Grand Committee Report of 2 June 2003

Official Report of the GrandCommittee on the

  Local Government Bill
  (First Sitting)
  The Committee met at half past three of the clock.
  [The Deputy Chairman of Committees (Lord Murton of Lindisfarne) in the Chair.]
  The Deputy Chairman of Committees (Lord Murton of Lindisfarne): Before I put the Question that the Title be postponed, it may be helpful to remind your Lordships of the procedure for today's Committee stage. 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 the Grand Committee. Any issue on which agreement cannot be reached should be 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 Unless, therefore, an amendment is likely to be agreed to, it should be withdrawn.
  I should explain what will happen if there is a Division in the Chamber while we are sitting. The Committee will adjourn as soon as the Division Bells are rung and will resume after 10 minutes.
  Title postponed.
  Clause 1 [Power to borrow]:
  Baroness Hamwee moved Amendment No. 1:
  Page l, line 9, leave out paragraph (b) and insert—
  "( ) subject to the provisions of this Act."
  The noble Baroness said: In moving Amendment No. 1, I shall speak also to Amendments Nos. 53 and 67. I should say at the outset that, generally, we welcome Part 1 of the Bill, which deals with the prudential borrowing regime, which is not, as the Official Report in another place described it at one point, the "prudential boring regime". I enjoyed that typo almost as much as one that I saw in a letter from CIPFA, which referred to an item "in elation to" the prudential indicator. Before we started, the Minister suggested that we should enthuse about the Bill, but I am not sure that I would go as far as elation. None the less, we support Part 1, and our amendments are generally directed at extending the new freedoms for local authorities, not at opposing them.
  Amendment No. 1 is a probing amendment. Paragraph (b) of Clause 1 provides that a local authority may borrow money,
  "for the purposes of the prudent management of its financial affairs".
  Those words must mean something, and it seems to me that it is unnecessary to spell out that the borrowing is for the management of a local authority's financial affairs. Anything else would be ultra vires. What is meant by the term "prudent"? In particular, what is meant by the term that is not dealt with by the detailed provisions of Part 1? If the word is a signpost to Clauses 2 to 4—Clause 2(2) suggests that that might be the case—why does not the Bill say so?
  When I started to read the Bill, I wondered about the protection of lenders. I came rapidly to Clause 6, which provides that lenders are not bound to inquire whether an authority has the power to borrow money. No doubt, that is to avoid cases similar to those in the 1980s that were so damaging for everyone involved. The clause protects lenders, but does it protect the borrowing authority, if its management is not prudent? I am not sure. If it does not, that could lead to all sorts of tangles. Is it about the council tax payer inspecting accounts and being able to say, as the opposition on a local authority might say, that the borrowing is not for prudent management? With my amendment, I seek to understand what the term imports. I have suggested alternative wording, allowing an authority to borrow money,
  "subject to the provisions of this Act".
  Partly, I hoped to pre-empt a suggestion from the Minister that I am being destructive.
  The later amendments in the group are similar and relate to the provisions for investment in Clause 12—to which Amendment No. 53 refers—and Schedule 1, which relates to parishes. It is precisely the same point. I beg to move.
  Baroness Hanham: In general, I welcome and support what the noble Baroness, Lady Hamwee, said. The Explanatory Notes become one's bible on such matters after a while, and I was interested to note that the power under Clause 1 is described as going further than the existing wide-ranging power and clarifies the fact that,
  "there is power to borrow for normal treasury management purposes".
  That covers paragraph (a) neatly, but, like the noble Baroness, Lady Hamwee, I remain, in a sense, mystified by paragraph (b). Does "prudent management" include borrowing to deal with debt that is already there? It is probably debatable that one would want to swap one for the other, when it is clear that any additional borrowing done under these provisions will be a direct cost to the council tax payer because there will be no government subsidy or support.
  In the light of what the noble Baroness said, I support her probing remarks to see what we can get from the Minister.
  Lord Dixon-Smith: I did not intervene at Second Reading, although I have some experience of finance

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  in local government. It was a long time ago, and it is possible that I am hopelessly out of date. The Minister will forgive me if I am.
  I too am fascinated by the wording of the paragraph:
  "the prudent management of its financial affairs".
  I know that the Bill is, in theory, about capital expenditure, but the prudent management of an authority's financial affairs describes a wider area than, I suspect, the Bill is directed at. Even in the management of an authority's capital affairs, it is not unusual for revenue expenditure to be applied directly to capital. Therefore, one can turn the question round and ask whether, in certain circumstances, it might not be legitimate to apply borrowed moneys to revenue affairs. That is the real sting in the tail.
  In national finances, there is nothing unusual about the power to borrow money to defray revenue expenditure. I do not know whether the power should go that far, and I am sure that the intention is that it should not. However, the wording of the clause implies that that might be a reasonable thing to do. The clause refers to the prudent management of the authority's financial affairs. That is different from the prudent management of the authority's capital financial affairs.
  I am a little concerned about the matter. I support the thrust of the Bill. I am all for giving authorities the maximum financial independence and freedom. The only way that my son learnt financial discipline was by being given complete freedom. He soon learnt to be discreet about what he did with his money. I am all for letting authorities get themselves deeply into the mire, if they are unwise enough to do so. It is the only way in which they will learn. I am all for it. However, I have a sneaking feeling that what I am describing and thinking about goes wider than the Government intended with the Bill, which deals here with capital finance and accounts. The phrase in the clause implies something far wider.
  The Minister of State, Office of the Deputy Prime Minister (Lord Rooker): I promised myself that I would enthuse so much about the Bill that I would stick ruthlessly to the groups of amendments. Considering the debates that are about to come up, it is clear that one could be repetitious, so I shall also stick to the notes that have been provided for me. I hope that I will be able to answer the questions from noble Lords and noble Baronesses.
  Amendment No. 1 relates to Clause 1, which deals with the power for local authorities to borrow. Paragraph (a) simply preserves the existing wide-ranging power for an authority to borrow for any purpose relevant to its statutory functions. Paragraph (b) is new, and the amendment would replace it.
  Under the current legislation, introduced in 1990, there have been technical doubts about the lawfulness of borrowing to repay existing debt. The aim of paragraph (b) is mainly to deal with that concern. The refinancing of debt is a widespread practice and has
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  full government approval. A large part of the money lent by the Public Works Loan Board to local authorities is for that purpose. It gives local authorities flexibility over the timing of loan repayments and often makes it possible to negotiate more favourable interest rates. Something similar is done by many members of the public with mortgages on their homes. They often find that they can replace an existing mortgage loan with a new one on more favourable terms.
  The present law does not, however, confer an explicit power on local authorities to borrow for such a purpose, although it is generally assumed that an implicit power exists. To clarify the matter, paragraph (b) of Clause 1 gives authorities power to borrow for the prudent management of their financial affairs. That will empower them to borrow to repay existing debts, provided that they are satisfied that it is prudent to do so.
  The removal of the existing words in Clause 1(b) would allow the uncertainty about refinancing to remain. That is why the provision is there in the first place. The words offered as a replacement are superfluous. There is no need to say that authorities will have power to borrow subject to the provisions of the Act, as that is already the overall effect of Part 1.
  Amendment No. 67 relates to the similarly worded borrowing power for parish councils in paragraph 2(1) of Schedule 1. The amendment proposes the same change as Amendment No. 1, and the objections to it are identical.
  Amendment No. 53 make an analogous change to Clause 12, by replacing the words in paragraph (b). The clause concerns local authority investment powers. It remedies a deficiency in the present legislation, which does not give authorities an explicit power to invest. Since 1990, authorities have had no choice but to assume that there is an implicit investment power. Understandably, they have often called for clarification. Clause 12 therefore confers such a power. It is in very broad terms, and the wording deliberately mirrors that of the equally wide borrowing power in Clause 1.
  The basic power in Clause 12(a) is to invest for any purpose relevant to the authority's functions. However, investment activity cannot easily be linked to a specific function. It is unusual for an authority to have an investment account earmarked for an identifiable kind of expenditure. In Clause 12(b), power is conferred on an authority to invest for the purposes of the prudent management of its financial affairs. That allows authorities to invest simply because they have temporarily surplus cash and must keep it safe until it is needed for spending.
  The proposed amendment to Clause 12(b) would allow the uncertainty about investment to remain. The words offered as a replacement for those in the Bill would not address the long-standing concerns and would add little, if anything, to what is already covered in Clause 12(a).

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  I have stuck to the purpose of this set of amendments, without going into the other areas that we will come to. I hope that, with those reassurances, the noble Baroness will withdraw the amendment. The noble Lord, Lord Dixon-Smith seemed to imply that he would like local authorities to get into the mire, as that would teach them a lesson. When that happens, it is the citizens who pay the cost. We do not want local authorities to get into the mire; we want them to be as active and independent as possible, within the big picture. We cannot encourage them to get into the mire, for it is the council tax payer who suffers at the end of the day.
  I hope that there will be a set of powers in the Bill that will give greater powers to local government. There is a consensus across all parties in the House, in another place and in local government generally that the powers are a good replacement for the existing setup. People will obviously want to broaden and deepen them here and there but, by and large, it is a good package for local government. It is designed to keep them out of the mire, not get them in it.
  3.45 p.m.
  Lord Dixon-Smith: I hope the noble Baroness, Lady Hamwee, will forgive me if I say that although I accept the Bill's intentions, I have found that if we want people to behave responsibly, we have to treat them as if they are responsible, not as if they need limits and have to be tied down.
  The point that the Minister has not answered is perhaps more significant, regarding whether the prudent management of an authority's financial affairs permits the borrowing of money for revenue use. That was the point at which I was aiming my remarks. I would be delighted to hear that that was so, but I suspect, because of the Bill's title, that it is not.
  Lord Rooker: It may not be, but I can assure the noble Lord that what local authorities do with their money in terms of revenue and capital will form a considerable part of some of our later debates. We can go into that in some depth at the appropriate time.
  Lord Dixon-Smith: I hear what has been said but I wonder if, when all that is over, the noble Lord might be prepared to concede that he might need to think a little more carefully about that particular phrase at this particular stage of this particular Bill.
  Baroness Hamwee: I agree with the noble Lord, Lord Dixon-Smith, on his comments about local authorities but I might not apply the analogy of teaching his son a lesson. I do not want to take up the Committee's time in investigating the affairs of the Dixon-Smith family.
  I confess to remaining a little troubled by this. Perhaps we can pursue it after the Committee stage. The Minister says that the present law does not confer an explicit power with regard to both borrowing and investment but that it is accepted that there is an implicit power. It would be wise to consider whether any wording might be inserted to make it clear that the
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  power is not new. Might the legislation otherwise not open up the possibility of challenges regarding previous accounts which have not been closed for local authorities? I have already mentioned the difficulties that can be caused, sometimes rightly, by a council tax payer inspecting accounts and raising matters with the district auditor. If this is not a new power, it would be comforting to say so.
  The Minister also said that an authority could borrow provided that it regards the borrowing as prudent. That is not quite verbatim, but I think it was his thrust. I agree that the local authority should judge whether its borrowing or its investment is prudent, but the clause suggests an objective rather than a subjective test, which could contain the seeds of later difficulties.
  I appreciate that I am being particularly technical, and that is a pity because one would rather start a Bill on a political note. We will be political later, no doubt. Having made those remarks, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Clause 1 agreed to.
  Clause 2 [Control of borrowing]:
  Baroness Hanhammoved Amendment No. 2:
  Page 1, line 16, leave out "direction" and insert "order"
  The noble Baroness said: In speaking to Amendment No. 2, I am also speaking to Amendments Nos. 23 and 69. They all more or less follow the same line. As the noble Baroness, Lady Hamwee, said, we welcome the possibility of greater freedom and flexibility. I am bound to say, having read the Bill clause by clause, that I am not quite sure where that freedom and flexibility will come from. However, we may manage to unpick it as we go.
  Amendment No. 2 would replace the Secretary of State's ability to specify an individual local authority's borrowing limit by direction with a requirement to do that by order, thereby making any borrowing limit decided by the Secretary of State subject to parliamentary scrutiny.
  We believe that it is reasonable to expect this sort of examination. After all, the additional powers this provision brings the Secretary of State go against the general principle of giving more freedom to local councils. We understand that if the Government were expecting to specify a number of individual limits, the process could become cumbersome and impractical. But since this is a reserve power only—it is suggested that it is used in exceptional circumstances, if something has gone wrong at a local authority—we believe that such an exception is so important that the Secretary of State should spell out his reasons justifying limiting a council's borrowing, and he must do that before Parliament.
  Amendment No. 23 continues this theme. It is to find out what is meant in page 3, line 4, by "direction". It is mentioned a lot in the Bill, and it would he helpful, at this early stage, if the Minister could identify what is meant by "direction". Or are we misreading this? Is

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  it intended that a direction would be laid before Parliament like regulations, or is it just a diktat to the local council in question?
  Amendment No. 69 is, we believe, of fundamental importance. Chapter 1 deals with capital finance, making provision for borrowing credit arrangements, the use of capital receipts, investments and accounting practices to be followed by local authorities. It introduces a considerable number of changes to the current system, several of which involve directions from the Secretary of State.
  If the Secretary of State is able to direct a local authority in these matters, it would appear to be a considerable usurpation of local authority power, bearing in mind that the Bill is meant to be about freedom and flexibility. We believe that local authorities know better than central Government how to manage their own financial arrangements. We are therefore not comfortable with these new powers and believe that it would be preferable for all directions made under this chapter, and in others that we shall come to later, to be in the form of regulation and therefore subject to parliamentary scrutiny. I beg to move.
  Baroness Hamwee: We share the noble Baroness's concern. It is sad, so early in the Bill, that what is given with one hand is subject to being taken away with the other. Clarity about how that taking away might happen would at least leave us knowing what the procedure would be and give us a little more certainty.
  Lord Rooker: I will do my best to answer. I am reminded of the comments of the noble Baroness, Lady Hamwee, on the last group of amendments, that she wanted to be political. I know it is unfair, but could she announce when she is being political, so that we know? We always have trouble with the Liberal Democrats in this respect.
  Baroness Hamwee: For my own self-respect, I have to say that I am always political.
  Lord Rooker: We have already had one major announcement of a change of policy from the noble Baroness, Lady Hanham, about letting local authorities do anything they want and keeping the big hand of Government off them. That is certainly a major change from what I experienced in 18 years of opposition in another place. Anyway, I digress and am falling foul of my cardinal rule—I will stick to replying to the amendments.
  Amendment No. 2 relates to Clause 2(2). It is not a question of giving powers with one hand and taking them away with the other, and I hope to be able to explain that. This is a power under which the Secretary of State could allow an individual authority to breach its national borrowing limit. The national limit would be intended to apply to all authorities, but-we could occasionally need to offer emergency assistance to an individual authority. We can do something like this
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  under the present system by issuing a supplementary credit approval to an individual authority, thereby allowing it to undertake extra borrowing.
  Only in the most exceptional circumstances would it be right to allow an individual authority to breach its national limit. The criteria would be similar to those we apply at present before issuing supplementary credit approvals. We would need to be satisfied, for example, that the authority's difficulties were such as to threaten the delivery of essential services. And any extra borrowing capacity we allowed would still have to be within the authority's own local prudential limit, since the Bill gives us no power to allow a breach of that limit set under Clause 3(1).
  Clause 2(2) would allow us to exercise this power by issuing a direction—in other words, by sending a letter to the authority, which is what we do when we issue a supplementary credit approval under the present rules. That would allow us to respond quickly to a case of real need. We could also easily attach any necessary conditions to the direction and tailor these to the precise circumstances of the case. However, the amendment would require us to lay an order before Parliament instead. That procedure would be much less flexible and could involve quite unacceptable delays. It is not an appropriate means of dealing, in a sensitive way, with a particular authority's emergency needs.
  Amendment No. 23 would retain Clause 4(2), under which a local borrowing limit could be set, but require the power to be exercised by regulations rather than by direction. The use of directions is a simple administrative procedure which allows a quick and sensitive response to local circumstances. Making regulations, which would normally take many weeks, is less flexible.
  In response to concerns expressed by local government, we have made it clear on the face of the Bill that this power may be used only to stop an authority borrowing more than it can afford. But if the power needed to be exercised against an authority deliberately flouting the prudential code, rapid action could be important. The amendment would therefore lead to delay in a situation where action might need to carried out in days.
  The power in Clause 4(2) was among those considered by the Delegated Powers and Regulatory Reform Committee. In its 16th Report, of 2nd April, the Committee reported on this Bill and did not recommend any change in relation to this provision.
  Amendment No. 69 covers some of the same ground. It relates to Clause 20, which deals with all the powers in Part 1 of the Bill to issue directions. The amendment would prevent the use of that flexible procedure and require regulations to be made instead.
  There are three powers of direction in Part 1. The first is the power in Clause 2(2) to waive the national borrowing limit, which I have just discussed in relation to Amendment No. 2. Secondly, under Clause 4(2), the Secretary of State could impose a local borrowing limit on an authority by direction. Finally, under Clause

