Richard Williams on local authority bonds, financial innovation and the Balliol Group

Councillor Richard Williams, is the Leader of Southampton City Council and is working on creating a ‘virtual council’ of around 15 local authorities which plans to issue a £150m bond to invest in the green economy.

Room 151: Where did the idea for a virtual council and bond issue come from?

Richard Williams: The first meeting we had on this was at Balliol College in Oxford in October 2011 where a number of authorities got together to see if this was something we wanted to do. Now we are going to launch the Balliol Group on the green economy in Oxford on February 6.

Room 151: How does it work?

RW: Hopefully we are going to get people to sign up to become a virtual local authority for the green agenda. That will involve working as one entity to negotiate with energy companies and others involved in the Green Deal, Renewable Heating Incentive and carbon reduction.

Instead of the authorities having to do it on their own we’re going to do it collectively. Certainly in terms of expertise, procurement, legal, instead of us each having to pay for it, we’ll work on it together. The benefit for the private sector companies is that they are hitting all their green deal targets with one contract and so both sides get better price performance and value out of it.

Room 151: And how does the bond issue fit in?

RW: The group enables us to have governance arrangements around it, and we’ll be able to say: ‘If we’re going to do this with the energy companies, are we going to use this new collective power to do a bond to invest some of this directly should we need to do so?’

It has taken a lot of dancing round political handbags and legal handbags but we are now in a place where we can ask people if they want to do this. There is a good selection of local authorities across the political spectrum attending the meeting in Oxford.

One of the big points that our consultant highlighted is if you are going to pull this kind of thing together you need a political de-risk policy and that is what you are going to get if you have engagement cross-party.

This is probably one of the only areas of policy that we could get this kind of harmony on because the green economy is one that everyone can see positive opportunities and outcomes from. People want to engage in some way, even if it is for different reasons: it might be about climate change, industrial investment, skills and development but it is certainly the area where that sort of thing is going to happen.

That gives us a platform. If we get buy-in from enough local authorities to get critical mass that brings the bond option into play and we won’t just be talking about it anymore. I ran a private seminar at the Local Government Association in Birmingham with their bond lead Mark Luntley on this and we are now at the next stage of moving this to reality.

If we get this, the intention is to see about getting legal structures sorted out, getting the arrangements with the energy companies that we’ll work with in a procurement context and then look to see how we are going to leverage finance. Can we live on prudential borrowing and resources if authorities have got them? If we go to the market then that money is ‘clean’. It’s not on public sector net borrowing, therefore we can use it to leverage potentially at the European level. That is where the real prize is if you can match fund because there are considerable under-spends in the area at the European level at the moment in the current budget round that is due to finish in 2014.

The idea is that we have got to get on with this and we’ve got to get a decision made on the partnership, get our virtual local authority and then decide if we’re going to do the finance and open up this match funding opportunity from Europe. That is really quite exciting. Most local authorities would rather borrow from PSNB or PWLB because going to the bond market is a bit of a step. It is for us, we haven’t done it before but I am quite up for this because it gives us so much more potential financial flexibility. It has got to work economically for us as well as environmentally and socially but it opens up a vista that we haven’t looked at before.

Room 151: A bond launch was your idea wasn’t it?

RW: Yes it was. In the post-crash environment local government finance is only going to shrink. At best it is going to hold the line, it’s not going to go back to where we were in 2008 before Lehman Brothers, so what can we do to liberate opportunity and finance? There are options around the Local Government Pension Scheme, bonds and we should be much more creative and forward thinking about our approach to financial management within local government. I think that is really important.

Obviously people have been talking about bonds and they were looked at to buy out the housing revenue account. When the PWLB rate came back down you might say that it was a bit cynical from government, they saw that Transport for London got a bond away and that people might go and do their own things and have that independence. The government argues for that kind of localism and then when it happens to finance? ‘Run away!’.

Interest rates won’t stay at the level they are forever so the work and the investment that we are putting into the market and the assessment I think is useful anyway because it means that when the economic climate does change this is going to be interesting.

Room 151: Are the other authorities as positive about a bond launch?

RW: Certainly the response I have had from authorities cross-party has been very positive. It’s time to go for it. We’re looking forward to the event in Oxford and if people want to be involved they have to sign up. There are 15 authorities interested, whether they all decide to come to the party or not is a matter for them, some I am reasonably confident are in the game and that means that we have got enough critical mass to do something with this anyway but I would like a significant chunk to be able to do this bond option.

At the level we’re at in Southampton we’re not the largest in the world but also not the smallest, if we club together with a few of similar size – and there are many across the country – you have got a serious critical mass. There are some districts involved as well which is excellent because I don’t want to preclude second tier authorities – and there are some mets, so we have the whole shooting match. Some of the districts have clubbed together, there are some Derbyshire districts, for example, looking at acting as one on this.

Room 151: You have quoted a £150m figure for the bond, is that looking likely?

RW: Yes, £150m is the ball-park figure we are looking to raise. We started at £100m and our advisers said that should be a minimum. We pushed it up. If £200m is a more sensible level to get a better investment rate we will do that and we know that the minimum has to be in the three-figure millions. It’s not worth the market bothering otherwise we have been told.

If we don’t change or try we are in a lot of difficulty. We have to innovate and finance is the key to so many other issues that if there are instruments and opportunities out there, they might not work but if we don’t ask and find out and commit to some sensible level of engagement we’ll never know and we’ll never get there.