HL Deb 29 July 1997 vol 582 cc124-38

4.45 p.m.

The Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions (Baroness Hayman)

My Lords, I beg to move that this Bill be now read a second time. The Government are committed to promoting opportunities for public-private partnerships because they offer the opportunity for increased value for money and innovation in the provision of the services that national and local government need. Mr. Malcolm Bates, chairman of the Pearl Group, has recently completed a rapid review of current private finance initiative and public-private partnership arrangements. His review was published on 23rd June. One of Mr. Bates's recommendations was to take speedy action to overcome the uncertainty over local authority powers to enter into public-private partnership contracts. The Bill aims to achieve that.

The Bill clarifies the powers of local authorities to enter into contracts for the provision or making available of assets or services. It also provides a "safe harbour" through a certification procedure to protect contractors and lenders from the possibility that a local authority may not have had power to enter into a contract or may have exercised its powers improperly.

Certain recent high profile cases have led contractors and banks to fear the financial consequences of a finding by the court that a contract with a local authority is unlawful, and therefore unenforceable, because the authority had no power to enter into it or because it exercised its power unlawfully. The contracts in question were bank guarantees, and in each case the consequence of the court's judgment was that the bank concerned had to finance the losses of companies set up to carry out work in connection with local authority functions. Because the contracts were found to be void, the private sector had no recourse to the authorities for compensation and so found itself saddled with bad debts.

Those cases did not involve new principles of law and concerned arrangements quite different from the great majority of local authority contracts, but the views expressed by the courts on them have resulted in a commonly held perception that providing finance for local authority contracts, particularly long-term partnership contracts, poses an unacceptable level of risk. That is a perception we must overcome if public-private partnerships are to work successfully in local government. We want to act quickly to dispel any doubts there may be in the minds of potential backers of local authority schemes, including public-private partnership schemes. The Bill aims to achieve that. It clarifies local authority powers. It also protects contractors and banks if things go wrong when they have been relying on an assurance by an authority that the authority has been acting within its powers.

It is the innovative features of public-private partnership schemes, compared to more traditional procurement contracts, that are perceived as likely to give rise to questions about the existence or exercise of local authority powers. The Bill will concentrate the minds of local authorities on this issue when they enter into contracts. It should reduce the chances of local authorities acting outside their powers.

The Bill does not disturb the fundamentals of existing legislation with respect to local authority powers. It does nothing to alter the scope for contracts to be challenged under public law. The court will have the same powers to review the exercise of a local authority's discretion to enter into a contract. It is essential to leave in place such powers for the protection of the local tax payer. For the same reason, the Bill does nothing to undermine the long-standing powers of the auditor to question the lawfulness of local authority conduct or expenditure.

I now come to the specific provisions of the Bill. Clause 1 makes it clear that a statutory function of a local authority confers power to enter into a contract for the provision of assets or services for the purposes of, or in connection with, the discharge of that function. The Bill is here not extending authorities' powers but making explicit what was already implicit. It covers contracts which are for the purposes of, or connected with, the discharge of a function, such as providing education or social services or leisure facilities. The Bill does not affect the exercise of an authority's implied or subsidiary powers, but an authority will no longer need to rely on those, including Section 111 of the Local Government Act 1972, in order to enter into those sorts of contract.

The Bill does not change the law which regulates the power of local authorities to delegate their functions. Part II of the Deregulation and Contracting Out Act 1994 empowers a Minister to make an order to allow an authority to contract out the exercise of a function. One such order is being prepared in connection with highways functions, because delegation in that area is necessary to underpin an effective PPP project. Contracts in other service areas seem less likely to entail delegation, but government departments could consider making similar orders, if necessary, in relation to other local authority functions.

The Bill provides a "safe harbour" to protect contractors and lenders from the possibility that a local authority may not have had power to enter into a contract or may have exercised its powers improperly. To achieve that, Clauses 2 and 3 introduce a certification procedure for contracts of a description then specified in Clause 4. In essence, they are contracts for five years or more involving the provision of services. The issue of a certificate (but not its content) has to have the consent of other parties to the contract because the legal rights of all parties are affected by the certificate in ways that I shall now describe.

