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The government has announced a £300m investment in social services for older people over the next two years in an effort to end widespread delayed discharge (bed-blocking) by 2004.

The money, jointly announced earlier this week by health secretary Alan Milburn and local government secretary Stephen Byers, will be allocated directly to councils to invest in more nursing home places, intermediate care beds, and intensive care packages to help older people live at home.

The investment is coupled with the publication of a new agreement - drawn up in association with the independent sector - outlining reform in the way the NHS and social services work together.

The agreement highlights the importance of closer working between commissioners and providers of services, and marks "the beginning of a new, more positive partnership between the statutory and independent social and health care and housing sectors".

The agreement states: "Commissioners and providers are equal partners in delivering services. The early and ongoing involvement of independent sector health and social care providers in the planning, delivery, and monitoring and review of local services is not optional - it is essential."

The agreement also criticises the current over-reliance on short-term or spot contracts between commissioners and providers of older people's services, and recommends that purchasing plans be produced for up to three years ahead. Rewards for quality services or the establishment of new services with incentives, such as upfront investment or a block contract, are also proposed.

Some £100m of the new money will be available for the remainder of this financial year, of which £45m will go to the 50 councils with the most severe problems, £45m to the other 100 councils, and £10m to a team of health and social care agents responsible for supporting change and implementing contingency arrangements where there are specific service problems.

No decisions have been made on the £200m for 2002-3, but the government has promised that no council will receive less than they receive this year.

The money is intended to free up 1,000 NHS beds this winter, see 2,300 fewer people prevented from leaving hospital when they need to next year, eliminate widespread delayed discharge by 2004, and instil greater confidence and stability in the care home sector.

Public sector union Unison welcomed the money, but urged for it to be "condition free" to allow councils to target funds where needed most.

The Local Government Association, which had been lobbying for £300m this year to avert a crisis in social care, also welcomed the government's announcement and its decision to hand the money directly to local authorities.

LGA chairperson Jeremy Beecham said: "Previous funding for winter pressures has been channelled through the NHS but it is councils that provide a wide range of care, support and advice services that can help reduce the need for admission to hospital and facilitate timely discharge."

President of the Association of Directors of Social Services Moira Gibb acknowledged the tension in some areas between councils and the private sector over fees, but added it was crucial for the initiative to end up with increased capacity in the long-term care sector and not end up "simply paying more for the same number of placements".

Agreement at website www.doh.gov.uk/buildingcapacity