Capital ideas for town hall borrowing

Local authorities have been busy examining their budgets in anticipation of the government’s forthcoming Spending Review. The sector is braced for cuts of between 25% and 40% when Chancellor George Osborne gets to his feet on 25 November.

The implications of tight funding are leading to innovation in how councils raise capital, with a determination to keep costs low being cited as the reason for some groundbreaking borrowing deals.

Three local authorities have recently agreed capital-raising programmes that save them money compared to the Public Works Loan Board. The PWLB lends money to most authorities at a rate 80 basis points above government gilts.

On 25 August, Warrington Borough Council became the first local authority outside London to enter the bond market for more than 10 years with an issue that will eventually be worth £150m.

Then, on 3 September, the European Investment Bank announced it would loan £102m to the London Borough of Croydon. In a UK first, the loan will pay for construction of six primary schools and six secondaries, as well as a school for children with special needs and the expansion of 25 existing schools.

Add to this a £200m bond issued by the Greater London Authority in May to fund the Northern Line extension, and a shift in approach can be seen.

Senior figures tell Public Finance these deals are part of efforts to ensure councils always borrow in the most cost-effective way.

Lynton Green, director of finance and information services at Warrington Borough Council, said local government is no longer automatically looking to the PWLB for capital funding.

“We are all becoming much more commercial in our approach to delivering things, and part of that involves looking at a wide series of options,” he said. “In the past, picking up the phone to the PWLB was seen as a very easy way of getting additional funding. But when you’re very pressed to deliver savings, if there’s anything we can do to squeeze a few more million out through a more creative way of funding then we have to do it.”  

Warrington has so far issued only £50m of the bond, with the other £100m retained for future use.

The money will fund town centre regeneration and is forecast to save up to £12m over 40 years compared to borrowing via the PWLB.

The decision to move away from the PWLB was simply made by looking at the savings, Green added. “We have a large capital programme in Warrington and we wanted to fund that with some certainty. Although you get very good certainty with the PWLB, we were being made aware that we might be able to get a better deal than PWLB by going out for a bond.”

Similar concerns motivated Croydon’s deal with the EIB. Nigel Cook, the borough's head of pensions and treasury, said the authority had been considering using the EIB for two years.

“The idea of packaging together a capital programme to a sum that was large enough to fit in with their criteria for loan funding was first posited then,” he said. “We went away and looked at what we had in the capital programme, and I think the school programme was an obvious choice for exploring that approach.”

The EIB loan is competitive with PWLB funding, said Cook. “We have been given a very clear indication that this will be cheaper than the PWLB’s appropriate rate when we ask for the first drawdown. Clearly on a loan of £102m, any interest reduction is welcome. Although we won’t actually know what it is until the day we make the drawdown, the potential savings are significant over 25 years.”

Municipalities in continental Europe use the EIB routinely, and Cook said he anticipated more UK councils will soon do so.

These developments come as the Local Government Association- backed municipal bond agency continues work on a scheme to issue bonds for member authorities, which would then be loaned the money for projects from the agency.

CIPFA technical manager Mandy Bretherton welcomed the emerging range of funding sources. “This enables authorities to have choice and make value for money choices,” she told PF.

Bretherton said significantly more work needed to be done to secure these deals, compared to the PWLB. Extra steps can include going through the EIB approval process or securing a credit rating needed to issue a bond. This is likely to put some authorities off. “Particularly in the current environment, local authorities are looking quite carefully at their capital programmes to make sure they meet their corporate objectives and looking at what they can afford to fund going forward,” she said.