debts? Although we accept the need for the safeguards Clause 13 provides, we should prefer to see the time limit extended to three months to allow for greater flexibility.

We accept that this is a matter of practical judgment rather than a philosophical or political difference. We should be grateful, therefore, if the Minister could share with us what evidence has led the Government to set a time limit on the repayment of large debts at two months. I beg to move.

Lord Bassam of Brighton

Amendment No. 56 relates to Clause 13(5). This provides that if the principal or interest owed to a lender is overdue by two months, the lender may ask the courts to appoint a receiver with power to oversee the management and distribution of the authority's revenues. So there is a common agreement and understanding of what the clause does. As the noble Lord said, Amendment No. 56 proposes that this period of two months should be extended to three.

The amendment is clearly meant to help local authorities. However, we believe that it could have the opposite effect. The measures in Clause 13(5) may seem stringent but they provide the assurance demanded by lenders. Any weakening of this protection to lenders could adversely affect local authorities. We know that private sector lenders are very much aware of the existing provisions, which have been in force for a considerable time. They have acted as a guarantee for a very long time. Even a minor change could send entirely the wrong signals to the market. I am sure that the noble Lord is well aware of the sensitivity of the market to such messages which would be very unwelcome. The effect could be to make it more difficult or more expensive for authorities to borrow. I do not think that that is desirable and I do not believe that the noble Lord thinks that that is desirable. We do not want to encourage such a situation which would not be helpful to local authorities.

I suggest that the noble Lord reconsiders the amendment and perhaps takes some further advice from lenders.

Lord Hanningfield

I thank the Minister for that reply. There are two ways of looking at the matter. I accept that, as the Minister said, we want lending to be at favourable rates and to be secured. I shall reflect on the amendment. It is not a terribly important amendment, but we sought the Government's reasons for wanting a period of two months. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hanningfield

moved Amendment No. 57: Page 6, line 29, leave out "£110,000" and insert "£50,000

The noble Lord said: In moving Amendment No. 57, I wish to speak also to Amendment No. 58.

We have concerns that these provisions set the threshold too low for the intervention of the High Court and the appointment of a receiver.

As I hope that I made clear in the previous amendment, we agree that there is a need to set safeguards of some kind, but we should be grateful if the Minister would share with us what evidence led the Government to set the thresholds at these levels. From our side, they seem too low.

We also seek some clarification as to why it should be necessary for the Secretary of State to have the power to alter this threshold by order. Can the Minister clarify whether the power is likely to be used to lower the threshold further, and under what circumstances it might be employed? I beg to move.

Lord Bassam of Brighton

As the noble Lord said, Amendment No. 57 relates to Clause 13(8). It relates to the ability of a lender, where interest is overdue, to ask the court to appoint a receiver to oversee debts and secure the revenues.

Clause 13(8) provides that lenders may not apply to the courts for assistance unless the sum owed to them is at least £10,000. Amendment No. 57 proposes to increase that figure to £50,000.

The present threshold, set in 1989 by the previous administration, is £5,000, so we are already making an increase, very roughly to reflect inflation. But the figure needs to remain low for the reassurance of lenders. As I said when responding to Amendment No. 56, any weakening of protection to lenders could make it more difficult or more expensive for local authorities to borrow. They might even try to borrow to invest in the art market. We would not wish matters to go awry in South Essex in that respect.

Even so, it seems sensible to keep this threshold figure under review. Clause 13(9) allows us to do that and to vary the figure by order, if we considered that was necessary. But Amendment No. 58 would remove that power. As I have said, we think that the figure in the Bill—given what has happened since 1989 in terms of inflation—is about right. However, we believe that we ought to have flexibility for the future. That is reflected in the wording of Clause 13(9). The Delegated Powers and Regulatory Reform Committee, which reported on the Bill recently, was entirely happy with the procedure that we set in place. I say to the noble Lord that it would not be our intention to lower that threshold. We cannot see any immediate circumstances in which we would want to do that. It is more than likely that the threshold would need to rise with inflation.

5.15 p.m.

Lord Hanningfield

For the record, will the Minister confirm that the purpose of the Secretary of State's power is not to lower the threshold but to raise it with inflation as the years go by? Will the Minister clarify that for the record?

Lord Bassam of Brighton

I think that that is what I said. The threshold would need to rise from time to time to reflect movements in inflation.

Lord Hanningfield

I thank the Minister for those comments. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 58 not moved.]

Clause 13 agreed to.

Clause 14 [Information]:

On Question, Whether Clause 14 shall stand part of the Bill?

Lord Hanningfield

I oppose the Question that Clause 14 stand part of the Bill.

We should like to take this opportunity to question the Minister about the kinds of information the Secretary of State intends to request from local authorities under this clause and how this information will be used.

Although we accept the need for an ongoing dialogue between local authorities and central government, we should like some assurance that the Secretary of State does not intend to use this power to intervene unnecessarily in local authority affairs.

Can the Minister also assure us that that will not add significantly to the workload of local authorities—we shall return to that point on another amendment—and that the range of performance indicators, data and statutory returns already submitted on a regular basis to the Government will not be duplicated in this information?

I speak with feeling on the matter having recently exchanged a considerable amount of information and letters with the Secretary of State for Education. I felt rather bruised and hurt by the Secretary of State's treatment of local authorities. I strongly oppose the Question that Clause 14 stand part of the Bill. I should like the Minister to confirm that the dialogue with local authorities will be conducted in a fair and just manner and that information will not be sought in such a way as unduly to increase the workload of local authorities.

Baroness Maddock

When this clause was discussed in another place there was a considerable amount of political knockabout—some of it concerned the clause but some did not—which reminded me of my early days in another place. I could never get used to the fact that we spent so much time saying how pleased we were to serve on committees with certain people and recounting our connections with those people outside politics.

When the clause was debated in another place my honourable friend the Member for Kingston discussed at length what it was reasonable for the Government to require under the terms of the clause and how much that would cost. The Conservative Members tried to persuade him not to press his amendments to a Division and the clause was agreed. Indeed, the honourable Member for Cotswold, Mr Clifton-Brown, said that the concept of reasonableness would have to be taken into account from a legal point of view. Perhaps I am being a little disingenuous in introducing a political knockabout point into the Committee, but I was surprised at the line taken by the Conservatives in another place.

Lord Smith of Leigh

Will my noble friend confirm that this is one of the freedoms which excellent authorities might have—namely, not to submit these returns—bearing in mind my interest as a leader of an excellent authority?

Lord Bassam of Brighton

I am surrounded by excellence in the Committee. We are all local government friends from times past—or at least I think that we are.

I hope that I can offer some words of comfort and reassurance on Clause 14. It requires local authorities to provide the information that is needed to implement the new capital finance system. That much is clear. There is an information requirement at present. That has been in existence for some time.

When I was a local authority leader I used to complain bitterly when the government wanted yet more information before they would accept a reasonable case that we had made. I also used to complain that the government did not ask for particular bits of information which would have proved that we needed to have extra resources for whatever project we were trying to plan. Those of us involved in local government always wanted to have it both ways.

We are trying to put in place a sensible system, to ensure that the information requirements are reasonable—to use a term that was used earlier—and that the requirements are no more onerous than they are at present. We are also trying to do our best in central government to simplify the information needs so that we do get the matter right. Obviously, there needs to be dialogue on these matters from time to time. The LGA is very good at making its case. We have discussed the matter with the LGA and with CIPFA. They have shared their views with us. So it is not just a case of central government imposing arbitrarily a need for information that we have dreamt up. We have worked it out with those parties that have worked closely with us to ensure that we request necessary data.

Some of the information sought for the new regime will be different because it is a new regime. Therefore, there will be new information requirements. I understand that we shall ask authorities to notify us of the affordable borrowing limit they have set at the start of the year. That ties in with Clause 3(1). That will be one of the factors we take into account in deciding whether a national borrowing limit needs to be imposed in any one year under Clause 4(1).

We do not wish to impose more onerous requirements. We want to keep the matter as simple as we can. The principle on which the clause is based draws on the history of controls in the area of the capital finance system. Therefore, the clause is not—and I hope will not be seen as—something which is new and burdensome for the sake of it. It will be reviewed from time to time and we shall take into account the views of CIPFA, the LGA and those other bodies that work with local government to ensure that regimes are sensible and practical in their workings.

Lord Hanningfield

I thank the Minister for that explanation. I still consider that the Secretary of State has a strong power under the clause.

Lord Bassam of Brighton

What is it specifically in the clause that the noble Lord objects to? What is it that the noble Lord thinks places additional onerous burdens on local authorities? It would be helpful to know that.

Lord Hanningfield

Clause 14 refers to a local authority supplying the Secretary of State with information, at such time, as he may request".

That is a very general power for the Secretary of State to have. As I said, we totally accept that information should be supplied.

Lord Bassam of Brighton

Does the noble Lord also accept that that wording is common throughout the language of local government finance and has been in existence for many years? I am sure that he is familiar with it from the time when his party was in government.

Lord Hanningfield

I accept that the wording is familiar but I do not consider that it is necessary to include it in the clause. I hear what the Minister says. This is a matter on which we shall want to reflect. We may return to the clause at a later stage.

Clause 14 agreed to.

Clause 15 [Guidance]:

Lord Hanningfield

moved Amendment No. 59: Page 7, line 5, leave out paragraph (a).

The noble Lord said: In moving Amendment No. 59, I wish to speak also to Amendment No. 60.

We welcome the Government's intention to support local authorities by issuing guidance on prudent financial management where necessary. This amendment would ensure that any such guidance is scrutinised by Parliament in the appropriate manner. This is a theme that runs through several amendments.

The Government have promoted the prudential regime as extending considerable and extensive new freedoms to local authorities. We hope that that will occur. Much of the practical working of the regime is not covered in the Bill and will become clear only once we have seen the regulations. The regulations are where many of the key elements will be determined. It is, therefore, of the utmost importance that Parliament has the opportunity to scrutinise the regulations. I beg to move.

Lord Rooker

Amendment No. 59 seeks to delete paragraph (a) of Clause 15. That would result in all guidance issued by the Secretary of State having to be in the form of regulations. However, there are well-established precedents for Secretaries of State to issue statutory codes of guidance without any requirement for regulations. We are not trying to circumvent parliamentary scrutiny, far from it. We are thinking of using the power in paragraph (a) mainly to give clear and simple guidance on prudent investment practice. Local government representatives themselves have agreed that such an approach is preferable to the present one which requires complex regulations about investments.

In those areas where we need to introduce regulation we shall do so, subject to parliamentary scrutiny. However, in other areas guidance will be issued following well-established precedents. Frankly, it would be a complete and utter waste of Parliament's time to force the Secretary of State to issue regulations in every case and would make the matter ever more complex. I hope that I have reassured the noble Lord.