Unlike the certification procedure under the recently enacted National Health Service (Private Finance) Act, the large number of authorities within the scope of this Bill makes it impracticable for Ministers to certify contracts individually. Also, such intervention by Ministers would weaken local authorities' responsibilities and their accountability, which is not a path that we would wish to take.

The effect of Clause 2 is that no one (including the authority, the contractor, and any other party to the contract) may argue in private law proceedings that a certified contract is unenforceable because the local authority did not have the power to enter into it or used its powers improperly. However, Clause 5 preserves the right of local tax payers or the authority's external auditor to challenge certified contracts under public law; that is, in judicial review and audit-related proceedings. Where there is a judicial review the court already has the discretion to allow a contract to continue if that is in the public interest. Clause 5(3) gives the court an equivalent discretion in audit-related proceedings. To meet the case where the court determines that a contract is to be set aside, the Bill provides for the enforceability of special terms agreed between the parties with that possibility in mind.

It would be open to the parties to agree a range of different discharge terms. Clause 6 provides that the enforceability of discharge terms would be unaffected by the setting aside of the certified contract. The aim of discharge terms would be to make provision for compensation and for dealing with the assets made available under the certified contract. Clause 6 also safeguards discharge terms by providing that they shall have effect as if the authority had power to agree them and used its power properly. Clause 6 makes clear the authority's power to agree discharge terms and that the enforceability of terms is unaffected by the setting aside of the main contract.

It is possible that discharge terms may be challenged on the ground that they do not simply provide for compensation or for dealing with the assets made available under the certified contract. Also, of course, the parties may not have agreed any discharge terms. Clause 7 provides that in either of those events, where a certified contract has been set aside, the contractor shall, nevertheless, be compensated as if the local authority had repudiated the contract. This provision is an ultimate long-stop, and the parties to a certified contract would be most unlikely to need to fall back upon it.

There are several other provisions in the Bill to which I should like to draw the attention of the House. Clause 1(2) confirms that, where a third party funds a contractor, the authority may enter into a separate contract with the financier, who could be a direct lender to the contractor or a person involved in other forms of finance, for example, bond issues. Such a contract might also include an arrangement whereby the financier would be able to nominate a replacement contractor if, for example, the original one became insolvent. The protection afforded by the certification procedure and discharge terms are extended to contracts with financiers.

In England and Wales, the Bill will apply to all bodies covered by Part IV of the Local Government and Housing Act 1989 and to probation committees and the receiver for the Metropolitan Police district. It will also apply to Scottish local authorities as defined in the Local Government (Scotland) Act 1973.

The Bill confers powers to make regulations. In particular, there are powers to regulate the certification procedure, which I have already explained, dealing with matters such as signature and the issue of copies, and power to make regulations about the kind of contract that can be certified under the Bill.

Clause 9 amends the Justices of the Peace Act 1997, so that revenue grants may be made to local authorities to meet payments under partnership contracts in respect of magistrates' courts. For technical reasons, the capital finance rules currently classify such payments as capital expenditure.

The details of the Bill reflect discussions and close working relationships with interested parties, including the Local Government Association, the public-private partnerships programme, and lawyers representing banks and contractors. Consultations have continued, following the Bill's introduction in another place. A consultation paper was issued on 16th June. Should the results of the consultations prompt the Government to bring forward further amendments, it will be done at Committee stage in your Lordships' House. There will then be a third round of consultations on the details of the secondary legislation, once the broad coverage of the regulations is established.

This is a short Bill, albeit a technical one. I hope that I have managed to explain its provisions clearly. We aim for it to be in force by November. Speed is important in this matter. Although there are provisions in the Bill which will allow it to bite on contracts entered into at any time after 12th June, it is probable that many contractors and banks would prefer to see the Bill in force and consider its provisions as enacted by Parliament before entering into a long-term contract which could be certified under the Bill. I beg to move.

Moved, That the Bill be now read a second time.—(Baroness Hayman.)

4.58 p.m.

Lord Bowness

My Lords, I thank the Minister for her explanation of the Bill. Local government Bills are described as either technical or simple, but they are usually complicated. While this Bill has relatively simple objectives, it is, nevertheless, confusing in some aspects.

