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Rates Of Return: Powers Of Secretary Of State

Volume 987: debated on Thursday 3 July 1980

The text on this page has been created from Hansard archive content, it may contain typographical errors.

I beg to move amendment No. 52, in page 12, line 42, leave out from 'if' to end of line 9 on page 13 and insert

'by virtue of subsection (1) above a local authority or development body come under a duty to give a notification to the Secretary of State in respect of the same description of construction or maintenance work in each of three consecutive financial years, they shall prepare a report in respect of that description of work.'

In response to representations from the Opposition, in Committee we promised to clarify the drafting of what was then clause 14(2) and which is now clause 13(2). This amendment is an attempt to clarify that, and I hope the House will feel that it succeeds in its purpose.

Amendment agreed to.

I beg to move amendment No. 53, in page 13, line 15, leave out 'if he thinks fit' and insert

'where a local authority has failed to conform with the appropriate statutory provisions'.

No. 54, in page 13, line 20, leave out 'three' and insert 'five'.

No. 55, in page 13, leave out lines 33 to 38 and insert

' he may direct that the local authority or development body shall conduct a comprehensive review of the Direct Labour Organisation and publish the report of such review'.

These amendments cover an important point of principle on local authority freedom. The Secretary of State and Ministers have prided themselves on the fact that the Bill is designed to reduce central Government power over local government and to let local government get on with its job. Yet under this clause the Secretary of State is taking unprecedented powers, in that when he has received a report—or if it is not sent to him in the time specified—he has the power to close down a direct works department. That is a power that all three local authority associations bitterly resent and object to.

What is proposed in this clause is monstrous. By these amendments the Opposition are saying that when the Secretary of State has received that special report he may direct the local authority or development body to conduct a comprehensive review of the direct labour organisation and publish the report of the review. The Secretary of State seeks the power to close that direct labour department forthwith. The House should not give that power to the Secretary of State. I said previously that the niggling way in which Ministers had dealt with the moderate points that we raised was an indication of their malevolence towards direct labour departments. Given that malevolent attitude by the Government—and particularly by the Secretary of State—there is no knowing how many departments he will seek to close under the powers in this clause.

Hon. Members who cherish local government and who may have become Members of Parliament via local government will heed the pleas of all three associations and not give such unprecedented power to a Secretary of State.

10.45 pm

It is unfortunate that we should have reached one of the most important clauses in the Bill at such a late hour. We have had a long and interesting debate on the operation of direct labour departments but, as my right hon. Friend the Member for Widnes (Mr. Oakes) pointed out, we are now talking about their very existence and whether they will be allowed to continue in being.

Whenever local government matters are discussed in this Chamber a great depth of ignorance is shown on the Government Front Bench. A wealth of inexperience permeates every ministerial utterance. I am not blaming Ministers for their inexperience, but I wish that they would pay attention to what is said by those with experience of this subject, especially people outside in the local authority associations who have been treated in a most cavalier fashion throughout the discussions on the Bill.

The clause that we are seeking to amend demonstrates as well as anything in the Bill that the Secretary of State has no sympathy for local government. He has no understanding and little knowledge of it. This is the problem that we and people in local government are up against. The right hon. Gentleman does not appreciate what an ancient, democratic institution local government is. It matters in this country. I hate to see it being emasculated by the Government. Local government has fallen into the hands of its most implacable enemy.

The Secretary of State does not understand the concept of local democracy. I am sorry that he has paid so little attention to our debates today. He has made a few fleeting visits to the Government Front Bench, but he has spent very little time defending these outrageous proposals in the Bill.[Interruption.] I have been here virtually throughout the whole of the debate. The fact that I have remained silent does not mean that I have not been here, although hon. Members may find it odd that I should be here and remain silent.

Before I was interrupted, I was saying that the Secretary of State did not understand the concept of local democracy. Like tyrants throughout the centuries, he is now out to destroy what he does not understand. Not only does he not know how it works; he does not even care that he does not know.

I am not pretending, and none of my right hon. and hon. Friends has tried to pretend, that all direct labour organisations are perfect. We do not suggest that they never make mistakes and are never guilty of poor workmanship or bad management. Many of us have been in local government too long to make such a foolish assertion. However, any member of the public who has a complaint against a local authority department can at least take it up with an elected councillor who can investigate and, if necessary, raise his complaint in the council chamber. That kind of accountability does not apply to firms in the private sector.

