HL Deb 14 May 1985 vol 463 cc1097-115

8.4 p.m.

The Earl of Swinton

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee.—(The Earl of Swinton.)

On Question, Motion agreed to.

House in Committee accordingly.

[The LORD HAYTER in the Chair.]

Clause 1 [Supply of goods and services through further education establishments]:

Baroness David moved Amendment No. 1: Page 2, line 5, leave out subsection (3) and insert—

("(3) For the purposes of this Act educational activities are—

  1. (a) the provision of teaching or industrial or vocational training;
  2. (b) the carrying out of research;
  3. (c) the exploitation of inventions or new techniques relating to further education;
  4. (d) any other activity which may be advantageous to further education; or
  5. (e) any activity incidental or ancillary to any activity mentioned in paragraphs (a) to (d) above.").

The noble Baroness said: I should like to say as we start the Committee stage that all the amendments, or certainly most of them, are to obtain further information on the Bill and are therefore probing amendments. Of course, it depends a little on the answers, so I cannot give any guarantee about that, but that is what I expect.

Lord Rochester

Will the noble Baroness forgive me if she has finished her sentence? I do not know whether it is for me to say, but is the Chairman intending to say anything about the Title to the Bill? For the sake of form, that should perhaps be done, should it not?

The Deputy Chairman of Committees (Lord Hayter)

The Question is, That the Title to the Bill be postponed. As many as are of that opinion will say Content; to the contrary, Not-Content. The Contents have it.

Baroness David

The aim of Amendment No. 1 is to make as wide and varied as possible the activities that can be undertaken by further education establishments as a result of the passing of the Bill. Clause 1 appears to be rather more narrowly drafted than the various supporting papers sent out for comment before the Bill finally appeared. The original consultative document listed the following six headings of activities which would be able to be undertaken by polytechnics and colleges; contracted research, exploitation of inventions, co-operative research with industry, consultancy work, routine testing and advisory services.

The local authority associations would like the terms of the Bill to be as wide as possible and to include all these six. For this reason, we have suggested changing "and" to "or" in Clause 1(3)(a) to make it clear that colleges will not be limited to individual blocks, and have added two more to the list of educational activities in Clause 1(3) as a new paragraph (c): the exploitation of inventions or new techniques relating to further education"; and as paragraph (d): any other activity which may be advantageous to further education". We hope that these additions will make clearer what activities are envisaged and allowed. I beg to move.

The Earl of Swinton

I do not think there is anything at all between myself and the noble Baroness on this matter. It really depends on the way you look at it. The sole purpose of Clause 1 of this Bill is to define the activities which the Bill sets out to legalise, and to distinguish them from the existing educational activities which are already within the LEA's powers by virtue of Section 41 of the 1944 Education Act. Subsections (1) and (2) respectively define the goods and services which may be supplied through further education establishments in both cases as those which result from its educational activities. Subsection (3) defines these activities.

It is quite crucial that the distinction is clearly drawn between existing or, if your Lordships prefer, "normal" educational activities which are already permitted, and the new commercial activities which arise as by-products of the normal activities, and which it is this Bill's objective to legalise. Everything else in the Bill hangs upon this distinction. I fear that this amendment will confuse rather than elucidate the distinction.

To begin with, the amendment extends the definition of normal educational activities so as to include the exploitation of inventions and new techniques, although these are covered by the phrase ideas of a person employed at the establishment, or of one of its students which occurs twice in subsections (1) and (2). If this amendment were to be incorporated, we would not know whether exploitation of inventions is a new "commercial" activity or an existing "educational" one, and hence we would not know whether the full-cost rule or any of the other financial and regulatory provisions apply to such exploitation. In the Government's view, exploitation of inventions is clearly a commercial activity, not an educational one. Indeed, the central purpose of this Bill is to encourage this new area of activity, and I would urge the noble Baroness not to press this amendment.

The second change proposed to subsection (3) is even more drastic. It would include in the definition of "educational activities": any other activity which may be advantageous to further education". On this basis the manufacture of, say, desks and chairs might be regarded as an educational activity, and any activity resulting from it would be permitted under the Bill. Surely that cannot be right.

However, I acknowledge that in places the phraseology of this Bill is somewhat opaque to the layman's eye. For this reason, the department will, after consultation with the local authority associations and others concerned—and I am glad to say that the first meeting will be held later this week, and it will be the first in a series of consultations—be issuing guidance, including examples of commercial activities arising under the Bill, and distinguishing them from existing powers.

However, the Bill has been carefully drafted in abstract rather than in particular terms so as to cover the possibility of new activities not yet envisaged but which may appropriately be carried on in polytechnics and colleges. I think that the draftsman has got the distinction about right, and in my opinion I am afraid this amendment would serve only to confuse and weaken the Bill and would introduce a great deal of uncertainty.

Baroness David

I am not, of course, surprised by the answer the Minister gave, but he made a comment about commercial activities intruding. I thought that the whole point was to make commercial activities possible. I shall have to read what the Minister said tomorrow to make sure that I heard and understood him aright.