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  16(2)(b), a direction could be used to allow items of an authority's revenue expenditure to be treated as capital expenditure.
  These powers are essential to the Bill. As I have explained, they enable action to be taken quickly and sensitively in particular cases. However, the amendment would, in effect, remove that option and require regulations to be made instead. As I said, that could lead to quite unacceptable delays and reduce the flexibility for the Government and local authorities.
  Several precedents have been set for the use of directions in the present capital finance system introduced in 1990 by the previous administration. I hope that, with these assurances which I hope are those sought by the noble Baroness, she will withdraw her amendment.
  4 p.m.
  Baroness Hanham: I thank the Minister for that explanation. While none of us seeks to be political at this early stage in our proceedings, I too have been a leader of a council and I know what government interference, of whichever complexion, can do. From that neutral point, perhaps I may take the opportunity to declare my interest as a current member of a local authority. Perhaps that will cover it for the duration of the Committee stage and I shall not need to bore everyone by repeating it.
  If I am correct in my interpretation, the Minister has explained that this would be used only in an emergency and that direction would have to be introduced because of that emergency situation. I further understand that it would be introduced because a local authority had either overextended itself or was in danger of doing so. The Minister is nodding his head to say that that is correct.
  I shall read with care the Minister's comments on the amendment, and for the moment I shall withdraw it. While I do not promise not to return to the matter, I believe that his remarks have given us the necessary clarification.
  Amendment, by leave, withdrawn.
  Baroness Hanhammoved Amendment No. 3:
  Page 2, line 1, leave out ", without the consent of the Treasury,"
  The noble Baroness said: The purpose of this amendment is to probe the circumstances under which the Treasury would give consent for a local authority to borrow other than in sterling, whether that consent would be general or would apply to a particular authority, and how it would be exercised. The Explanatory Notes, which serve as my bible here, make it clear that the Treasury could give approval for borrowing in currencies other than sterling, but I want to probe into exactly what that would mean.
  Under what circumstances would the Government think it prudent and right for local authorities to borrow in other currencies? Can the Minister envisage a reason for doing so, and could he cite some examples of where other currencies might be used? Do the Government envisage allowing an adventurous authority to borrow, as an experiment, Japanese yen to
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  take advantage of lower interest rates or would the power be exercised only as part of a general authority to borrow?
  Can the Minister give examples of past borrowing in other currencies and how successful that was? What was it in the past that led Ministers possibly to include this power, by the exception that the Treasury might approve it? In the light of what we have been discussing, I hesitate to ask whether there would be parliamentary control over the general lifting of a ban on borrowing in any currency? Does the Chancellor envisage allowing it simply by direction, or would the permission be granted only by regulation? Would such an order be subject to parliamentary scrutiny?
  Can the Minister give an explicit assurance that this power is not intended and would not be used under any circumstances to enable a general power to borrow in euros, as part of a back-door policy—
  Noble Lords: Oh!
  Baroness Hanham: I knew that noble Lords were waiting and poised for me to refer to the euro. I did not want to disappoint Members of the Committee. So the "euro" word has slipped in. We want to know whether the power could be used as a back-door transfer to the wider use of the euro in the economy. Such a major decision could be taken only in the context of general legislation on currency change. However, it is clear from what is proposed that it is expected that at some point borrowing could take place in other currencies. Without being too humorous about it, the euro area would be a logical choice and therefore I should like the Minister to explain further what this proposal would empower the Government to enable local authorities to do. I beg to move.
  Lord Dixon-Smith: I support this voyage of exploration. Investing in international currencies is quite a dodgy business, but of course investing in a currency is different from borrowing for revenue purposes. It would not be unreasonable to suppose that, if the power to constrain borrowing abroad was not in place at the Treasury, local authorities could at present borrow more cheaply if they were permitted to borrow in Europe, which might produce an interesting side-effect.
  An even more interesting side-effect is that, at present, sterling is relatively weak against the euro. If sterling were to appreciate over the duration of the debt, not only would an authority benefit from the lower interest rate, it would be able to repay a considerably lower sum when the debt finally fell due. So I do think that it is worth exploring this. However, I should like the Minister to go into the details of investment in foreign currencies.
  Every local authority has a large pension fund. It is not unknown for them to spread their investments across equities, gilts, property and foreign currencies. I had some painful experience of that with certain investment advisers and I would be wary of it.

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  However, the question I want the Minister to answer is whether this proposal would affect that position. I seek a reassurance that it will not do so.
  Lord Rooker: I can answer the final question put to me by the noble Lord, Lord Dixon-Smith, without advice. The answer is that no, it would not, because the Bill refers to local authorities borrowing "otherwise than in sterling". I see no connection between that and pension funds.
  It is my first time in the Moses Room, but I know that when the noble Lords, Lord Stoddart of Swindon and Lord Pearson of Rannoch, find out that we are debating the euro, there is going to be trouble. I can reassure noble Lords on this point because, first, this clause simply carries forward a provision already in place under the present legislation. The Treasury's power of consent has never been used, and therefore no examples can be given. However, I can say in response to the noble Baroness that if the UK ever adopted the euro, primary legislation would be needed to deal with statutory references. It would be a monumental piece of legislation.
  Borrowing in a foreign currency involves exchange rate risks as adverse movements in rates could result in a local authority owing more than it had borrowed. We would be reluctant to allow an authority to expose itself to such a risk. However, as local authorities increase their dealings with contractors and partners outside the UK, it is conceivable that in certain special circumstances an authority might make a case for such consent. Given that, it is worth preserving the flexibility. However, I stress that it would be most exceptional.
  The Treasury has never used this power so there are no examples to cite. I know of no applications in the pipeline. With that reply, I hope that the amendment can be withdrawn.
  Baroness Hanham: I thank the Minister for that reply. I wish to say only that quite often adverse risks are associated with investing in this currency, let alone investing in currencies elsewhere. Unless they are cautious, which I am sure they would be, local authorities could trip over their own feet even with sterling, let alone with currencies elsewhere. I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Clause 2 agreed to.
  Clause 3 [Duty to determine affordable borrowing limit]:
  Baroness Hanhammoved Amendment No. 4:
  Page 2. line 6. leave out "keep under"
  The noble Baroness said: In moving Amendment No. 4, I shall speak also to Amendments Nos. 5, 6 and 7 because they all address the same matter. The purpose of these two sets of amendments, the first of which applies to local authorities and the second to the Mayor of London and his functional bodies, is to explore what the Government mean by "keeping under review" the level of affordable borrowing. Will
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  the Minister spell out what kind of regime he envisages a local authority should follow and how much he expects it to do to show to the department that it had complied with this function?s
  All prudent authorities already review their finances and borrowing on an ongoing basis. In most local authorities that is underpinned by quarterly monitoring. Certainly every authority should undertake such a review at least annually, which is sought in Amendments Nos. 5 and 7. It is important, first, to get to the root of what is the expectation of "keeping under review" and then to ensure that such a review has some teeth.
  This also applies to the Mayor of London and the second group of amendments would have the same effect on what is suggested that he should do and how to keep it under review. I beg to move.
  Baroness Hamwee: I wish to put a short question. While I accept that the amendments tabled by the noble Baroness may be probing, are not authorities required to conduct an annual review as part of the annual budget-setting process? That must be the case, whether or not one states it.
  Lord Bassam of Brighton: Clause 3 is central to the prudential borrowing system. Local authorities are to be free to borrow whatever is prudent, in other words, whatever they can realistically afford. Clause 3(1) therefore requires authorities to determine and keep under review how much money they can afford to borrow. Clause 3(2) makes a similar provision in relation to the Greater London Authority and its functional bodies. I am sure that the noble Baroness is well apprised of that.
  Amendments Nos. 4 and 5 to Clause 3(1) would specify that the authority must determine and review its own borrowing limit at least annually. We agree that it is important that these processes are undertaken at least once a year, but there is no need to say that in the Bill. Clause 3(5) provides a power to make regulations about the procedures for setting and reviewing the borrowing limit, and Clause 3(6)(a)(i) makes it clear that such regulations may cover the timing of those decisions. So if we thought it necessary to include this timing issue in legislation, we could deal with it by way of regulation.
  However, the alternative option is to cover all such procedural details in a code of practice, and that is the course we favour. Clause 3(7) provides that regulations may specify codes of practice to which local authorities are to have regard when setting their affordable borrowing limits. We have made it clear from the outset that we intend to specify the prudential code that is being specially prepared by CIPFA, the Chartered Institute of Public Finance and Accountancy.
  The latest draft of the CIPFA prudential code has been placed in the Library of the House together with a draft of the regulations that refer to it. The code makes it perfectly clear that the borrowing limit is to be determined each year as part of the annual budgeting process and then to be kept under continuous review.

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  Dealing with such matters as timing in the code will allow greater flexibility and, in our view, much less legalistic framework and language. However, authorities will still be subject to a clear statutory duty to have regard to that code.
  In the case of the Greater London Authority and its functional bodies, Clause 3(2) provides that the affordable borrowing limit is to be set and kept under review by the Mayor of London. Amendments Nos. 6 and 7 would oblige the Mayor to undertake those procedures at least annually. However, the CIPFA prudential code already embodies such a requirement and the Mayor, like local authorities, will be under a statutory duty to have regard to that code. If the noble Baroness, Lady Hamwee, is in the GLA, her political edge will ensure that it is kept much more up to speed and regularly reviewed.
  4.15 p.m.
  Baroness Hanham: My only comment last time was, "Don't count on it". The noble Baroness, Lady Hamwee, keeps a very tight notch on things. However, I am not sure that she always wins, although she might like to.
  The amendment would have been less necessary if we had seen the draft regulations and the code of practice. I am mindful of the fact that they were sent to me while I was on holiday, so they were a bit late for catching up with as the amendment had already been drafted. I am prepared to accept the explanation. I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  [Amendments Nos. 5 to 7 not moved.]
  Baroness Hanhammoved Amendment No. 8:
  Page 2, line 14, at end insert "of which at least two-thirds of the members must approve his determination as to the maximum borrowing level affordable in each financial year"
  The noble Baroness said: Amendments Nos. 8 and 10 aim give the Greater London Assembly and its functional bodies a lock on the exercise of the Mayor's powers to set his own borrowing limits. Part 1 of the Bill gives the Mayor of London power to set limits for borrowing only after consulting the London Assembly and the functional bodies. There is no provision that requires him to heed the Assembly's views or any power for it to make him do so.
  The amendments give the Greater London Assembly and the Members of the functional bodies power to veto a high limit of borrowing being determined by the Mayor. I ask: what, in the Mayor's career so far, gives the Government the idea that he alone should have the power and the common sense to set appropriate borrowing limits? The GLA precept has already risen by 29.6 per cent this year and by other sums in previous years. Most boroughs would probably say that they would be very nervous about the borrowing being able to be increased without the Assembly having a role in it.
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  Amendment No. 10 proposes that at least two thirds of the Members of the Assembly must approve the Mayor's,
  "determination as to the maximum borrowing level affordable in each financial year".
  The Mayor already needs a two thirds' approval by the Assembly for his GLA budget proposal. There is no doubt that any increase in borrowing would have an impact on the revenue implications of the Mayor's budget. By definition, that would then have an impact on the London boroughs. Therefore, we think that this is a sensible lock to put on the Mayor. The London Assembly could well take on this requirement to not only consider the matter, but to vote in favour of it by a considerable majority. I think that the boroughs would regard the tension that would put on the Mayor as welcome. I beg to move.
  Baroness Hamwee: I decided that this would be the point at which to declare an interest as a Member of the London Assembly, but that has already been done for me by the noble Lord, Lord Bassam. I should say that I am currently also chair of the Assembly and chair of the Budget Committee. Could I first—
  Lord Bassam of Brighton: Leave it with the Government.
  Baroness Hamwee: Unfortunately, the Greater London Authority Act did not give as extensive powers to the Assembly or indeed to the Budget Committee as I might have liked.
  Perhaps I may plead with the noble Baroness, Lady Hanham. Mr Livingstone will not always be the Mayor; please do not encourage him by talking as if he might be. I am sure that the noble Baroness takes the same view even if our conclusions as to the outcome might be different.
  As to Amendment No. 8, the Mayor's annual budget can indeed by blocked by two thirds of the Membership of the Assembly, but only if there is agreement by two thirds on an alternative revenue budget. I do not say that I support that, but that is how it is. I am not sure how the amendment of the noble Baroness fits in with it.
  Of course the issue of how much the GLA "can afford to borrow" will be considered as part of that process because that is a part of the revenue budget. As regards capital, as distinct from the implications of the borrowing, the Assembly is consulted on the capital budget. After three years, I have learned that consultation can be all well and good but you say what you have to say and maybe that is an end of it; it does not necessarily affect the outcome.
  On Amendment No. 10, I am concerned about muddying the role of the functional bodies. The budget of the GLA, including that of the four functional bodies, is the Mayor's budget. It is not the budget of the different functional bodies. I would have liked to have seen some of the functional bodies taking a bigger part in the consideration of the budget put forward by the current Mayor over the past three years—in particular, Transport for London. However,

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  I am not sure that that is consistent with the role of the functional bodies. It is tempting to use the Bill to go down the road of suggesting substantial amendments to the established regime. I shall try not to do that and simply confine myself to those remarks. Although, as I say, I should like some of the functional bodies to take a more energetic role in regard to their own budgets than they have done up to now.
  Lord Dixon-Smith: I was very interested to hear what the noble Baroness, Lady Hamwee, had to say. Of course when the GLA was set up we debated together against the Government about the arrangements that were finally set up.
  I have a great deal of sympathy with what both noble Baronesses have said. It is a dangerous thing to do to stand between two ladies. However, we need to remember that the Mayor is in a unique position. Whether or not we agree that it is the appropriate position is neither here nor there. The Mayor will not always be Mr Livingstone. I am grateful for that reminder. I draw Members' attention to Clause 3(8). It states:
  "A local authority's function under subsection (1) shall be discharged only by the authority".
  That implies that such authority must be taken by the council and the Members quite openly and that it can never be delegated. We need to remember in respect of the Mayor of London that he is the authority. I can imagine his having some fairly ferocious debates with himself from time to time, but I do not see how he possibly manages to divide, and even if he does, he will always win the Division.
  Lord Bassam of Brighton: The digression into London GLA politics is interesting, but we ought to try to focus on the mechanics of this because they are not just there for the GLA, they are there for all local authorities.
  The regime we seek to establish is to enable local authorities to be able to borrow whatever is prudent; in other words, what they can afford. Clause 3(1) requires the authorities to determine and keep under review how much money they can afford to borrow. Clause 3(2) makes a similar provision for the GLA and its functional bodies.
  Amendment No. 8 relates to Clause 3(3), which requires the Mayor to consult the London Assembly before setting the prudential borrowing limit for the Greater London Authority or one of its functional bodies. It would require the limit to be approved by at least two thirds of the Assembly Members. We understand that.
  It might be helpful if I set out and explain the policy behind the arrangements in Clause 3 relating to the GLA bodies. In the case of all other authorities, the intention is that the setting of the borrowing limit should always be undertaken by the full council, rather than being delegated to officers. That is an important safeguard, which is implemented by Clause 3(8).
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  In the case of the Greater London Authority and its functional bodies, we again believe that the setting of the borrowing limit should not be delegated to officers. However, for the GLA group of authorities, the term "full council" has no application. To achieve the equivalent result, the Bill provides special arrangements to reflect the current responsibilities for budget setting and, as noble Lords have given good voice to, the central role—the key importance—of the Mayor of London.
  The affordable borrowing limit is to be set by the Mayor, both for the GLA itself and for each of the four functional bodies—Transport for London; the Metropolitan Police Authority; the London Fire and Emergency Planning Authority; and the London Development Agency. Before doing so, the Mayor must consult the London Assembly. Also, in the case of the limit for a functional body, the Mayor must consult that body itself. So that point is established. Clause 3(9) makes it clear that the Mayor's normal wide powers of delegation are curtailed in this context.
  The amendments to Clause 3(3) seek to elaborate on those requirements. The reference to the two thirds majority is no doubt meant to reflect the veto arrangements which the Assembly already has over the GLA budget. But, in practice, the prudential borrowing limits will have to be considered as part of the annual budgetary process and the Assembly's normal scrutiny and intervention powers will of course apply in those circumstances. The statutory consultation with the Assembly is sufficient to ensure long-term precept issues are fully exposed to democratic debate; and the Assembly has adequate teeth, through its ability to override the Mayor on the annual precept, subject to the two thirds majority.
  Furthermore, as it stands, Amendment No. 8 presents a potentially serious problem. If the Assembly were unable to reach a two thirds majority on the Mayor's proposals, the GLA and the functional bodies would have no borrowing limit set and so would not be able to borrow at all. That would be unacceptable. Being answerable to the electorate for the GLA's budget and precept through the ballot box is in our view a very important part of this process.
  Amendment No. 10 relates to Clause 3(4), which requires the Mayor of London, when setting the borrowing limit for the GLA functional bodies, to consult those bodies. It would require two thirds of the board members of each body to approve the borrowing limit. The amendment seems to be based on the assumption that responsibility for considering the precept is a matter for the functional bodies themselves. In fact, it is for the democratically elected Mayor and the Assembly to consider the impact on the precept on London taxpayers and to justify their decisions directly to the electorate. The arrangements proposed in the Bill are sufficient to ensure that the effects of the borrowing limit are properly considered in the normal budgetary process.
  The boards of the functional bodies, which are not elected, do not have a formal role in setting the precept and should not be expected to concern themselves with

