Second Standing Committee on Delegated Legislation
Tuesday 6 March 2001
[Mr. John Cummings in the Chair]
Local Government Finance (England) Special Grant Report (No. 76)
The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Ms Beverley Hughes): I beg to move,
That the Committee has considered the Local Government Finance (England) Special Grant Report (No. 76) (House of Commons Paper No. 233).
It is a great pleasure to serve under your chairmanship, Mr. Cummings, and I am sure that we will make good progress.
The report is highly technical. Hon. Members who were present at our sitting in June will remember the turmoil that was caused by references to x, y and z. That is partly why I arranged for the Chairman and all Committee members to receive an informal guide that explains, in as ordinary language as possible, what the special grant seeks to achieve, and why a scheme endorsed under the private finance initiative needs to be paid special grant. I hope that everyone has found that helpful.
As hon. Members know, the Government are committed to using various forms of public-private partnerships wherever they will promote best value in the delivery of public services across the country. The report demonstrates our continuing commitment to those partnerships and will allow us to pay grant to local authorities that have satisfied us that their projects will improve local services and offer better value than other options.
Since taking office, we have encouraged local authorities to explore the use of PFI in a growing range of service areas. We have made extensive changes to the regulations that control local authorities' capital financing arrangements, and we have removed some technical obstacles that stood in the way of PFI deals. We have achieved our overall aim of establishing PFI as one of the mainstream procurement options for local government.
We have achieved that success not only because of changes in regulations, but because of the arrangements that we have set up for the allocation of resources in the local government sector. A key feature of the process is the project review group, an interdepartmental body that is now chaired by the Office of Government Commerce. It meets several times a year to assess thoroughly projects that have requested Government support. Projects endorsed by the group are issued with what are called PFI credits, which are part of the formula for calculating the final grant. Once a project is endorsed, it is authorised to receive grant, and has an assurance to that effect. The private sector can then be more certain, when it bids for a contract, that the local authority can afford the project.
We have significantly increased the investment that supports PFI schemes. More than £3 billion of PFI credits were made available in the period 1997-98 to 2001-02. Last year's spending review increased by some 28 per cent. the funds that had previously been provided for 2001-02. The total funds allocated by 2003-04 will be double those allocated in the previous spending review. Local authorities can take advantage of significant resources.
The support has led to high-quality schemes, which, in turn, are bringing vital new investment to localities. Hon. Members might have discovered that in their constituencies. PFI is becoming a familiar way for local authorities to improve local services.
We endorsed the eleventh group of local government PFI projects in December. That brought the total number of endorsed schemes in all types of authorities and many different parts of the country to 148. The schemes cover a wide range of services such as new schools, road maintenance, street lighting, community and health care centres, social housing and the development of electronic information networks. That demonstrates the adaptability of the PFI approach and the energy with which local authorities have pursued the opportunity that it presents.
I shall explain briefly why we provide revenue support for PFI schemes through special grant. Authorities that procure capital assets in the traditional wayby borrowing and buyingnormally receive Government support towards the cost of borrowing from their revenue support grant. However, authorities that opt for PFI face the significant and continuing revenue cost of regular payments to the PFI contractor. Special grant is intended to cover the capital element of those continuing payments; usually up to 70 or 80 per cent. of the overall amount.
In principle, support for PFI schemes could be paid through the same machinery that is used for normal revenue support grant for traditional capital programmes funded by borrowing. However, some practical problems are solved by using special grant instead. In particular, the use of special grant ensures that we do not pay grant before the authority starts to make payments to the contractor. That is a significant advantage.
The Government are committed to giving revenue support to those authorities whose PFI schemes have been endorsed. It is necessary to continue giving revenue support through the special grant until the review of local government finance has been completed. I can assure hon. Members that whatever changes are made in the revenue support distribution system as a result of that review will take account of all existing PFI commitments when future levels of revenue support are determined.