This argument is not about efficiency. We are facing a demand by the Secretary of State to have the power to order a democratically elected local authority to close a department—that is what the clause means in practice—irrespective of whether is is efficient or not and irrespective of whether the authority and the people who elected it are satisfied with that department.

I do not understand why the Government have taken this power. Underlying the clause is the Government's inbuilt dislike of the public sector in all its forms. The clause is based on the notion that direct labour is intrinsically bad and should be tolerated only within certain severe restraints and restrictions. The Government believe that local authorities should be constantly exposed to the threat of arbitrary abolition by the Secretary of State. I repudiate that notion.

The national interest does not require such power to be vested in the Secretary of State. The clause is part of the Government's relentless drive towards centralised State control over many of the most important activities of local government. I am nauseated by the hypocrisy of a party that continually proclaims its belief in freedom. That party constantly tells us that it wishes to reduce the power of the State. It is supposed to abhor Government interference. It is now assiduously dismantling the rights of elected local authorities and establishing the omnipotence of the Secretary of State. How can Conservative Members match that with their proclaimed belief in freedom? I would welcome some answers.

If the Bill is enacted, the voice of the people will no longer be the voice of God. The voice of the Secretary of State will be the voice of God. The question is not whether direct labour departments are good, bad, inefficient or efficient. The question is whether the Secretary of State should have an unfettered and untrammelled power to impose his will on elected local authorities which are much closer to the people whom they represent. Local authority representatives understand the problems of their areas and the needs of their electorates better than a Secretary of State could. The clause therefore cries out to be amended.

Even at this late stage, the Government can save something of the tattered reputation that they have among local authority people of all parties. They can reconsider this outrageous proposal with a view to modifying the proposed dictatorial powers when the Bill is considered in the other place.

I would warmly welcome even a hint of an assurance that the Government will reconsider the advisability of establishing a dictator in Britain.

I shall be brief, but I have been prompted to rise by some of the outrageous remarks made by the hon. Member for Rotherham (Mr. Crowther). He is being unfair to the House and to those who read Hansard, because he has indicated that the Labour Party has a monopoly on knowledge of local government. That is not so. The hon. Gentleman may not know that I had the honour of serving on a local authority for about six years. That is a very small period in comparison with the hon. Gentleman and, no doubt, some Conservative Members. However, during that time I gained a great deal of knowledge about how local authorities work.

I understand some of the points that the hon. Gentleman made concerning the importance of maintaining independence from the Government. The hon. Gentleman advocated his cause with flowery and emotional language. I remind him that the central Government fund more than 60 per cent. of local authority expenditure. Inevitably, the Government have some power over the way in which local authorities operate.

I am sure that the Opposition spokesman would admit that there has been an abuse of power in local government. I could recite several cases. The majority of them would probably involve Labour-controlled authorities. For many years, they have abused their powers, not least in the operation of direct labour organisations.

I remind hon. Members that many private contracting companies pay rates. Therefore, is it not unfair that they might lose business to a direct labour organisation to which they are indirectly contributing through the rates? This is important. If there is an abuse, the Secretary of State and Ministers could obviously assess it, and therefore it is right that there should be a power of intervention by the Government over the operation of the department.

I am happy to attempt to answer that point. Direct labour departments themselves also pay rates. There is no distinction in that respect between public and private contractors. If there is an abuse in the sense that there is maladministration, it is a matter for the local government ombudsman. Assuming that things are properly operated and in order, there is no validity in what the hon. Member says—in fact, far from it. On the other side of the coin, the hon. Member and his hon. Friends should be urging that direct labour organisations should be allowed to compete freely in the open market.

It is not unknown for a local authority that gets into trouble to threaten to increase the rates. That is the case with Manchester, which has threatened a 70 per cent. increase in the rates to recover its position. But who will pay the increased rates? It will be the ratepayers, including the private sector, who will suffer at the hands of the local authority because it has mismanaged its affairs. I do not say that all such authorities are Socialist-controlled, but that is certainly the case with Manchester. Its mismanagement and total neglect of the Government's requests to contain its expenditure has placed business and domestic ratepayers in a precarious and unfortunate position. The local authority can always recover the position by increasing the rate poundage next year. The private contracting company, the building company and the operators of public service contracts are not in the same position. Also, bearing in mind the high interest rates, they are not in a position to borrow.