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  precept and taxation issues. The amendment would give them such a role and for that reason we believe it to be inappropriate.
  I hope, with that understanding explanation, that the noble Baroness will feel confident to withdraw her amendment.
  4.30 p.m.
  Baroness Hanham: I suppose that if I had greater confidence in the Greater London Assembly I might not be making these proposals. We have to understand that borrowing by the Greater London Assembly is going to be a major issue; it impacts not only on the authority itself but more specifically on the London boroughs. Moreover, any borrowing that it undertakes is not likely to be of a minimalist nature but is likely to be fairly substantial. It therefore seems fundamental that proposals for borrowing of whatever extent should be part of a policy initiative. Such proposals should not simply drop out of the sky, but they could do so. In the middle of a financial year the Mayor might suddenly decide that he had yet another wonderful wheeze that he wished to implement and would require borrowing. He may therefore wish to borrow outside the agreements already reached in the annual budget.
  The mayoral authority is at a quite different level from every other local authority. As we were reminded throughout our consideration of the Regional Assemblies Bill, the GLA is not a local authority. It must therefore be right that members of the functional bodies should have a significant role in policy and in considering the reasons for which money is sought. They should be able to decide whether to approve that policy. Equally it must be right that the Greater London Assembly has a view on the purposes for which borrowing is sought and that it should agree that borrowing.
  I hear what is being said—that the budget itself must be agreed by two thirds of the Assembly. However, I foresee cases in which the Mayor may wish in the middle of a financial year to borrow for some scheme or other which was not dealt with at the annual review. In such circumstances it is essential that a proper majority is in favour of the proposal. Not only should a majority of the democratically elected members of the specific authority approve the proposal, the proposal should also be approved in the functional bodies by more than a simple majority of those interested in the particular policy. It should be approved by many more people than simply the Mayor himself.
  Therefore, although I heard what has been said and I listened carefully to the beseeching voice of the noble Baroness, Lady Hamwee, for now I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Baroness Hanhammoved Amendment No. 9:
  Page 2, line 14, at end insert—
  "( ) In deciding under subsection (3) whether a determination by the Mayor represents an affordable level of borrowing, the London Assembly must have regard to the likely effect of borrowing to that level on the precept levied by the Greater London Authority on each of the London Boroughs."
  The noble Baroness said: This group of amendments also deals with the Mayor of London. The amendments seek to ensure that in deciding whether the Mayor is setting sensible and affordable borrowing limits for the Greater London Authority and the functional bodies, the members of the Assembly and the functional bodies must take into account the likely effect of the proposed borrowing limits on the level of the precepts to he levied on London boroughs. Current experience shows that the boroughs are the cats that are kicked whenever the Mayor decides to go for higher expenditure on a policy and wants a bit more money.
  The boroughs need a fair deal from the Mayor, but they currently do not believe that that is happening. The precept has increased every year by about one third. It is increasing remorselessly and despite all the efforts of the Assembly members to bring it under control. I think it fair to say that they are not always successful in bringing the extra figures down to what the boroughs believe to be a reasonable level. Therefore, apart from requiring a two-thirds majority in relation to borrowing, the amendments would require that consideration be given to the impact of the borrowing on the levy and precept on local authorities. That would at the very least prevent anything happening without the knowledge of the Assembly. It would also impose a test of transparency and a duty of care. In our view that is a sensible safeguard. I beg to move.
  Baroness Hamwee: Perhaps I may first take up a comment made by the noble Baroness in speaking to the previous group about a mayor deciding in the middle of the year that he or she would like to borrow money for a new project. I think that the issue is wider than that, and to that extent I share her concern. I assure her that the monitoring that the London Assembly has undertaken in the current term is not simply a once-a-year exercise after which we forget about it. It is important publicly to conduct regular monitoring and to question both the Mayor and the functional bodies about their spending. Last year, for example, it was revealed that Transport for London is heading, in about five or six years, towards a hole in its budget of about £600 million. Therefore, mid-year borrowing to deal with anticipated problems could indeed be an issue.
  However, having said that, I should say that borrowing is almost the least of it for Transport for London and the other transport authorities. Judgments about fare levels are the most important issue. Only about 2 per cent of Transport for London's current income of about £2.3 billion is raised by the precept, and that percentage will decrease when

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  London Underground is handed over. So although the cash figures are not inconsiderable, as a proportion they are very much the least of it.
  My overall response to this group of amendments, particularly Amendment No. 9, is that although we must have regard to the effect on the precept, why should we single out borrowing in that respect? One should have regard to the effect on the precept in terms of the whole budget. I would hate to see the Bill send out the signal that other aspects of spending are less important in that regard. It is of course possible that the Assembly would support borrowing and its effect on revenue for a particular project but not support other spending. So I think that the picture is perhaps more complicated than one might initially think.
  As for Amendment No. 11, we have already referred to the role of the functional bodies. Although they are consulted on their own budgets and within the parameters of guidance issued by the Mayor, the budget is the Mayor's budget.
  Lord Bassam of Brighton: Amendment No. 9 relates to Clause 3(3) which requires the Mayor to consult the London Assembly before setting potential borrowing limits for the GLA or one of its functional bodies. That fact has been made clear in earlier discussions and debates. In our view it is unnecessary to say that the Assembly must have regard to the effect on the precept which will be levied on the London boroughs. As I said earlier, the borrowing limit will inevitably be considered as part of the normal budgetary process. That should ensure that the impact on the precept is properly considered. However, I take the point made by the noble Baroness, Lady Hamwee, that not only borrowing limits should be considered in the context of the precept: all the other budget elements should also have a bearing on it. It should therefore be seen as part of a wider debate and in that wider context. The effect of the precept is of course going to be a key concern for the Mayor and the Assembly, who are answerable to the electorate through the ballot box for the GLA's budget and precept.
  Amendment No. 11 relates to Clause 3(4) which requires the Mayor of London when setting the borrowing limit for the GLA's functional bodies to consult those bodies. Amendment No. 11 would require the bodies' board members to consider the effect of the precept levied on the London boroughs. As I said, it is for the democratically elected Mayor and Assembly to consider the impact of the precept on London taxpayers and to justify fully—or not—their decision to the electorate. I think that we have to put some confidence into the political process. In a sense, the amendment rather underlines that fact. We need to let the political processes run their course.
  As I explained before, the boards of the functional bodies, which are not elected, do not have a formal role in setting the precepts and should not be expected to concern themselves directly with precept and taxation issues. The amendment would give them that role. We think that the democratic process should have the override here and run its course. Clearly that will not
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  entirely satisfy the noble Baroness. However, the processes are at work and throw up some of the strange idiosyncrasies that inevitably happen in the budget process. I think that we have to trust that process.
  Baroness Hanham: I thank the Minister for his reply. The democratic process is fine every four years when people are sharply brought face to face with those seeking their votes to be elected Mayor of London, but words such as "consult" and "consider" seem terribly feeble in this context. I am trying to separate out the difference between a local authority and the Greater London Authority where the sums borrowed could be inordinately larger than those sought by any individual local authority. As the noble Baroness, Lady Hamwee, indicated, Transport for London certainly has the potential to hoover up vast borrowed sums and resources.
  I fully accept that this issue is examined by the London Assembly and that the budget must be approved by two thirds of the Assembly. However, I still see pockets of potential problems where borrowing might fall outside that annual review and might need to take place in the interim. Despite the assurances that I have been given, I remain concerned about that. At the moment, however, I shall not press the issue. I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  [Amendments Nos. 10 and 11 not moved.]
  The Deputy Chairman of Committees: I should inform the Committee that if Amendment No. 12 were to be agreed to, I shall not be able to call Amendments Nos. 13 to 17 inclusive owing to pre-emption.
  Baroness Hanhammoved Amendment No. 12:
  Page 2, line 17, leave out subsections (5) to (7) and insert—
  "( ) In carrying out any determination or review under this section, a local authority or functional body shall have regard to any relevant code of practice or guidance issued by the Audit Commission or the Chartered Institute of Public Finance and Accountancy."
  The noble Baroness said: The purpose of this amendment is to try to dismantle the Government's intended cat's cradle of regulation-making powers about local authority borrowing, about which we have briefly spoken, and to replace it with a genuinely prudential regime in which local authorities would be freed of onerous regulation but would be required to take heed of codes of practice issued by CIPFA or the Audit Commission.
  Local authorities are currently being driven mad by excessive regulation on all fronts and there is no guarantee that any of the Bill's provisions will improve the situation. The Bill promises the same nightmare for directors of finance, beginning with the subsections that this amendment seeks to remove.
  We just have to glance at subsection (6) to see the likely scope and scale of the regulation that the Secretary of State is able to impose. I am not at all reassured by the only regulation of which I have a copy—part 1 of the code of practice, the draft regulation which the Minister kindly arranged to be

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  sent to me during my brief week off. That regulation refers only to the code of practice of CIPFA. That is the only aspect mentioned or given credence under the regulations provided for in subsections (5) and (6). It is the only one I have seen. It may be that the code of practice, which has been laid in the Library and which I will certainly read carefully before Report stage, deals with some of the regulations which it is suggested that the Secretary of State might be able to make under subsections (5) and (6). Equally, however, it may not; if that is so, no draft regulations yet exist regarding the main bulk of Clause 6.
  The CIPFA code of practice could be alternated with one from the Audit Commission. However, if the code of practice is going to be very clear on all those matters, I will not want to press the amendment. I would be glad to hear what the Minister has to say. I beg to move.
  4.45 p.m.
  Lord Rooker: Amendment No. 12 deals with the power in Clause 3 to which the noble Baroness has taken exception, in particular the wording of subsection (6). The amendment deals with the way in which local authorities are to set their affordable borrowing limits. It would remove the Secretary of State's power in subsections (5), (6) and (7) of Clause 3 to make regulations about setting limits. Instead, the clause would explicitly require authorities to have regard to a relevant code issued by the Audit Commission or the Chartered Institute of Public Finance and Accountancy.
  There is a simple answer to the noble Baroness's questions, into which no one need read anything subversive. We have always intended to make regulations requiring authorities when setting their prudential limit under Clause 3 to have regard to the code that CIPFA is producing. Copies of the draft code and draft regulations are in the Library. For the avoidance of doubt, they are in a box marked "Secondary legislation, Local Government Bill". A separate set of secondary legislation relates to this Bill. The clause as now drafted gives us the option of identifying some other code, including one of the Government's own. The clause also allows us to use regulations directly to specify how the borrowing limit is to be set. We must preserve that flexibility. This is the bald point which goes to the heart of the amendment.
  We are very grateful to CIPFA for producing the draft code and we fully recognise that it is an independent body, as is the Audit Commission. Neither of those bodies is compelled to publish a code and we must not take it for granted that they will always wish to do so. If, for any reason, CIPFA ever ceased to issue its code, the clause as drafted would allow the Government to produce their own guidelines, either in the form of a code or regulations, or a combination of the two. Without that power, the system would become completely unworkable.
  The provisions are there to keep the legislative options open, in case practical experience of operating the new system highlights concerns which need to be
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  tackled through regulations. They provide a fallback just in case it is needed. The other important point is that the Audit Commission and CIPFA are independent organisations; the Government are in no position to order them to produce a code. We are extremely grateful to them for doing so. It is that code to which we shall refer, and the powers in subsections (5), (6) and (7) are simply a back-up for the future.
  Baroness Hanham: I wonder which came first, the chicken or the egg? My understanding is that these clauses were in the Bill long before anyone thought of getting CIPFA to produce a code of practice. If they were, it would have been sensible to put that organisation in.
  I need to read the regulations, and we shall return to the matter on Report. In the meantime, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Baroness Hamweemoved Amendment No. 13:
  Page 2, line 31, after "by" insert "or on behalf of"
  The noble Baroness said: In moving the amendment, I shall speak also to Amendments Nos. 14, 15 and 16.
  Amendment No. 13 to Clause 3 refers again to codes of practice. It suggests that regard should be had to codes issued,
  "by or on behalf of the Secretary of State".
  This amendment and Amendment No. 14 would insert the full stop and leave out the words, "or another".
  The position is that a code issued by "another" should be regarded as one issued on behalf of the Secretary of State. I am happy to see the draft regulation, but it seems to me that the Secretary of State should put his own name to it, as the amendment would achieve.
  Amendment No. 15 returns us to the issue of parliamentary approval of regulations, proposing that the regulations under subsections (1) and (2) are subject to the affirmative resolution. Since I tabled the amendments, I have seen the draft regulation. In a sense, one could say that it puts the code at a further remove from Parliament. The regulation refers to the current code, which can change from time to time, so the Government's proposal does not even offer real scope for challenging the next but one code. At least, that is how I understand the way in which the procedure might work.
  I am not criticising the draft CIPFA code, but we are always considering a situation in which there may be a different Secretary of State and, perhaps, a different group of people running CIPFA and making proposals on its behalf. I hope that they would not go off their respective heads at the same time, but one would want Parliament to be able to stop the worst effects of that, if it were to happen. However, I accept that Parliament might be more likely to lose the plot than would CIPFA.

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  Amendment No. 16 probes just how much discretion local authorities will have. The draft code sets out its objectives and states, in paragraph 5, that:
  "Prudential indicators that are limits are for the determination of the local authority subject only to any long stop controls under statute exercised by… the relevant Minister. The government…have indicated that these are long stop powers and will be used only in exceptional circumstances".
  The obvious question is: could we have some examples of exceptional circumstances? For instance, are they different from circumstances that could cause reserved capping powers to apply? Why is it necessary to have different long-stop powers exercised through the code? I beg to move.
  Lord Rooker: If I was an impartial, dispassionate observer—which I am not—I would think that the speech I have just heard could be regarded as that of someone wanting to be an interfering busybody in local government. The noble Baroness seems to be saying, "Let the Secretary of State and Parliament do everything", but we do not want that. We do not want to be prescriptive; we are quite happy to work with independent professional people producing professional codes of practice which are well tried and tested. It goes without saying that this is not the first code that CIPFA has produced. The suggestion that we would want to interfere and that the Secretary of State should do everything may be Liberal Democrat policy, but it is not Labour Government policy.
  Amendments Nos. 13 and 14 relate to Clause 3(7). This provides that regulations may specify codes of practice to which authorities are to have regard when setting their affordable borrowing limits. Such codes may be issued by the Secretary of State or by some other body. The amendment would only allow the regulations to specify a code issued by "or on behalf or the Secretary of State. That would require a very different approach from the one currently envisaged. I have made it clear that the code we intend to specify in regulations is the one being specifically prepared by CIPFA, which is an independent body. The latest draft code has been placed in the Library of the House.
  CIPFA has developed the code in collaboration with the Government. I should tell the noble Baroness, Lady Hanham, that the code has been part of our proposals from the very first. The whole point is to rely as much as we can on professional regulation. It is worth trying to set this out because I do not want there to be any misapprehension. We have no secret motive or agenda in subsections (5), (6) and (7). They are there for the very reasons I gave when I replied to Amendment No. 12.
  CIPFA has developed the code in collaboration with the Government, the Audit Commission and representatives of local government. However, despite that close working relationship, the code remains CIPFA's own publication. In no sense has it been produced on behalf of the Government. The great merit of the code lies in its independent status. It will be viewed by local government in the same light as CIPFA's other well-established codes of practice.
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  There is, however, no risk in relying on an independent code since it acquires no legal status until it is named in regulations. Unless the Government are content with a code, they will not specify it in regulations.
  Amendment No. 15 relates to Clause 3(5), under which regulations may be made about the way in which authorities set their affordable borrowing limits. As drafted, the Clause 3(5) power would rely on the negative resolution procedure. That is consistent with the position under the present capital finance system, which depends heavily on secondary legislation. However, the amendment seeks to make the Clause 3(5) power subject to the affirmative resolution procedure.
  The Select Committee that looks after these matters in Parliament—the Delegated Powers and Regulatory Reform Committee—in its 16th report did not recommend any change to the procedure proposed for the Clause 3(5) power.
  Amendment No. 16 also relates to Clause 3(5). The amendment is concerned with the scope of the regulatory power and seeks to limit it. I am not clear about the precise intention behind the amendment, but I must emphasise that we consider it essential to have a flexible power to regulate the setting of the affordable borrowing limit. The whole system is designed to give authorities much more freedom than they now have, but the freedom must be balanced by safeguards for local taxpayers, which means that we must be able to ensure that the affordable borrowing limit is set professionally and responsibly.
  Our present intention is that the regulations will simply require authorities to have regard to the CIPFA prudential code. However, we need to keep the legislative options open in case practical experience of operating the new system highlights concerns which need to be tackled through regulations. I do not believe that should be described, in the words of the amendment, as seeking to "fetter the discretion" of authorities. That is far from our motives.
  I hope that I have given some reassurance. I may not have completely reassured the noble Baroness, Lady Hamwee, because she wants to go down a far more prescriptive path than the Government. I could not accept that.
  Baroness Hamwee: If I were an impartial observer, I would say that it is the Government who want to interfere, more than do my noble friend Lady Maddock and I. We are saying not that the Secretary of State should do everything, but that there should be greater accountability to Parliament. I am not questioning the current Government's motives; I simply want to make certain that the wording ensures that the motives find their way into action.
  The Minister said that CIPFA was independent and talked about the code being developed in collaboration with the Government. I accept that it was also developed in collaboration with the Audit Commission and local government. I started to write down a question about what would happen if the Government disliked the code, and, as I was doing so,

