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§ Mr. Christopher Chope (Southampton, Itchen)
I welcome the opportunity to draw the attention of my hon. Friend the Under-Secretary of State for the Environment to a sinister new development in local government—the abuse of companies limited by guarantee. The creation of such companies is often no more than a fraudulent sham and the use to which they can be put is grossly anti-democratic, an outrageous abuse of ratepayers' funds and a recipe for corruption on a massive scale. As not only ratepayers' but taxpayers' money is being siphoned into these companies, I hope that my hon. Friend the Under-Secretary shares my anxiety.
I shall illustrate the argument by referring to the recent establishment by Southampton city council of a company limited by guarantee, the Southampton Economic Development Corporation, which was incorporated on 20 March this year and has the widest possible terms in its memorandum of association. The report submitted to the city council said:A company which carries on an activity not permitted by its memorandum will be acting ultra vires and that activity will be void. It is therefore important that the memorandum must be drafted in the widest possible terms to enable a company to carry on any activity which it might wish to do in the future.The objects of SEDCO enable it to do anything calculated to assist and promote the economic, scientific, technological and social development of Southampton; to carry on research; to stage conferences, exhibitions or plays and to provide leisure activities and amenities; to deal in property; to invest, borrow and deal with money and to take shares in other companies. The city secretary reported that that was not an exhaustive list of the company's powers and that there was also a blanket clause enabling the company to carry on any activity that is deemed to be incidental, necessary, expedient or conducive to its other specified powers.
Therefore, Southampton Economic Development Corporation has powers that are far wider and more extensive than those of the city council itself. However, unlike the city council, the economic development corporation is devoid of public accountability. Its members and directors are appointed by the city council, but need not be elected members of that council. Once appointed, they are accountable to the company and not to the public.
The public and press are denied access to agendas, supporting papers and minutes, thereby being denied all the public safeguards in the Local Government (Access to Information) Act 1985.
The company board meets in private and, most sinister of all, councillors who are not on the board are denied access to information. Board members may be paid fees and the board may be so constituted that minority parties on the city council are not represented on it.
Although directors are governed by company legislation and the company must keep accounts and make and file an annual return, the controls on members of the board are a far cry from open accountability to the electorate and the public. Yet the company is wholly dependent on public funds or the guarantee of such funds.
Within a few days of incorporation, Southampton Economic Development Corporation was given £450,000 1466 by the council. The payment was made under section 137 of the Local Government Act 1972, which enables local authorities to spend up to the product of a 2p rate.
The product of a 2p rate in Southampton is almost £700,000, but by the end of the last financial year only £250,000 had been spent. The remainder, instead of being returned to the ratepayers, was siphoned into the new company. All that the public know is that the money was invested on behalf of the company on 29 March, the day on which it was transferred. From now on, the ratepayers of Southampton have no control over the way in which that money is spent.
Not content with a mere £450,000, the directors of the company immediately started investigating ways in which millions of pounds could be produced for the company. The ingenious and sinister proposal that was considered was a back-to-back loan by which the company would borrow up to £3 million from a bank on the basis that the city council would deposit an equivalent sum with that bank. In that way, the council would not be deemed to be spending money, but would potentially be liable to use the money to meet the company's debts under the guarantee. Meanwhile, the company, meeting in secret, would be able to spend millions of pounds as it wanted.
The sham nature of that proposal is clear from a report to the directors that was given by Mr. Grey, who is not only a director of the company but the treasurer of the city council. The first sentence of his report reads:When considering the ways in which the City Council could provide funds for SEDCO, it was clearly important to bear in mind the limitations imposed by Statute and by Government regulations.It may be apparent from that sentence that Mr. Grey was finding it difficult to separate his responsibilities as treasurer of the city council from the role which he was apparently playing at the time of making his report, that of a director of the corporation. Mr. Grey continued:If the revenue reserve for capital purposes of the Council continues to be the sole source of finance for this company, the present City Council policies, if maintained, would ensure that funds would be available for four to five years at the rate of £350,000 a year.That was not enough, apparently, for the directors of the company. They wanted to consider alternative provision, and the city treasurer reported that he had conducted negotiations with two banks, Hambros and the Trustee Savings bank, and said that, in consideration of an investment by the council in the bank, the bank would make a loan to the Southampton Economic Development Corporation. He said in his report to the board of directors:An arrangement of this sort ensures that there is no direct link between the two transactions, the bank loan to SEDCO and the City Council's investment with the bank, both being in the normal course of business.In my submission, that was nothing more than a sham, because it was clear that the bank would lend money to the corporation only if the city council agreed to deposit money with that bank, so giving a sort of back-to-back arrangement.
