Bonds agency could be ‘strangled at birth’
By Richard Johnstone | 29 November 2013
Plans to set up a local government bonds agency could be ‘strangled at birth’, councils involved in the project have told Public Finance.
An agreement to push ahead with the creation of the bonds agency was confirmed by the Local Government Association on November 21. Eighteen authorities – including Birmingham City Council, Lancashire County Council and the London Borough of Sutton – signed up as part of the first round.
Announcing the scheme, LGA chair Sir Merrick Cockell said he expected councils to be able to ‘substantially reduce’ their borrowing costs through the creation of the agency, which would issue collective municipal bonds and then loan the money raised on to authorities. A council borrowing £100m for 20 years could save as much as £4.7m compared to the existing Public Works Loan Board rates, he indicated.
George Graham, deputy county treasurer at Lancashire County Council, told PF the saving would come through borrowing from the financial markets at a lower interest rate than charged by the PWLB. For most councils, the PWLB interest rate is set at 0.8 percentage points above the level charged on government gilts.
Since coming to power, government changes to this rate had created ‘considerable uncertainty’ for local authorities, Graham said. Among the changes was an increase in the borrowing rate to 1 percentage point over gilts at the 2010 Spending Review, followed by a reduction to 0.8 percentage points at the 2012 Budget if councils provided information to the Treasury about their borrowing plans.
‘We could previously expect PWLB rates to be in a fixed relationship with the gilt curve forever, but that certainty has gone,’ Graham said. ‘That ability for government to change things in a way that they hadn’t previously chosen to do continues to be there and causes uncertainty for councils.’
However, this means the Treasury, which has not approved the creation of the agency, could undermine the scheme by lowering the margin over gilts to levels that bonds could not match, Graham said.
Whitehall feared that interest paid on any bond issue would represent a loss of cash from the public sector. ‘They could take action with the PWLB rates that would strangle this at birth, that’s one of the risks. Ultimately it’s a policy decision – do you want local authorities to act fiscally responsibly … or do you want a command-and-control type framework.’
Martin Easton, head of capital and treasury at Birmingham City Council, told PF that PWLB rate changes since 2010 meant ‘the cost of borrowing to local taxpayers is more than it ought to be’. He highlighted the case of Transport for London, which had been able to borrow from the bond market at rates cheaper than the PWLB.
Easton agreed it was possible that the Treasury could threaten the scheme, but hoped it would not encounter any problems. ‘It is an issue because the Treasury or the government could decide to undercut a bond agency any time they chose. In a sense, that underlines the vulnerability of local authorities to PWLB rules. I think it’s good in principle for local authorities to have access to more than one dominant supplier of borrowing in the market.’
Cockell told PF that the LGA had ‘positive and co-operative’ discussions with the Treasury.
‘They have been clear that the sector has the power to do this, and that organisations like TfL are doing this, so nobody’s contesting that,’ he said. ‘They have to make sure we will be doing this in the right way to conform to the highest financial expectations. Those are legitimate concerns.’
A Treasury spokeswoman said: ‘We have said all along that if people want to do that [create a local bonds agency], that’s their choice. We think the PWLB is the cheapest and best form of borrowing for local authorities.’
Mandy Bretherton, CIPFA’s technical manager for local government finance, welcomed the development of the bond agency.
‘If the agency is able to provide new funding for councils who need it, at lower cost than they currently face, it would give them more options to sensibly manage the resources they have available to them,’ she said. ‘It is a good example of the sector coming together to resolve an issue that has challenged local authorities for a long time.’