Local Authority Companies

Orders of the Day — Local Government Bill – in the House of Commons at 11:45 pm on 9th March 1988.

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Lords amendment: No. 14, after clause 31, insert new clause— .—(1) A local authority or relevant public body shall not enter into a contract under which a company which is associated with the authority or body is to carry out work falling within a defined activity, unless, before entering into that contract, the authority or body has taken reasonable steps for the purpose of securing competition for the carrying out of that work.(2) For the purpose of this section a company is associated with a local authority or relevant public body if, by virtue of any decision of the authority or body (including that of any committee or sub-committee thereof in the course of discharging any function conferred upon them by virtue of section 101 of the Local Government Act 1972, or, in relation to Scotland, section 56 of the Local Government (Scotland) Act 1973)—

  1. (a) the authority or body, or
  2. (b) any member or officer of the authority or body, or
  3. (c) any nominee of the authority or body,
is a member either of the company or of another company, which, in accordance with section 736 of the Companies Act 1985, is the company's subsidiary or holding company.(3) In this section—
  1. (a) "defined activity" has the meaning assigned by section 2 above;
  2. (b) "local authority" has the meaning assigned by subsection (2) or, as the case may be, subsection (3) of section 1 above; and
  3. (c) "relevant public body" means any authority or committee falling within paragraphs (e) to (j) of subsection (1) of section 1 above.
(4) This section (and, so far as is relevant for the purposes of the definitions in subsection (3) above, sections 1 and 2 above) shall be deemed to have come into force on 11th February 1988 and, accordingly, has effect in relation to contracts entered into on or after that day.

Read a Second time.

Photo of Dr Jack Cunningham Dr Jack Cunningham Shadow Secretary of State, Shadow Secretary of State for Environment

I beg to move amendment (a) to the Lords amendment, in line 17, leave out 'is a member' and insert 'form, whether separately or together, either—

  1. (a) a majority of the officers of the company; or
  2. (b) a majority of the shareholders'.

Photo of Mr Harold Walker Mr Harold Walker , Doncaster Central

With this it will be convenient to discuss amendment (b) to the Lords amendment, in subsection (4) leave out '11th February 1988' and insert 'the date of royal assent'.

Photo of Dr Jack Cunningham Dr Jack Cunningham Shadow Secretary of State, Shadow Secretary of State for Environment

The Government apparently introduced the amendment to block a loophole which they thought they had identified in part I. They apparently believed that some authorities were contemplating setting up private companies to take over defined activities on long-term contracts with the local authorities before the relevant section of the Act comes into effect. If that happened it would have the effect of frustrating the timetable for the introduction of competitive tendering in such authorities.

We are not aware of what, if any, evidence the Government have in support of the change, although there have been press comments about some local authorities contemplating such action. However, local authorities and their associations are concerned at the introduction of the new clause because of its implications for possible future Government action on local authority companies generally. Moreover, if we are reading the clause correctly, it has some serious implications for the activities of voluntary organisations.

The Widdicombe committee considered the question of limited companies controlled by local authorities. Its general conclusion was that the case for such companies could he properly assessed only in the context of a detailed appraisal of the requirements of the service in question.

Nevertheless, it recommended that the law in relation to local authority-controlled companies should be amended first, to make clear that they may be set up only where there is specific enabling legislation, and, secondly, to incorporate safeguards concerning their articles of association, membership and audit and reporting arrangements.

In April last year, the Department of the Environment requested information from all local authorities on the Companies Act 1985 companies in which they had an interest. I understand that the Department is still seeking responses from some authorities to that questionnaire so the results of the survey were not available—as of a few days ago—to the Government, and they have shown no intention of following up the Widdicombe recommendations.

Subsection (2) is a highly prescriptive, rigorous definition of what might constitute a company … associated with a local authority". The impression is given that, whatever the institutional link with the authority, even if it consists of a single nominee on the board, the company is subject to undue and illegitimate influence from the authority. That seems rather draconian.

