Orders of the Day — Local Government (Contracts) Bill

Part of the debate – in the House of Commons at 3:31 pm on 23rd June 1997.

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Photo of Hilary Armstrong Hilary Armstrong Minister of State (Local Government and Housing), Department of the Environment, Transport and the Regions, Minister of State (Department for Environment, Transport and the Regions) (Local Government) 3:31 pm, 23rd June 1997

I beg to move, That the Bill be now read a Second time.

I rise once again to move a Second Reading on an important issue, although I confess that it is no simpler than the Local Government Finance (Supplementary Credit Approvals) Bill, whose Second Reading I moved last week.

I welcome the new members to the Opposition Front Bench. I heard of the appointment of the right hon. Member for Sutton Coldfield (Sir N. Fowler) as I was driving to the big Methodist meeting in Durham, and it confirmed my belief in the resurrection. We are pleased that he is here, as well as the hon. Member for Christchurch (Mr. Chope), who is resurrected in another manner.

The Government are committed to promoting the opportunities for public-private partnerships, which offer the opportunity for increased value for money in the provision of the services that national and local government need. They allow public service staff involved in providing core public services, such as health and education, to get on with delivering those services in the most suitable facilities, without being distracted from their main responsibilities by worries about facilities management.

The purpose of the Bill is to remove private sector concerns about entering into partnership deals with local authorities. Partnerships can help to resolve the conflict between short-term financial pressures and long-term cost-effectiveness. The lowest initial construction cost for a building, road or other facility does not guarantee the lowest total cost over its lifetime for the service that it provides. There can be cost overruns and delays during construction, and false economies at the early stage leading to higher running costs later.

Partnerships can ensure the best value for money, and prevent under-investment, in the provision of assets and services. At the same time, the whole-life costs and risks of ownership are not borne by the public purse.

Partnerships can also improve value for money, by maximising the scope for outside revenues. There are often opportunities for the private sector partner to earn additional revenue, by using the facilities that he has helped to provide, without detriment to their availability to the prime user. That is particularly relevant in the case of schools and other local authority buildings that may be used for only part of the day. If a private sector contractor sees scope for obtaining such revenues, he should be ready to bid a lower price to the main user.

We have done away with the burdensome requirement on central Government and the national health service to test every project for partnership potential. There has not been—and cannot be—any compulsion on local authorities to use private finance, as they are autonomous decision-making bodies. The choice will remain with them, and support for direct local authority investment will continue. Nevertheless, we shall give every help and encouragement to authorities that want to use private finance.

The Government have no set view about the form that partnership schemes might take. I want to encourage all sorts of partnership initiatives for improving the quality and the management of local authority assets and services, while ensuring value for money for local taxpayers. The Government want to see new schools: we want to see the buildings and assets that local authorities need in order to deliver services.

I hope to see ideas for innovative partnership schemes brought forward as a contribution to the debate on the future of public service delivery. I also want to build on the successful joint venture projects already in place—for example, the Manchester metro and the Kirklees stadium.

Various partnership schemes have already been identified as pathfinder projects under the sponsorship of the public-private partnerships programme—we know it better as PPPP—which was set up by the local authorities. Experience of those schemes will be fed into consideration of the future of our public services.

The Government are committed to ensuring that partnerships between the public and private sectors work. We have inherited from the previous Government a private finance initiative process that has caused delay and uncertainty for many projects. Our business manifesto included a 12-point plan for partnership to speed up that process and encourage the development of good public-private partnership projects. One of those 12 points was to enact any new legislation that is needed to ensure that public bodies have the full legal power to enter into contracts. A separate Bill to deal with stalled projects in the national health service is currently before Parliament.

