§ 4.8 p.m.
§ The Earl of KINNOULL
My Lords, I beg to move that this Bill be now read a second time. This Bill has a somewhat formidable title, but it simply concerns the direct labour organisations of local authorities, and is of acute interest to all local councillors and, indeed, ratepayers. It has one prime purpose and aim, which is to meet what is now to many people an urgent need for a more effective control of DLOs, with particular reference to control of their costings, their productivity and their efficiency, and to put on to DLOs, and those who run them, a duty to be competitive and in no way to waste ratepayers' money. I know that that is an opening which the Government will support.
The need for greater control and for legislation has grown more acute, because of what has become almost continual exposure. Although the cases that district auditors bring forward and the number of reports which they make are not numerous, nevertheless there is a continual drip of worrying reports from district auditors about wastages, overspending and a general lack of cost control over the 1497 DLOs. But, also—and here one speaks personally, as well as for many other people—there is the continual worry of ratepayers. Ratepayers are becoming more and more militant, as indeed I am, about the massive, swingeing rates increases facing us for 1979, and the seemingly powerless control of our elected council members over the financial affairs of councils.
The House will recall that the origin of the direct labour organisations goes back a long way in local government history. I believe that the first direct labour organisation was set up in West Ham in 1893. Today there are approximately 487 direct labour organisations, which operate on an internal funding basis of something like £1,200 million of construction work per year.
These organisations differ enormously in their size and capacity. Some of them undertake major works, such as housing, schools and roads as well as the required maintenance, while others concentrate only on the very important emergency services which are carried out by the direct labour organisations. I was going to cite as an emergency service the gritting of roads, but perhaps that is an unfortunate example. Many direct labour organisations are very efficient units which give an extremely good service to ratepayers and represent very good value for money. There are, however, some direct labour organisations, which the Government and Members of your Lordships' House know about, which cause considerable concern when one reads what the district auditors have said about the way that they run their contracts.
Astonishment is sometimes expressed by councillors, who are the elected members and who are supposed to control the direct labour organisations, about what the district auditors have reported. If one looks at the Greater London Council in 1978 the district auditor reported that no final contracts would ever be produced for 163 contracts, that there was overspending on 36 projects costing £1¼ million and that the present cost of the direct labour organisation department to the Greater London Council was exceeding the value of work by £¼ million per month.
There was a very large housing programme in Glasgow some years ago. I 1498 do not know what was the original price of the contract, but after £2 million had been spent upon that contract it was abandoned when it was discovered that by the time the contract would have finished—and by that time the contract was already delayed by five years—the cost of a flat would have reached £36,000. In South Tyneside, the district auditor reported that cost control was quite inadequate, that £1 million had been overspent on 21 projects and that labour charges were 2¼ times more than the average. The district auditor could find no trace of some of the bonuses paid for extra works.
In Liverpool, it was discovered in 1977—again, I think, by the district auditor—that the cost of a new house built by the direct labour organisation was about £7,500, whereas a similar competitive estimate from an outside contractor came to £5,300. I hope that those few examples —I am sure that those who are taking part in this debate will have others—illustrate and demonstrate the need for far tighter control of district labour organisations.
May I remind your Lordships that this point was picked up by the Layfield Committee when it reported, that it was highlighted in the CIPFA report—the Chartered Institute of Public Finance and Accountancy—of 1975 and accepted by the present Government as long ago as 1976, at the time of the CIPFA report.
What is the root cause of the lack of control in direct labour organisations, and does it require legislation? I believe that the root cause—I am making no sterile, political point here—is that where direct labour organisations undertake major new works or large maintenance contracts they do not operate or, indeed, think like a trading undertaking. I do not blame them; they are not asked to do so under the present system of accountancy. There is no direct comparison on overhead charges and on capital employed, and there is no vital spur of competition or fear that the department could go bankrupt and be closed down and become non-existent if it continued to show losses. These are not my arguments. They are judgments to be inferred from many of the reports of district auditors, from the CIPFA report and even, indeed, from the Government's working party's report which was published in September 1978.
1499 Can the direct labour organisations be more effectively controlled within existing statutes, or is there a necessity for legislation? The answer, I believe, is that there can be improvements within the existing statutes but that they would be only marginal. There is an urgent need for legislation. It is now a matter of some priority, particularly for ratepayers. The House will recall that the present guidelines to local authorities on direct labour organisations go back as far as 1969. The Government's circular dealt with competition, trading undertakings, profitability and separate accountancy practice.
Turning to competition, the circular stated that direct labour organisations should be encouraged to tender a proportion of work as a test of efficiency. No recommendations were made regarding trading organisations. On separate accounts, the recommendation was that all costs should be recorded separately, but only in the case of new work.
Perhaps the most important and informed document since that time has been the CIPFA report of 1975. It is upon that report that this Bill is entirely based. On competition, the CIPFA report recommended that tendering should be adopted for the great majority of works and that the definition of what is the minimum that they should put out to tender should be £5,000 on any contract. The report was very firm about trading undertakings: that the direct labour organisations should be treated as trading services and should therefore be able to show a surplus or a deficiency. Indeed, this would give a financial discipline to the direct labour organisations and be of help to the councils, councillors and, indeed, the ratepayers.
What have the Government done since CIPFA? In 1976, the Government promised a Bill, but this was never hatched; anyway, it was never published. The Government then appointed a working party which took 2¾ years to produce what many people believe to be a watered down version of acceptance of the CIPFA report. The Government then announced that as soon as possible they would publish a consultative document, and in 1977 they announced that they would send what was termed, "further advice by circular to local authorities, stressing the 1500 need within the existing Statutes for careful and accurate accounting, for fair procedures and for a clear comparison with the private sector." I am quoting from col. 1183 of Hansard during the passage of the Local Authorities (Restoration of Works Powers) Bill 1977. The Government also indicated at that time what were their views. Their views were quite clear.
