Local Government and Housing Bill

HL Deb 26 July 1989 vol 510 cc1437-547

3.21 p.m.

Lord Hesketh

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

Moved, That the House do now again resolve itself into Committee.—(Lord Hesketh.)

On Question, Motion agreed to.

House in Committee accordingly.

[The CHAIRMAN OF COMMITTEES in the Chair.]

Clause 67: [Requirements for companies under control or subject to influence of local authorities]:

Lord Hayter moved Amendment No. 131B:

Page 74, line 42, at beginning insert— ("(1A) No power exercisable under this section shall be taken to confer any power to make an order in relation to an independent voluntary organisation company within the meaning of subsection (1C) below. (1B) A voluntary organisation company is a company which is also a voluntary organisation within the meaning of section 137(2D) of the Local Government Act 1972. (1C) An independent voluntary organisation company is a voluntary organisation company within the meaning of subsection (1A) above, which either—

1. (a) receives no financial assistance for a local authority whether by way of grant, loan, interest in land or otherwise; or
2. (b) receives such assistance, but that assistance is not given by the local authority with the intention of avoiding any restriction or control placed upon it try Part V of this Act.").

The noble Lord said: My Lords, for once in a while the amendment that is in front of the Committee means what it says. So often amendments are put forward which are quite inexplicable, but that is not so in this case. My duty is to explain why it is put down in this precise wording and the reason for the anxiety about the whole question.

In recent years I have often found myself defending the interests of the voluntary organisations. The pattern is becoming depressingly familiar. Legislation is put forward to deal with some aspect of local authorities and instead of simply addressing itself to that point it is so widely drafted that it catches a whole range of other activities, including the valuable work of voluntary organisations. The latest example is this part of the Bill. I do not believe that that was the Government's intention; it has just happened that way.

The Committee may well wonder what Part V of the Bill, which deals with local government, has to do with voluntary organisations. The fact is that potentially thousands of voluntary organisations could be affected because many of them are constituted as companies, usually by guarantee, or as industrial societies. There are many such companies. My concern is that those companies could be caught by this Bill if, first a fifth or more of the voting members of the company or its board of directors are associated with the local authority or, I have to add, their spouses—which sounds ridiculous but it is true—or, secondly, if half or more of its business is with the local authority. In those circumstances they fall into the category of local authority influenced companies if the local authority controls more than half of the votes at a general meeting. If a voluntary organisation falls into either of those categories it becomes subject to nearly all of the controls of the local authority itself.

Part V of the Bill implies that if a voluntary organisation works in close partnership with the local authority it should be treated as if it were a part of the local authority. There is no place in the Bill for the concept of independent partners, each working together but each retaining its own identity. Part V says that if they work closely together they have to be treated as if they were one and the same. I think that that is wrong.

Part V not only challenges that concept of the independent voluntary sector, it also introduces an immensely complicated set of rules and regulations. Those rules will be bureaucratic, intrusive and authoritarian and will seriously hamper the work of voluntary organisations. All that is designed to address a problem which somebody thinks might occur in the future. As far as I know no evidence has been produced to show that it has ever occurred. The Government propose to establish this elaborate set-up to prevent a potential abuse. I take a different approach. Why not address the potential abuse directly and leave everyone else to continue their valuable work unaffected by yet more regulations and controls?

If the voluntary organisations are caught by Part V of the Bill, what difference will it make to them? The first difference, and perhaps the most major, is that Part V introduces a system for controlling local authority controlled companies. The details will be contained in regulations. If Members of the Committee turn to the beginning of Clause 67 they will see that the Bill says: In relation to companies under the control of local authorities and companies subject to the influence of local authorities, the Secretary of State may by order make provision regulating, forbidding or requiring the taking of certain action or courses of action". One cannot get much more dictatorial than that, I venture to suggest.

Who knows what further controls might be introduced? Once the framework has been established and the independence of the voluntary organisations compromised, the extraordinarily wide powers that I have just read out could be used for any number of purposes. This is clearly the thin end of a very wide wedge.

Perhaps I may emphasise some of the difficulties of the voluntary organisations in connection with this clause. They would have to introduce complex bureaucratic systems in order to implement it. It is easy enough for a local authority to establish whether a voluntary organisation is a company, but it will be very difficult to determine whether more than 20 per cent. of the members of its management committee are "associated" with the local authority. Council officers will have to require that a voluntary organisation tells them who is on its management committee, who they are married to, who they are employed by and whether they hold office in a local political party. Furthermore, the council officers will have to keep that information up to date. They will have to inform the local authority every time a management committee changes, or a member gets married, changes employment or is elected to office in a political party. Many local authorities found that over 100 voluntary organisations would be involved. Imagine the questionnaires, the form filling, the records and the sheer bureaucracy which that will involve.

Another difficulty is that a voluntary organisation would have to obtain approval from its local authority before taking on a mortgage for premises or a loan for equipment or a vehicle regardless of whether the borrowing was being financed by the local authority or from an independent source. People disqualified from council membership, for example, because they live outside the local authority area, could not sit on the management committee. It is all beginning to be a little ridiculous.

Part V is a complex and confusing piece of legislation. There is already widespread uncertainty within the voluntary organisations about the implications. Some have decided that the best tactic is to escape the legislation altogether by not incorporating themselves or by not having people associated with the local authority. That, I am happy to agree, is not the purpose of the legislation. It would be most unfortunate if one of its main effects were to leave a management committee unprotected or to reduce the level of work carried out jointly by the local authority and the voluntary sector. It would be equally unfortunate if the voluntary organisations were to spend a great deal of money and effort drawing up new constitutions in order to escape controls which should never be there in the first place.

Also, people will be discouraged from serving on management committees. They would naturally object to all the questions that they would have to answer. Some voluntary organisations are finding it hard enough to get people to join them at the moment. Asking them those personal and intrusive questions would inevitably add to their difficulties. On the other hand, the local authorities may decide to withdraw grants altogether if the voluntary organisations decide not to have people associated with the local authority. Thus, Part V could unwittingly result in cuts in voluntary sector funding.

Undoubtedly the greatest concern among voluntary organisations is that the logic underlying the Bill questions the whole concept of an independent voluntary sector. It is assumed that a voluntary organisation which receives more than a certain amount of funding and has more than a certain number of people associated with the local authority on its management committee becomes, in a sense, part of the local authority. That denies the whole notion of two independent partners working together as equals.

It is true that there are exemptions. The Government have already undertaken to exempt citizens' advice bureaux and the Groundwork Trusts from the proposals. In both cases, they accept that the independence of those organisations can be guaranteed by their constitutions, their membership of a national network and their close links with government. However, there will be many other local voluntary organisations which are not members of national networks and yet are also completely independent of the local authority. Why should they, and not other parts of the voluntary sector, be potentially subject to that legislation? It would be most unhealthy to have two classes of voluntary organisation in that way.

I should emphasise that the amendment is not some invention of my own. It has been worked out carefully by voluntary organsiations which feel that they can speak for the other numbers in their sphere, and in particular the National Council for Voluntary Organisations. A far better approach, and one that has the twin virtues of fairness and simplicity, would be to amend Part V to exempt all bona fide independent voluntary organisations. The controls would then apply only to those that are established with the intention of avoiding any restriction or controls on capital borrowing. I do not deny for a moment that the Government are right to do that and to try to clobber voluntary organisations established with the intention of avoiding any restriction.

My amendment would exempt all voluntary organisations unless the local authority was using it for that purpose. The amendment may well not be perfect. I am sure that, if they come to accept the main trust of our argument, the Government might want to redraft it to their own liking. But I am sure that that basic concept is sound. I have emphasised all the difficulties that we had in our minds and the fact that the voluntary organisations are desperately anxious. I have tried to transmit that anxiety to the Committee.

Finally, perhaps I may say that my amendment has another great virtue with a long and honourable tradition in our legal system. It assumes that a voluntary organisation is innocent until it is proved guilty. The thousands of voluntary organisations working up and down the country for the good of the community deseve nothing less. I beg to move.

3.30 p.m.

Lord Seebohm

I should like to support the amendment strongly. No doubt noble Lords will recollect that the Government White Paper entitled, Charities: a Framework for the Future stated: What the voluntary sector has essentially to offer is the practical grass roots experience, its ability to respond swiftly and flexibly to changing needs and circumstances and above all its capacity to innovate". That statement made by the Government is as good a definition of the role of the voluntary sector that one could find. It represents a policy that must be protected at all costs.

In these debates it is sometimes useful to refer to a specific case which I shall do now, if the Committee will allow me. Since 1949, I have been concerned with a charity called Family Service Units. In the provisions of the Bill, that charity would undoubtedly be a local authority influenced body. Practically all its units are in various inner cities around the country. The local authority probably has 20 per cent. of the board and certainly finances it. As the Committee will no doubt know, the FSU provides a highly skilled service for rescuing multi-problem families whom the local authority may well have abandoned as hopeless. It is valued so greatly that, in many cases, the local authority pays the salary bill. One local authority that I used to know paid the entire costs of the unit.

Generally speaking, the FSU will be affected by the Bill as it now stands because it will be constrained on its committee membership and because it does not believe in mass advertising to provide funds, mainly for reasons of confidentiality. If such a clause were extended to the area in which Family Service Units belong, FSU might come under the direct rule of the Secretary of State.

Family Service Units cannot conceivably be considered to exist to enable local government to bypass financial regulations. The essence of voluntary bodies is the right and, I might add, the obligation to innovate—as the White Paper said—but also to experiment and, in some cases, to make mistakes. Those essential ingredients would be destroyed or seriously diminished if the voluntary body is compelled to look over its shoulder at the daunting shadow of the Secretary of State. This is centralisation gone mad. This amendment, or a similar one, must be introduced into the Bill.

Lord Hylton

I have been associated with voluntary bodies in one form or another since about 1962. I have occupied most kinds of roles from that of volunteer to that of president in such fields as housing, adult education, mental handicap and prisoners. I therefore strongly support the amendment.

As it stands, the Bill will discriminate between those voluntary bodies that are constituted as trusts and those that happen to have arranged their affairs as companies. That seems to draw an arbitrary and unnecessary distinction. The Bill also appears to give excessive powers to the Secretary of State who will be able to intrude into the relationship of confidence that has been built up between many local authorities and many voluntary bodies.

We should bear in mind that, on the financial side of their affairs, local authorities are already subject to the scrutiny of the district auditor who is expected to bring to light any financial improprieties. I strongly suggest that the amendment provides a much better way out of those dilemmas than a policy of exemption of voluntary bodies case by case which, as I understand it, is the only proposal that the Government have so far been able to make.

Lady Kinloss

I should like to support the amendment. The controls will, I understand, hit hardest those organisations with high needs for capital expenditure, in particular, community transport and Dial-a-Ride (in some areas known as Ring-and-Ride). Those projects, among others, need loans for vehicles and for capitalised repair and maintenance contracts. Those are vital services for many elderly and disabled people and could be hard hit by the provisions of the Bill.

I also understand that the Government are concerned at the prospect of the voluntary sector being used as a front by local authorities. Have they any evidence that local authorities have engaged in such practices to evade control so far?

Lord Graham of Edmonton

I very much hope that the Minister has listened with care, as he always does, to what is not only a reasonable but, in our view, an overwhelming case for the Government to think again. I hope that the Government do not believe that, when they put pen to paper and produce a Bill in the first instance, it cannot be improved. I also hope that they will be one of those governments who recognise that some people outside the House are closer to a problem than they are. Those people see the impact upon their own activities of what the Government intend to do more clearly than do the Government.

I am very pleased to say that so far in the debate we have not entered into a discussion on1he activities of councils. The debate is centred on the activity of what are known as "independent voluntary organisations". These are bodies which are intensely proud of their fiercely won independence. They exercise care and vigilance in their negotiations. They are very well aware that in this day and age they must be very careful about the company they keep and the inferences that may be drawn from what they say and do.

They are comprised of good men and women throughout the land who give up many hours of their time in order to look after, in the main, their fellow human beings who in one way or another are in desperate need of some assistance. That is the voluntary sector.

Quietly but I hope compellingly, I make an appeal to the Minister. The case has been made by speakers from all round the House to the effect that the Government's legislation, if misinterpreted, could—I do not say will—lead to damage to a very vulnerable sector of our society. The Minister does not have to tell me that that would not be the Government's intention but it may be the effect of their legislation.

This amendment will leave the Government with the rest of their legislation unimpaired. We ask them to take very careful note of it. It seeks to make sure that those organisations of the category listed in this amendment will not be considered as influenced companies.

Clause 67 already gives the Government the power in relation to companies of: regulating, forbidding or requiring the taking of certain actions or courses of action". It already prescribes requirements on local authorities in relation to: leases, licences, contracts, gifts, grants or loans". It makes provisions requiring the company or local authority to obtain the Secretary of State's consent before taking any action or course of action. In effect, the Secretary of State may do anything that he wishes, from interfering in financial matters to preventing recruitment in relation to voluntary organisations. That is surely an unreasonably draconian power.

This Government are proud of their legislation and their intentions to tackle the big problems. I therefore cannot believe that those who draft Bills and take guidance from Ministers have been urged to go into such detail as we find in this Bill in respect of this kind of organisation. Many other organisations are involved also.

If this amendment or something like it is not acceptable to the Government—and I was grateful to hear that it is recognised as not being comparable with the Ark of the Covenant—I ask them nonetheless to bear in mind the sense inherent in it. If the amendment is withdrawn perhaps one will consider coming back with something more acceptable. As it stands, the Bill is punitive and will hit the wrong target. I honestly do not believe that the Government intend to strike at the kind of organisation that we are trying to isolate and exclude in this amendment.

Quite frankly, we believe that there will be too much bureaucracy, time and money involved in this. Above all else there will be the sickening realisation by thousands, if not hundreds of thousands of people, many of them politically strong supporters of the Government, that if this is what local government has come down to, they want no more of it. It is not just local government with which we are concerned. It is the voluntary sector.

We are talking about people who not even remotely look upon themselves as councillors, politicians, activists or aparatchiks and so on. They are do-gooders who are doing good. They want to be able to work with the local authority, to be associated with it and even on the margin to be influenced by what the council is doing. But I beg the Government to keep in mind that we are speaking of people who are fiercely jealous of their own capacity to decide whether or not they are being made use of and whether they are likely to be made a front organisation for any council or group.

That will surely not happen. Should it threaten, they will be excluded because the amendment quite clearly lays down that such an organisation: receives such assistance, but that assistance is not given by the local authority with the intention of avoiding any restriction or control placed upon it by Part V of this Act". I believe that there is an overwhelming case for the Government either to accept the amendment or to accept the good sense of it as it has been so very worthily moved.

3.45 p.m.

Lord Ross of Newport

I rise to add my support for this amendment. For many years I was a county council representative on a charitable trust. I understand that such a trust is not in fact covered by this part of the Bill. Nevertheless I should like to say that on that trust there were four people. I was a county council representative and I comprised one quarter of the directors of that trust.

I know that in the part of the world from which I have just removed there will be caught in this legislation a centre for the disabled complete with workshops. It cost something over £1 million and we are very proud of it. It is just about to open its doors. I understand that the county council and the district council contributed something of the order of £½ million; the rest of the cost, over £½ million (perhaps £600,000 or £700,000) was raised by the voluntary bodies involved with it.

Undoubtedly there will be local authority representation on the management committee, particularly from the social services. I know that the county secretary has already pinpointed this wonderful achievement as coming within the scope of this Bill and will be affected by the controls exercised under this part of the Bill.

I think that it is absolute nonsense. I beg the Minister to listen to what has been said on this issue and particularly to the observations from the independent Benches. One would not obtain such co-operation again. One would not raise money on that kind of scale if one had to endure so much bureaucracy. There are so many voluntary bodies which are dependent on local government contributions.

A number of noble Lords from this Chamber and Members from the other place yesterday went to a joint meeting of the Forestry Commission and the Countryside Commission. It is a wonderful idea to set up forests on the outskirts of our cities but the first question that was asked at that meeting was: where does the money come from? The answer of course was that the local authorities could contribute for starters. Everybody expects the local authorities to make some contribution. But it is getting more and more difficult. I have written letters of appeal on issues such as the Portsmouth Cathedral and I find that industrialists are less and less inclined now to contribute to such appeals because they are inundated with them.

So in the end it is to the local authority and to some extent central government that we must look for a lead. Anything which despoils that traditional co-operation would be disastrous. I beg the Government to listen to what has been said about this amendment and to take it on board.

Lord Hesketh

In discussing earlier amendments last Monday evening I think that inadvertently I may have spoken to a part of this amendment. I was grateful to the noble Lord, Lord McIntosh, who brought that point to my attention. I hope therefore that the Committee will bear with me when I repeat some of the points which I made then. I think that it will help to explain why we believe that the Committee should resist the amendment.

Amendment No. 131B would introduce three new subsections with the aim of excluding from the scope of the rules on local authority influenced companies those companies which are independent voluntary organisations. New subsection (1A) would exempt independent voluntary association companies. Subsection (1B) defines a voluntary association company by reference to Section 137 of the 1973 Local Government Act. New subsection (1C) defines independence by two tests, one of which would require that the company receives no financial assistance from the local authority; the other would require that any financial assistance is not given for the purpose of avoiding restrictions.

I think that there is very little between the movers of this amendment and the Government as to the substance of what we want to achieve. Such differences as there are concern the most effective way of achieving what we want.

Let me begin by reminding the Committee that the definitions that we propose for what is to be regarded as a company subject to local authority influence require that the company meets two—not one—tests simultaneously. The first is that there is a close business relationship between the local authority and the company. The second is that there is a substantial overlap between the people associated with the authority and the members of the company's governing organs. I repeat, to be regarded as subject to local authority influence a company must meet both tests at the same time.

The two main forms of the business relationship test would be that the company derives half or more of its turnover or half or more of its capital from the local authority. Members of the Committee will see that this test therefore addresses the same point as paragraph (a) of the proposed new subsection (1C). Paragraph (a) of the amendment would exempt a company that receives no financial assistance from a local authority. But before the test set out in the Bill could be satisfied, a company would have to receive not merely some financial assistance, but more than half its turnover or capital from the local authority. Paragraph (a) therefore seems to be aimed at exempting companies which could never come within the definition. For that reason, it would seem to be unnecessary.

Lord McIntosh of Haringey

This is as far as the Minister got at one o'clock on Tuesday morning. Perhaps I may congratulate him on reading his brief this time rather more slowly than he did then.

Lord Hesketh

I am sure that I am not the only Member of this Chamber who after the hour of midnight tends inadvertently to speed up slightly.

Paragraph (b) of the proposed new subsection (1C) would, I agree, cover companies that meet the test, because it would disregard any assistance that was not given with the intention of avoiding any control under Part V of the Bill. It would, therefore, have the effect of exempting some companies which would otherwise be covered by the controls.

A technical criticism can be made of the drafting of this proposal. The controls that are relevant are those under Part IV as well as Part V.

But there is a more serious problem with the proposal. We do not think that it is sensible to legislate on the basis of whether the local authority is giving financial assistance with the aim of avoiding a restriction or control. We think that this test is almost impossible to apply. A local authority intent on avoiding the controls is not likely to pass a resolution saying that that is its intention. The noble Lady, Lady Kinloss, asked what evidence I have. There will be no evidence until the Bill I becomes an Act and is passed into law. Applying the test would therefore involve distinguishing between apparent motives and real motives which we believe would be a fruitful source of dispute. We do not therefore think that it is possible to proceed on that basis.

We do, however, share the aims of the movers of the amendment of excluding from the controls companies which are genuine voluntary organisations. Let me remind the Committee that before such a company could be covered by the controls it would have both to have a fifth or more of its directors or members associated with the local authority, and have half or more of its business associated with the local authority. In these circumstances we think that there is a strong likelihood that the local authority will have an influence over the company.

But we accept that, in spite of such prima facie evidence of influence, there can be cases where other factors will demonstrate that the company is independent. My right honourable friend the Minister for Local Government has undertaken that we will exempt the companies under the umbrella of the National Association of Citizens' Advice Bureaux. This is because we accept that these companies, even if they meet the tests which define a local authority influenced company, are in fact independent.

In discussion with representatives of the Advice Services Alliance, my officials have made clear that Ministers are ready to consider exempting other voluntary bodies which can similarly demonstrate their independence. We think that in many cases such independence will be capable of being demonstrated by a combination of the terms of the company's constitution, charitable status, and membership of a national grouping of such voluntary bodies which demands that its members be independent. Furthermore, we do not rule out the possibility that there will be other ways of demonstrating independence even though the company does meet the twin test of getting half or more of its income from the local authority and at the same time having a fifth or more of its governing board linked to the authority.

I am happy to make clear that we shall be very ready to exercise our powers under the Bill to exempt companies which—although they meet the tests—can show that they are independent of the local authority with which they are thus closely linked.

To sum up, we think that one category of company covered by the amendment—as in paragraph (a)—could not in any event meet the definitions that would bring that category of company within the controls on influenced companies. We therefore think that this is an unnecessary part. For the rest, we think that companies which do meet both tests are in a position to be influenced by a local authority, but even here we shall be glad to exempt voluntary bodies which can show that they are, in spite of that, independent.

On that basis, I hope that the noble Lord, Lord Hayter, will feel able to withdraw the amendment.

Lord Graham of Edmonton

Before the noble Lord sits down, can we be clear what he is offering the Committee as regards this amendment? Is he saying that there is a category of bodies which the Government will be happy to exempt—namely, members of the umbrella organisation to which he referred.

Lord Hesketh

It was the Citizens' Advice Bureaux.

Lord Graham of Edmonton

Is he saying that there could well be other bodies which, on their merits, would be exempted? We are faced here with the ludicrous situation that hundreds, if not thousands, of bodies will believe that they ought to be exempted. The Minister is saying, "Queue up one at a time, make your case, let us examine your credentials and your history, and we may or may not exempt this, that or the other one." It is ludicrous, time-wasting and unnecessary.

The amendment asks the Government to accept that although there may well be some bodies which are excluded in the definition, they will be excluded as exceptions. The Minister is saying that there are thousands of bodies which could be exempted, but each body must individually prove its case. It is a nonsense and a sham. The Minister has given the Committee a rotten answer.

Lord Hylton

Can the Minister very kindly say what will be the position of organisations such as the National Housing and Town Planning Council and other national organisations such as MIND, MENCAP and Age Concern?

Lord Hesketh

First, we shall be prepared to consider the question of independence to be demonstrated without an individual application, because there may well be groups. Therefore it is not correct to say that each application will be individual.

On the question asked by the noble Lord, Lord Hylton, conditions vary from case to case. However, the factors that we would consider would be the terms of the company's constitution, whether it had charitable status, whether it was a member of a national grouping—to which I alluded in my first reply—and whether it received substantial funding from the central government department. Those are all indicators of the level of true independence of an organisation from a local authority.

Lord Hayter

It is true that yesterday I had an inkling of the Government's attitude to this amendment in the circumstances that the Minister has indicated. However, he has gone further this time. I am much obliged to him for that. It would be churlish to turn such an attitude into any form of rejection. We should like to study the matter extremely carefully. It is a complicated issue. The Minister has made it quite clear that his aims and our aims are very nearly identical. In the circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

4 p.m.

Clause 67 agreed to.

Clause 68 [Control of minority interests etc. in certain companies]:

Lord Graham of Edmonton moved Amendment No. 131C:

Page 75, line 40, at end insert— ("(1A) The Secretary of State shall for the purposes of subsection (1)(b) above authorise any company which is a voluntary organisation within the meaning of Section 137 (2D) of the Local Government Act 1972, and which provides a facility, notwithstanding that the local authority may provide financial assistance to that company under Section 137 of the Local Government Act 1972 as amended.").

The noble Lord said: The purpose of the amendment is related to what the Government said in respect of this matter. They have stated that they will exempt, by authorisation, not for profit companies providing a local facility which is not funded under Section 137. Because it appears arbitrary to exclude Section 137 funded projects, the amendment seeks to require the exemption to be more general.

Clause 68 provides that a local authority may not take a minority interest in a company in general, except where the Secretary of State authorises it. That could have a serious impact on many voluntary organisation companies which are funded by local authorities. Councils have in general wished to place someone on the board, the management committee or the council of a voluntary organisation which they fund so that lines of communication can be kept open and to ensure that public money is being spent wisely. From the point of view of the voluntary organisation, it can often be useful to have a representative of the local authority on the committee because voluntary organisations need to be aware of the thinking of their local council, whether or not it funds them, about their work, funding and future and their relationship with the council.

In its consultation paper Local Authorities' Interests in Companies the department suggested that it would be prepared to authorise by order or regulation the taking of minority interests in certain classes of company. The relevant categories for the voluntary sector are: a Section 25 funded housing association; a non-profit-making company which provides a facility used by or which is for the benefit of residents of the local authority's area and to which the authority gives or has given financial assistance under a power other than Section 137 of the Local Government Act 1972; an enterprise agency; a professional association; a company limited by guarantee concerned solely with the promotion of commerce, art, science, education, religion or charity; or any profession which is permitted to omit the word "limited" from its name.

This excludes a great many voluntary organisations which receive funding from authorities under Section 137. There is no clear reason for discriminating against those who are funded under Section 137, as opposed to any other power, and it seems to us quite arbitrary to select these agencies for exclusion from the restriction against minority interests. Section 137 provides that the local authority must be of the view that the spending must be of direct benefit to its area, or part of it, or the inhabitants, or some of them. It seems a little absurd that they cannot maintain a presence on the management committee of a voluntary organisation in order to satisfy themselves that the organisation continues to be of such direct benefit.

One of the main ways in which local authorities use Section 137 is to fund voluntary organisations. Although there is widespread evidence that local authorities sometimes use Section 137 when in fact there are specific powers available which they should use instead, there are still some important cases where a local authority must use Section 137. I shall briefly indicate them. First, they include some of the representation and advocacy work of law centres and advice agencies; some aspects of race relations and equal opportunities work; some of the work of local development agencies, such as councils for voluntary service, which co-ordinate and support the activities of other voluntary groups; organisations such as action research centres which arrange secondments from the private sector to local voluntary groups; some health projects where they fall outside the health services and Public Health Act 1968; projects involving support to prisoners' families. My noble friend Lord Dean, because of his voluntary work, is well aware of organisations which undertake those aspects of the work. The last category includes case work and community development work in projects involving advice and support to migrant and refugee communities.

Another circumstance where Section 137 has to be used is when one tier of local government decides to fund projects which are the responsibility of another tier of local government. For example, the provision of wardens in sheltered accommodation comes under social services rather than housing powers and therefore in the case of a district council it has to be funded under Section 137. Similarly in a metropolitan district council there may be some aspects of transport or crime prevention which the district council wants to support even though it is the joint boards which have the statutory responsibility.

The purpose of the amendment is to seek a commitment from the Government that they will be prepared to authorise voluntary organisations irrespective of the powers under which the facility is funded. I beg to move.

Lord Hesketh

As the noble Lord, Lord Graham, has indicated, the amendment is directed to a specific point in the consultation paper on Local Authorities' Interests in Companies which we issued last year. In discussing how far local authorities should be able to hold minority interests in companies we said that local authorities ought always to be able to hold minority interests in companies that they assist which are voluntary bodies in the sense of the amendment and which provide a facility for the use or the benefit of the inhabitants of the area of the authority. We added the qualification, however, that such assistance should have been made under some power other than Section 137. The reason for this was that the list of companies in which participation was possible covered those where there was an important policy aim to be secured by such participation. Where the assistance was given under some power other than Section 137 we accepted that it was useful for local authorities to supplement those specific powers by using companies.

Section 137 is, however, different in kind since it covers everything for which there are no powers and there has not therefore been the same endorsement by Parliament of local authority action. A different treatment therefore seemed justified.

However, we have reviewed this approach, particularly in the light of the changes in Section 137 made by the Bill. In the light of that we have concluded that we should not press for the qualification proposed in the consultation document. We shall therefore be proposing that local authorities shall be free to participate in any voluntary body, in the sense of the amendment, which they have assisted and which provides a facility for the benefit of the inhabitants of their area, regardless, of what power that assistance is given under. In the light of that assurance I hope that the noble Lord, Lord Graham, will feel that he is able to withdraw his amendment.

Lord Graham of Edmonton

My colleague the noble Lord, Lord McIntosh, and I were puzzled at how the Government could reconcile what they said earlier and a possible resistance of the amendment. What the noble Lord has said is that the Government have reflected on what they said earlier and in the light of what they have done in the Bill they will in effect be revising the guidelines. What the Minister has said is that in the light of the intended revision there is no need for the amendment. We entirely agree. The purpose of the amendment is, as I believe the Minister has said, that there are circumstances in which funding other than by Section 137 for some activities ought properly to be given the benefit of the protections that we are seeking. The Minister will understand that we shall have to read very carefully what he has said. We may have to come back at a later stage, but what the Minister has said sounds hopeful to us and we are grateful to him if that hope is well placed. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 131D and 131E not moved.]

Clause 68 agreed to.

Clause 69 agreed to.

Clause 70 [Authorities acting jointly and by committees]:

Lord McIntosh of Haringey moved Amendment No. 131F: Page 77, line 20, leave out subsection (1).

The noble Lord said: The amendment is necessary because of a rather extraordinary provision in Clause 70 which follows Clauses 65 and 66 and appears to have what must be an unintended result. I cannot believe that this is what was originally intended. Clause 65 concerns controlled companies and Clause 66 influenced companies. Clause 70 states that any company which would not otherwise be controlled by or subject to the influence of a local authority can, if the actions, powers and interests of more than one local authority are treated together, be considered to be controlled by or subject to the influence of two or more local authorities.