Lord Hanningfield

I accept what the Minister said. At a later stage of our debates on the legislation we shall need to make clear that the regulations will be scrutinised by Parliament. As I said earlier, the new regime to which both Ministers have referred is totally new and, therefore, people will want to see the detail of it. I shall withdraw the amendment at this stage but we shall want to return to this theme as the Bill progresses through its stages. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 60 not moved.]

Clause 15 agreed to.

Clause 16 ["Capital expenditure"]:

Baroness Hamwee

moved Amendment No. 61: Page 7, line 1l, after "proper" insert "relevant

The noble Baroness said: In moving Amendment No. 61, I wish to speak also to Amendment No. 62.

Amendment No. 61 could perhaps have been more elegantly phrased by inserting "relevant" before rather than after the word "proper". But I hope that inelegance will not impede the Minister giving a satisfactory reply. I have tabled the amendment in order to probe the meaning of the measure in the Bill. I assume that the words "proper practices" refer to accounting practices. I assume that accounting practices—perhaps I have too much faith in the profession—will be proper. It is unlikely that they would be improper practices, if I can put it that way. Perhaps more seriously, Clause 21 seems to cover the position thoroughly, so I am unclear as to what is imported by this one word.

Amendment No. 62 would delete the power of the Secretary of State to make regulations providing that expenditure is or is not capital expenditure. We particularly oppose Clause 16(2)(b), as do the Conservatives, which provides that expenditure of a particular local authority is or is not capital expenditure. We have had, and no doubt will go on having, arguments about whether particular local authorities should have the powers that, in general, this Bill grants and whether there should be distinctions between authorities as to whether or not they can exercise powers. For the Secretary of State to be able to say, "Well, in your case, that expenditure on a particular matter is capital but in your case expenditure on the same matter is not capital'', seems to be odd at the least and, certainly, a control too far.

Having missed part of today's proceedings, I am unsure whether reference has already been made to the Hackney factor. Perhaps this is due to the Hackney factor. But we question the appropriateness of this in the context of the economy of local authorities about which we have talked from this side of the Committee. In another place, the Minister said that this was a "continuation" of an existing direction-making power. Is not the existing power adequate? Why is it necessary to continue it? If it is an extension, how is it an extension? Is it simply an extension because it goes into a new clause in a new Bill? And, of course, why? I beg to move.

5.30 p.m.

Lord Rooker

Amendments Nos. 61, 62 and 63 relate to Clause 16 which defines the term "capital expenditure". Amendment No. 61 focuses on the basic definition in Clause 16(1).

Lord Hanningfield

The Minister has referred to Amendment No. 63. That has not been moved.

The Deputy Chairman of Committees (Baroness Turner of Camden)

It is in the group of Amendments Nos. 61, 62 and 63. The noble Lord can speak in this group if he wishes.

Lord Hanningfield

Perhaps I may speak to this amendment to add to what the noble Baroness, Lady Hamwee, said. This is an odd clause because it particularly wants to define the capital expenditure for individual authorities. That obviously could be done for political, for favouritism, or for some particularly odd reason. Clause 16(2)(a) already provides for the Secretary of State to define "by regulations" what should constitute capital expenditure for local authorities, and we accept that. In fact, we started the day by defining capital expenditure.

But the most appropriate way to maintain transparency in local authority finance is to ensure that local authorities are treated equitably. We understand that the provision to define capital expenditure by local authorities by regulations is a necessary safeguard. However, given this provision, can the Minister explain under what circumstances it might be necessary for the Secretary of State to have the power of direction to make a different provision for an individual local authority, along the lines outlined by the noble Baroness, Lady Hamwee?

If this provision is intended to deal with anomalies or grey areas in the finances of a particular authority, can the Minister give us a better understanding of what these might be and how this provision will be applied? When will it be necessary to capitalise parts of a particular authority's expenditure and what types of expenditure will qualify for this treatment? Our concern is that this measure may raise doubts about the equitable treatment of different authorities and the transparency of local authority finance. Is the Minister able to assure us otherwise?

Lord Rooker

I certainly hope so. I shall start again, but I am sorry if I pre-empted the noble Lord. Amendments Nos. 61, 62 and 63 relate to Clause 16, which defines the term "capital expenditure". Amendment No. 61 seeks to replace the words "proper practices" with the phrase "proper relevant practices". That would make the provision unworkable. I draw the attention of noble Lords to Clause 21(2) in which the expression "proper practices" is defined. Therefore, the terminology in the two clauses must be kept fully consistent.

More significantly, Clause 21 makes the amendment unnecessary because it enables relevant accounting codes to be identified in regulations. We have placed the draft capital finance regulations in the Library in which Regulation 21, dealing with proper practices, names the statement of recommended practices, which is in draft form issued by the Chartered Institute of Public Finance and Accountancy (CIPFA). Local authorities will therefore be in no doubt where to look for relevant guidance on such concepts as that of capital expenditure.

Amendment No. 62 seeks to remove the whole of subsection (2) which provides two powers to vary the definition of capital expenditure. One is a power to do this by regulations applying generally to authorities and the other is a power to make variations for individual authorities by directions. Amendment No. 63 seeks to remove only the direction-making power. I understand why these amendments have been tabled, but both powers are basically continuations of ones we already have, which are much appreciated by local government.

By classifying expenditure as capital expenditure, we increase authorities' flexibility to apply their resources. Capital expenditure can still be met out of revenue resources, if authorities wish, but they have added options. They may use their capital receipts; alternatively they may borrow the money, subject to keeping within the limits applicable at the time.

In the draft regulations that I mentioned, Regulation 19 illustrates how we expect to use the first power. We want to continue to allow authorities the flexibility to treat computer software development costs as capital expenditure. A similar provision exists under the present system and, we believe, anticipates likely developments in standard accounting practice. We also want to ensure that when making loans and grants towards capital expenditure by other bodies, authorities may draw upon their own capital resources. That freedom exists under present legislation and it seems a sensible modification of accounting practice since authorities are, in effect, undertaking capital expenditure by proxy.

The direction-making power is also important. It enables us to define items of expenditure as capital expenditure on a one-off basis for individual authorities rather than having to make a regulation generally applicable to all authorities. We have used the power, for example, to help authorities cope with substantial redundancy costs and pension fund deficits that would otherwise have been unaffordable. The power was, of course, introduced by the previous Administration in 1990, which used it in much the same way as we have since.

Under the new system, the power would be exercised as of now. That means we would continue to issue capitalisation directions only in exceptional cases. Without the power, we could not offer quick assistance to local authorities facing serious financial difficulties borne out of these types of examples. I hope, with those reassurance, that noble Lords are assured and will withdraw their amendment.

Lord Hanningfield

I thank the Minister for those comments. Of course, one totally accepts, and is pleased, that computer software and so forth are considered capital expenditure. What concerns us, in particular, is the manner in which this is presented. The Secretary of State might suddenly decide to give advantages to one authority over others because that was the way he felt at the time. For example, the Secretary of State might say that a great deal of capital expenditure could be used for education provision, and choose the authorities which they wanted to do that to.

Because of the recent unpleasant experiences in education funding, at present, one is very suspicious of these types of clauses. I accept that at times it is appropriate that some capital expenditure could he used and should be used for revenue help for an authority. But it should be general for all authorities rather than for a favoured authority of the Minister of the day receiving preferential treatment. That is how it could be read. I accept that it is already in current legislation and that the Secretary of State needs powers to be able to help authorities. But the way in which it is presented here, it appears as though it could be given to some authorities and not others. That is our concern.

Lord Rooker

However much Labour might have argued during the long 18 years in Opposition, it is not possible that Ministers operated on whims to look after their own. We know that it cannot be done in that way because my noble friends usually slip in and have something to say. Therefore, the noble Lord, Lord Hanningfield, is being very unfair in talking about Ministers operating on whims in respect of individual authorities. As the noble Lord raised this matter, I must point out that the very freedoms that exist under the legislation we are perpetuating are the freedoms that allow his trust to buy and sell its paintings. It is exactly the same freedom for the local authority. I rest my case.

Baroness Hamwee

I am really sorry that I missed the start of today's proceedings. There was obviously a lot of discussion which took us into interesting realms. Earlier today, I thought that I should declare an interest in not being a leader of an authority, having been a leader of an authority. Therefore, I understand the concept of capitalisation.

What the Minister said has reassured me quite a lot and has helped to put the matter into context. Inevitably, because it is what oppositions are supposed to do, I retain just a sense of unease and a feeling that one must keep on asking for reassurance and asking how differences might be applied. But I thank the Minister for what he said. As regards proper practices, I understand how it relates to Clause 21. It is not always easy to know that a phrase is defined in a particular way because one does not know whether to look back, look forward or look at the interpretation clause at the end.

I am sorry to have taken the time of the Committee, but I have made the point because practitioners need to be able to handle legislation of this complexity.

Lord Rooker

I know that parliamentary counsel listen to what Members say. There is no science in drafting Bills—it is an art. The fact that there is no index, as opposed to a contents page, is always a problem in finding one's way through a Bill, particularly if it refers to further legislation. The definitions are used throughout the Bill; they are not found in one place. Therefore, I think that the noble Baroness has made a wholly legitimate point which should be taken up by those charged with drafting the Bill. I might add that those who draft the Bill are not the Government, of course. Parliamentary counsel is a separate body—of fine upstanding people, by the way. I have been into the inner sanctum as a Minister. I have made good friends there. I have enormous respect for them. But they do not have to stand at the Dispatch Box sometimes defending the way in which a Bill is drafted. We defend the policy. But putting policy into legislation and the rules of drafting Bills make it extremely difficult and sometimes cause amendments to be tabled that would riot otherwise be needed.

Baroness Hanham

I slightly despair because I think I made the same point during the course of the Regional Assemblies (Preparations) Bill.

Lord Rooker

Yes, I am sure.

Baroness Hanham

I hope that it was recorded in Hansard. Whether it was or was not, I hope that this exchange is recorded in Hansard because, ultimately, something might happen if all the comments are brought together from the different Bills.

Baroness Hamwee

I am grateful for the Minister's remarks. I have enormous respect for parliamentary counsel who clearly work fantastically hard—through the night as we move into the summer. While we are on the subject, there is a similar problem when different counsel draft different parts of the same Bill because the style changes and that makes it even harder to navigate. Perhaps we had better bring apples in for parliamentary counsel on the next day of Committee. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 62 and 63 not moved.]

Clause 16 agreed to.

Clause 17 agreed to.