May I press the hon. Member further on the question of whether the Secretary of State or the Minister should have powers of intervention? My mind goes back to the first Labour Government of my right hon. Friend the Member for Huyton (Sir H. Wilson) when the Conservatives took control of Manchester council and tried to dismantle the direct labour department. The DLO put in a serial tender for a primary school contract which was 2½ per cent. lower than the nearest private sector tender. The Conservative-controlled council decided not to give the contract to the DLO. The Manchester Labour councillors then lobbied the Government, but they refused to intervene in the matter, saying that it was for the local authority to decide. Why are this Government acting differently?

The hon. Member has greater knowledge of the case than I have. He makes a good point. I hope that my hon. Friend the Minister will answer the point in due course. I share the hon. Member's concern that a local authority must have some integrity and must retain an element of independence. However, it can never be totally independent, and to suggest that it can is to live in cloud-cuckoo-land. The hon. Member, who represents a Leeds constituency, knows Manchester extremely well as he served and lived there for many years. I must point out, however, that the local authority and Government Departments are under no obligation to accept the lowest or, indeed, any tender for any job. I have opened tenders, and I am well aware of the basis on which they are accepted. There might have been other reasons. I shall not speculate on what they might have been. The hon. Gentleman blames the dogma of a Conservative-controlled local authority. The Conservatives have not controlled Manchester for a long period. Its problems reflect many years of Socialist neglect and incompetence.

I look forward to my hon. Friend's explanation. The Government have good cause not to accept the amendments.

11 pm

The House is at its worst when talking of direct labour. The arguments are stale, and the solution is simple.

If the situation was reversed, the hon. Member for Macclesfield (Mr. Winterton), would consider the wording outrageous. A Conservative Opposition would have made great play with the words "if he thinks fit". The situation is similar to that in 1945 when a Labour Attorney-General stated "We are the masters now". Those words should not be applied to legislation and are an insult to local government. The amendment is much more sensible and nearer the mark. I am surprised that the hon. Gentleman does not support it. I shall remind him of this in future. We are asking only to substitute the words:
"where a local authority has failed to conform with the appropriate statutory provisions."
That principle is clearly set out in previous clauses.

The Minister has been courteous in his replies in Committee and in this debate. In Committee I raised the problem of a local authority, such as my own in the Isle of Wight, where it would be difficult to seek tenders from three persons. The Isle of Wight county council built up a direct labour organisation because for a long time we had only one substantial firm that could do maintenance work. It was a monopoly and often held the local authority over a barrel. There are now one or two other firms in the field. That point was accented in Committee. I hope that the Minister will indicate that it will not be a hard and fast rule. The Scilly Isles goes its own way and has only just done away with aldermen, but there could well be difficulties there.

A local authority should not be hauled over the coals and forced to make a report because it has not carried out the terms of the clauses. It is preferable to put the position right before the Bill is enacted. I should be grateful to hear from the Minister that there is a way round that.

I agree with my hon. Friend the Member for Rotherham (Mr. Crowther) that this is an extremely important part of the Bill. It emphasises the draconian powers that the Secretary of State will have over local authorities in his discretion to shut down direct labour organisations.

The four areas of accountancy—general highways, new construction of more than £50,000, new construction of less than £50,000 and maintenance—will be separate accounts, kept distinct from other accounts. Those accounts are not merely for the interest of the public. They will be trading accounts, and the object of trading accounts is to show a profit or loss, which is described in the Bill as a positive rate of return. The rate of return on capital and the method of calculation are once again the responsibility of the Secretary of State. We have repeatedly said that direct labour organisations were not introduced merely to show a profit. The service element is paramount in any direct labour organisation. The consultative paper referred to a 5 per cent. return on capital. That figure, or the figure prescribed by the Secretary of State, will, it is claimed, enable local authorities to decide whether their direct labour organisations are profitable or whether they should be disbanded, with the money put to better purposes.

Why is that principle not applied to every other local authority department, with a profit having to be shown in education, social services or housing? If local authorities existed merely to show a profit, most services would be dismantled and capital would be invested in speculative dealings.