Let me say straight away that we on these Benches support the general thrust of this measure and would wish to see it come onto the statute book within the timescale that the Minister indicated. There is no doubt that it has been brought about by the need to ensure that PFIs are not to fail because of private sector doubts that a local authority has the legal capacity and the power to enter into the contract or the partnership deal. I am certain that the doubts were brought about by the Hammersmith and Fulham cases surrounding the authorities trading in the money market (the swaps cases) and the losses that banks and others suffered as a result of the contracts proving to be ultra vires; and, indeed, by other high profile cases that were referred to when this matter was debated in the other place.

I hope that the Minister will be able to give the House comfort that, notwithstanding the passage of this Bill, such cases are now not to become possible under this legislation. I understand that that is the case, but an assurance on the record would be very welcome.

The previous government started PFI and encouraged it. There were problems in some directions, which has always been acknowledged. However, it was an initiative which has been of—and still has the potential to bring—enormous benefit to the public sector. Indeed, I say to the noble Baroness that it has become so popular that certain prominent members of the Labour Party now claim it to have been an original Labour Party idea. If that is true, they must have been very unpopular with many of their colleagues in the country, particularly those in local authorities, because it was seen as an extension of privatisation.

We on this side welcome the fact that PFI is now to be encouraged as much by this Government as by the previous one. I hope that the relatively new enthusiasm will continue to spread despite the original hostility in some quarters. We also welcome the fact that the protection given to the party contracting with the local authority and for allied contractors does not in any way diminish the opportunity for challenge by judicial review and audit, the challenges under public law referred to by the Minister in her introduction. That is an important protection.

However, there is one matter upon which I should be grateful if the Minister could throw some light. It seems to me—if I am wrong I shall be pleased for the Minister to point out where I am wrong—that one issue remained unresolved during the progress of the Bill through the other place. On a number of occasions the Minister of State was asked whether, in the event that a certified contract was found by the courts to be unlawful, there could be any challenge to the discharge terms. She was later asked whether there should be a specific provision to the effect that, before setting aside a contract, the court should have to consider the consequences for the parties arising from the discharge terms.

In Standing Committee B on 1st July the Minister said: I keep receiving notes and, as this is open government, members of the Committee should know what they are saying to me. The latest note says that discharge clauses can, indeed, be challenged and that clause 7 establishes a fall-back position. Another note says that the clause does not empower courts to set aside contracts. It allows them to continue in audit review by bringing in discretion in judicial review to refuse to give what has been applied for.—[Official Report, Commons, Standing Committee B. 1/7/97; col. 37.] I remain somewhat confused on reading that and submit that the position is still far from clear. The Minister based her rejection of the requested amendment to give effect to that specific provision on Clause 5(3) which requires the court to act as it would upon judicial review and to take into account all the circumstances. The problem nevertheless of the discharge terms which may be unreasonable remains unaddressed.

Indeed, the answer seems to indicate that, if in determining that the contract was unlawful the discharge terms were so unreasonable, the contract should nevertheless continue. I do not believe that that can be what was intended and I certainly do not believe that it is desirable. The position on the face of the Bill as it stands—it may not be what was intended—is still not clear. As the Minister explained, Clause 6 reads, No determination or order made in relation to a certified contract on an application for judicial review, or an audit review, shall affect the enforceability of any relevant discharge terms relating to the contract". Clause 7 in part—I need not trouble the House with the whole clause—reads, Subsection (2) applies where the result of a determination or order made by a court on an application for judicial review or an audit review is that a certified contract does not have effect, and there are no relevant discharge terms having effect between the local authority and a person who is a party to the contract. That person shall he entitled to be paid by the local authority such sums", and so forth. Clause 7(3) goes on to say, For the purposes of this section there are no relevant discharge terms having effect between a local authority and a person who is a party to a contract if no such terms have been agreed, or the result of a determination or order made by a court is that any such terms which have been agreed do not have effect". I suggest that on the face of it there is a conflict. I am sure that the best legal brains have been brought to bear on this subject but clarity and certainty would be helpful and are needed for the members and officers of local authorities. It would be disastrous for the Bill and PFI initiatives—and unhelpful at the least—if there were to he a succession of cases in relation to the enforceability of discharge terms.