Clause 18 [Local authority companies etc]:

[Amendment No. 64 not moved.]

Lord Hanningfield

moved Amendment No. 65: Page 8, line 28, at end insert— (5) A local authority may make and issue a guarantee in respect of membership of a company incorporated under the Companies Acts either operating in its area or operating as a local authority association. (6) Any guarantees issued under subsection (5) above may not exceed a total value at any one time equivalent to one-fifth of the expenditure limit applicable at that time under section 137 (as amended) of the Local Government Act 1972. (7) The provisions of Part 5 of the Local Government Act 1989 (local authority controlled companies) shall not apply in the case of a company limited by guarantee which is either one with charitable objects or is a local authority association.

The noble Lord said: Amendment No. 65 refers to parish and town councils. The Government have taken a number of steps to improve the position of parish and town councils during the past few years. I hope that they will consider this amendment sympathetically. At the moment, parish and town councils are unable to join fully in the operating partnerships of companies limited by guarantee and, of course, a great number are much bigger than district councils which are allowed that provision within this legislation. In addition, many charities and regeneration partnerships are incorporated in this way. That means that on many occasions the most local tier of government is rendered incapable of contributing to the wellbeing of its community. This amendment would remove that obstacle and would enable parish and town councils to participate in these partnerships and to make a real contribution to their local communities.

While I am on the subject of parish councils, I should like to fly a little kite on which I would like the Minister to comment. It has been suggested that the minimum age for standing for election in parish councils should be reduced from 21 to 18. That would provide an opportunity for young people, particularly in rural and smaller communities, to participate and reinvigorate their local areas. I hope that the Minister might comment on that point. This is very much a pro-parish council amendment and I hope that the Government might think fit to support it. I beg to move.

5.45 p.m.

Lord Rooker

As regards the final question asked by the noble Lord, Lord Hanningfield, about the minimum age for standing for parish council elections, I do not know anything about that proposal. But I do know that the minimum age limit of 21, in which minors shall not be elected, is in an Act of Parliament, currently on the statute book, dated 1675. Time for renewal, I think. That is the Act of Parliament that sets the age. One cannot be elected to the House of Commons until the age of 21. That is barmy. The side-title of the clause is "Minors shall not be elected". This is a matter that I researched some years ago—for reasons of which I shall not bore Members of the Committee. I do not know whether there are any proposals but I presume that there would be plans to update current legislation that is more than 300 years old.

Turning to the point of substance, Amendment No. 65 seeks to add a new subsection at the end of Clause 18. That would give authorities power to issue guarantees in respect of companies, subject to certain safeguards. We are not clear about the exact intention, although the noble Lord has now spoken to it. However, we believe that authorities have sufficient powers under existing legislation to work in partnership with companies of the kind mentioned in the amendment. In appropriate circumstances, that could include offering guarantees on their behalf to enable them to raise loans more easily. We do not think that it is practical to specify the limits to such powers on the face of the Bill, as the amendment seeks to do. The prudential system should offer a sufficient safeguard against reckless use of guarantees.

Any authority offering a guarantee to a company will have to assess the risks of that guarantee being called and the likely cost implications for the authority. Obviously, such revenue implications will need to be taken fully into account when the authority calculates its capacity for affordable borrowing under the prudential rules. In the event of a national limit ever being imposed, the regulations enforcing it could make special provision relating to guarantees if it was deemed necessary at the time.

The regulations setting a national limit could exempt specific kinds of companies, such as those with charitable objectives. There are certain exemptions of that kind under the present system and we would expect them to be carried forward into the new system. We think that that is best done in regulations rather than on the face of the Bill. I hope, with these assurances, that noble Lords will withdraw the amendment and enable us to move quickly on to the next amendment on which I have some really good news.

Lord Hanningfield

I thank the Minister for those comments, on which I should like to reflect. Obviously, I shall be consulting the town and parish councils. As I said in my introduction, there are several of considerable size with budgets of several million pounds and representing communities of 50,000 or 70,000 people. I think that they should be able to benefit from some of the provisions of this Bill. I thank the Minister for his comments. I shall examine his comments and consider whether we should return to this issue at a later stage.

In addition, I was interested to hear his comments about the voting age. Certainly, the Association of Councils feels that it would like a younger age of representation in order that it could more widely represent its communities. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hamwee

moved Amendment No. 65A: Page 8, line 28, at end insert— ( ) The Secretary of State may by order make provision amending the definitions referred to in subsection (2) and contained in Part 5 of the Local Government and Housing Act 1989 to ensure that the definitions conform to generally accepted accounting practice. ( ) An order under subsection (5) shall not be made unless a draft of the statutory instrument containing it has been laid before, and approved by a resolution of, each House of Parliament.

The noble Baroness said: I turn first to the issue of age, which is one to which we shall return when we discuss the amendment tabled on that matter.

Yesterday, I mentioned a briefing that we had received from CIPFA. I talked about it being "in elation" to the Bill—maybe this is the time to apply that. Amendment No. 65A is made at the request of CIPFA and is supported by the Local Government Association. The regulatory framework for local authority companies is currently provided in Part V of the Local Government and Housing Act 1989. The definitions in it differ in small but very significant ways from definitions in the UK Generally Accepted Accounting Practice (UK GAAP). That practice, adapted to reflect local authority circumstances, is the basis for financial accounting for UK local government and also underpins the definitions and the computations of the key indicators in the Prudential Code. It will also form the basis of the information flows for the Whole of Government Accounts programme, which is now rapidly developing momentum—I am told by this note.

It is expected that local government will be included within this programme. If the current Part V of the 1989 Act definitions continue, local authorities will have to carry out separate classification exercises for prudential framework/annual financial reporting purposes on the one hand and the regulatory framework on the other. As Members of the Committee will appreciate, that will create costs and—I am not sure that this is a technical expression—will risk creating a technical fog where we want to see clarity and transparency.

The Local Government Association confirms the importance, in its eyes, of local authority accounts following best practice and supports the mechanism introduced in the Bill to allow statutory definitions to be replaced with definitions from UK GAAP, subject to modifications for local authority practice. CIPFA has also said that the amendments are not merely technical. In the post-Enron environment the issue of whether entities are on or off balance sheet has a particular resonance and it looks forward to local authority accounts following best practice. I beg to move.

Lord Rooker

Amendment No. 65A relating to Clause 18 is important. While we should like to accept the amendment as it is, we cannot do that. But we shall accept the spirit of it and, by and large, come back on Report with something that goes even further. I am quite happy to put all this on the record, but I do not think that it is strictly necessary to go through the whole of my speaking notes.

We were aware, of course, that CIPFA, which lays down the accounting standards for local government, had been examining the treatment of local authority companies and whether local authorities should move to a formal system of group accounting under which the authority would prepare consolidated accounts for itself and its companies. Once such a system is in place, the statutory definition of a company could easily be based upon that in the revised accounting code. That would mean a reference to the 1989 Act would no longer be necessary.

Such a change would also fit well with another imminent development—that is, the Treasury's Whole of Government Accounts initiative—to produce a consolidated set of accounts for the whole public sector, as required by the Code for Fiscal Stability.

The difficulty is that the timetable for CIPFA's introduction of a group accounting standard is still uncertain. The revised accounting code may not be in force by the time the Bill becomes operative. We were therefore unable to refer to this accounting definition and decided to keep the existing definition which, though far from ideal, is workable.

The amendment suggests an interesting approach. It would leave the definition as drafted for the moment, but would give us power to update later by order in line with changes generally accepted in accounting practice. The introduction of CIPFA's group accounting proposals would certainly come under that heading. Therefore, as soon as its new standard is in place, we could make an order which would base the definition of a local authority company on the new accounting standard.

Since the Bill was drafted, we have continued to explore this whole issue in liaison with CIPFA and the Local Government Association. Our own ideas have moved in much the same direction as those embodied in the amendment. However, we have taken the concept a little further. We are aware that other international and national developments are on the horizon, including potential major changes in the accounting treatment of leasing and borrowing. Some of these accounting changes may be a few years away but, if and when they materialise, it may be necessary to harmonise various aspects of existing local government financial legislation. We should like to ensure that we have the power to do that.

Consequently, we are proposing to put down our own amendment on Report which would go rather beyond what is proposed in this amendment and allow a wider range of definitions to be revised by order in line with accounting practice. That would achieve all that the amendment proposes and, indeed, more besides. I am extremely grateful that the amendment has been tabled because it has given me the opportunity to make that response and foreshadow what we shall put forward.

Baroness Hamwee

For my part, I am grateful that the Minister has not teased me about proposing to give the Secretary of State an extra power. That is very welcome news and I thank the Minister. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18 agreed to.

Clause 19 [Application to parish and community councils]:

Baroness Hamwee

moved Amendment No. 66: Page 8, line 35, after "may" insert ", following consultation with representatives of parish and community councils and charter trustees,

The noble Baroness said: In speaking to Amendment No. 66, I speak also to Amendment No. 230 with which it is grouped. Amendment No. 66 proposes inserting in Clause 19— under the power which allows the Secretary of State or the National Assembly to make regulations to extend the provisions of the Bill—that, parish and community councils and charter trustees",

have an obligation to consult with their representatives. I hope that I can quite simply be told that that will happen and have that assurance on the record.

Amendment No. 230 has been tabled because it is perhaps unclear whether Clause 23(2), bringing in first tier councils, is replacing Schedule 13 of the Local Government Act 1973. The local councils have asked me to table this amendment to probe whether that is the case. I beg to move.

Lord Hanningfield

I support the amendment, which is very much in line with the amendment I moved earlier. It is very important that we involve parish and community councils, which are the trustees, in the new provisions and the new legislation. They are an increasing part of our local communities and it is important that we support them. I endorse and support the amendment.

6 p.m.

Lord Bassam of Brighton

I can deal with the amendment reasonably easily and provide the assurance and clarification that the noble Baroness—and, by extension, the noble Lord, Lord Hanningfield—seeks.

Amendment No. 66 would require consultation with representatives of parish and community councils before regulations were made under Clause 19(3). This power allows provisions in Chapter 1 to be applied to these councils and corresponding provisions in Schedule 1 to be disapplied.

The system for regulating parish council borrowing has always operated in close consultation and co-operation with the National Association for Local Councils and its network at county association level. The package of administrative improvements to the system announced in the White Paper was developed in consultation with it. We greatly value its input and—I can say this without any fear, favour or risk—it would be unthinkable that the power under Clause 19(3) would be used without seeking its views.

Amendment No. 230 is quite interesting and I can understand why the noble Baroness has brought it forward to probe what has happened. As it stands, the amendment would add Schedule 13 to the Local Government Act 1972 to the list of repeals in Schedule 7 to the Bill. The schedule contains the provisions regulating borrowing by parish and community councils that are to be superseded by Clause 19 and Schedule 1.