The service, whether a direct labour organisation or any other department of a local authority, should be based on need. Local councillors, elected by the ratepayers, should assess those needs. If, as elected members, they wish to set up a direct labour organisation, that is their prerogative. Even if they wished to disband an organisation, it should be their decision and not the decision of the Secretary of State.

This part of the Bill will be forcing one department to make a profit out of others in the same authority. In future, departments will not be paying cost, as they are at present. Should a DLO refuse to carry out work for another department if it is not profitable?

The Government claim that the Bill will create public accountability, but, as one member of the Institute of Municipal Building Management commented,
"this is virtually akin to requiring that all DLO tender prices be published in the National Builder."
He made that comment because DLOs will not be able to shift finance to other headings. It will be judged under each of four separate categories and it will, therefore, reveal the make-up of DLOs' tender prices. Direct labour organisations will be under continual scrutiny, and the only people to derive any benefit will be the private contractors and not the ratepayers.

The Minister has referred to a code of practice approach, which, we were told in Committee, would include not only the CIPFA recommendations but consultation with the Institute of Chartered Accountants and, as the Government moved on, other bodies. Perhaps the Minister will tell us whether he has asked the Institute of Municipal Building Management for its observations, because, like the local authority associations, the institute has grave reservations about this aspect of the Bill. A code of practice imposed without in-depth consultation with the organisations immediately concerned will be of overriding concern to them. A practice must be acceptable and not put DLOs at a direct disadvantage.

If the code of practice is not in the best interests of DLOs and if the Secretary of State maintains the fall-back power, the elected local authority members must fully understand the implications of that. Should the return on capital employed not be achieved over a period of three years, the Secretary of State will have the power to close a division or the whole of a department's operations.

The whole tenor of the Government's proposals points to a bias against DLOs, and the Government's rhetoric about giving local authorities more freedom and autonomy contradicts their actions in taking away the democratic tradition of local authorities in which the elected representatives take the decisions.

This is once again an undesirable shift from local government responsibility to central Government control—a shift which is unnecessary and undesirable and must be resisted. The closing of a DLO would clearly be relished by the private sector. The intention is to eradicate DLOs as building and minor works departments and to leave a clear field where public building and lucrative maintenance can be shared out and where monopolies and cartels can prosper.

Without a DLO putting in a responsible estimate for work, which in turn forces the private contractor to put in a realistic price—if DLOs are taken out of the tendering procedure—the ratepayers are at the mercy of price fixing.

The Bill, with all its restrictions, is creating an atmosphere in which DLOs cannot compete. The ultimate power of the Secretary of State to close down is adding insult to injury. The director of works in Manchester has already stated that staff required for administration will have to be increased, which would have repercussions on staffing resources. Another difficulty, presented by new legislation, will be the varying work loads of a department. The director predicts that the more variations there are in the work load, the more will work have to be sublet. This factor, together with the hardening of the financial position in general, will mean a reduction in the work force. Management will find itself in a difficult position to ensure continuity of work for all its personnel and yet remain competitive.

DLOs need to be given preferential treatment to keep a rolling programme of work either in the capital or the minor works division. They will not be able to show a profit under the stringent restrictions in the Bill of having to tender for all major contracts and for a percentage of minor and maintenance works. The Bill is a constraining measure with the objective of moving public sector work more into the private sector. If this can be achieved at the expense of DLOs, the aims of the Government will be achieved.

I am very moved by the reception accorded me. I do not think that it is entirely in anticipation of the content of my speech.

Amendment No. 53, moved by the right hon. Member for Widnes (Mr. Oakes), seeks to remove the discretionary power of the Secretary of State. The hon. Member for Isle of Wight (Mr. Ross) was also concerned by the words "if he thinks fit". In many places in legislation there is the discretionary power contained in the words
"if, in the opinion of the Secretary of State"
But it is not an unfettered power. There is protection, at all times, in the courts. If the Secretary of State cannot show good reason why he exercised his power, it is challengeable in the courts. If it is found that the Secretary of State has exercised his discretion without good cause, the courts can order such action to be quashed. It is important to recognise that this is far from the sort of dictatorial, absolute power that might be suggested.

