13 February 2004
In these times of thrift, it is perhaps ironic that the public sector has turned towards a British institution synonymous with risk to solve its financial conundrums: the City of London.
Ironic but sensible, that is. For, as Chancellor Gordon Brown has been quick to point out, City financiers are still at the forefront of public sector financial innovation, even if one ignores the contentious attractions of public-private partnerships.
Nowhere is this more apparent than in London itself, where Mayor Ken Livingstone is at the centre of plans to attract private investment into public projects.
Livingstone, as his failed attempt to stave off London's Tube PPP shows, is known to favour the use of US-style bond issues to raise cash to pay for vital public service upgrades. And he is ready to re-embrace the City to ensure his ambitious plans are met.
Livingstone is currently negotiating with the Treasury over a deal that could see Transport for London, one of the few UK public sector bodies with a credit rating, raise billions of pounds in bonds to part-finance the capital's Crossrail project – expected to cost £12bn, should it go ahead.
Livingstone's office this week told Public Finance that plans to issue bonds for other infrastructure projects in the capital – such as the extension of the East London Tube line – were also 'afoot', but that 'no firm decisions have yet been made'.
City credit ratings in the UK public sector are rare creatures, but the signs are that public bodies, including local authorities, universities and housing associations, are increasingly keen to be rated.
Put simply, ratings reflect an organisation's credit-worthiness and the chances of it defaulting on debts. The higher the rating, the bigger the chance of attracting heavyweight investors into a project, and the bigger the chance of securing favourable terms on that borrowing.
However, City experts this week warned Livingstone that his plans to issue bonds must take into account the lack of revenue sources across the public sector, or he faces the prospect of lower ratings.
Standard & Poor's, one of the world's largest ratings agencies, warned that it would be too easy to assume that such issues were a panacea for all financial challenges facing the public sector.
Adele Archer, the firm's director of public finance, told PF: 'One restricting factor is the small number of revenue sources within the sector. A lot of the money to fund [transport] bonds, for example, would have to come from the travelling public.
'A body like TfL has to assess the cash flow potential in the transport sector if it is to fund something substantial like Crossrail.'
Brown is understood to share some of Archer's concerns and has yet to give the go-ahead to Livingstone's Crossrail plan.
But Archer's team at S&P are broadly supportive of moves by public sector bodies to seek credit ratings to help raise revenue.
S&P published a series of reports on February 2 indicating that UK local authorities, including TfL, remain a 'stable', if unspectacular, ratings market – despite some concerns over PPPs.
Last year, S&P downgraded its underlying rating for UK Private Finance Initiative projects from BBB+ to BBB-, a middle ranking, on the back of fears that the private sector had assumed higher risks in the market.
S&P also believes that other parts of the UK public sector could soon open themselves up to credit ratings and investment markets.
Five universities – King's College in London, Bristol, Lancaster, Nottingham and Sheffield – already possess ratings. Archer says: 'University finance is incredibly constrained and it is clear that the maximum [£3,000 per year top-up fees] allowed will not bridge the funding gap they face.'
Universities cannot borrow or issue debt to meet day-to-day commitments, but they could fund capital projects, through rated bonds or PFI schemes.
Archer believes that could be the answer to some prayers across the public sector, but those involved would do well to heed her warning about income flows. As the chancellor is sure to tell us in next month's budget, indebtedness has its limits.
PFfeb2004