It therefore seems perfectly logical to include the repeal in the Bill, so why did we not do so? The answer is that it was unnecessary. The repeal of Schedule 13 is already on the statute book. It came about in this way. Before 1990, Schedule 13 applied to all local authorities. The Local Government and Housing Act 1989, which introduced the current system of capital controls for principal authorities, included the repeal of the relevant parts of Schedule 13. But the 1989 Act controls were never applied to parish and community councils and so the repeal was never commenced for those councils. When Clause 19 and Schedule 1 are brought into force, we intend simply to make a commencement order under the 1989 Act to complete the repeal.

The amendment is virtuous but unnecessary and I am sure that the noble Baroness will feel quite confident in withdrawing it.

Baroness Hamwee

I am grateful to the Minister for filling in the gaps between the lines. Others no doubt will follow that Minotaur's trail. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 19 agreed to.

Schedule 1 [Capital finance: parish and community councils and charter trustees]:

[Amendment No. 67 not moved]

Baroness Hamwee

moved Amendment No. 68: Page 79, line 3, leave out "due rate" and insert "rate from time to time specified by the appropriate person

The noble Baroness said: I suspect that I may be told that the definition of "due rate" appears elsewhere in the 100-odd pages of the Bill. The amendment seeks to delete the words "due rate" in paragraph 3(2) and to replace them with "rate from time to time specified by the appropriate person"—in other words, the Secretary of State or the National Assembly.

I do not, of course, support the Secretary of State having additional powers but it may be what the "due rate" means. Can the Minister say where and how it is defined? This is another case of it being quite difficult for new readers starting here. I beg to move.

Lord Bassam of Brighton

I am sorry, but I cannot resist a tease. It is usually the case that the Opposition seek to remove or limit the powers of a Minister. Here the Liberal Democrat spokesperson on the Bill is proposing a new and thoroughly draconian power for the poor old Secretary of State. But we really do not want it. So thank you, but no.

Consider what would happen if an interest rate were to be set under this power. Parish councils throughout the country would be repaying loans taken out at different times at different rates. They are contractually bound to pay the interest rate stipulated for each loan, but this provision would constrain the charge for interest that they make to their revenue accounts.

The charge to the revenue account, of course, in turn determines the precept that they set as a call on their council tax. If they were required to charge less to their revenue accounts than the amount they were required to pay, they would have insufficient funds to make the payments. It is true that they have a discretion to make a higher charge, but that is not likely to reassure a lender that funds will necessarily be available. If the charge is to be greater than the amount due, then council tax would have been raised unnecessarily.

So the provision requiring the due amount of interest to be charged to revenue accounts is taken over from the Local Government Act 1972. We believe that that works well for local government, and local government seems to believe that it works well. It is certainly well understood. It is a fundamental part of good and sound financial practice and provides a good framework for parish councils. We would be ill-advised to alter it.

We are grateful for the suggestion that the Secretary of State should have new powers, but on this occasion we do not believe it would help parish councils.

Baroness Hamwee

The Minister's answer showed a lot of imagination. However, he omitted to refer to the clause in the 1972 Ad which defines and provides for "due rate". Teasing aside, it would be helpful to know the definition. I appreciate that this may be a question to be dealt with in a letter, although the Minister may be about to be told the answer by people who carry the enormous volumes of local government legislation in their heads, which is admirable. Perhaps he will be able to tell us which clause it is.

Lord Bassam of Brighton

"Due rate" means the rate due. It means no more nor less than that.

Baroness Hamwee

That answer may or may not be helpful. I shall think about it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 1 agreed to.

Clause 20 [Directions]:

[Amendment No. 69 not moved.]

Clause 20 agreed to.

Lord Hanningfield

moved Amendment No. 70: After Clause 20, insert the following new clause— COST TO LOCAL AUTHORITIES OF COMPLIANCE WITH REGULATIONS (1) In publishing any regulations or directions under this Chapter, the Secretary of State shall publish a statement of his total estimate of the time and the average cost in officer time that it will require for local authorities and functional bodies as a whole to read, implement and comply with each set of regulations and directions that he may issue, and the number of civil servants in his department or other government agencies required to prepare, monitor and apply the said regulations, together with his estimate of the cumulative annual cost to the taxpayer of implementation of the regulations and directions by both central and local government. (2) The chief executive of each local authority or functional body in receipt of regulations and directions issued by the Secretary of State under this Chapter shall publish an estimate of the total compliance cost to his authority and shall furnish the figure annually to the Audit Commission. (3) The Audit Commission shall publish an annual table setting out the figures published by the Secretary of State and the chief executives of local authorities and other functional bodies under subsections (1) and (2) above, and shall lay that table before Parliament.

The noble Lord said: The amendment is straightforward. It would require estimates to be produced of the costs involved in complying with the new provisions set out in Part 1 of the Bill.

Most people accept that there are freedoms in the Bill, but increasingly—as we have discussed in Committee for two days and will discuss in the next four days or so in Committee—more and more regulations and complexities are contained in legislation. When members and officers of local government read this legislation they are very concerned about the continuing cost and work involved in providing the material to implement it, as we have discussed today. That applies not only to this legislation but to other legislation all the time.

We have brought forward the amendment to ensure that someone will calculate the cost of this legislation to local authorities. I shall be interested to hear the Minister's response.

Baroness Hanham

It could be said—the Minister may be about to say it—that this is a trivial amendment, but people in local government will not believe that it is. As my noble friend Lord Hanningfield said, they have to wrestle all the time with the regulations and the legislation produced here, and with its impact when it falls on them. Perhaps at some stage we should pay more attention to the impact of such regulations and legislation.

The cost of implementing regulations and legislation arises from employing people to carry out its requirements and to provide the information required, and ensuring that they understand what is proposed. It is to be hoped they will not try to do that from this Bill because they will not be able to. They will have to go back through all kinds of legislation to understand what is proposed.

Without in any way wishing to denigrate civil servants, I believe that they are frightfully good at producing reams of regulations. They rationalise issues very carefully because they do not want to leave any stone unturned in the course of what they are doing, but they do not perhaps understand its implications. The reality of life in town halls is that more and more senior officer time is taken up by reading, interpreting and responding to government directions and regulations.

For once, we may wish to follow the US, which has a paperwork reduction Act that requires federal agencies to estimate how long it should take to read and respond to documents. It is a very good idea. Every civil servant should have an egg-timer on his or her desk, as do lawyers and other professionals to help them in estimating their bills.

The amendment is not trivial. It suggests that we should stop and take stock. If we were to go through what we have already covered on page 10 and add up the number of times it is stated "and this will be carried out within regulation", the Committee will perhaps understand the purpose behind the amendment.

Lord Rooker

In speaking to this amendment to the "Local Government Reduction of Bumph Bill", which is what the Bill is—

Baroness Hanham

No. It is not a reduction of bumph Bill in its proposals.

Lord Rooker

Yes it is. The Bill reduces burdens on local authorities up and down the land. It takes the heavy rod of government off their backs and gives them greater freedom to operate without constantly reporting back to Whitehall.

I should be very interested to learn what the chief executive of the noble Lord's authority said about compliance with the amendment. I should be very interested to hear what the Local Government Association would have to say about this amendment putting extra burdens on local government. That is the reality—the amendment would put extra burdens on local government. That is what the proposed subsection (2) is all about.

I am appalled. The amendment goes against the whole grain of the Bill, which seeks to reduce the burden on local government. Many of the issues in the Bill that we have covered so far relate to powers of last resort which, like previous governments, we would use only as a last resort. The implication that the powers in the Bill are excessive and will be costly for local government does not stand up. The procedures involved in the amendment would cost a fortune to implement and require loads of paperwork, loads of red tape, loads of monitors and loads of people not delivering benefits or any other services. They would be incredibly time consuming. Before coming back with this issue at Report stage, I challenge noble Lords opposite to get the Audit Commission or the Local Government Association to run a rule over the amendment.

We have kept regulations to a minimum and made them easy to operate. The overall aim is to increase local government freedom, not to curtail it. It is true that there are some necessary long-stop powers in parts of the Bill. We understand that many of the main powers are regulations and directions, but most are such that they impose the national or local borrowing limit. As we have said repeatedly, we hope never to have to use them but we need long-stop powers.

The other regulations—those allowing the capitalisation of expenditure—are designed to help local authorities to cope with financial pressures. Local authorities have stated that the overall effects of Chapter 1 can be only beneficial to local government. But then what happens? We are faced with this amendment which seeks to place further burdens on local government. I am absolutely appalled. Opposition members should be thoroughly ashamed of themselves.

6.15 p.m.

Lord Hanningfield

We are not thoroughly ashamed of ourselves. I accept much of what the Minister said. The idea behind it has certainly not involved very much the LGA. The ideas behind freeing up local authorities are laudable but, increasingly, laudable ideas are then hemmed in by red tape. That is a problem in our country.

When I speak to colleagues in the United States—this follows on from what my noble friend Lady Hanham said—they are amazed by the prescription in the legislation for local government in this country. We prescribe so much and continue to do so. Every time a government—both previous governments and this Government—introduce legislation they continue to spoil the whole effect of it by so much prescription. We have tabled the amendment in an attempt to make people realise that.

Many people who have looked at this Bill—not chief executives but day-to-day people—feel that it is a very prescriptive and very detailed Bill which imposes a lot of work on local authorities. I accept that the Government want to free up the borrowing regime and improve the service for local government, but it would be very nice if the Minister would not joke about the amendment. He should take it seriously, because that is what many people feel.

Lord Rooker

I was not joking.

Lord Hanningfield

I recently made a speech in the Chamber pointing out that we have had 1,000 new regulations in the past three years or so. That is an enormous amount. Every piece of legislation introduces new regulations.

Lord Rooker

My noble friend Lord Macdonald has looked into the issue. The vast majority of all those so-called regulations were minor—for example, to close a road for repair. It is an absolute myth that there are loads of regulations. Some are necessary—as they were under the previous government—for road safety purposes. The vast majority, as I understand it—I remember reading the Parliamentary Answer at the time—were road closure orders required for necessary repairs to be carried out.

So it is an absolute myth that thousands of regulations are placed on thousands of local government officers every day. It is not true.

Lord Hanningfield

The Minister has given a classic example. In what other country in the world would a national Parliament be worried about road closure orders? It is a symptom of our centralised system. It is the same under both governments. Having joined Parliament from local government, I can see how everything has to be prescribed.

