Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I beg to move amendment No. 33, in

clause 8, page 4, line 3, leave out 'cost of' and insert

'capital value of the assets made available under.'.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

With this it will be convenient to discuss the following amendments:

No. 34, in

clause 8, page 4, line 5, leave out 'cost of' and insert

'capital value of any additional assets made available under the arrangement as a result of'.

No. 35, in

clause 8, page 4, line 7, leave out from second 'the' to 'and' in line 8 and insert

'capital value of an asset'.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Amendment No. 33 is designed to probe the Government's proposals. Clause 8(2) says that, in applying the borrowing limits,

''for the purposes of subsection (1) . . . entry into a credit arrangement shall be treated as the borrowing of an amount of money equal to the cost of the arrangement''.

Amendment No. 34 would delete the words

''cost of''

and insert the words

''capital value of the assets made available under the arrangement''.

I expect that the Minister's response will be that the Bill will work as the amendment suggests. If so, we need only an explanation of precisely how.

The cost of the arrangement should not be treated as the equivalent of the borrowing costs. When a local authority borrows £1 million, we do not treat it as having borrowed the £1 million plus the interest to be paid over the lifetime of the loan. We treat it as having borrowed simply the capital amount. Similarly, if a local authority chooses to enter into a credit arrangement instead of borrowing, we should treat the equivalent sum to be set against the borrowing limit as the capital value of the assets to be acquired or used under the credit arrangement. That should be self-evident.

The provisions in subsection (3), which allow the Secretary of State to define by regulations the calculation of the cost of a credit arrangement, may mean that the provision in subsection (2)—that the cost will equal the cost of the arrangement—is undermined. We already have draft regulations before us, which I am afraid do not help me in trying to get to the bottom of the matter. Regulation 5 says that, for the purposes of clause 8(2),

''the cost of a credit arrangement or variation of a credit arrangement shall be the amount of the liability in respect of that arrangement or variation which is shown, in accordance with proper practices, in the authority's accounts.''

My question to the Minister will undoubtedly ask him to draw on the detailed briefing on accounting standards that he will have had in preparation for the Committee. Will he say whether the amount that would fall under draft regulation 5 to be treated as the cost is only the amount equivalent to the capital value of the asset and excludes the amount that is akin to a debt service cost if the asset or use of the asset were financed by conventional borrowing? If so, I suspect that my amendment is redundant, but it means that the Bill is extraordinarily obtuse. Subsection (2)(a) is specific and will appear clear to the layman—that the amount is to be

''treated as the borrowing of an amount of money equal to the cost of the arrangement''.

The clause then gives the Secretary of State the power by regulation to redefine the cost of the arrangement.

It would be better if it were explicit in the Bill that the amount of money to be taken into account is equivalent to the capital assets made available under the arrangement. I shall be content to thunder against the obscurity of the drafting rather than the substance if the Minister confirms that the amendment is redundant, because the provision I have sought is in fact provided for under draft regulation 5.

Mr Andrew Turner (Isle of Wight, Conservative)

I, too, was mystified by the meaning of ''cost'' in the clause, largely for the reasons set out by my hon. Friend the Member for Runnymede and Weybridge. I was also slightly concerned by his alternative definition of the capital value of the assets made available, but I shall return to that in a moment.

The cost of the arrangement could have the meaning set out by my hon. Friend: the aggregate borrowing, plus the cost of interest and other repayments, plus the fees involved in setting up the arrangement; or it could refer merely to the fees in setting up the arrangement. I, too, would like to hear from the Minister which of those definitions he intends should be covered by ''cost'' on the three occasions on which it occurs in the clause.

My hon. Friend's alternative proposal suggests that borrowing by local authorities is designed to create an asset. On many occasions borrowing by local authorities is designed to pay for a liability, not to create an asset and certainly not necessarily to create an asset of a value equivalent to the amount of money borrowed.

Let me give you an example, Mr. Conway. If a local authority borrows money to build a house on a piece of reclaimed land, it is more than likely that the value of the house on the open market will be less than the aggregate cost of building the house and reclaiming the land. In other words, the asset's value is not equivalent to the sum borrowed, let alone the sum borrowed, plus the interest paid, plus the costs of the arrangement.

A second example might be for the construction of an ice rink, swimming pool or other facility. As many of us who have served on local authorities know, ice rinks, swimming pools and other facilities have huge maintenance costs. Sometimes local authorities have to pay the private sector to take these wretched facilities off their hands because the maintenance costs are so great. It cannot therefore be construed that the capital value of the asset made available under the arrangements is equivalent to the cost of making the arrangement or the value of the sum borrowed.

Then there is the cost of a coastal protection measure. A coastal protection measure has no intrinsic or asset value. It only has a value in terms of the amount of money spent on it. I would like to ask the Minister, in responding to the amendment, to clarify what is meant by ''cost'', which is the thrust of the amendment. I have been a little critical of my hon. Friend's alternative, but perhaps the Minister could do what my hon. Friend has valiantly tried to do. I believe an amendment is required.

Mr Christopher Leslie (Parliamentary Secretary, Cabinet Office; Shipley, Labour)

What a pleasure it was to hear the hon. Member for Isle of Wight try to help the hon. Member for Runnymede and Weybridge. In many ways, he said what I was about to say about the amendments and the phrase

''capital value of the assets''.

The amendments relate to clause 8, which is mainly about the calculation of the cost of credit arrangements. It enables the details of what is inevitably a somewhat technical procedure to be covered in regulations, and we have provided the Committee with copies of the draft regulations.