The Earl of Swinton

Perhaps I may help the noble Baroness. This is slightly complicated because there are already some commercial activities which are carried on; for instance, where hairdressing is practised, where old ladies can have a very cheap perm, and in bakeries, where they sell off the buns. The Government believe that these activities should be allowed to continue without the full cost having to be recouped. We want the items that are slightly new and probably more technical to be fully charged for, whereas the existing activities should not be. Perhaps that explains the point.

Baroness David

That is certainly a help. I am not quite sure whether the noble Earl referred to paragraph (a) in the amendment, which changes "and" to "or"; I do not think he did.

The Earl of Swinton

If I may say so, I think that that would make it even more difficult to understand.

Baroness David

All I can say is that the advice that I have received from various quarters is that it would be a great improvement. I have noted what the Minister has said about consultation with local authority associations later in the week. I hope that the discussions that we have tonight will make those consultations a little easier. Although one or two points may not become clearer, it will be even more important to decide exactly what the Bill means. With that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 agreed to.

Clause 2 [Powers of local education authorities):

Baroness David moved Amendment No. 2: Page 2, line 15, after ("of') insert ("facilitating")

The noble Baroness said: I think that I can also speak to Amendment No. 3 because, again, the aim is to make sure that local authorities and their institutions are as free as possible in pursuing the new activities. Amendment No. 3: Page 2, line 17, at end insert— ("(1A) For the purposes of subsection (1) above the powers to enter into an agreement as mentioned in paragraph (a) includes the exercise of powers to establish or to acquire shares in a limited company.") Therefore, we insert the word "facilitating" in Clause 2(1)(b), so that the clause reads: to lend money for the purposes of facilitating such an agreement to a body corporate in which they have a holding such as is mentioned in subsection (9) below".

As the Bill is drafted, we think that to give the power to lend money for the purposes of such an agreement may presuppose existing arrangements and would deprive LEAs of the opportunity of getting them off the ground through providing some pump-priming money. One example might be the provision of research assistants. It would also cover the point that a loan would normally be to enable the company to establish itself to compete for a range of contracts.

Amendment No. 3 is to make it absolutely clear that that establishment can both set up and acquire shares in a limited company. Therefore, we have added subsection (1A) to the Bill, we hope, as is set out in Amendment No. 3. I beg to move.

8.15 p.m.

The Earl of Swinton

Dealing with Amendment No. 2, the idea of this subsection is to enable LEAs to lend money to companies, provided that two conditions are fulfilled. First, the loan must be for the purposes of an agreement of the type defined by Clauses 1 and 2(1)(a) of the Bill. The second condition is that the authority holds not less than 20 per cent. of the shares in the company.

The first of these conditions is necessary in order to ensure that LEAs' lending to companies is restricted to the furtherance of the commercial enterprises of its FE establishments, and nothing else. This of course in no way affects LEAs' existing powers to fund the educational acitivities of their FE establishments however they see fit. I confess that it is not absolutely clear to me what the effect of this amendment would be. As presently drafted, this clause empowers the authority to lend money only if the loan is for the purposes of an agreement. It does not attempt to circumscribe the ways in which the loan may be applied. the most probable case is to provide working capital while the company awaits payment from its customers, enabling it in turn to pay the authority for the goods and services supplied through the company. But it could equally well be used to purchase equipment, rent premises or hire staff, provided in every case that it was for the purposes of an agreement with the authority.

Therefore, the question is: does the word "facilitating" actually add anything? I think that this is really a point for the lawyers. My dictionary defined "to facilitate" as: To make easier, to assist the progress of". In a sense this is precisely the purpose of these loans. So perhaps this is a case where I should acquiesce to the noble Baroness's amendment. But another, narrower, interpretation of the phrase "to facilitate an agreement"—and to my mind the correct one—might simply be to make the process of making an agreement itself easier, perhaps by lending money to cover the legal costs of preparing the documentation. If this interpretation were to prevail, the effect of the amendment would be to narrow rather than to widen the scope of this subsection.

I appreciate that the purpose of Amendment No. 3 is to make it absolutely clear that under the Bill, a local authority will be permitted to establish or acquire shares in limited companies. But this power is already conferred by Section 111 of the Local Government Act 1972 which permits a local authority to do anything which is calculated to facilitate or is conducive or incidental to the discharge of any of its functions. This Bill will establish commercial trading in further education establishments as a legitimate function of a local authority, and accordingly the powers under Section 111 are available to enable the authority to participate in companies for the purpose of carrying on such activities.

Indeed, I fear that if this amendment is passed, it might have the indirect effect of calling into question the application of Section 111 in other areas—nothing to do with the scope of this Bill—where authorities wish to use limited companies for the performance of any of their functions. I am sorry that my noble friend Lord Renton is not here, because I know that this is a matter which is very much up his street and which he has mentioned on a number of occasions in your Lordships' House.