The spirit behind the amendment is that people should recognise that not everyone sees—as the Minister hopes— this legislation as a freeing-up. They see elements of it as being bureaucratic and number-crunching in the figures that local authorities have to provide all the time. I shall withdraw the amendment today but I am sure that we shall return to this issue during the passage of the Bill. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clauses 21 and 22 agreed.

Clause 23 ["Local authority"]:

Lord Hanningfield

moved Amendment No. 71: Page 10, line 41, at end insert— ( ) a regional assembly constituted pursuant to a referendum.

The noble Lord said: The amendment seeks to probe whether the Government intend any elected regional assembly to be subject to the provisions under this part of the Bill. I should be grateful for clarification on this matter. I beg to move.

Lord Rooker

It is amazing that we have reached this part of the Bill without anyone referring to the regional assemblies. Let us live in the real world. The assemblies do not exist. The detailed policy on such assemblies is still being developed. We have not made any firm decisions. There has been no announcement yet about the soundings exercise, which is fairly imminent, so this is purely hypothetical.

We have not made any decision on whether the assemblies' capital finance system should be governed by the provisions of this Bill or the Bill that will establish them if they are established after referendums, and if referendums take place. The legislation creating the assemblies could bring them within the scope of Clause 23(2) if that is considered appropriate. However, elected regional assemblies will not be local authorities.

The Government intend that elected assemblies will be established in the England regions in the future, but only if approved by regional electorates in referendums. We expect the first referendum or referendums to take place in autumn 2004. We would then need to introduce legislation whenever parliamentary time allows to set up the elected assemblies. That legislation will set out their detailed powers and functions, including provision for their capital finance arrangements. But those good debates are for the future, not for this Bill.

Lord Hanningfield

Can the Minister tell the Committee when the Government will announce the first dates for the referendums?

Lord Rooker

Shortly.

Lord Hanningfield

Obviously I accept that there will be legislation. We have been told that over and over again. I gather from what the Minister said that some of that legislation may apply to regional assemblies, if and when any are established. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hanningfield

moved Amendment No. 72: Page 10, line 42, leave out subsection (3).

The noble Lord said: We welcome measures in the Bill to free local authorities to manage their finances in order to respond to local needs. However, we seek an explanation—this is somewhat similar to my previous amendment—as to why it should be necessary to make provision in the Bill to extend this regime to other bodies. Can the Minister be more specific about the kind of bodies to which the regime may be extended and clarify whether the subsection has been drafted with regional bodies in mind? I appreciate that he has given me an answer on the second issue. I beg to move.

Lord Rooker

I hope to be able to answer the noble Lord's question. Amendment No. 72 seeks to remove subsection (3) of the clause. However, the subsection serves an important purpose. It enables us, when bringing additional bodies within the system by regulations, to apply the legislation in a modified form. The kinds of bodies in question may well be structured differently from the mainstream authorities listed in the Bill in Clause 23(1).

Before giving any of these less typical bodies full access to the freedoms of prudential borrowing, we must, in particular, be satisfied that they can cope properly with the new responsibility of setting and monitoring an affordable borrowing limit. The power in Clause 23(2) would enable any necessary additional safeguards to be introduced. The amendment would remove that flexibility. That could work to the disadvantage of bodies with an untypical structure, which might then have to be denied access to the system altogether.

As I have no example to give of the kind of bodies that may involve, I offer that explanation on the basis that situations are always changing—bodies merge and different bodies are created for different purposes—and that we need flexibility. If I had any example of bodies to give, I suspect they would be listed in the Bill in any event.

In the draft regulation 22, examples are given of bodies, including the National Parks authorities, Broads Authority and the Lea Valley Regional Park Authority, which are not mainstream authorities. I hope that satisfies the noble Lord.

Lord Hanningfield

I thank the Minister for that answer. Obviously I accept that bodies such as the National Parks authorities should be included in the regime. It is interesting that other bodies could be included. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 23 agreed to.

Clause 24 agreed to.

Clause 25 [Budget calculations: report on robustness of estimates etc]:

Lord Smith of Leigh

moved Amendment No. 73: Before Clause 25, insert the following new clause— APPLICATION OF PROVISIONS OF THIS PART (1) The provisions of this Part shall be applied to those local authorities which have—

1. (a) been assessed as weak in Corporate Performance Assessment overall;
2. (b) been assessed as weak in Corporate Performance Assessment in "Use of Resources";
3. (c) received an adverse report from their external auditors about their financial management.

(2) The application of the provisions of this Part to a local authority shall cease if a subsequent assessment or report shows improvement in its financial management.

The noble Lord said: The purpose of Part 2 was clearly established in the Second Reading debates in both Houses by the Government's Front Bench spokesmen. Broad agreement exists that the overwhelming majority have to have, as my noble friend said, effective processes in place to manage and monitor their budgets".

The problem therefore lies with a small number of local authorities which do not live up to that requirement. As my noble friend the Minister in another place said, it remains the case that a small number of badly managed and poorly performing local authorities tarnish the good reputation of local government.

If the problem lies with a small number of local authorities, why is Part 2 attached to the performance of all local authorities? The amendment seeks to limit the provisions of Part 2 to those local authorities which need to improve their procedures and processes and to target in on those.

In his letter to me replying to the points raised at Second Reading, my noble friend admits that the new duties under Clauses 25, 27, 28 and 29 will not be a matter for central government to police. If that is the case, why on earth are all local authorities meant to jump through these particular hoops?

I appeal to my noble friend's deserved reputation for directness: let the legislation apply only to those local authorities that have a problem and to which it needs to apply. The remainder of local authorities feel somewhat offended that procedures that are natural and normal to them are suddenly now applied through this legislation. I hope my noble friend will listen to what I say and concentrate the attention of the Bill on those who need its direction. I beg to move.

Lord Hanningfield

I support the amendment. The debate has shown that there is a lot of unanimity across local government areas. We have debated several times the CPA regime and what is happening in local authorities. The amendment is laudable and I support it.

Baroness Hanham

I do not want to embarrass the noble Lord. Lord Smith, by overstating our enthusiasm for what he has proposed. However, I know him well enough to know that he is perfectly able to shoulder the burden of the responsibility of our support.

When I first read the thrust of Part 2 I found it absolutely astonishing. In most senses, most authorities would consider the aspects of budget monitoring, the calculation of reserves and so forth to be par for the course. They come absolutely naturally. It is nine-tenths of any senior cabinet member's responsibility to ensure that it is all carried out above board. As the noble Lord, Lord Smith, said, it is probably only a few authorities in which there is a problem. In the past there may have been many authorities with problems. Mostly it was the ones run by the party opposite which caused the difficulties.

The noble Lord, Lord Smith, put his case well. Now that we have in being a system of comprehensive performance assessment, if the purpose of the Bill is to take the dead hand of government off local government then the whole of Part 2 is quite extraordinary. I support the amendment.

Baroness Maddock

We are not quite unanimous. I understand what is behind the amendment and I have great sympathy with not wanting any interference from national government in local matters and in allowing local authorities to look after their own finances. But this would still allow the Government a hit of control.

In an ideal world we would say that local authorities look after their finances well and that there are various other bodies to ensure that they do so. When I was in local government I can remember the district auditor coming along. As we have said many times, there is a lot of flourish in the Bill about how local authorities will be given freedoms, and then, as we go through it, they are taken back again.

We have some sympathy with the amendment but we would not want this part of the legislation to apply to local authorities but to rely on the mechanisms that have worked satisfactorily in the past.

6.30 p.m.

Lord Rooker

But they have not worked satisfactorily; that is the point. I understand the reason for my noble friend tabling the amendment. I hope that I have a sufficiently robust and practical answer in defence of this part of the Bill. Clearly, there is an attempt to reduce the burden of regulation on local authorities. I sympathise with that objective. I keep repeating that it is one of the main purposes behind the Bill. We have given a yard but now they have come for the marathon. The idea that the Bill is not reducing burdens is not true; it is.

We do not believe that the amendment would improve the Bill. Indeed, it would not reduce burdens on authorities and will leave authorities uncertain in some cases as to whether or not Part 2 applies to them. To explain that I need to consider the effect of the amendment on each of the clauses it will affect. There are not many. I shall take Clauses 25, 28 and 29 together.

These three clauses put into statutory form some of the basic elements of good financial practice. The point has been made that well-managed authorities will follow this good practice anyway. We agree, and for these authorities the clauses will impose no extra burden. However, we know that other authorities have not made proper provision for reserves and have not followed good budget monitoring practice. When we consider authorities which have experienced severe financial problems in recent years, for instance Hackney, Walsall or North Tyneside, some combination of those failings will always be involved. But the problem is not confined to those extreme cases. The Audit Commission's auditors identified 12 per cent of authorities in England and Wales as having inadequate reserves.

The duties on reserves and budget monitoring are so basic that they should apply to all authorities without exception. A duty similar to Clauses 28 and 29 has applied to the housing revenue accounts of all authorities that keep such accounts since 1990. If Amendment No. 73 were accepted, the duties would apply only once financial management had deteriorated. It would then be too late; the damage would have been done. Once that has happened, it is far more difficult to restore sound finances.

As regards the effect on Clause 26, this is a power for the Secretary of State or the Assembly to require authorities to budget for a minimum level of reserves.

We have made clear the very limited circumstances in which we would intend to use the power. Regulations would apply only to particular authorities that were disregarding the advice of their chief financial officers and heading for serious financial difficulty. Amendment No. 73 would prevent the power being used until an authority had been formally identified as having poor financial management. Remedial action would be delayed and we would lose the chance to catch a developing problem at an early stage.

In the case of Clause 30, we suspect that its inclusion within the purview of the new clause was an oversight. Clause 30 concerns the most extreme situations, where it appears an authority may not have the resources to meet its spending needs. The chief financial officer in those circumstances already has a duty to report under Section 114(3) of the Local Government Finance Act 1988. If I remember correctly that is the poll tax Act. I was on the committee, helping my friend Dr Jack Cunningham lead for the opposition. I can remember the powers that were put in that Act for the whistle blower; that is, the duties of some of the officers in local government to blow the whistle before the problems arose so that we could nip them in the bud.

The effect of the report under that section is to oblige the full council to consider the situation within 21 days and in the mean time to impose a prohibition on new Financial commitments. That prohibition has been found in practice to delay vital action required to deal with the financial emergency. Therefore, Clause 30 provides a tightly-controlled gateway through the prohibition to let remedial action be taken without delay. That is crucial.

I repeat that Clause 30 has been generally welcomed in local government and by the Local Government Association in particular. In this Room I am surrounded by experts, representatives and practitioners of local government. I have never been a councillor and I cannot understand why local government associations support particular clauses. I accept that it is good to get things on the record. However, the effect of the amendment would be to restrict its application to the authorities where we have received adverse assessments.

