When we talk about local authorities and banks in the same sentence, it is usually a bad news story. Most recently it was the Icelandic banks episode.
What this teaches councils is that they need to be cautious in their dealings with banks. But currently it is the banks that are being cautious, and the local authorities and their communities that are feeling the effect. While councils can still borrow from the Public Works Loan Board, the private sector is having a harder time getting banks to part with their cash.
As many local government plans depend on private sector investment, this is not good news. For example, the flow of funds for the Private Finance Initiative has slowed to a trickle, regeneration developments have stalled and the local economy’s supply of credit has dried up.
Maybe the time has come for the tables to be turned. Rather than wait for the banks to shake off their inertia, local government should fill the funding gap itself – not by throwing scarce capital resources at the problem, but by taking on the role of lender. This will get things moving and will make a return on investment, too. If ever there were a time to show leadership and get the local community working again, it is now.
This has been the approach taken by Essex County Council, which has set up ‘Banking on Essex’ in partnership with Santander. The council is making up to £50m available to support local businesses.
If town halls are successful in this field, it could help to restart stalled PFI deals. That embarrassing hole in the ground in the town centre could be kick-started with investment from the local authority. The small or medium-sized enterprise, especially one that is part of the council’s supply chain, can be given a facility or loan. This not only helps achieve economic wellbeing, but secures that continuity of service and supply in a vital functional area.
Wait a minute, though. One thing our dealings with the banks have taught us is that local government has to operate within its powers, and some of this looks to be at the margins.
Moreover, everyone is a tad nervous on the powers front after the Appeal Court decision in the case of municipal insurer London Authorities Mutual Ltd.
So are we okay legally? Well, in principle, yes. Undoubtedly, the Laml ruling was an attack on the application of the wellbeing powers, but we shouldn’t now quietly park these. Many of the actions described here are palpably for the wellbeing of an area.
As the government guidance on the use of wellbeing observes: ‘Such financial assistance can be given by any means authorities consider appropriate, including by way of grants or loans.’
But local authorities need not just rely on wellbeing. Section 12 of the Local Government Act 2003 gives the power to invest for any purpose relevant to its functions.
Care and caution is needed, however. Such assistance could amount to state aid and fall foul of European Union rules depending on the purpose and the interest rates charged. And how the powers are exercised is vital. Councils will need to act prudently and commercially.
No lender would lend without undertaking appropriate due diligence on the borrower and the purpose of the loan. The council probably should not forgo an arrangement fee and the borrower should pay the authority’s legal fees. It should take appropriate security for the loan. This is what a bank would do and the council should not act any differently.
Council lending can fill what is hoped will be a temporary blockage in the commercial market. It is what local government does best – to be there for the community in times of crisis. The wider discussions about general powers of competence ought not deflect councils from recognising what powers they already have and how to use them effectively. As ever, the local authority lawyer should be at the forefront of making these solutions work and ensuring that powers are exercised correctly.
Mike Mousdale is a partner at Eversheds solicitors