We recognise that the Government's intention to close a loophole in the Bill may be legitimate, but the subsection goes well beyond what we think is necessary. It is surely sufficient to require an authority not to have a controlling influence in a company, either through the majority of its officers or its shareholders. Beyond that, the new clause sets an unfortunate precedent by seeking to control the influence that an authority has over a company by regulating the membership of the company.

One must examine the objects, purposes and utility of a company, the non-local authority interests it may have, and other relevant matters. A good example of a company involved in one of the defined activities could be a voluntary body whose legal form was that of a company limited by guarantee. The National Council for Voluntary Organisations and other bodies are concerned about the implications of that sort of case. It is important that Parliament does not prejudge wider discussion and consideration of local authority companies on the basis of the Government's current perceived need to block a loophole that may exist in the Bill.

Examples of companies in which member authorities of the Association of Metropolitan Authorities have interests are a company to run a multi-purpose arts centre, a company limited by guarantee, a charity, a company to make investments to promote the development of industry, the creation of jobs and job training in a borough, a regional tourist board, whose membership is spread among various local authorities, a company to advance public education in a subject such as archaeology within an authority's area, and the membership of a regional library association, which is a company limited by guarantee. There are other similar examples.

The key point about local authorities deciding to set up or participate in a company is the flexibility that that gives the authority. It is essential that companies should be able to operate speedily, confidentially, and with minimum bureaucracy, or the employment and economic advantages that have flowed from local authority companies involved in these activities might be nullified. If the Widdicombe recommendation that companies may be set up only when there is specific enabling legislation—a proposition that we would not be inclined to support—is accepted by the Government, either much of the employment and economic development activities of local authorities will be curtailed, or such specific legislation will be required. Such legislation must not be as highly prescriptive as the new clause about local authorities' interests in companies.

12.15 am

Here again, we have an example of a late addition of considerable significance being made to the Bill in the House of Lords. There has been no time properly to scrutinise the proposals in Committee. Like my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker), I seriously doubt whether debating these matters at this time and in these circumstances is an adequate scrutiny of powers.

Certainly, in addition to local authority concerns, the National Council for Voluntary Organisations has advised us of its anxieties. Many voluntary organisations have company status, as the Minister will recognise, although they are obviously not public limited companies such as profit-making concerns. Instead, many are limited by guarantee, bound not to make a profit, and subject to the Companies Act 1985. Therefore, the limitation of the clause to cover companies is not sufficiently precise to serve the Government's purposes and needs to be rewritten at least to include an exemption for companies that are voluntary organisations. The definition of voluntary organisation is taken from previous legislation.

Our understanding of the clause as presented leads us to believe that it will be harmful to the legitimate, effective—indeed, some would say necessary — and beneficial activities of local authorities, and harmful also to the legitimate and constructive activities of voluntary organisations, sometimes on their own account and sometimes in conjunction with local authorities. We know that from time to time voluntary oganisation companies have local authority representatives on them. In such circumstances, it seems that they would be caught by the legislation. That may not be the Government's intention. The Minister may be able to persuade us that that is not likely to be the case, but, for the moment, we believe that it is the case, and that is why we have tabled the amendments to the Lords amendment.

Photo of Simon Hughes Simon Hughes Shadow Spokesperson (Environment, Food and Rural Affairs)

I support the amendments. Local government should be entitled to have discretion to make decisions about such matters. The amendments seem to achieve the sort of compromise that even the Minister should be able to find acceptable. They respect the interests of local authorities of all political persuasions which have shown a desire to be able to work not only with the voluntary sector, although it is important, but independently in the community, while recognising that independence, by making sure that there is no majority domination in such separate companies. I hope that the amendments are recognised as a reasonable compromise between total independence and total dependence on the commercial activities of local government, and that the Government will support them.