As I said, I understand the reasons for my noble friend tabling the amendment, so that the good and excellent authorities, such as the one he leads, do not have any burden. But an excellent authority will not suffer. An excellent authority should not be affected by this part of the Bill.

It is true that Section 114 reports are generally associated with poorly-run authorities that have brought about their own financial troubles. But other authorities not covered by the new clause may also be subject to Section 114 action. Perhaps an authority has lost a court case that results in substantial damages being awarded against it. The effect of Amendment No. 73 would be to deny such an authority the flexibility permitted by Clause 30.

Amendment No. 73 is therefore unnecessary and would have undesirable consequences for the application of Part 2. It would create uncertainty for authorities in knowing whether Part 2 applied to them. It is in some instances difficult to say whether an auditor's report is adverse; I accept that. Auditors will usually include elements of criticism and praise within a report to give a balanced view of an authority. A subsequent report may refer to improvements, but they may not be sufficient improvements.

In the light of the problems that the new clause would create, I hope that on further consideration my noble friend will agree to withdraw the amendment. It may be that there are elements of this which should be discussed on Report. Nevertheless, I repeat what I have said. Excellent, well-run authorities carrying out proper financial procedures should not find this measure a burden. It is there to be used in a small, limited number of examples. As I said as regards Part 1, it is a measure of last resort.

Lord Smith of Leigh

I thank my noble friend for his response, although I am nevertheless disappointed. Perhaps what he does not understand is that what local authorities do naturally most of the time is to listen to good, sound advice from officers. Suddenly, that has become part of legislation. Are we to have a new clause in the Bill which states that we have to listen to the advice of a chief education officer or a director of social services? That is what councils do daily to implement their business. Suddenly there is an element here that is treated as different from the rest.

I accept the point made by my noble friend at the beginning. There is a problem that the current legislation has not dealt with. That is why I do not agree with the comment made by the noble Baroness, Lady Maddock, that this can be left to local authorities. There have been problems with local authorities of all political persuasions which have not taken a grasp of their financial situation. I understand that there is a problem.

My noble friend said that we need to nip this in the bud. If I really felt that the Office of the Deputy Prime Minister was best located to nip the problem in the bud I might be more sympathetic to what he said. Frankly, I do not believe that that is the case. I believe that the district auditor, who is hands-on, working with the local authorities, is the best person to discover the sudden change in circumstances that my noble friend suggests. Those authorities in which there is a systematic problem, to which he referred earlier, will be shown in a CPA result and can be regularly monitored. But where there is something that has changed, surely it is the role of the district auditor to understand problems on the ground and to deal with them.

I am disappointed by my noble friend's response. However, I shall read what he said—

Lord Hanningfield

Before the noble Lord sits clown, the Minister referred to the LGA. Clause 26 on minimum reserves is the one to which the LGA had the most objection in the whole of the legislation, and in a moment I shall oppose the question that Clause 26 stand part. The Minister very kindly said that he was surrounded by local government figures. Those of us who have been through the CPA process this year will be aware that the rigour of the auditing part of that is immense. The Government have set in place that process. To put in this further piece of legislation is rather offensive to local governments. Before we reach the final stages of the Bill I hope that the Government will think again as to how this section is dealt with.

Lord Smith of Leigh

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 25 [Budget calculations: report on robustness of estimates etc]:

[Amendment No. 73A not moved.]

Clause 25 agreed to.

On Question, Whether Clause 26 shall stand part of the Bill?

Lord Hanningfield

I shall speak at some length on this matter. As I have just said, this is the part which the LGA finds the most difficult of the whole legislation.

This clause gives the Secretary of State the power to set a minimum level of reserve for a local authority. It is a power that is wrong in principle for the Secretary of State to seek to take and a power that will be ineffective in practice.

As the Minister has just said, I understand that Ministers are seeking this power as a reserve to enable them to deal with a small number of authorities. However, there is surely a question as to whether the powers will enable the problems in those authorities to be tackled. The Select Committee did not think that those powers would prove effective. It stated that it did not receive any evidence that had those particular measures been in place they could have prevented financial imprudence. We have just referred to cases in Hackney, Walsall and so forth.

In the light of that it would be interesting to hear from the Minister exactly how and in what circumstances those powers might be exercised. However, I note from the ODPM's memorandum to the Select Committee on Delegated Powers and Regulatory Reform that those circumstances cannot be foreseen at present. So the Secretary of State is taking power which no experts think will work, which local authorities oppose, and which he is not quite sure how to exercise.

I also noted with interest that the same memorandum states that the exercise of that power would be through the negative resolution procedure as the powers might have to be exercised rapidly. However, looking at the Bill these powers cannot be exercised rapidly. The Bill does not prevent an authority from running down its reserves to a level below that set by the Secretary of State during the course of a year. The Bill refers only—we have not discussed this before—to an out-turn position at the year end. By that time the damage will have been done.

We might then have a situation in which local authorities required to meet a statutory obligation at the year end have to scramble around to make the necessary savings. It is conceivable that under those circumstances the focus will be on meeting the short-term target and not on what the long-term implications for the community or for the financial health of that authority may be. One can see some extremely painful decisions being taken by local authorities: the closure of elderly people's homes; the withdrawal of grants to voluntary bodies, and reductions in services simply to meet a figure stipulated by the Secretary of State. In the long term, breaching this minimal level of reserve might save an authority money if the alternative is to take drastic action in the short term to meet it.

That is why reserves are a highly sensitive local issue, a point recognised by CIPFA in its evidence to the Select Committee on the Bill. I wonder how the Secretary of State will set the level of reserve and whether he will take into consideration and take responsibility for the effect on services that having to meet this requirement will mean.

Local people will find it very hard to understand why homes are being closed and services cut because the Secretary of State believes that the authority should keep a certain amount of money in the bank. I urge the Government to think again on this provision. Perhaps I may add that this is the part of the Bill about which I feel most strongly. It is an intrusion on local democracy. I regret very much that the Government feel that they need this power in the Bill. I hope they will think again.

6.45 p.m.

Baroness Hanham

I want to continue the comments made by my noble friend Lord Hanningfield. The suggestion under Clause 2 is that a minimum amount would be determined in accordance with regulation by the appropriate person, neither of which is defined in the Bill in Clauses 2 and 3.

As leader of a council I spent a disproportionate amount of time at any budget meeting defending the position of any reserves. My council was very prudent. It insisted on having at least three months' worth of salaries in reserve so that if a crisis arose it would have something on which to fall back. That was a political decision taken after advice from the then director of finance that that, in his view, was the minimum that should be in any reserve. But that might not be the view of any other director of finance—I am sure that the Minister is listening—who might have different ideas on what the level of reserve should be.

I agree with my noble friend Lord Hanningfield. This section undermines the authority of a local council to decide what it will do with its money and what it believes it requires to ensure prudence so that it will not fall into difficulties. It has been said that some of these provisions have come about because of the well-known and well-vaunted problems of some less than prudent councils. I accept that there have been a few and probably there will be a few more, but of all those of which we know setting a level of minimum reserve would have had not the slightest effect. They were well beyond any minimum reserve by the time they were in difficulties. It was not a problem associated with minimum reserves.

This is a tendentious clause. It is a matter about which local authorities need to make their own decisions. It is politically highly contentious as to what those levels of reserves should be. But, indeed, that is probably correct—that is what it should be—because what is in reserve is not being used for expenditure and all kinds of decisions have to be made as regards that. I support the comments of my noble friend Lord Hanningfield.

Baroness Hamwee

My name is also down to oppose the question that Clause 26 stand part. As I said on the first day of Committee, the only reason that my noble friend's name does not appear also is to leave the gap for number four.

When I first read Clause 26, I felt that it was a bit rich of the Government—

Lord Rooker

That is the problem. It is not rich.

Baroness Hamwee

It is a bit rich. I have experience of seeing organisations coming into the control of a new sphere of government in London. The Metropolitan Police and Transport for London were handed over by the Government without reserves. Frankly., their finances were in a state such that, particularly in the case of the Metropolitan Police, it was difficult even to understand what assets they had. They would accept that now. The state of finances of such bodies and their lack of reserves—presumably because they would just turn to the Government and say, "Can we hold out our hand and ask for a hit more as we need it from central government?"—was appalling.

This again is about central government not leaving local authorities to carry on their own affairs, subject to the decision of the electorate as periodically stated. The electorate is not concerned only about a minimum; it is sometimes concerned about a maximum, which is not dealt with in the Bill. The experience of administrations building up a war chest in order not to have to increase the council tax by much or at all—or even to be able to reduce it in election year—is certainly not unknown. That is not something which I have done, but I have observed it. It is perfectly right that it is a matter for the democratic process to state, "We are not funding this". I support the opposition to Clause 26 stand part.

Baroness Maddock

I, too, support the opposition to Clause 26 stand part. As with many other things, as Liberal Democrats we believe that it is up to the local electorate to make a judgment about how many aspects of local authorities are run. When my noble friend referred to a war chest I was reminded of the war chest that was left behind in Southampton by the Conservatives. The present Member of Parliament for Southampton Test, Dr Alan Whitehead, was able to put a lot of money into saving what was a bingo hall and is now the Mayflower Theatre. So, it was put to good use. That is the kind of thing which happened. We were able to spend money on other things, too, not just the theatre, because there were rather larger reserves than were needed. It is important that we consider not only the minimum but the maximum.

My question to the Minister concerns how this would play out if the Bill were enacted now. Let us consider what happened recently as regards money for education when instructions were given to dip into reserves. Some of those would have been in individual school budgets, some would not. I refer to capital reserves for repairing buildings which have been under-funded for quite a long period of time. However, the recommendation from the Government was, "Do not make teachers redundant; use that money". Could that have happened if this Bill had been on the statute book?

Lord Smith of Leigh

In reply to the noble Baroness, Lady Hamwee, my treasurer did his thesis upon the level of local tax rises in county councils and found, remarkably, that in an election year they were a lot lower than in other years. I am sure that that was entirely coincidental.

I rise to give a sincere warning to the Minister. Is this a power that the Government really want? I think it is a power that will be very difficult for them to exercise. The figures he quoted earlier and in his letter demonstrate that. They show not that the level of reserves was necessarily dangerously low in a large number of authorities but perhaps that there is a difference of opinion between local authorities and their auditors about what is an adequate level of reserves.

The question we should ask is in how many cases did that create problems in the following financial year for local authorities. Clearly, running down reserves to a ridiculous level could create serious problems—and no one is advocating that—but how do we define what the level of reserves should be? Is it a percentage of total spending? Does that cover schools' budgets? Schools also have their own reserves, which they keep. In a sense, if we do that we are double counting that particular amount of education spend.

