LGA presses on with local government bond
By Richard Johnstone | 29 June 2012
A collective local government bond could be issued as early as 2014, the Local Government Association conference was told yesterday.
Mark Luntley, the LGA’s programme director for finance, said plans to create a bond agency for the sector were progressing despite the government’s proposal to reduce the borrowing rate from the Public Works Loan Board.
Luntley launched a briefing on the plans, which he told Public Finance would now be sent to local authority finance directors for approval.
He told delegates that the agency would help diversify the sources of borrowing for councils, which are currently vulnerable to changes in the PWLB rate.
The ‘terms of trade’ of borrowing from the board, including interest rates, have changed six times in the past two and half years, he said. Such ‘chopping and changing‘ was ‘very awkward’ for town halls trying to develop long-term plans. He said councils typically borrow £5bn annually over a 20-year average duration. So the 2010 rise in the PWLB rate to 1% above government gilt rates would increase their total borrowing costs by £1bn. It was this decision that led some authorities, as well as the LGA, to examine the potential for borrowing using bonds.
Chancellor George Osborne subsequently announced in this year’s Budget that he would reduce the rate this year by 20 basis points to 0.8% above gilts.
However, Luntley warned that the Treasury offer of a ‘discount’, which could change again in the future, was a reduced rate, as opposed to a new rate above gilts. A lower rate could also involve greater scrutiny of local government capital plans by the Treasury.
He said the new agency was about ‘more than just money’ and would provide greater independence for local government through increasing the diversity of sources of borrowing.
‘We are a purchaser, and there is a monopoly supplier [the PWLB]. If the government changes the rules there’s little we can do, if the government changes them again there’s little we can do.
‘There’s a different possible outcome – that instead of always looking up to the Treasury, we look out to our peers and colleagues. It’s an agency that is managed for the sector by the sector.’
Luntley said that the planned agency, to which local authorities would sign up, would be triple-A rated and ‘broadly competitive’ with the new PWLB interest rate. ‘We looked at an agency that can probably lend, in normal circumstances, at 80 basis points above the gilts rate,’ Luntley said.
It would issue bonds to investors, with the funds raised then being loaned to local authorities. The agency would also hold some risk capital.
The bond agency would also provide ‘positive incentives’ for financial stability, as all councils would have an interest in each other’s financial discipline as they borrow together.
The ‘vision’ is for the agency to be set up by 2014, he added, if finance directors back it. He added that the Welsh LGA had been involved in the developing of the plans, and that the Northern Irish group had also recently expressed an interest.