Photo of Michael Howard Michael Howard Minister of State (Department of Environment) (Local Government)

The hon. Member for Copeland (Dr. Cunningham) asked for evidence to justify blocking the loophole. On this occasion, I am not sure whether I can give him much evidence.

Photo of Michael Howard Michael Howard Minister of State (Department of Environment) (Local Government)

I did on the last occasion, but not on this occasion.

This is an attempt to close the stable door before the horse has bolted. The Government have received many reports. Local authorities were actively examining the possibility of setting up companies, consisting essentially of their existing direct labour organisations, to carry out work falling within the defined activities listed in the Bill. It seemed to us that, in some cases at least, developments of that kind were likely to be aimed at circumventing competition, rather than putting direct labour organisations into a fully commercial arm's-length relationship with their parent authorities.

No other provision in local government law requires competition prior to awarding work to a company when the work consists of services of this kind. Therefore, the Lords amendment fills the gap in respect of defined activities. What it requires is hardly onerous. Authorities are to take reasonable steps to secure competition before entering into a contract with an associated company. An associated company is not just any company in which the authority holds shares, because that could apply to companies where the shareholding came about simply as a result of pension fund management. Association exists, therefore, only when the authority is a shareholder by virtue of a decision to that effect.

I cannot agree to the amendment further to restrict the definition of an authority so that the clause bites only when an authority and its members or officers hold a majority of a company's shares or form a majority of its officers. It is possible to exercise effective control without having a majority in either of those senses. I am sure that on reflection the hon. Member for Copeland will recognise that.

It is imperative that such provision be retrospective to the date of its announcement, so I cannot accept amendment (b) which would delay its effect until Royal Assent.

As for voluntary bodies and charities, amendments (c) to (e), which were not selected, addressed those issues. I acknowledge that a number of voluntary bodies and charities are established as companies limited by guarantee and that in some cases the links between those bodies and local authorities are close enough to be caught by the new clause. In many cases, however, the authority provides a grant to the voluntary body, and that will not necessarily lead to a contractual relationship between the two. It certainly seems unlikely that many voluntary bodies will be entering into contracts with authorities to carry out defined activities such as refuse collection and street maintenance. The extent of the problem has been greatly exaggerated in some of the views that have been expressed.

I should emphasise that these amendments do not in any sense prejudge the wider question of regulating local authority companies generally. The new clause does not prejudge anything; it merely requires contracts for defined activities to be subject to competition where the local authority has a link with the company.

If there are examples of voluntary bodies which are associated companies entering into such contracts, the new clause would not make that impossible. It would mean only that authorities have to take steps to secure competition from other contractors. That does not seem a huge burden and it will provide a useful check on the value for money secured by using the voluntary body.

The term "voluntary organisation" covers a wide range of bodies. The definition that the Opposition proposed in amendment (d) encompassed wholly owned local authority companies which are not run for profit, which could well have been how authorities would have set up their direct labour organisations. Of course, amendment (d) would have driven a coach and horses through the new clause.

We have never considered the provision to be more than a modest measure likely to affect a small minority of authorities, and even then only by way of requiring financial prudence which should not reasonably he regarded as a burden by any self-respecting body. I shall therefore be asking my right hon. and hon. Friends to oppose the two Opposition amendments to the new clause and to accept the clause as passed by the other place.

Photo of Dr Jack Cunningham Dr Jack Cunningham Shadow Secretary of State, Shadow Secretary of State for Environment

With the leave of the House. The Minister's response is not satisfactory. During the last debate he produced bad-natured and abusive representations in place of evidence. This time he freely confesses that he has no evidence at all to support the Government's proposals—as we suspected when we saw the proposals. Nor does his understanding of the implications accord with ours or, indeed, interesting and importantly, with the views of the local authority organisations or of the voluntary bodies themselves.