To turn the 12-point plan into action, my hon. Friend the Paymaster General announced on 8 May that he had asked Malcolm Bates, chairman of the Pearl Group and former member of the private finance panel, to undertake a rapid review of current PFI and public-private partnership arrangements. Malcolm Bates's review was completed on 13 June, and the Paymaster General has today published his conclusions and the action that he intends to take to ensure the delivery of good partnership projects. One of the review's recommendations is to take speedy action to overcome the uncertainty regarding local authority powers to enter into public-private partnership contracts. The Bill before the House aims to achieve that.

High-profile court cases have led banks to fear that partnership contracts with local authorities may be found unlawful, and thus unenforceable. The banks would then suffer financial losses. In the Allerdale and Waltham Forest cases, contracts entered into by local authorities were found to be null and void because the authority concerned did not have the power to enter into them. Because the contracts were found to be void, the private sector had no recourse to the authorities for compensation and so found itself saddled with bad debts.

The schemes that led to those court cases had special features and they are unlikely to be replicated. Nevertheless, the cases have created a perception that providing finance for long-term partnership contracts with local authorities is high risk. That is a perception that we must overcome if public-private partnerships are to work successfully in local government. We want to act quickly to dispel any doubts that there may be in the minds of potential backers of local authority partnership schemes. The Bill will achieve that. It clarifies local authority powers and protects contractors and banks if things go wrong.

The Bill does not disturb the fundamentals of existing legislation. It does nothing to alter the scope for contracts to be challenged under public law, by which I mean reviewed by the courts, for the protection of the taxpayer, or by local authorities' external auditors. It does nothing to undermine the long-standing powers of the auditor to question the lawfulness of local authority conduct or expenditure.

Discussions and consultations have shown that, to reassure contractors, banks and other lenders to contractors, the Bill needs to achieve two aims. First, it needs to make explicit the power of a local authority to enter into contracts of the sort envisaged in public-private partnership schemes. The Bill does that in clause 1, by making it clear that authorities' statutory functions confer power to enter into contracts under which assets or services, or both, are provided for the function in question. The Bill is not extending authorities' powers, but making explicit what was already implicit. It covers contracts directly or indirectly involved in discharging a specific function—for example, a contract that makes available a school building and one that provides IT facilities that are needed for the administration of council tax.

The Bill does not affect the ability of authorities to act in a manner that is incidental to their functions, as permitted by section 111 of the Local Government Act 1972. The Bill also does not affect authorities' powers to delegate their functions. There is already statutory provision under the Deregulation and Contracting Out Act 1994 for orders to be made that allow local authorities to contract out functions. One such order is being prepared in connection with highways functions. Contracts in other service areas seem less likely to entail delegation, but departments could consider making analogous orders if necessary.

Therefore, the Bill clarifies the powers of local authorities to enter into contracts. It then provides a safe harbour, by protecting contractors and lenders if an authority is later found to have entered into an arrangement that is invalid. To achieve that, clauses 2 and 3 introduce a certification procedure for contracts of a description specified in clause 4. In essence, they are contracts for five years or more involving the provision of both assets and services. The issue of a certificate—but not its content—needs the agreement of other parties to the contract, because the legal rights of all parties are affected by the certificate, in ways that I shall now describe.

The certification procedure is similar in principle to that proposed under the National Health Service (Private Finance) Bill, but is achieved differently. That is because the large number of local authorities makes it impracticable for Ministers to certify contracts individually, as is proposed for the NHS. Also, such intervention by Ministers would weaken local authorities' responsibilities and accountability, and that is not the way in which we as a Government would wish to go.

The effect of clause 2 is that no one—including the authority, the contractor or any other party to the contract—may argue in private law proceedings that the certified contract is unenforceable because the local authority did not have the power to enter into it. However, clause 5 preserves the right of local taxpayers or the authority's external auditor to challenge certified contracts under public law through judicial review and audit-related proceedings. In a judicial review, the court already has the discretion to allow a contract to continue if that is in the public interest. Clause 5(3) gives the court an equivalent discretion in audit-related proceedings.