There are differences in the wording of Clauses 65 and 66 which mean that the provision in Clause 70 is nonsensical. There are also differences within Clause 66 between what is called a "business relationship" and a "personnel relationship". Clause 70 would crush those together just as it attempts to crush together Clauses 65 and 66.

I shall give an example of the way in which that might work if Clause 70 is accepted unamended. I take the example of the management of a community association. The management committee is seven strong. There are no councillors, and no one is appointed by a local authority. But of the seven, one works for a firm of consultants which provides professional or managerial services to local authorities and he is caught in that way. A second works for a local authority which may not have contact with any of the local authorities concerned. A third holds office in a political party which may not be in control or have a majority in any of the local authorities concerned. A fourth retired from employment with the local authority two years ago. He may not now have any connection with the local authority but the rules state that if one has retired from a local authority within the past four years, one is deemed to be associated with that authority and is caught by the provisions in the Bill.

There is no common thread between any of these people. They have no connection with each other except that they happen to be members of the management committee of the community association. There is no common thread between any of them and the local authorities with whom they have had connections. There is no coincidence of connections between them. However, under the terms of Clause 70 their connections are added together and the community association can be held to have more than 50 per cent. of its management committee associated with local authorities.

We are familiar with the concept of totting up points in respect of traffic offences which lead towards a disqualification, and I do not disagree with that principle. However, this is an extension of that principle to the point of madness. In the eyes of the Government these are offences because one is not supposed to take part in voluntary organisations if one has any interest in other aspects of public life. If there is no connection between those "offences", one has an association plus a totally independent and irrelevant association adding up to control.

With the best will in the world, I believe that the Government have some good intentions in some parts of the Bill—

Lord Graham of Edmonton

Steady on!

Lord McIntosh of Haringey

At least I should like to believe that the Government have some good intentions in some parts of the Bill. I cannot believe that the Government intend the meaning carried in Clause 70(1). If they are to defend it and say that there are abuses which will be corrected by the provision, let us at least know what the abuses are. It is difficult for me to understand what they could possibly be. The example that I have given is by no means outrageous or untypical of the way in which the clause can operate. I beg to move.

4.15 p.m.

Lord Hylton

I read Clause 70 as a non-lawyer, and it appears that subsection (1)(b) is directly relevant to the case of the four voluntary bodies about which I asked the Minister a question when the Committee dealt with the amendment tabled by my noble friend Lord Hayter. I ask the Minister to take the issue away and read the two amendments in conjunction.

Baroness Phillips

My noble friend on the Front Bench has evoked a strange thought in my mind. It is all right—it is not erotic! I am not thinking of opening a massage parlour under local government funding, although that would not be unknown.

I am bothered because I know a number of ex-policemen outside London who are closely connected with voluntary community operations which are funded by the local authority. Am I being too tenuous? After all, indirectly they were paid from local authority funds in the same way as teachers. Therefore, would they come under this clause? I find that matter worrying because we always welcome such people retaining their interest on retirement. There is an increasing number, so perhaps the Minister can reasure me that they will not be covered by the clause.

Lord Hesketh

The amendment would remove subsection (1) of Clause 70. That subsection provides that where two or more local authorities are involved with a company, their interests should be aggregated for the purpose of deciding whether a company is subject to the control or influence of a local authority.

We think that it is quite clear that some provision of the kind contained in Clause 70(1) is necessary. It would be indefensible if a company that was 51 per cent. owned by one local authority was subject to the controls of Part V, while another owned 50 per cent. by one local authority, and 50 per cent. by another was not subject to the controls. To leave out this subsection would be equivalent to saying that the rules binding local authority committees did not apply to joint committees appointed by two or more local authorities.

It is a our clear intention that when the two tests—of personnel linkage and of business association—are applied, we should take into account only the interests of those authorities which in part meet both tests. In other words, if the whole of the personnel linkage is with one authority, and the whole of the business relationship is with another, we do not think that the tests for local authority influence are satisfied. Or, to take what is perhaps a more likely case, if a company which is under the influence of one local authority starts trading with another local authority and that second local authority has no personnel links with the company, then that second local authority should not be regarded as having influence over the company.

As I said, we came to the conclusion that the drafting of this subsection was not as clear as it might be in order to achieve that purpose. We have been able to see at least one way in which the drafting can be improved. However, it is possible that there might be some other ways in which the problem could be tackled. Rather than put down an amendment now which might need to be further amended on Report, we thought it better to consider the matter thoroughly and come back at Report stage with an amendment which effectively addressed the problem.

We are grateful to the noble Lord, Lord McIntosh, for drawing our attention to the need for clarification in this passage and I am happy to give an assurance that we shall propose such an amendment on Report.

As the noble Lord, Lord McIntosh, is probably aware, an amendment was tabled in another place which was not then moved. In the light of that, I hope that the noble Lord will feel able to withdraw his amendment.

Lord McIntosh of Haringey

The deep suspicion in my mind is now crystallising. I had forgotten that today is a Garden Party day and that the Government do not want a Division on the Bill at this time. That is why they are now making nice noises about several of our amendments in turn—

Lord Graham of Edmonton

Shame! Disgraceful!

Lord McIntosh of Haringey

In all conscience, I cannot force the Committee to a Division on matter about which the Minister has not only said that he will return to it at a later stage but that he recognises the justice of our case. The Government have dug a hole for themselves, and they have fallen into it. All credit to the Minister because he is trying hard to clamber up the sides of that hole. I congratulate him. I hope that between now and Report he will find some suitable hand and foot holds, and that he will come back with an amendment which satisfies what he recognises to be the valid point made in our amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Graham of Edmonton moved Amendment No. 131G:

Page 77, line 37, at end insert— ("(3A) For the purposes of this Part anything done and any power exercisable by a scheme established under section 48 of the Local Government Act 1985 shall not be treated as done or as the case may be exercisable by each of the Local Authorities concerned.").

The noble Lord said: The purpose of this amendment is to exempt from the scope of the clause those cases where a collective grant-making scheme in a metropolitan area, such as the London boroughs grants committee, takes an interest in a voluntary organisation which it assists by way of grants under Section 48.

Clause 70 provides for cases where more than one authority is involved in a company. Where the involvement of any of these authorities individually would not lead to the company being deemed to be influenced or controlled but where treating those authorities collectively would lead to the company being deemed to be influenced or being controlled, then that aggregation of local authorities is to be performed and the company deemed to be controlled or influenced. Is not this terrible gobbledegook which has been put together in the name of local government in 1989?

We seek clarification. The clause requires the aggregation of the actions, powers and interests of two or more local authorities. Therefore, we understand the Government's intention to be that the aggregation of the level of business relationships and the level of representation on the board of management or membership must be with the same authorities. However, we would welcome clarification from the Government that they do not intend to count as influenced by each authority a company which in any one financial year receives more than half of its income from a group of councils and which, in the same year, has 20 per cent. of its board or membership from local authorities but not exactly the same group from whom the income is in that year received. This point is particularly important to historic building trusts which are likely to drift in and out of influenced status. The grants they receive for renovation may well be from a partly different set of authorities from those represented on the company.

Section 48 of the Local Government Act 1985 was a special arrangement made for those metropolitan areas whose metropolitan county authorities were abolished by that Act. It provided for a lead borough in the metropolitan area to administer on behalf of the other boroughs a scheme under a joint committee for the making of grants to voluntary organisations. Section 48 was and can be used only by those collective grant-making schemes. Each scheme annually agrees a budget and levies the member boroughs for their contribution to that budget under a formula geared to each borough's percentage of the population in the area of the scheme.

Thus, the London boroughs grants committee is established under this provision to cover the area of the 33 London boroughs and the City of London and Westminster. All are represented on the committee. For the purposes of Clauses 70 and 66 there is an aggregation of 33 boroughs from whom the organisation funded by the committee will be said to derive one half of its income in any given year. The committee, should it choose to be represented on the management committee of an organisation which it runs, will then be acting on behalf of the 33 boroughs, and its representatives would be a person or persons associated with all 33 boroughs.

If a voluntary organisation were to be influenced by virtue of the circumstances described above, then the consequences would be very serious. Voluntary organisations often need to borrow capital. Advice agencies will need shopfront premises and may need to take out a mortgage. Community transport projects need loans for vehicles, and so on. For such a voluntary organisation, this borrowing would be counted against the credit limits for all 33 boroughs. Therefore, the organisation would have to seek approval of the 33 boroughs before undertaking the capital borrowing. Clearly, that would be practically impossible. The only alternative to this crippling scenario would be for each of the boroughs to allocate a part of their own capital credit allowance to the lead borough for the scheme. That approach was tried in 1987 under the existing capital spending controls and failed to secure the agreement of the boroughs. There is no reason to suppose that it would be successful now.

The combination of Clause 70 aggregation with the definitions of "influence" in Clause 66 and the capital borrowing system set out in Part IV of the Bill mean that it will be virtually impossible for voluntary organisations funded by the scheme, and on which the scheme places a representative, to undertake capital borrowing.

There are a number of voluntary organisations which are partly funded by the LBGC for London-wide work and partly funded directly from an individual borough for local services. Such voluntary organisations would find themselves doubly influenced under Clause 70 because the two sums would be aggregated.

The bureaucracy generated by this clause would be enormous both for voluntary organisations and for the collective grant giving scheme set up under Section 48. The LBGC in order to secure its own position vis a vis its constituent authorities will have to supervise its 750—and I repeat 750—funded projects very closely, all of which are approved by the 33 London boroughs. It will have to keep up to date records of every change of personnel on all management committees and personal details of those people's connections with any London borough. By the same token, the individual boroughs will have to keep the scheme informed, and the money used for that would be far better spent on the making of grants.

Perhaps I may give a final example. SHAC (The London Housing Aid Centre) is an example of the kind of organisation which will have severe difficulties if Clause 70 is enacted without amendment. That organisation receives about 33 per cent. of its funding in the financial year 1988–89 from the London Residuary Body under arrangements made prior to the abolition of the GLC. Another 25 per cent. comes from the London Boroughs Grants Scheme and 20 per cent. from the Department of the Environment. Of the remaining 22 per cent. a significant proportion comes from contributions which are usually small—under £1,000—from individual London boroughs for the proportion of work done by that organisation in their area. Of the 12 members of the board of trustees, one is a local authority employee, one sits on the board of a housing association and one is the director of the housing association. At least two other members act as consultants to local authorities from time to time. Any or all of those people, depending on their work, the status of the housing association and the terms of the promised exemption, could count as associated with local authorities which are members of the scheme and so are likely to be aggregated together with the scheme by virtue of Clause 70.

I very much hope that the Minister will have listened carefully to the real problems which this clause, unamended, will have certainly for the London boroughs with whom I am proud to be closely associated and also for many other organisations. Of course, the amendment is not only supported by the London Boroughs Grants Scheme but also by NCVO. I beg to move.

Lord Hylton

The noble Lord, Lord Graham, has demonstrated beyond any possible shadow of doubt the unbelievable complexities of the implications of this Bill, and this particular part of this Bill. Perhaps I should say that I was one of the founder members of the organisation which the noble Lord mentioned—the London Housing Aid Centre (SHAC)—although it is quite some years since I had any connection with it.

During the drafting of this Bill was any thought given to the situation now obtaining not only in Greater London but also in the former metropolitan counties, all of which have been abolished? Will the Government bear in mind that the situation in these different urban areas is likely to differ from one to another, and in all cases will not be on the same footing? That is quite a large question, and I leave it to be dealt with by the Government.

4.30 p.m.

Lord Ross of Newport

I am becoming more confused. I am not entirely sure that the Government themselves understand the position. I wish to raise one case in point. I established a buildings preservation trust. A small amount of money came from the private sector, but the vast majority came from the county council and two district councils. The trust was originally chaired by the Lord Lieutenant. The trust continues today and the representatives on that trust are making grants to people of little means who wish to make repairs to properties that it is considered worth preserving. The majority are local authority nominees from the county council and two district councils. One or two people have been brought in from outside for their expertise. The current chairman is the former county planning officer. Presumably, unless has done four years, he is involved.

It may be that we are excluded by these clauses, but the longer I consider the matter the more I believe that we are included. Is it really the proposal within the Bill that this trust, which meets about every three months and which is doing good work, has to go through all this rigmarole because the funds originally came from local government to the extent of 85 per cent. or 90 per cent. under pressure from me as the Member of Parliament? I cannot believe it. I beg the Government to look again at these clauses in order to try to simplify the problem. It is a very worthwhile organisation and there must be similar ones all over the country. If they are being caught by these clauses, it is daft.

Lord Hesketh

This amendment would declare that where a scheme for grants to voluntary bodies has been established under Section 48 of the Local Government Act 1985, the grants paid under that scheme are not to be regarded as done by each of the participating councils. The concern which has given rise to this amendment would be reasonable if it actually existed. However, as I shall try to show, the concern is non-existent, and the amendment is therefore unnecessary.

To do so I must explain a little of the detail of schemes under Section 48. The crucial feature in this context is that there is a designated authority, usually called the lead borough. It is this lead borough which actually makes the payments to the voluntary bodies. The sequence is that the grants committee for the scheme authorises the payment, the lead borough makes the payment and the constituent authorities then reimburse the lead borough in proportion to their population. This is not done on a grant-by-grant basis but on a lump sum basis.

As I explained in connection with the previous amendment, we are not proposing that the interests of local authorities should be aggregated for the purposes of the tests to determine whether a company is under local authority influence unless the authority shares in both the personnel link and the business relationship. As I have said, we shall be seeing whether we can make this point more explicit in Clause 70. I believe that this point clearly defines the situation with individuals because it does not cover the business relationship. The two points have to be joined together for the test.

Given the way in which the Section 48 schemes work, and given what I have said about the way in which interests will be aggregated, it follows that grants under Section 48 could not lead to a company being regarded as under the influence of the constituent councils generally. It would theoretically be possible for a company to be regarded as under the influence of the lead borough, but that would only be where one-fifth or more of the members of the governing bodies of the company are associated with the lead borough. We are aware of no such cases.

We do not think that the worries expressed about these grant schemes exist because the financial relations of the companies assisted by them are exclusively with the lead boroughs concerned. As far as the other boroughs are concerned, they can therefore disregard payments under the schemes in working out whether a company is subject to their influence.

Finally, the London Residuary Body is not a local authority. Therefore any payments that it makes would not fall to be counted as a payment by a local authority. For these reasons, I hope that the noble Lord, Lord Graham, will be able to withdraw his amendment.

Lord Graham of Edmonton

The purpose of this stage of the Bill, as the Committee is well aware, is to clear away misunderstandings from outside the Chamber. We have brought to the Committee the obvious misunderstandings of some very important people; namely, 33 town clerks or chief executives and leaders of councils. The fact that they have seen a threat to what they are doing because of the wording of the Bill is sufficiently indicative of the requirement for it to be either tidied up or changed.

The Minister said that, where there is an arrangement, for example in London, the grant-giving body, which has the approval of the 33 boroughs, comes to a decision and then decides to grant-aid one of the bodies. The money is paid by the lead authority provided that that authority does not transgress the rule as regards the number of people on the board of the voluntary body who would escape. It is ludicrous.

Let us suppose that inside that lead authority at member or officer level there exist the best people to look after the interests and money of all 33 boroughs and the viability of the voluntary body. Let us suppose that they collectively decide that it is from the lead authority that those men or women should represent the 33 boroughs. That immediately places the grant at risk. It also puts the relationship at risk and makes their actions wrong.

This is not the place to deal with the manifestation of what the Government have said as regards the branches. We intend to deal with the root of the problem at the Report stage of the Bill. The Minister has re-interpreted understanding given by himself and his colleagues that have been accepted by people outside as to the way in which the scheme will work. They will read very carefully what he has said. I have no doubt that they will give us some advice which we shall deploy at the next stage of the Bill. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 70 agreed to.

Lord Montagu of Beaulieu moved Amendment No. 131H: After Clause 70, insert the following new clause:

("Exemptions from ss. 65 and 66

Registered charities established as companies limited by guarantee or as societies registered or deemed to be registered under the Industrial and Provident Societies Act 1965, whose purposes include preserving for the benefit of the public buildings, monuments or other edifices or structures of whatsoever kind and wheresoever in the United Kingdom situate, of particular beauty, or historical, architectural or constructional interest shall not be deemed to be subject to the provisions affecting companies in which local authorities have interests as defined in sections 65 and 66 of Part V of this Act.").

The noble Lords said: The discussions this afternoon have centred a great deal around voluntary organisations. The Committee may or may not be aware that many charities will fall within the definition of companies under the control or influence of a local authority. As chairman of English Heritage I am particularly concerned with the impact that this will have on charities concerned with preserving historic buildings.

Perhaps I may briefly explain the work of buildings preservation trusts. These trusts are registered charities formed by members of the community in many parts of the United Kingdom for the purpose of preserving and promoting the preservation of historic buildings. The majority accomplish this charitable purpose by buying, restoring or selling problem buildings of historical or architectural merit in which, for various reasons, neither the public nor the private sector is willing to invest. Sometimes it is necessary for a preservation trust to make a longer-term commitment involving the acquisition and management of a building.

I am very glad to say that over the years governments have proved staunch supporters of the buildings preservation trust movement, universally recognised as a highly cost-effective means of achieving the preservation and very often the rehabilitation and practical use of historic buildings. It was in order to encourage the formation of more buildings preservation trusts that the then Secretary of State for the Environment undertook in 1975 to match pound for pound any sum that could be raised from the private sector in order to establish a national revolving fund to provide cheap working capital to help buildings preservation trusts with this important work.

The Architectural Heritage Fund opened for business in 1976 with a capital of £1 million. As a result of the commitment and thanks to the support of successive governments, English Heritage and the Secretary of State for Scotland, as well as its own fund-raising efforts, the fund now has a working capital of £4.5 million from which it has loaned over £8 million in support of more than 170 preservation projects since 1976.

For sensible technical and tax reasons the great majority of buildings preservation trusts are established as companies limited by guarantee, using a model memorandum and articles of association drawn up by the Architectural Heritage Fund and approved by the Charity Commissioners. Ironically, the clauses in this Bill will almost certainly apply to the Architectural Heritage Fund itself because it is a registered charity and a company limited by guarantee. It is also a company controlled by government, since the Department of the Environment appoints 50 per cent. of its council of management.

Building preservation trusts are rooted in local communities and always involve co-operation, if not a more formal partnership, between the public and private sectors. Although trusts which are established as limited liability companies are subject to the provisions of company law, their operations are conducted exclusively for charitable purposes. No building preservation trust director, for instance, receives a salary, and any excess of income over expenditure is ploughed back into the company's next project. Very few building preservation trusts have paid staff, and the complex and demanding work they do is undertaken, as in the case of so many charities, by busy people willing to give up time for a good cause. I am sure that the Government would wish to ease and not complicate the task of such people.

Building preservation trusts have to mobilise very substantial sums of money to finance their work. Like every other charity, most raise money by public appeal and fund-raising events, but preservation trusts also look to the Government, governmental agencies and local authorities for grant-aid for their projects; to English Heritage for Section 3A grants and Section 10 grants; and to historic building grants and home improvement grants from local authorities. For up-front capital they often borrow cheaply from the Architectural Heritage Fund. Many other trusts borrow on commercial terms from banks. Local authorities often come into that by making low-interest loans or by accepting deferred payments on the purchase price of buildings in local authority ownership. In addition, building preservation trusts sometimes need to seek repayment guarantees from local authorities as security for loans from the Architectural Heritage Fund.

Given the role that local authorities are required or asked to play in making funds available and also in the question of listed building consents, planning permission, and building inspection grants, it is entirely reasonable that they seek representation or are invited to be represented on the board of their local building preservation trusts. The extent of that representation varies but, whether or not a local authority controls a majority of votes on the board of directors or management, it should be emphasised that every director of a building preservation trust is charged with ensuring that the trust fulfils its charitable objects and purposes. To that end, the directors are responsible for ensuring that the trust's money, irrespective of its source, is used for those charitable purposes.

Therefore the impact of the Bill could be serious. It is with considerable concern that everybody involved with building preservation trusts has noted that they will fall under the definition of companies controlled by local authorities or subject to local authority influence, and in particular that they will be treated as if they were local authorities for the purposes of Part IV of the Bill. That seems to mean, for example, that the borrowing and expenditure of such trusts, even moneys obtained from the private sector or from grant-making charities, would have to be counted against the local authority's capital expenditure allocation; that trusts would have to conduct their affairs along the lines of a local authority committee: and that the local authority would have to monitor a trust's operations to ensure that it complied with the provisions of any order the Secretary of State might make under Clause 67.

It is not difficult to conclude that these and other provisions of the Bill could make it almost impossible for certain building preservation trusts to continue to pursue the charitable purposes for which they were established and registered, which they have carried out with such success and distinction in the past.

However, I note that the Bill provides for the Secretary of State, by means of a direction, to exempt particular companies from the provisions affecting local authority controlled or influenced companies; but it is surely unsatisfactory to subject an unknown number of charities to the provisions of an Act unless and until they obtain an exemption. Such charities seems to be judged guilty until they are proved innocent. Moreover, the pursuit of their charitable purpose is bound to be interrupted if a lot of work is required to make the case for an exemption.

Therefore I hope that the Government will accept the amendment and allow the excellent partnership between local authorities and building preservation trusts to continue. If not, will they urgently consider which organisations will be exempt so that they can at least be relieved of their agony and allowed to get on with the job that they do so well? I beg to move.

4.45 p.m.

Lord Ross of Newport

The noble Lord, Lord Montagu of Beaulieu, has answered the question which I posed on the previous amendment. He is telling the Chamber—and it is a very serious matter—that a building preservation trust such as the one I outlined, although it is a fairly small one—I think he probably has personal knowledge of it—would almost certainly be caught by the terms of the Bill. That is so stupid that it would be ridiculous. Local authorities themselves are now referring cases which they think are deserving—but which they cannot help because their moneys have been so restricted—to those kinds of trusts.

We carried out the kind of scheme which the noble Lord has described. We took over a derelict property—which incidentally was sold to us cheaply by the local authority—and did it up and sold it, but most of the work now is by way of grants and loans at what I suppose would be called reasonable rates of interest. I think last time we were charging about 5 per cent., which would be a very reasonable rate of interest today, but our aim was to ensure that where buildings were falling into disrepair and people were deserving of help—and we always looked into their resources and satisfied ourselves totally as to that—we might make some grant to help them repair the buildings. That must be right, and no doubt it is what the Government wish to happen. Therefore it seems stupid to put any sort of impediment in the way of the working of trusts of the kind which the noble Lord has so clearly outlined.

I very much hope that the Government will accept the amendment, or at least come back on Report with something which excludes such worthwhile organisations.

Lord Hylton

I have every sympathy for the amendment, but if the particular class of charity with which the noble Lord, Lord Montagu of Beaulieu, is concerned is exempted, why not exempt all registered charities? I urge the Government to make use of the protection that is presently provided both by the district auditor and by the existence of the Charity Commission and vetting bodies, instead of introducing the unbelievably complex provisions, checks and controls which are in the Bill.

Lord Moyne

I should like to support all that my noble friend Lord Montagu has said. While head of an independent organisation, he stands at the right hand of the Government in protecting our heritage. I think that he should be listened to very attentively by the Government because in my view he is almost a member of the Government. I hope that he will be regarded as such.

Lord Hesketh

This new clause would exempt from the controls on companies subject to local authority control or influence all companies whose purposes include preserving public buildings and monuments or places of beauty or interest. The amendment brings us back to the basic question which we have been debating for most of the afternoon. This concerns which companies are to be regarded as so closely associated with local authorities that they should be controlled as part of the local authority sector.

We recognise that many companies in which local authorities have an interest are doing valuable work in preserving the national heritage. We welcome that. However, we doubt that it is appropriate to exempt certain companies from controls to which they ought otherwise to be subject simply because they are doing work of national importance.

For this reason we think that the new clause is flawed. If the amendment were accepted it would mean that no matter how closely a company was under the control of a local authority it should not be subject to controls if its purposes include the preservation of the heritage. Let me give an example. Consider a company in which the whole of the voting rights are held by or on behalf of the local authority; all the directors are councillors of the local authority, and the company is wholly dependent on the local authority for its finance. The company could not then be regarded as anything other than a creature of the local authority. However, the new clause would provide that if that company included among its objectives the preservation of the heritage it would not be treated as part of the local authority sector.

Perhaps I may draw the Committee's attention to the precise drafting of the clause. The condition required for exemption is that the company includes among its purposes the preservation of the heritage. That test does not mean that the company must be doing anything to satisfy that purpose, merely that such an object must be one of the purposes that the company can pursue. The company could also have other objects which are quite different and could actually be pursuing those and not the preservation of the heritage.

We have had a number of representations from various companies which see themselves as threatened by these proposals. We have been suggesting to them that they have discussions with the department's officials. Where such discussions have been held in other cases—for instance, with the Yorkshire Mining Museum Trust Ltd.—we have been able to convince them that the fears that they have were mistaken. That may be the case here.

The controls which we are proposing are of two basic types. The first concerns propriety in the conduct of business. Such controls should pose no problems to well-run companies. The second concerns the capital finance of companies which form part of the local authority sector. It seems to us that, when a company is borrowing mainly on the basis of expectations that the money to service the debt will come from local authority funds, then it is reasonable that that borrowing should be controlled as part of the borrowing of the local authority sector. It does not seem to us that the purpose for which such borrowing is undertaken is relevant to the question of whether it should be controlled.

I have argued that the crucial question is how closely a company is linked to a local authority. We think that the tests set out in the Bill for the categories of company subject to local authority control or influence adequately delimit those companies that should be regarded as part of the local authority sector. If a company is within that sector, then it should be subject to the controls. If it is not, then it should not. We think that the proposed new clause would undermine that approach.

We have received a number of representations from, among others, English Heritage and the Architectural Heritage Fund. My officials will be arranging a meeting to discuss the position of the building preservation trusts. I am sure that this will help to clarify the issues that concern them. Earlier this afternoon, during discussion on Amendment No. 131B, I talked about the possibility of exempting further voluntary bodies which put a good case to the department. I explained that one of the indicators for which we would be looking was the independence of a body from the local authority. Other factors could demonstrate beyond doubt that it is to all intents and purposes operating independently of the local authority. It may well be that the building preservation trusts will be able to demonstrate this level of independence and thus enable us to exempt them. I hope that, with what I have said, the noble Lord will feel able to withdraw his amendment.

Lord McIntosh of Haringey

The noble Lord, Lord Montagu, has made an incontrovertible case for the exclusion of building preservation trusts from the controls of Part V of the Bill. He set out the additional work that would be required of building preservation trusts if they were to be covered by the Bill. He explained the effect on local authority capital finance and the difficulties there would be in receiving as they do now local authority capital for their work. He did not especially refer to it but it would also affect government controls over local authority participation, because Part V of the Bill provides that in these circumstances the Secretary of State shall have substantial controls over the ways in which local authorities participate in such companies. The noble Lord's case for the damage that would be done is overwhelming.

I accept, as the Minister said, that the amendment is technically flawed. To include building preservation in its purposes would be far too wide and would allow exemption even if the trust did not do anything about building preservation but did a good many other things. What this has revealed, and what the noble Lord, Lord Hylton, in referring to SHAC, and the noble Lord, Lord Seebohm, in referring to family service units, have revealed, is that the Bill is inadequately drafted for its purpose. It reveals that the independence of a charitable organisation of this kind is to be established not on anything laid down in Part V of the Bill but by, as my noble friend Lord Graham pointed out, all these bodies queuing up, asking to be exempted and being told, "You are exempted, but you are not exempted". It is to be established on a definition of independence made by officials in the department.

This is far too serious a matter to be left to administrative convenience in that way. If the Minister will not give us an undertaking that at Report stage this part of the Bill will be amended in order to make it clear on the face of the Bill what the Government mean by independence so that people will not have to come cap in hand to ask for independence, I promise him that we shall put down not 100 amendments but 1,000 amendments on the same lines as the amendment of the noble Lord, Lord Montagu.

There are thousands of examples of charitable organisations doing good work with the assistance of local authorities. They deserve to be exempted in exactly the same way as those referred to by noble Lords on the Cross-Benches and by the noble Lord, Lord Montagu. I shall ask for the support of the noble Lord, Lord Montagu, in these cases because I am sure that I shall be able to convince him that these cases are as deserving as the case of which he has special and distinguished knowledge.

This part of the Bill has been revealed to be inadequate. It is necessary, before a decision is taken on this amendment or on any of the amendments, for the Minister to recognise that he has to deal not only with the particular case but with the principle behind it. How is independence to be defined?

Lord Montagu of Beaulieu

I thank my noble friend for his reply to my amendment. I understand that the wording of the clause is perhaps flawed in some ways. However, we have had a useful debate on the clause. I take the point that the test which my noble friend outlined might not apply to such property trusts, and I certainly welcome an opportunity on behalf of those preservation trusts and English Heritage to come to the department and discuss them further. I hope he will bear in mind that this will have to be defined better by the time we reach Report stage. In view of the assurance I have had this afternoon that this matter will be looked at with us, I beg—

Lord McIntosh of Haringey

Before the noble Lord asks leave to withdraw his amendment, may I have a reply to the points that I made to the Minister? They deserve a reply.

