Clause 10

Business Rate Supplements Bill – in a Public Bill Committee at 4:45 pm on 27th January 2009.

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Variations

Question proposed, That the clause stand part of the Bill.

Photo of John Healey John Healey Minister of State (Department of Communities and Local Government) (Local Government)

We have come to an important part of the Bill, which is the provision that we are creating in the legislation framework for levying authorities to make variations to the business rate supplement when circumstances or conditions require them to do so. In framing this part of the Bill, we aim to strike the balance between allowing the local authority, or levying authority, to respond to the particular demands of the economic development project and the funding that it may require while at the same time giving the businesses that may be affected and may be contributing through a BRS a degree of certainty and a safeguard to allay their potential concerns. In framing the provisions in clause 12, Committee Members will see that we have taken the same approach as we have taken in the rest of the Bill.

It is clearly important for local authorities to have some flexibility to deal with changing circumstances. Subsection (1) allows a limited variation, provided that the possibility of the variation and the circumstances in which it is made are set out in the BRS prospectus; and—this is referred to in subsection (12)—that the variation will not increase the number of people liable to pay the supplement. This is designed to provide some  flexibility to ensure that projects that are funded by a BRS can maintain momentum in the event of a change in their economic circumstances or other circumstances.

Let me move on to the safeguards or reassurances to business. Subsection (2) is designed to protect businesses from any unexpected changes in the supplement arrangements. It provides that the levying authority cannot without due consultation make significant changes that were not foreseen at the outset of the process and therefore not consulted on or, in some cases, voted on at the outset. If the authority wants to vary a BRS in a way that was not foreseen and set out in the original prospectus, it will need to consult on its revised plans. Subsection (2) requires the authority to undertake a number of steps: to publish a document setting out the proposed variation; to consult on those proposals; to hold a ballot in the cases in which the variation will mean that the supplement supports more than one third of the project cost or in which there was a ballot on the original proposal; and to publish a revised prospectus setting out the new arrangements, once the variation has been agreed.

Photo of Bob Neill Bob Neill Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

I rise on a genuine point of clarification. As I understand it, if the effect of the variation is that the BRS supports more than one third of the project cost, there must be a ballot. Is that more than one third of the total project cost as revised? What about a situation in which the variation might give rise to the BRS supporting more than one third of the variation? Should there be a ballot in those circumstances, if there is a shifting of the burden and an increase in the burden? I can conceive of such a configuration, depending on the rest of the funding.

Photo of John Healey John Healey Minister of State (Department of Communities and Local Government) (Local Government)

We are trying to provide for variations in the business rate supplement. If there was a ballot on the project in the first place, the position is straightforward. If a variation in the business rate supplement meant that the business rate supplement was bearing more than one third of the total project cost, that would bring the revised BRS into the bracket of requiring a ballot. Those are the circumstances that we have in mind.

Photo of Dan Rogerson Dan Rogerson Opposition Whip (Commons), Shadow Minister (Communities and Local Government)

It is certainly reassuring to hear what the Minister is saying about the matter. I just seek clarification again. He has probably addressed this point, but I would like it to be absolutely clear. I am talking about subsection (7)(b), which begins:

“the document published for the purposes of subsection (2)(a) states that, even though paragraph (a)...does not apply”.

This relates to what he said about a situation in which the local authority for some other reason decided that a ballot was necessary on the original proposal. The provision is at the top of page 7. It concerns a situation in which the local authority decided to go to a ballot even though it did not have to on the original proposal. If it called for a ballot on the original proposal, will it now automatically go to a ballot in the event of a proposed variation, or does it again get to decide whether that is necessary? I would like that to be addressed. If it is automatic that a ballot at the beginning means a ballot on a variation, that addresses the point, but if the local authority gets to take a view for a second time, one could conceive of a situation in which there had been a ballot that approved the proposal, but the variation  meant that perhaps the original ballot—[Interruption.] I hope that the Minister can understand the point that I am trying to make.

Photo of John Healey John Healey Minister of State (Department of Communities and Local Government) (Local Government)

The hon. Gentleman will find by careful reading of subsection (2)(c) alongside subsection (7)(b) that the provision means that, irrespective of the reason for the ballot in relation to the original project and BRS proposal—whether it was required under the one third rule, or the local authority decided to hold a ballot despite not being required to do so—a formal variation to the BRS that was not anticipated and set out as a possibility in the prospectus would follow the same procedure as the original introduction. Therefore, the provisions are intended to say that if there was a ballot on introducing the BRS and there is a significant variation that was not covered in the prospectus, there should be a ballot for the variation as well.