To meet the case where the court determines that a contract is to be set aside, the Bill provides for the enforceability of special terms agreed between the parties with that possibility in mind. It would be open to the parties to agree discharge terms that provide, for example, for an asset to be made available for use by the authority. Clause 6 makes clear the authority's power to agree discharge terms, and provides that the enforceability of those terms is unaffected by the setting aside of the main contract.

If the parties do not agree terms to deal with the possibility that the contract may be set aside, or if the court finds that such terms are themselves unenforceable, clause 7 provides that the local authority shall, nevertheless, compensate the contractor as if it had repudiated the contract. That is the ultimate long stop.

We have considered whether there should be a more exact parallel with either the "safe harbour" provisions in the Companies Act 1985 or those in the Local Government and Housing Act 1989. The latter say that any absence of a power shall not prejudice a person lending money to an authority.

However, such an approach would leave too many questions unanswered. The matters to be settled in respect of a partnership contract are much more complicated than those relating to a loan agreement. Therefore, we do not believe that the "safe harbour" provisions in the Local Government and Housing Act 1989 are sufficient.

Clause 1(2) confirms that, where a third party funds a contractor, the authority may enter into a separate contract directly with the financier, who could be a direct lender to the contractor or a person involved in other forms of finance, such as bond issues. Such a contract may allow the financier "step-in" rights, by which I mean an arrangement whereby the financier would be able to nominate a replacement contractor if, for example, the original contractor became insolvent. The protection of the certification procedure and discharge terms are extended to a contract with a financier.

The Bill will apply, in England and Wales, to all bodies covered by part IV of the Local Government and Housing Act 1989 and to probation committees and the receiver for the Metropolitan police district. It will also apply to Scottish local authorities as defined in the Local Government (Scotland) Act 1973.

Secondary legislation will be subject to the negative resolution procedure in Parliament, except for regulations that define the type of contract that may have the protection of the Bill. For those regulations, the affirmative procedure is required.

As a separate matter, clause 9 amends the Justices of the Peace Act 1997, so that revenue grants may be made to local authorities to meet payments under partnership contracts in respect of magistrates courts. For technical reasons, the capital finance rules currently classify such payments as capital expenditure

The details of the Bill reflect discussions and close working with interested parties, including the Local Government Association, the public-private partnerships programme and lawyers representing banks and contractors. We have now begun further consultations on the coverage of regulations. If those consultations result in proposals for amendments to the Bill, we shall consider carefully whether to bring them before the House. There will be a third round of consultations on the details of the secondary legislation once the broad coverage of the regulations is established.

Prompt action is needed, because private finance schemes in the local authority sector have been slow in developing. Indeed, no scheme has so far reached the stage at which actual construction work has begun. The present system, for controlling local authority capital finance and the use of privatefinance for capital purposes, is laid down in the Local Government and Housing Act 1989 and subsequent regulations. It is an ingenious and rigorous system. In its original form, it put big obstacles in the way of local authorities that wished to pursue partnership deals. Such deals would have counted as "credit arrangements", the full capital cost of which would have had to score up front against the authority's capital resources. Pressure on local authorities' capital resources was such that, effectively, partnerships in local government were a non-starter.

In 1995, the previous Administration began to amend the system to facilitate partnership arrangements. Last October, they made regulations that relaxed the requirement for "credit cover" on deals with the private sector that met a test of adequate risk transfer. Also last October, the then Government announced that revenue support would be available for local authorities' payments towards such partnership schemes. Offering that financial assistance was right, because the system of revenue support grant already helps local authorities to meet the costs to them of conventional borrowing. If they are to procure the use of assets through partnership arrangements, they will incur comparable revenue costs.

The then Administration announced revenue support for the past financial year to the tune of £50 million of investment costs, none of which was actually spent. They also announced support for £200 million of investment this year. The resources are available; we need to remove any obstacle to their being taken up.

This is a necessary measure. The previous Administration were committed to the private finance initiative, and I would expect Opposition Members to support the current Bill.