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  the Minister said that they would not specify it if that were the case. Draft Regulation 2 does not say that. It states that a local authority and mayor shall have regard to the code. So, it is good in parts, in that the Secretary of State cannot stop it, but it still leaves me a little concerned about where responsibility lies.
  5 p.m.
  Lord Rooker: That is an unfair way of describing it. These are not the regulations and code; they are in draft form. The code has no statutory instrument number; it will have to be approved in due course. If we were not satisfied with the final code, we would not specify it. The regulations and code are in draft form, so the noble Baroness's concluding point is wrong and could be misunderstood by those outside Parliament who follow our proceedings.
  Baroness Hamwee: In that case, I am glad that I raised the point. Draft regulation 2 states:
  "In complying with their duties under Sections 3 (1) and (2) …a local authority and the Mayor shall have regard to any current prudential code for capital finance in local authorities issued by the Chartered Institute of Public Finance and Accountancy".
  I take from the Minister's comments that that part of the draft regulations may not appear in the same form in the final draft. I am not trying to impute motives. Perhaps others do not share my lack of understanding, but I am trying to understand the chain of command. After all, the draft regulations are all that we have to go on at the moment—although I accept that they may not be in their final form.
  I am sorry that I was not clear about Amendment No. 16 in asking what were the exceptional circumstances referred to in the current CIPFA code, which, I accept, is in draft form. The question remains of what long-stop powers the Government might need as part of this regime that could not be covered by applying current long-stop reserve powers for capping of revenue spending.
  I will read what the Minister says. I assure him that, as much as anything, I seek clarity and accountability to Parliament. For the moment, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  [Amendments Nos. 14 to 16 not moved.]
  Baroness Hanhammoved Amendment No. 17:
  Page 2, line 36, at end insert—
  "( ) No regulation made under this section shall apply to any local authority that has been assessed as "good" or "excellent" in its most recent comprehensive performance assessment."
  The noble Baroness said: In the past two or three years, local government has gone through the extraordinary process of the comprehensive performance assessment. Each local authority has now been branded with a category of performance. Presumably, at some stage, those categories may change. A few authorities are within the "good" and "excellent" categories, which, as I understand it, means that they are more than competent to manage their own affairs, and that they have also demonstrated an ability to do so.
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  There are many critics of the system, including authorities who have been assessed as being in the higher categories. Some of the criticism will be maintained if the freedom or flexibility that those authorities expect to gain as a result of achieving the upper echelons of performance are not met. The Bill, which has been lauded as giving freedom and flexibility, needs to ensure that it does just that.
  We have discussed the regulations put forward in Clause 3(5) and (6) and the code of practice. But it would be fair to say that the local authorities view further regulations with some dismay. It would not be unreasonable to suggest that there should he a light touch in regulating borrowing by good or excellent local authorities. The amendment would place those local authorities in the sort of category that they expect, and which has been made out as one of the advantages of being in those upper echelons. It would begin to mark out the fact that good and excellent authorities were deemed to be able to manage in a good and excellent way. I beg to move.
  Baroness Hamwee: I put it on record that, although we believe that external assessment is useful, we do not regard it as the appropriate indicator or permit for the exercise of rights and freedoms. We could not support the amendment.
  Lord Rooker: The noble Baroness, Lady Hanham, said that there would be a light touch. The problem is that there would be no touch, as I will seek to explain. The amendment would prevent such regulations applying to any authority assessed as "good" or "excellent" in its most recent comprehensive performance assessment. As I made clear, we envisage using the regulations to require authorities to have regard to the CIPFA prudential code. So the amendment would mean that good or excellent authorities would have no statutory obligation to consider the CIPFA guidelines.
  The amendment appears to be based on the assumption that a high-performing authority can be trusted to act prudently and thus merits the reward of being exempted from the statutory controls. Compliance with the CIPFA code is a factor that will normally be taken into account in performance assessments once the new system is in operation. Good and excellent authorities will therefore have an established track record of prudent borrowing.
  However, we must face the fact that authorities may change for the worse as well as the better. Much could happen after an authority gains its good rating and before it is assessed again. Without the prudential controls, local taxpayers would be exposed to a considerable risk. A single unwise borrowing transaction could ruin many previous years' exemplary financial management.
  I do not believe that high-performing authorities seek that apparent freedom. I am not aware of any high-performing authority that wishes to opt out. The prudential code merely records borrowing and treasury management practices that any good authority will already be following. It allows

  GC81
  individual authorities considerable discretion about the specific application of the general principles it lays down. Removing the statutory duty to have regard to the code would confer no practical benefit on high performers; it could work to their disadvantage. Good authorities will wish to demonstrate to their electorate that they are borrowing prudently. In the absence of the statutory duty to have regard to the code, the soundness of their borrowing practices will be much less apparent to the public. That loss of transparency would be regrettable.
  Good and excellent authorities would continue in their good and excellent role anyway. They have everything to gain from being part of the system whereby they must have regard to the statutory regulations. If the authorities were cast out on their own, there would be unacceptable risks between the comprehensive performance assessments. In any event, the loss of transparency would probably be more regrettable than some other risks. I hope that, with those assurances, the noble Baroness will not press her amendment and that the explanation is satisfactory.
  Lord Hanningfield: In spite of what the noble Baroness, Lady Hamwee, says, we have the CPA regime whether we like it or not. The Bill legitimises the regime, so we will have to live with it. We therefore have in this country a system of categorisation of authorities. I declare an interest as the leader of a "good" authority that narrowly missed being deemed "excellent".
  I think that the Minister missed the point. Surely, the idea is to give authorities, after they have gone through the hoops, the freedom and flexibility promised by the Government. Obviously, they will abide by the principles. As the Minister said, they would not be good or excellent authorities if they had not abided by the principles. I must have misread many of the purposes of categorisation and this Bill. It was intended to give more freedom and flexibility to the authorities that have gone through the hoops. Amendment No. 17 would give those authorities one of the freedoms or flexible measures of which we would like to see more.
  Although the Minister gave a technical answer, he missed the point as regards what could be seen as adding to the advantages of being "good" and "excellent" authorities. Can he clarify the point? Yearly changes could apply in the context of granting good or excellent local authorities any of the freedoms or flexible measures, such as freedom from inspection. But if authorities changed category, they would lose their freedom and flexibility as provided in the legislation. Will the Minister rethink on the amendment? It would provide one more type of freedom or flexibility that the Government could offer the authorities.
  Lord Rooker: Yes, one more. There is a classic argument: give them a foot, and they will want to take a mile. I am not the Minister for Local Government and the Regions, and I do not read all the papers dealt
  GC82
  with by my colleague Nick Raynsford, but I see some of them. Many areas of form-filling, reporting and accounting have been lifted from good and excellent authorities.
  But this amendment would have no practical effect on the authorities concerned. We are not asking them to do anything more. The code would not place on them an onerous burden, because they adhere to the principles anyway. It would be counterproductive to move local authorities out of the regime, leaving them vulnerable to attack. It would result in a lack of transparency. I cannot see the point that the noble Lord makes. Local authorities won many freedoms because of the assessment. Under this amendment, we would be asking them to depart from best practice, which they adhere to anyway, and which is not a burden in the first place. I genuinely believe that the amendment would have no practical benefit to any good or excellent authorities. They receive a raft of benefits—I am not sure how many—and do not have to carry out lots of tasks that they would otherwise have to do. We have lifted burdens, which is important. The code does not place on them a burden, so there is no burden to lift.
  As I know, the noble Lord strives to lead an excellent authority to do even better. But we are not placing on it any extra burden. The idea that he would say that he does not want to be subject to the code of practice—
  Lord Hanningfield: The point is the philosophy behind the regime. To return to the point made by the noble Baroness, Lady Hamwee, we live by the regime as enshrined in the legislation; therefore, it is very important that all authorities recognise that and strive to become good or excellent. My noble friend and I were asking to have that point recognised in this little part of the Bill. We will return to the point as we deal with other aspects of the Bill. Although good and excellent local authorities have freedoms from inspection, other small burdens could be removed from local government through more freedom and flexibility. We shall return to the matter, even after my noble friend's comments on the point.
  Lord Rooker: My answer to that is to ask, "Where is the burden on the good and excellent authorities in what we propose? Where is the burden that we are being asked to lift?"
  Lord Smith of Leigh: I can speak on the matter as leader of an excellent council.
  It is an apparent freedom. As my noble friend the Minister said, we would always carry on a prudential regime in a "good" or "excellent" authority. We could not exercise a freedom. I am not sure that I agree with my noble friend's view that a raft of freedoms is coming our way, but this one is apparent. I have chaired the meetings of excellent councils, and no one has asked for that freedom. We are asking for a lot, but that is not one of them.
  Baroness Hanham: I thank the Minister for his reply, and I thank other noble Lords who intervened, particularly my noble friend Lord Hanningfield.

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  The regulations that seem to be apparent in Clause 3 seem to be in addition to the normal regulation to which any local authority would have to adhere. Given what the Minister said, it may be that that is not the situation, but I will consider the matter further. In the mean time, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Clause 3 agreed to.
  5.15 p.m.
  Clause 4 [Imposition of borrowing limits]:
  Baroness Hanhammoved Amendment No. 18:
  Page 3, line 3, after "the" insert "aggregate level of"
  The noble Baroness said: If caps on individual borrowing are to be set for reasons of prudent macroeconomic management, it is the aggregate level of borrowing that is important. It is the total debt that will have an impact on the bigger economic picture. The amendment would make that point explicit, by making sure that local authorities' aggregate borrowing was the target of Clause 4(1). I beg to move.
  Baroness Hamwee: We tabled Amendment No. 19, which is in this group. It skins the cat in a slightly different way by proposing that any regulations under Clause 4(1) should relate to the borrowing of money by all local authorities. We should make it clear that there is no distinction between local authorities, as regards the powers under the clause. We would be content with an assurance from the Minister to that effect and will not move our amendment if he can give such an assurance.
  Lord Bassam of Brighton: The amendments relate to Clause 4, which gives the Secretary of State the power to set borrowing limits for local authorities. Amendment No. 18 would change Clause 4(1), which empowers the Secretary of State to make regulations for national economic reasons setting limits on the borrowing of money by local authorities. If amended, the clause would refer to the setting of limits on the "aggregate" level of borrowing by authorities.
  It may help if I explain first how we see a national limit operating. As Clause 4(1) makes clear, such a limit could be set only for national economic reasons. The need for a limit might, for example, be triggered by a sudden downturn in the international economy. The Government would form a view on the maximum increase in local government borrowing that was sustainable. Even then, a national limit would be formally set only if there were strong evidence that the acceptable level of borrowing was likely to be exceeded without some form of intervention. In that case, for any individual authority, the limit would be likely to take the form of a maximum amount by which their borrowing could be increased over the coming financial year. The limit need not be expressed as an absolute sum but could be a formula, reflecting such factors as previous borrowing, budgets and commitments.
  Whatever formula was used at individual authority level, it would be calculated to produce the right aggregate result nationally. We are satisfied that the
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  idea of an aggregate level of borrowing is already implicit in the clause. In a sense, we are already taking on board the noble Baroness's point. For us, the amendment would add little and would not provide any further clarification. That might seem a bit rude, but that is the case.
  Amendment No. 19 would also change Clause 4(1). If amended, the clause would refer to the setting of limits on the borrowing of money by all local authorities. That idea is already implicit in the clause and need not be stated. The formula setting the national limit need not produce exactly the same result for every authority. It could be sensitive enough to take some account of different local needs and circumstances. For a few local authorities, perhaps, the impact might be minimal. However, the limit would be imposed through secondary legislation, which, I am sure, would need to apply generally to all authorities. For those reasons, the amendment seems unnecessary.
  I hope that, with those assurances, the noble Baroness will feel able to withdraw the amendment.
  Baroness Hamwee: I am not sure that I fully understood the Minister. In describing how the regulations would work, was he saying that, although the decision would be taken looking at the aggregate, there would be a different application authority by authority? Would it be the same proportion across authorities or the same cash amount? Should I ask the question in a different way?
  Lord Bassam of Brighton: I am trying to avoid the necessity to write.
  It would depend on the circumstances of each local authority. We would have to take into consideration the circumstances that prevailed at the time. That probably does not answer the point that the noble Baroness is probing at, but if she reads again what was said earlier, she will find that it probably does.
  Baroness Hanham: The only word that I heard that sank deeply into my soul was that aggregate was "implicit" in what is proposed. There are other considerations about the borrowing limits, and the fact that the word "aggregate" is implicit will be helpful in the discussions that we will have on the remaining amendments on the clause.
  Having had the assurance that that is what the clause means, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  [Amendment No. 19 not moved.]
  Baroness Hanhammoved Amendment No. 20:
  Page 3, line 3, at end insert—
  "( ) No regulation made by the Secretary of State under subsection (1) may reduce the overall borrowing limit set for local authorities in any year in which the Government is planning to increase the level of borrowing by central government departments or their agencies."
  The noble Baroness said: This is the beginning of a small group of amendments that deal with Clause 4 in various ways. It will not have escaped the Committee's

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  notice that I have had several goes at various different aspects. If, in due course, I moved the amendments on Report and pressed them to a vote, I would be in considerable trouble. I shall not do that, but I shall go through them one by one, as they all raise slightly different points. If one of them is agreed, I shall probably be in trouble with some of the others.
  Amendment No. 20 would ensure that central government could not use the pretext of national economic reasons to squeeze local authority borrowing, while increasing the borrowing of central government departments and agencies. We are looking for a level playing field, if there is a problem over borrowing. The amendment would protect the budget planning of local authorities against possible unfair action to squeeze their borrowing while increasing the Government's borrowing. It is a question of whose priorities will come out on top.
  It is understandable that, in certain circumstances, the Government might wish to reduce the overall level of public sector borrowing, as happens reasonably often. In those circumstances, it would be reasonable to expect local government to play its part. It would not be reasonable to make local authorities alter their budgets and borrowing plans, leading potentially to cuts in school programmes and discretionary services such as social services for which local authorities would take the blame, while central government planned to continue expanding borrowing for short-term reasons of their own.
  The amendment would protect local authorities against the threat of such one-sided interference, which, some authorities feel, does happen. It would also remove the temptation for government to try to do it. If the Government want to make local authorities virtuous in such circumstances, they must be virtuous themselves. I beg to move.
  Lord Bassam of Brighton: Amendment No. 20 relates to Clause 4(1) and would stop the Government imposing a reduction on local government borrowing in any year in which central government borrowing was allowed to increase. That would be the impact.
  In response to the former Select Committee on Transport, Local Government and the Regions, which considered the draft Bill, we have made it clear in the Bill that the reserved power could be exercised only for national economic reasons. Those are the circumstances in which it would be exercised, and they would have to be serious, if they were to justify a national limit. There might, for example, be a sudden and significant downturn in the international economy. Such a situation would demand restraint from the public sector as a whole, not just local government, and it is unlikely that central government borrowing could increase significantly, if local government borrowing were curtailed.
  Central government is the major lender to local government. Much of our borrowing is undertaken purely to fund the loans that we make to local authorities through the Public Works Loan Board. That reflects the fact that local government capital
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  expenditure represents about 50 per cent of the national total of such expenditure. We would expect local borrowing constraints to feed through to the national level.
  The amendment implies that the constraints should always be exactly the same for central and local government. I am sure that, on reflection, the noble Baroness will see that as being somewhat unrealistic. The Government will have to consider carefully how any borrowing capacity should be distributed, taking account of central and local needs and their different priorities. The amendment would remove that flexibility. The Bill is about providing greater flexibility, but the amendment would remove our flexibility to make a proper decision on that issue in the light of prevailing circumstances.
  I hope that, with that assurance that the power might be used in connection with difficult international and national circumstances, the noble Baroness will feel confident and able to withdraw the amendment.
  Baroness Hanham: I do not feel at all confident about it. What the Minister said has made me feel even more uncomfortable.
  The thrust of the chapter is that local authorities will be able to borrow outside the box and will have greater powers to borrow. They must make decisions about what the borrowing will be required for. It could be a capital programme or any number of things about which they need some confidence before they can go forward with the borrowing. Not all of that borrowing will come from government sources such as the Public Works Loan Board; some will come from outside. Funding that does come from government sources will still need to be secured elsewhere, and it may be only a part of what the local authority is borrowing. It is not unreasonable to suggest that if, for whatever national economic reasons, the Government decided to curtail local government borrowing, they should do so only while curtailing their own borrowing. Thus, there would be a level playing field for any decisions to lower or curtail local government borrowing in some way.
  I hear what the Minister says, but I am not happy with his remarks. However, for the time being, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Baroness Hanhammoved Amendment No. 21:
  Page 3, line 4, leave out subsection (2).
  The noble Baroness said: I shall deal with Amendments Nos. 21 and 24 together. The purpose of Amendment No. 21 is to probe the circumstances in which the Government would use the sweeping power to set limits not only for the borrowing of local authorities, but for individual local authorities. Here we move from advocate down to the individual.
  Controls of local democratic accountability already affect such limits: prudential advice from directors of finance and scrutiny by the district auditor, while the regulations we discussed earlier add a further layer of potential intervention. In general terms we believe that