The courts might well point to this Act and ask themselves whether, as it was necessary to make a specific provision to enable college companies to be set up, similar specific enabling provisions are required for any other circumstances in which local authorities wish to participate in companies. The effect of this amendment might thus be to restrict the application of Section 111, and if anything reduce local authorities' powers, when the whole purpose of this Bill is to widen them. I hope that the noble Baroness, having listened to that, might consider that this amendment is not a good idea.

Baroness David

Being interested in language, I am pleased to hear various definitions of "facilitate", and that in response to the last amendment the word "facilitate" was used. This will require a good deal of study, but at least I was pleased that the Minister said that at any rate under Clause 2(1)(b) it was clear that extra assistance, extra staff, could be employed under the Bill as it stands, which is one of the points about which I was anxious.

I shall have to read what has been said about the setting up of new companies. As I understand it, it is possible under the 1972 Act, in which case we can feel happy that that is covered. I should like to reserve my position until I have had a chance to read this because it is a complicated and difficult area, certainly to follow quickly. For the moment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 3 not moved.]

Baroness David moved Amendment No. 4: Page 2, line 34, leave out ("full").

The noble Baroness said: This amendment deletes "full" in line 34, so that the Bill would read: a local education authority shall not under such an agreement supply goods or services for less than— (a) their cost to the authority;". I said in my Second Reading speech that I was glad when public sector institutions were put on the same footing as university and grant-aided colleges. However, in dealing with similar activities in the university sector the Committee of Vice-Chancellors and Principals said in their paper Commissioned Research Costs Study—it was the report of the steering group— It should not be necessary to explain that the price charged for a project is a matter for decision by the universities and has no necessary connection with the costs". That is the point I want to emphasise— no necessary connection with the costs". That accepted, it suggests that local education authority institutions would be at a disadvantage compared with the universities if the subsection is passed in its present form.

The Secretary of State's powers under Clause 2(6) give only a limited possibility of departing from the full cost basis, in that variation can apply only to functions of a public nature. Clearly where Clause (2)(4) is concerned the authority should not be able to undercut competition by trading at a loss, nor should costs be uncompetitively high, because in both cases the expenditure on commercial activities would fall on the ratepayer.

Conversely, if market value is below costs, how can the authority be expected to make a sale if it has to recover full costs? For example, this could be a problem in sales of agricultural produce where market prices fluctuate significantly. Further education colleges with catering departments and training restaurants which sell food and provide meals for the public as a by-product of training rarely do so at open market values. They do not pay wages to students serving or cooking, etc., as do other restaurants. The full costs to the authority are met, but prices are lower than those in similar commercial restaurants.

A similar point could be made about running hair dressing salons, as the Minister has already mentioned, when they are part of training. For all these reasons, and for greater flexibility, which is what we want in this Bill, I hope that the Minister will agree that "full" should be removed from the clause. I beg to move.

The Earl of Swinton

Here again we seem to be in the same situation as we were on the first amendment. There is a bit of misunderstanding over this Bill. It is not the Government's intention that all these matters such as catering and hairdressing, which the noble Baroness mentioned, should suddenly start to have to be charged for at their full cost. This is not the idea. The idea is that this Bill will relate to the new technologies and that sort of thing, and not to what might be described as the traditional ways in which colleges have been providing a service.

After all, if you have to do people's hair and it is part of your educational training that you do the hair, it is obviously a good idea if you can do it for elderly people in the area. In the same way, if you are being taught how to do catering, it is a good idea if you can sell off the produce that has been cooked in the kitchens.

The aim of this Bill is that there should be a distinction between the educational side of things and what is being produced in the college: projects that can be described as a part of the educational process, and, for instance, high technology spin-offs which colleges can sell and so raise some money.

This amendment would make less clear the provision in the Bill whereby all products are to be supplied at their full cost to the authority or their open market value, whichever is the higher. The rule was incorporated in the Bill in order to eliminate any risk of unfair competition operating to the disadvantage of established traders already operating in this field in the private sector. This Bill will enable local authority colleges to set up trading enterprises on the back of their existing establishments, drawing upon all the facilities, buildings, equipment and staff expertise which have already been provided at public expense. This contrasts strikingly with the position of the private trader seeking to engage in a similar business, who must first provide these facilities from his own resources.

I have listened with interest to what the noble Baroness, Lady David, has said to justify relaxing this rule, but I remain convinced that if we are to maintain fair and healthy competition between public and private sector businesses, we cannot allow any artificial subsidies. Although a polytechnic may very well be able to carry out a piece of work at relatively low cost, since it is using existing buildings and equipment necessary for its teaching purposes, nevertheless it would be quite wrong if it were able to put private sector enterprises out of business by charging only the marginal costs involved. I hope that with that explanation the noble Baroness will withdraw this amendment.

Baroness Lockwood

I was not quite sure about the distinction which the noble Earl the Minister was making. He referred to the products of education and training such as catering and hairdressing, and then talked about the products of high technology and the setting up of an independent company.