The report to the corporation went on to point out the costs of such loans. It said that the interest would be £130,000 a year for each £1 million borrowed. In other words, it would be up to £390,000. It went on:It is extremely unlikely that interest commitments will be met in the early years of operation, and the City Council will, therefore, need to act as a guarantor. In addition, provision will need to be made for repayment of the loan principal.Mr. Grey said that the Hambros offer would cause little difficulty, because the loan would not fall due until the end 1467 of the seven-year loan period. That was, of course, a long way ahead for those currently running the council, although it would be a potential millstone around the necks of Southampton's ratepayers.
At the end of his quite long report, Mr. Grey told the directors:On balance, I would suggest that taking a loan at the present time is premature.One of the directors on the board was a Conservative councillor, Mike Andrews, an accountant. He thought that what was being proposed was of dubious legality, and he expressed the intention to vote against the proposal at the board meeting. He said that he would point out to the bank which was thinking of entering into this back-to-back arrangement that it might be entering into a matter of doubtful legality.
Within 24 hours, the city council decided that Councillor Andrews should be dismissed from the board. A special agenda item referred to using the powers in the Local Government Act to deal with a matter of "extreme urgency". The mayor stated:It has been brought to my attention by the leader of the council"—I do not know where that leaves the question of confidentiality, because it appears that the leader of the council, who is a member of SEDCO's board, is free to discuss matters that take place at board meetings with his Socialist colleagues outside, but can criticise someone who is not a member of the Socialist party if he acts similarly.
The mayor went on:Councillor Andrews who is a council appointed director of this corporation has indicated his intention to take action by writing to certain banking organisations on lines which could detrimentally affect the board's ability to satisfactorily progress negotiations. This action, if carried through, could be construed as directly incompatible with continued membership of the board of directors.The mayor said that he thought that the matter should be dealt with without delay. As a result, the council on which the Socialists have a majority voted to dismiss Councillor Andrews from the board. That meant that one of the two Conservative councillors who had been elected to the board was dismissed.
The corporation is so rotten that it appears that anyone who wishes to scrutinise what happens is likely to lose his position on the board. It is possible that no minority party representative will be allowed to serve on the board unless he agrees to be a silent stooge and cipher for the Socialists. As with all authoritarian and undemocratic councils, the voice of a minority is left with the expensive option of litigation in which the opponents will be funded by the ratepayers and the public purse.
The officers of the council are involved as directors of SEDCO. They are being put into an invidious position. The city treasurer owes a fiduciary duty to the ratepayers in his own right and, as an employee of the local authority, he should give his working time and undivided allegiance to that authority. What is he to do when conflicts of interest and duty arise? How can he remain, and be seen to remain, impartial, objective, politically neutral and professionally independent? It seems that pressure was imposed to make him agree to enter into a £3 million loan, despite his reservations. It has been suggested that another council officer has been faced with pressure to doctor the minutes of the board meeting to avoid potential embarrassment to the leader of the Socialist city council.
1468 It seems that nothing can prevent the corporation from incurring liabilities of countless millions of pounds which ratepayers will have to meet in the future. Short of rate capping, there is no limited liability for ratepayers. They are rather like names at Lloyd's: they will have to pay up, if called upon to do so, in relation to bad decisions over which they have no control.
In the limited time available, I cannot go into the temptation of corruption to which directors of such companies limited by guarantee may be exposed. Money taken through the rates from commercial and residential ratepayers in Southampton can, through the device of this company, effectively be spent on anything that the company directors think fit. If, for example, the Widdicombe committee recommends a clampdown on local authority propaganda — I hope that it will — SEDCO will be able, under its memorandum, to spend ratepayers' money instead.
If a trade union or individual agrees to give a fixed sum of money to the Southampton Labour party, and is then to be rewarded with a soft grant or loan from the corporation, how will the press or public be able to learn about it? There is no way that the press or public would be able to learn about such matters. That is why I say that it is a recipe for corruption. I feel that all right-thinking people would regard putting local authority money and property beyond the direct control of the local. authority as dubious in the extreme, and depositing or charging public money as security for the debts or other obligations of the company as grossly immoral.