Lord Hesketh

They deserve a reply to this extent. I gave various undertakings earlier this afternoon to the noble Lord, Lord Hayter, which is why I specifically mentioned Amendment No. 131B. The noble Lord, whose amendment it was—in a way the amendment is similar to the amendment before us—felt that he wished to consider what I had said and did not ask me to go further. I feel that I have gone a considerable distance already this afternoon in the reply that I gave to him, which is why the noble Lord did not press his amendment.

Lord McIntosh of Haringey

I thought so at the time, too. However, the noble Lord is continuing to say, as if he had not given the undertaking to the noble Lord, Lord Hayter, that specific bodies shall have an opportunity to go to the department and argue for their independence. He made the point to the noble Lord, Lord Hayter, about the National Association of Citizens' Advice Bureaux. He made a similar point about building preservation trusts to the noble Lord, Lord Montagu. But what he is saying about going to the department and arguing the case is in conflict with the offer he made to the noble Lord, Lord Hayter. We want a clear assurance that the Government recognise that this cannot be done by the department case by case. It has to be done by amendment to the Bill. That is the answer I want from the Minister.

Lord Hesketh

I am not willing to go further than I have already gone today. I remind the noble Lord that I pointed out to the noble Lord, Lord Graham, that we would be prepared to consider the question of independence that can be demonstrated without the requirement for individual application.

Lord Montagu of Beaulieu

I have no doubt that noble Lords will look forward to having this clarified at Report stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 37 [Application of Part IV]:

5 p.m.

The Deputy Chairman of Committees (Lord Murton of Lindisfarne)

I call Amendment No. 131L, which is tabled in the name of the noble Lord, Lord McIntosh of Haringey

Lord McIntosh of Haringey

I think that Amendments Nos. 131J and 131K should be dealt with before this amendment.

The Deputy Chairman of Committees

It is my information that the amendments are in fact correctly marshalled. I have been told that I should call Amendment No. 131L before Amendments Nos. 131J and 131K. The first amendment refers to page 43, whereas the other two refer to page 44.

Lord McIntosh of Haringey moved Amendment No. 131L: Page 43, line 39, leave out ("1990") and insert ("1991").

The noble Lord said: In that case we are moving on to Part IV of the Bill and it is important that we should take this opportunity to look at Part IV as a whole. I say that because what this represents is a new approach to the capital finance of local authorities which has been presaged for many years and which according to the proposals in the Bill is now to be brought into effect by 1990. Our amendment would delay implementation of the new system for one year.

My advisers will confirm that I am not generally in favour of seeking to delay implementation of a Bill for its own sake; we would not do so just to make a political point. However, the issues here are much too serious and reflect an historical period of discussion about capital finance of local authorities which makes it necessary to approach the matter in this way on this occasion, and perhaps on this occasion alone.

The origins of discussion of capital finance for local authorities are, in this decade at any rate, within the 1980 Local Government, Planning and Land Act. The truth of the matter is—and this was recognised quite early on—that the proposals for capital controls made in the 1980 planning legislation have not been a success. That fact was recognised as early as 1984 when the Government proposed changes to the system, and, more recently, in the past two years—and I shall not go back further than that, although I could do so—there have been a considerable number of substantial changes to the system of capital controls of local authority finance.

Perhaps I may give just a few examples of those controls: the Local Government Prescribed Expenditure Amendment Regulation 1987 which was brought in to bring finance leases of equipment and machinery within the controls of the system; the Local Government Prescribed Expenditure Works Regulations 1987 which were brought in to provide an exemption from the deferred purchase provision of the 1987 Act for schemes under £3 million; the Local Government Act of 1987 which changed the timing of the expenditure as regards when expenditure is scored for capital control purposes and deferred purchase schemes; the Local Government Prescribed Expenditure Amendment Regulations 1988 which brought leases of land and buildings over three years within the controls—previously the period had been 20 years; the Local Government Finance Act 1988—that is the poll tax Act—which in Sections 130 to 132 brought the acquisition of interests in land and buildings for less than the freehold values and acquisitions of share and loan capital within the scope of the capital expenditure controls; and the revised block borrowing approval and general consent to the use of capital moneys in February 1989 which prevented local authorities from using capital receipts to pre-fund capital expenditure.

It is therefore quite clear that we do not have a perfect system which has been carefully thought out over a period of time; we have a system which was introduced in 1980, which is frankly a botched system and one which has required a substantial change over a period of years. In the Green Paper Paying for Local Government in 1986 the Government set out the first firm proposals for putting matters right. They followed that process by introducing a consultation paper, Review of the local authority capital expenditure control systems in England and Wales, in February of 1986. However, they withdrew that paper in response to opposition from local government. Finally, the most recent consultation paper, of July 1988, which deals with capital expenditure and finance, is the basis of the proposals in Part IV of the Bill.

Therefore the Government, apart from the period in which the capital controls did not work after the 1980 Act, have for nearly four years been dipping a toe into the water. They have been making proposals to the public, to the local authority sector, about capital expenditure controls. Now, having dragged their feet for all of that period, they are proposing to implement a completely new system only six months after the legislation has been enacted. That is the implication of the provisions in this part of the Bill.

We do not think that this will work. There are three fundamental reasons why we think so. The first is that there is no reason to suppose that the drafting is any better now than it was before. We shall see in the debate which follows on the amendments which we have to this part of the Bill the many defects in the drafting that still remain. Secondly, the drafting is skeletal to say the least. In this part of the Bill, as I said on Second Reading, there are an immense number of regulations left to the Secretary of State. None of that will be finalised until the Bill has been enacted.

The Secretary of State has powers to make regulations under Clauses 37(1)(k), 37(3). 38(5), 41(5), 42(2), 46(1)(c), 46(5), 47(2), 47(3) and 51(4). I shall not weary the Committee with what those regulations are about. However, it is quite clear that this is not a Bill to enact anything; it is to enable the Secretary of State to make regulations in certain matters. In other words, this is not real legislation at all and what is proposed is getting close to the situation where the Secretary of State will do what he wants.

In fact, it is worse than that, if that proves to be the case. I say that because local government has not been given any indication of how the new system will operate in practice. If what is proposed is to be enacted and local authorities are to make preparations for it to take place in 1990, surely they should now be given an indication of the likely level of resources in terms of the basic credit approvals—the new acronym, BCAs—and the annual capital guidelines, ACGs. They should also know on what basis the other acronym, the SCAs, the supplementary credit approvals, will be considered.

In Committee in another place on 4th April the then Minister, Mr. John Selwyn Gummer, said (at col. 588 of Hansard) that each borough treasurer or director of finance in each local authority knew exactly what the implications of these proposals were for capital expenditure. I challenge that statement and I challenge the Minister to show us how that can be so. All of these regulations are the essence of this part of the Bill and yet the regulations themselves are not published. The basic credit allowance, the basic credit approval and the annual capital guidelines are essential to any understanding of the implications of the Bill and they are essential to any financial planning; but these, too, have not been published.

We have before us one of the worst pieces of interfering and badly thought out legislation which has been produced in the whole series of 50 legislative Acts affecting local government which have been produced in the past 10 years. Has there ever been a part of a Bill which has introduced as many as 15 new regulation-making powers for the Secretary of State? I shall gladly give the Minister time to get evidence on that question because the regulation-making powers are not only numerous but they are absolutely fundamental to any understanding whatever of the meaning of this part of the Bill. That is why so many of our amendments need to be probing amendments. We merely want to know what the Government intend. We are not being told what they intend.

Local authorities' capital expenditure is probably the most difficult of all aspects of local authority finance. So much so that many people, even those in local government, shy away from it, and with some reason, because not only are the rules complicated but, as I have shown, they change all the time. Even if one learns something, one will almost certainly have to unlearn it within the following few months.

When dealing with a local government finance Bill last year, I said that I understood the rate support grant for a few weeks in the 1970s. I never understood it before, and I have never understood it since. I do not claim to understand the capital finance system now, and I do not believe that directors of finance or borough treasurers will understand it when they read the text of the Bill, assuming that it is enacted as it is at present drafted. Although it is difficult to understand, that does not mean that it is not important. It is important because, as my noble friend Lord Dean of Beswick will show, the housing implications of capital finance are fundamental.

A large part of local authorities' capital finance is used for the provision, renovation, repair and maintenance of housing. It is analogous to examples we have seen recently in the Water Bill. A great deal of criticism came from the Government Front Bench about the inadequacy of investment in the water and sewerage system under the Labour Government in the late 1970s. Equally passionate denunciations came from these Benches about the inadequacy of investment in the water and sewerage infrastructure in the 1980s under this Government. Whoever was right—let us assume for the sake of argument that we were both right; that investment was inadequate in the 1970s and the 1980s—is it not equally true that investment in the provision, restoration and maintenance of our housing stock is as important a social issue and that the investment has been inadequate for the purpose for many years?

In case anyone should think that that is a party-political point, I would claim that investment in our housing stock has been inadequate under a Labour Government as well as under a Conservative Government.

The fact that housing is such a significant part of local authorities' capital expenditure indicates how important the issue is to our society and people. Local authorities' involvement in housing, however much the Government may wish to do away with it in the future, will, for the foreseeable future, be an important part of our housing provision, and an essential part of our housing provision for those of our people who are most in need.

We have a part of a Bill which has been in gestation for many years. It is a reflection of the inadequacy of Government thinking about capital controls for even longer. It is now to be introduced within six months of Royal Assent.

Those who are most concerned and knowledgeable about those matters (the local authority associations) take the view, which I put to the Committee in all sincerity, that the system of capital controls proposed in the Bill is not necessary in itself and that the other controls available to a local authority, notably the control by central Government of the revenue implications of capital expenditure, are adequate for the purpose. That issue is wider than that contained in the amendment, and I do not make a major or lengthy point about it.

The point that must be made is that to enact this part of the Bill by 1990, as is proposed, is courting similar injustice and administrative muddle as was caused by the 1980 Act, which has damaged the responsibility and effectiveness of local authorities in planning their capital expenditure for a decade. I beg to move.

5.15 p.m.

Lord Dean of Beswick

I support my noble friend Lord McIntosh of Haringey because the amendment he has moved is one of the most important amendments in the Bill. We are talking about council housing and the effect the Bill will have on council house tenants. The ramifications of Part IV are linked to those of Part VI.

It is widely expected that the proposals contained in Part IV will have a more dramatic effect on local authority housing services than those in Part VI will have on housing revenue finance. Local authority capital expenditure is still largely directed at housing provision, renovation, repair and maintenance. The main areas of expenditure of course are new house building—although that is almost down to nil—and the renovation, improvement and repair of the existing housing stock in management. By far the largest area of expenditure within the current housing investment programme relates to environmental improvements, demolition, slum clearance and energy conservation work. The whole gamut of local authorities' activities is covered.

Expenditure by local authorities in England on all those housing programmes during 1988–89 has been estimated by the Department of the Environment as £3.720 billion. Of that, less than one third—£1.150 billion—is funded by the housing investment programme. The remainder is funded by capital receipts and other forms of borrowing.

Despite asking the Government for borrowing approval to spend £6.333 billion on expanding those programmes during 1989–90, local authorities were given a housing investment programme allocation for the current year of £920 million, which is less than one-sixth of what they asked for. That was the situation despite an increasing supply of capital receipts which local authorities raise. It means, in effect, that the housing investment programme allocation is funded entirely by receipts from the right-to-buy programme; 1989–90 is the second year in which no new money has been put into local authority housing by the Government.

Despite protestations in the House, we, continue to hear bleatings from Ministers about 100,000 council properties being empty while we have homeless people. Is it any wonder, with the cuts that have taken place? I shall attempt to illustrate shortly what the Government have done to local authorities. I wish they showed the same sense of urgency when dealing with homeless people and people in bad housing as they appear to show when finding a residence for the new Leader of another place, even at the expense of one of his colleagues. I wonder what would have happened if the Chancellor of the Exchequer, having been in situ for six years, had exercised his right to buy, as do people who live in other publicly-owned houses. It would have created something of a furore, would it not?

The Government see housing associations stepping into the breach and switching their resources from rehabilitation to new housing and from inner city and metropolitan areas to rural areas.

However, we have quite hard evidence from the housing associations that they do not see themselves as being able to take on that role. That is too big for them. They are prepared to act in a complementary role to the local authorities, but not on their own. However, the latest public expenditure White Paper of January 1989 (Cmnd. 609), demonstrates that even if housing associations manage to start on site, the number of approvals projected in the White Paper of 16,000 for 1988–89 and 24,000 for 1991–92 will not compensate for the dramatic reduction in local authority new homes. They range from a figure of 15,000 completions for the year, 1988–89, to only 6,000 completions for 1991–92. There has been a substantial fall in local authority housebuilding due to the situation that has been forced on local authorities by the Government.

A decade ago, local authorities in England completed 66,000 homes. At that time just over 56,000 families were officially homeless. We know that the figure is now over 120,000. While we welcome the proposal in Part IV that the Secretary of State can take into account the local authorities' ability to supplement their annual capital guidelines with capital receipts, all local authorities are concerned about the overall availability of capital resources.

The public expenditure White Paper to which I have just referred indicates a continuing downward trend in the overall availability of net capital expenditure for local authorities. Indeed, local authorities will be making a net contribution to the Exchequer through capital receipts. That was never intended when we were first persuaded to support the sale of council houses. The beneficiaries of these capital receipts can only be assumed to be housing associations or other public expenditure programmes.

These proposals must be seen in conjunction with Part VI of the Bill and the proposals in the 1986 Housing Act to encourage local authority tenants to opt for a private landlord or to have their homes taken over by housing associations. That policy objective is obviously encouraged by council tenants who suffer accommodation of a poor quality and who have to wait a long time to have essential repairs and maintenance carried out, as well as much needed environmental improvement. That is why we have long since concluded that the Government have systematically disinvested in council housing over the last decade to promote their objective of increased owner occupation, at any cost.

If anybody thinks that I am just making a political point without the support of figures, perhaps I may briefly detain the Committee by giving some figures. The first is for the first year of the Conservative Government when they took office after the last Labour Government. The housing investment programme for the GLC in 1979—the first year of the Margaret Thatcher government—was £1.356 billion. The Government were so charitable that last year they allowed the same group of people—all the London boroughs and the GLC—£327 million—less than a quarter of what they were allowed a decade ago. Ten years ago the metropolitan districts received £1.339 billion as their allocation. Last year it was £300 million. The non-metropolitan districts 10 years ago received £2.141 billion, last year it was £455 million. If we take the grand total, 10 years ago, the housing investment programmes were nearly £4 billion. They are now just over £1 billion. Still the Government say that it is the fault of the local authorities that we have a housing problem.

Since I have been privileged to be a Member of your Lordships' House, I think that there have been five changes of Ministers in this House responsible for housing. Each one has left a worse record than his predecessor. I do not particularly blame the Ministers in the House because they do not make policy.

I do not wish to go further because no doubt later on when we discuss the revenue implications of Part VI, we shall go into the matter a lot deeper. The figures which have been produced for me today, of which I had some prior inkling, indicate quite clearly that the Government have not set a priority for housing. Once again I wish that they would stop blaming other people for their own shortcomings bearing in mind the dimension of the withdrawal of resources by the Government over 10 years.

The homeless people in this country will be aware of the figures. I thought I ought to rise in support of my noble friend and colleague Lord McIntosh of Haringey to give an indication of what the issue is about and to support the amendment which he so ably moved.

The Paymaster General (The Earl of Caithness)

We have considered carefully the case for delaying implementation, but we have no doubt at all that the correct course is to introduce the new system alongside our other reforms in April 1990. There are three reasons for this.

First, we must look honestly at the current situation. This was something which the noble Lord, Lord McIntosh of Haringey, started to do. He very nearly reached the point of saying what I shall say now, that the present capital control system is a crumbling ruin. It now serves the interests neither of central government nor of local authorities. It has not produced a fair distribution of capital spending power. Despite generous increases in the provision we have made for local authority capital expenditure, it has produced a steadily declining total of capital allocations. Because of the various devices that have been employed to avoid it, we have had to take remedial action on several occasions. That has not given local authorities the stability required for efficient capital planning.

The present system will not get any better. The time for shoring up the foundations has passed. As the volume of local authority capital receipts increases, there is a danger that it will collapse completely under the strain. We have recently announced a further increase in the receipts expected to be generated this year. We welcome that increase. Local authorities have followed where central government have led. They have come to realise the benefits of divesting themselves of assets that would be better managed in the private sector. The present system was not designed for such a level of receipts. Quite simply, it cannot cope.

I am sure that local authorities would not welcome another year where allocations were cut because of increased receipts. They, like us, have had enough. They must surely look forward to the end of the present system. Indeed, they have indicated that to me. I must stress that the new system of capital finance will bring benefits. Not only will resources be better targeted at need, but also central government will be stepping back from the control of local authority capital expenditure. It has been said that it is absurd to try to control capital expenditure annually. Those who have said that have accused the Government of trying to attempt to control gross expenditure, net expenditure and borrowing without emphasis on any particular aggregate.

The new system moves away from the annual control of local authorities' total capital expenditure. Obviously the Government have and will continue to have an interest in that expenditure as it is an important economic variable. With the greater accountability brought about by the community charge, they will be able to stand back from annual control of it. Our interest will focus instead on the kind of finance, in particular on the level of local authority borrowing.

The new system will give local authorities freedom to finance expenditure from their own revenue. This is what they have long asked for. It will also provide a sound basis for them to plan their capital programmes with confidence. Secondly, we have considered the arguments that some authorities cannot cope with the change to the new system and the uncertainty it brings. Quite frankly, we are not convinced by that. Any change involves some element of adjustment and has to be planned for, but our proposals on capital finance were set out in detail in July 1988, nearly two years before their proposed introduction. The main principles of these proposals remain intact in this Bill.

Much has been made about the uncertainty facing authorities as regards their capital spending in 1990 to 1991. I think this can easily be overstated. Under the present system local authorities have a reasonable idea of their spending power from capital receipts for some time ahead, but they only learn of their capital allocations some three months before the start of the financial year—that is about December time—beginning in April. Under the new system we have made clear since the time of the consultation paper that we propose that local authorities should be able to spend from receipts.

Local authorities should be able to work out the implications of these proposals for their capital programmes. For 1990 to 1991 we intend they should receive their credit approvals at roughly the same time as they would have received their allocations. Under the new system they will have the benefit of receiving provisional credit approvals for two further years ahead. That is something that local authorities have been pressing for for some considerable time. Having said that, we shall do all we can to aid authorities in their preparation for the new system. We have already made clear our intention to issue the necessary regulations and guidance as swiftly as possible.

I must stress that there is nothing sinister in the regulation making powers in Part IV. They are necessary for the fine tuning of the new system and for periodic adjustments to the system which may have to be made. Indeed, wherever possible, we have already indicated how we intend to use regulation making powers. Examples are the treatment of leased assets and the application of the reducing balance method of debt redemption. Work on formulating the regulations is in hand. We are conscious of the need to publish draft regulations for consultation with local authorities as soon as possible. We hope to do that in the early autumn. In addition, the department has taken part in seminars on the new system which have been attended by local authority financial officers. The noble Lord, Lord McIntosh of Haringey, said that local authorities have not been told about the new system. I beg to differ with the noble Lord. I think it was only Monday of this week when I chaired the housing consultative council at which papers on how the new system would work were discussed in some considerable detail.

While I am on the matter of regulations, the noble Lord, Lord McIntosh, would be disappointed if I did not rise to the bait he threw me about the number of regulation and order making powers in this Bill. As the noble Lord will appreciate, such powers greatly add to the flexibility of the legislation. Flexibility is something which, in, most other contexts, Ministers are constantly being urged to adopt. Moreover, many of the powers will be used to provide concessions which the Government are always being pressed to allow.

However, my main point is simply that subordinate legislation and primary legislation commonly go together. There is nothing new in the presence in this Bill of numerous regulation making powers, nor is it a practice that was introduced by this Government. The noble Lord, Lord McIntosh, will be only too well aware of what his party has done. Reference has just been made to the community land legislation, that great flagship that sailed to disaster. It contained 19 regulation and order making powers. We could go back a little further to the Transport Act 1968. It was of much the same length and it contained 53 regulation and order making powers. So the party of the noble Lord is well aware of the need for them.

Our third and final reason is the importance of ensuring that our reforms of local government finance proceed in tandem. They are inexorably interlinked. The community charge enables us to allow local authorities to spend whatever level of capital expenditure they wish to finance from revenue. Why should they not have that freedom in 1990 to 1991? The new rules on housing finance interlink with our proposals on capitalisation in Part IV. We have been discussing with the local authority associations the new capital finance needs assessment on the basis of the new system. At the end of the day, in our view, it would lead to more disruption and more transitional problems if we left this important piece of the local government jigsaw out of place for 1990 to 1991.

I hope the Committee will bear with me if I answer some of the points that have been made by the noble Lords, Lord McIntosh of Haringey and Lord Dean of Beswick. The noble Lord, Lord McIntosh, raised the question of the housing investment programme and its importance. Part IV of the Bill which we are discussing now is not about the level of capital expenditure. That is a matter for the Government's expenditure plans. Part IV is about ensuring an efficient distribution of the resources available.

5.30 p.m.

Lord Dean of Beswick

I am grateful to the Minister for giving way. Will he explain when he replies why, when we are continually told that the Chancellor of the Exchequer is awash with money, we have had such a tremendous cut in the money available for housing in the public sector? Can the Minister tell us the reason for that?

The Earl of Caithness

I think that point has been covered in detail before and will doubtless be covered when we come to Part VI of the Bill. I must confess to a feeling of slight disappointment in that I shall probably not be available to discuss Part VI of the Bill with the noble Lord. However, the noble Lord, Lord Dean of Beswick, raises the important point of housing expenditure funded from allocations. This is precisely what Part IV will tackle. It will enable us to increase the proportion of expenditure allocated through credit approvals. That is to be welcomed.

The noble Lord went on to give some figures about the London HIP allocations which he claimed had been cut to a quarter of their former levels. He is referring to the HIP allocations, but I wonder whether he has ignored the enormous spending power that is available from capital receipts, which have increased quite substantially.

I wish to pick up a point made by the noble Lord, Lord McIntosh, who also talked about investment in housing stock being inadequate. He tried to compare this with the investment in water in this country. I shall not trade figures about investment in housing with the noble Lord. He knows only too well that in the Labour Party's term of office it declined by 45 per cent. If the rate of decline had continued, we would not have had any local authority housing by the mid-I 980s. With respect, trying to compare housing investment with water investment is like trying to compare apples and pears. Water was predominantly local authority dominated before the water authorities took over. That situation covered 75 per cent. of the drinking water going to people's homes. The other 25 per cent. was already in private sector hands with the water companies. The water authorities dealt with 100 per cent. of the dirty water problem.

As regards housing, 67 per cent. of the people of this country live in houses which are owner occupied. That shows what a huge importance and success private enterprise and private finance have had in this sphere. When the noble Lords, Lord McIntosh of Haringey and Lord Dean of Beswick, talk about housing, they are talking about housing which is not in the owner occupied sector. Some of the housing they are referring to is private rented housing and some of it is under the control of housing associations. As the Committee knows, housing associations have enjoyed a huge expansion. They will continue to expand in the next few years, increasing the subsidised housing sector.

I shall now return to the amendment. We are quite clear that the time for change is now. We in local government have lived with the present capital control system long enough. We have spent several years discussing what should replace it. Now we have the opportunity to put a sensible system in its place—a controller borrowing system.

That is what local authorities have always wanted. It meets the requirements of both central and local government and it fits in with the rest of the reforms that we are introducing.

Lord Hylton

At the risk of prolonging the debate, I wish to congratulate the noble Earl, Lord Caithness, on becoming an economic Minister. Perhaps I may ask him, wearing both his former hat and his present hat, whether under the new system there will be incentives to local authorities to manage their housing stock as efficiently as possible. When I say incentives I mean both in capital spending and in capital borrowing. Perhaps I may go on to ask him why it is necessary to control so closely and to introduce fine tuning of local authority borrowing at a time when there are no controls, other than interest rates, on private borrowing for instant consumption.

The Earl of Caithness

I sincerely hope that local authorities will continue to improve their management performance. That is one of the reasons why we shall bring in management performance indicators. There is more to it than, as the noble Lord has suggested, capital expenditure and capital improvements; there is renovation and management. For the ADC now to say that it must treat its tenants as customers only goes to show that the Housing Act last year and this Bill are pushing local authorities, housing associations and private sector landlords in the direction of better performance.

Lord Ross of Newport

Before the noble Earl sits down, perhaps he could clarify one point. He used the term "subsidised housing sector". He was obviously referring to the public sector and local authority housing. I think he would agree that the private sector is also subsidised through mortgage tax relief. It is, is it not?

The Earl of Caithness

There is mortgage tax relief. I also mentioned housing associations.

Lord McIntosh of Haringey

It is a pleasure to welcome the Paymaster General to the Bench on this Bill. In the negotiations with central government to which I have become accustomed over the years there is always at one end of the table a person from the Treasury. He tends in the end to have the say on what is decided, whether or not departmental officials want it. Negotiations depend almost entirely on what the Treasury official decides. We have here the Treasury official sitting in the middle of the Bench. It would be nice to think that as the Bill proceeds to housing issues in October we should have the pleasure of hearing him arguing with himself about the proper level of resources that should be available for public housing. However, I gather from what the noble Earl said that that will not be the case. I am sorry about that, though I congratulate him on his translation to his new position.

In his last day as housing Minister, if I may put it that way, he has not convinced me, and I do not think that he will have convinced other Members of the Committee, that the proposals in this part of the Bill are so well thought out and so responsible in their approach, particularly to housing finance, that they deserve the support of the Committee. Still less do they deserve to be put into effect on 1st April 1990, less than six months after the Bill ultimately gains Royal Assent.

I do not want to anticipate the many defects that we see in this part of the Bill. Indeed, I shall not because they are set out in the amendments that we have tabled to this part of the Bill. They are very numerous. They are extremely serious. They affect the procedures for capital expenditure, and that is serious enough, but more importantly they affect the ability of local authorities to undertake the tasks, particularly in relation to housing, which their electors and the people in their neighbourhoods expect of them. I have not been convinced, and I do not believe that the Committee will have been convinced, that the case for introducing them in such a hurry after such a period of gestation has been adequately made out. I commend the amendment to the Committee.

5.44 p.m.

On Question, Whether the said amendment (No. 131L) shall be agreed to?

Their Lordships divided: Contents, 59; Not-Contents, 108.

DIVISION NO. 1
CONTENTS
Addington, L.	Hirshfield, L.
Airedale, L.	Houghton of Sowerby, L.
Ardwick, L.	Howie of Troon, L.
Barnett, L.	Irving of Dartford, L.
Blease, L.	Jeger, B.
Bottomley, L.	Jenkins of Hillhead, L.
Broadbridge, L.	John-Mackie, L.
Carmichael of Kelvingrove, L.	Kirkhill, L.
David, B.	Llewelyn-Davies of Hastoe, B.
Dean of Beswick, L. [Teller.]	McGregor of Durris, L.
Dormand of Easington, L.	McIntosh of Haringey, L.
Ennals, L.	McNair, L.
Ewart-Biggs, B.	Masham of Ilton, B.
Fitt, L.	Mason of Barnsley, L.
Foot, L.	Mulley, L.
Gallacher, L.	Murray of Epping Forest, L.
Galpern, L.	Nicol, B.
Graham of Edmonton, L. [Teller.]	Peston, L.
Grey, E.	Phillips, B.
Grimond, L.	Prys-Davies, L.
Hampton, L.	Rea, L.
Harris of Greenwich, L.	Ross of Newport, L.
	Seear, B.

Sefton of Garston, L.	Turner of Camden, B.
Serota, B.	Underhill, L.
Shepherd, L.	Walston, L.
Stoddart of Swindon, L.	Whaddon, L.
Taylor of Blackburn, L.	White, B.
Taylor of Mansfield, L.	Williams of Elvel, L.
Thomson of Monifieth, L.	Winterbottom, L.
NOT-CONTENTS
Aldington, L.	Johnston of Rockport, L.
Alexander of Tunis, E.	Joseph, L.
Alexander of Weedon, L.	Kaberry of Adel, L.
Ampthill, L.	Kimball, L.
Arran, E.	Kinloss, Ly.
Auckland, L.	Lauderdale, E.
Balfour, E.	Layton, L.
Belhaven and Stenton, L.	Long, V.
Beloff, L.	Lucas of Chilworth, L.
Belstead, L.	Lyell, L.
Blatch, B.	McFadzean, L.
Blyth, L.	Macleod of Borve, B.
Borthwick, L.	Mancroft, L.
Boyd-Carpenter, L.	Marley, L.
Brabazon of Tara, L.	Maude of Stratford-upon-Avon, L.
Brookes, L.
Brougham and Vaux, L.	Merrivale, L.
Caithness, E.	Monk Bretton, L.
Caldecote, V.	Morris, L.
Campbell of Croy, L.	Mountevans, L.
Carnegy of Lour, B.	Moyne, L.
Carnock, L.	Munster, E.
Clitheroe, L.	Murton of Lindisfarne, L.
Coleraine, L.	Nelson, E.
Colnbrook, L.	Newall, L.
Colwyn, L.	Norfolk, D.
Cox, B.	Orkney, E.
Craigavon, V.	Oxfuird, V.
Cross, V.	Prior, L.
Davidson, V. [Teller.]	Pym, L.
Denham, L. [Teller.]	Quinton, L.
Donegall, M.	Reay, L.
Dulverton, L.	Renton, L.
Dundee, E.	Renwick, L.
Ellenborough, L.	Richardson, L.
Elliot of Harwood, B.	Saint Oswald L.
Elton, L.	Saltoun of Abernethy, Ly.
Fortescue, E.	Sanderson of Bowden, L.
Fraser of Carmyllie, L.	Shannon, E.
Gray of Contin, L.	Sharples, B.
Greenway, L.	Stodart of Leaston, L.
Haig, E.	Strange, B.
Hailsham of Saint Marylebone, L.	Strathclyde, L.
	Swinfen, L.
Hanson, L.	Teynham, L.
Hardinge of Penshurst, L.	Thomas of Gwydir, L.
Harmar-Nicholls, L.	Torphichen, L.
Henley, L.	Tranmire, L.
Hesketh, L.	Trefgarne, L.
Hives, L.	Vaux of Harrowden, L.
Holderness, L.	Wedgwood, L.
Home of the Hirsel, L.	Westbury, L.
Hooper, B.	Whitelaw, V.
Hunter of Newington, L.	Windlesham, L.
Hylton-Foster, B.	Wyatt of Weeford, L.