If hon. Members want illustrations to show why this discretionary power is necessary and why there cannot merely be an absolute criterion of the statutory provisions in the Bill, I refer to the point raised by my hon. Friend the Member for Chorley (Mr. Dover). My hon. Friend asked whether it was mandatory for a council to accept the lowest tender. It is not. It is possible for a council to accept a higher tender, perhaps from its own direct labour organisation. It would be palpable nonsense to insist on every occasion that the lowest tender, from wherever it came, had to be accepted. That could lead to abuse. Although a council was observing its obligation to go out to tender it could ignore the lowest tender and continue to place every order with its own direct labour organisation at a higher figure. For those reasons, there is need for an extra discretionary power.

There is a requirement in the Bill that after three years of failing to make an adequate return or of making a loss, a special report should be called for and action should be taken by the Secretary of State. The situation might become so serious well before that time that the Secretary of State would have to intervene and ask for a special report.

11.15 pm

I hope that I have explained that, although the wording might look as though there is an absolute power for the Secretary of State, the laws are interpreted by the courts. The Secretary of State is obliged to act within his responsibilities and would need to show good cause if he exercised his power, and would be subject to the determination of the courts in the final analysis.

The second amendment seeks to change the period of three years to five years. If after three years there is a failure to perform it is sensible for a report to be made. There is nothing to stop a local authority, if there is a particular reason, submitting a further return to show the true picture.

The third amendment suggests that if the local authorities have submitted their reports the Secretary of State should have the power to ask for further reports. We did not think that that would meet the problem. We prefer to maintain the position that if it is proved that a DLO is becoming a substantial charge on the ratepayer and that it is consistently failing to perform efficiently there should be a power within a sector or within the totality of operations to require the DLO to cease operating. That is the ultimate sanction. I hope that it will never be used.

We are not making an attack on direct labour organisations, but we are attacking inefficient direct labour organisations, which we are determined to root out. The nature of their structure within local authorities can lead to inefficiency. I should have thought that all hon. Members would support proper accounting procedures. They are required in the private sector. If that sector does not have proper accounting procedures it goes bust quickly.

There is nothing in the Bill that an efficient direct labour organisation has any reason to fear. In some ways, the opposition of Labour Members does a disservice to many DLOs that are efficient and have done much good work. To argue that they cannot face proper accounting procedures does a disservice to them and acts as a camouflage to inefficient DLOs. I hope that my hon. Friends will insist on resisting the amendments, because the powers in the Bill are the minimum necessary to achieve our objective.

I have listened with care to the Minister. None of my hon. Friends has suggested that an inefficient and badly run direct labour organisation should be allowed to continue in that way. We are anxious about unfettered power being given to any Secretary of State. The Minister said that the words "if he thinks fit" do not bypass the courts. Therefore, if a Secretary of State—I used the word "malevolent" some time ago—were to close down building and direct works departments malevolently, as it were, on an issue of party principle because he believed in the private sector and intended to close as many DLOs as he could, and he was stopped from doing that by the courts, that would mean that he did not have unfettered power. That is what the Minister is saying.

This is an interesting point. Does my right hon. Friend agree —since he is a practitioner of the law and I am not—that, at the point where the court considers whether the Secretary of State has acted properly and reasonably in the exercise of his discretion, the court would merely have to establish, in finding that the Secretary of State had acted reasonably, that he had genuinely thought fit to act in that way? That is all that he is required to do.

Only in the event of the Secretary or State acting in a non-genuine way would the courts find that he had acted wrongly. If he could show the court that he genuinely thought it fit that he should take certain action, he would surely be covered. Is that not the case?

I do not blame my hon. Friend for thinking that. It is perfectly reasonable for any layman to think that if the words "as he thinks fit" are included in a Bill the courts have no power over the Secretary of State because he would say that he had thought fit.

I can tell my hon. Friend that, as a Minister, I went from the Department of Energy to being Minister of State at the Department of Education and Science at a peculiar time a few years ago. On an education issue to do with Manchester, the courts, in words not dissimilar to these, held that a Secretary of State was accountable. That is something that might blow back on the Government.

I return to my point that there is a fetter and that the Secretary of State, if challenged in court by an authority—as no doubt he would be if the authority felt strongly about an issue—would have to give his reasons and it would be for the court to accept those reasons.

By nodding his head, the Minister of State indicates that that is the position. In those circumstances, although we feel strongly about giving powers to the Secretary of State, and since there is a fetter enforceable by the courts of the land, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 56, in page 14, line 1, after 'not', insert

'notify the Secretary of State under subsection (1) above or'.—[Mr. King.]