The Wednesbury rules on reasonableness continue to apply. Some legal authorities are saying that even if the Bill ensures that local authorities cannot escape from their obligations to third parties, they cannot escape the Wednesbury rules. All the risk is then with the council. If that is the case, who will be paying? Will it be the council tax payer or, in extreme circumstances, the members or the officers? Thus, we need to ensure that one difficulty over making PFI work is not replaced by another.

As I said to the Minister—it may be hard to believe in the light of the questions I raise—we on this side welcome the Bill. We welcome the fact that PFI is so high up the Government's agenda, as we welcome all instances where our arguments have prevailed. We look forward to hearing from the Minister either this evening or, indeed, in Committee clarification on the points which I believe are of concern and perhaps threaten the success of the initiative set out in the Bill.

5.7 p.m.

The Earl of Balfour

My Lords, it is a pleasure to follow my noble friend Lord Bowness. I am in almost the same position. It is seldom that I refer to the first clause of a Bill but I am amazed that the first words are, Every statutory provision conferring or imposing a function on a local authority confers power on the local authority to enter into a contract with another person". It goes on to say that "a person" can be "the financier". Those seem to me to be incredibly wide powers. I ask the Minister to consult a little over the drafting.

I want to refer to only one other clause: Clause 4(2) on page 3. It says, A contract entered into by a local authority falls within this subsection if it is entered into with another person for the provision or making available of services…for the purposes of, or in connection with, the discharge by the local authority of any of its functions, and it operates, or is intended to operate, for a period of at least five years". That subsection appears to be incredibly restrictive. I would have been happier if it had been the clause, but the subsection seems to be limiting the function of the clause very tightly.

Further, are the Government wise to specify a period of at least five years? I realise that sometimes such things as public sector borrowing requirements cover long periods. But is it in the best interests of the Government to specify that the period is not allowed to be under five years? Otherwise I agree with my noble friend; this is a perfectly reasonable Bill. The points I raised were technical ones, but I feel that the Government may be restricting themselves unduly.

5.9 p.m.

Baroness Hamwee

My Lords, we on these Benches are not opposed to the Bill and I hope that is self-evident. We welcome the confirmation of local authorities' powers. I regard it as a bit of an opportunity missed, though I hope less an opportunity missed than one postponed.

As has been said, this is a technical Bill. I was alarmed to read that the Minister in another place, on Third Reading, said, It is with great pleasure that we come to the Third Reading of what I admit is an exceptionally complex Bill. None of us is certain that what we want from the Bill is what we will end up with. Unfortunately, that is the nature of such legislation".—[Official Report, Commons, 8/7/97; col. 831.] I am sure that all noble Lords and the officials concerned with the Bill have higher aspirations than that. Perhaps that was an example of the endearing openness to which the noble Lord, Lord Bowness, referred.

I was a little late getting to my feet after the speech of the noble Earl, Lord Balfour, as I was reflecting on the clauses to which he drew your Lordships' attention. Clause 4(1) sets out what is probably a Henry VIII provision, providing for regulations to amend the previous two subsections, but I hope that it will not be necessary. Certainly we on these Benches will not hold up the Bill on technicalities. The Government have clearly had no shortage of advice during the passage of the Bill but it seems to be just the kind of Bill that would have benefited from being published in draft in order that full consultations could have been held before the Bill arrived in another place and indeed before it came to your Lordships' House.

I must take this opportunity to say that, although we shall not obstruct the passage of the Bill, it is a Bill about symptoms and not about causes. It adds another bureaucratic step to what is already a complicated process. We often talk about the alien who lands on our planet and what he might think having seen how we go about certain things. If he arrived here and encountered many aspects of the way we are governed he might find a good deal that is odd. He would certainly find Clause 1(1) of the Bill a little odd because it seems to amount to saying that where a local authority has a function, it can enter into a contract to discharge that function. Most of us would think that obvious and it is a pity that it requires such complicated legislation to ensure that it is the case.

