Council bonds ‘will offer cheaper borrowing’

31 May 13

Plans to establish a municipal bonds agency for local government could provide cheaper borrowing for councils than the Public Works Loan Board, an international expert has told Public Finance.

By Richard Johnstone | 3 June 2013

 

Plans to establish a municipal bonds agency for local government could provide cheaper borrowing for councils than the Public Works Loan Board, an international expert has told Public Finance.

 

Money Bonds Photo: Dreamstime

 

Lars Andersson founded Sweden’s Kommuninvest agency, and is now helping the French government to create a similar body to issue bonds and lend to local councils.

He has urged the UK Local Government Association to press ahead with establishing the scheme in England and Wales, and to seek government backing later.

Andersson predicted that demand for highly rated public sector bonds meant agencies would be able to borrow as cheaply as 60 basis points over government gilts – 20 basis points cheaper than the PWLB.

He said the LGA’s proposal, which has been in development since the government increased the PWLB rate in the 2010 Spending Review, ‘must be cheaper’ to be viable. ‘Local authorities must choose the best solution, and that is the cheapest solution,’ he added.

Other local government lending agencies, such as Kommuninvest, get a ‘very good’ rate in the market, Andersson said, so it should be possible to better existing borrowing costs for town halls. ‘When we’ve looked at this in France, we’ve done some very cautious calculations, and come to 60 [points over gilts] – but I think that could be bettered.’

The LGA has said the bonds agency could be established by next year. Andersson said the association could press ahead with its development without official Whitehall backing.

Sweden’s central government provides some support to the agency, but this was not in place when it was initially launched in 1986, Andersson noted.

‘We launched it, then started the discussion with the Ministry of Finance. To us, it was obvious local authorities should be able to co-operate in such matters, but my experience in France and Britain is that it is almost impossible to wait for approval. You have to do something to create political pressure.’

The LGA has asked the Treasury to join a shared examination of the business case for a bond agency. However, in a letter to LGA chair Sir Merrick Cockell, Chief Secretary to the Treasury Danny Alexander said it was down to councils ‘to determine whether a local authority bond agency could be delivered on a sustainable footing’.

In the letter, Alexander added: ‘It is consistent with the localism agenda that the autonomous local government sector considers whether it is able to deliver and sustain alternative financing models.’

Chris Hearn, head of education and government at Barclays Corporate Bank, which has worked with authorities over bond issues, told PF that ‘capital markets are definitely open to local authorities’.

He added: ‘There’s appetite to invest in local authorities if they came into the market with either individual bond issuance or collective bond issuance.

‘The principle of what’s being proposed by local authorities makes absolute sense.’

Hearn highlighted Barclays’ involvement in recent bond issues by Transport for London that were cheaper than the PWLB. This shows it was possible for bonds to be less expensive, he added.

‘Councils are different [from TfL], but it does at least show the LGA and all the treasurers at local authorities what the bond market can do,’ said Hearn.

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