Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

I beg to move amendment No. 43, in

clause 16, page 6, line 30, leave out 'proper practices' and insert 'Generally Accepted Accounting Practices.'.

Mr Win Griffiths (Bridgend, Labour)

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

No. 78, in

clause 16, page 6, line 31, leave out subsection (2) and add—

'(2) The Secretary of State may request the Chartered Institute of Public Finance and Accountancy or the Comptroller and Auditor General at any time to provide guidelines and advice on what expenditure of local authorities shall be treated for the purposes of this Chapter as being, or not being, capital expenditure, and shall lay any such guidelines or advice so received before Parliament.

(3) The Secretary of State may direct a local authority to follow any guidelines and advice laid before Parliament under subsection (1)'.

No. 44, in

clause 16, page 6, line 35, leave out from beginning to end of line 37.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

Amendment No. 43 seeks to probe what the Minister means by ''proper practices''. ''Generally Accepted Accounting Practices'' is a well-known term, and I would like to know why the phrase ''proper practices'' has been included in the provision.

I do not intend to address amendment No. 78, as that was tabled by the Liberal Democrats.

Amendment No. 44 would remove the power of the Secretary of State to, by direction, treat the expenditure of a particular authority as being capital expenditure or not. If that power is retained, black could be white, and there would be no scrutiny or direction. That contrasts with the provision for all local authorities in subsection (2)(a), which operates by regulation and is subject to parliamentary scrutiny. Will the Minister explain the reasons for that difference, because that would help us to decide whether to push amendment No. 44 to a vote?

Mr John Pugh (Southport, Liberal Democrat)

I am rapidly forming the view that the Local Government Bill should be renamed the Local Government (Hackney) Bill, because there seems to be a sort of pattern running through it, in which the apparent granting of freedoms is followed by a process of gradual retraction during consideration of the detail of the Bill. Several times, the Secretary of State seems to have reserved powers that he has given away at an earlier stage.

In this case, the Secretary of State has absolute discretion, and amendment No. 78 seeks to fetter that discretion. The amendment asks him to ask CIPFA to provide guidelines, so that he is not free to define black as white or white as black.

I am forming a view about the genesis of the Bill. I think that what happened was that the Minister met someone like Sir Jeremy Beecham at a conference and that they agreed a new concordat for local government that would end the decades of friction and factions that have existed between local and central Government. While the Minister was going through the details of the new piece of legislation that he had in mind, there was some Sir Humphrey character who, the moment any clause came forward, shouted, ''What about Hackney?'' and suggested a solution which, while apparently dealing with an exceptional case, none the less took away all freedom that existed for local authorities in the legislation.

If that is the case, that will mean the Minister having to go back to local government and the guileless Sir Jeremy Beecham to explain how things will run. That conversation will require trust, and I am sure that it will not draw attention to the letter of the law but to the spirit in which it is moved and presented. We are all prepared to trust the Minister to some extent, but this regulation appears to put into the hands of any successor an enormous power to take away most of the freedom initially granted. Therefore, I suggest that he fetters that power a little in the letter of law by accepting amendment No. 78.

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

I understand the normal cry from the Liberal Democrat Benches against regulations, which is echoed by the Conservatives, but it might be a tad overdone in this case given that we are talking simply about the definition of capital expenditure. However, I shall try to address each amendment.

Amendment No. 43 relates to the definition of capital expenditure. It would make the starting point what is known as the generally accepted accounting practice rather than the proper practice terminology that we have used in the clause. We will come in clause 21 to talk about proper practice in more detail, but we have already covered the issue of how we define proper practices when debating clause 7 on credit arrangements, as members may recall. I refer the hon. Gentleman to that part of the record.

There has been a general movement over recent years to bring public sector accounting close to GAAP in the private sector, but local government has its own well-established route to accounting practices, summed up in the phrase ''proper practices''. The main element of proper practices is an accounting code of practice produced jointly by CIPFA and the Local Authority (Scotland) Accounting Advisory Committee. This requires endorsement by the Accounting Standards Board, and the ASB will permit the code to diverge from generally accepted accounting practices only if the divergence is required by statute.

This follows the model in central Government, where the Government Resources and Accounts Act 2000 acknowledges that generally accepted accounting practice as it applies to resource accounts will be subject to modification. The Government's view is that the current framework for local authority accounting set out in clause 21 should continue. We particularly

value the independent role of the accounting institutes in this framework. It would be anomalous to import a definition from generally accepted accounting practices into this clause when the circumstances in which local authorities should capitalise expenditure in exceptional cases are set out in proper practices, in particular in the accounting code of practice. I hope that that goes some way to explaining our reasons for following that phrase in this regard.