It might need an alien with a sense of history to start thinking about the creative accountancy in local government, which might have been part of the provenance of Clause 2. It gives statutory blessing to what some might regard as creative accountancy. I shall not talk about the sale of parking meters—I am not sure that that was to provide services—but the fact that local government went through such hoops over recent times in order to raise funds to provide services speaks volumes.

The purpose of the Bill is to remove doubts about the validity of local authorities contracting with financiers but I cannot accept that the private finance initiative is the panacea that some people would have us believe it is. It is not a cost-free arrangement. Indeed, there are many criticisms of PFI based on the fact that it costs rather more than if local authorities have greater freedom to raise their own finance as the interest rates are often higher. The problem that is not addressed by the Bill is the capital restrictions on local authorities. The Government's hands are tied in the matter of spending and they seem willingly to have allowed their hands to be tied with regard to the matter of local authorities' powers. Despite saying that, I make it clear that I have never argued that local authorities should be able to benefit from acting outside their powers in the way that must have appeared to be so in the stream of cases involving local government to which other noble Lords have referred. I well understand the worry in the minds of potential partners caused by that stream of cases.

All three major parties in local government want wider powers for local government. The Liberal Democrats have long argued for a power of general competence—in other words, general freedom for local government to do what it thinks is best for its community. I understand that the Government are proposing a new duty for local government to promote the economic, social and environmental well-being of its residents. However, I do not think that local government needs a new duty; it needs extended powers.

The European charter for local self government, to which considerable reference was made in the debate in the House last week on relations between local and central government, provides in the article on the scope of local self government that local authorities, shall within the limits of the law have full discretion to exercise their initiative with regard to any matter which is not excluded from their competence nor assigned to any other authority". The Select Committee, on Relations between Central and Local Government, while not going as far as advocating the power of general competence, proposed a power of local competence. Paragraph 6.28 of the Select Committee report states: Local government needs encouragement to innovate, to be more interactive with local opinion". That is partly to attract good people as both councillors and officers. It continued: The current constraints on freedom and on the ability to act as local community leaders, combined with a fear of failure, have further demoralised local government. This culture needs to change if local government is to play its role as community leader and to manage a mixed economy of service delivery". The freedom to do things differently, including the freedom to fail, and the ability for local government to play its role of community leader, are fundamental to the health of local government.

We shall not obstruct the Bill. We hope to see it on the statute book in short order. However, we look forward to measures that will ensure the long-term vigour of local government, not just measures to prop it up.

5.17 p.m.

Baroness Miller of Hendon

My Lords, as my noble friend Lord Bowness and my honourable friend in another place have made clear, Her Majesty's Opposition support the general principles of the Bill.

The private finance initiative was launched by the Conservative Government some five years ago with the aim of harnessing private sector resources and management and enterprise skills to improve both the quantity and quality of public capital projects and to enable necessary products to go ahead despite any restraints that might be imposed by the Treasury or the PSBR. It is true to say that the rate at which PFI projects were initiated was slower than many of us would have wished. Nevertheless, by April of this year nearly £7 billion worth of PFI contracts had been entered into.

Radical measures were introduced by the previous government in the autumn of 1996 which, by removing some of the restrictions, have facilitated or will facilitate the inception of design, build, finance and operate projects—DBFO—for schools, transport, police facilities and many municipal facilities. These will enable local councils to provide services without cost to their capital resources.

In January, the Treasury launched new guidance on best practice in PFI. Major projects that had already been signed up for by that date, as a result of the previous government's pioneering of PFI, include Dartford Bridge, the second Severn Bridge, the Skye Bridge, Heathrow Express and the University Hospital of Wales. I suspect that, but for PFI, all of these ventures might still be languishing in the "pending" tray at the Treasury.

Although the Labour Party has to some extent claimed to approve of PFI, that approval has not always been more than lukewarm, especially among some of its members and allies. Hospital projects have been condemned as privatisation of the National Health Service. In its policy document Renewing the NHS, published in June 1995, it said: we will do our utmost to discourage the signing of PFI contracts". Strangely enough, in the Second Reading debate in the other place, the Minister of State nevertheless chose to intervene in the speech of my honourable friend to challenge him on the number of PFI hospitals that were in the pipeline or secured under the previous government. On 20th April, during the recent election campaign, UNISON, the trade union heavily involved with the NHS, in a motion to the Scottish TUC called on the Labour Party to end the PFI.

