Clause 7 - Credit arrangements
Local Government Bill
10:15 am
Mr Philip Hammond (Runnymede and Weybridge, Conservative)
Amendments No. 32 and 50 amendments seek to address the PFI exemption, if we can call it that, from the limits. Amendment No. 50 seeks to include all PFIs as credit arrangements. We have approached the issue in a slightly different way, but the intention is clearly the same. Amendment No. 32 is linked to amendment No. 36, to which we will come later. Amendment No. 36 would remove the power that the Secretary of State has under clause 8(4), which has been used to lay draft regulation 7(3)—the regulation that effectively exempts PFI contracts from this process.
We have sought to analyse what a PFI contract is and to identify the fact that often one part of it will effectively be the procurement of a capital asset and another will be the provision of a service. If we are to
see through the structures that are put in place and look at the fundamental transaction, we must see a PFI arrangement as being a credit arrangement for the provision of an asset and then a services contract on top of that. Amendment No. 32 seeks to identify the part of the liability that is akin to a credit arrangement for a capital asset, and to treat it as being on a level playing field with other credit arrangements in terms of borrowing limits. However, it would allow the part of the PFI contract that represents the fee for the provision of services to be treated as a separate matter outside the constraints of the capital borrowing regime.
The problem with the approach proposed by the Liberal Democrats is that, by including the whole of the PFI arrangement within the areas to be taken into account in calculating the use of borrowing limits, there would be a danger of catching something that should not be caught—the provision of a service. For example, in a PFI contract for a building, the capital cost of the building element should properly be caught, but the provision of maintenance and support and security services should not. That latter element should be treated as more akin to revenue expenditure.
We accept, as the hon. Member for Kingston and Surbiton suggested, that it is wrong for local authorities to be pushed into particular forms of transactions because of the arbitrary exclusion of PFI liabilities from the calculation, but we believe that the solution is to divide the PFI liabilities into two separate component parts and to take into account the part that is similar in nature to a capital transaction. Draft regulation 7(3) would exempt PFI from the restriction on the use of credit for the provision of services, but would not address the capital element that might exist in a PFI contract.
A further concern that should be addressed in considering the clause is the apparent assumption that all leases are equivalent to liabilities. On the face of it, a lease is a liability, but it is possible that the asset has an offsetting value. An example would be a local authority that has a 20-year lease on a building that it partly occupies itself, but partly rents to a major supermarket chain. The whole cost to the authority of that lease over time should not be treated as a net liability. It is a gross liability, but it is offset by a net asset, in terms of the rolled-up stream of income that will be generated from the part of the building that is sub-let. I am not sure that the arrangements proposed by the Under-Secretary cover that, because they seem to me to treat the lease of all assets, including buildings, as a future liability to be rolled up and capitalised at the outset.
I would also like the hon. Gentleman to address the way in which the Bill proposes to treat PFI deals. The proposal would not only mean that PFI deals would be excluded from the capital controls but also, in practice, allow the hypothecation of a revenue stream in preference to the general creditors of the local authority for the provision of that capital asset.
Great play has been made elsewhere of the continuation of the arrangements whereby all local authority debt ranks pari passu. However, by financing an asset such as a building through PFI,
and thus making payments for the use of that building—not repayment of debt as would be the case if the money had been borrowed, but the payment of a service fee under a PFI contract—that obligation is ranked ahead of payments to other unsecured creditors of the local authority. That is important because, as the hon. Member for Kingston and Surbiton pointed out in another context, it is driving local authorities towards entering into certain forms of transaction rather than others. We believe that the Government should be neutral about the form that the transactions take.
I look forward to hearing the Under-Secretary's detailed analysis of why the clause is necessary. Everyone recognises the significance of PFI transactions and the use to which local authorities can put them, but the Committee is concerned about local authorities being steered in the direction of one type of transaction rather than another that would possibly not be in their best interest, if it were not for an artificial incentive provided by the clause.