Without stating that some authorities are more reckless than others, those of us who know local authorities could state that some are more careful about budget monitoring than others. So those authorities—the auditor would probably endorse this—could have a lower level of reserves because they have a very finely tuned system of monitoring the budget. If things started to get out of kilter they could rapidly bring them into line. Clearly that sophistication is probably not available to the Office of the Deputy Prime Minister to be able to understand that particular case.

In future Ministers may regret this clause. They may regret having to impose minimum reserves on local authorities and getting themselves into endless wrangles. In how many cases will this be a significant problem?

Lord Rooker

This is another clause which we sincerely hope we do not have to use. On the other hand, it is nonsense to say that the local electorate are in charge—we are talking of local governments which are elected once every three or four years—as though they can influence what happens with reserves on a yearly basis. That is nonsense. It is paying lip service to a mythical system of local democratic control by the electorate. I will not have that.

If there were annual elections and if local government raised 100 per cent of its money, then there would be real accountability, but it is not like that.

Lord Smith of Leigh

It is in metropolitan districts.

Baroness Maddock

In the authorities to which I referred it happens every year.

Lord Rooker

It is not like that all over the country. The metropolitan districts have a year off and I know what happens in that year off. So there are not debates every year, even where they have third elections.

As I said, we hope that we do not have to use this clause. No one who has spoken has made the point—perhaps because they do not agree with it—that guidance to local authorities on this subject of minimum levels of reserves has been available for many years from CIPFA.

I presume that that is irrelevant and it is up to the local authority to decide what its reserves should be. No one has said, "Oh, by the way, we have the Audit Commission, which was put there to do a job and is as independent from government and local government as possible. That gives the electorate, the population, a degree of comfort". Its recent report, to which I referred, states that 12 per cent of authorities have inadequate reserves, not low reserves, and that the proportion is the highest among the largest authorities. Twenty-one per cent of English county councils were assessed as having inadequate reserves, and 31 per cent, almost one-third, of the London boroughs. That is an unacceptably high level.

Lord Hanningfield

Perhaps—

Lord Rooker

I shall give way in a moment. Having got that information from the Audit Commission, if the Government then put through a local government Bill and did nothing about it, and did not take some reserve powers if things were to go wrong, the electorate would say, "You saw this coming. You were warned about it by the Audit Commission. You did nothing about it. We have this difficulty"—this situation might arise; we hope that it does not—"and you, the Government, did nothing about it. Yet you knew about it; you were told about it by the Audit Commission and you did nothing about it". We will not be in that position.

We want to have the power on the statute book so that it is there if needed. We hope that it is not, but we have to send a signal to local government that the auditors are there for a purpose. We should like CIPFA's guidance to be followed and it is not being followed. I cannot believe that I am more or less hearing—it is not being said but it is being implied—"Don't bother with CIPFA's guidance. Do what you want yourself". I shall give way to the noble Lord.

Lord Hanningfield

I am rather sad to hear the Minister make those comments. He does not really understand how local government works. I want to go back to the comments of the noble Lord, Lord Smith. I do not like quoting my own example, but we have a budget of £1.2 billion. We have reserves of only £15 million. Sometimes our auditors say we should have a bit more but we have £70 million of cash in the bank for road maintenance and building maintenance. If things do not go quite right, as has just been said, we review our budgets every month and we might use some of that cash for the reserves. So, although we have £15 million nominal reserves, we have £65 to £70 million. Our schools have £50 million in reserves. So, there is a lot of money in the system.

The nominal CIPFA reserves, our auditors' reserves, would be £15 million. The auditors come and see me and say, "You should have a nominally higher figure". I would rather put the money into schools. I do not believe in taking money from the council taxpayer and sitting on it in the bank. I believe in providing services. Although we have all this cash around, if there are problems we look at our budget every month. We have taken corrective action and used some of the building maintenance money to bolster reserves temporarily. We are professional people.

I was sad to hear the Minister make those comments just now because he clearly does not understand, in particular, large county councils and the way we professionally operate. When we saw this clause in the draft Bill I believe that it angered people more than the Minister understands. We are professionals. We have our members and our political element. We decide what we want to do. We are under tremendous pressures now to help schools. Therefore, we are dipping into reserves to do so. That is what local democracy is about.

I believe the Minister should consider this matter again. It is an offensive part of the legislation. By his comments the Minister shows that he does not really understand how local government operates. The auditors, CIPFA, have their code of conduct and so forth, but we know how much money we have and what we can do with it.

7 p.m.

Lord Rooker

I like the term "we noticed" the CIPFA code of conduct. We are expecting local government to operate to those professional codes. It was the very purpose of our first few debates. We want to operate to independent codes of advice. Local government must do more than notice CIPFA's codes. The provision was not a surprise to anybody. Let us not talk about the draft Bill; the proposal was in the White Paper. It did not appear from nowhere. It has been opposed all the time. But there has not been a substantial argument against it that has caused us to change our opinion, bearing in mind the report from the Audit Commission, which we cannot ignore. We do not want to use the power. We have included it in case authorities do not remedy the deficiencies set out in auditors' assessments, in which case action could be taken. We are working on the basis that the regulations would apply only to authorities that disregarded the advice of their chief financial officers.

That gives a long-stop measure to local government, not just the Audit Commission and the auditors. If the chief financial officer has told an authority that it is ready for serious trouble but it ignores the warning, action can be taken. I cannot conceive of a local council doing that. Just because we cannot conceive of it happening—with reasonable professional people, as the noble Lord said—does not mean that it will not happen. There have been financial difficulties with some authorities. I am not saying that the problems would be strictly analogous.

I do not wish to wind up the noble Lord, Lord Hanningfield, any further but I cannot accept that, when a little local problem arises, the authority should stop running the roads. Just because another difficulty has arisen, we should not knock out a service that people expect and that their council tax has paid for.

Lord Hanningfield

I did not say "knock out"; I said that you might reduce expenditure elsewhere if there was a problem. For example, if an authority were spending £50 million on road repairs, it might spend £48 million and put £2 million into reserve. That is why flexibility is built into our system. Authorities take the advice of their professional officers. That is why we do not need such a clause. We must trust local government more. I thought that part of the legislation was about freeing up local government and trusting it more.

Lord Rooker

So what is the problem? If the authority followed the advice of the chief financial officer we would not operate the clause. I do not see the problem. If, in certain circumstances, an authority ignores the advice of its chief financial officer—we shall not name authorities—bearing in mind what we know about the inadequacy of reserves, we are duty bound to do something about it. If an authority follows the advice of the chief financial officer, there is not a problem.

I could make a much longer speech, but obviously I have upset people. It is being put across that I do not understand how local government works, is it not? I speak here on behalf of the Minister for Local Government and the Regions. I know enough about how local government works, having spent 27 years in another place, to know about how treasurers and others manipulate accounts. I know how budgets get raided. Education budgets get raided, as do social services budgets for building grandiose projects. I have seen it happen and its effects on people. Nobody understands what is happening to start with because of the accounting method.

I am not saying that that approach is wrong or bad. But there is such an enormous amount of flexibility that things can go wrong. When the Audit Commission produces a report about the inadequacy of reserves, we can say that we are including the provision just as a long stop. If there were a problem, we would rather not have to rush through emergency legislation.

If an authority operates prudent financial management processes, and its chief financial officer says that it is doing OK, we will not operate the clause. I do not see the problem. There is no extra burden, nor any need for the Local Government Association or anyone else to be worried about the provision. It is a little sensitive that the Audit Commission has picked on an area and said that it thinks that the operating reserves are inadequate. They are on a big scale, given the London boroughs and the overall effect of English and Welsh local government. We must take some action in the form of this precautionary legislation. It is precautionary legislation; it is not intended to operate, save in the most exceptional circumstances.

We consulted local authorities as we said we would do in the White Paper. We would argue that different levels would be set for different authorities—we are not talking about the situation if that were ever the case. Relevant factors include the ability of larger authorities to spread risk more than smaller ones, as the noble Lord has said, and on which he gave an example. Some types of authority have services that carry high levels of financial risk.

The power in subsection (3) to specify which reserves would be subject to control would be used to exempt reserves that cannot be adjusted as part of the process of deciding the council tax. The examples would be school balances and housing revenue accounts. Immediately that gets rid of the argument about schools, as they would not be covered. The clause does not cover schools, so what is the problem? There is not a problem.

These red herrings are being raised simply because we are taking a precautionary approach. Local government feels "offended"—that was the word—that we have had the temerity to say that a problem has been identified that may affect a few authorities and that we need to include a clause in the Bill. We hope that the clause will not be necessary, but it is a safeguard against the risk that some authorities, in spite of all the statutory duties and professional guidance, continue to allow their reserves to fall to dangerously low levels. If the Government did not include the clause, they would be failing to fulfil their duties.

Baroness Hanham

We will clearly return to the matter on Report. There are no draft regulations on what minimum reserves should amount to. Everyone will have a different view on what the adequate minimum reserve should be. It would be extremely helpful if the Audit Commission indicated what it believed a minimum reserve should be—the proportion of any local authority budget—and the factors that it should take into account. Should it take into account, as the noble Lord, Lord Hanningfield, said, budgets for road works? All sorts of reserves are put aside for specific purposes? The draft regulations do not contain anything relating to this clause. It might help the Minister's blood pressure—I rather doubt it—if we could have an indication of what the regulation might amount to. If the regulation is not there, it will be a case of the Audit Commission's judgment against that of local authority members as to what the reserve should be.

Again, I think that the Minister's blood pressure was probably getting away on him, as people were not saying that all Members of Parliament are accountable to those who elect them. But, in the interim, between elections, they must act in their democratic role. We said that there was democratic accountability within local councils on the making of budgets and on decisions about reserves. The Government have made those functions more directly the responsibility of a directly elected councilor—one person is now responsible rather than the whole council, as was the case in the initial stages.

There are also restrictions whereby the full council could call in any budget about which it was concerned. The Audit Commission is dipping into only one small area. There are areas of financial concern that might be far greater than this. I am astonished that the Audit Commission has got itself stuck on this issue. We ought to know what it thinks it is talking about.

Lord Rooker

May I give another example? In the same Audit Commission report, it noted that councils had been slow to address risk management issues. Fewer than one in five councils had adopted a risk management policy, and only half of those had reported on risk management to their members. That must be a failure. The Audit Commission is doing a much more rounded job than simply looking at reserves. Action must be taken.