Mr. William Cash (Stone): Will the Minister confirm that the special grant is a supplement to deal with the shortfall that some local authorities, particularly the group of 40, are suffering as a result of the failure to generate sufficient standard spending assessment, which many authorities, including Staffordshire, believe they lack? Is this a supplement to fill the gap that some counties are suffering?
Ms Beverley Hughes: No, Mr. Cummings. I do not accept the basic premise of the hon. Gentleman's assumption. All local authorities have received substantially more in funding since 1998-99 as a result of the Government's settlement with local authorities than they ever received during the previous Government's terms of office. The hon. Gentleman knows that real-terms cuts were made to local authorities' annual settlements compared with considerable real-terms increases under the present Government. I do not accept his point.
The report is part of the revenue support process. Annex A sets out those authorities that are eligible to receive special grant; annexes B and C explain the way in which the grant is calculated; and annex D sets out the conditions under which it is paid. I apologise for the technical language of the report, but hon. Members will know that it is a legal requirement to draft it in that way. As so often with grant regimes, the need for financial rigour means that the underlying method of calculation appears complex. However, I hope that the informal guide has been helpful.
There have been no significant changes this year in the way in which special grant is calculated, but there has been a slight change to clarify for authorities the point from which the grant should be paid. That will allow the amount paid to be based on the start of the period covered by the first payment instead of the month in which an authority makes the first payment. That is helpful. Another change will allow the grant to be paid for services that were made available during the previous financial year. Instead of going into more detail now, I shall do my best to respond to any points raised by hon. Members.
In summary, we have provided substantial extra resources for local authority projects so that the benefits of the PFI can be spread more widely around the country. It is importantlocal authorities consider it essentialthat we approve the revenue support arrangements to the authorities listed so that they can get on with their projects. Approval of the report will be welcomed by others working on PFI projects to improve local services. I commend the report to the Committee.
Mr. Geoffrey Clifton-Brown (Cotswold): It is a pleasure to serve under your chairmanship for the first time, Mr. Cummings. I pass on to you and to the Minister the apologies of my hon. Friend the Member for Eastbourne (Mr. Waterson). He has important business outside the House and cannot be present, so I am speaking in his place. I thank my hon. Friends the Members for Stone (Mr. Cash) and for Chipping Barnet (Sir S. Chapman) for turning up to support me.
As usual, the Minister has done her homework diligently and has given the Committee a cogent explanation of a highly technical measure. We welcome it in principle, because the Conservative party conceived the idea of the private finance initiative in the first place. That initiative enabled the Government recently to announce a huge increase in the hospital building programme. The special grant report covers 74 authorities, and we are pleased that they will benefit from PFI and from the payments granted by the report.
I am grateful to the Minister for her explanation, but I want to ask her one or two detailed questions. She did not make the size of the budget for the special grant entirely clear. She said that it will be £4 billion over three years, but she also mentioned a figure of £3 billion. She went on to say that in 2003-04 the budget will be double that of previous years. Will she clarify that statement in relation to the 74 authorities that have benefited and say what the figure will be in future? Will she tell the Committee whetherand, if so, howthe Government will encourage more local authorities to move towards PFI instead of the conventional mechanisms such as borrowing through capital receipts?
Will the Minister comment on the 70 to 80 per cent. of the capital grant that is being paid back under the special grant? I may have misunderstood the report, but I took it to mean that factor Z includes a notional repayment of 4 per cent. of the principal, which implies that the principal would be paid off over 25 years. Can the Minister explain how that will work, given that PFI projects vary in length between 15 and 30 years? Those that are paid off early may have been paid more through factor Z than they would warrant, while projects of a 30-year duration may lose out.
When I was a member of the Public Accounts Committee and we considered PFI projects, often not a great deal of risk had been passed. The excellent booklet entitled ``Local Government and the Private Finance Initiative''which should be required reading for every Member of Parliamentmakes it clear that risks should be passed.