I congratulate Mr. Darvill on his success in securing the debate. He was one of several Members of Parliament who responded directly with their views on the options for reform outlined in the Green Paper, "Modernising Local Government Finance". I have read his response, which was thoughtful, as was his speech today.

We heard interesting and serious contributions from Mr. Kidney and for Stroud (Mr. Drew) and from the hon. Members for Eastbourne (Mr. Waterson) and for Carshalton and Wallington (Mr. Brake). Several hon. Members referred to the unique and compelling reasons why their local authorities should receive a somewhat better deal out of local government finance arrangements, and I should like to have been able to respond to those individual concerns. However, in view of the limited time remaining to me, I propose to confine my remarks to the Green Paper, which has been the underlying theme and connecting link of the debate.

First, on revenue grant distribution, the key point to emphasise is that we have not yet made final decisions about whether we will extend the formula freeze for another year or base the new revenue grant system on a formula or plan-based approach. In the meantime, officials are working with local government on the detail of our proposals for reform. New formulas are being developed only on a purely contingency basis. I shall return to that matter later.

Perhaps the most consistent message in the responses to the Green Paper was that local government needs more stability and predictability in funding levels. That enables authorities to concentrate on medium and long-term planning for improved service delivery rather than on annual fire-fighting and demotivating rounds of cuts when grant figures are announced. As my hon. Friend the Member for Upminster said, we have made progress in that respect. We have sought to provide as much stability and predictability as we could, through three-year plans for total grants and the continued freeze on SSA formulas. This year, we have gone further by introducing floors and ceilings to grant changes. That was much welcomed by my hon. Friend the Member for Stafford.

However, we have promised more than predictability and stability. We all agree that a fairer grant distribution system is needed, but fairness does not mean just "fairness for my authority". Given the complexity of the formulas, it is inevitable that every authority feels hard done by in some respect. Every authority can give compelling reasons why it should get more, and it is the unenviable job of central Government to try to balance all those views and to deliver a fair outcome for all areas throughout the country.

Our present grant system attracts a lot of criticism. It has not made it easy for authorities to improve their services and it is extremely difficult for people to understand. Small wonder, therefore, that authorities doubt whether it is fair. However, our review of the distribution system has been making good progress. We are not rushing ahead with hasty solutions, as some would urge, but taking a long, hard look at our shared objectives for the system and the best way in which to deliver them. We are building consensus through working alongside and listening to local government and other stakeholders, but much work remains to be done and we are eager to press ahead.

We are well aware of the F40 campaign, which has been active at grassroots level among local authorities and in the House, and is so ably led by my hon. Friend the Member for Stafford. I thank him for his kind words on the work done through direct grant to schools and through floors and ceilings. He will be pleased to hear that we have made an early start to joint working with local government and wider stakeholders on education funding.

A group has been set up to work on the funding of schools and local education authorities. Its overall aim is to oversee the production of a full proposal for a new funding system and a timetable for its implementation. The group's membership has been drawn from central Government and local government unions, and also includes representatives of teaching and non-teaching staff, schools, governors' organisations and the churches. It is working on a contingency basis and no decisions have been taken about changes for 2002-03.

My hon. Friend the Member for Upminster mentioned the safety-valve grant. The proposal on that was well received by Green Paper respondents. We are now discussing the detailed operation of the scheme with the Local Government Association, and considering the issues that my hon. Friend raised. The grant must be targeted at only a small number of authorities, but my hon. Friend has made a cogent case for his borough, Havering.

My hon. Friend the Member for Upminster also mentioned the local public service agreements that we are piloting. They are a new and potentially valuable tool for improving local services, involving closer co-operation between central Government and local government. They allow councils to sign up to challenging targets and to deliver on key national and local priorities in return for agreed freedoms, flexibilities and financial incentives. They allow us to examine ways in which the finance system can encourage exceptional performance. The pilot exercise is now being concluded. Some 14 agreements have been signed with authorities around the country and the remaining six should be signed shortly. We will extend the local PSAs to other upper-tier authorities in England on a voluntary basis.

I have concentrated on the distribution of revenue grant, which arouses strong feelings because of the sums involved. The debate, however, is on modernising the whole local government finance system and I will briefly cover other matters raised in the Green Paper.

We are introducing more flexibility to capital finance by the single capital pot--a cross-service allocation mechanism for giving central Government capital support to local authorities. That will be introduced next year, but we are going still further. Green Paper respondents overwhelmingly endorsed our proposals to abolish the complex system of local authority capital controls and replace it with the "prudential system" described in the Green Paper.

Two weeks ago, my right hon. Friend the Minister for Local Government and the Regions announced to the House our decision to implement the changes. Local government has long sought such capital reforms and they are widely welcomed. Under the new system, authorities will be free to invest in their communities without needing permission from central Government each time. Safeguards in the system will ensure that authorities do not run up unsustainable debts, but the increased flexibility will enable them to deliver better value for money, including through partnership working. The necessary legislation will be introduced as soon as there is parliamentary time.

In the past four years, the Government have increased grant to local authorities by £8.7 billion. That real-terms increase of 13.6 per cent. contrasts with the previous four years, when there was a real cut in grant of 6.9 per cent. In our first four years in office, we have concentrated on the biggest problems: inadequate funding for local government and lack of certainty about future funding. The Green Paper and forthcoming White Paper represent the next phase of our agenda to modernise local government. That includes the reform of grant distribution, capital finance and local taxation systems, and we will continue to work in partnership with local government and local stakeholders to achieve our aims.