Clause 3 - Duty to determine affordable borrowing limit
Local Government Bill
3:15 pm
Mr John Pugh (Southport, Liberal Democrat)
I seek clarification from the Minister about the clause. I have to go at 3.45 pm, so I will not be here to hear his clarification. However, I shall read his answers with assiduous care in Hansard.
I accept that the Bill will place local authorities under a duty to produce a borrowing limit of some kind and to state it; I am not clear whether it is a ratio or a cash limit that they need to state, none the less they will have to state a limit and keep to it. If they wish to vary it, the regulations prescribe that they should hold a council meeting. Is there not a danger that the Bill may build in bureaucratic inflexibility by producing more council meetings than are necessary? At the moment, there are not many of them and members have little to do under the new cabinet system, but we do not want them to do unnecessary work. We want them to be prudent and we want all members of the council to be aware of the risk, but it seems to me that limits can be exceeded for a variety of reasons.
If the Government mismanage wholesale the country's economy, interest rates may have to go up dramatically, which might put a council on or over the limit. Under normal circumstances, the director of finance would suggest re-phasing of the capital programme and looking at slippage and so forth at the cabinet meeting or the policy resources meeting. He would not consider it necessary to hold a full-scale council meeting to make ordinary adjustments. I am concerned not so much about that scenario but about others that I am not sure are catered for.
The Minister has sensibly reserved himself the power to disapply some of the regulations, but I am not certain whether disapplication would work in
some of the following scenarios that I shall sketch out. I am referring to councils that wish to run major schemes, such as Manchester with the Commonwealth games and Sheffield with the student games. Clearly, they must put their exposure on such issues to their local electors and to the full council, but there are circumstances during the progress of contracts for such schemes in which their capital exposure will go up temporarily and they will be a relatively good business proposition for the council. The public good may be secured thereby, but temporarily the councils will edge over the limit if they are already close to it.
Of more immediate concern is how councils are expected to react to failed schemes in which the contractor goes bust and for a short time they are contractually exposed, perhaps to a considerable extent. I shall cite an example from my own experience. The contractor Christian and Nielsen went bust while conducting a major refurbishment of Southport pier, which is now happily complete. During that period, the council was financially exposed and had to cover for capital funds that were not provided through the contractor performing in the way that was expected. The cost of the job went up substantially when the contractor left the site.
Under those circumstances, what is a local authority to do? I do not think that my local authority would have gone over its prudential limit if it increased its capital limits, but a hypothetical authority might do so in such circumstances. What should it do? Should it de-commit to a major scheme, abandon other schemes or simply walk away from the job and see what happens?
In the case of Southport pier, the council required settlement on a bond, but that bond was only sorted out two or three years after the contractor went bust. In a sense, the council behaved prudently in accepting extra capital expenditure, and it performed a noticeably good public service. Under the old scheme, they would have had to ask the Minister for special capital approval. I am not certain whether current arrangements allow for that, so I should like the Minister to comment on the question.
How would the Minister react if a local authority approaching its prudential limits were faced with a proposition whereby the capital financing of a scheme would be considerably lessened by an up-front capital commitment from the local authority? I am familiar with such schemes, under which the contractor attempts to minimise his risks. Eventually, the capital risks of the local authority and the contractor may be diminished, and the cost of the project may come down. Would that be out of order, or would an authority have to make an application to the Minister in respect of such a scheme?
The key questions are how the idea of prudence will be interpreted, and whether, with the best will in the world, there might be circumstances in which, although a prudential limit is set, the public good may be served by varying it, albeit temporarily.