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  we should be trying to move away from powers where central government can interfere unequally with different local authorities. Amendment No. 21 seeks to discover the Government's intentions.
  Amendment No. 24 seeks to address the issue that Clause 4 would give the Secretary of State power to impose a barring limit on a local council irrespective of whether the power to set a national limit is taken up. The amendment would leave in the power to impose a borrowing limit, but would require that the Secretary of State can act under Clause 4(2) only where he believes that a local authority has failed to have a proper regard to the codes when determining its borrowing limit under Clause 3(1).
  Given that, in the extraordinary circumstances of a national economic crisis, the Minister already has the power to impose individual borrowing limits under Clause 4(1), I should like the Minister to explain under what other circumstances an authority that complies with the requirements under Clause 3(1) and has proper regard to the codes of practice specified by the Secretary of State should be subjected to a special sentence issued by the Secretary of State. Perhaps I am missing something, but it is not apparent how any such circumstances would arise outside of a time of national economic crisis.
  If the Minister drew a comparison based on the current regime of capital approvals and said that local authorities might find ways of avoiding those approvals, which was why the Secretary of State required these wide-ranging powers, I suggest to him that a regime based on a code of practice which reinforces standard accounting practices is not susceptible to avoidance in the same way as a prescriptive regime of capital approvals might be. The power in its unqualified form is wholly unnecessary and is merely an example of the instinct to keep hold of reserve powers. I beg to move.
  5.30 p.m.
  The Deputy Chairman of Committees (Lord Elton): If this amendment is agreed to, I shall be unable to call Amendments Nos. 23 and 24 by reason of preemption.
  Baroness Hamwee: Given our procedures in Grand Committee, I suspect that the amendment will not be agreed to. I have added my name to Amendment No. 21, and the only reason that the name of my noble friend Lady Maddock is not included is that we thought that another noble Lord might take the fourth place.
  My honourable friend Edward Davey tabled a similar amendment in the Commons, and certainly the Liberal Democrats and the Conservatives agree on this point. Clause 4(2) seems to be inconsistent with Clause 4(1). Subsection (1) refers to "national economic reasons", while subsection (2) allows particular local authorities to be fingered. That does not seem to support the reasons of national economy that the Secretary of State might seek to apply under this subsection.
  GC88
  At col. 85 in the Standing Committee the Minister spoke of,
  "building a good, new relationship with local government, based on responsibility and a shared concern to tackle and turn around the relatively small number of authorities in real difficulty whose failures, sadly, give the whole of local government a bad name".— [Official Report, Commons Standing Committee A, 2111,103; col. 85.]
  Yes, but is this the way to do it? This is not the way to bring struggling local authorities up to scratch.
  Clause 4(2) states that the Secretary of State can give a direction. We have more than touched on what is meant by "direction" in this context and I shall certainly look again at the comments made on that to see how they might apply here. However, I wonder what will be the sanction if a particular local authority does not observe the direction. Perhaps the Minister can explain what would happen in that situation. We have the protection of lenders under Clause 6, so that money would be repaid, but what would be the effect of a direction made under Clause 4(2)?
  Our points are not only technical or practical. There is the whole principle of local democracy and accountability to consider. We have already made it clear, and no doubt will do so again, that we believe that it is for local authorities rather than central government to deal with these matters.
  At this point, I wonder whether I might ask a question with regard to Clause 4(3) rather than asking it during the clause stand part debate. Subsection (3) provides for different limits to be set,
  "in relation to different kinds of borrowing".
  Can the Minister explain what that means, because if "national economic reasons" require restraint, why should different restraints apply to "different kinds of borrowing"? Furthermore, what is meant by that phrase in this context? When I first read it I assumed that it meant borrowing for different purposes, but it might mean long-term or short-term borrowing. We do not yet know what kinds of borrowing would be covered by this.
  Lord Rooker: I shall seek to answer the point about Clause 4(3), which is not the subject of the amendment before the Committee. We need to go through the Bill as best we can, and if we can avoid debating matters on the clause stand part debate, as my noble friend said, we shall give answers as we go along.
  I turn to Amendments Nos. 21 and 24. I realise that even the title of the clause, "Imposition of borrowing limits", must generate apoplexy: "Is that nasty Government coming along again to stop us being reckless?". However, I hope that I will be able to satisfy the concerns of both noble Baronesses. There is no question that this is an important provision, and Amendment No. 21 seeks to remove it completely.
  I do not think there are any differences between us as regards Part 1 of the Bill. It would give local authorities the freedom to borrow without government consent, provided they can afford to service the debt without extra government support. That is a massive extra freedom for local authorities. No one would contradict that. But that freedom must

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  be balanced by safeguards for local taxpayers, and that is why Clause 4(2) provides a reserve power for the Government to set a borrowing limit for an individual authority overriding any locally set limit.
  In response to concerns expressed by local government about the terms of the draft Bill, we have now made it clear on the face of the Bill that the power can be used only to prevent an individual local authority from borrowing more than it can afford. We would use this power very much as a last resort and only if there was strong evidence of a real risk of imprudent borrowing. It is not a question of the Government moving in at the first sign of an authority doing something with which they disagree. That is not the case. In fact, the Government will not even police the system. As at present, scrutiny will rest in the first instance with the external auditor. But concerns could come to light through the process of the comprehensive performance assessment. We could then consider using the power.
  Without the power, the Government would be unable to stop an authority from borrowing recklessly and thereby imposing a long-term burden of unaffordable debt on its local taxpayers. I do not have loads of examples, but I recall reading about the Western Isles some years ago. What that authority had done caused considerable difficulty for its local taxpayers.
  Amendment No. 24 proposes another approach to Clause 4(2). As drafted, the amendment states that the power to set an individual borrowing limit is to apply only where an authority has not had proper regard to the requirements of Clause 3(2). There may be an error of reference here due to the renumbering of the subsections since the Bill was first published. Clause 3(2) in fact deals with the borrowing limit of the Greater London Authority. The intention might have been to refer to Clause 3(5), which would be consistent with the effect of a similar amendment debated in another place. I shall proceed on that assumption.
  Clause 3(5) provides a power for the Secretary of State to make regulations about the way that authorities should set their affordable borrowing limits. The power may be used to specify a code of practice to which authorities are to have regard. We intend to specify the CIPFA prudential code which will lay down the guidelines on deciding how much borrowing is affordable.
  The effect of the amendment is that an individual borrowing limit could only be imposed on an authority which had disregarded regulations made under Clause 3(5). In practice, therefore, that would mean an authority which had disregarded the prudential code and was borrowing unaffordably. That may seem to be the right result.
  However, the present wording of Clause 4(2) is much more transparent. It makes it absolutely clear that the aim of the power in subsection (2) is to prevent unaffordable borrowing. There is an explicit link with Clause 3(1), which requires authorities to set an affordable borrowing limit. Clause 4(2) comes into
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  play only if that duty is at risk of being breached. It is desirable to have that policy brought out as clearly as possible on the face of the Bill. The amendment would conceal the policy intention. I hope that those remarks provide a reassurance.
  I turn now to subsection (3) of Clause 4. This could be helpful in taking account of the varying needs of authorities if a national limit was needed. It could allow greater borrowing capacity for specified projects considered to be exceptionally urgent, of which housing is an example. In other words, this covers different kinds of borrowing for specified projects. It would only arise in respect of the imposition of borrowing limits, but obviously we hope that Clause 4 as drafted is not used, that it will not be made operable. It is a provision of last resort. However, I hope that that gives an example of fall-through, but I shall be happy to return to this on Report if my explanation does not satisfy any potential Opposition amendment.
  Baroness Hanham: Again I thank the Minister for his careful explanation. I note his point as regards Clause 4(2). The purpose of the power is to ensure that authorities do not borrow more than they can afford, but given some freedom and flexibility, at some stage they may do just that. I suppose that a restriction is required to prevent that.
  I shall read what the Minister has said and for the moment I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Baroness Hanhammoved Amendment No. 22:
  Page 3, line 4, leave out subsections (2) to (6) and insert—
  "( ) No regulations may be made under this section unless—

  (a) the Secretary of State has consulted such representatives of local government as appear to him to be appropriate.

  (b) he has laid before each House of Parliament a report explaining the reasons why he considers it necessary that the regulations be made, and

  (c) the report has been approved by resolutions of each House of Parliament.

  ( ) Section 122( I ) and (2) do not apply to regulations made under this section."
  The noble Baroness said: This amendment seeks to lay down some conditions that we feel are appropriate for when the Secretary of State may wish to limit the amount of money that a local authority can borrow. This covers points that we have already talked about, but as I explained earlier, discussions on these amendments are taking place around each other.
  The Secretary of State may want to limit the amount of money that a local authority can borrow when he feels that it is necessary to do so for "national economic reasons". The amendment also seeks to remove the provision given in subsection (2) that gives the Secretary of State the power to set individual borrowing limits on local authorities for reasons other than national economic emergencies. We touched on this when discussing the previous amendment.

  GC91
  It is welcome that the Government are concentrating on the economic cycle, the same cycle that the Chancellor told us in his first few years in office was a thing of the past. However, perhaps that is a political snipe that I should leave alone.
  The first part of the amendment requires the Secretary of State to consult local government before taking action. I remind the Minister that this was a key recommendation of the Select Committee. We believe that it would be inconceivable for the Secretary of State to take such drastic action without consulting local government.
  The second part of the amendment provides for the Government to report to Parliament to explain the macro-economic reason that gives rise to the need to limit local authority borrowing.
  Thirdly, we propose that there should be an affirmative resolution of both Houses to approve the order that imposed the new limits on local authorities. The Committee should note that this procedure is used in an extreme macro-economic crisis only, and while we wish that the Secretary of State never has to come before the House to seek such an order, I hope that we have broad support in asking for this type of parliamentary scrutiny.
  I would like to give a topical example of when the Secretary of State may need to reduce borrowing limits. If in the future the Government take us further into the euro-zone, they may find it necessary, in order to satisfy the European Bank, to curb the country's borrowing. Indeed, we understand that some countries, including France and Germany, are already having difficulty with the 3 per cent deficit. In this instance, I feel—and I hope I have broad support—that the Secretary of State should come before the Houses of Parliament and that his decisions should be subject to parliamentary scrutiny. I beg to move.
  5.45 p.m.
  The Deputy Chairman of Committees: I should advise the Committee that if this amendment were to be agreed, I should be unable to call Amendments Nos. 23 to 28 inclusive.
  Baroness Hamwee: We support this amendment. Perhaps I should sit down to enable us to get through it before either the noble Lords, Lord Pearson of Rannoch or Lord Stoddart of Swindon, come into the Room and find us discussing the corrupt octopus of Brussels.
  Lord Bassam of Brighton: Amendment No. 22 would substantially change the operation of Clause 4. The first effect would be on the power to set a national borrowing limit under Clause 4(1). As drafted, the power would be exercised by making regulations under the negative resolution procedure. My understanding is that the Delegated Powers Committee was very happy with that. The amendment would require a report to be laid before and approved by both Houses of Parliament as well as the undertaking of formal consultation with local government before regulations could be made.
  GC92
  Any national limit would he in accordance with policies on public expenditure which had already received parliamentary approval. Economic circumstances serious enough to demand national borrowing constraints would inevitably be the subject of extensive parliamentary debate. But Parliament has never been involved in scrutinising the allocation of the local authority borrowing limits which, every year since 1990, the Government have set by the issue of credit approvals. Under the new system, a national limit would achieve exactly the same result. We see no need for a statutory requirement for parliamentary approval of that process.
  With regard to consulting local authorities, we have already given clear commitments to local government representatives that they would be fully consulted about any possible need to set a national borrowing limit. I am quite happy to put that on the record this afternoon. There are well established agreements between central and local government about consultation, and we take those commitments very seriously. Under the present system, there is no statutory duty to consult prior to the annual issue of credit approvals, which act as borrowing limits, but we regularly discuss these matters and the arrangements that follow from them with local government representatives.
  Amendment No. 22 would, in our view, have other unfortunate effects. Deleting Clause 4(2) would remove the Government's power to set a borrowing limit for an individual authority. But that second reserve power provides a vital safeguard for local taxpayers against unaffordable borrowing by their local council.
  Amendment No. 22 would also eliminate the important flexibility conferred by Clauses 4(4) to 4(6). These provisions would allow local authorities to transfer borrowing headroom between themselves under a national limit, without Government consent. They make no difference to the total effect at the national level and would ensure that borrowing capacity was distributed efficiently and not wasted. These provisions also help to underline the fact that the Clause 4(1) power is directed only towards protecting the national economy.
  In addition, Amendment No. 22 would disapply Clause 122 when regulations on a national limit are made and thus prevent different provisions being made for different cases and different descriptions of classes of authority. Such flexibility could be important in spreading the impact of a national limit fairly among authorities. For those technical and rather hard-nosed reasons, I hope that the noble Baroness will feel happy about withdrawing the amendment.
  Baroness Hanham: I thank the Minister for his reply. This was a probing amendment and the response was interesting. Of course we have the local government consultation process, but what is being suggested here is that this might come about in an unexpected way. If a national economic crisis arose, we would not be working with normal factors. If at some stage