Resolved in the negative, and amendment disagreed to accordingly.

5.53 p.m.

Lord Hesketh moved Amendment No. 131J: Page 44, line 33, leave out from ("Executive") to end of line 34 and insert ("and any company which, in accordance with that Part, is either under the control or for the time being subject to the influence of such an Executive").

The noble Lord said: These are technical amendments which mirror an amendment made to Part V of the Bill at Committee stage in another place. The amendments ensure that companies under the control or influence of passenger transport executives may be made subject to Part IV of the Bill. Hence the new capital finance regime will apply to the passenger transport executive authorities' companies as well as to other companies in the local authority sector. I beg to move.

Lord Underhill

The Committee may know that I am the President of the Association of Metropolitan Authorities. I mention that merely to indicate that the passenger transport executives are associated with the AMA and we therefore know something of what they are thinking.

When the Minister says that these are just technical amendments, I can asure him that that is not how the PTEs regard them. Is it the Government's intention that all PTE companies shall be caught by the amendments or will there be provision to grant individual exemptions? The PTEs have a particular case in mind. That is the case of National Transport Tokens Limited. That is a concern in which all PTEs have shares, and therefore an interest, but which is a self-standing company. It would be helpful to know what the Government's intention is, and whether there would be an exemption for an organisation such as that.

This also appears to be the opportunity to clarify exactly how the controls in Parts IV and V of the Bill will apply to public bus and public airport companies which are to all intents and purposes commercial concerns. The PTEs are concerned with aspects of the Bill as it affects them.

I have before me a copy of a letter sent from the Department of the Environment headed: Local Authority Interests in Companies: Consultation Paper". That letter was sent to the managing director or company secretary of public transport and public airport companies and to the chief executive of the relevant authorities. It was dated 16th August 1988. When I quote from the letter, the Committee will appreciate why I raise the point. The department states that it recognises that a number of public transport companies and public airport companies have expressed concern about the proposals set out in the consultation paper to which I referred.

After making it clear that, regarding public transport and public airport companies, a wide ranging set of provisions are laid down in the Transport Act 1985 and the Airports Act 1986, the department makes a quite definite statement which I shall quote. It states: There is no intention, as a result of the proposals in the consultation paper, of changing the main lines of these existing arrangements—particularly as concerns the financial arrangements and public access to papers and meetings". I shall quote the next sentence because it obviously causes some concern to the PTEs. It states: Some details may, nevertheless, need rethinking in the light of any decisions that are taken as a result of the consultation paper". It is then made clear that that letter from the Deprtment of the Environment was sent with the agreement of the Department of Transport. That was 12 months ago. Although the Minister says that these are merely technical amendments, the PTEs regard them as more than that. We should like the Minister to confirm that the assurance laid down in the letter still holds firm, and that any rethinking has not changed the situation as laid down in the letter. If it changes the situation, the amendments are far from being merely technical amendments. They will have changed an assurance given to public transport and public airport companies 12 months ago. Some assurance on that matter is therefore requested.

Lord Hesketh

The passenger transport executives are part of the local authority sector and the rules should treat them accordingly. It therefore follows that we need to consider the position of companies which are extensions of passenger transport executives in the same light as companies which are extensions of local authorities. The PTEs have the same potential to use companies to avoid controls to which they are subject as local authorities. To ensure that there is therefore a comprehensive and logical pattern for the whole of the local authority sector, it is necessary to bring within the system companies which are subject to the control or influence of PTEs. Airport companies' borrowing is controlled at the moment and that will remain the case.

I do not have answers to the two points raised by the noble Lord, Lord Underhill, but perhaps I may give him an absolute, categoric assurance that I shall write to him immediately with the answers to those points.

On Question, amendment agreed to.

Lord Hesketh moved Amendment No. 131K: Page 4, line 36, leave out from first ("the") to end of line 39 and insert ("local authority specified or determined in accordance with the order; and, where an order so provides in relation to a local authority, that authority together with any companies and Executive concerned are in subsection (6) below referred to as members of a local authority group").

On Question, amendment agreed to.

Clause 37, as amended, agreed to.

Clause 38 [Capital purposes]:

6 p.m.

Lord McIntosh of Haringey moved Amendment No. 131M:

Page 45, line 28, at end insert— ("(d) any other item of expenditure for capital purposes if it would be so regarded in accordance with proper practices".).

The noble Lord said: Clause 38 is concerned with the definition of expenditure for capital purposes and subsection (2) contains a number of elements in the definition of "expenditure for capital purposes". It includes: the acquisition, reclamation, enhancement or laying out of land … the acquisition, construction, preparation, enhancement or replacement of roads … and the acquisition, installation or replacement of movable or immovable plant, machinery and apparatus and vehicles and vessels".

Subsection (3) seeks to define further the word "enhancement". At the end it contains the caveat that: expenditure on the enhancement of an asset shall not be regarded as expenditure for capital purposes unless it should be so regarded in accordance with proper practices".

When I first saw that, I was distinctly puzzled because I was not familiar with the phrase "proper practices". However, Clause 63(4) defines "proper practices" for the purposes of this part of the Bill as practices:

1. "(a) which the authority are required to follow by virtue of any enactment; or
2. (b) which, whether by reference to any generally recognised published code or otherwise, are regarded as proper accounting practices to be followed in the keeping of the accounts of local authorities, either generally or of the description concerned".

It is puzzling, first, that definitions in subsection (2) should be considered as complete, with no possibility of any further aspects of capital expenditure; and secondly, that the restriction of the "proper" practices criteria should only apply to enhancement rather than to the other elements of capital expenditure. The question must arise as to why the restriction is necessary in Clause 38(3) when it is perfectly adequately contained in Clause 63(4).

We wish to see in subsection (2)—and it is the purpose of the amendment—a further opportunity to have as an additional description of expenditure regarded as being for capital purposes: any other item of expenditure … if it would be so regarded in accordance with proper practices. In other words we do not propose any departure from the normally accepted local authority finance procedures but we think it is too restrictive to have paragraphs (a), (b) and (c) without any possibility of expenditure which, although proper, has not been included in the previous account.

I can give one example. There is a considerable number of items on repair and maintenance—not ad hoc repair and maintenance but planned programmes of repair and maintenance—which have been considered in the past, particularly in the housing sector, as being appropriate as capital expenditure. After all, with the decline of new house building in the public sector, one of the most urgent needs is for planned programmes of repair and maintenance of public housing which may not be enhancement and therefore may not fall within the scope of subsection (3). We shall come to the definition of the word "substantially" when we deal with the next series of amendments.

Will it now require credit approval cover and, if so, will the BCA and the SCA be increased accordingly to provide for that? On the face of it, it is surprising that the Government are attempting to define "expenditure for capital purposes" so closely. It would seem preferable to have this additional paragraph to subsection (2), at least in drafting terms, even if there is no substantive issue of which we are aware at the moment that would make it unnecessary.

I hope that the Government will feel that this is a helpful amendment rather an an obstructive one. As I said, it does not involve any departure from existing local authority accounting practices but it would make the definition more flexible and more helpful to local authorities. I beg to move.

Lord Hesketh

Amendment No. 131M would provide that expenditure would be expenditure for capital purposes if it would be so regarded under a generally recognised published code or any equivalent statement of accounting practices.

I ought to begin by drawing the Committee's attention to the definition of "proper practices" in Clause 63 on page 69 of the Bill, as did the noble Lord, Lord McIntosh. It will be seen there that there are two types of proper practices. The first are statutory proper practices; that is to say, those which arise by virtue of an enactment. The second are those proper practices which arise from accounting codes of practice. Understandably enough, Clause 63 provides that the statutory proper practices take precedence over the non-statutory practices.

The relevance of this definition to the amendments is as follows. Clause 38 is nothing more than a statement of proper practices as regards the capitalisation of expenditure by local authorities. It is an example of statutory proper practices and thus overrides any non-statutory proper practices. If the amendment were to be accepted, I think that there would a certain danger of a degree of circularity arising. When one was considering whether an item of expenditure fell within the new paragraph (d), one would have to ask whether it could be regarded under "proper practices" as being expenditure for capital purposes. One would then have to ask: what were the relevant proper practices? The answer to that question would be that the relevant proper practices are in Clause 38. So we would be back where we started.

I am advised that subsections (2) and (3) of Clause 38 as they now stand represent a full statement of what expenditure on tangible assets would be regarded as capital expenditure under present accounting conventions. The subsections are an attempt to codify those conventions. So the amendment would not in fact widen the definition of expenditure for capital purposes. It could well be argued that accounting conventions might change and it would come to be accepted that certain types of expenditure which do not fall within Clause 38 as it stands should be treated as proper to be capitalised. But the clause already allows for that. Subsection (5) permits the definitions to be altered by regulations.

It is for that reason that we believe that the amendment is not necessary.

Lord McIntosh of Haringey

I am grateful for that explanation. I should certainly not wish to be accused of trying to introduce circularity into the argument for the Bill. I shall read carefully what the Minister has said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Dean of Beswick moved Amendment No. 131N: Page 45, line 32, leave out ("substantially").

The noble Lord said: I understand that the Committee will deal with Amendments Nos. 131N, 131P and 131Q together.

When he moved the last amendment, my colleague, the noble Lord, Lord McIntosh, gave an exposé of the intentions behind Clause 38. These three amendments are aimed at requesting the Minister to clarify, if he can, the meaning of the word "substantially" and also to ask him for a definition of "enhancement" in Clause 38(3).

Given the safeguard that expenditure on the enhancement of an asset will not be regarded as expenditure for capital purposes unless it accords with the Government's defnition of "proper practices" in Clause 63(4), the use of the term "substantially" appears to be quite unnecessarily restrictive. At the very least the Bill should either define the term "substantially" or indicate how it is to be interpreted and of course by whom. I beg to move.

Lord Renton

Although by nature I am one of those people who like to see things left out of Bills, I regret to have to say that on this occasion it would not make sense to leave out these three insertions of the word "substantially".

We refer here to capital works. For example, if we merely say, "which are intended to lengthen the useful life of the asset" it might be by only a few weeks. That would be meaningless. Unless we insert the word "substantially" we might as well not have the expression in subsection (3)(a). I hope that my noble friend will resist these three amendments.

Lord Hesketh

These amendments would delete the word "substantially" in each of the three places where it occurs in subsection (3) of Clause 38. The upshot of these amendments would be that expenditure on works could be capitalised if it lengthened the life of an asset but did not do so to a substantial degree, or if it increased the value of an asset hut did not do so to a substantial degree also, or increase the extent to which the asset could be used but again did not do so to a substantial degree.

I do not dispute for a moment that it is often necessary to undertake expenditure which has these characteristics. But I would question whether such expenditure could be regarded as being of a capital nature. It was argued in another place that prompt replacement of missing slates may prevent the life of a building being substantially reduced. That is true. But it does not mean that the expenditure should be charged as capital. It should be allowed for as current costs and charged to the revenue account.

If expenditure does not substantially lengthen the life of an asset or substantially increase its value or substantially increase the extent to which it can be used, then the motivation (if I may call it that) for the expenditure is clearly not of a capital nature, as my noble friend Lord Renton pointed out. The nature of capital expenditure is that it should provide an enduring asset which has value, that value being measured either in terms of marketability or in terms of the use to which it can be put, or to both. It seems to me that expenditure which does not substantially address the purpose is not capital expenditure. That is why we resist the amendment of the noble Lord.

Lord Dean of Beswick

I do not wish to delay the proceedings any longer on these three amendments. I disagree with the noble Lord, Lord Renton. The word "substantially" is not a quantitive word and does not define anything. Very often "substantially" can be used in a relative sense. What is one comparing it with? The Minister will obviously not alter the legislation. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 131P and 131Q not moved.]

Clause 38 agreed to.

Clauses 39 to 41 agreed to.

Clause 42 [Borrowing limits etc.]

6.15 p.m.

Lord Dean of Beswick moved Amendment No. 131R: Page 50, line 7 leave out subsection (2).

The noble Lord said: The purpose of the amendment is to remove the Secretary of State's regulation-making power to regulate borrowing, in the interests of prudent financial management". While the Bill introduces a new regulatory regime to determine which borrowing requirements will be introduced, it leaves open the question as to whether they may be tightened still further in the future in the interests of prudent financial management.

It appears to be a wholly unnecessary power in the light of the voluntary codes of good practice which most authorities follow at present. At the very least the Bill should define the exact nature and extent of the Secretary of State's reserve powers over local authority borrowing in order to remove the vagueness of this subsection and the uncertainty that it will introduce into the new system.

Paragraph A48 of the consultation paper on capital expenditure and finance issued by the DoE Welsh Office last July gave some indication of what the regulations could require. I wish to quote from it briefly. It states: The new system will also confer upon the Secretary of State a reserve power exerciseable with the consent of the Treasury to make regulations to ensure that local authorities manage their external borrowing portfolio in a prudent fashion. Regulations could, for instance require that:

1. (1) The ratio between the amount of each local authority short-term borrowing, ie, repayable within 12 months or at least less than 12 months notice, and their annual revenue should not exceed the prescribed level;
2. (2) The amount of such borrowing should not exceed the specified proportion of their total external borrowing; or,
3. (3) The average term of their external borrowing should not be less than a specified period".

These matters are largely covered, or likely to become covered, by voluntary codes of practice. The departments do not envisage that the powers would be used unless such codes prove ineffective. The powers will replace the relevant provisions of the Borrowing (Control and Guarantees) Act 1946 and the Control of Borrowing Order 1958. We consider that the Bill should also contain a commitment that such powers would not be used unless voluntary codes in the first instance proved ineffective. I beg to move.

Lord Hesketh

The amendment would delete the power of the Secretary of State in the interests of prudent financial management to make regulations to regulate borrowing by local authorities. The primary question raised by the amendment is not whether the Government should have the power to regulate local authority borrowing in the interests of prudent financial management. It is whether they should continue to have that power. The secondary question is whether that power should be contained in a not very well-known Act sponsored by the Treasury or whether it should be contained in local government finance legislation alongside the other provisions dealing with local authority borrowing and capital finance.

At present all local authority borrowing is potentially subject to regulation by the Treasury under the Borrowing (Control and Guarantees) Act 1946. That Act is now a reserve power. Successively wider general consents have been given and it no longer regulates local authority borrowing on a day-to-day basis. But it has been there and could have been used if the need had arisen to ensure that local authorities borrowed in a prudential fashion.

It would be a heroic understatement if I were to say that not every feature of this Bill is immediately apparent at first glance. In connection with the present amendment I draw the Committee's attention to Part I of Schedule 11, which is the repeal schedule. On page 216, in line 36, there is an entry relating to the Borrowing (Control and Guarantees) Act 1946. The substance of that entry is that local authority borrowing would in future not be the subject of special Treasury control.

The question is whether those controls should be replaced. There is no intention on the part of the Government to use Clause 42(2) in circumstances where voluntary codes of practice are enforced and are being complied with. But the reserve power should be available. That is the best guarantee that the voluntary codes of practice will be produced and that they will be observed. That is why we resist this amendment.

Lord Dean of Beswick

I am grateful to the Minister for drawing our attention to the provisions of Schedule 11. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Earl of Arran moved Amendment No. 131S:

Page 50, line 17, at end insert— ("(4A) For the purposes of subsection (1) above the temporary use by a local authority for a purpose other than that of the fund in question of money forming part of such a superannuation fund or trust fund as is referred to in paragraph (h) or paragraph (i) of subsection (2) of section 40 above shall be treated as borrowing.").

The noble Earl said: On behalf of my noble friend, in moving Amendment No. 131S I speak also to Amendments Nos. 131ZZL, 134ZD, 134D, 134N, 134P and 134Y. These are technical amendments concerning superannuation funds and charitable funds of which the local authority is a trustee.

They serve two purposes. First, they ensure that financial transactions of the authority on behalf of these funds are outside the controls imposed on the authority's own finances by Part IV. Secondly, they provide that, for the purposes of the aggregate credit limit, the money of these funds is treated as not being money of the local authority.

It may help Members of the Committee if I explain how these purposes are achieved in a little more detail. First, perhaps we may look at the transactions of superannuation funds and charitable trust funds of which the authority is a trustee. The Bill already provides, at Clause 40(2)(h) and (i), that expenditure on behalf of these funds is not controlled by Part IV. That clause exempts such expenditure from the requirement that expenditure should be charged to a revenue account.

Amendments Nos. 131ZZL and 134ZD provide an equivalent exemption for capital receipts of the funds. Amendment No. 131ZZL provides that capital receipts of superannuation funds are not capital receipts for the purpose of Part IV. Amendment No. 134ZD extends the exemption from the debt redemption provisions which already existed for disposal of assets held for charitable purposes to all capital receipts of a charitable fund of which the authority is a trustee.

The second purpose of the amendments is to treat the funds as being separate from the local authority for the purpose of the aggregate credit limit. Technically the money held by the local authority on behalf of superannuation and charitable trust funds is money of the local authority. But if this money is to be outside the controls of Part IV, then for the purposes of the aggregate credit limit imposed by Part IV it should be treated as being separate from the local authority.

Aggregate credit limit is the limit on the authority's outstanding borrowing plus the cost of its credit arrangements. Thus Amendments Nos. 131S and 134Y provide that if an authority makes temporary use of or borrows money from that supperannuation fund or charitable trust fund, that counts as borrowing against its aggregate credit limit. Amendments Nos. 134D, 134N and 134P provide that cash and approved investments which an authority holds on behalf of these funds, unlike cash and approved investments held for its own purposes, do not add to an authority's permitted aggregate credit limit. I beg to move.

Lord Renton

First, I should like to offer my congratulations to my noble friend Lord Arran on the new appointment he has been given in the Government, which he so richly deserves. It is rather sad for me to have to express a little doubt about the amendment which he has moved and those which are grouped with it. I am not sure that it is sound in principle, whatever has happened in the past, for the trustees of a superannuation fund or of a trust fund to be allowed to use that fund, presumably for purposes which have nothing to do with the superannuation or the trust but for the purpose of the local authority. Certainly if the trustees of any other fund were to use the money for a purpose which was not within the objects of the superannuation or the trust fund, they would be in for a good deal of trouble.

Although I tried, when my noble friend referred to the other amendments grouped with it, to follow the implications of the other amendments, they did not answer the kind of queries which arose in my mind. For example, will interest have to be paid by the local authority to the superannuation or trust fund of which the authority is a trustee? If interest has to be paid, at what rate will it be paid or how will it be determined? Perhaps the Government have good reasons. They may even be following precedent, but on the face of it I find Amendment No. 131S very difficult. The amendments that are grouped with it do not allay my fears. Although I expect that we shall pass this amendment, I should be very grateful to my noble friend, if he is able to do so at this short notice, if he could allay my fears and in particular say whether interest will be paid and how the interest rates will be determined.

The Earl of Arran

I warmly thank my noble friend for his very generous comments upon my new appointment. At the same time, he raises extremely tricky points upon a particularly technical and complicated amendment. I shall do my best in a short time to see whether I can help him on the several matters he has raised.

Interest will normally be required by the law governing charitable trusts. My noble friend's next point concerned superannuation trustees. There are no trustees for superannuation. It is money of the authority for particular purposes, the use of which is controlled by the superannuation regulations.

Finally, the amendment gives no power to use this money other than those which already exist. If, however, having read my noble friend's questions again carefully in Hansard I find that I have not answered them fully or sufficiently explicitly, I shall write to him.

Lord Renton

I am grateful to my noble friend for giving me those answers at short notice. Although I am a lawyer I am not always impressed by precedent. I do not find that the precedent in this case is a very happy one, bearing in mind that all of us in our experience have found that local authorities have sometimes overspent their revenue. The tendency to dip into superannuation funds or other trust funds to which they themselves admittedly have contributed is not one which I find very inviting. However, I do not believe that we can pursue this matter further now. I certainly do not wish to obstruct my noble friend in view of his valiant attempt to justify what he has moved.

Lord Ross of Newport

I am sure that the noble Lord will accept my view, as one who once chaired meetings of a superannuation fund which was invested only with the greatest care through the advice of City experts, that in 90 or even 99 per cent. of cases supernnuation funds of county councils and other authorities are run very carefully indeed. I do not believe that he wishes to imply anything less than that. There might have been one or two bad examples, but I do not know of them.

Lord Renton

I am not alleging that there has in the past been any kind of frequent breach of the obviously necessary obligations which arise. All I am saying is that I doubt whether it is necessary or desirable for us to give power to perpetuate the practice which has gone on in the past.

On Question, amendment agreed to.

Clause 42, as amended, agreed to.

Clause 43 [The authority's own limits]:

Lord Graham of Edmonton moved Amendment No. 131T:

Page 50, line 46, after "or" insert— ("in so far as it applies to the discharge of functions by officers".).

The noble Lord said: The purpose of this amendment is to permit delegation to a committee of the council to vary borrowing limits. Clause 43 requires local authorities to determine before the beginning of a financial year a limit on borrowing. The limit can be varied after the beginning of the financial year, but only by the authority itself, and that means the full council. Subsection (4) prevents this power to vary the limit from being discharged by a committee of the council or the officers.

It should not be argued that a power of delegation to officers should be retained. The Government may cite the recent activities of councils in respect of interest rate swaps and so on. These are very delicate matters. It seems sensible to me to retain the power of delegation to committees of the council because authorities may have to respond quickly to changes in interest rates. The delay caused by the requirement to convene a full council meeting may prevent the authority from rearranging its loan portfolio, with adverse financial consequences.

This is particularly important in respect of the requirements in Clause 43(1)(c) for the authority to set limits on external borrowing, which is at fixed rather than variable rates of interest. As an example of the over-restrictive nature of this provision, I point out the recent upward movement in interest rates. The Committee will not need me to remind it, and painfully the Government will not need to be reminded, that there have been nine increases in interest rates since the autumn of 1988.

Whenever interest rates increase or decrease councils will wish to examine a proportion of borrowing at fixed or variable interest rates in order to minimise revenue costs. That requires an immediate response. Other financial institutions have more freedom. We know that millions and billions of pounds change hands when interest rates change.

It is difficult to see how we can minimise the revenue costs if it cannot be achieved by flexibility. In order to avoid convening meetings of the full council to vary borrowing limits and so forth, after the beginning of the financial year the authority may draw the initial parameters so wide as to make them virtually meaningless. I am sure that the Minister does not want that. He wants sensible, prudent and well-drawn boundaries. Borrowing limits must be revised each time supplementary credit approvals are given. That may be several times in a year. It is unrealistic to expect a full council meeting to be convened to revise full borrowing limits each time SCAs are issued.

I believe that the amendment is sensible. More than once the Government have talked of the flexibility that they have built into the regulations. I believe that the proposed flexibility is sensible and that, without it councils will be punished, the public will be penalised financially and the result will not be in the best interests of the Government's overall management of the economy. I beg to move.

6.30 p.m.

Lord Hesketh

Under the present legislation, the function of borrowing must be exercised by the full council. That function cannot be delegated to a committee or a sub-committee, let alone to an officer. I do not think that there is any dispute that this is quite unrealistic in present circumstances. In practice, the tactical decisions about borrowing are taken by officers. What Clause 43 seeks to establish is a division of functions between the full council on the one hand and, on the other, committees, sub-committees and officers, which is sensible in present circumstances.

The clause as it stands requires three limits to be set by the full council before the beginning of each year. The amendment would permit a committee or a sub-committee, but not an officer, to vary those limits.

There are various existing statutory functions which may be discharged only by the full council. In particular, a precept may be issued only by the full council of a precepting authority such as a county council. And only the full council will be able to set a community charge. Without exception, in so far as an existing statutory function can only be discharged by the full council, then any power to vary can again be exercised only by the full council. Thus a substitute precept can be issued only by the full council. Likewise a substitute community charge can be set only by the full council of the charging authority.

So far as the existing legislation is concerned, what is done by the full council can be varied only by the full council. I see no reason why it should be any different as regards the setting of borrowing limits.

The limits originally set under Clause 43 will have contained a margin for safety. There is nothing to prevent a council from including such a margin and it would be surprising if one were not included. Indeed, when setting their community charges or precepts, local authorities are required to allow for contingencies. While there is no specific statutory requirement, authorities ought to do the same when making their plans for the forthcoming year for capital expenditure.

If a local authority finds that it can no longer stay within the limits that it has set itself, then it must be for one or more of the following reasons. First, that the estimates before the authority when the limits were set were seriously in error. Secondly, that there have been substantial changes in its capital programme. Thirdly, that its capital receipts or other revenues have fallen off seriously. If this is the case, then the consequence ought to be that the matter is drawn to the attention of the full council. It is a question of responsibility and that is the reason why we resist the amendment.

Lord Graham of Edmonton

I am disappointed in the Minister's reply. I agree that some matters ought not to be capable of being varied from one period to another. The Minister gave good illustrations, but can he address himself to mine? I referred to a situation in which there had been freed borrowing by the council with a need to react to the forces of the market so favoured and loved by the Minister and his colleagues.

If other borrowers or lenders can react immediately—within seconds on the telephone—can the Minister say why the consequences of being unable to act as prudently and quickly should fall upon councils? Can the Minister say why councils should not be able to protect their financial interests? I am not talking about using money for speculative or reckless purposes. I am talking about managing and protecting the funds of the council—the money of the ratepayers, a phrase so loved by the Minister.

Lord Hesketh

The noble Lord's suggestion indicates that a local authority will have a vast amount of proportion and a single length of debt. In 1975 40 per cent. of local authorities' debt was in short-term securities, and that provided a great problem. That situation has changed. I gave examples of good and prudent housekeeping and said that we feel that councils are responsible for carrying out their responsibilities. Councils are able constantly to have meetings and we believe that the responsibility rests in the proper place.

Lord Graham of Edmonton

The Minister blithely says that councils are constantly having meetings. He is inviting the local authority world to take on board with his approval the suggestion that, where they are obliged to seek approval before and in anticipation of a need to exercise their stewardship over funds, they must have full council meetings to give that approval. They will look askance upon that suggestion. They do not wish needlessly to call meetings.

I am trying to avoid the issue becoming part of the football match which at times develops between the Front Benches. We are talking about councils having one hand tied behind their backs while doing their proper job in looking after funds.

Of course I shall not press the amendment but it has the approval of local authorities. They do not want the matters to be delegated to councillors because the Minister will say that the provision could be used recklessly or fecklessly. We are talking about proper officers who are responsible and whose professional integrity has not been impugned.

The Minister insists that borrowing limits must be set at the beginning of a period. Does he understand that, in order to try to encompass every possibility, those limits will be set widely? Does the Minister intend to limit the limits? Does he intend to interfere? If a council decides, "We are not going to put up with this nonsense of having meetings two or three times a week. We shall set our borrowing powers sufficiently wide to enable us to take advantage of moves to avoid doing that", is there a limit to that?

Lord Hesketh

First, as I pointed out in my initial remarks, the council should set a limit which allows for day-to-day contingencies. That will be the level of good management that we expect from local authorities. Secondly, the answer is, no, there will not be limits on the limit.

Lord Graham of Edmonton

I am now satisfied in respect of that matter. The Minister is saying that when councils set those limits they should be set reasonably, prudently and in the light of experience. However, the Minister has also said that if they do not set wide enough limits, then they will be obliged to call more frequent council meetings. I suspect that in the future the Minister or his successors will be told that councils will set their limits wide enough to avoid that, because by and large councils do not like meetings purely for the sake of rubber stamping. However, I am grateful to the Minister for his attempts to be helpful. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 43 agreed to.

Clauses 44 and 45 agreed to.

Clause 46 [Credit arrangements]:

Lord Graham of Edmonton moved Amendment No. 131TA: Page 52, line 29, leave out paragraph (a).

The noble Lord said: This amendment seeks to delete paragraph (a) from Clause 46.

The purpose of the amendment is to exclude from the definition of credit arrangements acquisitions of land and goods under leasing contracts. As in the case of many other amendments, this amendment is designed so that the Minister can help those outside the Committee in trying to understand the raison d'etre for the clause.

Clause 46 includes within the definition of credit arrangements transactions whereby the local authority becomes the lessee of land and goods. However, Clause 46(5) allows the Secretary of State to exclude certain types of leases from the definition of credit arrangements. I want the Minister to say what types of leases will be excluded. This is very much a case of lease said, soonest mended! I look forward to hearing what the Minister has to say on that.

