Public Bodies (Abolition of Public Works Loan Commissioners) Order 2019

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Public Bodies (Abolition of Public Works Loan Commissioners) Order 2019.

My Lords, the draft order, which is being introduced under the Public Bodies Act 2011, abolishes the office of the Public Works Loan Commissioners and transfers their power to lend and all other functions to Her Majesty’s Treasury, including interests in land, liabilities, property and all other rights. This draft order does not affect the essential role of the Public Works Loan Board as a lender to local authorities. Instead, it will resolve ambiguities in the governance and accountability arrangements of this vital body to ensure that it can continue to support local capital investment across the country.

As noble Lords may be aware, the PWLB was formalised by an Act of Parliament in 1817, and has supported local authorities in England, Scotland and Wales through major historical events, from the Napoleonic Wars and the formation of Trafalgar Square to our recovery from two world wars, as well as the construction and maintenance of essential infra- structure projects. By funding public utility and sanitary improvements, conservation of harbours and housing developments, the PWLB has created employment prospects and enhanced the quality of life for our citizens over generations.

Over the years, the role and legal basis of the PWLB has transformed. It is now a statutory body of up to 12 independent commissioners that issues loans from the National Loans Fund to local authorities and other specified bodies. The PWLB operates within a policy framework set by Her Majesty’s Treasury and delegates the practicalities of lending to the UK Debt Management Office.

It is important to note that, since 2004, all borrowing decisions have been devolved to the local authorities under the prudential regime. The commissioners no longer assess applications and retain only a ceremonial role, serving in office so that central government lending complies with statute, rather than serving any executive purpose. The recruitment of commissioners for these posts has predictably become more difficult as the role has diminished over time. Were the board of commissioners to become inquorate, the PWLB would be unable to lend or collect repayments. This would have substantial repercussions on local authority budgets and financing plans, jeopardising essential capital works.

These critical concerns will persist while the governance arrangements of the PWLB continue to go unreformed. This draft order will put this essential lending function on a secure statutory footing, giving local authorities the reassurance of a lending function, and so supporting their delivery of value-for-money, long-term capital investment initiatives, strengthening the Government’s commitment to levelling up.

As is usual for this type of legislation, the draft order has been put to the SLSC, the JCSI and the TSC for scrutiny. None of the committees requested the enhanced scrutiny procedure available under the Act. Further, the SLSC report states that Her Majesty’s Treasury demonstrated that the proposals will clarify

“the governance framework and improve accountability by making Ministers directly accountable to Parliament for”

PWLB loans.

Finally, I wish to thank current and former Public Works Loan Commissioners for the services that they have rendered, on an entirely voluntary basis, to the benefit of the citizens of this country. I commend this instrument to the Committee. I beg to move.

My Lords, I remind the Committee that I am a vice-president of the Local Government Association.

This is an appropriate measure for all the reasons the Minister set out. Indeed, the responses to the formal consultation indicate broad agreement. In paragraph 7.14 of the explanatory document, there is a reference to annual reporting to Parliament, which sounds as if it is going to be enhanced. I suggest that when the Government report to Parliament, they comment on whether they see the level and nature of borrowing causing any concern, generally or specifically, in relation to a single council. It is important that local councils do not turn into property companies, with council services becoming an ancillary function. That would be a very rare event, but it is something one has to guard against. It is reported in the media that councils have spent around £5.5 billion in property acquisitions over the past three years, with a quarter of that being invested in the retail sector. Issues arising include whether they may have paid more for the property they have acquired than the market value. Is there any evidence of local authorities borrowing from the Public Works Loan Board and paying over the odds for what they are purchasing?

Secondly, it is important for the Government to report on whether there is a danger of assets declining in value. We have recently seen some of the problems that there are with retail shopping centres. I find it entirely understandable that a local council might wish to invest in its own retail shopping centres or in property within its own borders, but I find it harder to understand why some councils are investing in places a very long way from their immediate responsibilities in their area.

Finally, there is social housing. As Members will know, last year, there was a 1% increase in the interest rate for loans from the Public Works Loan Board. I am interested to know what the Government think the impact of that is on the ability of local councils to build social housing. Most Public Works Loan Board borrowing now relates to social housing. The removal of the borrowing cap on housing revenue accounts was welcome, but the rise in the Public Works Loan Board interest rate may have negated some of that positive impact. How do the Government plan to judge the correct level of interest rate that encourages the building of social housing?

My Lords, I follow the noble Lord, Lord Shipley, on the first of his points. It is a great pity to abolish things that have been going on for so long, but if we are going to do it, it is perfectly sensible. I am not really arguing about that. However, there is an opportunity here to make sure that there is better understanding about some of the decisions that are made.

I declare an interest because one of my businesses advises companies on sustainable development in the sense of building. Obviously, we see what the market for development is; it is very noticeable that, on quite a number of occasions, developers have decided that the price being offered for a particular development has been too great but a local authority has been prepared to pay that price. It may be that the local authority is clever enough to be cleverer than the developer, but in the one case, it is quite a difficult profession, and in the other case, it is an ancillary activity and sometimes one notices a certain belief by the local authority that it knows better. I am not saying that that is always true but I suggest, as the noble Lord, Lord Shipley, rightly said, that it is a question we have to ask.

My worry is that, with the very serious downturn in shopping, particularly in the kind of malls that have been bought by local authorities, it must be true—it is not a question of asking whether it is true—that quite a number of local authorities have spent above the odds and now hold significant assets that may be worth considerably less than they actually paid for them. To give them some uncharged advice, if I may: it ain’t going to get any better. This is not an area where sensible people would invest, except in circumstances where they really did have a plan for the future that is very different from others.