The Government's policy—here I quote from col. 492 of 7th July 1977 when the noble Baroness, Lady Birk, was the Government spokesman—was stated as follows:The Government's policy is to encourage efficient direct labour organisations. In this context the Government would have implemented in essence the recommendations in the report of June 1975 by the Chartered Institute of Public Finance and Accountancy. Separate accounts of DLO activities would then have been required. Charges would not have been limited to actual costs as at present, but could be based on original tenders, so that the extent of profits and losses would be known. All appropriate overheads would have had to be taken into account, including a return on capital employed. A local authority would have been under a duty to avoid making a loss, and powers would have been taken to close down activities where an organisation failed consistently to meet the financial objective".That was the policy of the Government in 1977; but we see now, after four years of the CIPFA report, despite the need, despite the evidence and despite the concern, the Government have still not come forward with a Bill. I hope that the Government will be able to accept the general principles of this Bill this afternoon and will encourage its Second Reading; so perhaps now I may turn briefly to the Bill itself.
The Bill has three prime purposes: first, to organise separate accounts for DLOs, to demonstrate to local authorities, to councils and to ratepayers the true costs and competitive positions of the DLOs. Secondly, to establish that the DLOs could be a trading undertaking with certain limited purposes; and, thirdly, to impose a duty that they should compete for 80 per cent. of the value of new or other works as set out under Clause 10, which clause refers to any contract over £10,000.
Clauses 1 and 2 provide for the establishment of new accountancy systems suitable for a trading undertaking. Clause 3 provides, together with Clause 10, a form of tendering with a duty to tender 1501 for 80 per cent. of the work. Clause 4 limits the operations of the DLOs as under existing legislation; in other words, we are not trying to widen the powers of the DLOs. Clause 5 and Schedule 1 set out the additional financial requirements to ensure the true cost position for fair competition. Clause 6 and Schedule 2 deal with the tendering procedure, again to ensure the fair comparison with outside tenders. Clauses 7 and 8 and Schedule 3 set out the accountancy procedures. Clause 9 imposes a duty on the Secretary of State within two years of making an order to bring the Schedules to the Act into force and Clause 10 defines what constitutes a major construction work, as I have already said.
I wish to add two things about the Bill. First, it will be seen that under Clause 11 it excludes Scotland and Northern Ireland. In fact this was a mistake on my part and I hope it may be corrected in Committee. There are a number of other possible faults with the Bill as at present drafted. There is no provision as yet for the Secretary of State to require the closure of a Department which consistently makes a loss, and I hope that this may be put into the Bill. Also, in the Explanatory Memorandum to the Bill, under paragraph (c) "the value of new construction work "should read" the value of major construction work", as defined in Clause 10.
I hope that short explanation gives the bones and purposes of the Bill. This is not a political Bill, on a subject which attracts fierce comment from the extremes of many parties. It is a Bill designed to minimise wastage and loss of ratepayers' money, and to encourage greater control and direction of the DLOs. The need has been recognised and it is a Bill which, I would submit to the House, the Government should have introduced many years ago. I hope that the House will give the Bill a Second Reading. I beg to move.
§ Moved, That the Bill be now read 2a.— (The Earl of Kinnoull.)
§ 4.25 p.m.
§ Lord SANDYS
My Lords, we welcome this Bill most warmly and we believe that my noble friend Lord Kinnoull has performed a major public service in bringing this matter to your Lordships' attention. All of us as ratepayers share 1502 an interest in the Bill. In the first place, I congratulate my noble friend on being so persistent over this important subject. We shared that same interest in a Bill with a long name—and I will quote it: Local Authority (Restoration of Works Powers) Bill 1977. At that time it revealed a situation which was, to say the least, disquieting. Since then it has become much more disquieting and my noble friend has suggested that some of us may make other quotations, so I think it would be appropriate if I were to accept his invitation and mention what has been taking place in Liverpool over the past nine or 10 years.
My first quotation is from the Liverpool Daily Post of 1st May 1969, nearly 10 years ago. At that time the Department was expected to lose £1½ million on work worth about £6½ million. That was the first point which the Liverpool Daily Post brought out. Going on a number of years, to the 20th September 1978–last autumn—the same newspaper, the Liverpool Daily Post, advised its readers that the city architect of Liverpool reported that the Department's—and that of course is the Direct Labour Department—last four major schemes for housing rehabilitation were 19 per cent. above what he regarded as a reasonable price.
Let us take these two facts together. In the first case, the much earlier date of nearly 10 years ago when the Department was losing £1½ million on a £6½ million project, did it not then suggest to that Department that it would be very well worthwhile looking further into the means of accountancy? My Lords, apparently not, because last autumn the city architect considered that the figures were nearly 20 per cent. above a reasonable price. I think that points more than anything else to the need for the elimination of the waste of resources. On this side of the House our party has taken a special interest in this factor, and for that reason alone I believe that my noble friend should be commended for bringing forward this Bill.
One of the principal factors is that the manual drawn up by the Ministry of Housing and Local Government in its working party of July 1969, and recommended in the departmental circular 587/69, is over 10 years old, and of course there are very definite weaknesses in the 1503 present situation. First, the direct labour departments should win a significant proportion of their work in competition, and for that purpose the Bill quotes 80 per cent. At the present moment there is no compulsion, and I will refer to that again later in my speech: there is no compulsion on direct works departments to tender competitively. The second weakness is that the basis of charging works carried out should be on costs incurred and not on the original tender.