There could surely be a middle area between those two groups. I am not sure in the wording of the Bill where that distinction is drawn. It does not seem very explicit. Therefore, I wonder whether it would not be better to accept my noble friend's amendment, which makes it clear that in normal circumstances the cost to the authority would be the guiding factor, but that there would be some cases where it would be possible that full costs need not be included. The second point I would make is that the Minister did not reply to my noble friend's comment about the unfair disadvantage that the polytechnics and colleges would have in relation to the universities.

8.30 p.m.

The Earl of Swinton

I think that that can be dealt with. This is one of the questions which will be raised with the meetings with the LEAs which are going on. I must admit that I am not altogether happy about the wording of the Bill on this. I do not know whether we shall have to come back, either at a later stage in this House or in another place, with some amendment which will make this perfectly clear or whether it can be done by a list of guidelines; although I think that even if we have a list of guidelines there is bound to be, as the noble Baroness has said, a grey area.

I think this is something that will have to be spelt out. It is obviously a very important principle. I think it is one which the Government would like to get right. I must come back, however, to say that I do not think that this amendment is the sort of simple way round the problem which will provide the answer. I think that it will require a lot more thought and I hope that the noble Baroness will withdraw the amendment.

Viscount Simon

Before the noble Baroness replies, I was wondering whether the Minister could explain whether the use of the word "full" is meant to imply that a proper assessment should be made of the proportion of overheads such as rent, rates, salaries of the principals, and so on.

The Earl of Swinton

Yes, the idea is that it should be the full market value. That is one of the principles behind this. On the other point which both Baronesses have made, I can assure them that advice to polytechnics and other colleges will be similar to that which is now given to universities.

Baroness David

It is quite clear that there is some confusion about this and that it needs looking at again. It is quite clear from the advice that I have had and the requests that I have had to raise this point that a lot of people are not at all clear what it means. I do not think that we have solved the problem in the course of these exchanges. But, if the Minister is prepared to say that he will look at it again and that he will either write to me or bring forward his own amendment at Report stage, I shall now be prepared to withdraw the amendment. But I should like his assurance that he is prepared to do that before I do so.

The Earl of Swinton

I am most grateful to the noble Baroness for that. It is something which I must say worried me when I got down to the brass tacks this morning. It is something in which I like to take a personal interest. At the very minimum, I shall write to the noble Baroness. However, I cannot give an undertaking that we shall have anything ready for Report stage.

Baroness David

On that half assurance, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness David moved Amendment No. 5: Page 2, line 28, leave out subsection (3).

The noble Baroness said: This amendment deletes subsection (3) from the clause. At Second Reading, I raised—in col. 1226 of the Official Report of 25th April—the question of assisted establishments which are generally registered charities and the difficulties that they might be in at trading at a profit, thereby putting their charitable status at risk. I said then that most charities seem to have got round this by setting up trading companies which covenant their profit to the parent organisation. But Clause 2(3) states that any agreement: must be supervised or controlled by a person employed at the establishment". That might make that possibility more difficult, as the Charity Commissioners are not always ready to accept such an arrangement and a more independent person is asked for.

We should like to know the Government's views on this. It would seem that the simplest way out is to delete subsection (3), which, quite apart from the charity problem, is very restrictive and in our view unnecessary. Why does it have to be in the Bill? Give the LEAs and the institutions the freedom to manage as they think best. That is what the Government are constantly saying that they like to do, and here is an opportunity for them to do it. I beg to move.

The Earl of Swinton

Perhaps first I can try to put the mind of the noble Baroness at rest about the question of the charities. I acknowledge her point about the difficulties of providing supervision for contracts which are carried out through companies set up by assisted FE establishments (such as the ILEA polytechnics) in order to preserve their charitable status. But I do not think that there is any cause for alarm here, because the subsection has been carefully drafted so as to refer only to agreements carried out under subsection (1)(a)—that is to say, agreements carried out by a local authority through further education establishments provided by them. This provision does not bite either upon companies' activities under the Bill, or upon those separately constituted or assisted FE establishments.

The noble Baroness has made her point convincingly. When this subsection was drafted it was intended to provide an additional safeguard to ensure that the powers conferred by Clause 2(1)(a) were not abused in such a way as to permit authorities to engage in commercial activities having little or no connection with the primary work of the institution. The theory was that by requiring every contract to be supervised by an employee of the establishment, it would be difficult for spurious ventures to spring up, because employees on the establishment's staff might not be prepared to devote their time to supervising such activities.

I would accept that in practice this restriction could not apply anyway to the activities of companies, which will be free-standing enterprises; and I am persuaded by the noble Baroness that little is gained by its retention in relation to activities undertaken by FE establishments direct in their own right—the scope of which will of course be subject to the restrictions imposed by Clause 1 of the Bill. Accordingly, it gives me great pleasure to accept the amendment of the noble Baroness.

Baroness David

I need hardly say how delighted I am to have achieved something.

The Earl of Swinton

You have achieved a lot.

