Councils might use bonds to pay for projects
By Richard Johnstone | 20 February 2012
councils are considering issuing small local bonds to raise funds for essential
capital projects, according to the New Local Government Network.
authorities first looked at the potential of raising funds through bonds after
the interest rate charged by the Public Works Loan Board was raised in October
2010. This led to a number of councils, including Birmingham City Council
, getting credit rated.
a survey by the NLGN, covering senior officials at 13 authorities, finds that councils
examining the potential of small-scale ‘retail’ bonds – aimed at residents – to pay for
crucial improvements such as to schools and highways.
report, Retail therapy, published
today, concludes that retail bonds would be a ‘significant
attraction’ for finance directors trying to raise funds.
Bonds issued to
the market for institutional investors such as pension funds typically need to raise a minimum of £150m,
but the retail market can be used for
smaller sums of as little as £25m. They are also issued in smaller
denominations, so private individuals can purchase them. One finance director quoted
in the report said that the retail market would ‘eliminate [the] barrier’ of
the size of borrowing needed to access the bond market.
report follows an NLGN poll last December
highlighted that 84% of
councils still faced a capital funding shortfall as a result of both more
expensive PWLB borrowing and public spending cuts.
A retail bond aimed at local
residents could build stronger links
between citizens and council’s capital projects if funding was raised as part
of a ‘more localist approach to finance’, report author Joe
‘The wholesale bond market is beyond the reach of all
but the biggest councils, but retail bonds are issued in smaller denominations
which mean that many more councils can take advantage.’
added: ‘Local people would take an active role in shaping the
future of their communities while gaining access to a new, safe and accessible
Government Association is also currently assessing the business case for developing a national finance
agency that would collectively issue bonds for councils.
The NLGN said
that if this were to be established, there is a good case for a retail issuance
to form part of this agency’s borrowing portfolio.
Sturge told Public
Finance that this could provide ‘more diversity’ in the market for council
bonds, with the required funding split between bond offers to institutions and
However, he added that the price would have to be
right, with retail bond interest rates needing to be as cheap as wholesale bonds
to be successful.