The Comptroller and Auditor General has an interest in this, but he has effectively handed over his interest to the Chartered Institute of Public Finance and Accounting, referred to as CIPFA, and my noble friend has referred to the CIPFA report at some length. So, at the present moment there is no accurate way of assessing whether the ratepayer and the local authority as a whole is getting value for money. The CIPFA working party on direct works undertaking accounting reported on this subject, as my noble friend has said, in 1975, and it said this—and I quote the exact words:Competition is the only real means of ensuring that an authority gets genuine value for money from its direct works undertaking".That comes from Part I, paragraph 7(12). A little further down in the same paragraph they say:There is no compulsion on direct works undertakings to tender competitively".So the basic information which we can adduce from the present situation is that the most effective systems of control should be these. First, all costs attributable to their operations must be recorded in completely separate accounts and the DLOs should be established as separate trading organisations; secondly, effective competition must take place for at least 80 per cent. of the work; thirdly, the value of the work must be certified by independent supervision and inspection; fourthly, it is essential that repairs and maintenance should be the subject of separate accounts.
The Bill's Title refers to major construction works, and this is very important. It does not say "major construction works and maintenance" accounting. So we are to assume that the terms of reference exclude at the present moment the maintenance situation. I think it is 1504 very important indeed to consider Schedules 3 and 4 to the Bill. I think we should turn to these two Schedules, which set out the code of accountancy practice. I hope that in setting forward these two Schedules a form of contract and financial control will be established which will be both workable and practical. It will meet the terms of the CIPFA Report, and it will also mean that local authorities will be able to bring accounts forward in a manner they would find satisfactory.
To sum up, I think one of the most important things of all is that a direct works department at the moment is working under a system which does not place any limits on its operation. I suppose the most discredited argument is that direct labour departments must save money, that councils do not have to pay builders' profit. It is impossible in this present situation for there to be any profit. In fact, the losses are so enormous that they are something of a public scandal in those authorities where they have been mentioned. I have mentioned only one local authority. I could quote many. I suppose it is rather invidious to quote one, because I understand that there are no fewer than 89 local authorities up and down this country employing over 500 on their staff. This must mean a very large number of local authorities who employ less than 500 people. I think it is axiomatic that the Bill when it comes forward will have a substantial number of Amendments, and I wish my noble friend every success in the later stages of the Bill.
§ 4.34 p.m.
§ Lord HARMAR-NICHOLLS
My Lords, on the basis that silence means consent, I think that the principle behind this Bill is obviously going to be completely acceptable to the House; there is no doubt my noble friend reflects the point of view on these Benches, while the absence of noble friends of the noble Baroness, Lady Stedman, to put criticisms means, I hope, that the general principle behind the Bill is one that we all want. It ought to be like that, because while it has always been important to ensure that value for money is obtained from local authority spending, it has never been more important than it is at this minute when rate increases are going on at an alarming rate and new increases are announced almost every day. It is quite clear that 1505 councils of all political complexions who have to announce these increases reflect a certain conscience about it.
The work done by councils' own direct labour departments is one area in which local authorities have not been getting value for money, not having the disciplines of having to compete fairly with the free enterprise firms in order to arrive at the best price. There is a terrific amount of evidence to show that because of this lack of discipline costs have been soaring, which is reflected in the extra imposts put on every ratepayer and taxpayer. This wastefulness —because that is what it amounts to—is costing millions of pounds to ratepayers and taxpayers throughout the country, and it is for that reason that I hope that the House will accept the principle behind the Bill, as it looks from the list of speakers as though it will. I am certain that the local authorities themselves will welcome it and will support the initiative taken by my noble friend in presenting this Bill to the House.
My noble friend has explained that the Bill seeks to ensure, among other things, that council building departments keep accounts in a prescribed form so that true costs and competitiveness are demonstrated. I do not see how anybody could object to that. Anybody spending money which is not his own should keep proper accounts that can be easily identified and easily and properly checked. People are rather stupid if they do not do the same thing with their own money, but it is really vital when you are spending taxpayers' and ratepayers' money at a time when there are so many charges.
The second thing that my noble friend includes in his Bill is that the trading undertakings should be for limited purposes. I think that is right. I do not think it right to give an open-ended power to build anything and to maintain. I think the powers given, because of the amount of money involved, should be easily recognisable and prescribed and laid down. Thirdly—and I think this is the most important because at the end of the day it is the most effective check—the Bill seeks to ensure that the DLOs compete for at least 80 per cent. of the value of new construction work they undertake. That is the only way they can test the market. With people all over the country having to dig even deeper into 1506 their pockets to meet steeply rising rate demands, and with many wondering where the money is to come from to meet these demands, I am happy to note that this Bill is going to go right across political lines. I think that is overdue.
The Bill seeks to provide that at last we do have a comprehensive framework for accounting. Council building in this direct way dates back more than 80 years. Yet there has never been any real attempt to provide a comprehensive system of accounting. We have had several half-hearted efforts to guide local authorities, but we have never had a requirement that they shall fit into a system which would satisfy even the most compliant accountant, to enable him to give a report that he knows where the money has come from, and what has happened to it and whether it has been efficiently looked after. In the last few years the House of Commons Public Accounts Committee—and they are a very good watchdog in these matters — have become increasingly anxious over the accounts of direct labour departments. So I believe my noble friend is right in trying to face up in a proper way to these anxieties which come from such an important and authoritative body as the Public Accounts Committee in the other place.
At present, the accounts which they examine do not enable a local authority to assess the efficiency of the work of its direct labour department. Under the present loose system an authority cannot tell whether it would be better to use direct labour or to ask free enterprise contractors to tender. The reason for that is that the accounts do not produce the right figures at the right time to enable a proper judgment to be made.
Some reference was made to the difficulties which councils encounter. Councillors have no way of knowing at the end of the day as regards a direct labour estimate—although originally it may seem to be lower than a free enterprise contractor's tender—what the real cost has been to the ratepayers, because the figures presented are not comparable. If the work goes to direct labour, councillors will not be in a position, until a long time after the project has been completed, to know the financial outcome, and they will not know whether a better alternative could have been obtained had the project been put out to tender.