Under the present system, a distinction is made between operating and finance leases. Assets acquired under operating leases do not score as prescribed expenditure. The conditions which must apply for a lease to be an operating lease are set out in the Local Government (Prescribed Expenditure) (Amendment) Regulations 1987. Will that definition be carried through into the new system?

Prior to October 1988, the value of leases of land and building was excluded from prescribed expenditure if the period of the lease was less than 20 years. This was reduced to three years by the Local Government (Prescribed Expenditure) (Amendment) (No. 2) Regulations 1988. I understand that local government organisations-that is, councils and associations—have made representations to Government that short leases—that is, leases fewer than 20 years—should not score as prescribed expenditure under the present system nor as credit arrangements under the new system. This is argued for on the basis that short property leases are more akin to revenue rather than capital expenditure. Will all property leases over three years count as credit arrangements under the new system and therefore require credit approval cover, and will they be caught by the provisions under Clause 46? I beg to move.

The Earl of Caithness

The concept of the credit arrangement is of prime importance in the new system, and I hope that Members of the Committee will bear with me while I explain the rationale behind it. We start from the position that borrowing, and transactions which have the same economic effect as borrowing, should be controlled. Credit arrangements are, in simple terms, transactions which, although not borrowing in law, have the same economic effect. For example, an authority might, on the one hand, decide to borrow £100,000 to buy the freehold of a building. It might then make annual loan repayments of £5,000. On the other hand, it might take a long lease on a building at a rack rent of £5,000 per annum. The legal definition of the transactions is not the same but the economic effect is clearly similar. In both cases the authority gets possession of a new building but pays for it over a period of time which is equal to or less than the life of the asset.

A lease of the sort I have described is called a finance lease. It is called a finance lease precisely because it is a conventional way of financing the purchase of an asset. There is nothing wrong with it. It is perfectly acceptable and respectable. But it is just the same as borrowing for the purchase of the asset. Such transactions should, and need, to be regulated by the new system.

To do otherwise would undermine the system. Past experience has shown that when some leases are outside the system of capital control, there has been an incentive for local authorities to enter them. For example, under the present system finance leasing of plant and machinery and medium term leases of land mushroomed to such an extent that we had to bring them within the system. It cannot be right that the effect of the capital finance system, rather than what makes most economic sense, should dictate local authority financing arrangements.

The case for treating leases as credit arrangements is very strong. There is some scope for some exceptions for which we shall make provision. But in general where a local authority takes a long lease of an asset, it is entering into a transaction very similar to borrowing. That is why leasing has been included in prescribed expenditure under the present system and indeed why it has to be regulated in the new system. With the treatment of leases which we propose local authorities will be left free to choose between leasing and purchase on sensible financial grounds. This amendment which was so ably moved by the noble Lord, Lord Graham of Edmonton, would prevent that. I suggest to the Committee that that would be very detrimental.

Of course, the noble Lord, Lord Graham of Edmonton, asked what exemptions we had in mind.

There will be two broad exemptions. We propose to provide these through regulations under the power in this clause. First, operating leases of equipment, plant, vehicles and the like will not be credit arrangements. Very broadly, an operating lease, in contrast to a finance lease, is where the lessee does not take on the risks and benefits of owning the asset. The lease period will not be for the major part of the useful life of the asset and at the end of lease the asset will revert to the lessor. We exempt operating leases from prescribed expenditure in the existing capital control system and I would expect the exemption in the new system to be similar to that used in the present system.

The other main exemption, which is of more concern to the noble Lord, will be short term leases of land and buildings. By short term I mean fewer than three years, the same as in the present system. Members of the Committee will probably be aware that the limit in the present system has been three years only since last March. Before that it was 20 years. The reason for the change provides a salutary example of the need to treat leasing in the same way as borrowing.

The 20 year limit on leases of land applied from the start of the present system in 1981. It worked reasonably well at first. But a few years ago shorter leases started to proliferate. There was no new economic justification for such deals, no reason for suddenly taking out lease deals on parking meters, for lease/leaseback deals on abattoirs or town halls, for complicated property deals with authorities entering into one way options which everyone knew would be called, or—I should say—there was no economically justifiable reason. No, there was only one reason for these deals: that was to avoid capital controls.

So we must ensure a level playing field between leasing and borrowing in the new system. We shall, as I said, keep the three year limit. But we intend to deal with an anomaly that has resulted from the reduction in the limit. At present whenever an authority leases land for more than three years, it is treated as paying the full market value of the land. In the new system we intend to have a smoother transition from short to long term leases of land. A lease of fewer than three years will not, as I said, be a credit arrangement. A lease of more than 20 years will be a credit arrangement and will require credit cover equal to the full market value of the land. Leases in between three and 20 years will also be credit arrangements. But the amount of credit cover required will be calculated on a sliding scale and will only equal the full value of the land for a lease of 20 years. I hope I have answered the points about which the noble Lord is concerned.

Lord Graham of Edmonton

I am very grateful indeed because the Minister obviously anticipated the need to give a lengthy discourse. He also appreciated the value which people outside this Committee will attach to what he said. That sounds to me eminently sensible in the light of experience. I know that he will accept that his words need to be read and studied by those outside the Committee.

I had framed a number of questions in my mind, but I think the Minister has been very fair and understanding about the problems of local government and the problem of treasurers in ensuring that they give correct financial advice to their councils. I beg leave to withdraw the amendment, although I may wish to return to the matter on Report.

Amendment, by leave, withdrawn.

Clause 46 agreed to.

On Question, Whether Clause 47 shall stand part of the Bill?

The Earl of Balfour

I wish to raise a question on this clause as regards the formula used. I trust that it is the Government's intention that "n" is a power and not a multiple. If it is a power and "n" is three years, the reduction in the value of "x" would be very much less than if it were a multiple. On the other hand, if "n" is a multiple, it would normally be written before the brackets. I wish to make certain that it is intended that "n" is a power.

The Earl of Caithness

I am happy to confirm to my noble friend that in Clause 47 "n" is meant to be a power. I shall look at the warding and the formula to see whether it can be made absolutely clear since he has raised this doubt.

The Earl of Balfour

I am most grateful.

Clause 47 agreed to.

Clauses 48 and 49 agreed to.

Clause 50 [Transitional credit arrangements]:

The Earl of Caithness moved Amendment No. 131U: Page 58, line 6, leave out ("that Act") and insert ("the Local Government, Planning and Land Act 1980").

The noble Earl said: I beg to move this amendment and at the same time speak to Amendment No. 131V. These are technical amendments.

On Question, amendment agreed to.

The Earl of Caithness moved Amendment No. 131V. Page 58, line 12, leave out from ("works") to end of line 14 and insert ("which, in whole or in part, were carried out before 1st April 1990 and in relation to which, by reason only of regulations under subsection (7) of section 80A of that Act (payment for works), subsection (1) of that section did not apply or, to the extent that the works were carried out on or after that date, would not have applied if they had been carried out before that date.").

On Question, amendment agreed to.

Clause 50, as amended, agreed to.

Clause 51 [Basic credit approvals]:

Lord Graham of Edmonton moved Amendment No. 131W: Page 58, line 26, leave out (`beginning of") and insert ("30th November in the year preceding").

The noble Lord said: I beg to move this amendment standing in the name of my noble friend Lord McIntosh. The amendment requires the Secretary of State to issue credit approvals earlier than is proposed in the Bill. During the debate on this amendment in Standing Committee the Government did not concede an earlier date for the issuing of credit approvals. The Minister gave assurances that the timetable for the issuing of credit approvals would be no later than that for the issuing of capital allocations under the present system. It would seem preferable for this commitment to be put in the Bill rather than being left to the good will of Ministers, though no disrespect is directed at those who are dealing with this matter in Committee this evening. Not all Ministers might be so willing to accommodate the wishes of local government.

In essence, that is the purpose of this amendment. The proposed system of capital expenditure controls focuses on the control of expenditure financed by borrowing and the control of credit arrangements. The means by which this will be achieved is by the issuing of annual credit approvals by the Secretary of State. They will permit authorities to borrow or to enter into credit arrangements up to the level of the credit approval. I believe that we have listened to and benefited from the discussions that have taken place in the past half an hour or so on this matter.

The Bill as drafted requires the Secretary of State to issue credit approvals before the beginning of each financial year. We are saying that there should be tighter requirements on the Secretary of State to issue credit approvals well before then in order to assist authorities in their capital programme planning. Authorities are required to issue their precepts on the collection fund by 1st March. This process will need to take into account the revenue implications of capital programmes, the levels of which are dependent in part on credit approvals. This would point to the need for credit approvals to be issued well before then.

The Minister may very well say that the requirements to issue credit approvals are no different from those relating to the issue of capital allocations under the present system. One of the Government's main objectives in the new system set out in the consultation paper Capital Expenditure and Finance was that it should provide a sound basis for local authorities to plan their capital programmes with confidence. We believe that it is difficult to see how this objective is to be achieved when the Minister is empowered to issue credit approvals as late as 31st March.

Lord Hesketh

I have some sympathy with the points that the noble Lord has made. I am very much aware of the importance of a stable background against which local authorities can plan their capital programmes. That is why the Government propose to issue provisional indications of credit approvals three years ahead; and that is the crucial point. Local authorities receive no such forward indications at present. Their capital allocations for the financial year, which they receive some three to four months before the start of the year, are the first notice they receive of their resources for the year.

So the basic credit appoval in the new system will only be the final confirmation of an authority's resources for the year. It will already have had two previous provisional indications, and it will know what usable receipts it expects to have available in the year in question. What we are talking about therefore is when the final indication can be given. The finalising of anybody's annual budget is always a matter of balance. On the one hand, you want to do it as early as possible so as to aid stable planning. On the other hand, you want to be able to take into account the latest possible information when setting that budget. The Government are no exception. They have to decide on this balance when they set the annual public expenditure plans. They set their plans in the annual Autumn Statement, which normally takes place in November.

There is no getting round the fact that the final credit approvals cannot be issued before that Autumn Statement, and after the Autumn Statement one has to allow time for any appropriate decisions and discussions with local authorities about the distribution of the figures. These are the actual constraints. It is no good pretending that they do not exist. Within these constraints we firmly intend to issue credit approvals as early as possible. The Committee will no doubt ask why we do not commit ourselves to a date in the Bill.

Perhaps I may explain. I mentioned discussions with local authorities or their representatives. These will take place before credit approvals are issued. Their timing or length could not be legislated for. If we accept the amendment, we might have to say to the local authority associations on 29th November: "We are very sorry. The discussion is over. We must issue the credit approvals today".

In another place the Opposition suggested that we try to legislate for this, that we set a statutory deadline of 30th November or when consultation is finished, whichever is the later. We have considered this, but we do not think that it is sensible. Consultation can go on as long as either party wants it to go on. If you set such statutory constraints you invite both parties to prolong consultation if it suits them. So I am not convinced that it would do local authorities a great deal of good.

It is far better to rely on the good will of the parties concerned and the Government's desire to issue credit approvals as soon as possible. If Members of the Committee doubt this, let me remind them of the Department of Environment's record, which the Minister for Local Government set out in another place. In the past five years housing allocations have been issued between 8th and 19th December. Other service block allocations for which the Department of Environment is also responsible have been issued by the same date, except twice when they were delayed because consultation was still taking place. In another place the Opposition accepted that the Department of Environment's record was good. They said that the Department of Environment was good at producing the estimates on time, but they were concerned about the record of some other departments. In the new system the Secretaries of State for the Environment and for Wales will issue the basic credit approvals. I give the Committee my assurance that they will do their utmost to maintain their previous good record. That record has been achieved without any statutory deadline for capital allocations in the present system. I do not think a statutory deadline in the new system would help to improve it. That is why we are resisting the amendment.

Lord Graham of Edmonton

The Minister has convinced me of the wisdom of not pressing the amendment at this stage. I am very grateful to him for reminding us that under the three-year rolling programme one has considerable notice of what the revision is likely to be. We are really talking about the current year. That is the next financial year. I am satisfied from what he has said that there are difficulties. Also, one could very well cut off one's nose to spite one's face if one insisted on an arbitrary date and the consultations were going on.

I am grateful that the Minister rests very heavily on the value of consultations because in later amendments I shall be challenging him about the extent of consultations that he has in some other fields. But that is for another day. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Parliamentary Under-Secretary of State, Ministry of Defence (The Earl of Arran)

I beg to move that the Commitee do now adjourn during pleasure until 8 p.m.

Moved accordingly, and, on Question, Motion agreed to.

[The Sitting was suspended from 7.1 to 8 p.m.]

Lord Graham of Edmonton moved Amendment No. 131X: Page 58, line 27, after ("shall"), insert ("after consultation with the local authority associations,").

The noble Lord said: The purpose of the amendment is to require the Secretary of State to consult the local authority associations prior to issuing credit approvals. We touched on this matter during an earlier debate. The Minister would form decisions on aggregate provisions rather than on the criteria to be adopted for the distributions of credit approvals between authorities.

Since the amendment was debated in Standing Committee the Minister for Local Government has written to the chairman of the AMA setting out his views on how the consultation process will operate under the new sysem. Essentially it proposes no change from the ad hoc arrangements which currently exist. It is unfortunate that the Government are not willing to strengthen the consultation process on need to spend. What is on offer in Mr. Gummer's letter is consultation on capital expenditure after decisions have been taken on overall levels of public expenditure provision. The Minister's letter is disappointing. I beg to move.

Lord Hesketh

Consultation was thoroughly aired both at Committee stage and on Report in another place. As the noble Lord, Lord Graham, pointed out, the Minister for Local Government undertook to give further consideration to the question of consultation. On 12th July he wrote to the chairmen of the local authority associations. He assured the local authority associations that, if they consider that there is scope or need for development of the existing opportunities for consultation, he would invite them to discuss this, in the first instance, with officials in the relevant service department.

We should not underestimate the degree of consultation which already takes place with the associations on capital matters, particularly in the forum of the capital programmes working party. That has been especially active during the development of the new system of capital finance. This consultation will continue on the details of the new system. We will be consulting on the regulations to be made under the new legislative provisions and the methods by which credit approvals are to be allocated.

We believe therefore that in the normal way the line of representation about the level of credit approvals and annual capital guidelines ought to be to Ministers and officials of the relevant service department. There may, however, be matters relating to the general level of capital expenditure implied in credit approvals and annual capital guidelines under the new system. We have no objection to the associations proposing discussion as appropriate in the Capital Programmes Working Party and the Consultative Council on Local Government Finance.

We therefore believe that no substantial change in the existing arrangements is necessary, which is why we resist the amendment.

Lord Graham of Edmonton

The Minister's reply is disappointing. He is saying that he and his colleagues and officials are willing to discuss the form of consultation with the local authorities. The authorities believe that the best way to achieve that is to have these words on the face of the Bill. What is wrong with that? It is a question of the chicken and the egg. Which comes first?

There should be freedom to have what I would call a frank exchange of views after which the Government would have a duty to lay before Parliament and the local government world their observations. However, Mr. Gummer's letter offers consultation on capital expenditure after decisions have been taken on overall levels of public expenditure provision. There is not a great deal between us. It is a question of deciding at what stage to hear the views of local government and then for the Government to allay those fears and worries or to set them in a proper context.

If the Government are serious about the matter I fail to see why they are not prepared either to accept the amendment or at least to be a little more positive. Instead, Mr. Gummer says that if the associations consider there is scope or need for development of the existing opportunities for consultation, he will invite them to discuss that, in the first instance, with officials in the relevant service department.

Lord Hesketh

We are not offering consultation after decisions. What is on offer is consultation before public expenditure survey decisions are taken. I must emphasise that.

Lord Graham of Edmonton

I am obliged. I may have got hold of the wrong end of the stick. If what the noble Lord has said, which will be read with care by those outside the Chamber, circumvents the need for the amendment, that at least will be a service. I am grateful to the Minister for that latter clarification. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey moved Amendment No. 131Y: Page 58, line 30, at beginning insert ("Except for a tolerance of 10% between financial years").

The noble Lord said: In moving this amendment I should like to draw attention to what seems to us to be a rather complex system of basic credit approvals and supplementary credit approvals, which will undoubtedly give rise to the shortening of BCAs and SCAs. Those of us who have to be concerned with these matters will be bored with that for years to come.

The amendment proposes to add to subsection (2) the words, Except for a tolerance of 10% between financial years". It would do a great deal to improve the flexibility of the basic credit approval system and would reduce the necessity for the supplementary credit system. In the consultation paper Capital Expenditure and Finance, published in July 1988, the Government suggested that there could be flexibility in the use of credit for capital purposes by using revenue expenditure for capital purposes, by using the profit from trading activities—though I was not aware that the Government have ever accepted that municipal trading could be a source of profit—and using the proceeds from asset sales.

That is all very well, and nobody would want to reject those reasons for flexibility. However, there are still a number of difficulties in ensuring that capital expenditure is actually incurred in the year in which it is approved.

These difficulties are endemic in business life as well as in local authorities. There are difficulties in getting planning permission; there are difficulties in the performance of contractors to carry out the capital works, there are difficulties with the weather, and so on. It would not involve the provision of any more money; but it would involve a very simple measure of flexibility if the Government were to agree to include the phrase, Except for a tolerance of 10% between financial years", and thus reduce the necessity for the more complex procedure of supplementary credit approvals. I beg to move.

Lord Hesketh

The question of tolerance was aired in Committee in another place. In the existing capital control system there is what is known as 10 per cent. tolerance on capital allocations. What was intended was that an authority should be able to spend 10 per cent. more than its allocation in any year. But it would have to offset this against its allocation for either the previous or the following year. I say "was intended" because, due to a defect in the legislation, it does not quite work like that. Authorities can in fact usually spend the 10 per cent. tolerance without suffering the offset. So the effect of tolerance has simply been that we have to issue fewer allocations in the first place. Otherwise we would have a built-in overspend.

Nevertheless, I accept that in the present system there is a case for some form of tolerance on allocations. Capital expenditure requires long-term planning. It is difficult to control precisely on an annual basis. Some degree of flexibility is necessary. It prevents unnecessary wasteful spending to mop up an underspend, or costly last minute reining back of a programme to avoid an unforeseen overspend. In the present system local authorities have two main means of justifying their capital expenditure. Capital allocations is one. The prescribed proportion of their receipts is the other. There is very little flexibility on receipts spending between years, so some form of tolerance is needed on allocations.

Obviously in the new system the case for some flexibility for capital programmes is the same. But things are rather different. Local authorities will have several ways of financing their capital expenditure. The use of credit approvals is one. Revenue contributions and usable capital receipts are others. On these latter two local authorities will have complete flexibility to switch spending between years. If they raise revenue and do not spend it this year they can spend it next year, the year after or any year after that which they want to choose. The same goes for capital receipts. When an authority gets a capital receipt, it will set aside a reserved part as provision for credit liabilities. The rest of the usable capital receipt can then be spent in the year it is generated; or in any other year. This gives local authorities flexibility. Revenue contributions are currently £400 million in a year. Usable capital receipts in the first year of the new system will be some £4 billion. That is nearly £4½ billion which local authorities can switch between years. We should compare that to the tolerance available on allocations in the present system—10 per cent. of some £2½ billion, or some £250 million.

In short, we do not see a need for tolerance on credit approvals. I have to say that I am not alone in that view. Indeed, a district treasurer has written to my department saying as much. I accept that local authorities need flexibility on capital expenditure. But they will have plenty of that from revenue and receipts. The level of usable receipts may fall as time passes. But the figures I have quoted above are large and this will not alter the argument. Indeed, the flexibility from revenue contributions alone, without any capital receipts, is substantially greater than tolerance on allocations in the present system. That is why we are resisting this amendment.

Lord McIntosh of Haringey

I think that if I came to this Dispatch Box and said, in support of my case, that a district treasurer had written to me expressing concern about government proposals, I should get short shrift. An unnamed district treasurer says something which happens to be convenient to the Government; but the Minister has not told us whether 20 district treasurers or the society of district treasurers have written to the contrary.

I am telling the Minister that all the local authority associations have expressed concern about the tolerances allowed in capital expenditure. Indeed, you only need to look at underspending on capital account by local authorities last year to find proof of that fact. Underspending on capital account last year was of the horrific order of 40 per cent. That is not because there is nothing on which to spend the money; it is because the timing and the organisation of approval for capital expenditure are not adequate to meet the demands and to reflect the conditions in which capital expenditure can be undertaken.

For all the reasons which I have given, capital expenditure is not easy to predict. Indeed, to be fair to the Minister, he recognised that fact to some extent in his reply. I am only partly mollified by the suggestion that there is more flexibility when it comes to spending capital receipts, because later on in this part of the Bill there are controls on the use of capital receipts. There is of course the whole concept of reserved capital receipts which we shall tackle in later amendments this evening.

I am still less mollified by the suggestion that there is more flexibility in the use of revenue for capital purposes. Moreover, although I know that local authorities have to use revenue for capital purposes and that water authorities, for example, have virtually ceased to raise money for capital purposes-indeed, almost all of their capital expenditure recently has been from revenue—nevertheless, it is not a good business principle. Capital ought to be distinguished clearly from revenue. Further, it ought to be, as the Minister said before the dinner break, for enduring assets, and those assets ought to be paid for over the life of such assets. Therefore to have excessive reliance on revenue for that purpose is not sound finance or sound business.

I do not find the Minister's response in sum very reassuring. However, I shall read carefully what he said and consider whether to return to the matter at a later stage. Accordingly, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

8.15 p.m.

Lord McIntosh of Haringey moved Amendment No. 131Z: Page 58, line 34, leave out from ("issued") to end of line 36.

The noble Lord said: I can reassure the Minister straight away that this amendment is one which I do not propose to press to a Division. It is genuinely a search for clarfication. Subsection (3) of Clause 51 refers to the limitation of basic credit approvals by exclusion, from the purposes for which the approval may be used capital purposes of a description specified in the approval". An interpretation of that wording is that it means whatever the Government wish to specify. The reason that we have put down this amendment is that we want to know under what circumstances the Government intend to impose limits on credit approvals by excluding certain types of capital expenditure from the purposes for which they may be used. For example, what are the circumstances? What are the types of capital expenditure? When will they be used and how likely are they to be used? That is what we need to know in order to be able to understand and, if appropriate, approve the subsection. I beg to move.

Lord Hesketh

Let me say at the outset that the Government understand the importance which local authorities attach to being able to determine their own priorities. That is why the Government have permitted capital allocations to be used for any service in the present capital control system and why we have distinguished between basic and supplementary credit approvals in the new system.

It may help if I explain that distinction. Basic credit approvals can be used for any capital purpose, unless the Secretary of State specifies otherwise. Each authority will receive one for each financial year. Supplementary credit approvals can be issued at any time and can only be used for the purposes specified in them.

The Government propose that most of the resources available for credit approvals should be distributed in the form of basic credit approvals. That will increase local authorities' flexibility. Taken together with authorities' freedom to use usable receipts for any capital purpose, this will mean that authorities have freedom to decide their own priorities for most of their capital budget.

Supplementary credit approvals will be issued in the sort of circumstances where special capital allocations are issued at the moment. These may cover, for example, estate action projects, coast protection schemes and urban programme expenditure. They will also be issued for law and order services, which are controlled separately at the moment but will be brought into the new system.

Turning to the purpose of the amendment, I can assure the Committee that the Government do not at present intend to exclude purposes from the scope of basic credit approvals. As I have said, we understand authorities' desire for flexibility and the fact that we are adopting basic credit approvals is proof of that.

However, it would be unwise to rule out the possibility of ever excluding anything from basic credit approvals. For example, in a case where expenditure was supported by government grant, it may be sensible in certain circumstances to provide for it through supplementary credit approvals and to exclude it from basic credit approvals. I stress that that is not our intention at present, but it would seem unwise not to have that option available.

In the light of that explanation, I hope that the noble Lord, Lord McIntosh, will consider withdrawing his amendment.

Lord McIntosh of Haringey

That explanation is irrational for two reasons. The first is that the example given by the Minister—that something should be taken out of basic credit approval and used for supplementary credit approval—can be done without that phrase in subsection (3). The basic credit approval should therefore just be less than it would be if the amount involving government grant were included in it. The second reason why it seems irrational is that, apart from the one inconsequential example, the Government have not indicated the purposes for which the approval may be used.

If it were possible to specify the purposes for which the approval could be used, it should be done. We have already had in this part of the Bill a definition of "capital". We have been reminded that the Government have, by regulation, the power to change the definition of "capital". Is the Minister saying only that basic credit approvals may be limited by excluding the purposes if the purposes are not those covered by Clause 37 in which the definition of "capital expenditure" occurs? Is the phrase required only if capital expenditure is proposed which falls outwith the Clause 37 definition?

Lord Hesketh

If one wants to control grant-aided expenditure, one has to exclude it from BCAs as well as including it in the SCAs otherwise the authority could increase expenditure above its SCA by using the BCA. I know that the noble Lord, Lord McIntosh, felt that the grant was insignificant, but we disagree.

Lord McIntosh of Haringey

I suppose that is an explanation of a sort of what is intended by the whole business of grant. I cannot say that I am satisfied. We shall have to consider what further amendment may be necessary to deal with the problem at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Earl of Arran moved Amendment No. 131ZZ: Page 58, line 42, leave out ("sums") and insert ("amounts").

The noble Earl said: This is a technical amendment. Following Second Reading in another place, we examined the wording of the Bill to ensure that local authorities would be able to continue the practice of internal lending under the new system of capital finance. It has always been our intention that they could.

A number of amendments were brought forward on Report in another place to make the position quite clear. Those amendments did that by changing certain references in the Bill from "sums" to "amounts". Thus they made it clear that the requirement to set aside provision for credit liabilities applied to amounts in accounts and not to the sums of money received. So there would therefore be no impediment to internal lending. Due to an oversight, the reference in Clause 51(4) to "sums" was missed. This amendment corrects that oversight. I beg to move.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendent No. 131ZZA:

Page 58, line 47, at end insert— ("(6) When issuing to an authority its basic credit approval for any given financial year the Secretary of State shall specify a provisional total for the authority's credit approval for each of the succeeding two financial years, indicating what allowance he intended to make for capital receipts in these years.").

The noble Lord said: The amendment seeks to secure for local authorities what I thought was now well established as the basis for the forward planning of expenditure and which the Government have accepted for themselves in their own expenditure. The Government's publication Public Expenditure Planning Total for 1991 makes provision for credit approvals for a period of three years. That is clearly desirable and necessary if government departments, like local authorities, are to have the opportunity for adequate forward planning of their expenditure.

The amendment provides that with the basic credit approval for a given financial year the Secretary of State shall specify a provisional total for the authorities' credit approval for each of the successive two financial years indicating what allowances he intended to make for capital receipts in those years.

If we go back to the consultation paper Capital Expenditure and Finance of July 1988, we find the statement that the intention is to provide a sound basis for local authorities to plan their capital programmes with confidence. The object is that the Secretary of State should specify a provisional total for the annual capital guideline. That would be the Government's view of gross capital expenditure which could be financed by means of credit approvals and useable capital receipts.

In paragraph 9.17 of the consultation paper it is said that the Secretary of State would specify a provisional total for the authorities' annual capital guideline for each of the next two following financial years. He would also indicate what allowance he intended to make for receipts for those years. Our amendment therefore reflects the wording of the July 1988 consultation paper and brings it into the credit approval procedure.

It does not seem to us sensible that there should be, either for central government or local government, a continuation of the old-fashioned way of year-on-year accounting which is so inappropriate for the planning of capital expenditure and the effective use of capital finances. If it is good enough to go into the central government finance from the year 1990–91, why is it not good enough to go into local authority finance? I beg to move.

8.30 p.m.

Lord Hesketh

The amendment attempts to provide that we should issue provisional basic credit approvals to local authorities for two years ahead, and that we should give indications of the extent to which we intend to take account of receipts in future years.

We announced in the consultation paper last July that we intended to give forward indications of credit approvals. It is still our firm intention to do just that. It is a major step forward in the new system. It is one of the pleas that local authorities have made most consistently in the present system. They want forward indications to help them plan their capital programmes. The Audit Commission has also argued strongly for such an approach. We have listened. That is why we came forward with the proposal last July. That is why we intend to deliver it.

In considering these amendments, it is important to be clear why we are able to offer such assurances. It is not a direct result of the new capital finance system. It is instead to do with the new planning total for public expenditure which we are also introducing from 1990–91. The difficulty with such assurances in the present system is that local authorities are interested in capital allocations; but public expenditure is planned in terms of net capital expenditure. So although we have had net expenditure plans for three years ahead, we have not known what level of allocations would be consistent with that expenditure.

It has only been possible to determine that for one year ahead when we know what spending from capital receipts and other sources is likely to be. So there is difficulty in giving such assurances on allocations when public expenditure plans do not actually contain any allocation figures for future years.

With the new planning total things will be rather different. Public expenditure will, as far as local authority capital is concerned, be measured in terms of goverment grants and credit approvals. So credit approvals will be part of the currency of public expenditure plans. As now, we shall plan public expenditure for three years ahead. So we shall have planned credit approval totals for those three years. That makes it possible to give forward indications.

Such indications are really a result of the new planning total, and not of the new capital finance system. It was never our intention to enshrine them in the legislation for the new capital finance system. We never said we would. Indeed, it would not be appropriate to do so.