The Association of Magisterial Officers has condemned the PFI schemes to build much needed new courts in Hereford and Worcester as "wholly inappropriate". I spent most of my 20 years as a magistrate in a courthouse that was wholly inappropriate to the dispensation of justice simply because the money could not be found to build the larger modern one that the district urgently needed.

Soon after taking office, the environment Minister expressed reservations in Construction News about DBFO schemes on the basis that, it is better to build the road yourself because you don't have paybacks in future years". Only just one year ago the Deputy Prime Minister, who was then the shadow environment spokesman, called on the Government to, recognise the limits of the PFI approach". Despite its new-found enthusiasm for PFI, I trust that the old Labour instincts against it will not result in similar objections to other DBFO schemes in local government.

In the Second Reading debate the Minister of State said, the Government are committed to public-private partnerships". The word "partnership" is significant and that has not been stressed in either House. In PFI the entire financial risk and the responsibility for the proper performance of the contract rest with the third party, not on the Government, the local council or other public body. That is the whole point. As long as there is any financial risk either as to capital or running costs, the PSBR and Treasury constraints continue to apply, as well as all the bureaucratic paraphernalia of administering the project. In a so-called partnership then an element of those risks continues to fall on the public purse.

I now turn to the Bates report, commissioned by the Government immediately after they came to power in order urgently to review the whole concept of PFI. Not surprisingly, it came out in favour of the continued use of this method of financing public projects and indeed recommended refinements that could be made now that the idea was not only acceptable but had, with time, matured in the light of gained experience.

I welcome the fact that, according to a reply given in the other place on 10th July by the Paymaster General, the Government say that they have accepted the 29 recommendations of the report. Introductory paragraph 3 proposes highly skilled departmental procurers of goods and services. Such an organisation already exists in the semi-public sector. I refer to the Crown Agents, of whom I used to be one and who can doubtless provide the standard of service, integrity and expertise that they do to overseas governments.

Bates says, PFI transactions require a level of commercial knowledge and project management". The report calls for deal-making expertise, standard or model contract conditions and a dedicated Treasury library of relevant documentation. I agree. But the Government have followed the recommendation of the Bates report by scrapping the private finance panel, including three senior legal positions. The outgoing deputy chief executive, Mr. Edwin Godfrey, has warned that this could lead to government departments being understaffed in key areas. Mr. Godfrey is a partner in a leading firm of City solicitors who has been engaged in the standardisation of PFI contracts.

Another leading City legal firm says that the shortage of expertise within the Government is such that the Government cannot always be regarded as an equal partner in PFI deals. However, I am very glad to have seen a report in the Law Society's Gazette of 23rd July that several of the major City and provisional firms of solicitors have specialised teams dealing with PFI contracts and are able to provide major input into new transactions on both sides of the fence. Some Government departments have self-standing PFI units, but others such as education and the Home Office do not, and there will be an urgent need to recruit staff with adequate expertise.

With the welcome creation of the PFI task force, I hope that the Minister will be able to reassure us that in the public interest of having adequate contractual protection they will take the fullest advantage of private sector expertise until they have fully acquired it within the Civil Service.

This Bill has been necessitated, as other speakers have pointed out, in order to clear up doubts about the powers of local councils and other public bodies and organisations to enter into the types of contract described in the Bill. All of this is grist to the lawyers' mill, as they live on legal doubts.

This Bill is complementary to the Local Authorities (Capital Finance) Regulations 1997, which were introduced by the previous government and to the National Health Service (Private Finance) Bill. Its intention, according to the Department of the Environment's press release, is to restore confidence in the partnership process.

Subject to more detailed examination in Committee, this Bill is similar to one which the Conservative Party would itself have introduced. For this reason, and because we welcome the Government's conversion to the private finance initiative, we wish the Bill well and we will help to ensure that it reaches the statute book.

5.25 p.m.