Baroness David

I thank the Minister wholeheartedly.

On Question, amendment agreed to.

Baroness David moved Amendment No. 6: Page 2, line 42, at end insert ("or (c) for a body which is considered by a local education authority to be appearing to subsidise the educational work of a further educational establishment provided by them.").

The noble Baroness said: This amendment adds a third subsection, subsection (c), to Clause 2(5). The reason for this addition is to avoid the exclusion from participation in funding and research of a company which wishes to add to the funds of an establishment for the purpose of improving research activity without that company being required to pay the full cost of the research programme which it is subsidising but which would proceed, albeit at a lower level of activity, even without that subvention. That would also include work done by a polytechnic or a university. Again, this amendment will give a little more freedom and a little more flexibility. I beg to move.

The Earl of Swinton

I explained earlier on Amendment No. 4 why the Government consider the full-cost/open market value rule so important, in order to avoid unfair subsidies to businesses in the public sector which will be in competition with private sector enterprises. This amendment would have the effect of weakening that provision, though in a manner rather different from the earlier one.

Subsection (5) of this clause is a recognition by the Government that there are some circumstances in which the full-cost rule is not appropriate. But the exceptions are few and far between. Subsection (5)(a) is the important one. Research council sponsorship of work at universities, polytechnics and other higher education institutions is already conducted on the basis that the institution's overhead costs are met from within the institutional budget. The Government have no desire to disturb that arrangement. Subsection (5)(b) is an acknowledgement that there may be other parallel cases where the total cost of a project is likewise met from public funds, but partly by the sponsor of the work, and partly within the institution's own budget. However we do not think it will serve even the institution's own interests if the range of such cases is widened more than is strictly necessary. We think it will actually help them—particularly when conducting tough negotiations with procurement divisions of Government departments—to be able to say, "We cannot waive our overhead costs on this contract, however much we might like to do so, because we have a statutory obligation under this Act to charge the full cost for the work done."

For this reason, we have deliberately drawn the scope for exceptions to this rule narrowly. In order to exempt a body from the full-cost rule, my right honourable friend has to make an order by statutory instrument, and Parliament would have the final say, by means of an annulment resolution by either House. The Government intend to use this mechanism sparingly. But, under the noble Baroness's amendment, this power of determination would be exercisable by individual local authorities themselves, with no parliamentary sanction or other scope for challenge whatsoever.

The Secretary of State's power to make exceptions to the full-cost rule by statutory instrument is itself exercisable only in respect of public bodies; that is to say, A person or description of persons appearing to the Secretary of State to be exercising functions of a public nature". There is no similar restriction in the amendment of the noble Baroness. We could therefore see a situation where an individual local authority, without reference to parliament, could arrange for goods and services to be supplied at subsidised prices to private sector bodies—even to commercial trading enterprises—with the ratepayer and taxpayer footing the Bill. The only condition which such a body has to fulfil is that it must appear to be subsidising the educational work of an FE establishment. Just who is subsidising whom? This provision, taken to the extreme, would enable a company which has made a £10 donation to the college's coffers to negotiate cut-price deals on contracts worth tens or hundreds of thousands of pounds. It blows the full-cost rule wide open. It will not, in the Government's view, encourage increased donations from industry—something we should of course greatly welcome—and it would not serve the interests of the FE establishments concerned.

In conclusion, I repeat that there are circumstances where the full-cost rule may be overridden, but the Government believe that these should be few and far between and should be subject to parliamentary scrutiny in each case. Accordingly, I hope the noble Baroness will withdraw this amendment.

Baroness David

I am very surprised by the interpretation put on what I though was a fairly simple amendment. Again, I shall certainly have to read what the Minister has said and decide whether I am convinced by his arguments and whether it will be necessary for me to return to this at Report stage. In the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2, as amended, agreed to.

Clause 3 [Financial and accounting provisions]:

Baroness Lockwood moved Amendment No. 7: Page 4, line 1, leave out subsections (3) and (4).

The noble Baroness said: it would perhaps be convenient if I spoke to Amendments Nos. 7 and 8 together, because the purpose of the two amendments relates to the power given to the Secretary of State to direct local education authorities on the way in which they keep their account. Amendment No. 8: Page 4, leave out lines 15 and 16 and insert ("Any deficit resulting from activities permitted by the Act shall be charged—").

We should like to ask: why is it necessary to do this? Perhaps the Minister can tell us. He will be well aware that local education authorities are always concerned and indeed suspicious when the Secretary of State takes powers centrally to direct the authority. In this case it seems to be a completely unnecessary power. In the first place, local education authorities are already free to set up such funds as they consider appropriate in connection with their functions: this is provided for under Schedule 13 to the Local Government Act 1972. These accounts are all subject to audit by the district auditor and, as a consequence, they are probably checked and audited more thoroughly than the accounts of a private company would be by an external auditor under the Companies Act.