1507 As my noble friend has already said, this is not a matter where we, as individuals, are merely putting forward our point of view or even reflecting a personal prejudice. These are not the views of any individual, or the views of the private building sector alone. Nearly four years ago, a working party of the Chartered Institute of Public Finance and Accountancy which—and I stress this—represents the public sector treasurers (and there is nobody in a better position than they to form a view) declared that the present system of direct labour accounting does not work at all well. The chairman of that working party, Mr. Hopkins, who was Director of Finance at Newham at the time, said:from the present form of accounts we cannot discover how the undertaking is performing".Indeed, I do not think that we need speeches to emphasise that point.
In order to justify the Bill we can find many examples of failure—several have been given—which affect this lack of discipline in the direct labour departments. The most recent one concerned the Newcastle-upon-Tyne direct labour department which on 21st March—only six days ago—announced that a modernisation scheme for 123 houses which had been given to the direct labour department without any competition, was to be taken away from that department. An approach has now been made to five building firms to tender for the project. That is a welcome return to competiton, and I have no doubt that they were stimulated to make that decision because they had found evidence of the concern that we are trying to express today—concern which, to some extent, if not completely, can be overcome if the terms of the Bill of my noble friend are taken into account.
I turn next to the report of the Layfield Committee. I think that one or two views of that committee's wider investigation ought to be on record. On page 7 of its report it said:the complaint most forcefully made to us was of a lack of control over expenditure … it was said that local authorities decided first what they intended to spend. Only thereafter did they consider what rates they must levy to meet the bill. This process was not considered to be budgeting in the sense that individuals understood it".1508 That is what the Layfield Committee said, and I think that it is almost stating the obvious —once they had recognised the need to be disturbed. The committee went on to say:Moreover, it was alleged that once a budget and spending programme had been settled little attempt was made to exercise a continuing financial discipline through the year. The operations of direct labour organisations were singled out as particularly bad examples of a failure to control costs".Then, on page 95 it said that the problem most relevant to the complaints made to it was:how to provide safeguards against inefficiency when an authority is acting within its legal powers".It was not a question of the authority acting outside its legal powers, but just that the framework within which it had to work—because of the looseness of it all—meant that these wasteful expenditures took place at the cost we know. The Layfield Committee came down very much in favour of a much strengthened central audit system. As the Bill of my noble friend goes some way towards that, I believe that we should accept it.
It is absolutely clear that local authorities, left to their own devices, have not been able to develop effective economic controls for direct labour. The Bill would help them to do that. The basic requirements are that all costs should be accurately and clearly ascertained and recorded that they should be clearly separated from other local authority activities —both the new construction and for maintenance—and that work should be allocated by effective competition for at least 80 per cent. of direct labour work; and that the value of all direct labour work should be established and certified by independent supervision and inspection. That is what everyone does who runs his own business. If he does not do it he will run the risk of becoming bankrupt, or at any rate being put in considerable financial difficulties.
If those requirements are observed in full, with the supporting provisions that exist in the Bill, there would be much less chance of the many failures of direct labour recurring, such as we have seen. I wish to make the point that by tightening up and carrying it out more efficiently it does not necessarily mean that there 1509 would be a reduction in direct labour. We do not approach this matter—at least I do not—from any ideological standpoint. I am saying that by the very nature of things, the looseness of the direct labour system means that it will be very wasteful. If it can be made efficient and if, at the end of the day, it can be shown that it can compete more effectively with private enterprise contractors, then that is what we want. We want efficiency and good results.
I emphasise the point about it not necessarily meaning that there would be less direct labour. That matter was brought to my attention only the other day by a local councillor who had been canvassing for the local elections. Apparently the situation arose as regards a family which was employed in a direct labour organisation. People had gone to that family and said, "If you support the Tory candidates, they will cut out direct labour and your people will be out of work". That is the type of incident which introduces the prejudice against wanting real efficiency, and it is something that we should try to avoid. Therefore, I emphasise that this tightening up is not designed to end this form of business by local authorities. All we are saying is that if it is to be done, it must be done efficiently and without waste. Clearly the national interest demands that these departments should operate only where, and at a size at which they can demonstrate that they are competitive and efficient. If they do that—and that is the purpose of the Bill—the kind of thing that is happening throughout the country should not happen.
I shall give some examples. In the large City of Manchester the direct labour department would not be able to vest the ownership of all the plant in its maintenance section; it would then recover its overheads for new construction by a charge based only on the actual hours the plant is used at work. That is covering up the real costs. That system can lead to a serious under-recovery of overheads. So, new construction costs are likely to be underestimated, creating a false impression of the department's efficiency. If the department is efficient, if everything is taken into account, if all the council's expenses are being properly recouped, instead of someone shouldering part of the burden to cover up for another, it would 1510 give a wrong impression. Although it may seem clever to whoever tries to operate that system, at the end of the day it is not right, nor, where it is done, is it in the best interests of the local authorities.
The district auditor was able to pinpoint some shortcomings in maintenance at Manchester. For example, he said that abuses of the bonus system were:firmly established and have existed for some years".Men were able to claim bonus payments for work not done and for hours not worked. If we had the inspection and the supervision laid down in the Bill, those failures would be much less likely. The statement about people claiming bonus payments for hours not worked is rather sad. We know that it applies only in a minority of cases; we know that overall an honest day's work is given. It is not fair to those people that the looseness of the system allows one or two to get through the net and, as a consequence, that sort of charge to be directed against all of them.
I should like to give another example. With this Bill operating it is unlikely that Newcastle-upon-Tyne would have expanded its direct labour department rapidly to 400 men, lost nearly £1 million and then run the department down to a target figure of 70 men. Under a system such as is envisaged in the Bill, that could have been prevented. Wigan would not have been able to award nearly two years' work to its department using overhead rates that did not cover its full costs.
