Birmingham poised to fund bond agency

Birmingham City Council is set to become the first council to commit funds to the launch costs of the Local Government Association’s proposed municipal bonds agency.
A meeting of the council’s cabinet will next week consider a proposal from officers to commit £200,000 towards the running costs of the agency.
The LGA said earlier this year that it was seeking commitments of £400,000, which it would match with a contribution of half a million pounds, to fund the first few months of the agency’s operation. Only a small proportion of Birmingham’s commitment will fund the first stage, with the rest kicking in during a second stage which is dependent on further review of the project.
The association hopes to raise a total of £10m in capital by the time the first bond is launched.
Ian Ward, deputy leader of the council, said: “There are occasions when the council needs to borrow money to fund major projects, which is then repaid over a period of time, just like individual families do when they make large purchases for the home.
“It is therefore vital the council does everything within its powers to get the best interest rate possible. Increases to the PWLB’s rates mean we have a duty to Birmingham’s taxpayers to look at alternatives.
“The municipal bonds agency is a way of getting the best value for citizens, using a model that has worked successfully in other countries.”
A spokesman for the LGA told Room151: “Birmingham is at the most advanced stage of any of the councils which have indicated that they would like to contribute.
“We are at the stage where we will be asking councils to turn their informal indications of support into firm commitments. Birmingham should hopefully be followed by a fair few more.”
Birmingham said that its investment is likely to take the form of ordinary shares in the agency.
Share acquisition would be accounted for as capital expenditure which the council will finance from prudential borrowing, at an annual revenue cost of £15,000.
The council hopes to recoup this cash from dividend after five years or so, but says that if the returns fail to materialise the cost will be met from within the approved treasury management budget.
A report to councillors said: “It should be noted that this is a start-up proposal and there is a real risk that some or all the equity investment might be abortive if the agency fails to succeed.
“However, if the agency fails because the Public Works Loan Board decides to undercut its rates, the desired outcome of cheaper borrowing is still achieved through a different route.”