The voluntary organisations believe that the new clause would force voluntary organisations to tender for services that they currently provide for local communities. Invariably, those services are based on a joint concern on the part of the voluntary and statutory sectors to promote community development and the provision by local people of flexible services sensitive to local needs. That work is not prescribed by the Government, and in certain areas it is encouraged, but it could be threatened by the new clause.

Therefore, it seems clear that the broad brush approach of the Government is imprecise and dangerous. Even if a perceived loophole in the legislation makes the Government want to act without any evidence at all, that is bad enough. However, it is unsatisfactory that the innocent activities of voluntary bodies and the local authorities that provide them with their funds should be so threatened. It would be far better to write an exemption into the Bill and thereby remove the doubt. The meals-on-wheels service that is provided by voluntary organisations and companies limited by guarantee could be affected. It cannot be the Government's intention that such activities should be caught by draconian legislation. We shall invite the House to vote on our amendment.

Question put, That the amendment to the Lords amendment be made:—

The House divided: Ayes 68, Noes 153.

Division No. 209][12.25 am
Ashdown, PaddyKinnock, Rt Hon Neil
Banks, Tony (Newham NW)Livingstone, Ken
Barnes, Harry (Derbyshire NE)Livsey, Richard
Battle, JohnLloyd, Tony (Stretford)
Bermingham, GeraldLofthouse, Geoffrey
Boyes, RolandMcCartney, Ian
Bradley, KeithMcKay, Allen (Barnsley West)
Brown, Nicholas (Newcastle E)McNamara, Kevin
Campbell, Ron (Blyth Valley)McWilliam, John
Clay, BobMarshall, Jim (Leicester S)
Clelland, DavidMartlew, Eric
Cook, Frank (Stockton N)Michael, Alun
Cryer, BobMichie, Bill (Sheffield Heeley)
Cummings, JohnMoonie, Dr Lewis
Cunningham, Dr JohnMorgan, Rhodri
Darling, AlistairMowlam, Marjorie
Davies, Ron (Caerphilly)Nellist, Dave
Dixon, DonO'Brien, William
Doran, FrankO'Neill, Martin
Evans, John (St Helens N)Patchett, Terry
Ewing, Harry (Falkirk E)Pike, Peter L.
Fisher, MarkRoberts, Allan (Bootle)
Foster, DerekRooker, Jeff
Garrett, John (Norwich South)Skinner, Dennis
Garrett, Ted (Wallsend)Spearing, Nigel
Griffiths, Nigel (Edinburgh S)Steinberg, Gerry
Henderson, DougStott, Roger
Home Robertson, JohnStrang, Gavin
Howarth, George (Knowsley N)Taylor, Matthew (Truro)
Hughes, John (Coventry NE)Thompson, Jack (Wansbeck)
Hughes, Sean (Knowsley S)Turner, Dennis
Hughes, Simon (Southwark)Wall, Pat
Wallace, James
Welsh, Andrew (Angus E)Tellers for the Ayes:
Welsh, Michael (Doncaster N)Mr. Ray Powell and
Wise, Mrs AudreyMr Frank Haynes.
Alexander, RichardHolt, Richard
Alison, Rt Hon MichaelHoward, Michael
Amess, DavidHowarth, G. (Cannock & B'wd)
Amos, AlanHughes, Robert G. (Harrow W)
Arnold, Jacques (Gravesham)Hunt, David (Wirral W)