Direct labour addicts are inclined to argue—I hope that the noble Baroness, Lady Stedman, is not one, because she has vast experience in local government, perhaps more experience than most of your Lordships in this Chamber—that they need much less supervision than building firms and that, therefore, they save costs. Experience has shown that in almost every department of every industry supervision is needed in order to make certain that results are achieved. Supervision reduces the cost; it does not increase them.
Those are just a few of the inefficiencies that can be prevented by a proper system of accounting and control, such as is envisaged by the Bill. The points that I 1511 have made, and which my noble friends have made so far, are what I would call the businessman's points, supported by the accountants. I do not think anyone could say that the terms of the Bill could be more businesslike or sounder in terms of accountancy.
However, we should not be coy. What of the politicians' points? In recent weeks we have suffered from snow and ice and we must recognise that centralised organisations, such as the direct labour organisation, can hold, and have held, the public to ransom. Therefore, on social grounds, we should look at whether it is a good idea to build up the centralised organisations which can have that sort of power. In recent weeks private enterprise has had to be called in; the dustmen have gone on strike, the gritting men have not been working and volunteers have been necessary in the hospitals. However, I think that we are learning a lesson and that lesson is taken very much into account by the Bill.
Therefore, in recommending the Bill to the House—and it will obviously be accepted with acclamation on all sides—on economic, accounting and social grounds it is a must. When it is on the Statute Book we must recognise that in terms of obtaining real efficiency it is only a beginning.
§ 4.55 p.m.
§ Lord HEWLETT
My Lords, we have heard from my three noble friends that the Bill seeks to establish value for money, fair trading, honest accounting and fair and prompt reporting of direct labour to the council and ratepayers. I believe—as indeed my noble friend Lord Sandys suggested that this House, the country and in particular the tax and ratepayers owe a real debt of gratitude to the noble Earl, Lord Kinnoull, for introducing the Bill.
For far too long many direct works departments have been run as a rather inefficient social service and not at all in a businesslike manner. It is essential—it is long past time—that proper financial disciplines are introduced and enforced. That is precisely the aim of the Bill. I entirely agree with my noble friend Lord Harmar-Nicholls, that this is not a Bill made out of prejudice; it is a Bill desiring 1512 the best value for money and the best possible establishment of the true facts in fair competition, particularly in local building—whether it be done by free enterprise or by direct labour.
Local authorities carry out a very considerable volume of building work—about three-quarters of all public building organisations' work and nearly 10 per cent. of all construction work. Without the provisions of the Bill being enacted and enforced, I believe that further wastage of money and resources will continue almost unchecked. My noble friend Lord Harmar-Nicholls referred to Manchester. I know that city pretty well. Perhaps I should declare an interest in that my company does not pay rates in it. Until the reorganisation of local government, Manchester's direct works organisation was not subject to district audit. The first district auditor's report in 1976 revealed a terrible situation. As my noble friend said, the bonus system had been abused for a good number of years, so that men were paid for work that had not been done. Excessive issues of stores were made and in many instances the use to which those stores had been put could not be established. Client committees of the council had been severely overcharged. Only internal audits were made in Manchester up to 1974. There is a suggestion that a period of seven years elapsed without a proper audit of this department's work being carried out. Now we are talking in present-day terms of a force of 4,300 manual workers and 1,000 staff presently engaged in £65 million-worth of building work. However, no major capital works were put out to free enterprise tender, not even last year. Therefore, no one can confirm that proper value is being had for all this money being spent.
In 1977–78 the work obtained in competition was probably as little as 2½ per cent. of the total turnover of the department. That just does not bear any sensible reference to what was said earlier about the guidelines given in response to the report made in 1969 in regard to direct works. It was not what was intended when these rules were produced. Department of the Environment Circular No. 57/69 recommended that the DLO should obtain in competition with contractors: 1513a considerable and representative proportion of their work by value".Frankly, 2½ per cent. this year is trivial. Do noble Lords realise that before these rules were established Manchester's DLO actually went six years without facing any competition whatever for any housing project? The whole thing was handed out on a plate without reference to what the cost to the public might eventually be. That is scandalous. Even recently it obtained work worth £4 million by a margin of less than 1 per cent. on tender. As some of my noble friends have said, the DLO does not have to make a surplus to meet tax, to finance future work or to pay interest on working capital—what we call servicing the money—so clearly it is not truly competitive. It must be using more resources than a contractor would if it can only show a saving of 1 per cent. on the overall cost.
Let me make it clear that I am making no reference of an adverse nature whatever to the new manager of Manchester's direct labour department. Mr. Munday has had a comparatively short time with the department and I hear that his services are very highly thought of. I am talking essentially about the past. We have to talk about the past to establish the case for the need for the Bill, and from what has been said already by all my noble friends this really has been established.
If you think I am just particularising on Manchester, let me refer to Glasgow. A good reason for extending this Bill to Scotland, as the mover has suggested, can be illustrated, not by the report of some Tory body but by the Scottish Development Department's decision in February to decline to approve the award of three projects to Glasgow's direct works department, because the development department decided that the estimated costs were "in excess of relative costs and also well above the general level of prices likely to obtain in the Glasgow area". That is a fair indictment.
These projects, worth some £1¼ million, were said to be necessary for the department's survival. There we strike the nub of the matter. Many a time we are given the reason that the work has to be put out otherwise the department will fold, and that is one of the worst reasons imaginable for putting work out through this channel. I ask your Lordships: 1514 should a wholly uncompetitive price be paid to keep a DLO in business? Until the next project comes up. This is as long as it lasts, mind you, and then the same story is told all over again. There are far less expensive ways of providing employment even in so high an unemployment area as Glasgow. I share the noble Earl's view and my other noble friend's view that both Scotland and Northern Ireland should be included in the Bill at a later stage.
Support for the grossly inefficient just brings delay and higher tax burdens until the inevitable has to be faced, which I regret to say does sometimes mean the closure of the department. Despite what my noble friend Lord Kinnoull reported in regard to Tyneside, that on one project alone the wage cost was two and a half times the expected level, still that department was given work without any challenge of competition after that disclosure was made. This seems to be perhaps wilful behaviour of an unwelcome type.