Unfortunately, there are now elements in local government that are not right-thinking and are prepared to bend whatever rules and conventions exist to further their own party political objectives. The members of the board of the company have no experience whatever in investing in businesses, which is apparently the purported purpose of setting up the developmemt corporation. It will take money from existing thriving businesses in Southampton and give it to dubious businesses that may well not survive and are likely to collapse, but only after a good deal of ratepayers' money has been poured into the board.
I hope that my hon. Friend will be able to give a message of hope to those who are desperately trying to resist these sinister developments in local government.
§ The Parliamentary Under-Secretary of State for the Environment (Sir George Young)
I am grateful to my hon. Friend the Member for Southampton, Itchen (Mr. Chope) for raising the question of the activities of the Southampton Economic Development Corporation. The specific case that he has raised in turn raises general issues of principle concerning the activities of local authorities. He touched on the potential conflict of interest facing local government officers who find themselves acting for the council but also for bodies that are at arm's length.
My hon. Friend raised a fundamental issue that we have asked the Widdicombe committee to look at: whether the premise on which Parliament gave local authorities very wide discretionary powers — in the belief that they would honour the convention to use them responsibly—is still valid at a time when, unfortunately, a growing number of local authority councillors exploit to the maximum the framework of the law to use ratepayers' funds for purposes that were never intended by Parliament:. One of the most valuable things that I can do is to refer 1469 my hon. Friend's speech to the Widdicombe inquiry, together with any supportive evidence that he has, particularly from the minutes of the board.
My hon. Friend likened the Southampton ratepayers, whom he represents so ably, to those who are named at Lloyd's, but if one is named at Lloyd's one has the option at the beginning of deciding whether to enter into that obligation. Short of moving out of Southampton—and denying themselves the benefit of my hon. Friend's representation in this House—those who live there do not have the option that members of Lloyd's have of deciding whether to take on a particular liability.
My hon. Friend raised several matters on which I am not able to comment in detail. I should like to reflect on them and seek further advice from my Department, but it might be helpful if I outlined to my hon. Friend and the House the Government's general philosophy about the relationship between local government and the funding of economic activity in a particular local authority area.
I think my hon. Friend will agree that responsible local authorities have a legitimate role to play in the economic development of their district. When my hon. Friend was leader of Wandsworth council, he worked closely with my Department to bring to fruition many worthwhile urban programme schemes directed at creating employment and improving Wandsworth as a place in which to invest. But Wandsworth council was answerable for its proportion of the programme, and there was the element of accountability, whereas in Southampton the link of accountability is somewhat weakened.
My Department's 1982 consultation paper, "Local authority assistance to industry and commerce", stated:Local authorities have a key contribution to make to the development of small firms—sand indeed to the encouragement of enterprise generally—through the proper exercise of their statutory powers, and especially in ensuring that enterprises are not unduly hampered by bureaucratic delays, over restrictive planning policies or unnecessarily heavy rate burdens".In the past weeks two major Government reports have been published. The White Paper "Lifting the Burden" specifically drew attention to how local authorities can help local enterprise to flourish by minimising controls and bureaucracy and by adopting a positive approach through the planning system. Secondly, the publication "Pleasure, Leisure and Jobs" which my right hon. Friend the Secretary of State has sent to all local authorities outlines one important area of economic growth—tourism—and the important role that local government has to play in developing it.
I must qualify that support with a reservation which I am sure will meet with my hon. Friend's agreement: that local authorities must avoid conflict with central Government's priorities towards regional and inner city development and the control of public expenditure generally.
Local authorities are not capable of taking on and should not be expected to take on the whole burden of reviving the economy. They must work with the grain of national policies and not cut across them. Assisting industry locally should not be used as an excuse for experimenting with doctrinaire economic theories, imposing political conditions on employers, pursuing political propaganda campaigns or side-stepping expenditure controls.
1470 If ratepayers' funds were used through the board to fund party political campaigns, every right-minded person would see that as an abuse of those funds. In the end, a high-spending policy, brought about by a local authority, designed to revive the local economy, will inevitably be self-defeating because of the high rates burden which is added to the costs of local firms.
The Government have also made it clear that they are not opposed in principle to the setting up of enterprise boards. They are still a fairly new feature, and are one way in which local authorities can organise themselves to help industry. I can assure my hon. Friend that the Government will watch carefully how they develop — the crucial point that he made — and how the parent local authorities exercise control over their activities. My Department has already learned a great deal about the enterprise boards funded by the GLC and the metropolitan counties because we have power and control over their expenditure, which is exercised by my right hon. Friend the Secretary of State.
