Clause 8 - Control of credit arrangements
Local Government Bill
11:00 am
Mr Philip Hammond (Runnymede and 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.