Indeed, I have evidence of houses built in South Tyneside by the DLO being one-third higher in cost compared with the free enterprise tenders for that particular area in similar conditions. So surely the case for a Bill to bring proper financial disciplines to DLOs is made by the speeches so far in this debate. What we have said from this side of the House is that we seek to ensure that direct labour organisations of local government keep separate and effective accounts in some common form so that genuine competition can take place with outside contractors. Direct labour organisations really will have to set up their own separate trading undertakings to compete for 80 per cent. of the work carried out. In fact, putting it bluntly they will have to commence fair trading.
The Chartered Institute of Public Finance and Accountancy has pointed out that the present rules do not ensure that there is genuine fair competition. We cannot afford such inefficiencies to continue nor such a growth in the wastage of our resources when, but for North Sea Oil, we should ourselves be in desperate straits on the economic front. I realise that presently DLOs cannot be bound by contracts. They cannot because they are servicing individual departments, client departments, as their own local authority in most instances. Therefore, the liability 1515 for the taxpayer and the ratepayer is quite limitless. If they really do a thoroughly bad job on the financial front, bad luck, we pick up the bill and there is no answerability whatever in contract terms.
There is, to say the least—and other Members of this House have said so—a resentment against the terrifying increase in local government rates. If better protection for the ratepayer is not given we shall be facing the equivalent of a rates revolution. You cannot push our reasonable and generally unexcitable people too far. The lesson of California and taxation should not be lost on us. With this Bill we shall alter for the better one of the unacceptable faces of Socialism. I suggest that long before there is any further talk of extending nationalisation to the building industry, we put right the present frightening situation with respect to direct labour organisations in local government. It is past high time that we did so.
§ 5.7 p.m.
§ Lord ROCHESTER
My Lords, I ask the House to forgive me if I rise for just a few moments conscious, as I am, of the inconvenience which it occasions the House if too many people who have not put down their names on the speakers' list do just that. Yesterday, as the noble Lord, Lord Jacques, will know, in discussion on another Bill in which we both took part, no fewer than four noble Lords sought to do this, one of them even after Lord Jacques had wound up on behalf of the Government. At least I am not doing that.
I rise because I am conscious that there have been no contributions to the debate from these Benches and in response to something that the noble Lord, Lord Harmar-Nicholls, said when he supposed that the absence of any speaker—save for the noble Baroness—from Benches other than the Conservative Benches meant that this Bill would command general assent. I thought that for my part I should just say, having read the Bill, having heard the explanation from the noble Earl, Lord Kinnoull, as to its general principles and purposes —namely, that direct labour organisations should be required to submit to competition and to conform to certain basic costings and 1516 accounting procedures in order to operate on a reasonably commercial basis —that those principles do commend themselves to me. I should like, therefore, to offer my general support to this Bill.
§ 5.9 p.m.
§ Baroness STEDMAN
My Lords, I am grateful to the noble Earl, Lord Kinnoull, for the way in which he has presented his Bill to the House this afternoon. He has identified a subject where there is genuine concern, and where there is a real need for early legislation. It is an area where the Government are already committed to act as soon as circumstances allow, and I therefore welcome this opportunity to discuss the Bill, and to give some indication of our thinking on the important matter of local authority direct labour.
First, let me say right away that there is fundamental agreement between the Government and the noble Lord whose Bill we are discussing so far as its objectives are concerned. The controversy which all too often surrounds the subject of direct labour is and and inconclusive. It is futile to attempt to weigh against each other the charges and countercharges which each side levels against the other alleging alternatively gains and losses to the public purse in particular cases in particular areas, because no one can ever be sure whether the performances of direct labour and of private contractors are being compared on a consistent basis. So this afternoon I propose to concentrate on elements of the problem on which there is agreement; and I believe I can demonstrate that these elements heavily outweigh—both in number and in importance—those few areas where there remain some differences. Moreover, it is all too easy to forget the solid advantages which direct labour organisations can bring to their parent councils, advantages that are solid enough to persuade 456 out of 457 local authorities in England and Wales to set up their own direct labour organisations. The benefits of having a construction capability on hand at all times, of having a workforce skilled and experienced in meeting the special requirements of their statutory functions, and of being able to integrate the provision and maintenance of physical facilities with the planning and development of services for their electorate 1517 are accompanied by wider benefits to the community at large.
In an industry where conditions of work and employment are often far from satisfactory, and where the hazardous nature of construction operations can demonstrate itself in site accidents, direct labour organisations set an outstanding example of good practice. Many firms in the private sector would do well to examine their own record and compare them with the achievements of the DLOs in giving their workers reasonable terms of employment, in protecting them at work through good safety practices, in looking after them in retirement through good pension schemes and in contributing to the well-being of the industry as a whole through the training they give to their force. Even though the present Bill is not specifically concerned with these wider questions, it is essential in our consideration of it to bear in mind the fundamental nature of the organisations we are discussing.
We have, of course, at the same time to look at the DLOs as a provider of construction services and to ensure that they give value for money. We want to be sure that those local authorities who use their own direct labour get the best possible job done in the most efficient way, and they must be able to demonstrate, to their own ratepayers no less than to central Government, that they are doing so. This means that the performance of every DLO must be kept under continuous scrutiny. Their effectiveness must be regularly and frequently checked by careful comparison with the results that might have been expected from private contractors brought in to do the same work. And their accounting and tendering procedures must be designed and presented to make these checks and comparisons as easy as possible.
The noble Lord's Bill is directed to this objective, and it is an objective we share. He takes as his starting point the report of the Chartered Institute of Public Finance and Accountancy on Direct Labour Accounting, which was published in June 1975, and we agree that that is a useful document to base oneself on. The Government have declared publicly that they accept the broad lines of the recommendations in that document, and our own departmental working party, 1518 whose report was published in August last year, founded a great deal of their work on it. So we start from the same place, and we are trying to reach the same destination.