Secondly, many authorities already keep separate accounts. For example, certainly two of the ILEA colleges have trading accounts for their public restaurants, which are used in the training of catering students. It seems to me a matter of common sense and normal business practice in all organisations—certainly in all organisations with which I have had any dealings—to keep separate accounts for specific activities or functions.

In his letter to my noble friend Lady David dated 13th May, the noble Earl, referring to the accumulation of surpluses and deficits, said: But I believe that all this is a matter for managerial discretion by shareholders rather than statutory control". Would it not be better in this instance to leave the way in which accounts are kept to managerial discretion rather than ministerial prescription? I beg to move.

8.45 p.m.

Lord Rochester

I think this might be the appropriate moment for me to offer a word of support on this amendment. At Second Reading I said that if in its early stages some project should result in a deficit, I hoped it would be possible for the financial and accounting provisions of Clause 3 to be interpreted in such a way that no unduly harsh penalties were incurred either by individual members of staff or collectively by the educational establishment concerned—that establishment perhaps not being very experienced in commercial enterprises. I added that in facilitating the establishment at a university with which I am connected of a company embarking on certain business activities it had been found necessary to make special financial arrangements to cover this crucial introductory period and to deal with the element of risk-taking which is inherent in the establishment of any new enterprise.

The noble Baroness, Lady David, at Second Reading referred to that situation and asked the noble Earl whether it would be possible for any loss or gain to be carried forward from one year to another, on what I believe is known as the "roll-over" principle. I hope, if this is indeed the appropriate moment to raise the matter again, that in his reply the noble Earl will be able to go at least some way towards relieving the concerns which the noble Baroness expressed on that occasion, and which I share.

The Earl of Swinton

I should like to begin by assuring the noble Lord, Lord Rochester, and indeed the noble Baroness, Lady Lockwood, as well as your Lordships, that the Government do not intend to use the powers to which these amendments relate in order to create voluminous and burdensome regulations or accounting arrangements, and that the local authority associations and other interest groups, including notably the CIPFA—the local government accountants' professional body—and the Audit Commission will be fully consulted before the regulations envisaged are issued. What we are concerned to secure., however, in the light of the consultations, is the establishment of a responsible financial regime for the activities permitted by the Bill within the framework of the existing accounting regime for local authorities.

Local authorities are under an overall statutory obligation to compile their accounts using what are termed "proper practices". These are not statutorily defined. What constitutes a "proper practice", is a matter of professional judgment by qualified accountants. In particular, CIPFA makes recommendations about best accounting practices; and over the last few years it has, jointly with the other main accounting institutes, issued guidance notes on how statements of standard accounting practice—SSAPs—prepared by the accounting profession to apply to the accounts of companies should be applied to local authority accounts. Neither these recommendations nor the guidance notes have any statutory force.

The purpose of subsection (3) is to ensure that recording and reporting of the financial results of activities under this Bill are handled consistently from one authority to another. The subsection requires every authority which exercises its new powers to keep a revenue account of its FE establishments' commercial activities, and such other accounts as the Secretary of State may direct. The latter might include a balance sheet or consolidated statement covering activities of limited companies set up under the Bill, as well as those carried on in the authority's own name. I think that this will be welcome news to the noble Baroness, Lady Lockwood. The department is discussing with local authority associations the form and content of these accounts, with a view to ensuring that the information obtained is relevant and consistent, but building so far as is possible upon the authorities' existing practices and data bases.

Surely noble Lords will acknowledge that a statutory accounting framework is essential for the proper regulation of the new powers granted under this Bill, both to ensure consistency and, more important, to determine the basis on which surpluses and deficits are calculated for the other purposes of this Bill. How otherwise are the authorities to comply with subsection (5), since the size of the deficit will depend entirely upon what costs are brought into the revenue account?

Turning now to the second part of this amendment, the deletion of subsection (4), I will say that the Government considered a number of alternative formulations before plumping for the "best endeavours" duty. In other trading activities of central and local government a particular rate of return on capital employed is fixed by statute or regulation. We prefer in this instance to rely upon authorities' own management to ensure that the return secured is as high as is feasible in any given instance. This view reflects two prime factors: first, the wide variety of activities envisaged in the Bill making a single rate of return difficult to apply; and, secondly, the difficulty of defining the size of the capital base on which the calculation has to be made, given that the buildings and equipment will already have been for the educational purposes of the establishment. Nevertheless we wanted to make it clear that we intend authorities to enter into the activities in a proper spirit of enterprise, expecting to make a profit. I believe that this subsection conveys the right balance.

So far as the question of the roll-over is concerned, I did in fact write to the noble Baroness, Lady David, and if she agrees I shall be very happy to send a copy of the letter to the noble Lord, Lord Rochester. Do I see her nodding?

Baroness David


The Earl of Swinton

She is quite happy, so I will do that. I hope I have convinced noble Lords that both the accounting regulation and the "best endeavours" provision are essential controls to prevent abuse of these powers and ensure consistent monitoring of the outcome. I hope I have also convinced noble Lords that these will not be burdensome on local authorities and that it will be done with consultation, using their standard ways of accounting. I hope that the noble Baroness will withdraw this amendment.

