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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,

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

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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.

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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

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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

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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

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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

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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

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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

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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.

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