PWLB loans rise as councils try to shore up financial futures

1 Aug 18

Local authority borrowing from the Public Works Loan Board has reached a seven-year high as cash-strapped councils increasingly invest in capital projects. 

In the last financial year the PWLB increased the value of loans to local authorities by 42%. It advanced 780 loans with a value of £5.2bn to local authorities, compared to 622 loans with a total value of £3.6bn in 2016-17, the board’s annual accounts, released yesterday showed.

The value of loans has been going up in recent years after dropping to £3.2bn in 2012-13 following a high of £16bn in 2011-12. 

Paul Dossett, head of local government at Grant Thornton, said the rise was part of a growing trend of councils borrowing more – and not just from the PWLB.

As a recent analysis by PF showed, local authorities are increasingly looking at methods such as bonds and forward-starting loans for capital projects.

“It reflects the growing increase we have seen in capital investment in local authority infrastructure as a whole,” he said.

 “While different councils have different options and approaches to generating income, a small amount of this increase is likely to relate to investment in assets for income generation.”

Although, he believed the rate of councils investing in assets for commercial gain might have slowed since the government responded to its consultation on the prudential code earlier this year. 

The Ministry of Housing, Communities and Local Government announced in Feburary it will now require local authorities to produce an annual investment strategy to ensure greater transparency. 

This change followed concerns over councils' increasing investments in commercial properties but did not go as far as some expected. There had been suggestions that the government might ban investment of properties out of area. 

Dossett believed many of the PWLB loans would have been made “largely prior to the MHCLG’s guidelines about the appropriateness of borrowing for income generation purposes”.

Sanjiv Kohli, deputy chief executive and director of resources at Newark and Sherwood District Council, told PF borrowing by local government to invest in projects “will almost become the norm as councils continue to grapple with ever increasing shortfalls in funding”. 

“Borrowing is, therefore, being used by councils to fund residential, commercial and direct investments that will generate new income in an attempt to bridge the funding gap, and thereby safeguard valuable front line services.”

Although, he warned: “Councils should exercise caution and ensure that the borrowing costs can be serviced from the additional income generated from the investments”. All borrowing should meet “the test of being prudent, affordable and sustainable on the long term”, Kohli added.  

Jonathan Werran, chief executive at the Localis think-tank, agreed that the rise in borrowing was likely to reflect the “drive for councils to become more commercial with things like investments in city centre shopping centres”.

He added: “Local government finance is still a continual work in progress and the challenge for the sector is finding more diverse routes of borrowing.”

He also said the figures showed the PWLB remained “the lender of first resort”.

Councils have been looking for ways to keep financially afloat as they continue to manage austerity, and government continues with its plan of phasing out grant and local authorities keeping 75% of business rates by 2020-21.

Their commercial activities - as explored in a PF investigation here - have been seen as both necessary but also concerning because of the risks placed on the authority.

The PWLB’s annual report also showed the lending body’s interest income went up by £11m from £2,848m in 2016-17.

PF has previously reported how a PWLB rule change in 2007 has left councils struggling to repay their loans due to early repayment penalties.

In November 2016, after running a consultation, the government decided that the PWLB should be abolished and its powers transferred to the Treasury.

The government is still looking at ways it can deliver this reform.

In July, 14 local authorities initiated legal action over loans that they had taken out with private banks.

The PWLB, which operates within the UK Debt Management Office, is responsible for lending to local authorities from the National Loans Fund.

UPDATE at 11.10am on 2/8/18:

Sanjiv Kohli’s comments have been added since this story was originally written on the 1/8/18. 

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