  GC93
  decisions had to be made about the national economy, it would be essential that local government was involved and that consultation took place. That particular aspect still stands.
  On the other aspects, I shall read the Minister's reply. For the moment, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  [Amendments Nos. 23 and 24 not moved.]
  Baroness Hanhammoved Amendment No. 25:
  Page 3, line 8, at end insert—
  "( ) No direction or regulation that applies to a particular local authority or local authorities may be made by the Secretary of State unless he has laid before Parliament a statement explaining the reasons that justify selective action in the case of that authority or authorities."
  The noble Baroness said: The purpose of this amendment is to achieve an important element of transparency in the exercise of powers under this section which would allow the Government to make different rules for individual authorities. No one who has studied this year's local government settlement could doubt that there was a great variation between the apportionment of money to individual authorities.
  Against that background, an explicit power to penalise individual authorities, as set out in the clause, should be subjected to the closest scrutiny. The amendment suggests that when a government uses this power, an open and transparent statement must be laid before Parliament by the Minister to explain on what grounds the power is being used. That would give proper protection in the case of a selective power which would enable an intervening Minister's actions to be probed by public and Parliament alike instead of being shrouded in secrecy. It could be a provision that might be applied in other powers to intervene selectively being sought by the Government in this Bill. I beg to move.
  Lord Bassam of Brighton: This amendment seeks to insert a new subsection in Clause 4 relating to the powers in subsections (1) and (2) to impose borrowing limits. Before those powers could be used, the amendment would require a statement to be laid before Parliament explaining the reasons for the limits set on particular authorities under the provisions of Clause 4(1), or for imposing a limit on an individual authority under Clause 4(2).
  Subsections (1) and (2) already make clear the general circumstances in which these powers may be used. However, the amendment would require the Government to give Parliament a specific reason for setting borrowing limits for particular authorities. Parliament has never been involved in scrutinising the allocation of local authority borrowing limits which, as I said earlier, every year since 1990 the Government have set by the issue of credit approvals. Under the new system, setting national or individual borrowings would achieve exactly the same result. We can see no need for a statutory requirement for parliamentary approval of that process. There has not been one in the
  GC94
  past and when the party of the noble Baroness was in government, it certainly did not see the need to have such a process in place.
  If any authority ever felt that the Government, in imposing a borrowing limit, had acted improperly or unjustly, of course it would be fully entitled to seek judicial review. In addition, in the case of the individual limit provided for under Clause 4(2), urgent action could sometimes be needed to prevent imprudent activity. The procedure suggested in the amendment could lead to delays which might have potentially serious consequences for local council taxpayers. I am sure that, given her strong background in local government finance and her desire to see prudence in local practice, the noble Baroness would not want to assist in that process.
  I hope that, with those comments and assurances, the noble Baroness will feel able to withdraw her amendment.
  Baroness Hanham: I enjoyed the digs. They have been the best part of the Bill so far. To say that something has never been done in Parliament before seems a jolly poor excuse for not doing it now. We are moving into a new regime. The expectation is for permissiveness rather than restriction. If, for some reason, that permissiveness is not to be allowed or agreed to, or there is some major reason why there should be a limit on a particular local authority's borrowing power, it seems not unreasonable that that matter should be brought to Parliament for an explanation. It puts it into its proper perspective and makes it a very unusual event. I do not think that the Minister's response to my amendment is seriously satisfactory enough to enable me to say that I shall not pursue the matter in future. Meanwhile, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Baroness Hanhammoved Amendment No. 26:
  Page 3, line 8, at end insert—
  "( ) A limit set under subsection (1) or (2) may not, in respect of any local authority, be set at a level less than the level of that local authority's borrowing on the date that the draft regulation is laid."
  The noble Baroness said: This amendment would require that any enforced borrowing limit for a local authority should never be set below that authority's level of existing debt. I find it hard to believe that it is the purpose of this provision that an authority could be put in breach of its own limit, in itself a statutory offence, on the direction of the Secretary of State. I hope that the Minister will say that he agrees with this amendment or that he undertakes to give the Committee another guarantee that its intended purpose will be built into any regulations issued in the future.
  If the Minister were to accept my argument, authorities that have been prudent and have low levels of borrowing relative to their borrowing limits would

  GC95
  have to take more of the hit to achieve a given macroeconomic effect, because authorities that are close to their borrowing limits cannot, in practice, have their borrowing limits cut. I beg to move.
  Baroness Hamwee: On Amendment No. 26, I would like to understand what would happen in practice if there were what would effectively be a retrospective application?
  Lord Bassam of Brighton: The amendment would insert in Clause 4 the condition that no borrowing limit may be imposed on a local authority below its actual level of borrowing. That is commonly understood. I fully accept that the Government should not be able to impose a retrospective limit on an authority to make its existing debt unlawful. The legislation, as drafted, certainly does not allow that. Any borrowing limits set under the powers in Clause 4 can only serve to restrain the future level of borrowing.
  The safeguard here depends upon Clause 2(1). It provides that an authority may not borrow money if doing so would result in a breach of any borrowing limit it has set for itself or which the Government has imposed upon it. So, if a loan does not breach such a limit when it is actually taken out, nothing can later make it unlawful.
  I hope that that answers the point. I think that the noble Baroness may have slightly misunderstood what was in front of her, but I hope that my explanation clarifies matters.
  Baroness Hanham: I thank the Minister for his explanation, and I am happy to accept it. I beg leave to withdraw the amendment.
  Amendrnent, by leave, withdrawn. 6 p.m.
  Baroness Hamweehad given notice of her intention to move Amendment No. 27.
  Page 3, line 10, leave out "subject to a corresponding limit"
  The noble Baroness said: I tabled Amendment No. 27 to probe whether the national limit applies only to some authorities or to all of them. However, the noble Lord, Lord Bassam, explained not only that point but said that subsection (2) onwards is not a part of subsection (1) and is not reliant on it. It is a whole set of rights on the part of the Secretary of State to impose borrowing limits rather than them all being a part of the national economic reason. Unless the Minister feels there is anything more to be said, I shall not pursue this. I did not say "not moved" to the amendment originally, because it is sometimes a bit confusing to do that when everyone has their notes ready. Apologies for that, but I thank the Minister for his explanation.
  [Amendment No. 27 not moved.]
  Baroness Hamweemoved Amendment No. 28:
  Page 3, line 16, at end insert ", and
  ( ) the rights of the transferor to borrow in the event of failure by the transferee to repay borrowing undertaken on the basis of the transfer."
  GC96
  The noble Baroness said: The draft regulations do not cover Clause 4(4) so far as I can see. This is the opportunity to ask when—and, indeed, if—more draft regulations will be published. It is a serious point. I know that noble Lords frequently complain that we do not have regulations on the real meat of any particular provision, and I am not talking just about this Bill. But. the real issue is for local authorities to know what the detail will be and to have the opportunity to comment, particularly if the new regime is to be effective from April next year—less than a year away. It will not be that long before local authorities are into the start of the budget-making process for next year.
  My amendment was to probe the effects of the transfer of headroom, which is an odd concept in itself. What would happen if a transferee were in default? Is there any problem for the transferor? I hope the answer will be no, but that is what the detail of Amendment No. 28 is designed to ascertain. I beg to move.
  Lord Rooker: This is one of the rare cases where what has happened has not thrown the notes out, as the numbers are consecutive. What throws the notes out is changing the order of everything at about 1 o'clock in the afternoon. That causes a problem. It does not prevent us from giving proper answers but that might happen on one occasion. As this is our first sitting, however, I suppose it is to be expected.
  On Amendment No. 28, there is, I hope, a perfectly satisfactory explanation to the noble Baroness's question, which relates specifically to the transfer of borrowing headroom which, as it says in my notes, "I have just described". I would have done that if I had dealt with the notes on Amendment No. 27. That is part of the problem. The notes were written for the two amendments together, as a package. That is an important point. I shall now try and explain how it works.
  If there were a national limit it would apply to all authorities. However, the local impact could vary. It is possible that under the limit, an authority might be allowed a higher borrowing capacity than it could make use of. In that case, it would be free to transfer the surplus borrowing capacity—that is, the headroom—to any other authority. This would increase the national limit for the latter, allowing it greater freedom to borrow. That is basically the way the system works. Such transfers would be arranged voluntarily between authorities themselves. The Government would not be involved. However, Clause 4(5) would allow the Secretary of State to make regulations about the operation of the system. The power is drafted in sufficiently broad terms to allow regulations to deal with any aspect of the arrangements that we might conceivably wish to cover.
  However, the amendment seeks to specify one additional use of the regulations. It envisages the case in which, following a transfer, the authority receiving the headroom has borrowed on the strength of, and then failed to repay, the debt. The amendment would allow regulations to make provision about the

  GC97
  borrowing rights of the authority which made the transfer. I presume the idea is that it would suffer some penalty.
  The first point to make is that no authority has ever defaulted on a loan. However, in case that ever occurs, Clause 13 provides substantial protection for lenders. Secondly, local authorities borrow for very long periods—25 years is typical—and the most usual arrangement is for the principal of the loan to be repaid only at the end of that period.
  As I have explained, this transfer of borrowing headroom would happen only while a national limit was in place. Such limits would be very exceptional and short-lived affairs—indeed, we hope one is never needed. So, in the unlikely event of default by the recipient of the transfer, it would occur well after the national limit had ended.
  It would be quite unreasonable for there to be any impact on the authority which had made the original transfer of headroom, perhaps many years earlier. Public expenditure policy does not require it, and there would be no obvious mechanism for delivering such a result. I hope that with those assurances I have satisfied the noble Baroness on Amendment No. 28, while using a bit of the explanation relating to Amendment No. 27.
  Baroness Hamwee: I apologise to the Minister for making life more difficult; I thought I was doing the right thing. However, in my defence, my only comment on the draft list was made by e-mail at about midnight, although I do not expect anyone would have been there at that time to deal with it. It was to put two amendments together in the hope of slightly speeding up business, rather than moving them apart.
  I shall read what the Minister has to say. It sounds right, but these are technical areas, and one has to be fully assured. I thank him for his explanation and I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Clause 4 agreed to.
  Baroness Hamweemoved Amendment No. 29:
  After Clause 4, insert the following new clause—
  "BORROWING LIMITS

  (1) The Secretary of State may by regulations set limits in relation to the borrowing of money by a local authority.

  (2) The Secretary of State may only make regulations under subsection (1) if the code for fiscal stability, as provided for in section 155 of the Finance Act 1998 (c. 36) (code for fiscal stability), would otherwise be breached in any way.

  (3) Before the Secretary of State may make regulations under subsection (1), the Treasury must prepare and lay before Parliament a document which shall be subject to approval by a resolution of the House of Commons explaining how the code for fiscal stability would otherwise be breached if limits were not set in relation to the borrowing of money by local authorities.

  (4) It shall be the duty of the Comptroller and Auditor General to examine the Treasury's document published under subsection (3) and report to the House of Commons on his findings."

  The noble Baroness said: The amendment provides for the Secretary of State to make regulation, as based on the code for fiscal stability in Section 155 of the
  GC98
  Finance Act 1998. When I saw that my honourable friends in another place had moved an amendment to this effect, my heart sank because I assumed that I would have to read a tome on Section 155 and the code. However, both are very short and direct.
  Section 155 gives the Treasury the duty of preparing a code for application to the formulation and implementation of fiscal policy and the policy for the management of the national debt of the principles of transparency, stability, responsibility, fairness and efficiency—all admirable principles.
  The code is almost as brief and straightforward as Section 155. For instance, paragraph 65 says:
  "The principle of responsibility means that the Government shall operate fiscal policy in a prudent way, and manage public assets, liabilities and fiscal risks with a view to ensuring that the fiscal position is sustainable over the long term".
  The purpose of the amendment is, in part, to probe whether the five principles underlie Clause 4(1) and how that clause and the Secretary of State's assessment of the national economy relate to the code. The term "national economic reasons" is very broad. Regulations under Clause 4(1) would have to be clear about the borrowing limits set, but not why. I suppose it could be said that the new clause would provide the same sauce for the goose of central government and the gander of local government.
  In another place, one of the Minister's objections was that there should not be a statutory requirement for parliamentary approval before setting a national limit. We touched on that this afternoon, but it seems questionable whether regulations would not even be subject to being prayed against. Another objection was that in any event, the Government would be implementing policies on public expenditure which had already had parliamentary scrutiny as part of the code. It seems to me that there would be no problem in confirming that in the context of the Bill. He also said that it would not be practical to specify in the Bill detailed methods for assessing national economic interests. The code, however, sets the principle—it does not set the detail. Furthermore, he said that one cannot anticipate the circumstances. I assume that that is why the code is about principle, not detail. Indeed, paragraph 11 says:
  "The Government may depart from its fiscal objectives and operating rules temporarily, provided that it specifies:

  a. the reasons for departing from the previous fiscal policy objectives and operating rules;

  b. the approach and period of time that the Government intends to take to return to the previous fiscal objectives and operating rules; and

  c. the fiscal policy objectives and operating rules that shall apply over this period".

  The Minister also said that the new prudential regime might prompt a sudden surge of borrowing. I read that sentence twice, because if this is regarded as both likely and a problem, one wonders why the Government are not, at this point, proposing, for instance, a gradual release of the restriction. I am not suggesting that we would support that—we want the wholesale release—but if that is a real issue, would it

  GC99
  not be logical rather than saying no to the kind of approach that my honourable friends and I have suggested'? I beg to move.
  Lord Rooker: The new clause would require the Secretary of State to follow much more elaborate procedures than are provided for in the Bill. Regulations could be made only to prevent a breach of the code of fiscal stability. Parliament would have to approve a report on the potential breach, and the views of the Treasury and the Comptroller and Auditor General would also be needed.
  As I have pointed out, there would have to be a serious set of circumstances to justify a national limit, such as a sudden significant downturn in the international economy. We do not believe it is practicable to specify on the face of the Bill detailed methods for assessing the national economic interests in those circumstances. The Code for Fiscal Stability lays down very broad financial principles, which would not be particularly helpful in this context.
  Along with Ministers in another place, I am not persuaded of the need for specific parliamentary approval. Any limit would be in accordance with policies on public expenditure that had already received parliamentary approval. Economic circumstances serious enough to demand national borrowing constraints inevitably would be the subject of extensive parliamentary debate.
  Parliament has never been involved in scrutinising the allocation of local authority borrowing limits, which, every year since 1990, the Government have set by the issue of credit approvals. Earlier I reminded my noble friend beside me that, when I arrived in another place in 1974, it was not normal to debate the rates before grant settlement. They were never debated; they simply whizzed through. Although I do not use that as a reason to pray in aid, things evolve over time. Where problems arise, Parliament will debate them in the circumstances that would cause this to come into operation; that is, Clause 4. Furthermore, extensive public debate would take place outside Parliament. Under the new system, a national limit would achieve exactly the same result as that under the system which has been operating since 1990. Therefore I see no need for a statutory requirement for parliamentary approval of the process.
  Also, the appropriate audit authority for local government is the Audit Commission, which we would certainly involve in discussions on any possible national limit. The appropriate independent body would be involved in the discussions to set a national limit, but there is no need for a statutory duty for such consultation.
  I hope that, with those reassurances, the noble Baroness will withdraw the proposed new clause. I understand the motives for tabling it, but one has to say that the circumstances under which such a clause would operate would not be normal.
  6.15 p.m.
  Baroness Hamwee: No, but Clause 4(1) does not say that. While I appreciate that it is difficult to find a point on the spectrum, what I am trying to achieve here is for the legislation to specify how serious a situation might need to be and that it needs to be serious. Clause 4(1) does not address that. Common sense might say that a certain situation would bring Clause 4(l) into effect, but we do not know that. The Minister has found it difficult to cite an example. We must show good faith if we leave the subsection as it is.
  What I propose in the new clause is more elaborate, but it is also more transparent. That point lies at the root of the new clause. For example, Clause 4(1) would allow the Secretary of State to take the relatively easy way of achieving a reduction in borrowing by saving to local government: no more, or much less, rather than addressing the detail in central government. That could be a temptation. Whether or not this is the right way to deal with the point, what circumstances might cause Clause 4(1) to be applied by the Secretary of State is a matter that we shall have to come back to at a later stage. For the moment, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Clause 4 agreed to.
  Clause 5 [Temporary borrowing]:
  Baroness Hanhammoved Amendment No. 30:
  Page 3, line 28, after "relates"insert" and is reasonably expected to be received within that period"
  The noble Baroness said: No doubt the Ministers opposite will be pleased to note that broadly we welcome this clause. Giving local authorities the power to make temporary borrowing arrangements for managing their in-year cash flows is wholly sensible.
  The formula for establishing the limit on such temporary borrowing is based on the amount due to the authority within the period that it has not yet received. As it stands, however, the provision does not take into account the fact that in practice some of the money will not be collected. We fear that it would be imprudent for local authorities to be able to borrow money on the assumption that in the future they will receive 100 per cent of council tax and, not only this. also assume that they can collect all of the housing revenue account arrears and council tax arrears from previous years. It is worth noting that some local authorities receive only around 60 per cent of the moneys owed to them.
  We believe that is a sensible way to approach borrowing for in-year cash-flow management purposes; it must be based on real anticipated receipts, not nominally receivable amounts that in practice everyone understands will not be received in full. I hope that the Minister will accept the amendment or undertake to deal with the issue in another way. I beg to move.
  Lord Bassam of Brighton: Amendment No. 30 seeks to change Clause 5, which allows an authority's borrowing limits to be increased temporarily. Before

