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Lord Hanningfield: I thank the Minister for his answer. We feel that it is possible to separate them. Some projects are very much capital orientated. For example, in Essex we built a road under the PFI scheme that cost 120 million. That is essentially a capital scheme. As the Minister said, some projects such as schools are both capital and revenue projects. However, one could separate the capital element from the revenue element. That is why a very substantial project such as a 120 million road scheme should be taken very much into consideration when considering the prudential borrowing of a local authority.

Perhaps the Minister could look again at the matter before we reach Report stage. We have to clarify the relationships between some of these enormous PFI

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schemes and the other borrowing arrangements of local authorities. Perhaps we could provide more evidence to the Minister before Report stage on exactly how that might work. The Government might like to look again at the whole issue.

Lord Rooker: I am quite happy to receive any evidence. I realise that I am going to be rapped over the knuckles for the caveat which I gave at the end of my reply. However, when I read:

    "The required results are achieved by the legislation as already drafted and the amendment is unnecessary",

I thought that the amendment is doing something that we do not agree with anyway. I hope that I have that right. I am sure that I will be told if I am wrong. The amendment seeks to separate out the various bits of the PFI contract. I spent 10 minutes saying that that could not be done, but I then said that it is unnecessary. So unless I am wrong about that, I think that one of my sentences was inoperative.

Each contract has to be looked at to see whether as a package it would score against the borrowing limits. I do not know—I have no experience in this area—whether it is as plain as a pikestaff that some PFI contracts self-evidently do not score against the limit. However, because of the way in which a package is put together for the bidding process, it is inevitably complex and difficult when a package is then split. However, I shall be happy to receive any evidence that the noble Lord wishes to give me between now and Report.

Lord Hanningfield: I thank the Minister for that. The noble Baroness, Lady Hamwee, highlighted some of the problems in her amendment. We are not seeking in our amendments to reduce freedom and flexibility, but one should take very large capital schemes into account when considering the borrowing arrangements for local authorities, to ensure that that is properly dealt with in the overall arrangements. I shall not press the matter now but I am sure that we will return to it on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 agreed to.

Clause 8 [Control of credit arrangements]:

[Amendment No. 33 not moved.]

Lord Hanningfield moved Amendment No. 34:

    Page 4, line 22, leave out paragraph (a).

The noble Lord said: As we have said several times in the Bill's early stages, we welcome the greater flexibility that the Government are proposing for local authorities under the prudential regime. However, we are still concerned that some of the detail has not been properly thought through. For example, we are not quite clear what is meant by the "cost" of an arrangement. It is also not clear from Clause 3 that there is an absolute requirement on the Government to clarify that issue through regulations. If that is the intention, perhaps the Government could take this

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opportunity to explain what they mean by the "cost" of an arrangement, and to tighten up Clause 3 to make that clear. I beg to move.

Lord Rooker: Again I hope that I can satisfy the noble Lord. Knowing the sort of thing that is in my notes, I hope that I can do that without a full frontal attack on some of the things that local government got up to in the past. Nevertheless, I will begin at the beginning.

Amendment No. 34 relates to Clause 8 which makes further provision about credit arrangements. That term has already been defined in Clause 7, which has been agreed to. The purpose of Clause 8 is to specify how credit arrangements are to be taken into account under the capital controls. The amendment would delete subsection (2)(a) which provides that entering into credit arrangements is to be treated as undertaking an equivalent amount of borrowing, for the purposes of applying the borrowing limits set out under Clauses 3 and 4. Without this provision, the capital controls would apply when authorities took out loans but not when they undertook other forms of credit. Authorities would have to take account only of straightforward borrowing transactions when considering the limits prescribed under the legislation.

That would recreate the loopholes of the 1980s which the present system was designed to plug. In the 1980s authorities found that they could evade the borrowing controls that then existed by acquiring capital assets through leasing and other forms of credit. However, the use of such kinds of credit arrangement has exactly the same financial effects as borrowing. At the local level, it creates long-term revenue commitments which may prove unaffordable. At the national level, there is the same increase in public expenditure which would arise if the authority had borrowed money to buy the assets outright. Credit arrangements must therefore be taken into account both for the purposes of the local affordable borrowing limit and any national limit that may ever be imposed.

The amendment leaves in place subsection (2)(b) which would apply the capital controls to the variation of a credit arrangement, such as extending an existing lease. However, it is even more important to cover the entry into completely new leases and other credit arrangements, because that provides the greatest scope for evasion of the controls. That is why subsection (2)(a) is so vital to the system. In the 1980s many local authority treasurers and others made their name by getting round some of those issues and controls by using the wheezes set up at that time.

I have just received a note relating to the earlier comments of the noble Lord, Lord Hanningfield. No, it does not. It essentially says, "Please do not leave the room without talking to me, so we can be helpful on the previous amendment".

Paragraph (a) is necessary. Given the expertise of those in local government and of their advisers, it would not be very clever to create loopholes by leaving it out. That would be the inevitable consequence. We are not saying that people are hell-bent on distorting

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the system. However, where there is a possibility for that to happen, where there is a loophole and where it is legal, treasurers will advise their councillors accordingly. They will look at the local circumstances and say, "The Government have not banned it. We will get on and do it". In this case, we do not want to create the loophole.

Lord Hanningfield: I thank the Minister for that response. I accept much of what he says. One wants to be quite clear what the regime stands for and about the possibilities within it. However, I still think that in order to make the Minister's comments just now completely understandable, the Government could tighten up Clause 3. I tabled this probing amendment because we were not clear what was meant by the "cost" of the arrangement. That has now been explained very fully. It would be appropriate for that to be spelled out in the Bill. Perhaps the Minister could re-examine the wording of Clause 3 in order to ensure the clarity of the Government's proposal.

Lord Rooker: I have also received a note which draws my attention to the draft regulations which we have in front of us. Paragraphs 5 and 6 are perhaps helpful by defining the concept of the cost of credit arrangements as the amount of the liability shown in the authority's accounts. So the draft regulations may be able to answer the query.

Lord Hanningfield: I thank the Minister for that and beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hanningfield moved Amendment No. 35:

    Page 4, line 30, leave out subsection (4).

The noble Lord said: It seems that the Secretary of State wishes to impose additional restrictions on the power of any particular authority to enter into credit arrangements. Those restrictions are too far-reaching. Will the Minister explain what form those "additional restrictions" may take and in what circumstances they might be applied? We are concerned that this provision allows the Secretary of State to intervene in a local authority's affairs at will. It may not be the intention of this Secretary of State to exercise this power in a high-handed way, but who can say to what ends the powers might be put at some future date? We are unhappy about such general powers appearing on the statute book without a clear explanation of their purpose and the circumstances in which they might be used. I beg to move.

7 p.m.

Baroness Hamwee: We support the amendment. I suspect that the Government do not know what circumstances would give rise to imposing additional restrictions. The point of the subsection is to allow us to deal swiftly with any good wheezes that clever local authority treasurers might find. I can put it like that in view of the way in which the Minister replied to the previous amendment.

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It is potentially quite a heavy-handed provision. There is a degree of game playing between central and local government in trying to find ways around restrictions. That may sound more sinister than I mean. I refer to the way local authorities seek opportunities to exercise the freedom all of us believe that they should have. There is a bit of a game about this, not unlike individuals and companies seeking to avoid rather than evade tax provisions. It is quite something to be given such a wide power, and we support a restriction on it.

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