It would not be appropriate because it would unnecessarily constrain the way the assurances could be calculated. We shall come shortly, at Clause 54, to discuss how credit approvals will be determined and in particular, how receipts will be taken account of. I do not want to go into that in detail now. But it is likely that credit approvals will be based on annual capital guidelines which will reflect an authority's relative need to spend and an allowance to take account of receipts. We have not yet decided whether it would be sensible to give forward indications for the credit approvals in total, or for the annual capital guidelines and receipts allowances separately. That depends to some extent on how we take account of receipts. It is something we wish to discuss with local authorities. It is something we might want to change over time if, for example, it becomes clear that it would be sensible to take account of receipts in a different way. It would not be sensible to constrain the Government's room for manoeuvre with this amendment.

In short, we believe that these amendments are unnecessary and possibly harmful. We have made clear our intention to give forward indications, and that is what we shall do. We shall decide the best approach in the light of decisions about how credit approvals should be determined. That is why we urge the Committee to resist the amendment.

Lord McIntosh of Haringey

I wonder whether the Minister was speaking to the right amendment. I only spoke to a single amendment, Amendment No. 131ZZA. I was not particularly talking about the criteria for credit approvals, which are in Amendments Nos. 131ZZB and 131ZZC, which my noble friend Lord Graham will move in a moment. If anything, it seems to me that I understated the case for my amendment because I did not make the point—for which I am grateful to the Minister—that it is the very fact of the public expenditure planning totals procedure which is to be adopted from 1990 that makes it possible for us to ask for these provisions for local authority capital finance. They make it possible for us to ask for the same opportunities for sensible forward planning which central government plan for themselves.

Our amendments say no more than is provided for in pargraph A.17 in the consultation paper. The only difference is the distinction between the ACG and the BCA. Some time earlier today the Minister referred to the possibility of confusion between net and gross capital expenditure and capital receipts. I think that the Government are in danger of tying themselves up in knots between these distinctions. Our amendment recognises the need to forecast capital receipts as well as capital expenditure. Therefore it takes account of all the possible meaningful definitions of capital expenditure.

What I really need if I am to be persuaded to withdraw the amendment is a concrete example of how the formula contained in the consultation paper, and presumably reflected in the Bill, would work in practice. It seems to us that the local authorities would have enormous difficulty in making the formula which is proposed work in practice.

What conclusions can authorities draw about their likely level of credit approvals in future years? Can we have some practical examples of how that would work? Failing that, I should have some difficulty in withdrawing the amendment because I do not fully feel that the Government have brought this proposal off the drawing board and thought about it in practical terms.

Lord Hesketh

It is because we are making plans for total credit approvals on a three-year basis in public expenditure plans that we can offer these forward indications to local authorities. However—and here is the rub—public expenditure plans are not statutory. They include variables such as the annual capital guidelines which have no statutory basis.

Lord McIntosh of Haringey

But the amendment only asks for a provisional total for the authority's credit approval for the two succeeding financial years. Therefore it is not demanding a statutory basis for it. The consultation paper last year went further. It said that, when the Secretary of State came to issue the final BCAs for those years, he would not base them on lower ACGs than he had specified, nor allow for receipts to a greater extent than he had indicated. The paragraph goes on to say that: The Government's present intention is that the total of the provisional ACGs thus specified would be about 85 per cent. and 70 per cent. of the amount consistent with the relevant public expenditure provisions for BCAs for the two following financial years". We are not asking for a commitment that when the final BCAs are issued they should not be based on the lower ACGs. Nor are we asking for specific percentages, as the consultation paper indicated. What we are asking is for the Bill to state clearly what appeared a year ago to be the Government's intention—that the Secretary of State should specify provisional totals. What is wrong with that?

Lord Hesketh

We stand by paragraph A.17. We never said that the indications would be enshrined in statute. That is what we said in that paragraph and it is what we say now.

Lord McIntosh of Haringey

Then local authorities could be forgiven for thinking that the Government do not mean what they say when such a modest amendment is put forward. If the Government stand by paragraph A.17, they ought not only to accept this amendment, they ought to accept an amendment which went further and said that the final BCAs would not be based on approved capital guidelines lower than those specified in year one.

It seems to me that the Government are retreating not only one step but two steps. They are not even accepting a very modest indication as a basis for capital planning which has already been agreed for public expenditure for central government. I hope that the Minister will be able to think about this again, because I am sorely tempted to divide the Committee on it.

Lord Hesketh

It is difficult when the noble Lord, Lord McIntosh, asks whether I will think about it again. The noble Lord has asked for examples of how the forward assurances would be given. This is a matter which we are still considering and we shall be consulting local authorities. It could be that we shall give local authorities an indication of a proportion of their basic credit approvals. The difficulty here is that if their expected receipts fall off we may not be able to make a corresponding adjustment. An alternative would be to give an indication as to annual capital guidelines, which would overcome this difficulty.

Lord McIntosh of Haringey

I think that the Government are groping towards an answer to the question. I shall not push the amendment any further now. We shall have to have better answers by the time we come to the Report stage. We shall have to have some indication of the justification for not including in the Bill the, in our view, essential indications which were included in the consultation paper a year ago. It is more than 12 months since the publication of the consultation paper. There was plenty of opportunity to think about the matter, plenty of opportunity to produce examples of how it would work. There was plenty of opportunity to think about the percentages which the Minister has just referred to as if they were a totally fresh idea, whereas they were actually published on 7th July 1988.

Local authorities will require that indications of the opportunities for forward planning which will be a reflection of the public expenditure planning totals from 1991 are available to them as well. They will hope that they are more realistic than the somewhat arbitrary percentages which are included in the consultation paper. I have no doubt that the Paymaster General, who will be concerned with the public expenditure planning totals for next year, will take this on board and will wish to see that local authorities have the same opportunities for rational planning as he would wish to see for central government.

With that indication that we shall not let this matter drop, and in the hope that consultation with local authorities and further thinking within the department will be fruitful, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 51, as amended, agreed to.

Clause 52 agreed to.

Clause 53 [Criteria for issuing credit approvals]:

The Deputy Chairman of Committees (Lord Grantchester)

If Amendment No. 131ZZB is agreed to, I cannot call Amendment No. 131ZZC. I now call Amendment No. 131ZZB.

Lord Graham of Edmonton moved Amendment No. 131ZZB: Page 59, line 23, leave out subsection (1).

The noble Lord said: If that was an offer, I happily accept it. However, I am afraid we must go through the arguments first. In moving Amendment No. 131ZZB, I wish to speak also to Amendment No. 131ZZC. I believe that is the wish of the Committee.

As the Minister has sought, not wholly unsuccessfully, to convince me that there is a genuine desire to consult local authority associations on a range of matters at the appropriate time, I believe he should be sensitive and sympathetic to what this amendment seeks to do. We are asking the Minister not only to tell us what is in his mind in general, but also to tell us what makes up his mind in particular. We are asking here that the Minister takes local authorities into his confidence as regards the factors, the criteria and the reasons why various disposal decisions are made.

As the Minister knows, the present credit approval system is derived from individual government departments' views of what authorities need to spend on the services they control. The main service blocks are housing, transport, social services, education and other services. There are separate blocks for Home Office services and urban programmes.

At present, local authorities are involved in a bidding process. However, when they recieve their capital allocations they generally do not know what criteria have been adopted in setting those allocations. I want the Minister to tell us what criteria, measuring rods or yardsticks will be determined in the case of each local authority. The Minister may say that they are all taken on their merits or that there are hidden means whereby there is a blanket application to groups, sections and kinds of authorities. However, we want to hear something more than that.

The capital allocations to housing, transport, social services, education, Home Office services and urban programmes have been the subject of some criticism of the department by the Comptroller and Auditor-General over the distribution of capital allocations under the present system. The Comptroller and Auditor-General stated in the Department of the Environment document entitled Control of Local Authorities' Capital Expenditure, issued in May 1986: There are however certain features of the distribution procedures which indicate gaps in the extent to which they take account of the particular spending needs of individual authorities".

In this amendment we are asking that the capital allocations should be precise. I think it is also right to raise the issue of capital receipts. The Government Amendments Nos. 131ZZD and 131ZZH give us considerable cause for concern. Amendment No. 131ZZD permits the Secretary of State to take into account capital receipts which an authority, might reasonably be expected to have received". So capital receipts which an authority had not actually received could be taken into account. This appears to us to give the Secretary of State carte blanche in discriminating between authorities. Will the Minister take this opportunity to tell us what "reasonably" means in this context? It would be grossly unfair if an assumption has been made which is not delivered. I beg to move.

8.45 p.m.

Lord Hesketh

Amendment No. 131ZZB would delete subsection (1) of Clause 53. This subsection provides that, in determining the amount of credit approvals, Ministers may have regard, subject to the provisions of this section, to such factors as appear to be appropriate.

This is a reasonable provision. It concerns the criteria for issuing credit approvals. The Secretary of State must be able to take account of the appropriate factors. If he cannot, resources will not be targeted efficiently when he issues credit approvals. This is well illustrated in the existing system. The Government are not allowed to take account of individual authorities' spending power from receipts when setting capital allocations.

Consequently, as the spending power from receipts in total has increased, it has squeezed allocations. The result has been that allocations to both receipts-rich authorities and authorities with few receipts have been cut across the board. There has been little scope for targeting because we cannot direct resources to authorities with few receipts. We do not want a similar state of affairs in the new system.

Amendment No. 131ZZC would require Ministers issuing a credit approval to consult the local authority associations. Earlier today the matter of consultation was thoroughly aired in our debate on Amendment No. 131X. I do not propose to go through it in detail again. But I would reiterate that we are firmly committed to consultation with the local authority associations. There will, for example, be opportunities for the associations to discuss the volume of allocations with the relevant service department. Capital allocations and decisions on public expenditure provision for local authority capital expenditure are made service by service. Discussions should be with the relevant department. It would be inappropriate to focus them on credit approvals. There is no need to provide for statutory consultation on capital matters.

The noble Lord, Lord Graham, insisted that local authorities do not know what criteria have been applied in the issuing of capital allocations. Local authorities are well aware of the criteria of capital allocations. Other services' allocations are distributed by formulae proposed by the local authority associations. Housing associations' allocations are formulated by reference to the general needs index, which is the subject of consultation. Transport allocations are set on the basis of authorities' transport and policy programme submissions. We believe that this system will be successful. For the reasons I have outlined we resist the amendment.

Lord Graham of Edmonton

The Minister has gone some way to explain to me why the amendments are unnecessary. I only hope that those outside the Chamber who will read the Minister's words with care will be able to relate to what he has said is happening and will happen, and that their fears will be allayed. I think the Minister should acknowledge that there is nothing more aggravating to a local authority than to be given, as it were, information as regards what it will or will not recieve, without knowing fully the reasons.

Local authorities do not need reference simply to the macro situation; they want to know why it is that another authority which appears to be in the same position has received more or less money, as the case may be. The Minister says that the reasons for that are, if not obvious, at least easy to ascertain because some of the allocations have been compiled by local authorities themselves and the reasons for them are well known. I am not at all certain that they are. I do not believe that local authorities idly produce amendments which seek information they do not need. Local authorities are not in the business of wasting the Minister's time or ours. They will obviously read what the Minister has said and it may be that at the next stage we shall raise the matter again. In the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 131ZZC not moved.]

Lord Hesketh moved Amendment No. 131ZZD: Page 59, line 36, leave out ("and") and insert ("might reasonably be expected to have received or to receive or").

The noble Lord said: In moving Amendment No. 131ZZD I propose to speak to Amendments Nos. 131ZZE, 131ZZF and 131ZZG.

A major objective of the new capital finance system is to enable the Government to target resources more efficiently and in a fairer way than at present. Clause 53 is crucial in meeting that objective. It concerns the criteria for issuing credit approvals.

Credit approvals will be calculated in broad terms by reference to two amounts. The first amount will be the sum of the annual capital guidelines for an authority. Those will be based on the relative need of each authority to incur capital expenditure on the services for which it is responsible. The second amount will reflect the authority's relative ability to finance that expenditure from its own capital receipts. In the jargon of the new system—and Members of the Committee who have not yet mastered the jargon have my sympathy—this second amount will be called receipts taken into account (RTIA).

The way in which receipts taken into account will operate is simple. Suppose, for example, that there are two authorities with roughly the same need to spend. The first has a great many receipts, the second has none. The second authority will receive a higher credit approval than the first. It is hard to argue against the fairness of that. The authority with fewer receipts has more need to borrow than the authority with high receipts.

I should like to clarify two points that have been the source of some confusion. First, in my example the authority with more receipts should still be able to spend more than the one with fewer receipts even though it will have a lower credit approval. It will have the spending power from its receipts, so authorities will derive benefit from generating receipts.

The second point is that the Government are very concerned to maintain that benefit and the incentive for authorities to generate receipts. That, I know, is a concern that many Members of the Committee share. That brings me to the purpose of the first three amendments we are considering here. At present Clause 53 permits the Secretary of State to take account of the receipts that it appears to him an authority has actually received or is likely to receive. This will improve targeting for the reasons I have explained. However, obviously it leads to a marginal decrease in the benefit of capital receipts to an authority. In recognition of that fact the Government have made it clear that we intend to take account of only a relatively small proportion of authorities' receipts.

We have said that in 1990–91 receipts taken into account will be some £400 million to £500 million compared with an estimated total of £4 billion of usable receipts in that year, the first year of the new system.

A better way of solving the problem of the incentive could be to adopt what I shall call a normative approach. If we take account of the receipts an authority could be expected to receive, rather than those it has actually received, then the authority retains the full benefit of its usable receipts. Every extra £1 of usable receipts it receives is an extra £1 it can spend. That is what Amendments Nos. 131ZZD to 131ZZF provide. They enable us to take account of the receipts which it appears to the Secretary of State an authority might reasonably be expected to have received or to receive.

I have outlined the principle of the first three amendments. I hope that the Committee will agree that it is a sound principle, since it is designed to increase the marginal benefit of capital receipts to an authority. What is not so straightforward is the question of how to operate this principle in practice. It involves devising a means of estimating the receipts an authority might be expected to receive. I can assure the Committee that the Government would have to be sure that we had a proper mechanism for assessing the receipts an authority could be expected to receive before we used this power. But I am sure that Members of the Committee will agree that that is something that we should strive for and that it therefore makes sense to take this power.

Amendment No. 131ZZG is a technical amendment. As I said, we need to do further work to devise a method of assessing the receipts an authority might be expected to receive. So in the first year of the system at least we shall have to take account of authorities' actual receipts. Obviously the figures we have when we set credit approvals for 1990–91 in the autumn of this year will relate to capital receipts in the existing system. This amendment allows us to take account of those receipts, even though technically they may not be capital receipts for the purposes of the new system. I beg to move.

Lord Dormand of Easington

I take it that I am in order in speaking to Amendment No. 131ZZG, which has been spoken to by the Minister. In introducing the amendments the Minister did not mention specifically any moneys which might come from the European Community and in particular from European Regional Development Fund grants. Amendment No. 131ZZG mentions: capital receipts for the purposes of Part VIII of the Local Government Planning and Land Act 1980". I speak from memory, but I am pretty sure that ERDF grants are not referred to in that Act. The amendment also mentions: capital receipts under section 55 below", and they are not referred to specifically in that section.

In the Department of the Environment letter on Part IV of the Bill sent to the local authority associations on 2nd February there are two paragraphs dealing with ERDF grants. Those paragraphs acknowledge that the Government originally had "an open mind" on this issue. They indicate that strong pressure was brought to bear on the Secretary of State in an attempt to allow ERDF grants to be regarded as an additional source of spending power for authorities receiving them within the context of the new capital spending controls in this part of the Bill. It is not clear from the letter what conclusion the Secretary of State reached. That the second paragraph of the letter is, to me, a classic of obfuscation. There appears to be nothing in the Bill at present that requires him to make adequate allowance in credit approvals specifically to those local authorities on receipt of EC grants.

Paragraph A31 of the consultation paper dated 7th July 1986 published by the Department of the Environment considered the question. It recognised that it would be possible to allow EC grants: to be a source of both finance and spending power for local authorities receiving them". There would appear to be a contradiction in the Government's thinking on this issue compared with the treatment of capital receipts. In relation to capital receipts the Government have acknowledged that under the present system of capital expenditure controls it is not possible to take into account the ability of individual authorities to generate receipts. The new system will allow discretion to the Secretary of State in order that he can issue higher credit approvals to those authorities without access to capital receipts. That recognises that authorities which can generate receipts are not always those with the greatest need to generate capital expenditure.

The contradiction with EC grants is that the Secretary of State will not be required to give higher credit approvals to those authorities which generate the grants. He could allocate credit approvals disregarding EC grants, and that would run contrary to the apparent desire to recognise need as the vital factor in determining approvals. I cannot understand that reluctance.

The Government approve schemes before they are submitted to Europe. If schemes are approved, that must mean surely that Ministers accept that spending is justified on the basis of need, yet authorities may find themselves in the invidious position of receiving grant approval and still not being able to carry out a scheme because of a lack of credit approval. That surely cannot be intended.

Every day we move closer to the European Community. Almost every day in this House and in another place, we hear of the need for preparation for 1992. However, there is no specific reference in the Bill or in what the Minister has said, or perhaps will say, to ERDF grants. I hope that he will give an indication about that. I look to him not only for clarification but for sympathy.

9 p.m.

Lord Graham of Edmonton

I admire the ingenuity of the noble Lord, Lord Diamond, in having found—

Noble Lords

It is the noble Lord, Lord Dormand of Easington!

Lord Graham of Edmonton

I believe that the noble Lord is a diamond. He is a gem, rough as that gem may be.

I hope that the Minister will understand the anxiety and concern. This relates to the capital receipts nexus. Perhaps he will address the point that I made in respect of Amendment No. 131ZZD—a point to which he quite fairly chose not to respond when I raised it out of order during the previous debate. The amendment reads: might reasonably be expected to have received". In the main, capital receipts relate to the sale of houses, although I recall that, when I served on the Local Government, Planning and Land Bill 1980—under which for the first time the instruction was given to the new towns to dispose of their assets—there were all sorts of arguments as to what the Government laid down or felt was likely to be raised by the sale. I hope that the Minister will take on board our serious concern. We do not want people to dispose of assets, sometimes at a disadvantageous time so far as concerns the market, in order to raise money.

The Minister is acting in a highly dangerous way by coming to a conclusion as to what the local authorities might reasonably be expected to receive. For the past five years, when councils have received 100 per cent., they have wanted to spend that money, but they have been restricted in their ability to do so. There have been slight easements in the most recent periods, but there have also been great difficulties. The Government now not only say, "You cannot spend 75 per cent. of what your receive", but, "We shall also take into account the possibility that you might receive some more, most of which you will not be able to spend". That is nightmare financial jiggery pokery. How can the Minister possibly lay on a local authority such an obligation? The Minister may dress it up whichever way he likes, but he is forcing authorities to sell their assets, which will in the main be housing but may very well be other things. The Government will assume that they have spent the money in order to deal with the capital receipts nexus.

I shall ask again: what does "reasonably" mean? Is it what the Minister considers "reasonable" in the context of the Treasury targets for income? Is it something about which the Government might ambitiously say, "I want to show how macho this department is by getting in as much money as I can. Every local authority will be obliged to come up to some kind of level"?

My voice seems to come and go in this debate, which is perhaps a benefit to those who do not want it to come back again. Does the Minister understand the burden of what I am saying?—namely, that there is concern in local councils that they may well be driven to dispose of their assets in order to measure up to some yardstick which the Government have set and which is grossly unfair to them?

Lord Hesketh

Like the noble Lord, Lord Graham of Edmonton, perhaps I may also congratulate the ingenuity of the noble Lord, Lord Dormand of Easington, in discovering the flexibility of the fourth Government amendment to probe the innermost workings of the ERDF.

The Bill provides that the ERDF grant should be set aside to meet credit liabilities. That is appropriate since those grants are normally paid in arrears. The local authoritiy will then have to borrow to finance the expenditure in the first place. As a result, the treatment of the total available for credit approvals will be higher than it would be if the grants directly conferred additional spending power. We are still considering whether we should allow for the distribution of ERDF expenditure when distributing credit approvals to authorities. We hope to make an announcement shortly, after the consideration.

The noble Lord, Lord Graham, is referring to the mechanism of taking account of receipts. That is what is at the heart of his question. Essentially, he is asking what would be a proper mechanism for taking account of expected receipts. I would consider a proper mechanism to be one which set an objective figure for each local authority. Not only does it need to be objective; it needs to be seen as objective. So I would expect to discuss the method with local authorities before it was adopted.

I would expect the method to be based—in part at least—on the use of a formula. Figures input to the formula would be certified or audited. The sort of things of which the formula might take account could include land and property values, an authority's stock of assets and the propensity of tenants to increase the right to buy. Such an approach needs a great deal of research—I appreciate that—but it is not impossible. The problems are similar to those involved in assessing an authority's spending needs. That is something that we manage to do, both for revenue and capital expenditure. I hope that we can do the same for receipts.

As I have said, there are great advantages in that approach if we can make it work. Let us take two authorities with the same spending need and assume that they both have a lot of surplus assets. One tries to sell the assets; the other does not. Why should the one that does not try to sell its assets be subsidised with a higher credit approval? So this is a fairer method. If we can find a way to make it work we shall do so.

The final point in answer to the noble Lord, Lord Graham, is that the Bill provides for the Secretary of State to take account of the usable part of the receipts only. In the case of council house sales, that figure is 25 per cent.

Lord Graham of Edmonton

That still does not get rid of the fact that it is the Government's intention to make assumptions about the rate of dispersal of council assets. In a sense that will drive the council to dispose of assets when otherwise it may not have been inclined to do so.

If the Government say that they expect the sale of assets to realise £2 million, which means that they have to take into account £½million, then if councils do not get rid of the assets, they will be penalised. There will be a school of thought in an authority which believes that in order to escape the penalties the assets will have to be sold.

We know what the Government are after; they do not believe that a council should be the holder of assets such as housing, factories, estates and so on. They do not believe that councils should be in the business of sensibly managing the affairs of the community with which they are involved in the manner in which it has been done in the past.

I think that that view is very sad and wrong. However, we shall get no joy out of the Minister on the amendment tonight.

Lord Dormand of Easington

I was glad to hear the Minister say that the point I raised is being considered. I take it that it has been considered for some time. It seems to me that this is such an important aspect of this part of the Bill that it ought to have been considered.

I should like to ask the Minister whether it is possible for him to say when we are likely to hear the decision on the matter. I have to say with some regret that quite often we hear from the Government—not only on this Bill but on other Bills also—that they are considering a particular point which some noble Lord may have raised, but we do not always hear about the matter in good time.

Can I assume that we shall hear of the decision before the next stage of the Bill?

Lord Hesketh

I can give the noble Lord that assurance.

Lord Dormand of Easington

Thank you very much.

On Question, amendment agreed to.

Lord Hesketh moved Amendment No. 131ZZE: Page 59, line 39, at beginning insert ("In determining the amount of a credit approval").

On Question, amendment agreed to.

Lord Hesketh moved Amendment No. 131ZZF: Page 59, line 40, leave out from ("receipts") to end of line 41.

On Question, amendment agreed to.

Lord Hesketh moved Amendment No. 131ZZG:

Page 60, line 6, at end insert— ("(5) In this section "capital receipts" includes sums which constitute capital receipts for the purposes of Part VIII of the Local Government, Planning and Land Act 1980, whether or not they fall to be treated as capital receipts under section 55 below.").

On Question, amendment agreed to.

Clause 53, as amended, agreed to.

Clause 54 [Use of credit approvals by local authorities]:

The Earl of Caithness moved Amendment No. 131ZZH: Page 60, line 20, after ("under") insert ("section (Effect of certain capital grants on credit approvals) below or").

The noble Earl said: In moving this amendment, with the leave of the Committee I shall also speak to Amendments Nos. 131ZZJ, 131ZZK, 134R and 134S. The amendments concern the treatment of certain government grants in support of local authorities' capital expenditure. As the Committee may recall, I trailed them at Second Reading.

The new capital finance system does not place any direct control on capital grants paid to local authorities by central government. Obviously, however, the Government themselves have to ensure that the total of capital grants which they pay to local authorities is controlled adequately. We are, after all, talking about a large sum of money here—some £1 billion annually.

In many cases the Government can adequately control the amount of grant they pay through the normal grant mechanism. This is the case, for example, with urban programme grant and transport supplementary grant where the Government approve individual projects. But in other cases local authorities have considerable influence over the amount of grant that they receive and the Government have no direct control over what they pay. I put to the Committee that that is not satisfactory and these amendments are intended to provide the appropriate control.

The way in which the control will work is quite simple. The grants concerned will be specified in regulations. We anticipate that these will be specific housing grants paid in support of home improvements grants, environmental works, housing defects expenditure, improvement for sale, and slum clearance. When a local authority receives one of these grants, its credit approval will be reduced by the amount of grant received. If it receives more grant than it has credit approval, then future credit approvals will be reduced to compensate.

To compensate for these reductions, the total for credit approvals will be increased by the amount of the specified grants allowed for in government plans. So local authorities will be no worse off as a result of this treatment. In fact they will be better off. They will have more flexibility. They will be able to choose whether to borrow less and receive more grant, or borrow more and receive less grant.

Amendments Nos. 134R and 134S are technical amendments. I beg to move.

Lord McIntosh of Haringey

This series of amendments, although moved seductively, reflects the constant schizophrenia in government thinking between the claimed desire to give local authorities greater freedom to plan their capital expenditure in a rational way to reflect their local needs and the constant fear that as soon as that has been done and there is any gesture towards independence by local authorities they might misuse such independence and therefore it must all be taken back again. The Paymaster General is telling us that we are on that part of the cycle that says, "We are terrified that local authorities, while not spending more than they are supposed to, because that is already adequately controlled, might not spend the money on exactly the thing that central government wish them to spend it on. They might not get exactly the same balance between home improvement grants, for example, and other forms of capital expenditure".

We therefore have an elaborate procedure now proposed that says, "Yes, you can borrow more money to spend on capital but it will all be taken away from your grants. Yes, you can have more of your grants to spend on something else, but it will all be taken away from your borrowing powers". If ever there was a case of Whitehall—or in this case Marsham Street—knowing best, that is what is proposed in this series of amendments.

It was moved very seductively. I am grateful to the Paymaster General for explaining in the way that he did. However, this is a profoundly centralist series of amendments. I very much regret that the Government have thought fit to bring it forward and to do so under the guise of increased flexibility when clearly it is not.

On Question, amendment agreed to.

9.15 p.m.

Lord Hesketh moved Amendment No. 131ZZJ: Page 60, line 23, after ("that") insert ("section or").

On Question, amendment agreed to.

Clause 54, as amended, agreed to.

Lord Hesketh moved Amendment No. 131ZZK: After Clause 54, insert the following new clause:

("Effect of certain capital grants on credit approvals

— (1) In this section "specified capital grants" means grants, contributions and subsidies—

1. (a) which are paid to local authorities in aid of their expenditure for capital purposes;
2. (b) which are neither commuted payments falling within subsection (2) of section 60 below nor single or other payments falling within subsection (3) of that section; and
3. (c) which are, or to the extent that they are, specified for the purposes of this section by regulations made by the Secretary of State.

(2) If at any time a local authority receives a specified capital grant, such, if any, of the authority's credit approvals as are relevant to that grant shall, in accordance with the following provisions of this section, be reduced or, as the case may be, extinguished by deducting therefrom an amount equal to the grant.

(3) For the purposes of this section, a credit approval is relevant to a specified capital grant if—

1. (a) the approval has effect at the time the grant is received or at any time thereafter; and
2. (b) the purposes for which the approval may be used are or include the purposes towards expenditure on which the grant is made.

(4) Subject to subsections (5) and (6) below, where, by virtue of subsection (2) above, a deduction is required in respect of a specified capital grant,—

1. (a) the deduction shall be applied to the credit approvals which are relevant to the grant in the order in which those approvals were received;
2. (b) subject to paragraph (d) below, the reduction or extinguishment of any such approval shall be regarded as taking place when the grant is received;
3. (c) if the amount of the deduction exceeds the total of the credit approvals which are relevant to the grant and were received before the grant, the excess shall be applied in reduction (or extinguishment) of credit approvals which are so relevant and are received later; and
4. (d) any such reduction or extinguishment of a later credit approval as is referred to in paragraph (c) above shall be regarded as taking place when the approval is received.

(5) Notwithstanding anything in subsection (4) above, any reduction or extinguishment of a credit approval which is required to be made under Part I of Schedule 3 to this Act shall be applied before any reduction or extinguishment under this section.

(6) In any case where—

1. (a) before the time when a specified capital grant is received by a local authority, the authority have made a 1519 determination under subsection (1) of section 54 above with respect to a credit approval which is relevant to that grant, and
2. (b) by virtue of subsection (3) of that section, that credit approval is to any extent to be regarded as having been used before that time,

the credit approval shall not, to that extent, be taken into account under subsections (2) and (4) above; but subject to that, the making of a determination under section 54(1) above with respect to a credit approval shall not affect the operation of those subsections in relation to it.").

On Question, amendment agreed to.

Clause 55 [Capital receipts]:

Lord Hesketh moved Amendment No. 131ZZL:

Page 61, line 21, at end insert— ("(1A) The following sums are not capital receipts for the purposes of this Part, namely, sums received by an authority in respect of—

1. (a) the disposal of an interest in an asset which, at the time of the disposal, is an asset of a superannuation fund which the authority are required to keep by virtue of the Superannuation Act 1972; or
2. (b) the disposal of an investment held for the purposes of such a superannuation fund; or
3. (c) any repayment or payment such as is mentioned in paragraph (c) or paragraph (d) of subsection (1) above which is made to such a superannuation fund.").