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  addressing the amendment, it may be helpful if I explain how Clause 5 is meant to operate. Money owing to an authority does not always arrive on time. We all understand that. Even the most efficient authority—I am sure that Kensington and Chelsea is one of those—may face arrears of council tax or be paid late by a private sector partner. However, the authority must still pay staff salaries and other major bills on time. To meet those commitments, the authority will have no choice but to borrow until it receives the money it is owed. The loan may be needed only for a few days, but it could push total borrowing above the affordable limit that the authority has already set for itself under Clause 3.
  Authorities must keep their borrowing limit under review. If it is prudent to do so, the limit may be increased at any time by the full council. However, a sudden cash crisis could require action before a full council meeting could be convened. Clause 5 therefore provides for an automatic temporary increase in the borrowing limit. That increase is equal to the amounts due to the authority in the financial year, but not yet received. The amendment would allow the borrowing limit to be increased only by the amount of an outstanding payment which could reasonably be expected to be received in the same financial year that it is due.
  [The Sitting was suspended for a Division in the House from 6.21 p.m. to 6.31 p.m.]
  6.30 p.m.
  Lord Bassam of Brighton: Such a qualification would, however, introduce uncertainty into an assessment and in some cases make it impossible for the authority to borrow to cover a cash shortage. For example, suppose an authority is due to receive a large amount of money on 25th March and is relying upon that to pay staff salaries on 31st March. If the authority learns that the sum will not arrive until 2nd April, that sum will not be expected to be received in the same financial year that it was due. The authority would still need to borrow temporarily to pay its staff. The amendment would prevent the increase in the borrowing limit.
  We must not confer an open-ended power to borrow for revenue purposes, but other components of the statutory and accounting structure for local government will stop that happening. Authorities are required by the Local Government Finance Act 1992 to set a council tax that will balance the council's revenue budget. They are also bound by accounting rules to make proper provision for bad and doubtful debts. When a debt is written off as bad or a provision is set up for doubtful debts, that is a charge on the revenue account. It will result in additional council tax being raised or other expenditure being displaced.
  Authorities must take account of the need to make these changes when they set their council tax. If they underestimate they must make good the shortfall in the following year. One way or another, therefore, uncollectable debts will be covered by new income and the borrowing requirement will be removed.
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  I am sure those of us who are familiar with local government finance will see that as a practical and sensible way to operate. I hope with those assurances that the noble Baroness will feel able to withdraw her amendment.
  Baroness Hanham: I thank the Minister for that response. We broadly welcome what lies behind the clause. The problem that still hangs around over this is that if you are able to borrow in excess of what you are likely to receive, at some stage additional problems will stack up. I seek to limit the possibility of matters running over. The Minister has already suggested that the issue might go off until another financial year. However, if one cannot collect enough money in one year, there is no guarantee that one will be able to collect enough money in the second year to cover the borrowing from the first year, for which there is a shortfall.
  I am not sure that I accept and am happy with the Minister's reply. I think that pensions should be built in for those who are not going to receive 100 per cent of what they expect to get. That must concern practically all local authorities, all of which will be able to look for temporary borrowing. I appreciate that this is temporary borrowing. For the moment I beg leave to withdraw the amendment, but I might return to it at another stage.
  Amendment, by leave, withdrawn.
  Clause 5 agreed to.
  Clause 6 agreed to.
  Clause 7 ["Credit arrangements"]:
  Baroness Hamweemoved Amendment No. 31:
  Page 4, line 1, at end insert—
  "( ) the transaction is related to a "private finance initiative" or a "public-private partnership""
  The noble Baroness said: Clause 7(1) states that,
  "a local authority shall be taken to have entered into a credit arrangement".
  Amendment No. 31 seeks to extend that arrangement to a,
  "'private finance initiative' or a 'public private partnership"".
  That is not the most technical wording that one might find. Nevertheless, it enables some probing at this stage.
  Amendment No. 32, standing in the name of the noble Lord, Lord Hanningfield, is more detailed about splitting liabilities into those which are on the balance sheet of a local authority and those where the liability is transferred to the private sector.
  Amendment No. 31 simply gives the Minister an opportunity to explain why there is no reference to PFI or PPP. In Committee in another place, the Minister said:
  "The Government's intention is to rely as far as possible on current accounting practice to determine what does and does not count as a credit arrangement".—[Official Report, Commons Standing Committee A. 28/1/03; col. 111.]
  Do those words "as far as possible" mean that we are into further regulations? Certainly, the words "as far as possible" need either retracting or explaining.

  GC103
  Reference was made in another place to the recent Audit Commission report on PFI in schools. Among other things, the report said that,
  "government policy increasingly recognise that it is not possible to deliver strong public services that meet public: expectations using a top-down, 'one-size-fits-all' solution, but that delivery needs to be via local choice and flexibility".
  We agree with that. However, support for projects under the PFI seems inconsistent with the credit arrangements as dealt with in the Bill.
  I am unclear how PFI and PPP would fit into the new regime. Will PFI still receive special treatment? Perhaps the Minister can explain how the regimes fit together. I beg to move.
  Lord Bassam of Brighton: Amendment No. 31 seeks to change Clause 7(1), which deals with the definition of credit arrangements. The amendment is concerned with the treatment of contracts under the private finance initiative. The effect of the amendment is to classify all PFI and public-private partnership contracts as credit arrangements.
  The amendment would be unworkable without defining the terms it uses. However, it is in any event unnecessary and at odds with the strategy of Clause 7. The intention is to rely as far as possible on accounting practice to determine what counts as a credit arrangement.
  For the purposes of the prudential borrowing system, precise definitions are not so important. What is crucial is the long-term revenue implication of any contract being entered into. An authority will have to take account of the revenue impact of a transaction, whether it involves the traditional approach of borrowing to buy an asset or a more innovative approach using some form of public-private partnership. Either kind of commitment will have the effect of reducing the capacity for further affordable borrowing in future.
  If there were ever a national limit in place in accordance with Clause 4(1), the concern would be the impact of any new contract in the national accounts. In the case of PFI, the intention is that a contract will be treated as a credit arrangement only to the extent that it has to be shown on the local authority's balance sheet. Only then is the authority undertaking something akin to borrowing. That in turn depends upon the degree to which risk is transferred to the private sector partner.
  Such an approach gives authorities an incentive to achieve a significant level of risk-transfer when negotiating such contracts. It is consistent with the approach adopted under the present system. Some technical issues relating to PFI need to be clarified, as under the present system, but that can best be done in regulations. There is no need to refer to PFI explicitly in the Bill. I hope, with that assurance, the noble Baronesses will withdraw their amendment.
  Baroness Hamwee: I shall withdraw the amendment today. I accept that the amendment is unworkable without definitions. At the start I offered that acknowledgement. I am not convinced by what the
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  noble Lord has said that—although I hate the term—a level playing field is being created. Certainly, we should like to give the matter further thought and to hear the Minister's response to the next amendment. This may be a matter to which we shall want to return. For the moment, I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Lord Hanningfieldmoved Amendment No. 32:
  Page 4, line 15, at end insert—
  "( ) The Secretary of State shall lay regulations before Parliament within 30 days of the coming into force of this section providing for liabilities under Private Finance Initiative contracts to be apportioned so that, where appropriate, a part of those liabilities are to be treated as a credit arrangement."
  The noble Lord said: We have heard the Minister's response to the previous amendment, but this amendment further explores the whole issue.
  While we welcome measures to free up local authority finance and to manage local priorities in a more flexible way, there seems to be a lack of clarity about how private finance initiatives will fit into these new arrangements, although I listened very carefully to the previous response. In tabling the amendment we seek to query why private finance initiatives are not treated like other credit arrangements and included in the borrowing ceilings calculated under the prudential regime.
  In many cases, private finance initiatives consist of the procurement of some form of capital asset and the procurement of a managed service. Our concern is that despite that fact, the Government have chosen to put PFIs outside the definition of credit arrangements. The definition of a credit arrangement under the new legislation is far less prescriptive than the one that currently holds sway.
  As I understand the situation, a contract under PFI is to be treated as a credit arrangement only to the extent that it will be shown on the local authority's balance sheet, as the Minister has just said. Can he assure us that this is a sufficiently prudent system of financial management? We believe that a more robust mechanism is needed to ensure that PFI contracts continue to be treated as a credit arrangement where appropriate. That can easily be achieved by separating out the component parts of a PFI arrangement. That means that contractual transactions within a PFI arrangement, which are similar to a credit arrangement, would be subjected to the limitations of the prudential borrowing regime. That part of a PFI concerned with the provision of service would naturally remain exempt from the controls.
  As the Bill stands, local authorities will tend to adopt PFIs as a means of reinforcing that headroom within their prudential borrowing limit. For example, a local authority at its borrowing limit could legitimately enter into a PFI arrangement to finance a project that it was otherwise unable to afford. 'That does not necessarily represent the best choice for the local authority, the best way to provide quality services to the public or the most prudent form of financial management. We are concerned that in a Bill that

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  claims to champion choice for local authorities, certain transactional methods are receiving preferential treatment from the Government. I beg to move.
  6.45 p.m.
  Lord Rooker: I hope that this explanation on Amendment No. 32, along with that given by my noble friend on the previous amendment, will satisfy the Committee that real, practical problems would result from Amendment No. 32. As the noble Lord said, the amendment is concerned with the treatment of contracts under the private finance initiative. It seeks to insert a new subsection requiring regulations to be made bringing part of the liabilities under a PFI contract within the definition of a credit arrangement.
  The amendment seems to be based on the assumption that liabilities under a PFI contract can be easily separated into those relating to the capital asset and those relating to the associated services. But the essence of a PFI contract is that it is a package deal. The authority is paying for the use of an efficiently managed and maintained building. The asset and the services are inextricably linked. The charge cannot be apportioned between those elements.
  Therefore, the whole value of the PFI contract must be taken into account. When calculating the affordable borrowing limit, the authority must consider all long-term revenue commitments including the full value of PFI deals as well as loans. If there is ever a national limit, that will take account not just of borrowing but of other contracts which score on the local authority's balance sheet. If a PFI deal scores in that way, then again its full value must be taken into account, not just some part of it. The required results are achieved by the legislation as already drafted and the amendment is unnecessary. I hope that, with those reassurances, the amendment will be withdrawn.
  I am not so sure that the last couple of sentences which I have just uttered are relevant to the amendment. However, given that the noble Lord is the leader of an exemplary, good council—although not quite excellent—I wonder whether his treasurer or someone else could explain to him whether it would be easy and practicable to separate out the different elements of a PFI contract.
  Lord Hanningfield: I thank the Minister for his answer. We feel that it is possible to separate them. Some projects are very much capital orientated. For example, in Essex we built a road under the PFI scheme that cost £120 million. That is essentially a capital scheme. As the Minister said, some projects such as schools are both capital and revenue projects. However, one could separate the capital element from the revenue element. That is why a very substantial project such as a £120 million road scheme should be taken very much into consideration when considering the prudential borrowing of a local authority.
  Perhaps the Minister could look again at the matter before we reach Report stage. We have to clarify the relationships between some of these enormous PFI
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  schemes and the other borrowing arrangements of local authorities. Perhaps we could provide more evidence to the Minister before Report stage on exactly how that might work. The Government might like to look again at the whole issue.
  Lord Rooker: I am quite happy to receive any evidence. I realise that I am going to be rapped over the knuckles for the caveat which I gave at the end of my reply. However, when I read:
  "The required results are achieved by the legislation as already drafted and the amendment is unnecessary",
  I thought that the amendment is doing something that we do not agree with anyway. I hope that I have that right. I am sure that I will be told if I am wrong. The amendment seeks to separate out the various bits of the PFI contract. I spent 10 minutes saying that that could not be done, but I then said that it is unnecessary. So unless I am wrong about that, I think that one of my sentences was inoperative.
  Each contract has to be looked at to see whether as a package it would score against the borrowing limits. I do not know—I have no experience in this area—whether it is as plain as a pikestaff that some PFI contracts self-evidently do not score against the limit. However, because of the way in which a package is put together for the bidding process, it is inevitably complex and difficult when a package is then split. However, I shall be happy to receive any evidence that the noble Lord wishes to give me between now and Report.
  Lord Hanningfield: I thank the Minister for that. The noble Baroness, Lady Hamwee, highlighted some of the problems in her amendment. We are not seeking in our amendments to reduce freedom and flexibility, but one should take very large capital schemes into account when considering the borrowing arrangements for local authorities, to ensure that that is properly dealt with in the overall arrangements. I shall not press the matter now but I am sure that we will return to it on Report. I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Clause 7 agreed to.
  Clause 8 [Control of credit arrangements]:
  [Amendment No. 33 not moved.]
  Lord Hanningfieldmoved Amendment No. 34:
  Page 4, line 22, leave out paragraph (a).
  The noble Lord said: As we have said several times in the Bill's early stages, we welcome the greater flexibility that the Government are proposing for local authorities under the prudential regime. However, we are still concerned that some of the detail has not been properly thought through. For example, we are not quite clear what is meant by the "cost" of an arrangement. It is also not clear from Clause 3 that there is an absolute requirement on the Government to clarify that issue through regulations. If that is the intention, perhaps the Government could take this

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  opportunity to explain what they mean by the "cost" of an arrangement, and to tighten up Clause 3 to make that clear. I beg to move.
  Lord Rooker: Again I hope that I can satisfy the noble Lord. Knowing the sort of thing that is in my notes, I hope that I can do that without a full frontal attack on some of the things that local government got up to in the past. Nevertheless, I will begin at the beginning.
  Amendment No. 34 relates to Clause 8 which makes further provision about credit arrangements. That term has already been defined in Clause 7, which has been agreed to. The purpose of Clause 8 is to specify how credit arrangements are to be taken into account under the capital controls. The amendment would delete subsection (2)(a) which provides that entering into credit arrangements is to be treated as undertaking an equivalent amount of borrowing, for the purposes of applying the borrowing limits set out under Clauses 3 and 4. Without this provision, the capital controls would apply when authorities took out loans but not when they undertook other forms of credit. Authorities would have to take account only of straightforward borrowing transactions when considering the limits prescribed under the legislation.
  That would recreate the loopholes of the 1980s which the present system was designed to plug. In the 1980s authorities found that they could evade the borrowing controls that then existed by acquiring capital assets through leasing and other forms of credit. However, the use of such kinds of credit arrangement has exactly the same financial effects as borrowing. At the local level, it creates long-term revenue commitments which may prove unaffordable. At the national level, there is the same increase in public expenditure which would arise if the authority had borrowed money to buy the assets outright. Credit arrangements must therefore be taken into account both for the purposes of the local affordable borrowing limit and any national limit that may ever be imposed.
  The amendment leaves in place subsection (2)(b) which would apply the capital controls to the variation of a credit arrangement, such as extending an existing lease. However, it is even more important to cover the entry into completely new leases and other credit arrangements, because that provides the greatest scope for evasion of the controls. That is why subsection (2)(a) is so vital to the system. In the 1980s many local authority treasurers and others made their name by getting round some of those issues and controls by using the wheezes set up at that time.
  I have just received a note relating to the earlier comments of the noble Lord, Lord Hanningfield. No, it does not. It essentially says, "Please do not leave the room without talking to me, so we can be helpful on the previous amendment".
  Paragraph (a) is necessary. Given the expertise of those in local government and of their advisers, it would not be very clever to create loopholes by leaving it out. That would be the inevitable consequence. We are not saying that people are hell-bent on distorting
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  the system. However, where there is a possibility for that to happen, where there is a loophole and where it is legal, treasurers will advise their councillors accordingly. They will look at the local circumstances and say, "The Government have not banned it. We will get on and do it". In this case, we do not want to create the loophole.
  Lord Hanningfield: I thank the Minister for that response. I accept much of what he says. One wants to be quite clear what the regime stands for and about the possibilities within it. However, I still think that in order to make the Minister's comments just now completely understandable, the Government could tighten up Clause 3. 1 tabled this probing amendment because we were not clear what was meant by the "cost" of the arrangement. That has now been explained very fully. It would be appropriate for that to be spelled out in the Bill. Perhaps the Minister could re-examine the wording of Clause 3 in order to ensure the clarity of the Government's proposal.
  Lord Rooker: I have also received a note which draws my attention to the draft regulations which we have in front of us. Paragraphs 5 and 6 are perhaps helpful by defining the concept of the cost of credit arrangements as the amount of the liability shown in the authority's accounts. So the draft regulations may be able to answer the query.
  Lord Hanningfield: I thank the Minister for that and beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Lord Hanningfieldmoved Amendment No. 35:
  Page 4, line 30, leave out subsection (4).
  The noble Lord said: It seems that the Secretary of State wishes to impose additional restrictions on the power of any particular authority to enter into credit arrangements. Those restrictions are too far-reaching. Will the Minister explain what form those "additional restrictions" may take and in what circumstances they might be applied? We are concerned that this provision allows the Secretary of State to intervene in a local authority's affairs at will It may not be the intention of this Secretary of State to exercise this power in a highhanded way, but who can say to what ends the powers might be put at some future date? We are unhappy about such general powers appearing on the statute book without a clear explanation of their purpose and the circumstances in which they might be used. I beg to move.
  7 p.m.
  Baroness Hamwee: We support the amendment. I suspect that the Government do not know what circumstances would give rise to imposing additional restrictions. The point of the subsection is to allow us to deal swiftly with any good wheezes that clever local authority treasurers might find. I can put it like that in view of the way in which the Minister replied to the previous amendment.