It is important for us to have much more independent reporting from the Treasury if it is to take over this role in name as well as in fact. Parliament ought to be much more aware of these matters—not because we should be interfering with local authority decisions in single cases, but if there is a general change where we are seeing some real concerns, it is important that Parliament should be warned of it because it could have serious effects in a number of local authorities that are seeing their purchases as a mechanism for supporting both the government resources that they get and their own local rates.

My Lords, the Labour Front Bench does not intend to oppose these statutory instruments but the essence of the case for getting rid of the commissioners is that, essentially, they do not do anything and taking them away will have no impact or a benign impact. That is quite an attractive argument, until it alerts one to the question of how these loans are actually managed and controlled.

So, my first question is: can the Minister flesh out a bit more how loans to local authorities are managed and controlled? I realise there is a letter from John Glen that may answer this question but there is a crucial difference between a letter that floats around among Peers and a record in Hansard. Local authorities will be reading this debate—poor souls—and a clear statement by the Minister in the record is worth while, so can he explain how loans to local authorities will now be managed and controlled?

Secondly, I come to the exact point that was made previously. I do not know, but it sounds as though it is true that some local authorities have been taking loans and investing their money in property, perhaps as a straightforward business exercise to support their other incomes. If the answer to that is yes—it seems that it is—is this practice legal, or at least is it seen as undesirable? In the light of the fact that it has been debated in other places, has it now been stopped?

My next question is: why were interest rates raised—last autumn, I believe—from 1.8% to 2.8%? I do not know the system, so does this apply to current loans or just to new ones?

My Lords, I thank noble Lords for their contributions and questions.

My noble friend Lord Deben asked how Parliament will be kept informed. I may have to write to him with the exact details on that issue, but I will take it back to the department and try to get some clarification on it.

First, I will deal with the point made by the noble Lord, Lord Tunnicliffe, and explain how loans to authorities will now be managed and controlled. The statutory instrument does not change how loans are managed or controlled. The purpose of the statutory instrument is to resolve to administrative risk around the recruitment and maintenance of a quorate board of commissioners, as I said earlier. There is no change to existing debt or to lending terms. Day-to-day operation of the PWLB will continue to be managed by the Debt Management Office. No action is required by local authorities. The Government consulted on this change in 2016 and found widespread support.

With respect, that does not answer the question. To be fair, I gave him a few hours’ notice of it. Subsequent questions suggest that it has not gone exactly right—that this money has not been used for general purposes. I cannot take a view on that unless I know how the Debt Management Office does its job. For example, what criteria does it use? How much direct control does it have, or is it a big bag of money? I know that I should know that, but given the number of portfolios I have, please forgive me for not knowing the answer to my own question.

I understand that the noble Lord is for ever on his feet on a wide range of issues. I am probably putting the cart before the horse. If we go to the cart, I will come on to aspects of the management of the governance relating to these loans.

The noble Lords, Lord Shipley and Lord Tunnicliffe, and my noble friend Lord Deben referred to property investments being made by local authorities. Decisions on borrowing and spending capital are devolved to local authorities. They pick capital projects in line with local priorities and choose how to pay for those projects, including whether to borrow. Where local authorities borrow, they must have regard to the prudential framework—as set out by CIPFA and MHCLG, or the respective devolved Administration—to ensure that they borrow prudently.

If I may say so, the phrase “to ensure that their borrowing is prudent” covers a multitude of sins. My issue is not that local authorities should not be able to borrow or to make their own decisions, but if they make a number of decisions that mean that there is a change in the way in which the Public Works Loan Board is being used, does my noble friend not think that that issue should be raised in Parliament, not just left to the local authorities?

My Lords, my noble friend makes a good point. I will come to that issue in a couple of paragraphs and will point it out when we get to it.

Under the prudential system, local authorities should not look to take on disproportionate levels of financial risk, especially when that is funded by additional borrowing. On the point raised by my noble friend and the noble Lords, Lord Tunnicliffe and Lord Shipley, the Treasury is concerned about local authorities investing in commercial assets that do not directly serve policy objectives, especially when these investments are financed by debt, including from the Public Works Loan Board. The National Audit Office is currently reviewing the issue and intends to publish a report into this activity in the coming weeks. We will continue to keep this situation under review.

In his intervention, the noble Lord, Lord Tunnicliffe, asked for an explanation of how loans to local authorities will now be managed and controlled. Decisions over whether to borrow and how to spend borrowing are devolved to individual local authorities. Each council must appoint a qualified finance officer and have regard to statutory guidance published by MCHLG and CIPFA. This is called the prudential regime, as I mentioned earlier. As decision-making is local, the PWLB does not ask what loans are for. If there is anything more I can add on that, I will write to the noble Lord.

The noble Lord, Lord Tunnicliffe, also asked about the interest rate being raised. There is a statutory limit on the total amount of PWLB loans that can be outstanding at one time. Some local authorities substantially increased their use of the PWLB in 2019. If PWLB borrowing had reached the statutory limit, it would have effectively been unable to issue new loans. That would have been very disruptive to local authority capital plans. To ensure that lending continued to be available, the Government legislated to increase the statutory lending limit from £85 billion to £95 billion and raised the interest rate on new loans by one percentage point. In making this change, the Treasury restored rates to levels available in 2018. The cost of PWLB loans has fallen significantly over the past decades, even accounting for changing policy margins.

Motion agreed.