Let us look in a little more detail at the Bill: I shall take the Explanatory Memorandum and comment on the intentions outlined there. I have already said we agree with the overall purpose of the Bill to implement the CIPFA Report. However, in some respects we feel the measure before us does not go far enough. The Explanatory Memorandum speaks of "major construction works", which are elsewhere described as "new" works. We believe that more comprehensive proposals are necessary to impose the requirement for more stringent accounting and tendering procedures on, for example, maintenance work as well as new works. Of the three principal means which the memorandum lists as ways of achieving the objectives of CIPFA, we can accept entirely the first—that local authorities must keep proper accounts which show up true costs and enable fair comparisons to be made.
We are also happy to accept in principle the notion underlying the second point—that direct labour organisations should become trading undertakings—though there are certain difficulties here in reconciling the degree of independence a trading body must have with the need to keep the organisation under the firm control of the parent authority. This is a matter on which the Government are committed to consult the interested parties before they present legislation.
The requirement that direct labour organisations should compete for an appropriate proportion of their work embodied in the next point is also entirely acceptable to us in principle. We do, however, have serious doubts about the wisdom of fixing the proportion rigidly at so high a figure as 80 per cent. We think the aim should be to put DLOs as far as possible on an absolutely equal basis with private contractors, and it seems to us most unlikely that any contractor ever finds himself having to compete for so high a proportion of his work. We should like to hear the arguments about this, but we feel it would be best to allow a degree of flexibility so that the proportion of work to be won in 1519 competition can be adjusted to take account of the great variety of DLOs, of the work they do, and of the extent to which they are able to demonstrate a proven record of efficiency.
It will come as no surprise, at least to the noble Lord, Lord Harmer-Nicholls, that we find ourselves able in principle to accept the intention behind virtually every clause of the Bill. Yet we have a serious quarrel with it. Our objection is not that it goes too far in trying to sharpen up the operations of direct labour organisations and improve their efficiency, but rather that it does not go far enough. It addresses itself, like the excellent CIPFA Report from which it springs, only to the technical accounting and book-keeping arrangements of direct labour organisations. Yet, there are other factors which have a critical impact on efficiency. I refer in particular to the limits on the scope of their operations—that is, the clients they are allowed to work for and the geographical area in which they can work.
Because direct labour has grown up gradually in response to local needs, and has never had a coherent statutory framework for its operations, the limits on its working are haphazard, and without any underlying logic. As a general rule, for example, the direct labour department of one local council cannot do work for another, and cannot in most circumstances work outside the boundaries of its own authority. This means, therefore, to take the most obvious instance, that where a road crosses and recrosses the boundary between two councils, the job of repairing and maintaining it cannot be given to one DLO, as common sense might suppose was the most efficient solution; the two must have a go at it.
There are no such restrictions on the operations of private contractors, who can accept work anywhere in the country or indeed overseas. This freedom enables them to make the most efficient use of their resources and to avoid so far as possible unproductive idleness. Since we are agreed that the objective of this legislation is to ensure that DLOs and private contractors are put as far as possible on an equal footing, it seems to the Government essential that these other factors which unbalance the comparison between 1520 the two ways of doing things should be looked at closely, and adjusted as necessary.
We do not believe that all restrictions on DLO operations should be lifted at this stage. We think they should still be tied to working only in the public sector, save perhaps in certain exceptional circumstances, such as for example where a private owner in a housing action area wishes to employ local authority workmen to do repairs to his property or where a person has bought a municipally-owned dwelling. We also consider that DLOs should not be allowed to extend the area of their operations beyond fairly tightly defined geographical zones. However, we are satisfied that some relaxations will have to be made simply to allow management to take sensible decisions about the economic use of resources.
Beyond this, I have to say that, admirable though the intention is behind the clauses in the Bill, our lawyers advise that if it were enacted it would fail to achieve its purpose. They have detected what they believe to be a fundamental flaw whose correction would take us beyond amending the language of the Bill into its complete restructing. The flaw is, in essence, that the Bill is based on the assumption that a direct labour organisation has its own legal existence and that its existence is separate from that of the parent local authority. This is not the case.
Many noble Lords have referred to various items relating to particular authorities and to the district auditor's powers. The district auditor is an independent person whose reports are made to the elected members of local authorities. The Department is sent copies of those reports, but they are sent to us for information only. It is the responsibility of the council concerned to take whatever action is necessary if an adverse report is made. We find that the unfavourable publicity that such a report invariably attracts is usually enough to ensure that something is done. In the extremely rare event of an audit uncovering unlawful expenditure or revealing a wilful failure to account for money spent, it is the auditor who would take the council to court; it has nothing to do with the Department.
§ Lord HARMAR-NICHOLLS
My Lords, may I ask the noble Baroness a 1521 question. I do not understand the legal advice that the direct labour department is not an entity within itself. If, as is usual, the committee concerned is given executive powers by the council, the department would be an entity within itself, and if there is any wrongdoing, the members of the committee can be surcharged. Thus the department is a separate entity from the local authority. If that is the noble Baroness's only reason for not wanting to base improvements on the Bill, I should like to hear a little more about the matter before I accept entirely what has been said.
§ Baroness STEDMAN
My Lords, we have to accept what our legal advisers say, and they advise us that complete restructuring of the Bill would be needed. That is not beyond us; we did that to a minor Bill a few weeks ago, when we were discussing wild creatures and wild plants. We virtually re-wrote that Bill on the Floor of the House. However, that is not a task that I should like to suggest to any noble Lord, but we are advised that that is what would be needed for this Bill if it is to have the necessary legal backing.