Baroness Lockwood

I am very grateful to the noble Earl for what he has said. In particular, we are very pleased to know that consultations with the local authority associations are to take place on this matter. It seems to me that this question of consistency is certainly an important one, but I think that it would be more important within the area of an authority than between authorities. My noble friend and I would like to read very carefully the report of what the noble Earl has said to us. If he feels that he will be in a position to come back to us and indicate the outcome of his discussions with the local authority associations on this matter we can then, if necessary, return to it.

The Earl of Swinton

I know that both the noble Baronesses have a very good line to the local authorities and they will probably hear their reactions a damned sight quicker than I shall.

Baroness Lockwood

In the light of that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 8 not moved.]

Baroness David moved Amendment No. 9: Page 4, line 29, at end insert— (" ( ) If at the end of any year such an account is in credit, the local education authority shall be able to use such credit for the furtherance of the education activities of the further education establishment, such activities being defined in section 1(3), and the use of such credit for this purpose shall be considered to be the first call on that credit.".).

The noble Baroness said: May I first ask the noble Earl whether we are to finish this Committee stage tonight; or are we stopping, as was intended, at a quarter to nine?

The Earl of Swinton

I hope that we shall finish it. There are only two more amendments and at the speed we are going I think we can finish.

Baroness David

The Bill goes into what happens when there is a deficit at the end of the year, but although the DES commentary indicates that it is the intention of the Bill to aid public sector institutions to gain funds the present Bill does not even indicate that earned funds may be used for educational purposes. I should like to quote from paragraph 17 of the commentary, which starts by dealing with the deficit situation but goes on: Although it is not specified as a requirement—and would be inappropriate to do so"— I am not quite sure why— it would be in the spirit of this legislation if this ordering applied equally to the treatment of any surpluses. That is, FE establishments should, so far as possible, both bear the risks and be allowed to retain the surpluses arising from any commercial activities in which they engage". There is nothing in the Bill to suggest this.

I was a little disconcerted when the Minister said on Second reading that, it would be appropriate, where such enterprises are successful, for the major share of the rewards to accrue to the institution and staff who were responsible."—[Official Report, 25/4/85; col. 1221.] So one becomes suspicious. It seems that the original intentions of the Government should be written into the Bill and that we should not have to rely on the DES commentary. That is the reason for this amendment, which I beg to move.

Lord Rochester

Very briefly, I should like to support the even-handed nature of the concept underlying this amendment; that is, that in the same way as a deficit is to be charged in the first instance to any general fund set up by an authority to exercise its functions under the Bill, so any credits should be applied in furtherance of educational activities in the establishment involved.

The Earl of Swinton

As the noble Baroness explained, this amendment would enable local education authorities in effect to earmark the profits arising from their FE establishments' commercial training and apply them for the furtherance of the establishments' educational activities. I am sorry if the noble Baroness thinks that there is something sinister or suspect in what I said at Second Reading, because I was trying to give the impression very strongly that this is what we hope will happen. Perhaps I may put it a little stronger and say that I unreservedly applaud the principle behind this proposal. It is the corollary of Clause 3(5) concerning the treatment of deficits that profits should be treated in the same manner. I agree entirely with what the noble Baroness and the noble Lord, Lord Rochester, said about this.

But the question at issue here is not whether equal treatment of profits and losses is desirable in practice—on that point I am in complete agreement with the proposers of this amendment—but whether it is possible to make it mandatory for authorities to do so without effecting a very major change in the basis of local government finance which, I hasten to add, it is not the purpose of this Bill to achieve. Unfortunately, I believe that it is simply not possible.

Under existing law local authorities are permitted to establish such funds as the authority considers appropriate for the purpose of meeting any expenditure of the authority in connection with its functions and to make into a fund established under this paragraph such payments as the authority thinks fit. This is contained in Schedule 13 to the Local Government Act 1972, as amended, and it is implicit in Clause 3(5) of this Bill that authorities will use this power in order to establish funds either for this specific purpose of meeting expenditure in relation to the particular establishment's activities under this Bill or their other functions as local education authorities; or, more generally, for activities under the Bill: that is, across several establishments.

The first part of the noble Baronesses' amendment is unnecessary, because LEAs already have the power to do this if they wish. The second part of the amendment, however, goes a little further by requiring that education activities of the FE establishment are to be considered as the first call on such credits. I cannot quite see the point in this, however, since even if authorities were to be compelled to use the profits arising under this Bill for the education activities of their colleges and polytechnics there is no way to prevent them taking these credits into account when determining the amount allocated to the establishment from the rates, which must surely be the major part of the establishments' income.

The only way around this would be for Government to determine centrally the amount to be spent on further education by each authority and at each establishment. I doubt very much whether the Committee, and certainly the noble Baronesses opposite, would wish to see such a major change in local government financial management and accountability; and certainly not on the back of this modest Bill.