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendment No. 131ZZM: Page 61, line 39, leave out from ("Part") to end of line 42 and insert ("as being wholly available to enhance capital spending").

The noble Lord said: We bring forward this amendment in order to give the opportunity for the Government to honour what appear to us to be quite unequivocal undertakings given not only by a previous Secretary of State but also by the Government in one Green Paper and one consultation paper.

Perhaps I may begin with the undertaking of the Secretary of State. The noble Lord, Lord Jenkin of Roding, who was then Secretary of State in another place, in discussing the Local Government (Prescribed Expenditure) Regulations at col. 345 of Hansard on 13th March 1985, said: There is nothing in the regulations … to prevent these receipts in due course from being spent by the authorities to which they belong. The only issue … is the pace at which those receipts should be spent".

The receipts to which the noble Lord referred were the receipts accumulated under the current capital control system and not of course the receipts to be accumulated under the new capital control system proposed in the Bill. There is a distinction between the old system capital receipts and the new system capital receipts. That distinction ought to have been preserved after the publication of the Green Paper in 1986 and the consultation paper in 1988.

At paragraph 6.40 the Green Paper states: Local authorities have been given the assurance that this amount [accumulated receipts brought forward from the present system] will be available in full over time to justify additional capital expenditure".

The consultation paper Review of the Local Authority Capital Expenditure System in England and Wales in 1986 stated: The Government does, however, envisage that authorities would be able to use in full for capital expenditure that part of those receipts accumulated under the present system which is still backed by cash".

These are quite clear commitments. They refer to the receipts available under the present system. The Bill proposes to create a distinction between reserved and usable capital receipts. What it does not do and what it ought to do is to maintain the commitment already made that receipts under the old system should all be usable, as they were in the past.

When the matter was raised recently the Government did not attempt to deny that a commitment was given, but they have justified departure from the commitment by saying that the money available—or expected to be available when the council house disposal programme was first started—has proved to be very much greater than the anticipated figure. That is undoubtedly true, but it is not relevant to the issue before us. Indeed it is not referred to either by the then Secretary of State in 1985 or in the two 1986 government papers.

There is no justification whatsoever for the Government now to depart from the clear commitments already given. I invite them now to honour those commitments by accepting the amendment. I beg to move.

The Earl of Caithness

The amendment would exclude capital receipts from the present system from the definition of capital receipts in the new system. Instead they would be fully available to be spent in the new system.

There are two aspects I should like to consider here. First we have heard a lot from the noble Lord, Lord McIntosh of Haringey, about the supposed government assurances on capital receipts. I should like to put the record straight and then I shall turn to the merits of the amendment. I do not blame the noble Lord for running this hare again, but I hope that I shall be able to convince the Committee that it is not a hare that it should back.

First, therefore, the assurances: let us start by looking at what my noble friend Lord Jenkin of Roding said in November 1984. He said: The receipts are and will remain the property of local authorities. They can spend them in future years, but the Government must ensure that the pace at which they are spent is compatible with the Government's spending plans". My noble friend was speaking in the context of an announcement that the prescribed proportions of capital receipts would be reduced. What he said was a true statement of the effect of that change in the present capital control system. The Committee, I am sure, will agree that my noble friend gave no undertaking that the system could never be changed. In fact he had already announced at that time a review of the present system.

That review led to the publication of proposals for a new capital control system in the Green Paper Paying for Local Government which was published in January 1986. The Green Paper estimated tentatively that accumulated receipts at that time were £3 billion. It then said—I quote from paragraph 6.40, which the noble Lord, Lord McIntosh of Haringey, quoted: I hope the Committee will bear with me— Local authorities have been given the assurance that this amount (that is, the £3 billion) will be available in full over time to justify additional capital expenditure". But that is where the noble Lord, Lord McIntosh, stopped. The Green Paper made quite clear that it was our intention that receipts under the new system, which we proposed should operate from April 1987, would not be available fully for additional capital spending. If he had read on to paragraph 6.41 he would have seen one of the options for the treatment of receipts. It said: The new legislation would ensure that only the prescribed proportion of receipts could be used over time to justify [addditional capital] … spending, rather than the whole". The noble Lord, Lord McIntosh, said at Second Reading that local authorities were given a very clear indication that they would be able to spend all their future receipts. I am afraid that that was not what my noble friend Lord Jenkin said. And certainly it did not fit with the clear statement in the January 1986 Green Paper.

I return therefore to the figures quoted by my noble friend Lord Hesketh at Second Reading. Local authorities will have spent £8.5 billion between April 1987 and April 1990. They will take a further £3 billion usable capital receipts into the new system. That makes £11.5 billion in total. If one goes back to the time of the speech of my noble friend Lord Jenkin, the total figure is £14.5 billion. That compares with £3 billion or £4 billion which local authorities had at the time. It seems to me that the noble Lord's protests about broken assurances are rather hollow.

I turn now to the merits of the amendment itself. The effect of it would be to produce an extra £5 billion spending power at the start of the new system. Not all of that would be spent immediately. But a fair amount of it would be. Any responsible government would have to allow for that spending. The result would be a huge cut in credit approvals. In fact there would hardly be any credit approvals at all in the first year of the system. I wonder whether the noble Lord has asked himself which authorities this would hurt. It would hurt those very authorities with high needs and few receipts. It is those authorities which the Bill seeks to help. Perhaps they have not benefited as much as they should have under the present system, and the proposed system is designed to help. I hope that the noble Lord will reconsider the amendment.

Lord McIntosh of Haringey

The Minister chose to quote from other parts of the speech made by the Secretary of State, and that made at an earlier date. He then chose to quote from the January 1986 Green Paper but not from the February 1986 consultation document. In none of those statements was it said that the receipts from the existing system would not be available. A qualification was always made; but it is not now being made because it is irrelevant. It was that there could be a change in the timing of the availability. As the noble Lord, Lord Jenkin, said, the question was the pace at which the receipts should be spent. Unless the Secretary of State was deliberately seeking to deceive the House of Commons—and I cannot believe and do not assert that that was the case—the impression that he gave and which has since been universally accepted was that the receipts would be available. The only issue was the pace at which they should be spent. That was confirmed in the February 1986 consultation paper: The Government does however envisage that authorities would be able to use in full for capital expenditure that part of those receipts accumulated under the present system which is still backed by cash". Because of their majority, we do not doubt the Government's intention and ability to carry through a change in the system and the balance between reserved and usable capital receipts under the new system. However, there can be no doubt that the impression given by the Secretary of State in the Green Paper and the consultation document was that the only issue in respect of existing capital receipts—that is up until the time of new legislation because in statutory terms nothing changed between 1986 and now—was the question of timing.

If, on legal examination (of which I am not capable), the Minister can show that the commitment is less clear than it appeared at the time, then if the Government are right now they were certainly wrong then. They succeeded in giving a totally wrong impression of their intentions. The Paymaster General says that my claims are hollow, but I suggest that he has an unenviable choice.

He has to choose between not honouring commitments or his Government having made commitments before his time which did not mean what they apeared to mean. In his shoes, I am not clear which I would rather choose. It is not a satisfactory situation and does not reflect credit on those who made what appeared to be clear commitments. I shall not overturn this by a Division at this stage, so I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 55 agreed to.

9.30 p.m.

Clause 56 [The reserved part of capital receipts]:

Lord Ross of Newport moved Amendment No. 132: Page 62, line 42, leave out ("75") and insert ("5").

The noble Lord said: I shall also speak to Amendments Nos. 133 and 134. At the outset, I congratulate the noble Earl on his advancement to Paymaster General. I very much hope—and I suppose it is a forlorn hope—that he will take into the Treasury the knowledge which he undoubtedly has of the problems which are obviously facing people in the housing sphere today.

These amendments, which the noble Earl will no doubt reject, would give local authorities the opportunity to do something about the growing problem whereby a vast number of people, particularly young people, have been priced out of the housing market especially in South and South-West of England. There may be an argument that the difficulty in other parts of the country is not so great, but that problem certainly exists in London, the South-West and the South-East. There is no question that prices and rents have gone through the roof and that a large number of our fellow citizens cannot afford to buy or rent. The amendment would give local authorities the opportunity to spend far more of the money that they receive from the sale of council houses on replacing stock which has been sold off.

At present I am not quite sure but I believe that a figure of 20 per cent. is allowed to be spent by the local authorities. In this Bill, which refers specifically to housing, that will increase. That will now become 25 per cent., and in the case of other receipts, 50 per cent. The amendments reduce that 75 per cent. to 5 per cent. so that 95 per cent. of that money could be used to do something about the chronic problem which faces us.

Why should councils which sell off their housing stock not be allowed the greater amount of the money which they receive from those sales to be spent on new construction work? It could perhaps be used for a more suitable type of accommodation; namely, one and two-bedroomed flats and maisonettes. That is the type of accommodation which is desperately needed.

We are in the midst of a housing crisis, although one would not believe that from what the Government say. However, tomorrow I am chairing a seminar run by the Salvation Army to enable representatives from Surrey University to give at least a preliminary response to a study which they did on two nights, in March and November, of the homelessness in London. I believe that the department is interested in the results of that inquiry which one hopes will be very much taken on board in the review which is taking place on homelessness at present.

I know that the Government and the noble Earl believe that the private sector can provide—and I also believe that in the long run the private sector can provide—a solution to the housing crisis, but it cannot do that now and it cannot do that for those who are the most vulnerable in society. It must be right that a council which has a surplus of three-bedroomed houses for historical reasons can sell those and use the money to build two-bedroomed accommodation to satisfy that demand.

The Secretary of State demands that local authorities should use up to 75 per cent. of their capital receipts to meet credit liabilities despite the fact that some of those councils may be paying as little as 6 per cent. on their borrowing. Would any commercial company or prudent family cash in debts on which it was paying 6 per cent. interest in order to take out new loans paying two to three times that amount of interest?

I always remember being addressed by the director general of the CBI and in those days he ran the Audit Commission. He was Mr. John Banham. He gave a presentation to the Cabinet of the time, and also to the opposition parties in the Commons, on local government spending and the way in which the local government sector managed to balance its books.

It was in fact a very good story. It showed that local government was in very much better order than departments of state. I asked him at the time whether he had actually presented this information to the Prime Minister. He said that he had and that he had been at 10 Downing Street for two hours. Unfortunately, he did not seem to convert anybody. He said that local government in this country, generally speaking, ran a much tighter ship than departments of state. It is a fact that, as a proportion of gross domestic product, local authority borrowing fell from 1.4 per cent. in 1980–81 to 1 per cent. in 1985–86. Over the same period the local authority long-term debt as a proportion of GDP fell from 15 per cent. to 13 per cent. The movement is in the right direction. There is not an argument that local authority has been increasing its debts. The loans outstanding as a proportion of gross annual revenue expenditure fell from 135 per cent. in 1980–81 to 117 per cent. in 1986–87. I gather that those are CIPFA figures.

I shall not delay the Committee as time is getting on. I do not expect to make progress on this matter. I know that the Minister himself is very well aware of the arguments. There is a feeling throughout the country that local authorities have got money. For goodness sake let them use it and let us do something finally to deal with the housing problem which this nation faces particularly in the South and West. That is why I feel so strongly about this matter. It cannot be right for us to let this proposal go through without protest. I beg to move.

Lord McIntosh of Haringey

Interspersed with these amendments so ably spoken to by the noble Lord, Lord Ross, there are amendments of mine which attempt the same objective but which produce slightly different figures. It does not matter at all because both sets of figures are much better than those of the Government. We need not feel ashamed about the discrepancy. In two cases our figures are more moderate than those of the Government. We are allowing them to reserve more of the receipts from the disposal of dwellinghouses and more of other receipts than the noble Lord, Lord Ross, proposes.

In some respects my amendment is more radical because it proposes to give the Secretary of State the opportunity to specify a lower percentage for the reserved figure, whereas the noble Lord, Lord Ross, simply removes the opportunity for the Secretary of State to make any change at all. There is something profoundly objectionable about the reserved receipts proposal and the argument on which it is based. The Government seek, by quoting a figure of £45 billion, to persuade us that there is something outrageous about local authority debt. The noble Lord, Lord Ross, has made it very clear that the contrast between the conduct of local authority capital financing and central government capital financing is very much to the benefit of local government and to the disadvantage of the reputation of central government.

As a proportion of gross domestic product, local authority borrowing is decreasing. Between the years 1980–81 and 1985–86 local authority borrowing as a proportion of GDP declined from 1.4 per cent. to 1 per cent. Local authority long-term debt declined as a proportion of GDP from 15 per cent. to 13 per cent. There is no significant problem there that can be identified. There is certainly not a problem that can be identified by waving around figures of £45 billion without saying what the figure was before or what changes there are either in real or in money terms.

The real reason why the Government wish to follow this course is that they want to keep greater control over the detail of local authority spending. The polite phrase used in the consultation paper refers to the need to maintain an adequate level of credit approvals. The Government do not like the idea of local authorities spending their own money on things that they consider necessary in the light of their contact with local people. They do not like the idea of local authorities. The Minister was quite candid about this only a few minutes ago. The Government do not like the idea of local authorities having the power to decide what their capital expenditure should be used for even when that expenditure is in the form of receipts on assets which they have built up and for which the ratepayers have paid over the years.

They do not like any sort of autonomy for local authorities and they seek to destroy that autonomy by forcing them to reserve 75 per cent. of their dwellinghouse receipts and 50 per cent. of their other receipts and to use them to redeem the debt. That is in order that there should still be an adequate level of credit approvals—in other words, of the kind of capital finance which central government keep their clammy paws on at every stage. That is further proof of the determination of this Government, in the centralist mood with which they seem to be gripped at the present time, to take away every aspect of local authority financial autonomy that they can think of.

There is no real claim of abuse. They have not made any effective claim that local authorities have been misusing their capital receipts. There is no claim even that capital expenditure by local authorities is too high. They would be hard put to it to maintain such a claim when restraints on capital expenditure have in fact meant that the infrastructure of local authority assets has been decaying and the necessary work, particularly on keeping up the quality of our housing stock, has not been done for a very considerable period of years.

I thought that the noble Lord, Lord Ross, made an extremely good case for his amendments. If they were to be acceptable to the Committee I would gladly not move mine, but it seems that the case for some drastic change from the Government's proposals is incontrovertible.

Lord Graham of Edmonton

Perhaps the Minister would consider an additional aspect. The Association of District Councils, of which I have the honour to be one of the vice presidents, and there are many other members of it in the Chamber, has drawn my attention to a matter which it finds disturbing. It concerns points that have been raised before.

The Government decide to shift the percentages of the non-housing receipts that will stand for the basic credit approvals, yet those outside the Chamber find great difficulty in understanding the criteria and the arguments. The Minister should tell the Committee which regulatory powers the Government are using and give examples of the circumstances when alterations or different provisions might be deemed necessary. There is no point telling us in advance that there is to be a new regime. What those at the sharp end of local government ought to understand is not that changes will be made but the basis upon which they will be made.

In determining the percentages to be applied in respect of reserved and usable receipts the Government have to balance the twin objectives of providing an incentive for authorities to dispose of assets and maintaining a level of credit approvals sufficient to direct resources to areas of greatest need. I believe that they must explain the balance that they have chosen, while recognising that authorities must be free to determine the right time for disposal of their assets.

I made allusions earlier to powers under the Local Government, Planning and Land Act 1980. I still believe that many public assets are sold when it is not propitious in the market so to do in order to comply with the directions of Ministers concerning the amount of moneys which the Government expect them to raise by the sale of their assets. We are asking the Minister to say whether he will be consulting with the local authority associations on when the movements take place, and what will be the cause of the movements. There will be great difficulties for authorities. We believe that their ability to embark on joint schemes with the private sector, schemes which the Government have encouraged, will be severely hampered. I want the Government to tell us that they intend to have sensible consultations with local authorities at the appropriate time.

9.45 p.m.

The Earl of Caithness

I thank the noble Lord, Lord Ross of Newport, for his kind words in introducing the amendment. I was interested in the speech of the noble Lord, Lord Graham of Edmonton. I wondered whether he would turn to his AMA brief on this amendment, as that would have been of interest to the Committee.

Lord Graham of Edmonton

Will the noble Earl take if from me that I have no AMA brief? I shall be happy to listen to the Minister reading his answer to the AMA brief. I shall then be able to decide what the AMA would have wanted me to say if it had asked me to say it.

The Earl of Caithness

My answer is to the ADC brief, which I thought the noble Lord would be picking up on this amendment.

I have listened extremely carefully to what noble Lords have had to say about these amendments. I think I am right in saying, perhaps because of my own interest, that the treatment of capital receipts is an aspect of Part IV which is of most interest to the Committee. It has certainly been of great interest to me over the past year. I hope I am right in saying that there is fairly broad agreement that some of those capital receipts should be used to reduce indebtedness. But for the benefit of noble Lords who do not accept that view, I shall try to persuade them.

Local authorities have always financed most of their capital expenditure by borrowing. There is nothing wrong with that. It means local authorities have debt. But they also have assets which that debt has to be used to acquire. When they come to sell those assets, however, they should ensure that some of the proceeds are used to reduce their debt. Just like when you sell your house, the first thing you do is pay off your mortgage.

There are two approaches to paying off the debt. I shall call them the allocated and the pooled approach respectively. Under the allocated approach debt is allocated to individual assets and when an asset is sold the debt on that asset is paid off. That is what the individual is doing when he sells his house and pays off his mortgage. Under the pooled approach which we have proposed, debt is pooled and a proportion of receipts is used to pay off debt regardless of the debt on the individual assets sold. Indeed, the debt on the individual assets may well not even be known to the authority. The pooled approach would obviously not be suitable for the individual with his mortgage. But it is suitable for a body which has a rolling amount of debt acquired over a long period on a large number of assets.

There are two reasons why we have gone for the pooled rather than the allocated approach. First, not all authorities will know what the debt is on each of their assets. Most, if not all, will know the debt for each service committee. But beyond that they may need to rely on a pro rata apportionment of debt to assets. Once one has to rely on a calculation like that, why not simply go for the aggregate pooled approach?

Secondly, the case for the pooled approach will become even stronger if local authorities adopt the proposals for capital accounting which the Chartered Institute of Public Finance and Accountancy and the local authority associations have developed and are consulting on at present. These proposals would involve a move away from charging the cost of debt to particular assets or services. The link between debt and assets would thus be further eroded. As I said, the accounting proposals are the subject of consultation at the moment. I do not want to prejudge that consultation. But we want the new capital finance system to be compatible with whatever accounting practices are likely to be adopted, including those proposals which CIPFA have put forward.

If one is going to adopt the pooled approach, then the question is what proportion of receipts should be set aside for debt redemption. At this stage I should like to pick up the point made by the noble Lord, Lord Ross of Newport. He mentioned the difficulty, in the present climate, of local authorities having to pay off a debt taken at 6 per cent., which would be wrong in business terms. I think that the noble Lord's assumption stems from a misunderstanding of what we propose. We are saying that this should be set aside for debt redemption; we are not saying that the debt has to be paid off. Therefore, in the case mentioned by the noble Lord, the local authority need not pay off the debt at a rate of 6 per cent. It could use the money in another way to reduce borrowings. I think that that also covers the point made by the noble Lord, Lord Graham of Edmonton, about a forced sale of assets in appropriate circumstances. There is flexibility to cover that situation.

I return to the question of the proportion of the receipts. As Members of the Committee will know, we propose that 75 per cent. of receipts from council house sales should be set aside and 50 per cent. from other receipts. I appreciate that the choice of the appropriate percentage is a difficult matter of balance. On the one hand, we have to ensure that there is sufficient incentive for authorities to generate receipts: on the other hand, we have to ensure that the Government are able to target resources in a sensible manner.

I do not wish to labour the point because Members of the Committee have listened with care all afternoon to what my noble friend Lord Hesketh and I have been saying about the necessity to target resources which the present system does not permit us to do and how this will benefit so many areas which have difficult needs and require better targeting of resources.

Although the balance is a difficult one to judge, the arithmetic is very simple. The main sources of spending power in the new system for capital expenditure will be credit approvals and capital receipts. To simplify matters, let us assume for the moment they are the only sources; and let us assume the Government consider that £6 billion is an appropriate level of capital expenditure. If we allow £2 billion to be spent from receipts, then we can issue £4 billion or credit approvals. If we allow £4 billion to be spent from receipts, then we can only issue £2 billion of credit approvals.

Those figures are purely illustrative. But I have looked at what these amendments would imply. I ask Members of the Committee to pay particular attention to Amendments Nos. 132A and 133A, which would reduce the debt redemption figure to 20 per cent. for all receipts and would reduce the scope for credit approvals by some £2.5 billion, whereas Amendments Nos. 132 and 133—that is, a debt redemption figure of 5 per cent. for council house sales receipts and 15 per cent. for all other receipts—would reduce the scope for credit approvals by some £3.2 billion.

That puts the Government's case very clearly. Indeed, with such low figures for debt redemption I wonder why the noble Lord, Lord Ross of Newport, has bothered setting any requirement for redemption. The plain fact is that the more spending on capital expenditure which is financed from receipts the less spending room there will be for credit approvals within any total provision for public expenditure. These amendments would concentrate most spending power in the hands of receipts-rich authorities. The Government would have little scope to target resources—through the issuing of credit approvals—at needs. Authorities with few receipts but a strong need to spend would be starved of resources.

To sum up, let me stress two things. First, these proposals do not take receipts away from local authorities. Local authorities will retain their receipts to finance their spending or to repay their debt. Secondly, these proposals do not ignore the needs of local authorities to spend money on their assets; far from it. They actually recognise that need. But they recognise that the need does not necessarily fall in the same place as the receipts. Indeed, quite often exactly the opposite is the case. The areas of greatest need have the fewest receipts; so Clause 56 will restore the Government's ability to ensure that these needs are met.

I shall deal briefly with one or two points that have been raised. The noble Lord, Lord McIntosh of Haringey, kindly reminded the Committee when we were discussing local authority debt in England and Wales that we were talking about some £45 billion. I think it is worth remembering that that is 25 per cent. of the total national debt. Moreover, when you look at the local authorities' revenue expenditure you will find that it is something like £32 billion or £33 billion. That puts the matter into context.

However, what about servicing the debt cost charges? Ratepayers and taxpayers would have to pay about £6 billion a year, which is £170 from every adult in the country. We can all benefit from reducing the debt. It would be wrong to lose sight of that fact. The savings to be made on revenue are substantial and, if community charge payers wish, those savings can be ploughed back into extra capital expenditure.

The noble Lords, Lord McIntosh of Haringey and Lord Ross of Newport, said that local authority borrowing is decreasing as a proportion of GDP. I am grateful for that compliment. It shows the true success of the Government's policy. The noble Lord, Lord Graham of Edmonton, asked whether local authorities would be consulted on the regulations and in particular on movements in their reserve powers. Of course we always like to consult. As he will be aware, I had a big meeting with all the associations earlier this week.

I agree that the amendments are well intentioned, but they would not achieve the results that noble Lords want. They would result in a substantial mismatch of needs and resources.

The Earl of Balfour

Before my noble friend sits down perhaps I may ask one question. Although I must admit that it is a while since I was involved in local government, when I was a member of a local government finance committee we often borrowed money on the security of the capital and income that we received from the rates. I hope that as a result of any government proposal to reduce the capital and income of a local authority, it does not then have to borrow at a higher interest rate because it does not have the same security as in the past. I put that as a point. If we lower the capital assets and borrow money, it is less secure and one may be charged a higher rate of interest.

The Earl of Caithness

I am interested in my noble friend's point. I am sure that he will agree that we are talking about a mismatch of needs and resources. That is the Achilles' heel of the present system. We hope that it will not be the Achilles' heel of the proposed system. That is the idea and why we have proportioned the figures in the way that we have.

Lord McIntosh of Haringey

In a just world the speech that has just been made by the Paymaster General would not merely be immortalised in Hansard; it would be set as a text in an economics paper, preferably at degree level, but it would even work at A-level. It contains more economic misconceptions in the space of five or six minutes that I have heard in my life. It starts with the most obvious one: the idea that there is something natural about repaying a mortgage when one sells one's house.

The issue of whether one repays one's mortgage when one sells one's house depends partly of course upon whether one is going to buy another house with the proceeds. If one buys another house with the proceeds, one repays one's mortgage, not because it is necessarily desirable to do so but because the mortgage company requires that the mortgage be repaid. It is often most disadvantageous to do so. The noble Lord, Lord Ross of Newport, talked about repaying borrowings at 6 per cent. so as to borrow at a substantially higher rate. If one has a fixed interest mortgage one greatly regrets the fact that one is forced to repay it so as to obtain a new variable interest mortgage to buy the new property.

That analogy falls flat immediately. The fundamental thing that is wrong with the Paymaster General's argument is the idea that there is some theological level of public expenditure, of which the local authority is a part, to be determined by central government, and that therefore any capital expenditure based on the use of capital receipts must be matched by a reduction in new approved borrowing levels as authorised by central government.

The real, the proper level of capital expenditure by local authorities is not to be set by a theological proportion of a theological figure of government borrowing, particularly when we are not even talking about borrowing but about repayment. It should be set by the needs of the local authority and by the need to renew, expand, improve the assets which the local authority has to maintain in order to provide the services that its ratepayers and inhabitants want. That should be the consideration.

It should not be a zero sum gain, as between credit approvals and capital receipts. This very simple example that the noble Lord gave may well represent government policy, but it is an extraordinarily foolish government policy, in that it does not take account of the needs of the local authority. The availability over recent years of capital receipts from the sale of council houses has been virtually the only way in which local authorities have been able to meet a demand for new and improved public housing. That demand has become greater because of the sale of council houses.

The issue of whether or not council houses should be sold is now political history. It is agreed by everybody that that is the right policy. But the issue of whether there is still a need for public housing is a live political issue. It will not be resolved by taking away from local authorities the power to spend the capital receipts on their own assets which have been built up by the ratepayers. Both in equity and in economic common sense, the Government's argument falls and the amendment of the noble Lord, Lord Ross, ought to be supported.

10 p.m.

Lord Ross of Newport

We have spent half an hour on this subject and ought not to spend much longer. I hope that, when he takes up his new post in the Treasury, the Minister, who has considerable knowledge of the housing problems of the nation, will at least fight the battle for more expenditure on housing both in the public sector and in the housing association movement. I am afraid he is likely to become subsumed into that terrible department, which controls everything. I hope at least that he can fight some battles on the problems which are not getting better but are getting considerably worse in certain parts of the country.

His response suggested that it was the right way that all authorities should pay this money off debt and the Government themselves would distribute it to the areas of greatest need. If only that were so and that they would do it. But they do not. Perhaps if we had a regional administration in this country we might manage to do something in that field, but we have not.

Therefore, we are right to argue yet again that those authorities which are facing the most dire problems at present should have a much larger allocation of receipts from the sales of houses to enable them to do something about the problems which they face.

There is no point in dividing the Committee on the issue at the moment. I think that the noble Earl, Lord Balfour, made a very good point by suggesting that it did not make much sense to pay off debt which one borrows at a rate perhaps as low as 6 per cent. and to be faced with having to borrow money at a higher rate. My first mortgage was from the local authority at 3½ per cent. fixed term, 15 years. I wish one could go back to that now. However, we have debated the subject and there is no point in dividing the Committee. I promise the Minister that we shall come back to this again. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 132A to 134ZA not moved.]

The Earl of Caithness moved Amendment No. 134ZB:

Page 63, line 2, at end insert— ("(3A) If the Secretary of State by regulations so provides, capital receipts of a description specified in the regulations shall be treated for the purposes only of this section as reduced by an amount determined in accordance with the regulations.").

The noble Earl said: I beg to move Amendment No. 134ZB and, with the leave of the Committee, I wish to speak also to Amendment No. 134ZC. We have made it clear that we intend to operate what is known as the "in-and-out" scheme in the new system of capital finance. The existing in-and-out scheme has been very successful and local authorities have been pressing for its continuation under the new system. These amendments provide a broad enabling power that will ensure that we can run a scheme such as a streamlined in-and-out scheme in the new system. It may help some Members of the Committee if I say a little about just what the in-and-out scheme is. In the present system it helps local authorities to carry out certain types of property rationalisation, the replacement of operational assets and the facilitation of private sector investment. It does so by reducing, or in many cases lifting completely, the rate of spend restrictions on the capial receipt arising on the transaction. An example of the operation of the scheme is the case where a local auhority is assembling land under compulsory purchase powers to facilitate a town centre redevelopment by the private sector. Land will pass into the local authority's ownership on compulsory acquisition and then, after a short time, out to the developers' ownership. With the passage of the land through the local authority's hands, it is enabling the private sector development to go ahead. It is right that in such a transaction the local authority should be free to offset the capital receipt against the capital expenditure.

The existing in-and-out scheme operates through the submission of individual applications to the Department of the Environment. Each case is then considered against the criteria for the scheme. With these amendments, however, we intend to run the scheme through regulations as far as possible. There are obvious advantages for local authorities. They will be able to tell whether a project which they have in mind is eligible under the new scheme by reference to the regulations rather than have to submit an application and wait for the result. We are reviewing the details of the present system and will be consulting in the autumn on the criteria we intend to adopt in the regulations for the new scheme. I beg to move.

On Question, amendment agreed to.