Photo of Brian Binley Brian Binley Conservative, Northampton South 5:00 pm, 27th January 2009

The clause is particularly confusing. If a variation demanding more money by way of the levy is refused by business and the ballot goes against the local authority, who then foots the bill, given that the project is under way, or could be under way?

Photo of John Healey John Healey Minister of State (Department of Communities and Local Government) (Local Government)

The variation may be a downward variation, because the project economics may have changed. It may not be an upward variation, but in the circumstances that the hon. Gentleman anticipates, if the ballot went against the variation, that variation could not be made. If there was then a project shortfall, there would clearly be a challenge for the project sponsors and the project authority to deal with it in a way that was different from the variation of the BRS that they were proposing. There is not a single answer to who might pick up the shortfall or how it could be dealt with, as he will appreciate. The important thing for the purposes of the Committee and the legislation is that if a ballot is held in order to introduce a variation to the BRS and that ballot is not carried, the variation cannot be put in place.

Photo of Brian Binley Brian Binley Conservative, Northampton South

I am most grateful for the Minister’s great generosity. He mentioned that the local authority could have overestimated the amount of money needed from business as a percentage of the project. Is he therefore suggesting that, in certain circumstances, business might get a dividend, a repayment?

Photo of John Healey John Healey Minister of State (Department of Communities and Local Government) (Local Government)

I would not necessarily describe it as a repayment or a dividend, but the hon. Gentleman will appreciate that we have built into the power to design and introduce a supplement certain flexibilities for a local authority. It can introduce it at a lower rate than the 2p maximum. It can introduce it and create the liability for businesses that are above the threshold only, so it need not be £50,000 plus, it could be £60,000 or £70,000. That is a decision that local authorities could take. There is also the flexibility to phase in the introduction, so the local authority might choose to introduce it at a rate of 0.5p in year one and 1p in year two. There is also flexibility in how to deal with the potential liability of empty properties.

A number of factors provide flexibility for the local authority. We tend to dwell on the limits to the supplement—the £50,000 rateable value threshold below which no business rate payer would be liable, or the 2p maximum supplement—but the design and introduction of the levy could be different, although within those flexibilities and parameters. To return to the original question, it may be that the variation will benefit the business rate payers that are liable for the levy, although that benefit should perhaps not be described as a dividend. There could be a variation to the threshold, or the rate, or to something else within the flexibilities that local authorities will have within the design of the legislation, which would benefit the authorities concerned.

Subsection (2) sets out the requirements of an authority in those circumstances. Subsection (3) sets out what the document explaining the proposed variation must specify. I hope that members of the Committee would agree that the requirements to consult and the conditions that must be met for the introduction of any variation to the BRS will give businesses real confidence that a BRS will not be altered without serious and due consultation. In practice, any local authority that even contemplates a variation on an established BRS will examine the case with the principal interest groups in its area, not least business itself, before any formal consultation point is reached. We can reasonably expect that any variation will not come as a surprise to those businesses that are liable to pay a BRS, or to any groups with a critical interest in the BRS and the project that it supports.

Subsections (7) to (11) cover the arrangements for ballots in case of variation. We have dealt with the circumstances in which that would be necessary, but the subsections capture them. Subsection (10) describes the wording for any ballot, following the model of the original wording proposed in the Bill.

Finally—

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

Normally when a parliamentarian says, “Finally,” he is about 40 per cent. of the way through his speech, so perhaps my intervening is not too much of an imposition—[Interruption.] I am being unfair to the Minister.

The logical way of easing the pain on the variation is simply to add a certain number of years to it. It would not mean additional money, and the percentage would not be seen as being of a bigger pot; there would just be a significant extension to the number of years that the BRS operated. Does the Minister have any guidance on variation? Presumably, if we extend the period of a scheme for which there is likely to be a BRS from 20 years to 40 years, that takes it well outside the realms of what was envisaged at the outset. Indeed, one envisages, therefore, double the money going in to the BRS over that period. Does the Minister intend to give any guidance, or does he have any thoughts about variation? Would it necessarily mean the sum paid, or the duration of the scheme? Does he feel that the pill could be sugared more easily by adding to the duration—adding some years further down the line—rather than by adding a surcharge, which would make the whole scheme larger? Has he given any thought to how a variation would operate? I appreciate that the Government have gone  into considerable detail to ensure proper re-consultation and a further ballot, but, in practical terms, what will a variation mean?