Baroness Hamwee

I was going to make the point about regulations that the noble Baroness just made. I was also going to ask whether we could hear more about the role of the chief finance officer. The Minister referred to that officer's position and gave his opinion. I plead for draft regulations, for the assistance not only of the Committee and in due course the House, but—as I said at our previous sitting—of those who will operate the system.

The noble Lord. Lord Bassam, agreed with me that we are just through the most recent budget-making process at local level, and therefore inevitably at the start of the next one. The point was made to me in the Greater London Authority—it could have been made in a local authority—that officers are very concerned that they do not know what rules they should work to for next year. As it happens, that could be a very considerable problem within the GLA, because it has not been possible over a short period to get the reserves of the functional bodies up to the level with which, frankly, we would all be comfortable. I entirely accept that there is a problem with at least two of the functional bodies.

On Monday, the noble Lord, Lord Bassam, was not able to give us any news. Can the Minister give us any assurances about when the further draft regulations will be available? They will not only help us at the next stage—indeed, when we debate the next clause—but assist those who will be affected in reality.

Lord Rooker

Reading the clause again and my own notes, I am not sure why draft regulations are expected on a clause that we do not want to operate. I have already referred to the fact that CIPFA guidance has been out for years. There is an Audit Commission report. What is the purpose of draft regulations when we clearly do not want to operate the clause? We are not planning to issue any.

The policy intent of Clause 26 is perfectly clear. There is no secret about that. There are no draft regulations, because it is a reserve power. We hope that we do not have to use it. It is not a question of central government once more spoon-feeding local government to tell it how to do its job—the job that it already ought to be doing. That clearly relates to what was identified by the Audit Commission.

We have not invented anything. The CIPFA guidance has been available for a considerable period. I am not quite clear why more regulations are required. I have already explained the circumstances in which we would operate the clause, probably quite inadequately, but I have done my best. I have no doubt that we shall come back to it on Report, but the message will not change. Going back even to the White Paper, our preference has been not to make use of the powers. However, we would not hesitate to do so if it emerged that authorities were failing to remedy deficiencies or were running, down reserves against the advice of their finance officers. That was in paragraph 10.19 of part 2.

The regulations would be made only if a minimum were imposed, but the intention would be to exclude reserves, and I have already said that the housing revenue accounts and school balances are not subject to adjustment. Subjects that have been raised, especially education, are red herrings, as they would not be affected.

Baroness Hamwee

Regulations may refer to a CIPFA code. If there are clauses in the Bill on which the Government do not intend to issue regulations, it would be helpful to have a list of them. I refer the Minister to Clause 27, which requires the chief finance officer to report to the authority if it appears to him. that a controlled reserve is or is likely to be inadequate".

For that purpose, a controlled reserve is a financial reserve of a description specified by regulations under section 26(3), and…a reserve is inadequate if the balance…at the end of the…year…is less than the minimum…determined in accordance with regulations under section 26(2)".

7.15 p.m.

Lord Rooker

I have referred to the policy guidance. I have not checked the box, but, at the beginning of Monday's sitting, I said that the draft regulations and draft CIPFA code were available in a box in the Library. My noble friend and I checked the box to make sure that they were there. I made the point of saying that they were contained in a box on the Bill. A free-standing note was deposited along with the draft regulations, the bids guidance and the other Bill material. The single-page note on Part 2, which deals with financial administration, relates to the power to make regulations under Clause 26. Clause 27 comes into effect only if Clause 26 regulations are made in the first place. They would be made only if we needed to operate the clause. We do not want to operate it, in which case Clause 27 will not operate anyway.

Baroness Hamwee

Obviously we need to think the matter through. Without asking to be spoon-fed, it was helpful to receive materials including copies of draft regulations during the Recess—even if there was only one set per party, as I think it was. Many of us do not spend the whole working day in this building. May I request that, in accordance with normal practice, Front-Bench Members are informed if items are put into the box? It is simply not practicable to check. I entered the building at 8 a.m. today to collect the Marshalled List before going on to City Hall for 8.20 a.m. I do not intend to whinge; it is just a fact of life.

Lord Hanningfield

I did not make clear initially the following point about what would happen if we were to have the reserve powers. At the beginning of the year, we take advice from our treasury officer in setting the budget and projecting the level of reserves expected at the end of the year. That is public knowledge and it is included in the budget. During the year, a letter from the auditors might say that the reserves should be higher. That would be a public document that all members of all parties would be able to debate. It seems odd, then, that the Government want to take retrospective action once the reserves have gone right down. That is akin to shutting the stable door once the horse is out. If the Government wanted to have such powers, they should make controls at the beginning of the year when they can see problems arising.

When the Government step in, the problem will have already arisen. That will cause chaos in the authority. Under the proposed system, the Government's power would not have stopped the problems that arose in Hackney and Walsall. That is the point that we have been trying to make. Therefore, the prudent authorities that try to manage themselves well and that take notice of the Audit Commission and other bodies must still make their own local judgments. The information is all there. It is the Hackneys that go dramatically wrong. The Government would be coming in afterwards. That is one of the problems of this whole area of legislation. I ask the Government to look both at the principle and their proposed approach. If we want to catch the Hackneys, they must come in at the beginning of the year, when the problems start. The legislation is inadequate even if it is going to he used.

Lord Rooker

That is the point that I made earlier. The action would not be retrospective. If the outcome of a year's budget decisions gave cause for concern, the Government would consider whether to make regulations that would apply to the following year's budget round. That would give time to consult the authorities on the minimum reserve to be set, in accordance with the undertakings in the White Paper, which I have already quoted. It would also allow regulations to be made in good time to be taken into account in authorities' budget-setting processes. The regulations would set out how the minimum for each authority was to be calculated. The method would be a matter for consultation at the time but it is likely to take the form of a prescribed percentage of the budgeted expenditure of the authority. Different percentages might be prescribed for different types and sizes of authority.

I have already said it, but I shall say it again for completeness: the minimum will apply to controlled reserves, which will be defined by the regulations made under Clause 26(3). The regulations will be made only if a minimum is imposed. The intention will he to exclude reserves that are not subject to adjustment as part of the setting for the authority's call on council tax. The examples that I gave are the housing revenue accounts and school balances.

In drafting a precautionary clause, we are now accused of doing so after the horse has bolted. In that sense, it makes it more important to draft it; at least it will have been done within a year. I do not know the details of the Walsalls and Hackneys, but they did not occur all in one year. The problems arose, and I know from being in the department the difficulty of sometimes taking action. As a Minister, one is very reluctant to take action against democratically elected local government. By and large, one would say, "No—they have been elected, so let them sort it out. They know what the rules are and what the law is". Sometimes that is not possible and we have to go to the wire.

Some local authorities are in extreme difficulty. Central government sometimes needs powers to send in commissioners, for example. It is highly contentious to ask people to go into an authority to overrule elected councillors and sort problems out. Of course we leave that until the problems have arisen. In a way, that is the difficulty. However, as soon as the problem is identified as serious, we have to be able to take action. We could not take it retrospectively—that would be wholly unfair—but we must be able to sort a problem out.

I shall ask my officials, but if anything else is in the box that is likely to be of note on the parts of the Bill on which there is division between us, I shall draw the attention of Members of the Committee to it, and if need be get them copies. The issue is important and, in some ways, the single sheet from which I have quoted probably should have been in the pack with the letter. It should been referred to at least, so I apologise.

Baroness Hamwee

I thank the Minister for that, and I do not intend to wind him up further.

Lord Rooker

I am perfectly all right; I know where I am coming from.

Baroness Hamwee

Me too. I need to be clear that, when the Minister refers to the regulations under Clause 26 that will be made only if there is a need for them, that applies both to the regulations under subsection (3) that define what a controlled reserve is and to those that deal with the minimum amount. We need to know what the controlled reserve is before the minimum amount is specified. I would like to understand whether it is intended to deal with all those in a compendium of regulations, or to define the controlled reserve beforehand so that one at least has a playing field.

Baroness Hanham

We have been discussing the whole of Part 2 as though it were a reserve power, and one that, if I understand what the Minister said, would be used in only the most exceptional circumstances. My reading of Part 2 is that it is a generalised part that does not apply only to a poorly run authority. It cannot do so, given its terms. It refers to Sections 32 and 43 of the Local Government Finance Act 1992. Section 32 deals with the, calculation by billing authority of budget requirement for financial year",

and Section 43 is the, corresponding provision for major precepting authority".

If Part 2 is a reserve power, it must be headed as a reserve power. If it is not—if it is a requirement for all local authorities, which it seems to be—we also need to be sure that we have access to what the proposed regulations will be.

Lord Rooker

What is the answer to that? It is an important question, and I cannot find the answer. Somewhere towards the end of the Bill, there will be a procedure to operate the clauses. We are debating Clause 26; I shall not go on to the others at the moment. We do not want to operate Clause 26. The Government would choose to operate it at a specific time. To that extent, it is reserved. There will be commencement orders and all kinds of stuff at the back of the Bill about when provisions come in and how the Government operate the clauses. If the clauses were not operated, the rules and regulations would not apply, and therefore we would not publish any regulations under Clause 26. It is our intention not to use the powers under Clause 26 and not to publish regulations. We hope to do it by consent. That is the general answer to the question asked by the noble Baroness.

Lord Hanningfield

We have had a long and somewhat lively discussion on this issue. Although we are having plenty of discussion, certainly there are good parts of this legislation which are welcomed by local government.

Lord Rooker

The noble Lord remembers that?

Lord Hanningfield

I remember that. I am trying to be nice now. I know that the Minister has good intentions on that. As he understands now from Members of the Committee, this is probably the most contentious part of the legislation. I am sure that we all want to free up local government so that it can do its job. It has a difficult time when it is told that it must give a certain amount of money to schools or that it must keep its council tax down. For local government to believe that another regulation is being proposed which will stipulate the level of reserves is a nightmare. That is why we are having this rather difficult discussion.

The Minister says that it is going to be a reserved power and I accept that. But local government is frightened that if this power is in the Bill, suddenly a Secretary of State will come along and say that local government has to keep 3 per cent of its money in reserves. I do not mean this Secretary of State, but local governments are frightened that a future Secretary of State or Government might implement this power, saying that it is sitting on cash rather than providing services.

That is why we should like the Government to think again on this issue. I am sure that the Government can obtain what they want to deal with the Hackneys and Walsalls. We all accept that perhaps commissioners have to go in and give assistance. In the local government world we have the IDA to try to self-help those types of organisations. I hope that the Government might think again on this issue. Obviously, we shall return to this matter at later stages in the Bill.

Clause 26 agreed to.

Lord Rooker

This might be a convenient moment for the Committee to adjourn until Tuesday 10th June at 3 p.m.

The Committee adjourned at half past seven o'clock.