But noble Lords may be wondering why, if it is possible to prescribe treatment of the deficit, it is impossible to do the same for surpluses. The short answer is that it is in fact impossible to do either; and Clause 3(5) does not compel LEAs to act in any particular way. What it does is to ensure that if the authority has chosen, using its existing powers under the Local Government Finance Act 1972, to set up funds to which surpluses have previously been credited, then the deficits must first be charged against such funds so far as possible, and then, only if they are insufficient, to the general rate fund. I am sure your Lordships will agree that it would be quite unfair if the surpluses were credited to funds for the establishments' benefit while the deficits fell into the general rate fund. I hope, therefore, that with that explanation, although in principle there is nothing between any of us on this, the Committee will recognise that it is not practicable to proceed along these lines.

9 p.m.

Baroness David

It seems odd to me that the Bill says that deficits shall be charged. That seems to be absolutely firm. I am very glad about what the Minister said about the intentions of the Bill, that the gains should be used for the establishment. But I am still a little mystified that the deficit is dealt with but not the profit.

I shall have yet again to read what the noble Earl has said about the various Finance Acts, and so on, which control some of these aflairs, so I give notice that I could easily come back on this because I am not satisfied with what he has said. But for the moment I shall withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 3 agreed to.

Baroness Lockwood moved Amendment No. 10: After Clause 3, insert the following new clause:

("Exemption for VAT purposes

. Education provided in pursuance of this Act shall be deemed to be an exempt supply within Group 6 of Schedule 6 of the Value Added Tax Act 1983 whether or not profit is made.").

The noble Baroness said: This is very much in the nature of a probing amendment. It seeks to insert a new clause clarifying the position in relation to VAT. Local education authorities and local authorities generally are already in some confusion in relation to the payment of VAT on post-16 courses. I understand that specific courses such as YTS, BTEC and other vocational education courses do not carry VAT, whereas adult non-vocational courses do, and the boundaries between the two are somewhat blurred.

In order to prevent confusion in the question of activities under this Bill, it would be helpful to have the position clarified. Presumably, as the intention of the Bill is to try to facilitate a closer relationship between the polytechnics and colleges and industry, and to encourage industry to take up the facilities which the polytechnics and colleges are offering, it would be helpful if all activities were exempt from VAT. If this was so the colleges would know exactly where they stood in assessing charges for particular courses or consultancies or related work.

What they do not want to happen, as I understand sometimes happens now, is for costings to be made on the assumption that no VAT will be imposed and then to find later that such a charge is being made and the authority is left to pay the bill. Obviously, if it is the intention to impose VAT on the work undertaken under the Bill then the colleges will have to build it into their charges in the first place. But it would mean, of course, that the extra cost of VAT would be paid by the customer—that is, industry or commerce—and that might mitigate the good intentions behind the Bill. I am not sure if this is what the Minister wants, and perhaps he could clarify the position for us. I beg to move.

The Earl of Swinton

I understand from the noble Baroness that the aim of the amendment is to exempt from VAT all supplies of goods and services made through local authorities' further education establishments in pursuance of the powers under this Bill. The provision of education by schools, colleges of education and other further education establishments maintained by local authorities is not regarded as being a business activity, and accordingly falls outside the scope of VAT. This Bill in no way threatens that state of affairs. For the Bill is not about the supply of education or training: it is about supplying the valuable by-products which arise in education establishments alongside their normal teaching functions, and furthermore about supplying these by-products on a commercial footing, with a view to profit.

The Government can see no reason why public institutions should be put in a preferential position in this regard, compared with private sector enterprises which are liable to VAT. The activities envisaged in this Bill are plainly business activities, and should accordingly be subject to VAT at the appropriate rate.

In conclusion, I should emphasise that the Government have no plans to alter the exempt status of education and training generally, but where goods and services which arise in education establishments but which do not themselves constitute education, training or research are supplied to third parties on a business footing, then they should be subject to VAT at the appropriate rate.

Baroness Lockwood

Is the Minister saying that all education activities and all education courses such as adult education courses should be exempt from VAT under the Bill? That seemed to be what he was saying, but I understand that this is not the case in all areas.

The Earl of Swinton

It is a slightly complicated matter. I understand that the universities and private schools, for instance, are neither part of central nor of local government. Group 6 of Schedule 6 to the VAT Act 1983 provides specifically for their supplies of educational and research materials to be exempt from VAT, and extends to cover the supply of materials and services to their own students when the supply is incidental to the main provision of exempt education. I acknowledge that there may be difficulty in defining exactly where provision of exempt education or research ends and where the commercial activities begin. This is a question which can be resolved only by examining individual cases in detail. I understand that local VAT inspectors can give guidance in cases of doubt.

Baroness Lockwood

I think that it is one of the problems. The inspectors do give guidance, and sometimes that guidance does not seem to be consistent. However, again, I think all we can do is to read very carefully what the Minister has said about this very complicated area. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Remaining clauses agreed to.

House resumed: Bill reported with an amendment.