Photo of John Healey John Healey Minister of State (Department of Communities and Local Government) (Local Government)

We have given a lot of thought to how a variation might operate and be required, but, in the legislation, we have tried to frame a general approach whatever the precise details of the proposed variation. I had not mentioned it, but the hon. Gentleman is right that a variation might well be the length of the project to be financed and, therefore, the length of the BRS term. I shall take the Mayor’s proposal for a 24-year term for Crossrail, for instance. In preparing for a business rate supplement, he might say, “We proposed it for 24 years, there may be circumstances in which we would have to extend it to 30, and the circumstances that might require us to do so are X, Y, Z.” If that potential variation had been set out in the prospectus, it would fall within the terms of the clause in the way that I have explained. If the potential variation was not foreseen or set out in the prospectus as I have explained, a fresh process of consultation with the prospectus and the details would need to be published.

If a ballot was used for the BRS in the first place, that would of course be used again. Also, if a variation would take the proportion of the project funding over one third, a ballot would be required for that variation, whether or not one was in place when the BRS was first introduced. On that basis, I hope that hon. Members will be content for clause 10 to stand part of the Bill.

Photo of Bob Neill Bob Neill Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

I am grateful to the Minister for his careful and detailed explanation of the effect of the clause. I do not think that there is a great deal of difference between us in what he is seeking to achieve, but I will highlight the areas for concern flagged up in our evidence sessions and elsewhere. I hope that the Minister will be able to reassure us that the Government are alert to them.

The concerns relate to two things. I hinted at one in my intervention, although perhaps I did not make it very clear. A variation of the BRS that does not fall within the existing criteria for triggering a ballot could still shift the burden of funding within the BRS scheme. For instance, it could be proposed initially that a fifth of the costs of a substantial scheme would be met by the BRS and the rest would come from various other funding streams, but for reasons that arise, it could be proposed to raise extra moneys by varying the length of the BRS or the amount of the contribution within the parameters. That could increase the BRS element from a fifth to a quarter, or to 30 per cent. That would fall just short of the threshold for triggering a ballot, but it would shift more of the percentage burden on to the BRS, perhaps because another funding stream did not come forward or additional unforeseen costs arose.

In such circumstances, consultation must be undertaken, but the businesses have no means of preventing the change. There is a danger that cost overruns, whatever the cause, could easily be shunted on to business without the need to go back to seek proportionate contributions from other funding streams elsewhere. Will the Minister enlighten us as to what safeguards the Government envisage to protect the BRS payer from being disproportionately affected by variations that might change the amount of funding?

I think that the Minister is alert to my second point, because the Government flag it up in their consultation document on the draft guidance. What is to be done to meet businesses’ fear that variations might be used as a way to make up for lazy or inefficient costing at the initial stage, and how will the Government deal with the risk of cost overruns occurring and being passed on disproportionately or wholly to businesses through the BRS element of the scheme?

The Government have issued some guidance. It is on page 18 of the consultation document. It starts with the question of assessing project costs for the one-third test. It is helpful as far as it goes, but it raises a question that it does not answer. It recognises what is called, in technical terms, “the optimism bias” in assessment of costs. That is a wonderful phrase. I was not surprised to find it defined, referred to and dealt with in a document emanating from the Treasury. Some of us might think that the Treasury had optimism bias for a number of years, but apparently it is in the Green Book.

The document says:

“Optimism bias is the demonstrated systematic tendency for appraisers to be over-optimistic about key project parameters, arising particularly in relation to: capital costs; works duration; operating costs; and under-delivery of benefits.”

One might say that that refers to the Olympics budget. However, in reality, that is a fair and sensible point. The Green Book contains further information, but the very fact that that reality has been flagged up needs to be addressed carefully if businesses are not to feel that the floodgates have been opened—so to speak—by variation. The result could be a series of variations that salami slice further contributions to make up for the failure to take proper account of that optimism bias.

Photo of Philip Dunne Philip Dunne Opposition Whip (Commons) 5:15 pm, 27th January 2009

Does my hon. Friend agree that the NHS IT project is a fine example of where optimism bias has coloured the delivery of a project for close to a decade?

Photo of Bob Neill Bob Neill Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

My hon. Friend is absolutely right; that is probably as good an example as one could come up with. It demonstrates why it is important to put safeguards in place.