Baroness Hayman

My Lords, I am grateful to the speakers in this afternoon's debate who have given support for the general purposes of the Bill that I am putting before the House. It comes a little ill to be lectured from the Opposition Benches about the private finance initiative and the late conversion to it, when we have long held to the concept of true partnership with the private sector and when the rosy picture painted of the success of the private finance initiative over the past few years is not one that I easily identify from my own experience, particularly in the National Health Service. I cannot believe that any of us on this side of the House would be willing to be judged by anything other than our actions in this field.

The actions that the Government have undertaken since they came to power to make a reality of some of the rhetoric about private finance that was heard from the last government, is something for which we can genuinely take credit in this area. If it had been so perfect I am not quite sure why the National Health Service (Residual Liabilities) Act that was passed by the last government did not work. The last government were having to prepare legislation. The noble Baroness, Lady Miller, accepted that they would have had to introduce legislation such as that which we are introducing in order to make the Bill work.

However, I know that your Lordships' House does not like entering into petty party political squabbles of this sort, so perhaps I can return to the technicalities of local government finance with which Members opposite may be more familiar than I am. I shall try to deal with the points that have been raised in the debate.

In replying to the points that have been raised, it may be useful to return to the reasoning behind the introduction. As I said earlier, following the various high profile court cases that have taken place, there has been doubt in the private sector about the powers of local authorities entering into contracts with the provision of assets and services. It is because of the need to clarify those powers that, perhaps to the noble Baroness, Lady Hamwee, Clause 1 is slightly otiose. But I believe that it is necessary. I say to the noble Earl, Lord Balfour, that it was necessary to frame Clause 1 in this way because it then clarifies the whole range of existing powers and duties that local authorities have in order to enter into contracts.

We were concerned that investors felt that they might suffer financially if local authorities were found to have acted ultra vires. It is the Government's policy that local authorities should explore the scope for partnerships with the private sector to achieve the best value for money in delivering services to the community. Doubts about local authorities seem most likely to arise in proposals for public-private partnership contracts.

Perhaps it would be helpful if I respond to the comments of the noble Lord, Lord Bowness, about the powers under this legislation. It is certainly not intended in any way to make it easier for local authorities to enter into the sort of interest rate transactions to which I believe he was referring. The Bill simply confirms the ability of local authorities to carry out the scope of their existing functions through contracts. The legislation does not extend in any way the permitted functions of those authorities.

The measures provide a framework within which local authorities and the private sector can work together in confidence, but they in no way undermine the rights of local taxpayers and auditors to challenge authorities where they have acted unlawfully. I am grateful for the support that we have received this evening for that aspect of the Bill.

The noble Baroness, Lady Hamwee, referred to some of the technicalities and said that publishing a draft Bill might have been useful. I can understand those comments, but they have to be balanced against the need for prompt action in this area. Private finance schemes in the local authority sector have been slow in developing. Indeed, no scheme has yet got to the stage where construction work has actually begun. That is why we felt it necessary to introduce legislation early in the Session and to get it on the statute book as soon as possible.

Perhaps I may now refer to some of the specific points that have been made. I turn first to the noble Earl, Lord Balfour, who asked whether the five-year limit is too restrictive. One of the balances is between the layer of bureaucracy which it has been suggested we are adding to the process of setting contracts for local government and the need to provide clarity. We envisage that the certification process will apply to contracts involving substantial long-term financial exposure to lenders. That is why it has been recognised in the five-year limit.

The noble Lord, Lord Bowness, asked a "multi-party question" (if I may put it that way) about the discharge terms and referred to the notes that were passed and read out in another place. In the spirit of equally open government, I offer the noble Lord the note that was passed to me in the hope that it sheds some light on the three issues that he raised. If it does not, I am sure that we can return to this matter in Committee. The issue of discharge terms is technical. The noble Lord's first point related to whether there can be a challenge to the discharge terms. They can be challenged on the grounds that they do not provide reasonable compensation to the contractor. Compensation could be excessive and not justifiable. In effect, they would not be real discharge terms and they would therefore be subject to challenge.