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  It is potentially quite a heavy-handed provision. There is a degree of game playing between central and local government in trying to find ways around restrictions. That may sound more sinister than I mean. I refer to the way local authorities seek opportunities to exercise the freedom all of us believe that they should have. There is a bit of a game about this, not unlike individuals and companies seeking to avoid rather than evade tax provisions. It is quite something to be given such a wide power, and we support a restriction on it.
  Lord Bassam of Brighton: The noble Lord, Lord Hanningfield, has been motivated by the "fear factor" in moving this amendment. He is fearful of what the power might be used for at some point in the future.
  Regulation 7 of the draft regulations indicates how we propose to use this power. We want to preserve the prohibition in present legislation on using credit arrangements for anything other than the acquisition of capital assets. Credit, like borrowing, should he used only to meet capital needs and not to pay for services and running costs.
  At present, the restriction appears in primary legislation, but it is more appropriate to deal with it in regulations because then any necessary exemptions can be more flexibly introduced. I am sure that the noble Lord will see the advantages in that. The main exemption, as the draft regulations show, will be in relation to private finance initiative contracts. These are of a hybrid nature, providing both capital assets and services. The regulations will ensure that PFI contracts are not inhibited by this restriction on the use of credit arrangements for services.
  It is also possible that the power in Clause 8(4) might be needed to prohibit kinds of credit transactions which were being used to avoid the controls under Part 1. In the 1980s, much ingenuity was shown by local authorities—my own included, at the better end of the market—in creating devices to get around the capital controls of the day. We need the flexibility to respond in future to any innovative schemes, as they might be described, that might emerge solely as a way round what is a sensible system of control. The power is there to deal with a situation in extremis, when there is a deliberate attempt to flout sensible and prudent regulations.
  Baroness Hamwee: I hear what the Minister says about it being sensible to leave certain provisions to regulations because that allows flexibility for exemptions. However, it would be nice if Clause 8(4) referred to possible exemptions as well as restrictions.
  Lord Hanningfield: I agree with the remarks of noble Baroness, Lady Hamwee. I accept the explanation from the Minister, but the clause takes wide powers for the Secretary of State, and although they may be spelled out in the regulations now, that would not stop even wider powers from being spelled out in future regulations. We are concerned about the wide powers given in the Bill.
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  I accept the Minister's comments on the regulations. I have not studied them, but I shall do so and we may return to the clause at a later stage. I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Baroness Hamweemoved Amendment No. 36:
  Page 4, line 31, at end insert—
  "( ) Before making any regulations under subsection (3) or (4), the Secretary of State shall consult such representatives of local government as he considers appropriate, the Chartered Institute of Public Finance and Accountancy and the Audit Commission for Local Authorities and the National Health Service in England and Wales."
  The noble Baroness said: The amendment applies to subsections (3) and (4) of Clause 8. Subsection (3) relates to regulations about how to calculate the cost of a credit arrangement and subsection (4) to the additional restrictions that we have just been discussing.
  The amendment provides that, before any such regulations are made, the Secretary of State will consult representatives of local government, CIPFA and the Audit Commission. I hope we will be told that that would be the Secretary of State's intention and I hope that we can have it on the record as a commitment. I beg to move.
  Lord Bassam of Brighton: The purpose of the amendment is plain. I am happy to confirm that it is our continuing intention to consult the Local Government Association, CIPFA and the Audit Commission because they are the parties we traditionally consult when dealing with capital finance matters and particular regulations. They have been closely involved in the preparation of the draft regulations, which include regulations relying on the powers in subsections (3) and (4).
  We will continue to consult on the regulations as they are finalised, as we greatly value their contribution. It would be a foolish government which did not consult people with that level of expertise and seek their full co-operation with secondary legislation. We do not believe that there is a need to set out the statutory duty to consult in the legislation, as the system has worked perfectly well for many years, and we have benefited from that. I hope that with that assurance the noble Baroness, Lady Hamwee, will withdraw her amendment.
  Baroness Hamwee: The Minister is happy, and I am happy to withdraw the amendment.
  Amendment, by leave, withdrawn.
  Clause 8 agreed to.
  Clause 9 ["Capital receipt"]:
  Baroness Hanhammoved Amendment No. 37:
  Page 4, line 37, leave out subsection (2).
  The noble Baroness said: In moving the amendment I shall speak also to Amendment No. 38. They relate to the vexed question of the use of capital receipts.

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  The first matter that we want to probe is what exactly is meant by a "capital asset". The regulations address what is to be treated as a "capital receipt". I am not very clear on that matter, but no doubt the Minister will explain. Under the definition in subsection (2), if a capital asset is something that is acquired only by capital expenditure, what would be the position of assets acquired under leasing arrangements that were financed on the revenue account? For example, we might refer to the payment of a mortgage on the acquisition of a building. What definition of capital expenditure is used in that?
  Does the phrase,
  "at the time of the disposal",
  mean that the definition of capital expenditure could be changed by order so that the Government could catch assets that were not subject to these powers under the rules in force at the time when a local authority decided on an investment?
  Will the Government publish draft regulations for subsection (3)? The answer is probably that they are here—in fact, now I look, I find that the answer is yes. However, I would be grateful if the Minister could give some further explanation of matters to be treated under Part 3 of the regulations. In what circumstances under subsection (3) would the Government decide that a capital receipt would not be a capital receipt? Questions are raised all along by the terminology of the Bill; it may be perfectly straightforward, but it does not look frightfully straightforward to me.
  What is the purpose of subsection (3)(b)? Why would the Government want to say that something not properly classed as a capital receipt was a capital receipt? Again, I seek an explanation of the wording. What particular receipts are the Government thinking of? Are they those in the draft regulations under Part 3, or are there others to be considered? Would they include a legacy or a transfer from a local trust or business? That should be spelled out so that local authorities are clear about what is included in capital receipts that is over and beyond what they might receive from a housing source. I beg to move.
  Baroness Maddock: I shall speak to Amendments Nos. 37 and 38, to which my noble friend Lady Hamwee has attached her name, and support the questions asked by the noble Baroness, Lady Hanham.
  I have had a chance to glance briefly at the draft regulations, which refer mostly to matters relating to housing. We would all be very grateful if the Minister could clarify exactly what is involved. We support the noble Baroness, Lady Hanham, in her amendments, and await the Minister's further explanation.
  Lord Rooker: The clause is an important part of the Bill. Amendment No. 37 relates to the clause, which deals with the definition of the term "capital receipts". The definition is essential and paves the way for the provisions on the use of capital receipts set out in Clauses 10 and 11. The amendment would remove subsection (2), which is a key element in the definition.
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  Subsection (1) begins by defining a capital receipt as the sum received in respect of the disposal of a capital asset. Subsection (2) says that an asset is a capital asset if its acquisition would count as capital expenditure. That links the whole definition to that of capital expenditure in Clause 16, to which I shall come shortly. A similar approach is taken in the present legislation and has worked well since 1990. Its great advantage is that capital expenditure is a concept derived directly from standard accounting practice. We thereby minimise the need to create special statutory definitions. By deleting subsection (2), the amendment would sever the link between capital receipts and capital expenditure, making the definition unworkable.
  Amendment No. 38 would remove subsection (3), which provides power to vary the definition by regulations. However, that power is essential, as I shall try to explain. Draft Regulations 8 to 11 illustrate how the power would be used. Draft Regulation 8 defines as a capital receipt the repayment to an authority of a loan or grant which it had made to another body for capital expenditure. That is important, because such a grant or loan would normally have been made out of the authority's capital resources. So, when it is repaid, we need to ensure the money goes to replenish those capital resources and can be used only for capital expenditure. The regulation achieves that result. A similar rule exists under present legislation.
  Draft Regulations 9 and 10 also carry forward existing rules. They define as capital receipts, first, the proceeds of selling mortgage portfolios and, secondly, payments by tenants under shared ownership arrangements to increase their stake in their homes. Similar regulations had to be made under the present regime to remove technical doubts that such proceeds were capital receipts. That was necessary to clarify that they were subject to the housing "set-aside" requirement. Under the new system, the regulations will confirm that such sales proceeds are to come within the pooling arrangements in Clause 11.
  Removing subsection (3) would prevent that from being done. It would also deprive authorities of the flexibility offered by draft Regulation 11, which exempts low-value sums from being treated as capital receipts. Again, that rule also applies under the present system. I hope that the Committee will be reassured in this early part of the debate on capital receipts, as that would make our debates on the other amendments more easily understood.
  7.15 p.m.
  Baroness Hanham: I have tried to read the draft regulations as well as sorting out the Minister's response to my question. To some extent, I can see the entanglement between subsections (1) and (2). Subsection (2) states that if something is now a capital asset, it should have been a capital asset when it was bought. I am not sure about the relationship between a capital asset and the capital receipt received for it.

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  I have a couple of other questions. Is a capital asset only something acquired by capital expenditure when it would be in the position of assets required under leasing arrangements? I do not know whether that point was dealt with. An example is the payment of a mortgage on the acquisition of a building. If the point cannot be dealt with now, I am happy to receive a written reply. I do not think that the Minister responded to my question on the definition of capital expenditure. This matter will be a kernel part of the Bill and the local authorities' responsibilities, so I may need to return to it later.
  Lord Rooker: I am taking advice, as I have referred in my remarks to other clauses, particularly Clause 16, in dealing with this point. When we reach Clause 16, I shall be able to answer the noble Baroness. It is a very inadequate approach, but it is dictated by how the amendments have been grouped. We are dealing with some points more than once, but I must adhere to the list of amendments that I have been given. The definition of capital expenditure will be dealt with when we debate Amendments 61, 62 and 63 to Clause 16. There will also be a clause stand-part debate, if required.
  Baroness Hanham: I thank the Minister. Before we finish, when is a capital receipt not a capital receipt?
  Lord Rooker: When it has not been received, I suppose. Other clauses relate to the use of capital receipts and non-money receipts. I know that there is jollity about subsection (2), but it tries to define in normal language how the system operates in local government at present. We are not inventing the wheel; this is part of a normal process. If at the time of an asset's disposal it had to be bought again through capital expenditure, it is a capital asset. There must be cases—but I cannot think of one—where an asset can become a mixture of revenue and capital or something so that by the time of its disposal its nature has changed slightly. Anything below £10,000 is not treated as a capital receipt. We know that, because it is stated in the regulations, and I have already drawn attention to it. If I have given an inadequate answer, as I feel that I have done, I will be happy to return to the matter. This is one area on which I will have to write to the noble Baroness if there is a problem. I will do so before the next Committee sitting.
  Baroness Hanham: I thank the Minister for that. I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  [Amendment No. 38 not moved.]
  Baroness Hanhammoved Amendment No. 39:
  Page 5, line 3, after "provision" insert "in relation to a local authority which is not debt-free at the time of the receipt"
  The noble Baroness said: If the Minister is not prepared to delete Clause 3—1 think that he is not—we believe that this alternative should be agreed at the very least. Its purpose would be to make the subsection inapplicable to debt-free councils. We will return to the
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  matter later, when we discuss the use of capital receipts. When an authority is debt-free, it is excessive and onerous for the Secretary of State to have the ability to regard a receipt as a capital receipt, in view of what he has in mind in Clauses 10 and 11. I beg to move.
  Lord Rooker: Again, we are dealing with an issue that will be split between different groups of amendments. Amendment No. 39 relates to Clause 9, which concerns capital receipts. Subsection (1) first defines a capital receipt as the proceeds of the sale of an asset. Subsection (3) then allows that definition to be varied by regulations. Under subsection (3)(b), regulations could define as a capital receipt a sum that was unrelated to the disposal of any asset. The amendment would prevent regulations under the latter power being applied to debt-free authorities.
  I can best explain how we intend to use the power in Clause 9(3)(b) by reference to Regulation 8 in the draft regulations that we have placed in the Library. That regulation defines as a capital receipt the sum that an authority receives when it obtains the repayment of a loan or grant that it had made to another body for capital expenditure. Such a sum does not arise from the disposal of an asset, but it needs to be treated as a capital receipt. That is because the grant or loan would normally have been funded out of the authority's capital resources—money that may have been raised by the authority itself borrowing. So, when the money comes back to the authority, we need to ensure that it can be used only for capital expenditure and not to meet revenue costs.
  That is achieved by defining the sum as a capital receipt. Draft Regulation 17 ensures that capital receipts may be spent only for capital purposes. A similar rule exists under present legislation. As now, this provision needs to apply to all authorities, whether or not debt-free.
  The amendment may have been prompted by concerns that this power could he used to extend the scope of the pooling arrangements provided for in Clause 11. That is, however, firmly ruled out by the terms of Clause 11(3), which says that pooling can apply only to receipts from the disposal of an interest in housing land. I hope that my explanation will make our debates on pooling arrangements less complicated. With those reassurances, I hope that the noble Baroness will withdraw her amendment.
  Baroness Hanham: I thank the Minister for that. The response begins to touch on the problems that we will have over the pooling of capital receipts, the nature of debt-free authorities and how they are placed in the position of pooling. I agree that the trouble with having to move amendments as we do is that we end up touching on some areas that will be dealt with later. As we will deal with the matter in detail when we reach the provisions on pooling—perhaps not today—we might return to it then. With that in mind, I beg leave to withdraw the amendment. I hope that we do not deal with pooling today.
  Amendment, by leave, withdrawn.
  Baroness Maddockmoved Amendment No. 40:
  Page 5, line 10, at end insert—
  "( ) Regulations made under this section shall be subject to affirmative resolution by both Houses of Parliament."
  The noble Baroness said: In moving Amendment No. 40 I wish also to speak to Amendment No. 41. The amendments relate to parliamentary scrutiny and consultation. Given our opening discussion on capital receipts, it is even more important that we scrutinise and consult properly when the regulations are made. Previously, the Minister has said that they do not want too much scrutiny; however, there have been times when there has not been insufficient scrutiny in the area of housing finance in the past. Indeed, we have had to have last-minute regulations and changes, particularly in relation to housing associations.
  We have perhaps reached the part of the Bill—how capital receipts are dealt with—that gives the least freedom to local authorities. I am sure that in the ensuing amendments, which I understand we will not be discussing tonight, there will be matters to be raised. Having listened to the questions of the noble Baroness, Lady Hanham, and the Minister's reply, I think that it is important that there be proper scrutiny and consultation before any changes are made. Such changes can be crucial to the local authorities and others involved, particularly in the provision of housing. I suspect that the Government will find it easier to convince us that there was proper consultation than they could convince us that there was proper parliamentary scrutiny of changes to the regulations. I beg to move.
  Baroness Hanham: We support the amendment. The draft regulations may change. Before any regulations are put forward, it seems perfectly proper that the House should have the right of seeing them. I support both the scrutiny and consultation aspects. The Government seem to have accepted the need to consult the local government associations, but other authorities have been identified. As usual, I would support consultation with them.
  Lord Bassam of Brighton: Amendment No. 40 relates to Clause 9, which defines capital receipts. The clause includes a power to vary the basic definition by regulations. The Bill as drafted provides for such regulations to be made under the negative resolution procedure.
  When drafting the Bill, it seemed to us right to opt for the negative resolution procedure here, since the similar power under the present capital finance system
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  relies upon that procedure. Since then, of course, all the regulation-making powers in the Bill have come under the scrutiny of the Delegated Powers and Regulatory Reform Committee. In its 16th Report of 2nd April 2003, covering this Bill, the committee recommended no change in the procedure proposed for the Clause 9 power. In view of that, the amendment is unnecessary. We have a very good track record of following recommendations from that committee. Here, we are sticking exactly to its recommendation, as we think that it is the right way to deal with the issue.
  Amendment No. 41 would require consultation with local government representatives, CIPFA and the Audit Commission. In some ways, it reflects earlier amendments that sought to include in the Bill an obligation to consult prior to making regulations.
  The local government associations, CIPFA and the Audit Commission are the very organisations that we consult as a matter of course on capital finance regulations. They were very closely involved in the drafting of the regulations that are placed in the Library of the House. We will continue to consult those organisations, and we very much value their comments and recommendations. We do not think that there is a need to include the proposed provisions in the Bill. We hope that the assurance that there will be continued consultation on the amendments will satisfy the noble Baroness so that she feels able to withdraw the amendments.
  Baroness Maddock: I thank the Minister for his answer; it does not surprise me. Earlier, the noble Lord, Lord Dahrendorf, said that when the Committee on Delegated Powers and Regulatory Reform does not object to something, it does not necessarily mean that it says "Yes" to it. On the previous amendment, the Minister waxed lyrical about how it gave great support for what was happening. We will return to some of the capital receipts issues in further amendments. I feel sure that, as a result of those discussions, we will wish to return to the matter, perhaps on Report. I accept the Minister's confirmation in good faith that there will he proper consultation. I beg leave to withdraw the amendment.
  Amendment, by leave, withdrawn.
  [Amendment No. 41 not moved.]
  Clause 9 agreed to.
  Lord Rooker: I think that this may be a convenient moment for the Committee to adjourn until Wednesday at 3.30 p.m.
  The Committee adjourned at half past seven o'clock.