Photo of John Healey John Healey Minister of State (Department of Communities and Local Government) (Local Government)

Does the hon. Gentleman also appreciate that the example cited by the hon. Member for Ludlow is entirely beyond the permissible range of what could be relevant to a business rate supplement?

Photo of Bob Neill Bob Neill Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

I am deeply reassured by the Minister’s point, as I am sure is everyone else.

With the best will in the world, there is often a tendency for those drawing up project costs in the public sector to be, for various reasons, unduly optimistic about their appraisal. Interestingly, that is recognised in paragraph 3.40 of the draft guidance defining acceptable project costs. It makes the point that the

“authorities should be mindful...and pay regard to the fact that the assessment undertaken”— internally and by themselves, in the—

“early stage scoping and feasibility work may not accord with the perspective of local businesses.”

Harking back to an earlier debate, when the Minister mulls the matter over he will appreciate that that is a very good reason why we should ensure real buy-in by businesses into the delivery of the scheme. It will make that unintended, but not infrequent, consequence less likely to occur. I raise those caveats. I am not saying that we oppose the clause, but underlying issues remain that I am not entirely convinced have been taken on board. I hope he can reassure us a little that, one way or another, they will be.

Photo of Philip Dunne Philip Dunne Opposition Whip (Commons)

Will the Minister enlighten the Committee on the thinking behind making the rules and, in particular, variations on ballots so different from the balloting process applying to BIDs? In particular, I am concerned that variations could be used, if a project overruns its original cost estimate, to extend the applicability of the BRS to a wider range of businesses that might not be consulted on the variation because they were not consulted on the original ballot. If I understand correctly, the beauty of the BIDs balloting process is that it is a dual voting system. Businesses not liable to pay the bids levy have the opportunity to vote, because as they grow they might become eligible for the scheme. A dual balloting system allows rapidly growing businesses that would have been eligible at the time of the original ballot, had they been that big at the time, to have a voice. Looking into the future, flexibility in the rules on variations, as in the BIDs model, would have some merit.

Photo of John Healey John Healey Minister of State (Department of Communities and Local Government) (Local Government)

The hon. Member for Ludlow was not with us at the start of our proceedings this morning, when we had a detailed discussion on the principal basis on which it is right to hold a ballot on a BRS. In particular, we discussed why, in this respect, our approach to BRS is different from our approach to BIDs. On BIDs, of course, every business in the proposed area will have a vote, irrespective of size, and may make a contribution. I do not propose to rerun the arguments for our proposals for balloting on BRS, but no doubt the hon. Member for Ludlow will be able to consult the Official Report and come back if he feels that we have not dealt with the issue.

On the concern expressed by the hon. Member for Bromley and Chislehurst, if the variation changes the proportion that the BRS contributes to a project from a fifth to a quarter—as he suggested—or to 30 per cent., we still propose to take the approach with the variation that is entirely consistent with the one that we take for the ballot for the BRS in the first place. I explained in my opening remarks the safeguards that are in place for businesses and the requirements that will be in place for local or levying authorities in such circumstances.

In response to the hon. Gentleman’s concern about cost changes, whether they come from cost creep or optimism bias or any other factor that might come into play, he may be interested to know that there is a requirement in paragraph 23 of schedule 1—we have already debated that schedule—for the local authority, in producing its prospectus for a business rate supplement, to consider carefully and to consult on the policy that it would have if the project were to

“(a) cost more than the authority was expecting;

(b) take more time to complete that the authority was expecting;

(c) cost less than the authority was expecting;

(d) take less time to complete than the authority was expecting.”

No business will therefore be in any doubt about the approach that the authority anticipates taking in such circumstances. I hope that that reassures the hon. Gentleman and enables him to accept that the clause should stand part of the Bill.

Photo of Bob Neill Bob Neill Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

I understand what the Minister says and I do not think that we will seek to vote against the clause. I hope that he will reflect, and at an appropriate point, or perhaps now, confirm that he would anticipate that if an authority were to set out its policy on these matters in such bland terms that it amounted to a statement of the obvious—such as, “It is the policy of the authority to avoid cost overruns”—that would not be adequate to meet the requirements of the Bill and there should be something specific in the authority’s review and monitoring arrangements to ensure that such a thing did not occur. Otherwise, one can envisage that no authority will say that it is its policy to incur cost overruns. The danger is that one does just enough to make oneself safe from judicial review, but not enough in practice to carry out the monitoring.

Question put and agreed to.

Clause 10 ordered to stand part of the Bill.