Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The clause asserts that

''a local authority may not mortgage or charge any of its property'',

thus continuing the principle that all local authority debt is deemed to be secured on the totality of the assets and revenue streams of the local authority. I am not suggesting that that is necessarily wrong, but we should challenge the thinking that lies behind the decision to perpetuate that system. I am sure that the Minister will say that that is the way that it has always been, but the fact that something has always been done in a certain way is not necessarily a good reason for continuing to do it in that way.

What analysis has the Minister's Department carried out of the impact on the total cost of borrowing of any change in the arrangements? For example, have proper studies been done to confirm that allowing local authorities to secure debt on specific assets would not reduce—indeed, would increase—the overall costs of borrowing to that authority?

The issue is the overall cost of borrowing. If local authorities go into the marketplace when they are in debt, rather than borrowing from the Public Works Loan Board, it is important to explore ways of making that debt less expensive. On the face of it, being able to

secure debt against real estate assets might make that debt less expensive. The freedom that the Government like to say they are giving local authorities to explore novel sources of lending is significantly curtailed by the inability to charge specific assets as security. Will the Minister therefore explain the logic behind the proposal?

The explanatory notes say that the clause enshrines the ''vital principle'' that local authority debts are secured by all their assets. It might have its uses and be convenient or expedient but it is not clear to me that it is a vital principle; the Minister must explain why it is.

Will the Minister confirm that the power in the clause to appoint receivers is the same power as in the current legislation with the exception of the threshold limit, which is raised, and rightly so? Will he also confirm that the powers of a receiver over the revenues and affairs of a local authority exactly reflect the existing legislation? If there are any changes, will he please tell the Committee?

Mr Robert Syms (Poole, Conservative)

I, too, would like a further explanation of the clause. I presume that borrowing includes leasing. Usually, equipment such as a vehicle, fire engine or computer equipment is leased and if the amount due is not paid the equipment is simply recovered. That could not happen under the clause as the High Court would have to appoint a receiver if a sum of more than £10,000 were involved.

Like my hon. Friend, I question whether we should proceed on that basis as it would make it difficult for authorities to put bonds into the marketplace. Bonds sometimes have a preferential position in the credit arrangements, which gives local authorities an opportunity to launch a bond for a specific, perhaps limited, purpose. For example, the Greater London Authority discussed whether a better way of organising the affairs of the London Underground would be to have a bond and a public corporation, which would be secured against Underground income. Under the clause, it would be secured against the income from people in the London charging area.

I am feeling my way in the matter and I should like a little more explanation from the Minister. Does the proposal include leasing? What impact would it have on local authorities that wanted to launch bonds? What would happen if a local authority such as Bristol decided that it wanted to raise money for a tram scheme? Is it implicit in the clause that the risk would be wholly on the council tax payers in the area or could that be ring-fenced against the income or assets of the enterprise?

What the clause proposes may be a good thing but I want clarification about whether it is a liberating or a constraining part of the Bill.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I have some sympathy with the comments made in the debate. As the Government move towards a prudential capital regime there may well be a corollary in due course, if they allow local authorities greater freedom to decide how they secure their debt. I do not wish to propose that as a policy initiative, but I should like the Minister's assurance

that the Government will follow the logic of their new freedoms on the capital regime, examine that issue and report on it to the House. Will he also assure the Committee that the Government will carry out the studies that the hon. Member for Runnymede and Weybridge suggested should already have been carried out—I doubt that they have been—and report back to the House on the results? Finally, will he assure the Committee, the House and local authorities that the Government will keep the matter under review?

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

Most hon. Members will now be clear that the clause is closely linked to clause 6 in terms of providing a safeguard to lenders. Clause 13 is even more important in that respect: it ensures that local authorities may not offer their property as security for loans.

The hon. Members for Runnymede and Weybridge and for Kingston and Surbiton asked what specific review we had undertaken to re-examine the fundamental principles in this area. We have not commissioned any studies or any accountants to do so. However, during the establishment of the prudential regime and in re-examining fundamentally the principles that underpin the capital expenditure and borrowing rules Ministers, including myself, came to the conclusion that this principle should be continued, for good, long-established reasons.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Does the Minister accept that what were good, long-established reasons may no longer be good, given that the Government are explicitly encouraging local authorities to explore other avenues of borrowing, and to move beyond the Public Works Loan Board?

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

I realise that the hon. Gentleman is attempting to be innovative by seeking to allow local authorities to borrow more widely. I was about to comment on the reasons why I believe that the provision should continue. One of the main reasons is that borrowing against a specific asset is usually more expensive than borrowing through the Public Works Loan Board. It is also a less secure method of raising resources. I accept that we could have a debate about that.

The provision came into being, and will be continued, because of the principle that the essential assets of a local authority could be exposed to a high level of potential risk if borrowing was secured against particular assets. It would not be sensible for those essential assets to be put at risk in such circumstances.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The Minister has just asserted that borrowing from the Public Works Loan Board will always be cheaper than borrowing from the marketplace secured against a specific asset. That was the purpose of the debate—to ask the Minister whether that assertion is based on a well-founded position that he has properly tested, or whether he is reciting a prejudice or a belief, without any rigorous analysis behind it.

