CIPFA’s Alison Scott on local authority borrowing

Alison Scott is associate director for local government, at the Chartered Institute of Public Finance and Accountancy. Formerly chief finance officer for Northamptonshire Borough Council, she is responsible for the development of local government financial management within CIPFA and provides support to the Treasury Mangement and Local Government Policy Panels. Alison recently sat on the New Local Government Network Capital Futures task force. She talks to Room 151 about the capital raising challenges for local government going forward.

Room151: Do you think we will see many Local Authorities (LA) borrowing enough to warrant single issuance bonds?

Alison Scott: It’s unlikely to be a significant source of LA borrowing because of the size of borrowing that is required, you’re looking at a few of the larger metropolitan areas and city areas that have borrowing (needs) of sufficient size for the costs associated with single bond issue.

R151: Are there many of these kind of bonds already out there?

AS: The key ones at the moment are Wandsworth and Birmingham, who did one a while ago for the refinancing of the NEC. Transport for London have also done one: they are technically a local authority.There are unlikely to be that many more out there, but potentially if there are a handful of single issuance bonds which can go to the market there may be a market for a private issue which can be a much smaller amount. That is likely to be the sort of size most LAs are looking at.

R151: Will any further single issuance bonds need to use Special Purpose Vehicles (like the GLA did) to avoid paying the coupons net of tax?

AS: At the moment because of problems around withholding tax SPVs are used to avoid some of those problems. It’s not completely necessary – you can do it without – but the SPV tends to make things slightly easier.

R151: Are there any plans afoot to amend this law for LAs so that they can pay the coupons
gross of tax without setting up an SPV?

AS: The feedback that we have had is that while government recognises issues around withholding tax it doesn’t see it as one of the most pressing issues that need addressing in terms of legislatory timescale.

R151: What is a Local Government Funding Agency (LGFA)?

AS: These are the plans for the Local Government Association to set up a collective bond. They are very much in the early stages but certainly if you go along with the Finnish model a number of LAs come together and issue a bond in joint names. The alternative is to set up some kind of intermediary mechanism where you can limit the liability of individual authorities within that and the third party issues the bond on behalf of the LAs. It’s still in the early stages and a case of looking at whether there would be sufficient interest to warrant the complicated legal work that would be needed.

R151: What demand do you expect to see for a pooled vehicle like a LGFA?

I suspect at the moment there is limited demand because LAs are not really borrowing heavily for capital programs. Capital programs are very restricted by financing costs and the ability to repay financing costs so we’re not in a period of significant capital investment by LAs. I think that once we actually get through the current period of cuts and get a more stable resource base, LAs might start to look at their capital programs. Beginning to emerge from recession there is likely to be more demand unless PWLB’s rates have come back down at that time.

R151: Would a LGFA be used by towns and parishes too?

AS: No, that’s unlikely because an LGFA is still likely to require some sort of market rating which will make it prohibitive to towns and parishes. They can get themselves a rating but the cost is so high in relation to their borrowing that it wouldn’t make financial sense to do so.

R151: Why have PWLB rates gone up so much?

AS: There are two mechanisms Treasury can use to control Local Authority borrowing. The first one is to apply some sort of debt cap or cap on capital investment which they can do under the 2003 Act and we’ve
already resisted that very strongly. The other way to control borrowing is to increase the cost of borrowing. You could see these increased costs as a way of reducing Local Authority borrowing and putting a cap on Local Authority borrowing. And a much more flexible way of managing that because you can see that if there is then a feeling that capital spending has been cut back too much it is easy to adjust the premium on PWLB to stimulate the market again.

R151: In what way are retail bonds attractive and why aren’t they likely to be the model of choice in the short term?

AS: Potentially they are very attractive to local government not just in terms of being able to raise capital finance but also in terms of wider social agenda, encouraging saving and investment in local areas,
things like that. The are drawbacks however around some of the administration issues: again withholding tax is a problem, it would require a national solution in terms of administration and management of them to get them going and make them feasible for Local Authorities.

R151: What type of arrangement or arrangements would you like to see replace PFI?

I think the focus needs to be on where there is logical reason to work in partnership with the private sector where they can bring additional skills or additional resources. The issue with PFI previously was that it was difficult to manage the risk transfer so where you are looking at facilities where you have a lot of private use or third party income coming in, then it very clearly makes sense for PFI. The government are talking about this for some of the toll roads, where you can get a very clear risk transfer to the private sector. Because of the changes in where the borrowing sits on the balance sheet the focus will be on PFI projects that really bring something else to the table and have the opportunity for risk transfer.

R151: Do you think social investment bonds will prove attractive enough for investors?

AS: I think at the moment the investors finding them attractive tend to be the big social investment vehicles, the trust foundations, people who are looking at a wider social impact. Once they start to get a bit of steam behind them, once we start to see some successes, I think that the pool of people that they are of interest to will widen quite considerably. They may become more attractive to other people but at the moment because they don’t have the track record they are really just appealing to investors with strong social investment ideals.