NLGN backs council bonds for capital spending

6 Dec 11

Councils could rescue infrastructure projects from government cuts by issuing bonds, according to the New Local Government Network.

By Richard Johnstone | 6 December 2011

Councils could rescue infrastructure projects from government cuts by issuing bonds, according to the New Local Government Network.

A survey by the think-tank shows that 84% of councils face a capital funding shortfall as a result of both spending cuts and more expensive borrowing from the Public Works Loan Board.

Government funding for local authority capital projects will be cut by 45% between 2010/11 and 2014/15. The NGLN report, Capital futures, says a new market in bond issues could be the cheapest option for councils to fill this gap.

It warns that without access to new types of capital funds, economic growth could be slowed at local levels by potholed roads and poor schools.

The Local Government Association is to publish its plans for a bond agency in January. A number of authorities, including Birmingham City Council, have recently obtained credit ratings, the first step towards issuing bonds.

These moves follow a government decision last year to increase the interest rate charged on PWLB loans by 0.83 percentage points to 1% above government gilts. Almost two-thirds of councils – 62% – now expect to look to other funding sources for borrowing, the NLGN report found.

Report author Tom Symons said a recent Greater London Authority bond issue demonstrated the potential of this method of financing. The GLA issued £600m of bonds in July as part of the Crossrail railway project. The report says bonds could save councils up to 20 basis points on their borrowing costs, compared with the PWLB. This would amount to millions of pounds on a large bond issue.

Symons added:Councils must explore a completely new landscape of financing options to survive this Spending Review. Issuing bonds on the capital markets could enable vital investments to be saved, assuming the right market conditions. As a result of central government cuts we need to see a much more ambitious approach from the sector if our infrastructure deficit is to be addressed.’

Capital futures was supported by a taskforce made up of experts from across the local government finance sector.

Taskforce chair Paul Woods, finance director at Newcastle City Council, added:The responsibility for driving economic growth and responding to the demands of communities in an uncertain and difficult climate has fallen largely on councils.

‘Councils have a vital role to play, and it is important that as a sector we optimistically grasp this time as a moment of opportunity.



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