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

No. The experience so far invariably suggests that the cost of borrowing through the Public Works Loan Board is cheaper than mortgaging and other forms of borrowing. As I said earlier, it would be possible to debate that whole issue. However, we came

to the conclusion that, given some of the essential facilities and property owned by local authorities, whether they be care homes or the town hall, it would not be a sensible use of those assets to use them as security for a loan, and risk their being taken away. That is why we view it as necessary to continue that prohibition.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Some of us may have some sympathy with the remarks that the Minister has just made. The Government are exploring new ways for the public sector to raise money on the markets through the private finance initiative. In many respects that is quite a sensible approach so it seems odd that the Minister resists our suggestions. The Government should examine whether there are other options. They should learn from the experience of the PFI and the experience in other countries where local authorities and lower tiers of Government have the freedoms that would apply if this clause did not go through.

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

I stand by the comments that I have already made. Local authorities must ensure that certain activities and properties are not exposed to risk. They can already obtain good and competitive forms of capital.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I understand the Minister's point, but the key point is that an asset is not at risk unless one defaults on loan payments. What is the current lending rate of the Public Works Loan Board? The Minister tells us that it is invariably cheaper. Perhaps we can test that against our experience of what is available in the marketplace.

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

I cannot give the hon. Gentleman chapter and verse about the various rates and offers from the PWLB off the top of my head. I believe that it is usually cheaper. It can pass on those benefits to authorities. If another borrowing opportunity came along that was cheaper than the PWLB the local authority could take it, but it could not necessarily secure it on particular property. The charge would be on the revenues across the authority. That would be the safest and most prudent way to secure that form of borrowing. There is still a great deal of freedom here, but we have to enshrine a certain measure of protection for local people who need and enjoy those essential assets.

Ms Kali Mountford (Colne Valley, Labour)

Does my hon. Friend recall the case of Allerdale, where the borrowing was against a particular asset? When that deal collapsed because the borrowing was outside the scope of the asset that it was borrowed against, it affected all local authority borrowing for a good 10 years afterwards. The rate of local authority borrowing against assets doubled for that period.

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

There are good grounds for having our rules and statutes, not least in case history probably before my time in this place. I understand that the case of Allerdale involved giving an unlawful guarantee on the loan that was undertaken. It was not specifically an issue that affected the borrowing in a more general sense. It is important to have this principle because certain essential local authority services and properties should not be exposed to the risk of a default. The

opportunities for borrowing in the normal processes with this rule continuing are the safest to protect the interests of local people.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I suspect that if local authorities test the marketplace they might find that it is difficult for them to borrow in the way that suits them best if they cannot do it secured on a specific asset when they are borrowing for the project. They will not be able to project finance on it. Would the Minister undertake to find out what the current rate offered by the PWLB to local authorities is and to let members of the Committee know? Normally, when the Minister says that he does not know something, the cavalry come charging in and a few minutes later his memory improves and he is able to answer. If he could give us that information, we could form our own judgment about whether he is correct, and it will invariably be cheaper than what is available from the private sector.

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

Yes, I can certainly provide a note to the hon. Gentleman and to other members of the Committee on the exciting topic of the rate that the Public Works Loan Board offers.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

I should like to challenge the Minister's assertion that the rate and terms available from the Public Works Loan Board are always and invariably cheaper. The national Fire Service College is in my constituency. It is locked into a 20-year loan with the PWLB at rates in double figures, which causes it considerable embarrassment. How does that contrast with the Minister's statement?

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

I do not know whether the position would be any better if the loan was secured on a particular fire station or property, which would give a certain amount of risk exposure to that essential facility. I would question the sense of securing that borrowing against an essential asset.

I will provide the note on the PWLB rate. The hon. Member for Runnymede and Weybridge asked whether the receiver powers would be the same as at present. They will be, although there is a change to the threshold so that the default powers cannot be triggered if the debt is below £10,000. The present threshold is £5,000.

The hon. Member for Poole (Mr. Syms) asked whether bonds would be affected. They will not be affected by the clause, which relates only to borrowing. It does not prevent the use of bonds to raise cash, but it means that they would have to be secured on all the local authority's revenues. I hope that that answers his question, but I do not think that it does.

Mr Robert Syms (Poole, Conservative)

May I ask for clarification of the phrase,

''indifferently on all the revenues of the authority''?

Does it mean that if an authority owed an amount to a bank, it would have to repay it by charging across the whole range of its charges—rents and everything else—so that council tenants and everyone else would have to pay a contribution? In other words, the authority would have no choice and the repayments would fall not only on the council tax payer but also on people from whom it might be taking rents. I am trying to get at the meaning of the

term ''indifferent''. Does it mean that the authority cannot discriminate?

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

All borrowing is to be charged indifferently on all revenues of the authority. That means that in the event of a default on a loan—which, incidentally, has never happened—the lender could look at the entire revenue stream of the authority for reimbursement. I hope that that answers hon. Members' questions and that the clause can stand part of the Bill.

Question put and agreed to.

Clause 13 ordered to stand part of the Bill.