As the hon. Member for Runnymede and Weybridge pointed out, regulation 5 indicates what we have in mind. The cost of the credit arrangement is to be decided as far as possible by accounting practice, rather than by special rules devised by us. It will normally depend on the amount of the long-term liability under the new contract as shown in the accounts. That will reflect the value of the payments that the authority is committing itself to make over the life of the contract. A broadly similar effect is achieved under the present system, but only with extremely complex rules and formulas in the legislation. The present principle is sound, but we hope to achieve the same result much more simply through reliance on accounting concepts.

Amendments Nos. 33, 34 and 35 suggest an alternative way of calculating the cost of a credit arrangement, by reference to the capital value of the assets made available under it. I accept the amendments in the spirit in which they were intended—as probing amendments designed to tease out what the Government mean. I will not seek to demolish them on technical grounds.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Go on, try.

Mr Christopher Leslie (Parliamentary Secretary, Cabinet Office; Shipley, Labour)

Most of the demolition job was done by the hon. Member for Isle of Wight, who speculated on the definition of costs and mentioned what would happen if the borrowing cost were different from the capital value of the asset. As anyone who has a mortgage knows, certainly from the experience of negative equity under a previous Administration, the amount borrowed will not necessarily equal the value of the asset.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The Under-Secretary's point is irrelevant. The Bill refers to

''the cost of the arrangement''.

In a credit arrangement, that will be the value of the asset, the cost of the asset, plus the servicing costs over the life of the arrangement. The fact that the asset may have a declining value will not affect the payments that have to be made under the credit arrangement. I am trying to get at whether it is appropriate that the element of the credit arrangement that is tantamount to the debt service cost should be included in the capital value in the case of a credit arrangement, although it is not included where the local authority borrows and purchases the asset. In that case, only the amount of borrowing, not the stream of debt service costs, will count against the borrowing limit.

Mr Christopher Leslie (Parliamentary Secretary, Cabinet Office; Shipley, Labour)

I take the hon. Gentleman's query seriously, but my concern, which must be considered in the context of the prudential borrowing regime and the affordability test, relates primarily to the affordability of such contracts. The most direct way of assessing that is to consider what the authority will pay. There is not necessarily a close link between asset value and the amount that the authority will pay. I think that the amendments confuse asset value with that liability set up to represent the credit arrangements. Values may rise in relation to the market, or decline, but the financial obligation at the outset to undertake the payments is not necessarily affected by those market changes. The example given by the hon. Member for Isle of Wight was interesting, although I would not necessarily describe ice rinks as ''wretched facilities''. In my youth, I had a soft spot for the occasional visit to Bradford ice rink—[Interruption.] Although the ice was not very thick at the time, I never fell through it.

I believe that the provisions in the clause, and the arrangements that define the cost of an asset, are sound. It would be wrong to look at the capital value of the asset in a similar way as described by the hon. Member for Isle of Wight. I urge the hon. Gentleman to withdraw the amendment.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

We have not got very far. I would dispute what the Under-Secretary said. The phrase I used in the amendment is the

''capital value of the assets made available under''

the arrangement. I entirely agree that the capital value of the assets might go up or down over time. However, the capital value of the assets when the arrangement is entered into jolly well better be equivalent to the amount that the authority is committing itself to paying over a period. The Minister for Local Government and the Regions shakes his head, but I should have thought it would very ''unprudential'' of a local authority to enter into a credit arrangement in respect of an asset if that credit arrangement contemplated payments based on a value of the asset that was higher than its value when the arrangement was entered into. I would not expect a local authority to borrow a sum of money to purchase an asset at more than its value at the time when it purchased it.

In focusing on value as against cost, we have perhaps missed the critically important issue. I am asking the Under-Secretary to compare two ways of financing a transaction. Take the purchase of an asset with a five-year life and a zero anticipated value at the end of that life. As I understand it, if the local authority borrows £1,000 to buy that asset its borrowing limit is debited with £1,000 only, not £1,000 plus the interest payments that it will make over each of the five years of the life of that arrangement. Only the capital costs will be taken into account. The debt service costs will not hit the authority's borrowing limit.

If the authority enters into a credit arrangement, a leasing arrangement for that asset over the five-year period, the amount to be debited to its borrowing limit will be the total payments to be made to the provider of that asset over the life of that credit arrangement. If

this is an asset with a zero value at the end of the five-year period, the amount to be paid over the life of the credit arrangement will be the capital cost of the asset on day one, plus the interest charge that the provider will levy throughout. That seems to create a situation where if the local authority borrows and buys the asset the charge is £1,000, but if it enters into a credit arrangement the charge against borrowing limits will be £1,050 or £1,100, whatever the interest rate being charged.

That seems a most bizarre way to approach a credit arrangement. It is effectively to roll up the finance cost with the capital costs of the asset provided and treat it all as if it were akin to money that would be borrowed if an authority purchased something outright. That is the key issue, which the Under-Secretary has not addressed. As with earlier issues that we have discussed, that would steer local authorities away from credit arrangements towards straightforward borrowing. The whole of thrust of what the Government say they are trying to do and what the Opposition want to achieve is removing artificial incentives or disincentives to local authorities to

enter into one type of transaction or another and to give them the freedom to look at the range of options available to them and to decide which is most appropriate.

Mr Christopher Leslie (Parliamentary Secretary, Cabinet Office; Shipley, Labour)

I can only seek to explain as far as I can the specifics of the point that the hon. Gentleman has now raised, which is slightly different from the amendments. [Interruption.] I cannot be sure what was intended by the amendments. My understanding is that there is a level-playing-field treatment of the cost of a credit arrangement to borrowing, insofar as the prudential regime test examines the revenue obligations that fall on an authority in making those payments, whether by normal borrowing arrangements or by credit agreement. Given that servicing costs are excluded from the cost of a credit arrangement, we are looking at the proportion of that credit agreement that falls on the authority's revenue commitments in one year—

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.