On the second point about whether the courts can take into account an authority's position, I advise the noble Lord that the courts can take all factors into account in deciding whether contracts should be allowed to continue, but we are considering whether an amendment to the Bill might provide further guidance on this point. Perhaps we may return to the point in later discussions. Thirdly, in the event of there being no discharge terms, damages are payable as if under repudiation. Repudiation occurs when a party to a contract simply terminates payment or duties unilaterally. That is basically a breach of contract and there is well-established case law to deal with such circumstances. We would be putting these contracts on the same footing.

I hope that those comments deal with some of the points that have been made in this Second Reading debate. However, perhaps I may say one or two things about other possible amendments. Ministers in another place committed the Government to consider how authorities might be required to make certificates available for public inspection. In Committee we intend to bring forward an amendment to provide for such a requirement. Again, in Committee we shall table an amendment to Clause 9 which was sponsored by the Lord Chancellor's Department. The amendment will be tabled at that department's request and relates to the finances of magistrates' courts, which is an issue that is dear to the hearts of those noble Lords who have spoken in this debate.

The noble Baroness, Lady Hamwee, raised the issue of the general power of competency. I recognise her concerns in this area. It is not the Government's policy to provide that local authorities may do anything that they might wish to do. There would clearly have to be limits on a general power of competency. Local authorities ought not have unfettered power to undertake any activity that they choose. The Government believe there should be a different approach, one which puts an emphasis on the power of community initiative: the power of authorities to pursue the economic, social and environmental well-being of their area. The Government wish to examine ways in which pilot studies on a wide range of issues can be developed: in the areas of best value, regeneration, community planning and partnership, and democratic innovations. All of those topics have already been discussed in your Lordships' House.

I return now to the Bates Review of private finance initiatives and to the Government's action with regard to public-private partnerships. On 8th May the Paymaster General announced the end to universal testing—the rule that all projects had to be tested for private finance potential. On the same day, Mr. Bates was asked to launch a rapid review of how the private finance initiative was working. His conclusions, published on 23rd June, were that public sector structures must be simplified and responsibilities made clear. A Treasury taskforce has been set up covering both policy and central input on projects. This ended the confusion over who is responsible for what at the centre and will make the best use of the available resources and expertise.

Mr. Bates made a number of recommendations which have implications for local authority projects and my department is studying these carefully to decide on the action to be taken. In particular, the department will be working with the new Treasury taskforce and the public-private partnerships programme to agree respective roles and responsibilities for public-private partnerships. Above all, the policy of encouraging a public-private partnership approach in local government will continue. This means, for example, that we shall continue to make available the revenue support, to the tune of £200 millions worth of investment costs for 1997–98, which was announced last October.

One of Malcolm Bates' conclusions was that action is required to clarify local authority powers to enter into these contracts. The Bill achieves this. Further conclusions concern the need to make smaller projects viable and to consider any obstructions still presented by the existing capital finance regulations, notwithstanding earlier changes. We shall be considering very carefully the action required on this.

The Bill reflects our manifesto commitment to public-private partnerships. The resources are available. We want to remove any legal uncertainties which might obstruct an approach which promises high quality services to communities and good value for money. It will then be up to the local authorities and their private-sector partners to show what they can do.

The partnership approach requires effort, commitment and initiative on the part of local authorities, but we are certain that given this new framework they will be able to rise to the challenge. On the part of the private sector, it also requires confidence in the legal machinery. It is of course the role of the entrepreneur to take a reasonable risk, and a main aim of the partnership approach is to ensure that the private sector bears those risks which it is best equipped to handle. The fear has been that contractors and their funders could sustain heavy losses for reasons quite outside the normal range of commercial risk. We believe that the Bill will allay those anxieties. It will create the necessary climate of confidence in which partnerships can flourish.

The Bill is the outcome of close collaboration between the Government, local authorities and the private sector. We have fully responded to the concerns and suggestions put to us by bankers and legal experts. The Bill fills the final gap in the existing legal framework for partnerships.

A great deal has been said today about the difficulties of making such partnerships work in practice. The Government are committed to doing that and this Bill is one of a range of measures which have been undertaken within the Government's brief term in office because we are committed to turning some of the rhetoric on public-private partnerships into reality. In that spirit, I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.