Some of those boards have adopted sensible, commercially minded approaches. I am sure that my hon. Friend does not object to that. I have to answer another debate later about the role of the Greater London Enterprise Board. Enterprise boards can offer potential advantages and, as my hon. Friend said, potential disadvantages. For example, an enterprise board, by concentrating local authority services in one body, separated from day-to-day political pressures, may be able to work more closely with the private sector, build up its own special expertise and identify gaps in local private sector provision whether in sites, services or capital. A body operating like that, using commercial criteria but with a regard to local employment needs, seems to me capable of fulfilling a useful role, not least in fostering the birth and growth of small firms in inner city areas.
There are obvious dangers, as my hon. Friend said, if the board diverts local government from what it can do to help in basic policy areas, in assembling land for example; or if it leads to additional bureaucracy with its own priorities, merely adding to industry's rate burden and imposing excessive conditions on the firms receiving aid. Problems would also arise if the scale and nature of the operations worked against national or inner-city priorities. Those dangers, while not inevitable, depend upon the guidelines that are set for the board by the elected members, how its performance is monitored and how it is made accountable.
As I said a moment ago, the Government have set up a committee of inquiry under the chairmanship of David Widdicombe to consider a number of aspects of local authority affairs, including the use of local authorities' discretionary spending power under section 137. As my hon. Friend made clear, it was the use of section 137 which enabled Southampton at the end of the year to use the margin available to it to fund the enterprise board. The Widdicombe inquiry will be looking at the clarification of the limits and the conditions governing the existing powers under section 137. There is a particular reference to bodies set up and largely funded by local authorities. Therefore, I expect the activities mentioned by my hon. Friend to figure quite prominently in the committee's deliberations.
My hon. Friend will understand that we want to have the benefit of the views of the inquiry, as an independent, 1471 impartial body, on the difficult issues that he mentioned before we can consider what policy changes are appropriate.
I come now to particular issues concerning the Southampton city council enterprise board, SEDCO. One of my hon. Friend's concerns is that it could be used to evade the normal Government controls on local authority expenditure. He described the transaction of the £3 million deposit with the £3 million advance.
It is certainly true that there are no constraints on the amount of money that an enterprise board may spend, other than those that apply to any commercial undertaking. Such expenditure is outside Government control on local authorities and could be brought within it only by primary legislation.
Grants to the enterprise board under section 137 would score against the authority's prescribed expenditure allocation. Likewise, revenue grants by Southampton to its board would count towards total expenditure for target purposes. My hon. Friend touched on the guarantees to the enterprise board and the potential long-term commitments that might be inherited by a city council of a different complexion.
As a matter of principle, I welcome private sector capital injections to a board as an indication that it is acting along sound commercial lines. The guarantee provided by the local authority does not score against expenditure until the guarantee is called. If it was called, a guarantee of a revenue nature would count towards total expenditure, but a guarantee of a capital nature would be prescribed expenditure only if the authority thereby came into beneficial occupation of a capital asset.
My Department is now reviewing the whole system of capital expenditure controls in consultation with the local authority associations, and the question of local authority controlled companies will be examined. It is a complex area and I listened with special interest to what my hon. Friend had to say about Councillor Michael Andrews, who was appointed to the board by the city council but subsequently dismissed in the circumstances outlined by my hon. Friend.
If Councillor Andrews was simply being censured for acting responsibly as a guardian of ratepayers, that is something that I would roundly condemn. I would want more details about the case before going further than that; however, there are grounds for anxiety. It raises the point of principle, on which I touched earlier, of the conflict of interest between accountability to the local authority and accountability to the enterprise board to which one is appointed as a director.
In the light of what my hon. Friend has said, we will continue to maintain a close watching brief on the operation of the boards, not least the one in Southampton. The points that my hon. Friend has raised are material to that monitoring exercise. When the recommendations of the Widdicombe inquiry are available, and when the exercise on capital expenditure controls is finalised we will be in a better position to decide whether any changes are required to the legal framework in which they operate.
In the meantime, I commend my hon. Friend for his diligence—which we have grown to expect from him—in bringing to public attention the potential abuse of the position in Southampton. My Department will keep a close watch on the position that he outlined.