Arnold, Tom (Hazel Grove)Hunt, John (Ravensbourne)
Ashby, DavidHunter, Andrew
Aspinwall, JackIrvine, Michael
Batiste, SpencerJack, Michael
Bennett, Nicholas (Pembroke)Janman, Tim
Blackburn, Dr John G.Johnson Smith, Sir Geoffrey
Bonsor, Sir NicholasJones, Gwilym (Cardiff N)
Boscawen, Hon RobertJones, Robert B (Herts W)
Boswell, TimKey, Robert
Bottomley, PeterKing, Roger (B'ham N'thfield)
Bottomley, Mrs VirginiaKing, Rt Hon Tom (Bridgwater)
Bowden, A (Brighton K'pto'n)Knapman, Roger
Bowden, Gerald (Dulwich)Knight, Greg (Derby North)
Bowis, JohnKnight, Dame Jill (Edgbaston)
Brandon-Bravo, MartinKnowles, Michael
Brazier, JulianLee, John (Pendle)
Bright, GrahamLeigh, Edward (Gainsbor'gh)
Brittan, Rt Hon LeonLennox-Boyd, Hon Mark
Brooke, Rt Hon PeterLightbown, David
Burns, SimonLilley, Peter
Burt, AlistairLord, Michael
Butler, ChrisLuce, Rt Hon Richard
Carlisle, John, (Luton N)Lyell, Sir Nicholas
Carlisle, Kenneth (Lincoln)Macfarlane, Sir Neil
Carrington, MatthewMaclean, David
Carttiss, MichaelMcLoughlin, Patrick
Chope, ChristopherMalins, Humfrey
Clark, Dr Michael (Rochford)Mans, Keith
Conway, DerekMarlow, Tony
Coombs, Anthony (Wyre F'rest)Martin, David (Portsmouth S)
Coombs, Simon (Swindon)Mayhew, Rt Hon Sir Patrick
Cran, JamesMiller, Hal
Currie, Mrs EdwinaMills, Iain
Davis, David (Boothferry)Mitchell, Andrew (Gedling)
Day, StephenMoate, Roger
Devlin, TimMoss, Malcolm
Dickens, GeoffreyMoynihan, Hon Colin
Dorrell, StephenNeubert, Michael
Douglas-Hamilton, Lord JamesNicholls, Patrick
Dover, DenNicholson, David (Taunton)
Durant, TonyOppenheim, Phillip
Fairbairn, NicholasPage, Richard
Fallon, MichaelPaice, James
Farr, Sir JohnPatnick, Irvine
Forman, NigelPatten, Chris (Bath)
Forsyth, Michael (Stirling)Pattie, Rt Hon Sir Geoffrey
Forth, EricPawsey, James
Franks, CecilPeacock, Mrs Elizabeth
Freeman, RogerPorter, David (Waveney)
French, DouglasPortillo, Michael
Gale, RogerPowell, William (Corby)
Garel-Jones, TristanRaison, Rt Hon Timothy
Gill, ChristopherRathbone, Tim
Gorman, Mrs TeresaRedwood, John
Greenway, John (Ryedale)Rhys Williams, Sir Brandon
Griffiths, Sir Eldon (Bury St E')Riddick, Graham
Griffiths, Peter (Portsmouth N)Ridley, Rt Hon Nicholas
Grist, IanRoberts, Wyn (Conwy)
Ground, PatrickRowe, Andrew
Hamilton, Neil (Tatton)Ryder, Richard
Hanley, JeremySainsbury, Hon Tim
Hargreaves, A. (B'ham H'll Gr')Shaw, David (Dover)
Hargreaves, Ken (Hyndburn)Shaw, Sir Giles (Pudsey)
Herris, DavidShaw, Sir Michael (Scarb')
Hayward, RobertShelton, William (Streatham)
Heathcoat-Amory, DavidShephard, Mrs G. (Norfolk SW)
Heseltine, Rt Hon MichaelSmith, Tim (Beaconsfield)
Hicks, Mrs Maureen (Wolv' NE)Soames, Hon Nicholas
Hogg, Hon Douglas (Gr'th'm)Spicer, Sir Jim (Dorset W)
Spicer, Michael (S Worcs)
Thompson, Patrick (Norwich N)Tellers for the Noes:
Thurnham, PeterMr. Peter Lloyd and
Waddington, Rt Hon DavidMr. Alan Howarth.
Widdecombe, Ann

Question accordingly negatived.

Lords amendment agreed to.