So far as the district auditor is concerned, the number of adverse reports on the DLOs has consistently been very low in relation to the number of authorities involved. The most common subject of criticism from the district auditor has been the control of the operatives' bonus schemes, and we know of no recent case where an authority has been taken to court for irregularity in the running of its DLO.
The noble Lord, Lord Sandys, suggested that this was a field in which the Comptroller and Auditor General might appear. However, that official has no locus whatsoever in relation to local authorities. He acts on behalf of Parliament in respect of Government expenditure, while the district auditor acts in the way I have already outlined, in relation to local authorities.
The noble Lord, Lord Hewlett, referred to the amount of work done by the direct labour organisations. I have before me figures showing DLO work as a proportion of all the construction output, including new work, improvement, and repair and maintenance. In 1975, the DLOs undertook 11.3 per cent. of the work. In 1522 1976 the proportion was 11.8 per cent., in 1977 it was 12.1 per cent., and in 1978, 11.6 per cent. So the figure varies between 11 and 12 per cent. With regard to the total in the public sector, the figures for 1978 are not yet available, but in 1975 the DLOs undertook 21.2 per cent. of the work; in 1976 it was 20.8 per cent. and in 1977 21.1 per cent. There is some degree of consistency in those figures, too. In 1975 17 per cent. of DLO work was new work; in 1976 it was 19 per cent.; and in 1977 17 per cent. In the public sector the DLOs account for only 6 per cent. of all the new work and approximately 50 per cent. of the repair and maintenance work, and this includes the improvement work now going on in housing action areas and so on.
The noble Lord, Lord Sandys, and the noble Earl, Lord Kinnoull, referred to the comments in the CIPFA report which made obvious the difficulty of making general judgments about over-spending and under-spending of estimates. Paragraph 7.4 of the report points out that in a typical sample of a dozen contracts the results may range from an under-spending of 10 per cent. to an over-spending of 10 per cent. This wide diversity in out-turn seems to be inseparable from building operations and is affected by the philosophy commonly held in the building industry; namely, that in any half-dozen contracts, one contract can be expected to show a useful profit, one will probably show a loss, and the remainder will show small profits, or will just about break even. The report also states in the following paragraph (paragraph 7.5) that because of the tendency towards unevenness in results, it is important that the performance of the undertaking should be judged on the results not of a single contract, but of a number sufficient to give a fair picture, and that ordinarily this will entail a review over a long period of five, seven, or even 10 years. So it is not a matter that we are able to judge on only one year's performance.
The noble Lord, Lord Harmar-Nicholls, and other noble Lords asked what would be the possible effect upon the rates, and wondered why we cannot tell exactly what the effect is. It is not possible to trace any direct connection between rate levels and the use of direct labour. The 1523 rate demands contain very many variables, as the noble Lord knows very well, but the CIPFA Report, in paragraph 7.14, suggests that because DLO prices do not include any allowance for profit, they should normally be between 2 and 6 per cent. lower than those of contractors. The working party report, which started on the basis of the CIPFA Report, gives details of an exercise which was carried out by the GLC's treasurer on contracts in force with its authority in 1975 and 1976. That shows that if housing maintenance work done by the DLO was given to contractors at the lowest tender rate, the GLC would have to find an extra £8 million a year, and these savings can be expected ultimately to show up in the lower rate bills. So there are some consequences of a better nature.
It would be a very difficult and hazardous step to provide that a direct labour organisation should have its own legal existence. Therefore it follows that all the main clauses of the Bill, which presuppose a contractual relationship between the DLOs and the local authorities, are ineffective. I am afraid that you cannot make a contract with yourself. For example, Clause 6 of the Bill speaks of an authority "employing" a DLO. Schedule 2, paragraph 1, says that the DLOsshall observe all … contractual obligations applicable to other contractors".There are many other pieces' of defective drafting in the Bill, apart from the underlying legal ruling which we have had. For example, I am advised that the expression in Clause 4permitted to operate as a trading undertakinghas no meaning in law. There is no getting over the basic flaw without starting again from scratch. Therefore, on behalf of those of us on the Government Benches I have to advise the House that the present Bill should not be proceeded with at this time, though I know that the noble Earl, Lord Kinnoull, is anxious that we should proceed to the Committee stage. However, I am able to give noble Lords the firmest assurances that the Government intend to introduce as soon as they can their own legislation on the subject. It will include provisions identical in intention and similar in spirit to virtually 1524 all those contained in the Bill now before us. We shall ensure that local authorities run their direct labour departments as efficiently as possible. We shall require authorities to keep, and to publish regularly, accounts in a form which brings out clearly the true costs involved. We shall require councils to test their direct labour departments by exposing them to competition from private contractors, and we shall ensure that when they do so the competition is on a basis of fairness and equality.
We are confident that a measure of the kind that I have outlined will mean that local authorities will get value for money on their building operations and that the elected members, the ratepayers, the construction industry, and indeed central Government, will be able to satisfy themselves easily that this is so. We agree with the principles behind the present Bill, but as I have said, it contains considerable defective drafting, and we believe that in the circumstances it does not go far enough.
§ 5.30 p.m.
§ The Earl of KINNOULL
My Lords, I should like briefly to thank all my noble friends for their support of the principles of this Bill; and, indeed, the noble Lord from the Liberal Benches. I must say I am a little disappointed with the noble Baroness's final remarks because, having listened to every speech which has been made, each of which was in support of the Bill, she then proceeded to give us a Government view which was encouraging right up to the very last moment. I should like to recommend to the House that we proceed with this Bill on the grounds that when we get to the Committee stage—and I hope we shall, although I recognise that time is short and that the Sword of Damocles is hanging over the Government, with that fragile thread between their existence or otherwise—we can look at the defective clauses and can usefully examine the principles which the noble Baroness has just set out. I would therefore ask your Lordships to give this Bill its Second Reading.
On Question, Bill read 2a, and committed to a Committee of the Whole House.