31 March 2006
Local authorities could start issuing more capital bonds as an alternative to central government borrowing or the Private Finance Initiative, according to credit rating agency Standard & Poor's.
At present, most local authority capital projects are financed either through the Public Works Loans Board or through the PFI. But, with concerns over the efficacy and expense of the PFI and constraints on the PWLB's lending limit, experts agree that a more 'mixed economy' in public sector borrowing is emerging.
Standard & Poor's say Transport for London's issuance of £200m worth of bonds in December 2004 – the first of a planned £3.3bn in bond borrowing – 'provides a model for local government financing that could point the way forward for other UK authorities'.
Despite TfL's high level of debt, Standard & Poor's currently give it a double-A rating – indicating to potential investors that there is a strong likelihood that debts will be repaid. A good credit rating means that borrowing costs are low.
Credit analyst Hugo Foxwood told Public Finance that TfL was an exceptional case, as it had a relatively high degree of control over its fare-based revenue.
But if possible reforms outlined by Sir Michael Lyons in his December 2005 interim report into local government funding are implemented, local authorities – particularly city-regions – would be granted new revenue flexibilities that would give them greater access to low-cost private borrowing.
'If councils can be given additional flexibility, they can also raise their debt level similarly to the TfL model without necessarily eroding their credit rating, especially if the investments can be used to generate additional incomes,' said Foxwood.
Income streams against which bonds could be issued include local business taxes, public transport fares and congestion charges.
Kevin Magner, director of specialised finance at Deloitte told PF: 'TfL has shown the way. We're now moving into a more mixed economy of central loans, PFI and bonds.'
Peter Watt, associate director at the Institute of Local Government Studies, said that bond financing could be cheaper than the PFI but that authorities would continue to favour PFI as long as government departments only offered grants to pay for PFI costs.
PFmar2006