The Earl of Caithness moved Amendment No. 134ZC: Page 63, line 3, after ("(3)") insert ("or subsection (3A)").

On Question, amendment agreed to.

Lord Hesketh moved Amendment No. 134ZD: Page 63, line 24, leave out from ("receipt") to end of line 30 and insert ("received by an authority as trustee of a trust fund which is held for charitable purposes").

On Question, amendment agreed to.

Clause 56, as amended, agreed to

Clause 57 agreed to.

Clause 58 [Capital receipts not wholly in money paid to the authority]:

Lord Graham of Edmonton moved Amendment No. 134A:

Page 66, line 7, at end insert— ("(7) Nothing in this section shall apply where a disposal under subsection (1)(a) and (c) above, or an assignment or waiver under subsection (1)(b) above, is to a registered housing association.").

The noble Lord said: I beg to move Amendment No. 134A standing in the name of my noble friend Lord McIntosh. The purpose of this amendment is to remove any transaction between a local authority and a registered housing association from the provisions of Clause 58.

Clause 58 provides that where a local authority disposes of land, and all or part of the payment is either not in money or is paid to someone other than a local authority, the local authority will be held to have received the full market value of the land—that is, the notional capital receipt—and will have to set aside 75 per cent. of the notional capital receipt for debt repayment. Similar provisions are made where a local authority forgoes all or part of a contracted repayment for a previous disposal.

The effect of this as regards local authorities and housing associations is that, when a local authority has disposed of land to a housing association at an abated price in return for future nomination rights to vacancies in a housing scheme to be produced, the authority would have to regard the abatement as a cash receipt for the purposes of offsetting 75 per cent. of it against outstanding loan debt.

The Minister will clarify and confirm this matter, but as we understand it, if a local authority sells land or housing worth £10 million to a housing association for £5 million, it will still have to make a provision of £7.5 million to repay existing debt, regardless of the fact that it only received £5 million for the transaction. I am advised that no local authority will wish to borrow money to make provision for repayment of debt in these circumstances. The net result of the Clause 58 provisions will be to inhibit local authority and housing association initiatives to utilise local authority land for low cost home ownership or affordable rented housing schemes.

It is difficult to see how the provisions of Clause 58 further the Government's stated objectives of bringing vacant public land back into beneficial use or of increasing the role of housing associations in the provision of affordable housing. In many parts of the country housing association schemes are unlikely to produce affordable homes unless the land can be obtained at less than market value. In addition, many local authorities are unlikely to wish to sell their land if they cannot ensure that that will help to meet the housing needs of the lower paid in their area.

In respect of housing association rented schemes there is no possibility of an abated land price resulting in double public subsidy as the abatement reduces the amount of housing association grant available to a scheme. By reducing the HAG it enables more homes to be produced nationally, as the amount available for HAG nationally will stretch further if associations are able to use local authority land obtained at an abated price.

Whether or not the low cost home ownership initiative will be affordable by those who cannot purchase outright on the open market may well also be dependent on the provision of land at less than market value. Clause 58 is likely to result in a reduction of such initiatives on local authority owned land. If unamended, Clause 58 will provide a serious disincentive to both local authorities and housing associations to work in partnership in order to provide affordable housing. Our amendment would rectify that by exempting transactions between local authorities and registered housing associations from the whole of the provisions of Clause 58. I beg to move.

The Earl of Caithness

It may be helpful if I explain the rationale behind Clause 58. One of the principles underlying the new capital finance system is that when local authorities dispose of capital assets they should make provision for debt redemption. I should draw the Committee's attention to the fact that local authority debt stands at about £45 billion and is still rising, notwithstanding the overall reduction in the council housing stock brought about by the success of right to buy.

Clause 56 provides that when a local authority sells an asset for cash a proportion of the amount received should be set aside for debt redemption.

Clause 58 complements Clause 56. It deals with the disposal of capital assets where, instead of money paid to the authority, the authority receives consideration in kind or where the cash is paid to a third party. The clause requires the authority to value the consideration received and to set aside the appropriate sum as if the whole consideration had been in money paid to the authority. As a general principle that must be right. The local authority is, after all, disposing of one of its capital assets. The original acquisition of most of those assets was financed through borrowing. There is therefore no compelling reason for exempting disposals where the consideration is other than money paid to the authority.

Indeed, past experience has shown that a more relaxed regime for barter transactions has tempted some local authorities to enter such deals to get round the capital system. This could not only undermine the debt redemption provisions of the new system, but also it means that local authorities may not be managing their capital programmes in the most cost effective way. Projects which can go ahead because a barter deal can be struck would proceed in preference to schemes with greater priority in the programme or which represent better value for money.

That said, I have to admit that I was struck by some of the points which the noble Lord, Lord Graham of Edmonton, put forward; and I appreciate the reasoning behind his amendment. Transactions where local authorities dispose of land to housing associations at a reduced price can play an important part in the role of authorities as enablers rather than direct providers of services. Plainly, the transactions help to meet the housing needs in an area and encourage local authorities to dispose of assets.

I can give this assurance to the noble Lord. We shall weigh very carefully the points that he has made against the broader points behind Clause 58 which I have already mentioned. I fully appreciate that noble Lords will want to know our conclusion as soon as possible. I can assure the noble Lord that we shall consider the matter with urgency.

10.15 p.m.

Lord Graham of Edmonton

I am most grateful for the Minister's helpful response. With his deeper knowledge of those matters, he perceives my point quickly and sympathetically; namely, that if the Government want the use of underused land and want to house people at affordable rents, a balance must be struck between what I call the economic imperatives for the Government in the Bill, and their other considerations.

The Minister indicated that the matter would be considered urgently. Shall we have an indication of the outcome of those considerations before the next stage of the Bill? If so, I shall gladly withdraw the amendment and await correspondence.

The Earl of Caithness

I always try to please the noble Lord. The answer is, yes.

Lord Graham of Edmonton

I shall please the noble Earl even more by begging leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Graham of Edmonton moved Amendment No. 134B:

Page 66, line 7, at end insert— ("(7) Subsection (1) above does not apply to—

1. (a) transactions carried out in fulfilment of agreements under section 52 of the Town and Country Planning Act 1971;
2. (b) agreements with developers under section 38 of the Highways Act 1980.").

The noble Lord said: This amendment deals with substantially the same problem. In the previous amendment, we tried to come to a better understanding of the impact of the clause on housing associations and affordable rents. This amendment seeks to exclude from the definition of capital receipts contributions made by developers in respect of capital gains. The amendment allows discussion on joint venture arrangements between local authorities and the private sector. During the debate on the amendment in another place, the Government gave an assurance that genuine Section 52 agreements would not give rise to a capital receipt as defined in Clause 58. The Government are invited to confirm that that is still the case.

There is a fine dividing line between Section 52 agreements and other agreements which might broadly be termed barter schemes. Such schemes usually involve the provision of an asset for the local authority by the developer in return for, say, the provision of land by the authority for the development to proceed.

CIPFA—which is a body well known in the Chamber; the Minister has pleaded in aid the views of CIPFA on other amendments—has written to a number of noble Lords. I am in receipt of a copy of its views. It states: The Bill as drafted is designed to treat assets acquired by barter in the same way as it treats, say, leased assets or assets financed by loans … For example, if a local authority provides part of the land for a development and the developer provides, say, a 'free' library, school or leisure centre, even though no money changes hands, the local authority will be required to set aside a cash amount based on the notional capital receipt. It is unclear how the capital receipt will be valued. It is clear that this is likely to act as an obstacle to development. This issue is causing concern to both local authorities and developers".

The Minister is well aware of a development over the past 10 or 15 years before which it was unheard of that a developer might obtain planning permission in exchange for the ability to aid other council ambitions; for example, the building of a swimming pool or leisure centre. Some unkind people used nasty words to describe what that is and what the authority does when considering the award of planning permission in those circumstances. However, that is increasingly the way things are done. If a notional value—the receipt of £1 million or £2 million, for example—must be taken into account in that way, it is likely to inhibit very much not just the activities of developers—I have no brief for them—but also the ability of a local authority to strike the best deal for its ratepayers.

I should be grateful if the Minister could respond. I beg to move.

The Earl of Caithness

As the noble Lord has reminded the Committee, this matter was raised in another place. My argument is much the same as the argument made there.

There is no difficulty with genuine planning agreements under Section 52. Clause 58 only comes into operation where local authorities receive consideration in respect of a disposal or right of repayment or payment. Planning permission is not sold. No consideration is received for it. It is not an asset falling within Clauses 55 to 58. So, for example, if a local authority grants planning permission for a development subject to a new access road being constructed and the developer pays the authority to construct the road, Clause 58 would not bite because the authority was not disposing of an asset within the terms of Clause 55. Instead, Clause 40(2)(g) would apply and the developer's contribution could be freely capitalised without any provision for debt redemption by the authority.

Some confusion arises because the term "Section 52 agreements" has been used to cover other transactions. As well as these "pure planning agreements", there are agreements encompassing development agreements. An example of such an agreement might be where, as well as granting planning permission, the authority hands over land to a developer in return for a leisure centre. That was a point mentioned by the noble Lord.

I would remind the noble Lord, Lord Graham, that one of the principles behind the new system is that when a local authority disposes of a capital asset, whether for cash or for payment in kind, it should make some provision for debt redemption. In the example I quoted the authority is plainly disposing of an asset and for this it is receiving a new leisure centre. It is right that this sort of transaction should come within the system of capital finance. The proposed provisions distinguish the "pure planning" agreement from the "development" agreement. Therefore I contend that this amendment is unnecessary.

Lord Graham of Edmonton

Is the Minister saying that in the circumstances that I outlined there is or is not to be a notional cost to be taken into account by the local authority when looking at its capital receipts? No money may have changed hands but account has to be taken of the fact that it has received, shall we say, £1 million worth of goods (something that it would have had to spend £1 million on); that is to say, it has received something to the value of £1 million but has not in fact spent that money. If that is the situation, does the Minister not understand that this will be an inhibiting factor between local authorities and developers in proceeding with their business?

That is a consequece of the mechanisms that the Government are setting up. The Government may argue that, if the council has not freely received that facility, it would have had to spend the money in order to provide it. In that case the Minister is right. That is correct. However he will no doubt understand that if from now on that has to be taken into account, there will be consequences for local council finance.

I argue the case put forward by CIPFA, which is a respected body and speaks with authority, not necessarily directly on behalf of councils. It has pointed out to the Government that there will be this consequence. Will the Minister confirm that he is aware that this consequence is likely to be visited upon the local authority? The provision of facilities by local authorities will dry up because they will no longer be free.

I do not intend even remotely to argue in terms of "You get planning permission in exchange for". We do not argue that case at all, and the Minister is as careful as I am. However, as part of the arrangements it may turn out that a local authority has a road paid for by a developer—a road which is helpful to the development but even more helpful to the community. If in future that road will not be built because it will not be a viable proposition, does the Minister appreciate how likely that is to be detrimental to the activities of local councils?

The Earl of Caithness

I hear what the noble Lord has said. However, I go back to the principles of the precise terms of the agreement: whether they are pure planning agreements or development agreements. On the pure planning side such agreements do not fall within Clauses 55 to 58. If there is a development gain in it, it is quite right that it should be taken into consideration because it is a barter deal. The local authority has disposed of an asset and has received a benefit in return. That should be taken into account.

I disagree with the noble Lord when he says categorically that this would inhibit local authorities from striking the best deal, or indeed carrying out any development. Let me put this argument to him: that the opposite is true. In a barter deal the local authority can deal with only one person. Therefore it often would not strike as good a deal as it could have done on the open market. I add further to that. Because of the attractiveness of the barter deal it might be putting forward the wrong priorities in its eagerness to do the deal and therefore not fulfilling its proper role as a result. I contend that there is very much a counter argument to that of the noble Lord. I understand his fears but I do not think that they are well founded.

Lord Graham of Edmonton

We shall get no further with this matter. I am grateful to the Minister for understanding what I was driving at, although he stuck to his guns. From my experience, very often there are bitter arguments by unsuccessful applicants for development when they find out that the developer who obtained the planning permission may have received it because of his ability to satisfy the local authority in a number of ways that other applicants did not find necessary or were unwilling so to do.

It is not a black and white issue. The Minister is not correct in assessing the likely impact. He wishes to grip more tightly on the ability of a local authority to manage its money. I am saying that there are consequences, the outcome of which we shall have to await. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 58 agreed to.

Clause 59 [Aggregate credit limit]:

10.30 p.m.

The Earl of Caithness moved Amendment No. 134C: Page 66, line 10, after ("which") insert ("subject to subsection (1A) below").

The noble Earl said: With the leave of the Committee, I shall speak to Amendments Nos. 134E, 134F, 134G, 134H and 134M. I shall have to touch on Amendments Nos. 134J and 134K also because they are relevant but they do not stand in my name.

These amendments concern aggregate credit limit and were foreshadowed in my speech at Second Reading. They are relevant to local authorities with arrears of rent and other income.

Amendments Nos. 134F to 134L concern the temporary revenue borrowing limit, which is part of the overall aggregate credit limit provided by this clause. The temporary revenue borrowing limit, as the name implies, ensures that authorities are able to borrow to cover revenue expenditure pending the receipt of income. That is perfectly reasonable and necessary. An authority must raise sufficient income through community charge, rents and the like to cover its revenue expenditure. But if it needs to make some revenue payments before that income becomes available then, as long as the income is going to be received, it is reasonable for it to borrow until it arrives.

There has always been a power for local authorities to borrow for this purpose. At present it is contained in paragraph 10 of Schedule 13 to the Local Government Act 1972. That paragraph says that local authorities may borrow for the purpose of defraying expenses pending the receipt of revenues receivable by them in respect of the financial year in which these expenses are chargeable.

The difficulty with the present arrangements is that in practice it lasts forever, or at least for as long as the authority persuades itself that the revenue is receivable. So if an authority runs a cash deficit on its housing account because it does not collect the rents, it can borrow to cover that deficit. It can keep that borrowing for as long as it thinks the rents are receivable. But when is an outstanding rent no longer receivable? When it is overdue by three months; six months; one year; two years; when the tenant has left the house without paying or when it is not known who the tenant is? The trouble with the present system is that there is no limit. Opposition Amendments Nos. 134J, 134K and 134L would replicate that defect. They mean that there is no proper and recognisable cut-off point for the temporary borrowing limit. The Opposition amendments therefore have severe drawbacks.

Clearly there has to be a time limit. There has to be a point at which one can say that potential bad debts are no longer proper security for borrowing. That is what the temporary revenue borrowing limit in this clause addresses. Subsection (3) sets that limit. We originally proposed that the limit should be set at six months after the end of the year in respect of which the income was due. But, having carefully considered the representations of the local authority associations, we propose to extend the period to 12 monhs after the end of the financial year. This means that a local authority can borrow throughout year one and year two against rents and income due in year one. It must then raise income in its budget for year three for the outstanding arrears.

We are firmly of the view that the 12-month limit proposed in the amendments strikes the appropriate balance. On the one hand it will allow local authorities to manage their cash flow efficiently and on the other it will encourage better collection of rent and other income. A longer limit, or no effective limit, would allow certain local authorities to camouflage their failure by borrowing to manage the collection of rents. Irrespective of where the burden for rent and other arrears should fall, there must be a reasonable time limit set for borrowing against rent and income due. The amendments set a reasonable time limit.

That said, however, we do appreciate that there could be problems at the start of the new system of capital finance for authorities with the worst arrears. Amendments Nos. 134C and 134E will allow these local authorities to apply to my right honourable friend the Secretary of State for a direction increasing their aggregate credit limit. The increase in the aggregate credit limit would allow a local authority to borrow at the start of the new system to cover these arrears. In issuing a direction to increase the aggregate credit limit the Secretary of State may impose such terms and conditions as he sees fit. He could use this power to specify the manner and timescale for paying off the arrears. We have indicated that we will use the power to allow authorities to spread the budgetary provision for writing off these arrears over three to five years.

Finally, my Lords, Amendment No. 134M extends from 12 to 18 months the period during which local authorities can borrow against capital gains and contributions from third parties towards capital expenditure This extension follows representations from the local authority associations that 12 months is not sufficient. I beg to move.

Lord McIntosh of Haringey

The Minister asks rhetorical questions about when a debt is likely to be collectable or uncollectable. He gives examples of three months, six months, 12 months, when a tenant has moved or when nobody knows who the tenant is. There is a simple answer to that question, which is that a debt is collectable when the auditor certifies it as collectable. It is an established principle of private sector financing where at the end of each year there has to be a statement of bad debts and where a debt is outstanding for more than a certain period the directors of the company have to certify that a debt is collectable before it can be included in the accounts. The same would apply here. The auditor would be able, on the basis of past experience and without going into every single rent or rate arrear, to establish a perfectly reasonable principle upon which to assess the proportions of the debt outstanding for particular periods which would be collectable, and he could provide a certificate to that effect.

To that extent the 12-month limitation proposed by the Government is irrational. The claim which the Paymaster General makes that opposition amendments involve an unlimited extention of debts is not true. The ultimate control should be—and would be according to our amendments—the auditor rather than an arbitrary period as proposed.

However, I must express my gratitude even for the progress that has been made. An arbitrary 12-month period is better than an arbitrary six-month period. It is a rare pleasure to find my name tabled with that of the noble Lord, Lord Hesketh. Hesketh equals Caithness and Caithness equals Hesketh and I cannot keep track of who is on the Order Paper and who is at the Dispatch Box. It is a rare pleasure to find an amendment in the name of both the Government and the Opposition. It would be churlish to do other than say that this is better than what we had before.

I should like to know whether the Paymaster General has an adequate answer to my claim that the auditor's decision about collectability should count.

The Earl of Caithness

In a perfect world the noble Lord is right. However, I am certain he will agree that notwithstanding their auditors' comments and reports certain authorities have in practice allowed bad debts to run on indefinitely. It is right that we should draw the line where we have.

During the past 18 months I have had the considerable privilege of debating a number of Bills with the noble Lord, Lord McIntosh. I have immense respect for his capability for work and his knowledge of a wide range of subjects. I am grateful for the way in which he has handled all the business we have dealt with together. I hope in particular that the noble Lord will pass on my comments to his noble friends Lord Dean of Beswick and Lord Graham of Edmonton.

I was so stunned by one comment made by the noble Lord, Lord Dean, that I forgot to reply. He said that Ministers in this Chamber do not make policy. I wonder what I have been doing for the past 12 months on housing. I believe that the noble Lord is slightly out of date or is thinking of glorious times in another place. Ministers in this Chamber make a great deal of policy.

I thank the noble Lord, Lord McIntosh, for his courtesy and the way in which he has handled the business. I look forward to opportunities to debate with him in future.

On Question, amendment agreed to.

The Earl of Caithness moved Amendment No. 134D:

Page 66, line 16, at end insert— ("but the reference in paragraph (d) above to approved investments and cash does not include investments or cash held for the purposes of such a superannuation fund or trust fund as is referred to in paragraph (h) or paragraph (i) of subsection (2) of section 40 above").

On Question, amendment agreed to.

The Earl of Caithness moved Amendments Nos. 134E to 134H:

Page 66, line 16, at end insert— ("(1A) On an application made by a local authority, the Secretary of State may direct that, for any period specified in the direction, the amount which, apart from the direction, would be the authority's aggregate credit limit at any time during that period shall be increased by an amount specified in the direction with respect to that period; and any increase specified in a direction under this subsection may be expressed to have effect subject to compliance with such terms and conditions as may be so specified.").

Page 66, line 23, at beginning insert ("the aggregate of—(i)").

Page 66, line 26, at end insert ("and (ii) any relevant arrears in respect of which provision has been or is to be charged to such a revenue account or which have been or are to be written off and charged to such a revenue account; and for the purposes of paragraph (b)(ii) above "relevant arrears" are amounts in respect of income which remain to be received by the authority and which, as income fall to be credited to a revenue account of the authority for the financial year beginning two years before the beginning of the current financial year.").

Page 66, line 27, leave out ("the first six months of").

On Question, amendments agreed to.

[Amendments Nos. 134J to 134L not moved.]

The Earl of Caithness moved Amendments Nos. 134M to 134P:

Page 66, line 43, leave out ("twelve") and insert ("eighteen").

Page 67, line 2, after ("cash") insert ("referred to in paragraph (d) of subsection (1) above").

Page 67, line 3, leave out ("paragraph (d) of subsection (1) above") and insert ("that paragraph").

On Question, amendments agreed to.

Clause 59, as amended, agreed to.

Clause 60 [Duty to set certain amounts aside as provision to meet credit liabilities]:

Lord McIntosh of Haringey moved Amendment No. 134Q:

Page 67, line 37, at end insert— ("(6)(a) The calculation of the minimum revenue provision referred to in Part IV of Schedule 3 to this Act shall permit other proper practices to be used for the redemption of debt; (b) A local authority shall determine its minimum revenue provision in accordance with proper practices and the duty to determine such provision shall be performed before the beginning of the financial year to which the provision is to relate").

The noble Lord said: This provision has given rise to a considerable amount of accountancy controversy. I am not an accountant and I find some difficulty in doing anything other than applying a common sense, layman's thinking to it. The original Government proposal was that there should be a method of determining the provision to be set aside for revenue account to meet credit liabilities on what is called equal instalments of premium.

I had not realised that the noble Earl was leaving us. I would have reciprocated his good wishes. Perhaps the noble Lord, Lord Hesketh, would be good enough to convey them to him because I had not realised that he had both ceased to move amendments and was leaving the Chamber.

On representation from the local authority associations, the Government have now changed to what is called a reducing balance basis. When this was proposed in Standing Committee in another place, the then Minister of State and now Secretary of State for Agriculture—and one has to keep up—not only defended the new method of calculating the revenue provision, but he made two claims about it. The first was that that was in accordance with local authorities' wishes. The second was that it was necessary for all local authorities to have the same debt redemption arrangements.

I challenge both of those claims. First, although the local authorities undoubtedly prefer the reducing balance method to the equal instalments of premium, they would prefer the much more common method of using sinking funds and annuities which have been well established in local authorities. However, above all they would prefer that, as at present, the method of debt redemption should be left to them in accordance with proper practice which is, as we have already seen, a definition of proper accountancy policies set out in Clause 64(3).

There is no good reason why local authorities should not have different policies for debt redemption. They always have done and that has not caused any confusion whatever. This is an unnecessary and nasty little piece of intrusion into local authorities' financial responsibilities. I regret that the Government should seek to lay down the law. It does not do anybody any harm, within the definition of proper practice controlled by the Secretary of State, to have a variation of methods to suit local needs. I beg to move.

Lord Hesketh

I shall certainly bear the felicitations and good wishes of the noble Lord to my noble friend the Paymaster General.

The amendment would allow local authorities to choose any system they like for redeeming debt so long as it was consistent with proper practices. This matter has been aired in another place and there is disagreement between us and the Opposition. Clause 60 and Part IV of Schedule 3 provides that local authorities should use the reducing balance method of debt redemption, unless the Secretary of State provides otherwise by regulations.

First, I should make clear that we are talking about prescribing a minimum of debt redemption provision for an authority for each year. It is the proper role of central government to set out the framework or in this case the minimum requirement. But authorities will be free to make greater provision, and how they treat the provision they make in their accounts will be a matter for them.

It is nothing new for central government to prescribe a method for debt redemption. There is a method of debt redemption provided for in the existing legislation. It is the annuity method, which is the basis on which a normal repayment mortgage works. It is provided in paragraph 7 of Schedule 13 to the Local Government Act 1972. We are repealing that legislation in this Bill, so it is perfectly reasonable that we replace it with some statutory method of debt redemption. We cannot simply leave matters to be decided entirely by accounting codes. I would remind the Committee that proper practices can be either statutory or non-statutory. Indeed, the majority of proper practices are to be found in legislation rather than elsewhere.

Part IV of Schedule 3 sets out a proper practice in relation to provision for credit liabilities. Past experience has shown that any room for doubt may lead to confusion, and some authorities may take the opportunity to exploit any uncertainty. We accept that proper practices have a role to play. But that role is complementing the statutory framework. They should flesh out the statutory skeleton. The question is what method should form that skeleton, not whether there should be a method.

We have chosen the reducing balance method. Our proposal is a compromise. It seems much more widely welcome to local authorities than the original proposal—the equal instalment of principal method or straight-line method as it is sometimes known.

We firmly believe that the reducing balance method is the correct approach for prescribing the minimum revenue provision. This amendment would replace it with freedom for authorities to choose any method that could be said to conform to the proper practices. I am afraid that past experience has shown that authorities are all too ready to change this method from year to year—by varying sinking fund rates, for example—so as artificially to defer or bring forward expenditure. That is bad for accountability. For those reasons I urge the Committee to resist the blandishments of the noble Lord, Lord McIntosh, on this occasion and to resist this amendment.

10.45 p.m.

Lord Winstanley

Before the noble Lord sits down, in conveying the good wishes of the noble Lord, Lord McIntosh, to his noble friend Lord Caithness, perhaps the Minister will convey also the good wishes of my noble friends on these Benches. I am quite sure that my noble friend Lord Ross of Newport would have wished to say this had he been able to be here.

Lord Hesketh

It gives me great pleasure to be twice blessed as the postman carrying felicitations to my noble friend.

Lord McIntosh of Haringey

As long as the Minister accepts that it works both ways: we shall shoot the messenger if he brings bad news. I believe that the Minister has set out very clearly in his reply the reasons why we find these amendments necessary and the Government's proposals unacceptable. He is very simply saying that the men in Whitehall and Marsham Street decide that what they think goes and that local authorities will follow whatever accountancy method these men find preferable.

There is a perfectly adequate provision of proper practice which rules out matters that would run the risk of lack of accountability, which is the charge that the Minister made. There are already in existence codes of practice agreed between local authorities and central government which lay down rules concerning debt redemption. Our view is that those rules are good enough. There should be no reason why a particular method, which may be appropriate for some authorities and not for others, or may be appropriate at some time and not others, should be imposed on all local authorities at all times. As the Minister said, this has become a matter of straight disagreement. We are not going to persuade him. It is another example of overprescription by central government on the practices of local government. I find it deeply unacceptable. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 60 agreed to.

Schedule 3 [Provisions supplementing Part IV]:

Lord Hesketh moved Amendments Nos. 134R and 134S:

Page 152, line 36, at end insert— ("(2) Any reduction or extinguishment of a n authority's basic credit approval under this paragraph shall be regarded as taking place immediately after the approval is received by the authority.").

Page 152, line 41, at end insert— ("(2) Any reduction or extinguishment of an authority's basic credit approval under this paragraph shall be regarded as taking place immediately after the approval is received by the authority.").

The noble Lord said: I beg to move these amendments en bloc.

On Question, amendments agreed to.

Schedule 3, as amended, agreed to.

Clause 61 agreed to.

Clause 62 [Information]:

The Earl of Arran moved Amendment No. 134T: Page 68, line 7, leave out ("has acted, or is") and insert ("have acted, or are").

The noble Earl said: On behalf of my noble friend, I beg to move this amendment and at the same time speak to Amendments Nos. 134U, 134V, 134W and 134X. These are drafting amendments. They are important because, although there: may be some differences between Members of the Committee on the substance of Part IV, I am sure we are all agreed that the grammar should be correct. Some people like their local authorities to be singular. Others like them to be plural. Parliamentary draftsmen are no exception to this. In some Acts of Parliament the words "local authority" are treated as a singular noun; in others they are plural. Part IV follows the pluralist road but a few references to local authorities in the singular crept into Clause 62. These amendments correct these oversights to bring Clause 62 into line with the rest of Part IV. In that context, I commend the amendment to the Committee.

Lord McIntosh of Haringey

Some draftsmen may prefer their local authorities singular and some of them plural. We prefer our local authorities independent. The Government propose to have them completely under the thumb of central Government. That is the difference which divides us on Part IV and on so many parts of this Bill.

However, we are about to adjourn the proceedings of the Committee until October without completing the progress of the Bill, and we—the select band who are still here—shall have the pleasure of meeting again in October. I have in no way been more convinced than I was of the virtue of the Bill. In fact, I have become even more convinced of its many vices. Despite that what I am grateful for is the unfailing courtesy of Ministers on the Government Front Bench and above all the support of my own colleagues and that of colleagues on the other Opposition Benches. I wish all of them on all sides of the Committee a very happy and restful Recess.

Lord Hesketh

Perhaps I may intervene in order to reciprocate the feelings just expressed by the noble Lord, Lord McIntosh of Haringey. It has been a lengthy Session, and this is a lengthy Bill which we are only half way through. But I take this opportunity of wishing all those on both sides, and particularly on the opposite Benches, a very restful Recess in preparation for the autumn.

Lord Winstanley

I thought some of us had to be here tomorrow.

On Question, amendment agreed to.

Lord Hesketh moved Amendments Nos. 134U to 134X:

Page 68, line 14, leave out ("it has") and insert ("the authority").

Page 68, line 26, leave out ("fails") and insert ("fail").

Page 68, line 30, leave out ("has acted, or is") and insert ("have acted, or are").

Page 68, line 36 leave out ("has acted, or is") and insert ("have acted, or are").

On Question, amendments agreed to.

Clause 62, as amended, agreed to.

Clause 63 [Interpretation of Part IV]:

Lord Hesketh moved Amendment No. 134Y: Page 69, line 37, after ("doubt") insert ("except as provided by section 42(4A) above").

On Question, amendment agreed to.

Clause 63, as amended, agreed to.

The Earl of Arran

I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.