Amendment No. 78 would remove clause 16(2), which provides the power to vary the definition of capital expenditure by regulations or directions. Instead of being able to make regulations under 16(2)(a), the Secretary of State would merely be able to ask CIPFA or the Comptroller and Auditor General to prepare guidelines about what should and should not count as capital expenditure. Having laid such guidelines before Parliament, the Secretary of State would be able to direct authorities to follow them.

In the draft regulations seen by the Committee regulation 19 makes clear the importance of the regulation-making power proposed in the Bill. For example, we want to continue to allow authorities the flexibility to treat computer software development costs as capital expenditure. A similar provision exists under the present system, which we believe anticipates likely developments in standard accounting practices.

We also want to ensure that when making loans and grants towards capital expenditure by other bodies, authorities may draw on their own capital resources. That freedom exists under present legislation and seems a sensible modification of accounting practice, since authorities are in effect undertaking capital expenditure by proxy.

The use of regulations is in our view the most effective way of adapting the accounting concept of capital expenditure to respond sensitively to the special needs of local government as a whole. Such regulations would of course always be the subject of full consultation with the local authority associations, individual authorities, CIPFA and the Audit Commission before being formally laid before Parliament. The curious arrangement suggested by the amendment offers few benefits.

Amendment No. 78 would remove the power in clause 16(2)(b) for the Secretary of State to issue directions to individual authorities turning revenue expenditure into capital. Amendment No. 44 would have the same effect.

The direction-making power is merely a continuation of one that we already have, which is much appreciated by the local government community. We have used the power, for example, to help authorities to cope with substantial redundancy costs and pension fund deficits that would have otherwise have been unaffordable. The power was introduced in 1990 by a previous Administration, who used it extensively in much the same way as we have since. Under the new system, the power will be exercised as now, which means that we could continue to issue capitalisation directions only in exceptional cases.

I hope that, in the light of those explanations, the hon. Member for Cotswold will withdraw the amendment.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

I am glad that my hon. Friend the Member for Runnymede and Weybridge drafted the amendments. I partially accept the Minister's explanation on clause 43, but it should be the general thrust that public sector organisations should, as far as possible, conform to the accounting practices in the private sector. After all, that is where risks are taken and innovation takes place. I cannot for the life of me see why the same prudent accounting practices as apply in private practice should not apply to the public sector. Be that as it may. The Minister has given an explanation.

Having heard that explanation, however, I now have some sympathy with the Liberal amendment No. 78, because it seems to me that clause 16(2)(b) could be used perniciously and unfairly. I do not see why a direction should be made to ''a particular local authority'' as to a class of local authorities with a particular asset.

The Minister referred to draft regulation 19(a) on computer software. It would be perfectly reasonable to make a direction to say that all computer software should be capitalised, but it would be unfair on an individual local authority to say that their particular leasing scheme had to be classed not as a revenue item, but as a capital item. It would be perfectly reasonable to issue a regulation to say that such leasing schemes should be capitalised or not across all local authorities.

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

Let me assist the hon. Gentleman. I am sure that he can foresee circumstances in which a direction may be required to aid a local authority in its definition of capital expenditure, if it needed to capitalise some of its revenue and ensure that it was able to cover unforeseen costs. I think that in 1996, a previous Administration used the powers to direct to

allow capitalisation in Plymouth for £175,000 and in Thurrock for £423,000.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

I accept what the Minister says, but in general it would be unfair to use the powers in relation to a particular local authority in a particular way. Doing that on a general class of assets would be a fairer way to proceed. However, I accept that the power may be needed in exceptional circumstances, so having probed the matter, I beg to ask leave to withdraw the amendment.

Mr John Pugh (Southport, Liberal Democrat)

I accept that the Minister has made valid points, particularly about computer software, on which we will have to reflect. What he has not done very well is counter the accusation that the framing of the words gives the Minister the power to be whimsical.

The phrase ''a particular local authority'' is a poor one. If particular circumstances prevail in one local authority, they may be replicated in a subsequent authority and therefore can be formulated in a general rule. There is a distinction between offering a particular authority advice on what the rules are and clarifying its position, and making exceptions or including an authority unnecessarily simply because it happens to be in the Government's firing line.

That reinforces my point that this is really the Local Government (Hackney) Bill, because the Government seem to have left themselves the possibility of referring to external rules, but with absolute unfettered discretion. Will the Minister explain in what sense the discretion of the Secretary of State will be limited?

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

The hon. Gentleman says that he wants to prevent the powers from being used in a whimsical fashion.

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.