Financing the future

Phil Woolley is a Partner in Grant Thornton UK LLP’s Government Infrastructure and Advisory team.

Given the austere financial environment in which local government is operating and will continue to operate for the foreseeable future , the challenge to innovate in order  to finance infrastructure and economic development has never been greater.  Over recent years the sector has seen a good deal of innovation – here we briefly consider some of the models applied by local authorities to the financing challenge, specifically:

• the opportunities arising from City Deal;
• the local asset back vehicle model; and
• area based investment fund models.

Perhaps the most recent and fundamental development has come through the announcement of the first wave of City Deals.

The Government set a challenge for eight of England’s core economic  cities – if these cities deliver more effective, accountable government, central government will transfer more powers and provide incentives for cities to apply their own solutions.

The proposals put forward by the eight cities show interesting differences in definition and priority.

Alongside the areas you’d expect cities to focus on, such as housing and regeneration of specific districts, several cities propose focusing on areas such as physical and virtual connectivity, with powers on transport and superfast broadband. Birmingham  has identified life sciences as a potential and exciting growth opportunity.

Considering both governance and financing frameworks, Manchester’s deal is particularly distinctive.  Founded on the long-established governance framework of AGMA (Association of Greater Manchester Authorities) its ‘earn-back model’ aligns investment resources and economic development returns for reinvestment in strategic priorities.  The model allows retention of additional business rates over and above that allowed by the forthcoming reform of local government finance, benefiting the city region to the tune of £30 million per year. Not that substantial in isolation, but bigger ambitions underpin this and, used effectively as enabling finance, this could unlock substantially more private investment.

The ‘earn-back model’ could offer a genuinely sustainable source of finance through which Greater Manchester is rewarded for good investment decisions made locally – being region wide and non-sector specific, it is broader in scope and potential than those funding elements more narrowly defined and tied to specific spatial (enterprise zones) or economic policy areas such as skills or apprenticeships, and to that end it marks a more substantive devolution of powers and resource.

This type of funding model is being applied elsewhere too, by a number of Cities and City Regions (often through partnership between a range of bodies including for example LEPs) in the form of area based or revolving regional infrastructure/development  funds.  At Grant Thornton we have been working with a number of clients in the establishment of these sorts of approaches.  Critical to the success of such a fund relies on:

• being founded on and aligned to a clear economic rationale and set of priorities;
• being seeded with sustainable sources of finance, which may include, inter alia, retained business rates from enterprise zones, community infrastructure levy, capital receipts, returns from operational assets and ERDF funding)
• effective investment instruments through which targeted interventions can be made and future returns retained and recycled for on-going investment in to the future

The establishment of such funds can also be aligned to funding approaches  such as Tax Increment Financing to unlock developments and large infrastructure projects.

Another approach increasingly applied is the formation of a Local Asset Backed Vehicle (LABV), a long term partnership or joint venture between one or more public sector bodies and private sector partner/s. Typically, this brings together public sector land – and sometimes funding – and private sector funds into a commercial partnership, whether joint venture, limited liability partnership or corporate entity.  In this model, asset values are leveraged to raise funds for investment or regeneration projects, with the development undertaken through subsidiaries.

In our experience, local authorities (and other public sector bodies such as NHS Foundation Trusts) are becoming more adept at using their significant asset holdings not only in order to lever value and raise finance for capital investment, but also as a means to achieving more efficient ways of delivering services.  The LABV model has been used successfully to deliver a range of development types including housing, commercial, industrial and leisure.  As well as providing a vehicle through which surplus assets can be rationalised.

Grant Thornton has advised on LABVs for Croydon, which was the first council in the UK to use the LABV model, plus projects for Bournemouth, Gateshead,  Sheffield, Tunbridge Wells, Torbay and Aylesbury Vale.

The key to success in LABVs is that the council must clearly define its aspirations, expectations and objectives – a successful LABV is one which enables the respective strengths of the public sector and private sector partners to be combined to deliver sustainable investment .

The financial environment has driven significant innovation in the sector, the key question is whether the tools available to local government, and the models developed truly  provide, in terms of materiality, the necessary firepower to underpin their economic growth ambitions.